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  • Thematic Investing

    Environmental Services Industry: Not to be Underestimated

    Samir Barjon, ETF Product Analyst
    September 30, 2021
     

    The environmental services industry represents an integral part of the economy that may be overlooked and under-appreciated by investors. According to VanEck research, the U.S.-listed environmental services opportunity set generated $78.1 billion dollars in 2020, up from $65.8 billion in 2015. Environmental services and waste management companies are those that engage in waste removal, operate landfills and process recycling for a range of customers including individual homes, retail businesses and massive industrial operations.

    Environmental Services Index Outperforms S&P 500 over the Last Year

    Environmental Services Index Outperforms S&P 500 over the Last Year

    Source: Morningstar Direct. 8/1/2020 – 8/1/2021.

    Tech and Sustainability Trends Drive Growth in Environmental Services Industry

    The environmental services industry as measure by the NYSE Arca Environmental Services index has outperformed the S&P 500 in the last year, from August 2020 through August 2021, with outperformance being driven by stocks spanning across the sector, rather than just dominant players. The industry is creating new business models that align with evolving strategies. These strategies are being influenced by new technologies, from bins armed with sensors to optimization software solutions and automating workflows. As more operations move away from paper and evolve to digitalizing and automating workflows, they are finding new growth opportunities.

    Smart technology and sustainability is increasingly on the agenda, for instance:

    • Casella Waste Systems (3.6% weight as of 8/31/21, +45% return over the last 1 year), has established the first zero-sort recycling system which helps customers and communities reduce costs and ease participation by placing all recycle materials into a single bin.
    • Darling Ingredients (3.5% weight as of 8/31/21, +113% return over the last 1 year), one of the largest producers of renewable clean energy, has developed an innovative organic fertilizer that prevents over 40 million pounds of organic waste per year from going to landfills. The fertilizer recovers organic material from agricultural industries and allows for a much richer organic fertilizer while providing a sustainable purpose for the organic material recovered from the pet food industry each week.
    • Covanta holdings Corp (3.6% weight as of 8/31/21, +153% return over the last 1 year), a pioneer of new technology, has developed the world’s first wastewater evaporator, shock pulse generator, and total ash processing system. The company is also developing the first microgrid using waste-to-energy technology in the United States. The microgrid would ensure electricity continues to power wastewater facilities even if a weather event disrupts the main grid.
    • Waste Connections Inc (10.5% weight as of 8/31/21, +26% return over the last 1 year), in partnership with AMP Robotics, plans to deploy 24 AI-guided robotic systems to recover recyclables reclaimed as raw materials. The technology recovers plastics, cardboard, paper, cans, and many other packaging types reclaimed for raw material processing.
    • Ecolab (10.1% weight as of 8/31/21, +9.5% return over the last 1 year), a leading innovator, has applied digital monitoring and advanced data analytics to improve results, increase operation efficacy, lower costs, and extend asset life. Furthermore, Ecolab has designed advanced dispensing and control technology, including sensor tracing chemicals that measure and monitor real-time chemical concentrations and can automatically dose chemicals as acquired.

    Trends in technology and sustainability are converging in the environmental services industry to power new business models and broaden market outperformance. The goals of increasing operational efficiency and reducing risks continue to contribute to the industry’s digital transformation and exploration of new technology.

    M&A and Consolidation May Boost Revenue and Growth

    Mergers, acquisitions and consolidation activity may give a further boost to revenue and growth to the environmental services industry in the next few years. While a few select names have dominated the majority of market share, there remains many idiosyncratic opportunities in the market, which are seen as growth opportunities for the larger companies.

    Four major environmental waste management companies own the majority of market share in the United States. These four companies are Waste Republic Services, Waste Management, Waste Connections and Ecolab. According to VanEck, these four names account for more than 50% of the revenue generated within this industry, as defined by the NYSE Arca Environmental Services Index.

    According to Morningstar research, “Waste Connections remains acquisitive and has closed 14 acquisitions so far in 2021, adding about $115 of revenue,” with even more acquisitions in the pipeline for the remainder of 2021. In 2020, Waste Management bought Advanced Disposal for $4.6b in October 2020, massively increasing Waste Management’s customer base and landfill infrastructure.

    Instead of building into new markets organically, environmental services companies are using mergers and acquisitions as a way to boost revenues and market share, often by consolidating smaller, local businesses into the bigger organization.

    VanEck Environmental Services ETF (EVX®) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Environmental Services Index (AXENV), which is intended to track the overall performance of companies involved in waste collection, transfer and disposal services, recycling services, soil remediation, wastewater management and environmental consulting services.

    Additional Disclosure:

    This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    These selected companies were chosen because they have implemented significant technological advances, according to VanEck research.

    The NYSE Arca Environmental Services Index is a diversified group of selected companies involved in the management, removal and storage of consumer waste and industrial by-products, and related environmental services. The S&P 500 index seeks to track the performance of 500 large companies listed on stock exchanges in the United States.

    The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright© 2021 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

    An investment in the Fund may be subject to risks which include, among others, investing in the environmental services industry, equity securities, basic materials and industrials sectors, American depositary receipts (ADRs), small- and medium-capitalization companies, issuer-specific changes, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.

    Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.

  • Authored by

    Samir Barjon
    ETF Product Analyst