Essex Global Environmental Opportunities Strategy (GEOS) December 2023 Update
The recently difficult equity returns environment for the Essex Global Environmental Opportunities Strategy (GEOS) abated in the month of November 2023 given positive updates from management teams, broader equity market participation, and some coding from the Federal Reserve that inflationary declines are resonating and on target.
Currently, world politicians, regulators, climate negotiators and diplomats are gathering for the Conference of Parties (COP) UN Climate Change Conference, held this 28th time in the United Arab Emirates. The Conference is important, as climate change affects all, and, in a perfect and unlikely world, countries need to band together to solve this long-standing critical problem. Yet we have lost faith in the ability of politicians to solve problems, let alone diplomats and bureaucrats at this time of global geopolitical strife. What we know is climate change and other environmental problems grow more dire by the day and year, while the solutions grow more viable. We continue to analyze, validate and invest in commercially viable solutions to environmental problems across themes that can assuage social, economic and environmental stress while generating growth with optimal resource efficiency. We invest in these companies because we think their technologies or services are commercially viable and create positive returns on capital led by executives that can manage the company and backed by a balance sheet that will be able to fund growth. The most relevant part of our investment philosophy is “commercial viability”. We do not invest in companies whose only path to success is to rely on external stimulus and subsidy programs.
During the month, power technology holding Infineon Technologies released their latest sustainability report, addressing how power semiconductors can solve societal problems and ensure the efficient adoption of new energy and mobility. Infineon is an industry leader in reporting their resource use, from water to Scope 1-3 emissions. Infineon has mapped their operations to the UN Sustainable Development Goals (SDGs), as well as their service and technology solutions. For example, SDG 7 seeks to ensure access to affordable, reliable, sustainable and modern energy for all. The Infineon offerings enable more efficient electricity generation and storage. One Infineon solution for client Anker reduces battery energy loss by over 20% while providing market leading power density for handheld devices.
As we express often, we do not invest in companies whose only path to success is to rely on external stimulus and subsidy programs. We have been around long enough to understand that any government largesse is at risk of being reduced or removed at any time. There are no investments in our GEOS portfolio that were purchased based on expected benefits from the IRA program, or any other global government support scheme. Certainly, we analyze the aspects of the IRA program (and other government subsidy programs) that might be helpful to companies in our universe, but we see these benefits as “gravy” rather than a key facet of our investment thesis.
The Inflation Reduction Act (IRA) has indeed increased demand (for clean technologies), but we believe it is early innings, and in no way is this major policy support reflected in clean tech valuations. The IRA does enjoy bipartisan support as it generates jobs in districts, providing over $370 billion in support of electric vehicles, renewables and other low carbon technologies. The primary implement is tax credits, and the US Treasury Department will implement these credits. While there have been significant announcements since the IRA was enacted last year, many industries are waiting for Treasury clarification regarding tax credit levels, before announcing new capital announcements. We expect Treasury clarification by the end of 2023/early 2024. Earlier this fall, the US Department of Energy (DOE) released a report on the impact of the IRA – again the findings are a reflection of the early progress here. The legislation is anticipated to reduce net petroleum imports by about 45% by 2030, and a shift to clean energy should increase its share of electricity generation from the present 42% to at least 70% by 2030. Again, note this is the reason for our constructive outlook for the GEOS power technology theme. Early last quarter, the American Clean Power Association reported that announcements for utility scale renewables projects totaled over $252 billion in planned investments since the IRA passed, covering over 172 gigawatts of utility-scale clean energy projects.
We recently heard a member of the US Department of Energy’s Loan Program Office (LPO) speak at a conference, and the LPO is fully staffed and providing loans to commercially viable clean tech projects across the US through a competitive process. This program provides loans from Treasury at competitive rates for senior debt. The program is providing capital for stationary power storage, utility and commercial scale renewables (primarily solar) and energy efficiency retrofits. There is a focus on energy regions, i.e. clean tech projects for traditional fossil fuel regions to scale new energy and labor initiatives. In sum, this is early days, but our outlook is this initiative will not be rolled back next year given the election year, as the projects catalyzed benefit all regions in the US. It is important to consider the actions at the state and local level, not broad political rhetoric. We believe the IRA benefits have been lost in the forest during the recent market volatility.
The Infrastructure Act and IRA are economic and political catalysts, as we moat our economy given continued global geopolitical and pan economic strife. We seek domestic growth and differentiation, hence the support for labor, domestic content and onshoring, all of which are catalysts for clean tech investing, or doing more with less. These catalysts are reflected across our themes, from distributed energy to industrial robotics and asset tracking, to water management technologies that save energy. We believe our current state will drive cap ex to productivity given the input/labor cost cycle, and our GEOS themes solve for that. In sum, clean tech is gathering steam, maturing, and we believe given the severe negative sentiment, is a great opportunity for investors as these catalysts are not reflected in current valuations.
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.
Please find important disclosures here.