Interactive Investor

10 of the most exciting ESG stocks on AIM

29th October 2021 16:16

Andrew Hore from interactive investor

With companies being made to ‘fess up’ their green credentials, our award-winning AIM writer names the green, or greener, small-caps that are grabbing his attention. 

While investors are keen to embrace environmental, social and governance (ESG) information, the problem is obtaining accurate and consistent data. If companies cannot be assessed and compared, then it makes investment decisions difficult.

Standardised information and assessment will help companies as well as investors. Without the information, poor decisions could be made, and the companies could flounder as the economy evolves. This is particularly true of the environmental aspect of ESG.

Companies forced to be more honest

The Taskforce for Climate-Related Financial Disclosures (TCFD) has been set up to provide companies with a structure for their environmental reporting and the related financial risks. It is an attempt to pull together all the existing ESG standards and frameworks, and is designed to enable shareholders and other stakeholders to understand how climate-related risks could impact the financial future of a business. There are four main elements: governance, strategy, risk management and metrics & targets used to assess risks.

Institutional investors are supportive of the disclosure requirements. The UK is the first country to mandate TCFD for all UK quoted companies, as well as large private companies and limited liability partnerships.

It has undoubtedly been difficult to assess and compare companies in terms of their ESG credentials when the way they report can differ. Up until now much of the information disclosed has been voluntary. TCFD encourages assessment of what will happen in the future and the impact on the business.

It is not just about reporting, it is about evolving strategy to cope with challenges. There are two main types of climate-related risks: physical and transition risk. Physical relates to how changes in weather patterns and temperatures can affect a business.

Transition risk is a broader thing. This can cover regulatory changes that could affect the company, or technology that will change the company’s market. There are also risks to the reputation of the company and, if investors are put off the business because of the operations it is involved in, it may be difficult to raise money to grow operations.

TCFD sets out the items that a company needs to disclose and the outlining of targets it is setting in each of the four elements of TCFD. The company also needs to decide what is material. The climate-related financial information should be included with the rest of the financials.

Companies such as National Grid (LSE:NG.) and ITV (LSE:ITV) have already used their annual reports to provide an overview of TCFD disclosures. Land Securities (LSE:LAND) has produced a separate sustainability performance and data report.

The AIM companies benefiting from climate action

This is information and data that is relevant to all companies and is particularly important for those businesses that could be changed or even eradicated by the move to a carbon-neutral world.

There are companies on AIM that will benefit from the strategy of reducing greenhouse gases and will help other companies, as well as countries, to meet environmental targets.

AIM has a history of attracting clean-tech and renewable companies going back nearly two decades, but many of them have fallen by the wayside because they were so early stage. The ones that have lasted have taken a long time to progress, and some have different strategies now, but they have got to the point where they have large addressable markets – not the revenues yet, though.

The four main fuel cell and electrolyser companies on AIM floated between 2004 and 2007, with Germany-based Proton Motor Power Systems (LSE:PPS) and AFC Energy (LSE:AFC) the most recent. ITM Power (LSE:ITM) has been on AIM since June 2004, and two years ago the share price was still below the original placing price of 50p. Some, such as Ceres Power (LSE:CWR) (LSE: CWR) took longer to return to their flotation share price.

This puts into context the outperformance of the fuel cell companies in 2020. There has been profit-taking this year, but the share prices are still high compared to two years ago. They have major backers who have pumped significant amounts of cash into them even though commercial revenues are still relatively low.

The four companies have a total valuation of nearly £6 billion and this makes significant assumptions about the commercial demand for these companies’ fuel cells and electrolysers. The timing of significant revenues is uncertain.

In contrast, the revenues of waste-to-energy technology company EQTEC (LSE:EQT) could be set to gain momentum and grow substantially over the medium-term. Analysts at broker Arden expected revenues to grow from €1.8 million to €15.8 million in 2021, which should be enough for a small profit. Next year’s forecast revenues are €62.4 million. The initial revenues are coming from equipment and installation, and these will be followed by ongoing revenues from the energy generation plants.

There is no guarantee that Eqtec will achieve these forecasts because they are partly dependent on gaining permissions from governments and local authorities, which can drag their heels. If they are achieved the business could be highly cash generative in 2022.

Smart meters are helpful in reducing energy consumption. Smart Metering Systems (LSE:SMS) has growing recurring revenues from installed smart meters, and it is ploughing some of the cash generated into grid-scale battery storage, which is used by grid operators as a balancing service for peaks in demand by storing excess renewable energy. This is needed because of the intermittent nature of wind and solar power generation.

SMS has also raised an additional £175 million to fund the pipeline of projects. The first projects with a total capacity of 90 megawatts (MW) should produce initial revenues next year. The total pipeline of projects is 470MW. It is estimated that the addressable market is around 25 gigawatts (GW).

Electric vehicle charging infrastructure is another area with significant potential for SMS, which is seeking opportunities in the domestic and destination charging markets. Charging capacity will have to increase enormously over the coming decade as electric car ownership rises.

Nexus Infrastructure (LSE:NEXS has started eSmart Network to install electric vehicle charging infrastructure. This includes electrifying bus depots.

Another company that is set to benefit from the move to reduce carbon is Sureserve (LSE:SUR). The Everwarm energy saving subsidiary is in a good position to benefit from investment in insulation, air and ground source heat pumps, solar and battery storage. The Providor subsidiary is a smart meter installer. Covid-19 restrictions, particularly in Scotland, have held back the progress and profit of this part of Sureserve, although it continues to win new contracts. The division provides a good base from which to grow in the energy saving market, but most of the profit currently comes from compliance activities.

Oil & gas companies are going green

Some oil and gas companies are transforming into renewables businesses. Coro Energy (LSE:CORO) still has an interest in the Mako gas field, offshore Indonesia, plus oil and gas interests in Italy, which are in the process of being sold. However, the focus of expansion is renewables. In March 2021, Coro acquired Global Energy Partnership, which has a portfolio of solar and wind projects in the Philippines.  

The focus is originating and developing early-stage renewable energy projects and then finding outside investment when the projects are ready to be built. Global Energy retains a carried interest and the management contract for the project.

The growing population in south-east Asia is increasing demand for electricity, but coal still dominates electricity generation in the region so there needs to be substantial investment in renewables. Legislation is supportive of renewables projects in the Philippines and there are attractive terms for power purchase agreements, plus tax holidays.

Coro is in the process of partnering with Vietnam-based rooftop solar company Vinh Phuc Electrical Mechanical Installation. Covid-19 restrictions have held back the completion of the joint venture, which plans to develop 150MW of solar projects.

Another company that has changed its strategy from a focus on oil and gas to renewables is GETECH (LSE:GTC). Historically, Getech published geoscience data that was used for oil and gas exploration. The business is moving into hydrogen, geothermal and carbon capture services.

Cloud-based services will provide energy transition data and knowledge. Getech’s hydrocarbon skills can also be used for finding sites for extracting geothermal heat or storing carbon.

Most significantly, Getech acquired H2 Green, which is a hydrogen hub developer focused on commercial transport. Discussions are continuing for the development of the first hydrogen asset. This is likely to be a major hydrogen, production, storage and distribution. This should be the first of five sites, which could produce 14,000 tonnes of hydrogen each year. There is also a strategic agreement with Element Two, which could sell hydrogen from its refuelling stations.

The UK government has set out a hydrogen strategy that has an ambition for 5GW of hydrogen production capacity by 2030. A £240 million Net Zero Hydrogen Fund will be launched early next year. This fund will co-invest in projects and could help the H2 Green projects get off the ground.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

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