Essex Global Environmental Opportunities Strategy (GEOS) November 2022 Update
The global equity markets had a long overdue rally in October 2022, as inflationary forces abated. While the world is experiencing multitudes of risks, the equity market has climbed this wall of worry consistently over time. As we have expressed recently, we remain at the proverbial helm of the Essex Global Environmental Opportunities Strategy (GEOS), focused on execution to what we believe to be the greatest investment opportunity of our time: doing more with less. Investing in companies that enable productivity and growth with fewer resources. This is the essence of clean tech.
In recent years, investors have started paying more attention to portfolio climate risks, including transition and physical risks. Transition risk refers to the risks associated with moving to a low carbon economy, including changing technology demand, policy and regulation, legal risks, and shifting consumer preferences. Physical risk refers to the actual acute and chronic impacts of climate change such as drought, heatwaves, flooding, sea level rise, and other factors. To protect their portfolios from climate risk, many investors have gravitated toward “net-zero aligned” strategies. These strategies primarily invest in companies with decarbonization targets or low emissions intensity with the intention to reduce the portfolio’s carbon footprint. As a result, they frequently overweight sectors like technology, given the “asset light” business model and low carbon intensity, but provide surprisingly little exposure to climate solutions. In contrast, GEOS invests in solutions that help decarbonize society and adapt to climate change, providing concentrated exposure to companies helping solve the climate crisis. Companies offering mitigation and adaptation solutions are expected to experience increasing demand for their products and services in the future, offering investors diversification against transition and physical risks in their portfolio. We believe many investors are unaware of the positioning of “net-zero aligned” strategies and mistake these strategies as investing in solutions to enable net-zero. To invest in solutions for net-zero, we believe GEOS provides true climate impact.
Our investment strategy has remained consistent for GEOS since inception: investing in businesses that enable our economy to operate with greater efficiency and optimized resource use. We are long term in our perspective, and this is borne out in our conversations with potential and current holdings. Ultimately, this is demonstrated by holdings consistency, or low turnover, historically well under 50% per annum. We have found investors to be extremely myopic of late, trading out of the stocks of businesses with sound fundamentals if they narrowly miss an earnings mark amidst extreme global macro and geopolitical strife. We have been taking advantage of volatility to add to existing positions selectively which are unduly punished post earnings with share declines as we invest in businesses and don’t trade stocks. We are closely monitoring the potential for financial impairments, rising costs of capital, and general deteriorating business conditions for our GEOS holdings. We strongly believe two or three years from now; we will look back on this period of extreme market volatility as one of rarely experienced opportunity for long term investors who want exposure to what we believe to be a long-term megatrend – the new energy and clean tech revolution. We look forward to conversations with our clients, and our clean tech market this quarter.
Disclosures:
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.
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