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Outside the Box: Winners and losers in the ESG-investing push: Garbage companies, utilities and convenience stores

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Investors already know the obvious industries set to rise and fall with renewable energy.

Global investment in oil and gas is expected to grow only 2% a year in the coming decade — though there will be a short-term burst due to the Ukraine conflict — then stagnate or plunge, according to proprietary L.E.K. research. Meanwhile, renewables investment will swell and grow 10% to 50% a year depending on the technology.

But while you may be late in the game to invest in a company such as Tesla TSLA, -4.96%, less-scrutinized industries are flying under the radar. A look at some of the unexpected winners and losers of the energy revolution:

Waste management

Every company frets about meeting its environmental, social and governance (ESG) goals. One of the major ways to do so is to reduce consumption and waste. This presents a major opportunity for waste management, which is moving from its past as simple garbage hauling to becoming a full-service sustainability partner.

The industry is improving sorting and waste-stream analysis and finding alternative markets for recyclables. Waste-management companies are investing in things like battery recycling for energy storage and powering electric cars. And they’re helping corporations reach their goals of sending no more waste to landfills.

The expanding menu of services translates to expanding revenue streams. With every company running toward net zero landfill use, few industries are better poised to capitalize.

Utility disruptors

Power monopolies were born from a simple proposition: providing reliable electricity. But that assurance is waning as energy production becomes more diverse — and managing the grid more complex.

It’s one thing to deliver steady power from a single coal or gas plant. It’s quite another to manage a grid increasingly powered by renewables, intermittent sources predicated on wind and sun. Throw in climate change — bringing fires to the West, more hurricanes to the South and furious storms in the Northeast — and America’s aging grid is becoming a major liability.

Set to take advantage are microgrid developers. Once associated with people living alone in the woods, microgrids are making their way to industrial parks and residential neighborhoods. They’re often cheaper and greener — powered by solar energy, battery energy storage, gas or hydrogen generators, or fuel cells — and capable of running independently when calamity strikes the grid at large. 

Their reliability will only improve with advancements in energy storage and fuel cells. Compared to conventional power lines, microgrids are soon to become the new name in stability.

Soybeans

Name a fuel, and be assured there’s a greener version under development — from renewable diesel to sustainable aviation fuel to bunker fuel for shipping. And there’s a good chance that that greener version is made from soybean oil.

Soybeans are experiencing the same growth as corn during ethanol’s rise, only more so. Corn served as but a percentage of a gasoline blend. These new soybean fuels are a much lower-carbon alternative to oil-based diesel. Huge opportunities could open up for those looking to invest in soybean planting and the machines that crush soybeans into oil.

Convenience stores and gas stations

Not every industry will be taking a bow, though. Last year, global electric vehicle (EV) sales rose more than 80 percent, according to BloombergNEF. Each new purchase promises to reduce the foot traffic to and value of gas stations and the convenience stores attached to them. As fewer heed the call of gas pumps, it becomes much harder to lure customers to the snack aisle.

Some gas stations will likely transition to electric charging stations. But they’re at a distinct disadvantage. Most EV owners will be recharging at home. And if they do need a charge while they’re out and about, convenience stores are ill-suited to host them for the 30 to 45 minutes or so it takes to complete a full charge. Retailers like grocers and big box stores have the advantage of allowing people to shop while they wait. All of which leaves the $36 billion convenience store market facing an existential threat. 

Companies serving process manufacturers

As we shift away from oil and petrochemicals, and increase reuse and recycling, the demand for plastics and other petrochemical-based byproducts will drop. That means less business for process manufacturers, which convert chemical recipes into finished products (as opposed to discrete manufacturers, who turn parts into wholes).

While this is a problem for process manufacturers, it is also a problem for the product, service and automation companies that work directly with process manufacturers — and which together form a multibillion-dollar industry in the U.S. Take industrial pump, valve, pipe and automation companies: Up to 60% of their business could be contracted with process manufacturers — and for some it might even be more than that.

Any reduction in demand for process manufacturing could be devastating for these companies. Those that ultimately succeed will be the businesses that reorient their products and services around key areas of the energy transition — such as hydrogen fuel, carbon capture or solar plant asset management.

Stiff headwinds await some industries, but others are riding the gust of the clean energy transition. Investors would be wise to closely examine its effects across the economy and adjust their portfolios accordingly.

Amar Gujral is a managing director and partner at L.E.K. Consulting and a leader of the firm’s energy and environment practice.

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