It Matters Now

It Matters Now

Our broad thesis behind Essex’s Global Environmental Opportunities strategy is that the environment has a number of substantial challenges (clean air, potable water, climate change, etc.) that are solvable through investment in new, clean technologies and a weaning off dependence on fossil fuels.  In our view, fossil fuel companies and related businesses ultimately are doomed to failure, fatally impaired by collapsing demand and burdened with a balance sheet of stranded, valueless assets.  A common refrain that we hear among investors (mostly of the institutional flavor) is that they will consider investing in clean technologies and environmental investing “when it matters”.

We’re here to break some news:  it already matters and savvy investors are already shifting their portfolios.  How do we know this?  We see evidence in many places:  observe what the markets are telling us; observe what the statistical data is telling us, and observe the behaviors of leading public companies.

The stocks of fossil fuel companies have been among the markets worst performers for some time. The Energy sector has underperformed the S&P 500 Index in 6 out of the last 7 years (and it’s on track to do so again this year, with the sector badly lagging the broader market through the end of the third quarter).  Following this poor performance, the Energy sector’s weight in the S&P 500 Index is currently at its lowest percentage weight ever.  We don’t think that the dismal traditional energy stock performance is completely based on poor trailing fundamentals as the underlying commodity has not performed as poorly.  In our opinion, this underperformance is forward-looking and makes sense:  the extraction of fossil fuels is becoming more expensive and complex each year yet competing renewable energy and related battery storage costs are declining every year.  These trends will not change.

Empirical data suggests that the world is behaving differently today than in the past.  Data shows that electricity usage in the United States is down over the past few years, despite the fact that our economy continues to grow.  Throughout history, economic growth has always caused an increase in energy demand.  Until now.  Within the past decade, this relationship between economic growth and energy usage has largely decoupled as electricity use in the United States is essentially flat despite a growing economy.  The aggressive adoption of energy efficiency technologies and practices has mattered.  In particular, companies have installed energy-saving LED lighting in offices and factories, buildings are being constructed with higher efficiency insulated panels, and factories and warehouses are utilizing automated equipment to increase throughput and reduce error rates and injuries.  In essence, we are producing more with less. This is the very essence of clean technology.

Corporations are acting now.  Over the past five years in particular, leading companies such as Apple, Google, Walmart, Target, Amazon and many others are aggressively investing in clean technologies and renewable energy.  For example, Target recently announced that they are installing solar panels on the roofs of all their stores and they will source 100% of their electricity needs from renewables by 2030.  Amazon owns more than 65 renewable energy projects, generating nearly four million MWh of clean energy annually.  Even Total SA, a France-based oil producer, has invested heavily in solar, wind, bioenergy and battery storage with a goal of having low carbon businesses accounting for 20% of their portfolio in 20 years.  These are large publicly traded companies that need to be focused on earnings growth and returns on capital.  Corporations are not embracing clean technologies and renewable energy just because it might be the right thing for the environment; they are acting because these investments reduce business risk and increase operating earnings.

The world is already moving forward towards a cleaner, more efficient future.  Many institutional investors are clinging to an outdated framework where they continue to allocate assets to fossil fuel investments, failing to recognize the tectonic shifts already underway.  It’s time for investors to recognize the changing role of clean technology and clean energy.  It matters now.



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.