Essex Global Environmental Opportunities Strategy (GEOS) Update:
We are increasingly being asked to contribute to the media and other outlets for our thoughts on impact, cleantech, and thematic investing. Rob Uek, GEOS Co-Manager recently provided some points on cleantech to TD Ameritrade:
And late in February, Bill Page, GEOS Co-Manager presented on impact investing to the CFA Society of Stamford:
Please be in touch if you would like to be placed on our distribution for our insights, also available when posted here:
Social Impact Management Update
We have been focused over the past year on mapping our GEOS holdings to the U.N. Sustainable Development Goals (SDGs), to illustrate the focus our companies have in solving global social and environmental problems. The global listed-equity market is the best option for solving climate change and other environmental problems given the scale and structure, but asset owners must deploy capital to solutions-oriented companies. We have met with every GEOS holding to discuss the SDGs, and how a given GEOS holding is solving for one or several of the U.N. SDG goals. Our impact management perspective was discussed in last year’s whitepaper here:
This endeavor is an example of the high-impact nature of GEOS, and to solve the SDGs, not just pledge to them.At this writing, the U.N. released an interim report on the aggregate effect of climate pledges, known as nationally determined contributions (NDCs), submitted by signatories to the Paris Agreement. To date, these pledges reduce projected 2030 emissions by a mere 2.8%, and are only equivalent to a 0.5% reduction from 2010 levels. In order to stem the increasingly alarming effects of climate change required with 1.5 degrees Celsius, a 45% emissions reduction is required by 2030. Capital must scale, and the answers to solutions reside in the technologies represented by GEOS.
Our meetings with GEOS water holding Energy Recovery led to the release of their inaugural ESG report late last year, where they discussed ESG in the context of their operations, and importantly discussed outputs. By outputs, we mean the measurement and explanation of the solutions offered by a company to solve environmental and social challenges. While we seek to measure carbon mitigated and water saved, in initial stages we are recommending the use of case studies. For Energy Recovery (ERII), they are mapping their water technologies to the SDGs, using case studies, and tracking aggregate water savings. For example, in 2019, almost 90% of ERII’s product revenue came from renewable energy and energy efficiency-related products, with their pressure exchanger offering reducing energy consumption for water desalination plants by 60%, avoiding 12.4 million metric tons of CO2 each year.
The Current Outlook
We have been discussing and debating in our GEOS team meetings as well as the Essex Investment Committee meetings the degree, timing and prospects for an inflationary cycle. As we evaluate past trends and new circumstances, it is probable some degree of inflation is manifesting itself currently, with the prospects for further inflationary pressures as this cycle unfolds. Currently, commodity prices have firmed, along with key manufacturing inputs such as semiconductors. While much of this pressure is due to dislocations from the pandemic, the associated fiscal stimulus and economic recovery could well contribute to an inflationary cycle. We are mindful as we evaluate current and prospective GEOS holdings, to factor inputs and commodity exposures as we evaluate profitability and growth of our companies. Most importantly, we want to state that in the potential eye of inflation, secular growth trends become even more important. Smaller companies in growth industries have outpaced their larger market cap brethren in past inflationary cycles. Most importantly, our very definition of clean technology is the ability to enhance resource efficiency. Most of our GEOS themes are positioned to limit inputs, costs of goods sold, and resources, to maximize outputs – the providing of goods and services while maximizing profitability for companies investing in these technologies. For example, GEOS has exposure to advanced robotics that optimize industrial manufacturing productivity, and asset tracking services to track suppliers, as well as provide services for optimal delivery of finished goods. While an inflationary cycle may pressure the equity market, we believe GEOS to be well-positioned given the environmental megatrends in place, as well as the benefits of resource efficiency.
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.