“…and all you can talk about is money and fairy tales of eternal economic growth. How dare you!” – Greta Thunberg
The above is an excerpt from the speech given by climate activist Greta Thunberg, and probably the most famous/notorious line of the year so far, depending on where you stand on the issue of climate change.
Q4 2019 hedge fund letters, conferences and more
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To be honest it shouldn’t matter where you stand on the climate change debate, the way I see it these are words that we should all take seriously, if for no other reason just in case. It is a call to action that we ignore at our own peril and that of untold future generations to come. It doesn’t matter which side of the political divide that you stand on, Democrat/Republican, Left/Right, or whether you are a denier or believer. The science on man-made climate change and global warming is compelling, and even if one is a sceptic, why take the risk of being wrong?
So having said that, I spent the last few weeks researching how we, fund managers and investors, could help out without taking a hit financially. Fortuitously I came across my old friend, Stephan Nicoleau of Fullcycle, a Fund managing investments in the global transition to low-carbon infrastructure.
How to approach investing in climate change
Traditionally (and I use this term loosely as climate change investments as a niche is less than 20 years old) There are two basic ways to approach investing in climate change based companies Divestment or investment.
Divestment: As the name suggests in this method we, the investor, move away from companies that contribute to global warming like oil and gas companies or carbon heavy industries like coal or cement. The conscientious investor uses a negative filter to divest their portfolio of these environmentally damaging companies thereby starving them of capital.
While it may sound logical this method has proven to be a failure, for every investor that moves away other steps in. Bill Gates in his interview with the Financial Times summed it best when he said “Divestment, to date, probably has reduced about zero tonnes of emissions.” He continued “it’s not like you’ve capital-starved [the] people making steel and gasoline.”
Furthermore by having a voice in these companies, an investor can try and effect change from within.
Investment: This is the preferred method; here the investor uses a positive filter to add companies that are contributing to the fight against climate change. Such investments would come under the heading of Environmental, Social and Governance (ESG) strategies.
The changing global climate and the increasing urgency to tackle the crisis are spawning a plethora of innovations all the way from investing in water resources to carbon-neutral infrastructure, from better data management to reduce waste to better transport infrastructure. By investing in start-ups, funds, and companies that are in this niche an investor can positively contribute to fighting climate change while turning a profit.
There are three major causes of climate change – Energy, Agriculture and Transportation.
Transportation: Carriage of material human and cargo is one of the largest contributors towards climate change, close to 70% of emissions are caused by the use of fossil fuels.
However this is an area where global climate goals and commercial interests intersect. Since the early 2000s massive investments in this sector have yielded significant results. From better efficiencies in fuel consumption to electric vehicles to reduce pollution to better use of GPS and tracking software to minimise transit times.
Tesla is no longer the only one racing toward an electric future, VW has announced plans to build a million electric cars a year by 2025, and they are not alone, Ford Motors plans to have half the cars it sells in Europe electrified (i.e. hybrid or BEV) by 2022. Others like Nissan, BMW, Peugeot, Hyundai, Citroen, Mini, Honda etc. have small BEV city cars on the market. Others have announced a major push towards offering options in the electric vehicle niche.
Thanks to Tesla, even trucks could see a worldwide push toward electrification.
Energy: This is a tricky one; fossil fuels like coal and oil still produce over 65% of the world’s electricity. In the early 2000s a slew of companies invested in renewable energies, from solar power to wind and hydro projects. Investments in this sector excited many an investor; this led to a bubble, which was punctured thanks to over-supply and a reliance on government subsidies. Biggies like SunEdison, Solyndra, Q-Cells etc. all fell to the vagaries and volatility of the renewable energy industry.
The production of electricity from renewable sources is less dependable (variable weather conditions) and costlier than fossil fuels, and that’s not even counting the environmental impact of mass produced and shipped solar/wind/hydro components. Nuclear energy which is probably the most efficient method of electricity generation took a major hit thanks to the Fukushima Daiichi disaster (despite not a single death contributable to radiation).
While still an attractive sector, the investor in Energy will be well advised to be cautious.
Agriculture: Animal husbandry is the second largest cause of global warming emissions. Cattle are known to contribute 15% of all methane gasses. An estimated 40% of modern agricultural land is used to grow feed for animals like cows, goats, pigs etc. It is also the single largest cause of water usage. Not to mention that pressure to grow feed has removed traditional methods of leaving the land fallow and farming only two seasons out of three. Instead farmers are becoming ever reliant on fertilizers and pesticides to grow feed the whole year round; this in turn causes a feedback loop causing the ground to become arid, needing more water and fertilizers with every crop.
Thus investing in companies that are looking to work-around these limitations makes sense. Startups like AeroFarms, Plenty, or Crop One, for example, specialize in vertical farming, where crops are grown indoors using LED lights and are supposed to use 99 per cent less water compared with traditional agriculture. Many of whom have been targeting private investors in the US.
Companies like Beyond Meat are trying to recreate the texture and taste of meat with plant based substitutes. Basically grow meat in vats instead of ranges. Beyond Meat launched its IPO at $25 per share back in May 2019, but investors looking to grab a piece of the meat substitutes market have sent its value surging to over $75 per share as of current date, giving the company a valuation of over $4 billion.
Also as mentioned earlier, a large part of the transportation network is dedicated to bringing this produce to our tables, sometimes from as far away as a thousand miles. These companies On the other hand can grow produce in the middle of cities cutting down on this immeasurably.
Funding the Battle
There are multiple funds dedicated to doing their bit in the fight against climate change, any one of which would be a good option to invest in. Funds like Fullcycle, Impax Environmental Markets fund, Templeton Global Climate Change, Aviva Investors Climate Transition European Equity Fund, DWS Invest Climate Tech fund etc. All of whom have declared their intention to contribute to combat global warming, and all of whom are decidedly for profit funds.
The trend towards investing in ESG funds is gaining pace, and as I’ve always said – Trend is Friend. Don’t get left behind, even more importantly when your grandchildren question you on your role in the great fight our generation faces, make sure you have the right answer.
Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.
Greg Silberman is the Chief Investment Officer of ACG Investment Management LLC (“ACGIM”). ACGIM specializes in creating custom private market solutions for RIA/Family Office clients.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views and strategies described may not be suitable for all investors. It is not possible to directly invest in an index. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of an index. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Advisory Services offered through ACG Investment Management, LLC. ACG Investment Management is an affiliate of ACG Wealth Inc.