Sustainable Investing: These under-the-radar stocks fight climate change by reducing carbon emissions


To fight climate change, most investors think about renewable energy and electric vehicles. But there’s another big carbon-belching culprit out there, and cutting emissions from this sector is key to mitigating climate change.

It’s energy wasted in buildings, and fighting it doesn’t require relying on unproven technologies from a startup company. In fact, these methods and products used in this sector are about as old-school as it gets: energy efficiency.

The buildings construction industry accounts for 38% of total global energy-related carbon emissions, according to a 2020 report from the Global Alliance for Buildings and Construction, part of the United Nations environment program.

Many of the companies that are leading the way on energy efficiency are in unsexy industries such as HVAC and insulation, which were often ignored in last year’s rush to green-themed stocks. Unlike a lot of techy green stocks that are still shaking off the excesses of 2020’s rally, many of these names have slowly churned higher and are up on the year.

That overlooked status may change as environmental, social and governance investors seek other areas to reduce carbon. For the buildings sector to meet net-zero goals by 2050, which is completely offsetting the greenhouse gas emissions produced by taking emissions out of the atmosphere, the report says direct building carbon emissions would need to fall by 50%.

In the U.S., two policy goals may drive greater interest in building energy efficiency, whether for new construction or retrofitting buildings, says Richard Wolfe, equity analyst at CFRA. First is the American Rescue Plan passed earlier this year, where $122 billion was allocated to support kindergarten through high schools to safely reopen, and second is the possible passage of President Joe Biden’s infrastructure bill.

Wolfe says some money earmarked for schools under the Rescue Plan may go to upgrading ventilation systems. A June 2020 Government Accountability Office report estimated that 41% of U.S. school districts need to update or replace HVAC systems.

“Assuming an infrastructure bill or something similar passes that is focused on retrofitting homes and buildings, this is a multiyear tailwind that we see,” he says.

HVAC companies leading the way

Brandon Rakszawski, director, ETF product development at VanEck, says a lot of the companies in the energy efficiency buildings space have evolved, partially out of necessity from government mandates to reduce carbon. However, the corporate messaging has changed, too.

“Companies that might have pitch their products and services based on cost savings are now being looked to for reducing emissions, which is kind of a double benefit,” he says.

An April Morgan Stanley research note says that the HVAC industry has taken the lead on setting decarbonization goals, driven by technology enhancements that generate increased energy efficiency and higher paybacks for customers. Three names stand out: Trane Technologies
Carrier Global

and Johnson Controls
all which have high ESG marks from MSCI, too.

In 2019, Trane announced a target to reduce one gigaton in carbon emissions from customers’ footprints, while Carrier Global and Johnson Controls announced similar targets, the bank says. Morgan Stanley says investments in higher-efficiency HVAC systems over the next 15 years will increase the cumulative total addressable market by $140 billion to $350 billion and will reduce carbon emissions by 1.7 gigatons over the same time frame.

Wolfe, who has buy ratings on these stocks, says Trane is investing heavily in sustainable solutions, including low and no global-warming refrigerants. Creating new refrigerants will be needed as the Environmental Protection Agency proposed its first rule to phase down the production and consumption of hydrofluorocarbon refrigerants, a highly potent greenhouse gas, he added.

Johnson Controls also is a leader in the smart technologies and building controls space, which includes sensors for lighting and temperature control, Wolfe says. The company has a digital platform that integrates building systems data which helps with predictive maintenance and remote diagnostics to help building managers optimize asset use and save energy.

Insulation and lighting

Peter Krull, CEO of Earth Equity Advisors, says ESG investors can also consider insulation firms. “The best kilowatt is the one that’s never used,” he says.

ESG investors need to look at environmental impact of the type of insulation used since some companies rely on harsh chemicals to create their products. Krull says he’s owned Owens Corning
which gets high ESG ratings from both MSCI and Refinitiv across all three ESG pillars. In addition to saving energy for its customers, the firm’s 2030 sustainability report has targets to cut its carbon emissions and volatile organic compound emissions by half.

Two other leaders in the insulation space are Ireland-based Kingspan Group

and Danish firm Rockwool
Rakszawski says, which are part of the VanEck Vectors Low Carbon Energy ETF
an index-based ETF that includes companies in smart grid technologies and building or industrial materials that reduce carbon emissions or energy consumption.

Energy-efficient lighting has made big advances in recent years in the move from heat-producing incandescent bulbs to fluorescent and now LEDs. Krull likes midcap company Acuity Brands
which produces lighting and building management for residential and commercial spaces. The firm said as of March 2021, its operations are 100% carbon neutral.

Beyond the building envelope

Hubert Aarts, portfolio manager for Pax Global Environmental Markets PGRNX, a fund that has 37% of holdings invested in the energy efficiency sector, says as investors consider energy efficiency and net-zero carbon emissions, they may want to look beyond the building envelope.

“You can build a net-zero building, but it’s not a standalone building. The infrastructure around it needs to be low carbon as well,” he says.

Two bigger infrastructure ideas for energy efficiency are water supply and power grids. Pushing water in a city is very energy intensive because water is heavy, and Xylem

makes high-efficiency water pumps, he says. Hubbell

sells electrical and electronic products for residential, commercial, industrial and utility applications to upgrade systems to save energy.

 “If you are building a completely new village somewhere, besides the land, you need everything that comes with it. You need to think about the that whole infrastructure chain,” he says.

There are no pure-play energy-efficiency mutual funds or ETFs, although one new ETF, Invesco MSCI Green Building ETF
invests in an index of mostly real-estate investment trusts where 50% of its revenues come certified green buildings.

Pat O’Hare, chief market analyst at, says given many of these companies have been operating for decades may offer investors stability in a sometimes-volatile theme. “These are reputable, well established companies that are in a good position and have the credibility behind their history probably attract more business than a lot of newer upstart companies,” he says.

Here’s how Wall Street analysts think about the domestic energy plays mentioned in this article. As always, you should do your own research about any investment.


Debbie Carlson is a MarketWatch columnist. She doesn’t own any of the funds or stocks mentioned in this article. Follow her on Twitter @DebbieCarlson1.

Also read: Sustainable agriculture is the next way ESG investors can fight climate change

And: If you support green energy, you should buy utilities and oil stocks — here’s why

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