Essex Global Environmental Opportunities Strategy (GEOS) Review:
Performance – January, 2021
The equity market volatility of January, 2021 was driven by a lofty equity market overall coupled with domestic civil unrest and extreme market speculation on retail trading platforms. Our investment objective and focus does not waver during such market backdrops when managing the Essex Global Environmental Opportunities Strategy (GEOS), and we did take advantage of some temporary stock price weakness to add to select portfolio positions. The Essex Global Environmental Opportunities Strategy outpaced the MSCI World Index, posting a 2.4% return for the month (2.3% net) versus -1.1% for the MSCI World Index without Income.
For portfolio transactions in January, we trimmed power technology holding American Superconductor early in the month given its strong performance and sold the entire position mid-month due to the stock hitting our price target. Early in the month as referenced above, we added to European holdings Umicore and Kingspan Group as they both exhibited attractive valuations with improving fundamentals. We trimmed Cree, the silicon carbide leader based on strong stock price performance, using the proceeds to increase portfolio weight in sensor company Sensata Technologies, which resides in the GEOS efficient transport theme. Later in the month we again increased the GEOS weight of Brussels-based, battery recycling company Umicore to 2.5%. We also added to Landis+Gyr, the European electric meter company as the stock has been a laggard with fundamentals that are improving.
Social Impact Management Update
We are actively following the movement afoot from major integrated oil companies over the past year to acquire new energy assets, and shift their legacy fossil fuel businesses in a clean tech direction. Over the past several months, European energy companies such as BP and Total have acquired significant renewable energy assets, as well as clean technology infrastructure assets such as EV charging companies. Our GEOS power merchants and generation holding Orsted announced last year a plan to be carbon-neutral by 2025, with targets matching scientific recommendations. In their recently released sustainability report, Orsted stated their renewable energy capacity increased by 14% in 2020, to 11.3 gigawatts (GW). Orsted is now the largest installer and operator of offshore wind projects, equating to over 7.5 GW (Orstead; 2021). Orsted’s overall renewable energy solutions avoided over 13 million metric tons (MMT) of CO2 last year, an increase of 2 MMT of CO2 from 2019. The aggregate total of CO2 mitigated from Orsted wind projects is now almost 60 MMT of CO2 since 2006.
While we expect less fossil fuels to be used for transportation in coming years, we believe cleaner technologies are at hand to substitute fossil fuels for many other industries such as packaging or consumer products ingredients. Bioingredients are being increasingly used in food and consumer packaged goods as well as cosmetics, given increased consumer demand for sustainable products coupled with increasingly competitive pricing for sustainable ingredients. A key GEOS holding in our low carbon commerce theme is Amyris, a renewable products company that creates molecules to transform renewable carbon sources into consumer products such as beauty, health and wellness including CBD, and flavor and fragrances. Amyris has a very large intellectual property platform to leverage new formulations for many end markets. Recently, the company indicated they have developed six new molecules and expects to close agreements for two new molecules this quarter. Amyris can achieve this high level of development ahead of their competition given its automated design and predictive scale-up platform development. Amyris solves the U.N. Sustainable Development Goals (SDGs) 12 – Responsible Consumption and Production, as well as 13 – Climate Action. For example, Amyris has designed and sourced Biosilica, a plant-derived silica made from sugarcane ashes, offering a sustainable alternative to microplastics, which are used in cosmetics products and lead to micro particulate water pollution.
Attribution – January, 2021:
Amyris – AMRS: (+52.2% for the month of January 2021) is in the GEOS low carbon commerce theme, given the firm’s focus discussed above on providing sustainable, plant-derived alternative products for the health and beauty and food products industries. Among many plant-based formulations, Amyris produces bisabolol, a skin care ingredient, using sugarcane as opposed to legacy standards which source from the Candeia tree. The Amyris process has a much lower environmental impact, requiring 230 times less land to produce the same quantity of oil. Amyris should benefit from California’s recent statute banning 24 toxic chemicals for cosmetic use.
Aspen Aerogels – ASPN: (+20.2%) is in the GEOS clean tech & efficiency theme, producing highly efficient and safe insulating foam products for industrial applications. Aspen has developed a differentiated and promising foam insulation for use in lithium battery packs for protection during a potential thermal runaway. ASPN is working on securing several contracts from leading battery and electric vehicle (EV) manufacturers.
Umicore – UMI BB: (+18.2%) is in the GEOS efficient transport theme, providing the most advanced battery cathodes for use in EVs and stationary storage applications. Umicore’s legacy business was catalytic converters for internal combustion engines, and they are also now moving to advanced battery recycling.
Iteris – ITI: (+15.2%) is also in the GEOS efficient transport theme, providing smart traffic management systems to municipalities which limit traffic congestion and improve pedestrian safety. Iteris has conducted several strategic acquisitions the enhance its already admirable position in traffic management systems, and has won several large contracts in the past six months.
PSI Software – PSAN GY: (+13.1%) resides in the GEOS power technology theme, with key technologies for electric utilities to optimize electricity delivery and management, leading to lower line losses and improved customer experience.
Itron – ITRI: (-10.3% for the month of January 2021) is a key holding in the GEOS power technology theme, providing electricity meters and management services to electric utilities that optimize electrical grid management. Itron has strong penetration of advanced metering infrastructure in the U.S. and is looking to expand further overseas.
MP Materials – MP: (-9.3%) is a new position in the GEOS clean tech and efficiency theme, providing rare earth materials for clean technologies such as wind turbines and electric vehicle motors. MP is well positioned as clean tech firms are heavily dependent on China for material supplies, and MP is U.S.-based.
Orsted A/S – ORSTED DC: (-6.8%), discussed above is in the GEOS power merchants & generation theme, and is the leading offshore wind developer. Orsted initially developed wind projects in the Nordics, and is now bidding on several projects off our East Coast.
Hannon Armstrong – HASI: (-6.8%) is a long-standing GEOS holding in the environmental finance theme. HASI provides financing for commercial and institutional energy efficiency retrofits, installing LED lighting systems, distributed energy, and now water management technologies.
Landis+Gyr – LAND SW: (-5.8%) resides in the GEOS power technology theme, and is a similar company to Itron, yet with primary revenue exposure to Europe.
The Current Outlook
As we stated last month, we believe we are now in the strongest phase of the 20-year cycle for cleantech, Cleantech 3.0, where multiple catalysts are emerging to drive clean tech success and growth for many years to come. The unfolding of this disruptive trend is due to clean technologies that save money and natural resources while improving the quality of life. As commercial viability increases for the technologies represented by the GEOS themes, they will continue to grow and penetrate new end markets. At the time when commercial adoption for clean technologies is scaling like never before, we are seeing unprecedented global support for clean tech, from federal, state and local governments as well as corporations. In our own state of Massachusetts, Republican Governor Charlie Baker released a plan last month requiring the state to dramatically reduce CO2 emissions over the next decade, including a mandate that all cars sold in the state be EV by 2035. Late last month, the European Commission launched its Green Consumption Pledge, to “accelerate the contribution of business to a sustainable economic recovery and to build consumer trust in the environmental performance of companies and products.” There are five core pledge areas, including ensuring information provided to consumers in relation to the company and product carbon footprints is accurate, clear and up to date. On the corporate side, PepsiCo just committed to zero net emissions by 2040. Disruption and environmental progress are gaining great traction, providing an attractive long view for environmental investing.
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally, or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.
Current and future portfolio holdings are subject to risk. Holdings subject to change without notice.