Profiting From ESG

About 20 miles from where I live in Venice, California, you’ll find Woodland Hills.

One week ago, this small town just northeast of Malibu reached its highest temperature on record …

121 degrees.

If you’re not aware, much of California has been experiencing a suffocating heat wave in recent weeks.

It has cooled off slightly in the past few days … primarily because the extreme smoke from the largest wildfire in California state history — exacerbated by the incredibly hot, dry conditions — is blocking out the sun.

And let’s not forget the rolling blackouts …

This is due to the surging power needs from air conditioners, controls on power generation, a shortage of power from shut-down gas-fired power plants, and an outdated grid system (among other reasons).

All of these issues should continue to elevate “ESG” and the green agenda into the national conversation — and quite possibly, the presidential debates.

For readers less familiar, ESG is the acronym for “Environmental, Social, and Governance.”

Here’s how Neil George, editor of Profitable Investing, recently described it:

The basic nature of ESG is that it is a means of investing that will not only provide growth and income, but it will do so in a manner that has a lighter environmental footprint, a greater positive contribution to society and is managed in a more transparent way while at the same time remaining focused on shareholders as well as other stakeholders.

In this Sunday Digest, let’s turn it back over to Neil. In his most recent update to subscribers, he highlighted one of his favorite ESG investments.

As his title below suggests, it’s a great way to make green from green.

Have a good weekend,

Jeff Remsburg

 

More Green From Green

By Neil George

It’s not easy bein’ green. But green’s the color of spring. And green can be cool and friendly like. And green can be big like a mountain or important like a river or tall like a tree. I’m green and it’ll do fine. It’s beautiful and I think it’s what I want to be.

Those memorable lyrics were made famous by the very green Kermit the Frog. And when it comes to green, I’m fully onboard with more green cash in growth and income for your portfolio.

Environmental, social & governance (ESG) investing was a feel-good sort of investing style for many years. But no more. Now, it’s one of the strongest performing segments in the stock and bond markets.

S&P ESG & S&P 500 Indexes Total Return — Source: Bloomberg Finance, L.P.

 

S&P tracks its collection of 505 stocks inside the S&P 500 Index as well as its ESG Index. Year to date, the ESG Index is generating significantly greater gains and dividend income for a greater return than the hallowed S&P 500.

 

ESG Corporate, General Corporate & U.S. Aggregate Bond Indexes Total Return — Source: Bloomberg Finance, L.P. & Barclays

 

The sharp bond guys over at Bloomberg & Barclays also have their ESG Bond Index. And again, this segment of the U.S. bond market is outperforming the overall U.S. Aggregate Bond Market Index as well as the U.S. Corporate Bond Index.

Now, this may come down to just better corporate management or products and services that are ESG compliant. But I would say that what’s driving the ESG markets comes down to greater demand by institutional investors that are following their clients’ appetites for ESG investments.

One of my favorite companies inside the model portfolios of my Profitable Investing advisory is Hannon Armstrong Sustainable Infrastructure Capital (HASI). It’s a great ESG investment for growth and income.

It provides financing for green energy projects. Since these projects are all in some way based on land (even if off-shore sea bottoms), it came up with the bright idea to incorporate as a real estate investment trust (REIT).

That enables it to avoid corporate income taxes and to pay dividends that thanks to the Tax Cuts & Jobs Act of 2017 (TCJA) come with a 20% tax deduction for individual investors.

 

Hannon Armstrong (HASI) Total Return — Source: Bloomberg Finance, L.P.>

I added the stock to the Profitable Investing portfolios late last year and since then the stock has returned 34.5%. That’s 5.1 times the return of the S&P 500 for the same period. And it’s still a value. The stock is only 2.62 times its intrinsic (book) value, which is just above the average of the Bloomberg U.S. REIT Index.

Revenue over the trailing five years has climbed on average by 28% on a compound annual growth rate (CAGR) basis. And as a green energy financial, it shows that green makes for more green as it runs at a net interest margin (NIM) — the difference between funding and earned interest — at a whopping 17.7%.

That’s way above traditional financials. And it runs lean on cost with an efficiency ratio — the percentage cost of each dollar of revenue — of 56.2%.

The dividend yields a tax-advantaged 3.3%, which is multiples above the average of the S&P 500 and is up in distribution on average by 6.2% annually over the past five years.

HASI has been successfully issuing green bonds, which are strongly in demand, including the recent 3.75% due 09/15/30 that currently yields 3.64% (ISIN # USU2467RAD18) and provides a yield spread advantage of 292.8 basis points (bps, 2.93%) over the equivalent U.S. Treasury bond.

The company operates with several federal, state and local credit guarantees for its financed projects as well as capitalizes on the tax credits and incentives (C&I) that its underlying developers and operators obtain for their projects financed by Hannon Armstrong.

The combination of government support provides an additional level of credit certainty for investors.

I was recently introduced to Laurence Sotsky, the CEO of Incentify, a company that works for businesses to find C&I. He is well-aware of Hannon Armstrong and observed:

“I applaud Hannon Armstrong’s green bonds, and sustainable investing as a whole as they present an innovative model for addressing major issues such as climate change within the bounds of capitalism. By utilizing investors to bridge corporate P&L gaps such that projects get green lit is a powerful model … but not a unique one.

C&I accomplish the very same thing but instead of using private investors to bridge corporate P&L gaps, it’s the government that steps up. Likewise, the results for the renewable energy and green worlds have been huge: Tesla depends on C&I to the tune of 8% of total revenue in 2019 just as the entire solar industry was essentially created through Obama-era C&I packages.

It is my mission to make sure that innovative macroeconomic policy like green bonds and C&I become celebrated in popular culture. All too often, counterproductive misinformation falsely accusing C&I of being corporate welfare dominates the news cycle. Welfare requires recipients to maintain a certain level of need whereas C&I requires awardees to maintain a certain level of achievement.

The reality is that capitalism isn’t going anywhere … nor should it. We need to work within its confines to address the big issues facing humanity. Principal approaches under that header are sustainable investing and C&I. So, congratulations to Hannon Armstrong on this $350M as well as the greater $6B they have invested overall. I hope to see even more in the future.”

For more green and for my latest buy-under price for Hannon Armstrong, sign up to become a Profitable Investing subscriber today.

Sincerely,

Neil George,
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life


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