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Morningstar Insights: Top Stocks for Climate-Focused Investors

Assets in climate funds topped $500 billion globally for the first time in the first half of 2023. Even in the United States, where appetite for sustainable funds has declined in recent quarters, climate-focused strategies collected more than $2.5 billion in net new money through October. In this article, we examine the top-rated stocks commonly held by U.S. climate funds.

What Are Climate Funds?

Climate funds represent a wide and growing range of strategies that aim to meet varying investor preferences, from decarbonizing a portfolio to investing in climate solutions. Our universe of climate funds is subdivided into five mutually exclusive groups based on investment objective and policy, diversification, and sector exposure: Low Carbon, Climate Transition, Climate Solutions, Green Bond, and Clean Energy/Tech. In this article, we focus on Clean Energy/Tech and Climate Solutions funds—the two equity-focused categories that lean most heavily into areas like electric vehicles, critical raw materials for the energy transition, carbon capture and storage, and renewable energy sources like hydroelectric and wind power.

Clean Energy/Tech and Climate Solutions funds tend to be more concentrated at the sector level than any other category of climate funds. These funds also have the highest exposure toward “pure-plays” in the renewable energy sector, such as solar photovoltaic system manufacturer First Solar and hydropower producer Brookfield Renewable. Because clean energy funds tend to be highly concentrated and subject to volatile market swings, investing in the sector isn’t for everyone. Diversification remains key.

What’s Inside Climate Funds?

We dissected the portfolios of U.S. Clean Energy/Tech and Climate Solutions funds to highlight the commonly held stocks that are rated favorably by Morningstar’s equity analysts. Unsurprisingly, based on these funds’ strategies, these companies tend to be providers of renewable energy solutions, precious metals required for the electrification of the economy, and electric and/or autonomous vehicles. On average, each of these stocks accounted for more than 2.5% of the portfolios in our sample. Two stocks appeared in the top holdings list for both Clean Energy/Tech funds and Climate Solutions funds—Tesla and SolarEdge Technologies.

In the following exhibits, we highlight various Morningstar metrics that illustrate our equity analysts’ opinions of these companies’ prospects for future performance. Namely, companies that earn 4 and 5 stars under the Morningstar Rating are trading at a discount relative to Morningstar’s estimate for the stock’s fair value. We also showcase Sustainalytics’ Impact Metrics, which represent the portion of each company’s revenue that is aligned to Climate Action, defined as the global effort to curb the Earth’s temperature rise and cope with unavoidable consequences.

Below are the 4- and 5-star companies most commonly held in solutions-oriented climate funds.

The clean energy providers on our list have taken a pummeling so far in 2023. Even so, the outlook remains bright for First Solar, driving a 4-star Morningstar Rating. According to analyst Brett Castelli, First Solar may be the biggest renewable energy winner from the Inflation Reduction Act of 2022 by selling to utility fields and expanding capacity in the U.S. to take advantage of domestic manufacturing incentives. From the climate solutions perspective, more than 80% of First Solar’s revenue is aligned to Climate Action impact because of its heavy focus on solar power generation.

Brookfield Renewable tops the list with nearly 100% of its revenue mapped to Climate Action impact. Most of this is due to the company’s leadership in hydroelectric power generation, but wind and solar have been growing as a percentage of the company’s energy mix in recent years. Brookfield Renewable’s diversification across clean energy assets contributes to a strong competitive position and a 4-star rating.

Orsted and Aptiv stand out as the two most highly rated stocks on the list. Orsted, which pioneered the offshore wind business and has a solid record in the industry, has faced some challenges in expanding its footprint in the United States. Among other factors, supply chain constraints and high interest rates caused the company to cancel a few projects, which negatively affected Morningstar’s fair value estimate for the stock. However, analyst Tancrede Fulop sees the company’s shares as materially undervalued, driving a 5-star rating.

Aptiv is a major supplier of components that make up a vehicle’s electrical systems, ranging from autonomous driving technology to the systems that distribute electric power in hybrid and electric vehicles. According to analyst Richard Hilgert, the company enjoys relatively sticky market share, supported by highly integrated customer relationships and long-term contracts. These factors contribute to the company’s narrow economic moat and 5-star rating.

Despite pressure from policymakers across the world to accelerate the transition to a low-carbon economy, clean energy and other climate-related stocks may still suffer periods of underperformance. As such, to lessen the chances of surprise, investors should take care to understand the risks and opportunities they court in their portfolios. Balancing fundamental financial metrics with emerging climate solutions data is one way to do this.


Morningstar Disclaimers:

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Morningstar, Inc. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

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