Analysts from banks including JPMorgan and Bank of America have named the stocks they expect to benefit from a shift to renewable energy, as well as those that score highly on environmental, social and governance — or ESG — factors. JPMorgan is overweight utilities, including renewable energy firms. "Elevated carbon prices make switching out of fossil fuels and into renewables attractive. The green deal and US re-joining the Paris climate accord under the Biden administration are also helpful, at the margin," the analysts stated in a Sept. 6 research note, adding that the sector has "pricing power." It comes amid a growing focus on the so-called energy transition toward lower carbon methods of power generation, however the world's dependency on fossil fuels is likely to rise and a U.N. climate report warned of a "code red for humanity" last month. JPMorgan's top European picks in the sector include French energy company Engie , Italy's Enel and Portuguese renewables firm EDP , which are included in its "Clean Energy transition basket." Other favorite stocks include wind and solar firm Orsted , electricity company Iberdola , renewables firm RWE and Terna , an Italian electricity company. The analysts noted that traditional energy companies don't generally do well on ESG measures. "This has weighed on the sector's performance, as a shift to renewables is becoming an increasingly important theme, and will likely continue." However, JPMorgan is currently overweight the energy sector, noting it is down from March to date which "could be an opportunity." ESG 'improvers' Meanwhile, Bank of America analysts assessed traditional energy stocks' performance in terms of ESG factors, as well as which stocks are "underappreciated" by ESG fund managers. "Our analysis of ESG fund ownership finds Energy is the most underweighted sector within Europe," they said in a Sept 9. research note. The funds might focus on emissions reductions and would therefore exclude traditional oil and gas firms, BofA said, but noted: "As the sector decarbonizes, we think ESG funds could increase exposure to companies that better manage their ESG risks relative to peers." "Investors are increasingly looking for ESG improvers: companies intending to manage ESG risks and opportunities but whose efforts may not yet be reflected in scores/ratings by ESG ratings providers or fund managers," its analysts added. The bank created an "ESGMeter" with three levels: low, medium and high. It said those companies that score highly were most likely to "translate into superior 'financial stability' (defined as a higher return on equity and lower earnings and price volatility) relative to a company's regional sector peers." Companies with "high" scores for all three ESG metrics include European oil companies Equinor , Galp Energia and OMV , all of which are buy-rated by the bank. Inflation-beating stocks Bernstein's analysts included a handful of renewable energy stocks in a Sept. 13 research note looking at inflation in the overall market. "We are not yet out of the woods on cost inflation. Despite financial markets seeming sanguine about inflation risks, spot inflation indicators continue to increase in many areas," the analysts led by Sarah McCarthy stated, noting indicators such as higher wages and transport costs. In August, euro zone inflation hit a 10-year high , with consumer prices increasing by 3% from a year ago. Bernstein polled its analysts on stocks that can withstand cost pressure better than their peers, picking Scottish firm SSE within utilities. "We highlight SSE as a beneficiary of higher inflation due to its inflation linked revenues in the networks division as well renewables division," the research note stated. Like JPMorgan, it also likes EDP, saying it has "disciplined green growth," and Enel, which it called a "renewables powerhouse." - CNBC's Sam Meredith contributed to this report.
This image shows the La Muela 3 wind farm in Spain.
Enel Green Power
Analysts from banks including JPMorgan and Bank of America have named the stocks they expect to benefit from a shift to renewable energy, as well as those that score highly on environmental, social and governance — or ESG — factors.