With tax year end approaching (5 April), now’s a great time to take a look at your investments. There are quite a few big trends worth watching, but the push toward sustainable energy is perhaps the most exciting.

Sustainable energy is gaining traction as a top priority for governments around the world and that means conditions are ripe for growth.

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There are lots of ways to play the sustainable energy trend, but we’ve pulled out three companies we think are well-placed to benefit from the shift towards cleaner power.

This article isn't personal advice. If you’re not sure if an investment is right for you, seek advice. Investments and any income they give you can fall as well as rise in value, so you could get back less than you invest.

Remember, investing in individual companies isn't right for everyone. That's because it's higher risk, your investment depends on the fate of that company. If that company fails, you risk losing your whole investment. If you cannot afford to lose your investment, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

Air Products & Chemicals

One of the most promising new technologies in sustainable energy is green hydrogen. Hydrogen will have to grow from 0.1% of the global energy mix in 2020 to 10% in 2050 in order to achieve net zero. While that might sound like a small slice of the pie, the pie itself is enormous.

Global hydrogen demand by sector 2019-2021, and the net-zero energy (NZE) forecast demand in 2030

Source: International Energy Agency.

Hydrogen isn’t necessarily ‘clean’ energy, but there are a range of ways to reduce its impact. Green hydrogen uses renewable energy to break water into hydrogen and oxygen, so it doesn’t take a toll on the environment.

US-based Air Products & Chemicals is building America’s largest green hydrogen facilities together with AES Corporation. It’s also working on a similar project in Saudi Arabia, which together with its blue hydrogen projects in Canada and the US, makes up a small, loss-making part of the business.

Clean hydrogen production should become a growth avenue once the projects come online. The financial benefits of these projects are some way off, but new US regulations mean they could offer a helpful tailwind through tax breaks.

The core business supplying industrial gas is supporting clean hydrogen expansion. Industrial gas customers tend to be sticky, so Air Products enjoys long-term contracts with favourable terms. That translates into more reliable, robust cashflow.

The group’s just cut its costs, sending operating margins from 16% in 2014 to 22% in 2021. That fell to 19% in 2022 thanks to the impact of rising input costs and exchange rates, but is expected to expand to around 23% by 2027.

Add to that the income improvements that should come from over $20bn in investment over the past five years, and Air Products is in a strong spot for a successful pivot toward clean energy.

However, there are some pitfalls to be mindful of.

Air Products’ fortunes wax and wane with the economy – industrial products are in demand when global industries are healthy. That means Air Products wouldn’t be immune to a prolonged downturn.

The group’s also in danger of losing some of its margin improvements if input costs continue to rise. Investors were underwhelmed by the group’s first quarter results, which has brought Air Products’ valuation to its lowest level this year. However, at 23.8 times expected earnings, it’s still relatively steep.

The premium price tag is justified if the group’s able to make good on its hydrogen ambitions. But given these projects are still in the early stages, it’s a risk to consider.

To buy US shares you must first complete and return a US government W-8BEN form.

See the latest Air Products & Chemicals share price and how to trade

NextEra Energy

NextEra Energy is an American utility that generates and distributes electricity.

The group’s split into two divisions. Florida Power & Light (FPL), which makes, transports and sells electric energy throughout Florida, and NextEra Energy Resources (NEER), which develops and manages electric generation facilities. It’s the latter part of the business that sustainable investors will be interested in.

The bulk of NEER’s energy comes from clean and renewable sources and it’s become the world’s largest wind and solar generator. This part of the business made up around 40% of underlying profits last year, and brought 4,600 megawatts of renewable energy into service over the course of the year.

Strong demand for renewables is expected to continue, which should support growth in this part of the business.

2021 NEER generating capacity

Source: 2021 NextEra annual report.

FPL is the profit driver for NextEra and given its status as a regulated utility, comes with some relatively reliable income. What sets FPL apart is the group’s focus on increasing its mix of energy generation.

Natural gas makes up the bulk of its energy mix, but solar is an important and growing part of the portfolio. Investment in diversifying its energy mix and improving infrastructure is necessary. But the group’s position as one of the lowest-cost providers is a key competitive advantage and one NextEra has managed to protect despite its expansion.

It’s rare to find a utility with growth potential, but NextEra offers that. The group’s renewables arm is emerging as a leader in a rapidly growing market, while its regulated utilities arm provides the steady base to keep things ticking over.

The growth potential means the forecast dividend yield of 2.6% is somewhat lower than what you’d expect from a utility – remember though, yields are variable, and no dividend is guaranteed. Investment in growing parts of the business also means net debt is more than seven times underlying cash profits.

However, debt is a necessary evil for utilities. And when you compare the size of the group’s assets to its debt pile, it’s in a stronger position than most of its peers.

NextEra’s got a lot of ticks in the positive column, but that doesn’t mean the group comes without risk.

It’s recently found itself implicated in a political scandal related to FPL’s campaign donations in Florida state elections. Soon after, CEO Eric Silagy announced plans to step down. If this develops further, NextEra could find itself on the hook for costly fines and significant reputational damage.

A new CEO together with potential controversy ahead means the shares are currently trading at their lowest valuation since March 2020. Investors comfortable with the long-term story for NextEra could see this as an attractive entry point, but the risks can’t be discounted.

To buy US shares you must first complete and return a US government W-8BEN form.

See the latest NextEra share price and how to trade

Schneider Electric

Schneider Electric is a French company that specialises in the distribution and management of energy. The group offers end-to-end efficient solutions for everything from buildings and data centres to the electric grid itself.

With operations around the world, the group’s cut nearly 350m tonnes of carbon dioxide from customer emissions and connected 34m people with green electricity in its lifetime.

Schneider Electric 2021 revenue by geography

Source: Schneider Electric 2021 annual report.

There’s no question the group’s offerings make the world a little bit greener. Schneider Electric’s aiming to grow impact revenue to 80% of overall sales by 2025. These are the products and services that create efficiency, support decarbonisation, and promote longer use of existing assets through better maintenance and repair programmes. At the end of 2022, this type of revenue made up 72% of the total.

The business itself is also extremely focused on sustainability, with a detailed transformation strategy in place. It’s working to clean up its own operations as well. It’s committed to using deforestation-free wood throughout the supply chain as part of a pledge to increase green material content in its products. It’s also planning to eliminate single-use plastic from primary and secondary packaging, a goal it’s nearly halfway to achieving.

The green credentials are hard to fault. But Schneider is no charity. Underlying cash profits rose 14% to €6bn last year, reflecting profit margins upwards of 17%. Improving demand, particularly for its digital products, is expected to support continued growth, while easing supply chain issues allow the group to meet that demand at a profit. Management sees margins continuing to expand in the year ahead.

The group’s balance sheet is also in good shape – although a recent acquisition to bolster its software business means debt’s now on the higher side, at nearly two times underlying cash profits.

Schneider Electric is trading at just under 20 times expected earnings, above the long-term average. Investors are expecting a lot, so any missteps could cause turbulence – a forecast dividend yield of 2.2% won’t do much to make ups and downs more palatable either. Remember, yields are variable, and no dividend is ever guaranteed. Withholding tax can also sometimes apply to overseas dividends.

A new CEO taking over in May also heightens the risk of a potential slip up. Although he’s expected to stay the course mapped out by his predecessor, leadership changes always come with some level of risk.

See the latest Schneider Electric share price and how to trade

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Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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