"Disruptive technology does not care who is in Washington. Sustainability is rapidly mainstreaming." - Robert Uek, Essex Investment Management
[The Institute for Innovation Development recently talked with Robert Uek and Bill Page, co-managers of the Essex Environmental Opportunities Fund (EEOFX/GEOSX)- a global, all-cap mutual fund investing across nine environmental technology themes. While the term nexus has been bandied about a lot, it seems most appropriate here as this fund’s investment strategy truly seems to position itself squarely at unique crossroads: between a socially responsible mindset and corporate profitability, technological innovation and bottom line efficiency. All the while, finding solutions to critical, real world environmental and social issues in the process. It really does beg the question: How impactful is your investment portfolio? ]
Hortz: Where are we on the issue of sustainability today and what is the investment case for areas like clean energy and resource optimization?
Uek: Sustainability is rapidly mainstreaming. What was once a social aspiration is now an economic reality where companies are investing in technologies that enable sustainability. Clean technologies, such as LED lighting, solar arrays and energy efficiency projects are proving to be strong investments. In late January, Nike announced it was going to be powered by 100% renewable energy by 2025, seven years earlier than initially planned. Nike just signed an 86 megawatt wind power purchase agreement from two Texas wind farms to meet this goal.
Companies are aligning sustainability and economic goals by moving into clean technology investment because it makes economic sense. As clean technology cost curves have come down over the last 10 years, end market demand has increased. For example, according to PV Insights, solar module prices are down from close to $2.00 per watt in 2010 to under $0.40 today, leading to solar energy taking share from traditional fossil fuel sources, as it is cheaper, and lessens commodity price risk for the companies running their operations on solar and wind power.
Page: The case for resource optimization is a global one today given the greater economic growth outside of the developed markets. Economic centers of the emerging markets are scaling, with consumer-driven growth a greater percentage of aggregate economic growth – there is simply not enough food and fuel to provide an easy economic transition. While over 100 million people per year have gained access to electricity since 2012 according to the International Energy Agency, 90% of sub-Saharan Africa still lacks access to electricity. This access gap cannot be filled with coal as the source given global climate change.
We believe strongly that renewable energy and clean technologies such as micro-grids for storage and electricity generation allow more efficient and feasible installations and scaling. Just as cell phone adoption was led by the emerging markets given lack of competing infrastructure, so too will the frontier markets scale electricity access with new energy technologies.
Hortz: How does the current administration’s actions support or hinder investment in this area?
Uek: Disruptive technology does not care who is in Washington. With successful and scaling clean technologies, more can be achieved with less. These technologies are adopted because they enhance the quality of life and save money, whether on a factory floor with robotics, on the farm with precision agriculture applications or in a city with traffic and energy management systems. Each of these solutions is represented by the Essex Environmental Opportunities Fund, striving to achieve economic growth with enhanced productivity and lower environmental impact. We manage the Fund with a focus on technologies that are commercially viable in the absence of government incentives.
We are struck by the continued progression of clean technology, despite the negative sentiment of a year ago. While concerns were not baseless, much was made of the negative prospects for clean tech and new energy given an incoming Administration that denounced clean technology solutions in favor of fossil fuels, with a focus on coal power promotion. As the Trump Administration attempted to limit EPA oversight and walked away from a global solution to combatting climate change with the Paris Climate Accord, disruptive clean tech solutions continued to take share from old-line, traditional energy sources. Since the Trump Administration denounced the Paris Climate Accord, 250 U.S. cities, 12 states and 300 companies representing over $6.5 trillion in market value have set climate targets, with more than 100 companies having committed to run their operations solely on renewable energy. As we begin 2018, the global direction for clean tech is evident, continuing to stride in forward fashion.
Hortz: Tell us about your research and thought leadership efforts in this space. What else have you been uncovering?
Page: We have been covering the clean tech arena in listed equities for over 10 years, so we have lived through the progressions of successful technological disruptions, while observing potential clean solutions that have failed due to costs that cannot meet end market demand. We break-down our research to nine themes and analyze the underlying industries, seeking Fund exposures for solutions we believe to be hitting market adoption tipping points.
As we model the growth prospects of companies across our themes, we may be factoring in a solution provided by a company that is missed by many analysts – such a company could well have greater growth potential in our opinion. For example, the Fund has several companies that provide solutions to auto manufacturers that are planning to enter the electric vehicle market with scale. We purchased these companies as they were underperforming over the past 12 months given concerns about the general automotive cycle. We believe the greatest automotive growth segment over the next several years will be electric vehicle manufacturing, providing strong positioning for electric vehicle suppliers with differentiated technological solutions.
We believe the Fund’s holdings are solving some of the greatest, most complex issues we are facing:
How can we feed the world? - We invest in technologies that increase productivity for farmers through the use of technologies such as big data weather forecasting and precision irrigation.
How about Day Zero, when Cape Town loses water access? - We have investments in distributed water de-salination and treatment that allow clean water access in faster and less expensive fashion when compared to constructing a large water treatment or de-salination plant.
Hortz: Please walk us through your 9 investment themes and 5 focus investment areas.
Uek: There are massive secular trends afoot globally that provide long-term opportunities for new and clean energy technologies. Our investment approach with the Essex Environmental Opportunities Fund is to invest across nine environmental themes that provide solutions for global resource optimization, or “doing more with less.” The nine themes are: agricultural productivity; clean technology and efficiency; efficient transport; low carbon commerce; environmental finance; power merchants and generation; power technology; renewable energy; and clean water.
Our Fund invests in an array of important clean technologies. Clean tech is not just solar energy – there are so many more solutions. The Fund currently has five areas of focus:
Smart City: LED street lighting & industrial internet of things (IoT) are examples of current investments.
Agricultural productivity: precision agriculture and field computing.
Efficient transport: electric vehicle systems, autonomous driving.
Power technology and renewables: wind turbine blades, advanced meter infrastructure.
Clean water: energy recovery technologies, water filtration and de-salination.
Hortz: Please give us a sense of the size of the universe of companies in these areas.
Uek: We have a proprietary universe of about 600 companies that have significant revenue to one, or several of our environmental themes. That is our definition of clean tech universe, and that is a lot of companies, equating to almost the total market capitalization of the MSCI World Index. Our universe is all-cap, but we have focused on smaller and mid-market capitalization companies as we want the Fund to have pure exposure to our themes. Many of the companies in the universe are industrial companies that have been public for many years, yet are focusing and scaling their growth in differentiated clean technology solutions. One of our efficient transportation holdings has an automated process for making electric motors – the company has been operating for 100 years, yet today has the most efficient electric motor winding equipment in the world.
Hortz: You emphasize that your investment approach is not an ESG strategy but more of a thematic investment approach. Why do you state that is a “big difference”?
Page: We believe clean technologies that enable the efficient use of scarce resources, are one of the most significant, sustainable, long-term global growth trends. We believe that companies positioned with leading technologies that can address resource scarcity will deliver greater shareholder returns over time. This is a significant point of differentiation, as an ESG fund is not as narrowly focused on this isolated and very strong growth trend. The Fund captures easily identifiable, recognized global trends, such as non-OECD economic growth, urbanization in China, related resource scarcity, global climate change, etc.
This, in contrast to an ESG strategy that has more elusive goals that are harder to isolate and, we would add, unrelated. ESG data also tends to focus on inputs, like company operations, and is highly suspect as many ESG research firms use modeling techniques that are model or estimate based. With our approach, we focus on environmental technology solutions – the companies are solving environmental problems with clean technologies, and as their technologies are scaled across economies, there is a compounding output affect. The ESG data providers are focused on corporate practices, not technology solutions. We believe our approach is highly differentiated.
Hortz: How do you go about quantifying the environmental impact of the companies you research?
Page: Most of the companies held by the Fund either save water and/or mitigate carbon, while providing other natural resource efficiencies. We strive to engage with the Fund holdings on social impact metrics: in aggregate, how much water and carbon emissions are saved as their technology is deployed into the market? We aim to develop carbon mitigation savings per revenue unit.
Hortz: How would you characterize your portfolio holdings in your Essex Environmental Opportunities Fund (EEOF)? Market cap, growth rates, etc?
Page: The Essex Environmental Opportunities Fund invests in public equities globally across all market capitalizations. The Fund is long-only, investing in low turnover fashion in environmental solutions. The solutions orientation leads to Fund holdings that are primarily focused on two economic sectors of the equity market: industrials and technology. The Fund is concentrated, and consistently owns between 30-35 stocks, historically in the small to mid-market capitalization segment of the equity market. As the focus is on clean technology solutions, the Fund is growth-oriented, with growth that should be greater than the board market over time.
Hortz: Based on your domain expertise, how best would you recommend advisors to work with their clients in this area and where does your fund fit in an asset allocation model?
Uek: Social impact investment solutions can now be had across all asset classes, and can also reflect the impact goals of asset owners. The Essex Environmental Opportunities Fund is appropriate for growth-oriented equity investors who want to invest for the long-term, with exposures to major secular trends such as climate change solutions and natural resource scarcity. The Fund is a solution we believe for investors who are concerned about the environment, and want to invest in environmental solutions. Perhaps investors are aware of their fossil fuel exposures, and they want to limit climate and carbon risk, yet invest in newer energy solutions. The Fund is solutions-oriented and thematic, but due to the growth orientation, will most likely be more volatile when compared to broad equity market indices.
Regarding asset allocation, the Fund is used by investors as a potential alpha source, and supplemented in most cases with a larger market capitalization, sustainability fund. Most advisors place the Fund in the thematic bucket, and knowledge of thematic investing has really increased amongst financial advisors over the past few years.
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