The Inflation Reduction Act, signed into law in August 2022, has set the stage for a brighter future by offering generous tax credits to companies willing to reduce their carbon emissions, according to Fidelity Portfolio Manager Bill Kennedy, in turn creating a surge of interest in green technologies, particularly among industrial gas giants.
“I’ve sharpened my focus on industrial gas names that are not just reducing their carbon emissions, but also pioneering the production of hydrogen—a cleaner, greener alternative to fossil fuels,” says Kennedy, who manages Fidelity® Sustainable International Equity Fund (FSYRX). “This is not a distant dream, as it's happening right now with two key industry leaders and represents a revolution that I believe can be as environmentally significant as it is financially rewarding.”
In helming the diversified international equity strategy since its inception in February 2022, Kennedy invests in high-quality, reasonably priced companies with above-average growth prospects and strong or improving environmental, social and governance characteristics. He favors businesses that have a stable and high return on capital, durable competitive positions, consistent profitability, solid free-cash-flow generation, a good balance sheet, and a management team whose interests are aligned with those of shareholders.
As oil producers—which unfortunately discharge a significant amount of carbon into the environment—work to reduce harmful emissions, Kennedy points out, industrial gas firms stand to benefit.
The industrial gas industry has become highly consolidated, with just three global operators, according to Kennedy. The fund counts two of them among its top overweight positions as of July 31, as he feels both have good management teams, sound balance sheets, reasonable valuations and a big addressable market.
The first is Linde, a multinational chemical producer headquartered in the U.K. and listed in the U.S. The other is Air Liquide, a France-based supplier of industrial gases and services.
“These are the largest industrial gas companies in the world, as measured by market share and revenue, though it’s worth acknowledging that, historically, neither has been a paragon of environmental virtue, but that narrative is rapidly changing,” Kennedy maintains.
Furthermore, both businesses have heavily invested in producing hydrogen, an alternative fuel that significantly reduces carbon emissions compared with the traditional fossil fuels used in heavy industry.
Kennedy believes the magic lies in how they produce this hydrogen—using either electricity generated from renewable energy sources (green hydrogen) or natural gas with carbon sequestration (blue hydrogen).
In doing so, Kennedy contends, these firms are cutting down on emissions by capturing carbon generated from an industrial activity—making cement, for example—and injecting it into sealed underground secure structures, such as depleted oil wells.
“This innovative approach not only helps the planet, but also positions these businesses for substantial earnings growth, which I believe can be counted on for many years to come,” he explains.
The stocks stand to benefit, says Kennedy, because the market is willing to pay a premium for companies that can demonstrate sustainable, long-term growth.
Linde and Air Liquide, which once grew earnings at a modest, low-single-digit rate, have seen their earnings growth soar into the mid- to high-single-digit range, a shift driven by their commitment to green and blue hydrogen and the broader environmental benefits it brings, Kennedy concludes.
For specific fund information, including full holdings, please click on the fund trading symbol above.
Bill Kennedy is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Kennedy manages Fidelity International Discovery and Sustainable International Equity strategies across various investment vehicles.
Prior to assuming his current responsibilities, Mr. Kennedy managed Fidelity Pacific Basin, Japan, and Worldwide strategies across various investment vehicles. Previously, he served as an assistant portfolio manager and as a research analyst covering investment opportunities in India and the regional power sector. Mr. Kennedy also served as director of equity research in Fidelity’s Hong Kong office and was a group leader of the Global Research group. Prior to joining Fidelity, Mr. Kennedy was an analyst in Prudential Investment Corporation’s private equity arm in Newark, NJ; Hong Kong; and Singapore. He has been in the financial industry since 1990.
Mr. Kennedy earned his bachelor of arts degree in economics from the University of Notre Dame. He is also a CFA® charterholder.