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number cruncher

What we are looking for

The government-appointed Sustainable Finance Action Council submitted to Finance Canada this past fall a proposal for a green taxonomy – a framework for defining what is a sustainable investment in Canada. It has yet to be publicly released by Ottawa, but investors are likely wondering which companies stand to benefit. “Greener” companies, as defined by the taxonomy, should attract capital from institutional investors that have made net-zero and other sustainability-related commitments. The European Union has already released its taxonomy. Canada, as a resource-rich economy, will almost certainly have a taxonomy that is at least slightly different from Europe’s, but we can use Europe’s framework as a proxy to identify Canadian companies whose revenues could be classified as especially green in Canada. If these revenues are attractively valued today, this could represent an enticing entry point for investors.

More about London Stock Exchange Group

LSEG is a leading global financial markets infrastructure and data provider. We play a vital social and economic role in the world’s financial system. With our trusted expertise and global scale, we enable the sustainable growth and stability of our customers and their communities. We are leaders in data and analytics, capital formation and trade execution and clearing and risk management.

The Screen

  • We look for Canadian companies that have at least two-thirds of their revenue estimated to be aligned to the EU taxonomy. This means that the revenue comes from an activity that is classified as green by the FTSE Russell Green Revenues Classification System, and also pass further criteria like “do no significant harm” to other sustainability goals. For example, certain minerals – nickel, lithium and cobalt, to name a few – are critical to the energy transition, and mining them can be considered a green activity, but if this is done in a way that destroys ecosystems or harms local Indigenous communities, this would not be EU taxonomy-aligned.
  • We will then look at the enterprise value (EV) to revenue ratio to see which of these companies’ green credentials are not yet priced in by the market, and thus could be attractive investments today.

What we found

Attractively priced stocks aligned to EU taxonomy on green investing

CompanyTickerEU Tax. Aligned Rev. (%)EV/Rev (NTM)1 Yr Total Return (%)Div Yield, NTM (%)Mkt Cap ($, millions)Mon Close ($)
Boralex IncBLX.TO100.08.733.21.6 4,196 41.00
Innergex Renewable Energy IncINE.TO100.08.6-1.44.4 3,332 16.39
Brookfield Renewable Partners LPBEP_u.TO99.68.8-12.35.0 9,958 36.32
West Fraser Timber Co LtdWFG.TO96.20.7-13.41.2 8,115 99.76
Canadian National Railway CoCNR.TO91. 110,738 164.81
Canadian Pacific Railway LtdCP.TO89. 96,365 104.03
Canfor CorpCFP.TO85.10.2-28.60.0 2,637 21.85
NFI Group IncNFI.TO79.80.7-37.81.0 892 11.61
Stantec IncSTN.TO68.61.8-0.91.1 7,297 66.15
Northland Power IncNPI.TO67. 9,270 37.79
Waste Connections IncWCN.TO66. 45,381 177.16

Source: London Stock Exchange Group | Data as of January 10, 2023

The screen yields 13 companies, with two from the forestry industry looking particularly attractively valued. West Fraser Timber Co. Ltd. and Canfor Corp. make all of their green revenue from the sustainable forestry microsector. They are also both attractively valued, with an enterprise value of only 0.7 times and 0.2 times forecast revenue for the next 12 months (NTM), respectively. Contrarian, opportunistic investors might also like the fact that Canfor shares are down 28.6 per cent over the past year, on a total return basis.

The only company whose shares are down more than Canfor’s is NFI Group Inc. – a Winnipeg-based company that produces mass-transportation vehicles. It is also attractively valued at 0.7 times NTM revenue. The company just won a contract on Tuesday to provide the city of Madison, Wis., with 46 zero-emission, high-capacity buses.

Investors are advised to do their own research before trading in any of the securities shown.

Hugh Smith, CFA, MBA, is director of sustainable finance and investing at London Stock Exchange Group.