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number cruncher

What are we looking for?

Canadian-listed companies with attractive valuations and more than 50 per cent of their revenue coming from green activities.

This year’s annual “Conference of the Parties” – COP27 in Sharm El-Sheikh – where business leaders, scientists and politicians gather to discuss action on climate change, comes to a close this week. There is hope that policy-makers will come away with a clearer picture on what form the greener economy of the future will take, and more urgency for implementing the transition.

Investors, naturally, will be wondering which companies will be poised to benefit. Some, such as a solar farm producing renewable energy, are obviously “green,” and this may be reflected through a higher valuation. Others, like a forestry company, for example, producing greener alternatives to steel and cement as construction materials, may be less obviously green and therefore not have the same valuation premium.

The screen

We will use the FTSE Russell Green Revenues Classification System (GRCS) to try to identify Canadian companies that fit this profile. GRCS is a classification scheme that identifies green products and services across the whole value chain in close alignment to the European Union’s taxonomy of green activities. We screen for companies that have:

  • More than 50 per cent of their revenue coming from green activities, according to GRCS;
  • A StarMine relative valuation ranking greater than 60. This is a percentile rank, relative to industry peers, based on a number of valuation metrics (for example, price-to-earnings, price-to-book, price-to-cash-flow). A higher ranking indicates a more attractive, or lower, valuation.

More about LSEG

London Stock Exchange Group PLC (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.

What we found

TSX-listed companies seen as solid bets in transition to a greener economy

CompanyTickerMkt. Cap. ($ Mil.) IndustryGRCS Green Rev. (%)StarMine Valuation RankDiv. Yld. (%)1Y Rtn. (%)Recent Price ($)
Canfor Corp.CFP-T2,896.5Forest & Wood Products85.11000.0-12.723.54
TransAlta Corp.TA-T3,363.7Independent Power Producers59.5691.7-6.812.37
GFL Environmental Inc.GFL-T11,919.5Waste Mgt., Disposal/Recycling90.6660.2-26.735.85
Innergex Renew. EnergyINE-T3,304.8Wind Electric Utilities100644.5-14.016.12

The screen yielded four companies from four different industries. In terms of valuation, Canfor Corp. (one of North America’s biggest lumber producers and 85.1 per cent green according to GRCS) stands out with a StarMine 100th percentile score – with a price-to-book ratio of only 0.6, compared with an average of 1.3 and 2.8 for its Paper & Forest Products and Basic Materials peers, respectively.

A slowing of U.S. housing demand is a potential risk for Canfor, but while the lion’s share of its costs are in Canadian dollars, more than half of its revenue comes from the United States. So, while rising U.S. interest rates would dampen demand for housing, and thus Canfor’s lumber products, they would also increase the value of the U.S. dollar. A more valuable greenback would improve Canfor’s margins and provide a natural hedge against slowing housing demand south of the border.

The only 100-per-cent green company – Innergex Renewable Energy Inc., a wind utility – also pays the largest dividend, a traditionally attractive attribute for utilities. TransAlta Corp., a company whose Canadian and U.S. coal segments made up roughly 60 per cent of revenues as recently as 2019, is now roughly 60-per-cent green after converting all of its coal-fired generation plants to natural gas. These green revenues come from gas-fired power generation where waste heat is reused, as well as both large-scale (greater than 10MW capacity) and small-scale hydro power generation.

The largest company on our list – GFL Environmental Inc. – has green revenues coming from a wide array of activities including water decontamination, recycling and hazardous and organic waste management.

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