GEOS – Portfolio Perspective
There is an important shift occurring in the global equity market – and one we have been observing and discussing over the past several months. While the market prognosticators state it has been an extremely difficult time to outperform the indices, we note that correlations across equities are decreasing. The reason active investors have been having a difficult time is because of an increase in market breadth towards smaller market capitalization equities. This is partially driven by an improvement in market fundamentals, given the global application of historically unprecedented fiscal and monetary stimulus. More importantly, the catalysts to which we invest the Essex Global Environmental Opportunities Strategy (GEOS) grow louder and with utmost importance. As our world grapples with COVID, the economic and social stresses driven by global climate change grow more alarming with each passing day. As we oft state with our GEOS investment philosophy, ‘our world is facing the greatest environmental challenges in history. We believe these challenges provide significant long-term investment opportunities. GEOS invests in companies solving these challenges, seeking to provide attractive financial and social impact returns.’ The vast benefits of clean technology adoption and investment are being increasingly recognized as paramount.
GEOS directly addresses environmental challenges by intentionally investing in solutions to climate change and associated environmental problems. We believe this is a higher impact strategy than that employed by ESG strategies that just consider ESG criteria during the investment process. ESG investing is still focused on exclusionary screening, and we believe GEOS goes further by explicitly investing in the clean technologies that are solving environmental challenges. Importantly, as the U.N. SDGs exhibit, many global social issues are centered on environmental degradation. We want to “move the needle” on climate and associated environmental and social issues as disseminated by the SDGs because the solutions are investible today. There have been significant pledges made over the past year, and commitments for 2050 are being moved with more urgency to 2030. For example, clean technology and SDG action will be further catalyzed by China’s recent commitment to become carbon neutral, as China is responsible for almost 30% of global greenhouse gases.
The GEOS social impact reporting work for the quarter centered on the U.N. Sustainable Development Goals (SDGs), to verify which goals align with our nine GEOS themes. Our latest work demonstrates GEOS solves for a ninth SDG, Goal 2: Zero Hunger. GEOS investments within the agricultural productivity and clean fuels theme solve this important SDG – please see the chart below, where we highlight the nine SDGs accomplished by GEOS holdings:
The raging wildfires throughout California are also demonstrating the importance of addressing climate change and strengthening resilience to electricity grid outages. GEOS holding Generac offers a new product that combines solar electricity generation with battery storage to generate and store clean energy even when the grid is down, allowing homeowners to achieve energy independence while reducing carbon emissions.
Recently, we engaged with GEOS water holding Energy Recovery management about the importance of addressing the SDGs in their public comments, as the company solves several SDGs. Our engagement with our holdings centers on describing the SDGs to management teams, to educate about the importance of providing examples of SDG solutions to the marketplace. While sustainability reports are important, we want to provide strong examples of technologies that are solving the SDGs, to move capital to solutions. After our conversations with Energy Recovery they reported publicly their alignment with three SDGs: Goal 6 – Clean Water and Sanitation; Goal 7 – Affordable and Clean Energy; Goal 9 – Industry, Innovation and Infrastructure.
We are observing that the COVID pandemic – caused by environmental degradation with deforestation and loss of biodiversity – is acting as a catalyst for enhanced focus on sustainability. Amyris, a leading synthetic biology company and holding in our low carbon commerce theme, has plans to supply sugarcane-derived squalene to pharmaceutical companies for use in COVID-19 vaccines as adjuvants. Adjuvants are used to boost immune responses to vaccines. Squalene is traditionally sourced from shark liver oil, making Amyris a key to addressing biodiversity declines while protecting marine life.
We have heard from many investors lately that they are shocked and astounded by the performance of the solar sector. We are not. We significantly increased our solar weight in late 2018 when, for example Vivint Solar was trading at $5, because we saw a significant shift in end market demand for solar power. The rapid declines for installation costs, even over the past 24 months is now the reason solar is the fastest growing source of power in the world. This solar disruption has even caught the fossil fuel analysts by surprise, and generalists are now assessing how to get exposure to the solar sector. We believe the trend in solar is still in its infancy, as total installations globally are still a mere 3% of global power supply. In managing GEOS, we have the lens and the longevity as clean technology managers to cull our GEOS themes for successful, disruptive new energy technologies that solve global environmental problems. Interestingly, as we have oft stated for years, there is so much more to clean technology investing than just solar – that is the exciting part of this segment of the market. We are entering the period now we believe of clean technology adoption in rapid scaling form. We believe we are now in the second inning of Cleantech 3.0. Fossil fuels are no longer relevant, and will continue to lose the share of the global energy mix. Cleantech disruption is fully at hand with more technologies becoming relevant, such as electric vehicles, power storage, GPS asset tracking technology, solar power with attached storage and micro grids. Each of these important solutions to powering our economy with less resources and in safer fashion is represented by GEOS. While we are in the second inning, it is fast moving, given the global commitments from countries, asset owners, cities and consumers for a cleaner, safer, more just path forward.
Most importantly, this new clean tech revolution is not dependent solely on legislation or government funding. As we have stated repeatedly, “disruptive technology does not care who is in Washington.” This new reality with Cleantech 3.0 is vastly different from the past cleantech cycles. Before 2007, with Cleantech 1.0, while there was disruption to incumbent technologies, funding was more than ample, supporting uneconomic solutions such as biofuels that could not compete with fossil fuels. Interestingly, we are benefitting from those legacy and surviving technologies from biofuels today, through alternative proteins and ingredients. The second ballgame for cleantech was a long one, we believe from 2007 – 2017. In this Cleantech 2.0 cycle, capital allocations were more disciplined, and several cleantech segments matured, such as LED lighting. Solar sector prices came crashing down with ample capital driven by China, and while it hurt the North American and European incumbents, it did lower costs for manufacturing, which is causing share gains for solar today. 2.0 also led to the launch of important technologies such as advanced robotics, the internet of things (IoT), precision agriculture and commercialization of advanced batteries. We are benefitting from this long cycle today with Cleantech 3.0 which started in 2018 by our measure. Our nine GEOS themes provide ample opportunity in the clean tech sector, while also providing diversification by technology. While the market is just beginning to recognize solar, and many are shocked, we believe the same will come to bare for many clean tech industries.
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.
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