Essex Global Environmental Opportunities Strategy (GEOS) June 2021 Update
Our social impact management efforts have centered on demonstrating that investing in listed equities can be of high impact, provided the equity holdings are solutions oriented. GEOS focuses on clean technology, which we define as “doing more with less”, enhancing economic activity with less inputs. The focus on clean technology spans across our nine GEOS themes, from agricultural productivity to power technology and renewable energy. The companies held across our themes are enabling the transition to a net zero carbon economy.
While global commitments to net zero carbon goals are now commonplace, the spotlight has been focused on the fossil fuel industry with increasing brightness the past decade. Initially, ESG research uncovered the massive carbon emissions stemming from fossil fuels, and the risks to the industry as the market moved from fossil fuels to new energy sources. As carbon could be factored as a climate change liability, coupled with the move to new energy, the value of fossil fuel companies would decline – “stranded carbon” was introduced. This theory was then followed by the fossil fuel divestment movement, led by environmentalists calling for the sales of all fossil-fuel related holdings beginning with university endowments. The protests called out the paradox of colleges that practiced sustainability on college campuses owning fossil fuel assets. Climate commitments have been increasing globally over the past few years and are now to the point where over 53% of countries are having at least a net-zero discussion (source: Bloomberg). The ESG community has long been engaging with major oil companies to decarbonize and acknowledge climate change, and many including this writer have described big oil as the next tobacco. May 26, 2021 will be remembered as the climate commitment “shot heard round the world.” After many years of unsuccessful shareholder resolutions during Exxon Mobil annual meetings, a $250 million hedge fund secured seats on Exxon’s Board of Directors to move the company in the direction of decarbonization. On this very day, a Dutch court ruled in favor of an environmental group that Royal Dutch Shell must reduce its carbon emissions 45% by 2030 versus 2019 levels. As the fight against big oil reached its crescendo, the energy source substitutes for fossil fuels are scaling and taking significant market share. Globally, net new energy sources are greatest for renewables, which are taking share from coal, and even natural gas in many regions.
We do believe fossil fuel demand will decline significantly in coming years as electric vehicles take share from internal combustion engines, and hydrogen enables electrification of heavy industry. We believe that the major oil companies that leverage their fossil fuel infrastructures and skill sets for the new energy economy will not only survive, but flourish. For example, many can maintain assets in hostile weather locations, a prime competitive advantage for offshore wind development such as embraced by Orsted. The seminal actions of May 26 are significant, yet were brought forth after years of engagement, protest, and, most importantly the rise of sustainability globally. Energy does not have to be fossil fuel related, and the holdings of GEOS are enabling the new energy economy.
The Current Outlook:
While the clean technology sector continues to experience volatility, we have been tactically adding to positions under market stress as their fundamentals improve. We view this environment constructively, and opportune for long term investors. We also should reiterate our long-held position that the valuation/growth rates are favorable for GEOS versus the broad market, given our focus on small and mid-cap clean tech securities. Lastly, we believe the long-term opportunities are greater for this equity market segment, which is also under owned, and a more inefficient segment of the listed equity market. Please review this chart from our latest GEOS presentation, which speaks to our differentiation, and is representative of our focus on solutions-oriented companies driving climate solutions:
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.