COP26: five top share picks that are climate leaders

7th October 2021 15:02

A City analyst has picked a handful of stocks for ethical investors. Find out why Rolls-Royce is also named as a favourite from the transport, property and fashion industries.

The role of Rolls-Royce (LSE:RR.) in decarbonising the aviation industry has been recognised in a City list ranking the stocks leading their respective sectors on the path to net zero.

In its report ahead of next month's United Nations COP26 conference in Glasgow, Liberum also names five stocks from across the UK and Europe it regards as ahead of the curve on climate issues.

They include private equity firm 3i Group (LSE:BR88), which Liberum says has made great strides integrating environmental, social and governance (ESG) risks into its investment process. Management compensation is also directly linked to ESG targets.

The Renewables Infrastructure Group (LSE:TRIG) is chosen as best value out of the 19 London-listed funds now focused on solar and wind power, as well as energy storage facilities. Liberum notes that the company runs 83 projects with a total energy capacity of 1.9 gigawatts (GW), but trades at the fourth-largest discount in the sector versus its one-year average.

The third of Liberum's top picks from the UK is Pensana (LSE:PRE), which is building a rare earth separation plant in the Humber estuary and the first anywhere to be located in a Freeport.

Rare earth metals are vital for electric motors, wind turbines and other parts of the green economy, highlighting the importance for Europe to source and process these metals from stable regions where supply disruptions are unlikely to happen.

Liberum said the facility under development is expected to produce 12,500 tonnes of rare earth metal oxides per year, 4,500 tonnes of which are magnet metals.

The two European stocks completing the five-strong list are French luxury goods group Kering (EURONEXT:KER) and Oslo-based Nordic Semiconductor.

Why Rolls-Royce has caught this broker’s eye

In the broker's look at individual sectors, it notes that transport is not yet moving quickly enough to meet the 2030 benchmarks for net zero or the 2050 target, despite the shift away from internal combustion engines towards electric and hydrogen cars.

Aviation faces the biggest hurdles within the transport sector, which is why the R&D efforts of Rolls-Royce in fuel efficiency has caught Liberum's eye. Its UltraFan technology, for example, delivers a 25% reduction in CO2 emissions compared to early Trent engines.

Rolls is also using its engineering know-how to develop small nuclear reactors, which are cheaper to build than traditional reactors. They have a power output of up to 440MW and can be used to generate hydrogen, ammonium or other synthetic fuels on a large scale.

Investors do not tend to think of the fashion industry as a major polluter, but Liberum warns it has the potential to be a top three emitter if it does not step up efforts to decarbonise.

Its top picks for the sector include Next (LSE:NXT), which it says has reduced its primary greenhouse gas emissions by more than any other UK retailer in the last three years. A key to this success was the drive to switch 100% of its electricity used in the UK and Ireland to renewables.

The next step for the company is to achieve a 40% reduction by 2030 in its supply chain-focused emissions intensity versus a 2019/20 baseline. Superdry (LSE:SDRY) is also picked out after switching to renewable energy and pledging to eliminate waste from packaging by 2025 and converting its supply to 100% organic cotton by 2030.

Liberum's top picks in property include Segro (LSE:SGRO) and Derwent London (LSE:DLN), which it says are already tackling the key challenge of embedded carbon in buildings.

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