Essex Global Environmental Opportunities Strategy (GEOS) May 2023 Update
The equity markets took to firm risk-off posture in the month of April 2023 as the markets absorbed several more banking crises and awaited May’s Federal Reserve decision on the path for interest rates. As we await the world’s most anticipated recession, the market has no appetite for smaller, faster growing companies, fearing credit needs and the fundamental viability of business models. While we do concur faster growing entities suffer relative to their large cap peers during economic downturns, historically they lead out of recoveries. Most importantly, we believe there is an important case for disruptive, clean tech now more than ever. We believe commercially viable clean tech companies that solve environmental problems have long-term catalysts that will drive revenue and earnings – well beyond the simple cost cutting stories we are witnessing amidst the large cap technology sector.
The GEOS team engages with companies to gather additional insights on material ESG factors and to encourage progress on key ESG topics. All companies in our portfolio provide solutions to environmental challenges and we believe engaging with companies can help improve their management of operational ESG factors. While we are not activist investors, and do not purchase stakes in companies to engage with them, we think an active ownership approach is beneficial to our investment process. The intention of our engagements is to help companies improve their future financial performance by better managing material ESG factors and ensuring companies are acting as responsible corporate citizens.
Priority engagement topics vary for each company, depending on the company’s business model, industry, ESG targets, maturity of ESG disclosures, and other factors. Some ESG topics like ESG governance, human capital management, and physical climate risk are common topics at most meetings given their relevance to all companies. Without strong management of ESG factors by a company’s board of directors and management team, environmental and social issues are likely to be mismanaged. Frequently, our engagements also touch on company ESG targets or goals. While we welcome ESG target setting, achieving announced targets is critically important and we press companies on how they will achieve their goals. Similar to how investors hold companies accountable for financial targets aiming to increase revenue growth and expand gross or EBITDA margins, companies should also be held accountable for ESG targets.
We recently engaged with Bloom Energy following the release of their 2022 Sustainability Report. We benefit from engagement meetings following new ESG disclosures since it allows us to gather additional context on new ESG information. We discussed Bloom’s decarbonization plan, exposure to physical climate risk, employee safety, and a variety of other topics at our meeting. Bloom has yet to establish a decarbonization target, preferring to wait for finalization of the SEC climate disclosure rule, and we gained new insights into their thought process moving forward. We also pressed the company about the significant increase in total recordable incident rate (TRIR) from 1.97 in 2021 to 2.95 in 2022 and believe the decline in safety performance was a temporary occurrence due to the doubling of their manufacturing workforce in 2022. Moving forward, we plan to monitor Bloom’s progress on decarbonization and employee safety, as well as employee retention given Bloom recently instituted a five day per week return to office (RTO) policy.
The clean technology stock arena is not a crowded one currently. Valuations are at parity with the broad market, and despite financing and capital markets headwinds, we believe valuations in no way reflect fundamentals. While investors have fled clean tech the past two years, the catalysts have grown stronger:
-climate and grid resiliency: as severe weather events increase across the globe, the need for urgent investment in electrical grid infrastructure is finally being recognized, driving investment from utilities and customers alike. Beneficiaries are the holdings in the GEOS power technology theme.
-geopolitical: developed countries are implementing incentives to limit energy and supply chain shocks to drive labor and industrial productivity and supply chain resiliency while ensuring manufacturing execution. Beneficiaries are held in GEOS clean tech & efficiency theme.
-disruptive technologies are maturing, costs are declining which increases adoption rates. It is for this reason that clean energy is the fastest growing new energy capacity:
Beneficiaries to this trend are across several GEOS themes, most importantly renewable energy and power technology.
-policy drivers are at hand: we invest GEOS in commercially viable technologies which are profitable and not solely dependent on incentives. For our GEOS companies, and incentive is gravy to an already growing business model. That said, the Inflation Recovery Act has initiated a clean tech arms race globally, and the US is positioned out front. The IRA is not reflected in clean tech valuations nor investor sentiment. So, catalysts abound, fundamentals are better, and investor sentiment is negative, with a capital markets environment that is even more myopic. We look forward to touching base with you next month after earnings season.
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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