Climate change: These 25 stocks are part of the solution (and buys)

'Climate change: it's real, it's now and it's scary."

The statement isn't another reminder from environmental activists, frustrated at inaction by the developed world. Instead, it appears on the first page of an equity research report from Merrill Lynch – a report titled "A Call to Action – Climate Change Solutions Primer."

The assertion, and the idea that a call to action is required, may be glaringly obvious to many. But those who have been hardened by the political discourse in Canada and the United States, where climate change is deprioritized, or even denied, might be taken aback by the clarity of the Merrill Lynch message. (One U.S. financial journalist felt he needed to say "I want to stress that this is Merrill's opinion," as he shared the excerpt with his Facebook friends, including me.)

The Merrill Lynch report, part of a series on "thematic investing," certainly isn't the first piece of equity research to identify stock opportunities related to climate change. (AllianceBernstein LP identified the opportunities in the fight against climate change as an investing theme in 2009, for example.)

But the 332-page Merrill report, broad in scope, deep in detail, and freshly prepared – it was released Nov. 27 and made its way to clients this week – provides the best current road map to investing in companies that will benefit as the world, presumably, comes to grips with climate change as "one of the defining issues of our time," as the Merrill Lynch analysts say.

"Climate change and the carbon-intensive economy are already causing unprecedented damage to financial stability via physical, liability and transition risks," the U.K.-based analysts say. "Without action, the global mean cost of climate change could rise to 1 to 5 per cent of GDP [per] year – with emerging markets and the poor to be hit hardest."

The forecast from the Merrill Lynch analysts is for at least $13.5-trillion (U.S.) in global low-carbon energy investments through 2030.

There are, in their estimation, nine main "entry points" for investors to benefit from it, from the expected sectors like energy efficiency, wind and solar, to less obvious or lesser-known spaces like nuclear and "yieldcos," the dividend-paying offshoots of many of these companies.

In all, the Merrill Lynch analysts found 220 companies among the ones their firm regularly covers that have some exposure to climate change solutions. Their exposure ranges from "low" – the solutions being a non-material factor in the company's business model – to "high," where climate change solutions are core to the business model, perhaps even 100 per cent of sales.

But simply appearing on the list isn't a recommendation – after all, while many have "buy" ratings from the firm, Merrill Lynch is neutral on others, and has "sell" ratings on a few, for a host of factors including company fundamentals and valuation.

We'll reveal the winners – high-exposure climate change companies, trading on U.S. or Canadian exchanges, that are also Merrill buys – in a moment. But first, just three Canadian companies made the Merrill list – and the names might surprise you.

Magna International, on which Merrill has a "buy," has medium exposure to climate change solutions, Merrill figures, because of an evolution in auto parts toward improving fuel economy and carbon dioxide emission reductions. (Magna sponsored a study from the Council of Canadian Academies released in October on technology and policy options for a low-emission energy system in Canada.)

Bombardier Inc., on which Merrill has a "sell," and Canadian National Railway Inc., which has a "buy" rating, have high exposure to climate change because the firm believes rail and bus "are seen as solution providers, transporting more people further and faster, with lower emissions and less congestion."

CN is one of three railway companies on the list with high exposure and "buys," with Union Pacific Corp. and CSX Corp. the other two. New aircraft engines that consume less fuel – the centrepiece of Bombardier's recent efforts – are another trend.

Merrill's inclusion of alternative-energy companies as having high exposure to climate-change solutions is no surprise – there are four U.S.-based solar companies with "buy" ratings on the list. Less known by investors, perhaps, are "yieldcos," an emerging structure that carves out cash-generating alternative-energy assets from a parent company and rewards owners of the yieldcos with a dividend. The assets are typically power or other infrastructure assets that have long-term, contracted customers and can forecast cash flow over 15 to 20 years – and pay out 80 per cent to 90 per cent of cash flow, after debt service, as dividends.

Merrill has "buys" on NextEra Energy Partners LP, NRG Yield Inc., Pattern Energy Group Inc. and TerraForm Power Inc.

It has, however, been a tough year for the yieldcos: Even including dividends, total returns range from negative 25 per cent to negative 70 per cent for the four. The Merrill analysts say that volatility in the names, which started in June about two years after the yieldco model debuted on stock markets, has been driven by low oil prices, "indigestion" from their acquisitions of additional power assets, and the "over-issuance" of new shares in June and July.

This, they argue, creates "opportunity," and they urge investors to "own the tail with the strongest dog" – the highest-quality parent companies that created the yieldcos in the first place. Merrill's equity-ratings model also assesses dividend strength – and in all four cases, the firm believes the yieldcos can maintain or increases dividends.

Merrill's inclusion of energy efficiency extends to the information technology industry, and allows for a set of names that also may not be the first thought in investors' minds when the topic is climate change.

Merrill has a half-dozen semiconductor, storage and tech consulting companies with high climate-change solutions exposure on its "buy" list, including Netherlands-based ASML Holding NV and NXP Semiconductors NV and the U.K.'s ARM Holdings PLC. "Semiconductors are a key enabler of realizing energy efficiency in the automobiles, buildings, IT, capital goods, and transport sectors – as well as aiding the business case for renewables," Merrill says.

A business case that has become a lucrative imperative, they argue.