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What are we looking for?

Attractively valued companies that will benefit from investment strategies that consider risks related to climate change.

The screen

One month after the third anniversary of the Paris Agreement, it appears Canada’s largest investors are stepping up in the fight against climate change.

According to a recent report on 2018 investing trends by the Responsible Investment Association (RIA), assets under management (AUM) in “responsible” investment strategies was more than $2.1-trillion at the end of 2017. (Responsible investment incorporates environmental, social and governance (ESG) factors into investment decisions.) This amount is growing rapidly, with 2017 marking the first year that responsible AUM was actually larger than AUM in strategies that do not consider ESG concerns. Interestingly, according to a survey conducted by Ipsos on RIA’s behalf, the top two reasons investors gave for considering ESG issues are minimizing risk and improving returns – goals that all rational investors aim to achieve.

The top environmental issue, according to the Ipsos survey, is climate change. Of this $2.1-trillion, roughly $1.4-trillion comes from Canada’s 11-largest pension funds, such the Canada Pension Plan Investment Board, Ontario Teachers' Pension Plan and British Columbia Investment Management Corp., for example. One of these – Caisse de dépôt et placement du Québec – has committed to a 25-per-cent reduction in its carbon footprint for every dollar invested by 2025.

So, which Canadian companies might benefit from this shift in the way investment decisions are made?

First, we see which companies have lowered their annual carbon footprint the most over the past five years. Fifteen Canadian companies have reduced their CO2 output over this period by more than 100,000 tonnes, and this is our starting list of companies. From these 15, we filter for those which have made specific targets for future emissions and which have explicitly acknowledged that climate change represents commercial risks and/or opportunities. Finally, in our search for attractively valued names, we include only companies whose SmartEstimate has assigned a forward price-to-earnings ratio of less than 15.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure, serving more than 40,000 institutions in more than 190 countries.

What we found

The screen yields six companies, including two miners. One of these – Dundee Precious Metals Inc. – recently reported very positive production numbers. Gold production for 2018 was 201,100 ounces, beating company guidance of 190,000 to 200,000, and the mean estimate of 195,000. This makes 2018 the third consecutive year that Dundee’s gold output has risen, and the fact the miner has been able to reduce its carbon output so significantly during a multiyear production expansion is all the more impressive.

There is also more good news forecast for 2019. The mean estimate for Dundee’s gold output this year is 228,750 ounces, and the SmartEstimate is even higher at 232,260 ounces – meaning the analysts who have been more accurate in the past are even more bullish. The latest Reuters Poll has a median estimate for the price of gold throughout 2019 at US$1,300 an ounce, higher than the current futures price of around US$1,283.

Editor’s note: The screen for selected names that had reduced their carbon output yielded six companies, as shown in the table. A previous version of the article said the screen yielded five companies.

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

Select TSX companies lowering their carbon footprint

Company Ticker Market Cap ($Mil) Recent Close ($) 5Yr CO2 Reduction (Tonnes) 5Yr CO2 Reduction P/E (Next 12M) 1Yr Return Div. Yield (Next 12M)
Encana Corp. ECA-T 8,867 9.31 -2,197,000 -41.2% 10.9 -44.8% 1.0%
Dundee Precious Metals DPM-T 628 3.52 -107,667 -33.9% 9.8 11.0% 0.0%
Atco Ltd. ACO-X-T 4,606 40.20 -2,663,000 -19.6% 12.9 -3.9% 4.0%
Loblaw Companies Ltd. L-T 23,658 63.70 -103,324 -11.5% 14.1 16.5% 1.9%
Capital Power Corp. CPX-T 2,918 28.64 -876,000 -7.7% 13.2 30.0% 6.5%
Teck Resources Ltd. TECK-B-T 17,649 30.70 -173,000 -5.4% 8.5 -14.3% 0.8%

Source: Refinitiv

Hugh Smith, CFA, MBA, is an investment management specialist at Refinitiv.