Impact Investing in the Energy Industry

Abstract

Project Overview and Objective: Our goal was to propose a stock investment in a publicly traded company within the energy industry that satisfied both financial return criteria and the impact objectives defined by the FSISIF (Fuqua Sustainable Impact Student Investment Fund). The FSISIF is a student-run investment fund that manages approximately $300,000 in public equities and ETFs (Exchange Traded Funds). My role was as a core contributor in the Energy Industry Group, where we collectively conducted deep sector analysis, developed an impact evaluation framework, and ran financial models for potential investments. We ultimately recommended Otter Tail Corporation for inclusion in the fund—and our recommendation was adopted. Research Process and Industry Analysis: The project began with our team charter, outlining communication expectations and accountability measures. We then performed a comprehensive analysis of the energy, utilities, and power sectors. Recognizing limitations in ESG (Environmental, Social, and Governance)-aligned opportunities in traditional energy, we expanded our focus to include utilities and power companies, where we found stronger alignment with clean energy and access objectives. Our SWOT analysis identified electricity as an essential service in a stable industry, supported by significant tailwinds like the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA). At the same time, we acknowledged risks such as high capital intensity, regulatory complexity, aging infrastructure, and shifting energy market dynamics. These insights helped us refine the criteria we would use to assess potential investments. Impact Framework and Screening: We created a customized impact thesis and matrix to assess each company based on five dimensions: What impact is created, who is served, how much change is made (scale, depth, duration), and Impact Risk. We prioritized firms that deliver clean, reliable, and affordable energy to over 500,000 customers, especially in underserved areas, and that are committed to the transition to net-zero carbon emissions. We applied a multi-stage screening process, first filtering over 1,000 companies using financial, geographic, and credit-based metrics. From there, we narrowed our list, eventually focusing our modeling and diligence efforts on the top two: Orsted and Otter Tail. Financial Modeling and Valuation: We conducted discounted cash flow (DCF) models for both finalists: • Orsted: Our valuation yielded an 11% upside from its then-current price. However, we raised concerns about a recent $5.6B impairment and the company’s withdrawal from key U.S. offshore wind projects. • Otter Tail: Our valuation projected a 25% upside from its then-current price. The company showed strong financial health, stable margins, and attractive long-term growth. Investment Thesis and Impact Justification: Otter Tail operates in three segments—Electric, Manufacturing, and Plastics. While it is technically listed in the utility sector, more than 50% of its revenue now comes from finished goods (PVC Pipe), which initially raised questions around ESG alignment. However, our deeper analysis revealed strong environmental and social contributions: • Ambitious Net Zero Goals: Otter Tail plans to generate 50% of its energy from renewable sources by 2030 and cut carbon emissions by 97% by 2050. It installed new solar and wind capacity in 2023 and plans to direct 45% of CAPEX toward clean energy and transmission upgrades between 2024–2028. • Grid Resiliency: The company is investing in long-range transmission lines and grid technology to modernize its grid, improve reliability, and support renewable integration. • Affordable Energy for Rural Areas: Serving customers across the Dakotas and western Minnesota, Otter Tail provides electricity at below-average rates, supporting underserved, largely rural communities. Key Risks and Concerns: While we endorsed Otter Tail’s investment merits, we also raised several concerns with the FSISIF committee: • Funding high CAPEX (Capital Expenditures) needs for net-zero and transmission goals • Continued reliance on coal generation from two aging plants • Exposure to market power price fluctuations • A growing share of revenue from non-utility segments like plastics, which complicates its ESG profile Despite these risks, the investment committee voted to approve our recommendation, and Otter Tail became one of two new investments added to the FSISIF portfolio that semester. Conclusion Our team's analysis demonstrated that Otter Tail offers a rare blend of solid financial fundamentals and meaningful environmental and social impact. It operates in a stable, essential industry with long-term decarbonization goals and a strong focus on equitable energy access. While the company’s manufacturing and plastics segments require continued monitoring for ESG alignment, their contribution to water infrastructure provides environmental relevance. With a compelling valuation and clearly defined impact dimensions, Otter Tail was a strong example of how public equities can be both profitable and purpose-driven, and led to the FSISIF investment.