ESG Rock Stars Sprout From Safe Utility Stocks in Canada

(Bloomberg) -- There’s a green revolution taking place in a corner of Canada’s stock market.

Some of the nation’s oldest utilities are turning themselves into renewable powerhouses with a bigger foothold in alternative energy. And they’re being rewarded in the stock market by traders scouring for favorable investments in the environmental, social and governance space.

“They are most definitely attractive because of the nature of the assets they own, which would be renewable assets,” Martin Grosskopf, money manager at AGF Investments Inc. said by phone. “There is absolutely appetite to get more exposure to carbon reductions and assets that are carbon-light.”

Last year, the S&P/TSX Composite Utilities Index was the second-best group of Canadian stocks -- surging 32% and gaining C$35 billion ($26 billion) in market value -- driven largely by a pullback in bond yields, increased appetite for low-volatility shares and improving balance sheets. That has continued in 2020. They remain in the No. 2 spot, after tech, as geopolitical tensions and a viral outbreak roil global markets.

Innergex Renewable Energy Inc., a renewable power producer, has soared 26% in 2020 after a 34% rally last year. Just this week, it announced a C$661 million partnership with Hydro-Québec targeting wind and solar projects.

Boralex Inc., an electricity producer with renewable energy power stations, is up 20% this year after a 45% climb in 2019. Algonquin Power & Utilities Corp., the regulated utility with sustainable energy assets is trading at the highest level since it was listed about 22 years ago.

While utilities have always been viewed as bond proxies in the stock market, Grosskopf says a shift is happening as the popularity of ESG investing climbs.

“Yield is still very important for assessing the value of a company like a utility, but there is now an additional interest in the market regardless of the company’s spread over 10 years,” he said. “The dynamics are maybe changing a little bit.”

Investor optimism is seen in a granular part of the stock market too -- the weighting of utility shares on the benchmark has doubled in four years.

Canada stands out as a prime target for foreign investors in the sector. With a scarcity of quality public companies in the pure-play renewable space, Canada has a handful of them with solid management track records that have been around for a long time.

“International investors from you name it from Europe to Asia to places like Australia have started to focus a bit more attention on some of these Canadian renewable names,” Mark Jarvi, an analyst at Canadian Imperial Bank of Commerce, said by phone.

As more companies commit to zero emissions, the esteem of carbon offsets increases, making a case for value creation in renewable power producers that historically hadn’t been priced in, Jarvi said.

Markets -- Just The Numbers

Economy

The economy added 34,500 positions in January, all in full-time work, beating economist expectations for 17,500 new jobs. The unemployment rate dropped slightly to 5.5% in the month, from 5.6% in December and wage gains accelerated 4.4%, while hours worked rose 0.5%.

Canada can now put a price tag on its diplomatic feud with China -- exports to the Asian powerhouse plunged 16% to C$4.6 billion last year. That’s the first decline in shipments to China since 2014, and the largest drop in data going back to 1997.

Politics

In more China news, Canada’s ambassador to Beijing said the arrest of a top Huawei Technologies Co. executive in late 2018 “fundamentally changed” the nation’s relationship with its second-largest trading partner. “The chill is real,” Dominic Barton told lawmakers Wednesday in Ottawa.

Supporters of Canada’s energy industry can breathe a sigh of relief. Prime Minister Justin Trudeau’s government cleared a key legal hurdle on its plan to expand a major oil pipeline, providing optimism the project will proceed and sending a lifeline to the country’s ailing energy industry. But the cost to build the Trans Mountain expansion has increased 70% to C$12.6 billion because of legal delays and accommodations made to indigenous communities along its route, the pipeline’s operator said Friday in an emailed statement.

#TrendingInCanada

Toronto Raptors NBA players Serge Ibaka and OG Anunoby had a “scarf-off” battle after Anunoby claimed that he helped Ibaka with his fashion sense and introduced him to scarves as a fashion accessory. Ibaka has vehemently denied that statement, adding that he’s been in the scarf game for 10 years.

To contact the reporter on this story: Divya Balji in Toronto at dbalji1@bloomberg.net

To contact the editors responsible for this story: Kyung Bok Cho at kcho7@bloomberg.net, Jacqueline Thorpe, Rita Nazareth

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