Essex Global Environmental Opportunities Strategy (GEOS) September 2022 Update
The global equity markets generally weakened in August, sensitive to the ongoing fight between inflation and the prospects of a resultant recession. As trading volumes lessened given summer holidays, the U.S. equity market was sensitive to commentary from the Federal Reserve given increasingly hawkish commentary regarding the on-going efforts to stem inflation with continued interest rate hikes. Overseas, we are concerned about the effects the European energy crisis will have on all aspects of economic growth, from corporate earnings to consumer spending.
With criticisms of ESG investing continuing in recent weeks, it is important to resolve some misconceptions about ESG and frame where GEOS fits in the ESG landscape. There are numerous categories of ESG investing such as ESG integration, exclusionary screening/values-based investing, thematic, and best in class investment. ESG critics have falsely labeled all forms of ESG investing as values-based investing approaches that promote social goals at the expense of financial returns. Common approaches to ESG investing, such as ESG integration and thematic investing, are explicitly focused on maximizing financial performance. For ESG integration strategies, this entails considering material ESG factors in investment and portfolio management processes to reduce risks and maximize returns. Historically, investors have ignored ESG factors in financial analysis, even if they could impact financial performance, which has led to the mispricing of assets in markets. Thematic investing strategies, like GEOS, invest in companies exposed to sustainability-related themes and megatrends that we believe will experience strong growth in the future. Thematic strategies seek to maximize financial performance by identifying the leading companies exposed to megatrends that will disrupt society.
GEOS invests thematically to solve environmental challenges, by investing in companies with impactful clean technologies. GEOS looks for companies that solve environmental challenges through their products and services and have strong operational management of material ESG factors. We believe companies providing environmental solutions will grow revenue and earnings faster than the market since they are providing vital solutions to societal challenges. The increasing urgency of environmental challenges and rapid cost reductions in clean technologies have strengthened the investment case for companies providing environmental solutions. The GEOS team uses the U.N. Sustainable Development Goals (SDGs) to measure impact and we have mapped our thematic solutions to the relevant SDGs. The GEOS team also seeks to quantify impact at the company level, where possible, through impact metrics such as greenhouse gas emissions avoided, water saved, and water produced. Our focus on mapping and quantifying impact helps us distinguish solutions-oriented companies from companies who are exposed to reputational risk due to greenwashing.
As Russia weaponizes energy supplies by limiting natural gas exports to the E.U., power prices have increased at historical proportions, as demonstrated by French electrical prices year/year:
This energy crisis in Europe is being exacerbated by climate-change induced severe weather in the form of drought which has limited the flow of goods across Europe given low water levels in rivers, hindering barge traffic. Currently, coal supplies are unable to be delivered, and low water levels are causing nuclear power plants to run at low capacities given the lack of cooling water. The historically warm summer and drought are also leading to low crop yields across South America and Europe – more dire given the supply disruptions with Ukrainian wheat, which provides over 10% of global wheat supply. Currently, according to the U.N., over 345 million people are food insecure, and over 50 million are on the edge of famine – primarily in Africa. Unfortunately, this is a 10-fold increase since 2019, all exacerbated by severe weather stemming from climate change. The complexities of water – water stress is a direct expression of climate change. Water is the lead catalyst for traditional, thermal coal energy production. Water is also the most important input for agriculture – and increasing agricultural productivity must happen rapidly given increased heat stress and global demographics. Water is linked to energy, and agriculture. Energy is the primary means to power economies. Energy = GDP. These key ingredients to human and economic progress are being set back and complicated by climate change. We recognize the direness of this message, and the often-human response to become paralyzed, taking no action. We remain sane in these circumstances by focusing on unique and viable technologies that are solving these problems now. We are optimistic that we can adapt, solve, and mitigate environmental challenges with the 34 company holdings in GEOS. We look forward to connecting with you this fall, to discuss our outlook, and examples to current global environmental challenges.
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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