Conversations with Adam Jokich

The public debate over climate change has intensified over the past 12 to 18 months with global efforts toward decarbonization accelerating. How will this momentum create investment opportunities?

by Adam Jokich, Senior Portfolio Manager of our Active Climate Aware Equity strategy 12 Aug 2021

Growing political attention and increased focus on regulation are key to the ongoing transition to a low-carbon economy. In 2021, we have already seen:

  • China pledge to be net zero carbon by 2060,
  • the EU announce their ‘Fit for 55’ package that aims to meet the 2030 goal of reducing emissions by 55% from 1990 levels and,
  • the US leadership change signalling that climate change is going to be the number 1 topic we need to tackle globally, as President Biden re-joined the Paris Agreement.

What does the race to net zero mean for climate aware portfolios?

Climate change is without doubt one of the biggest challenges of our generation and it clearly requires vast investment from both the private and public sectors. The dramatic flooding we’ve seen recently, and other catastrophic climate events have created a growing sense of urgency and we are seeing clear commitments from governments and companies to achieve net zero.

While there are many well-known examples across areas such as renewables, wind and solar, it’s some of the less well-known areas that we think provide the best opportunities for investors, such as in the small cap environmental services space, where stricter environmental regulation is driving demand.

We believe this will provide a multi-year tailwind for climate aware portfolios to take advantage of the many exciting investment opportunities across the world.

We have heard a lot about the premiums placed on ‘green’ stocks now, so are green stocks a mega trend or a bubble in the making?

While it is true that many of these so-called green stocks have rerated over the last 18 months, we do think it is important to remember that many of these stocks had a fairly large correction in the first quarter of 2021 that we believe was healthy and brought valuation multiples to a more reasonable level. Many of these stocks remain 30-50% off their highs and, with an improving outlook, look compelling investments to us.

Additionally, it is important to realise that many of these companies are fundamentally much more attractive versus history. Taking this into account and coupled with the green stimulus, it is unsurprising that valuation multiples have expanded.

For example, the solar industry was previously an industry characterised as having poor businesses requiring government subsidies. This resulted in a disaster as many companies went bankrupt in 2011/12 as subsidies faded and demand collapsed.

But these businesses now, given the vast improvements in technology and manufacturing processes, have significantly reduced the cost of solar, making the industry much more competitive. For instance, 10 years ago you had a cost per megawatt of solar of approximately $350 but today you can get it as low as $30.

In our portfolios, we are always trying to identify companies with a “defensive moat” or a sustainable advantage versus their peers and this could be in the form of a leading technology that better insulates the company from competition and pricing erosion.

With so much competition entering this space, it’s key to be highly selective and focus on the long-term winners, and that’s exactly what we do with our highly active approach.

Our approach is also a diversified one that includes transition and mitigation stocks. This diversification benefit means that we can avoid stocks when they become over-valued in short term periods, which is what we saw towards the end of 2020, and one of the key reasons our performance has been more resilient than some of our peers during this sell-off period in the first half of 2021.

In our portfolios, we are always trying to identify companies with a “defensive moat” or a sustainable advantage versus their peers

How are your climate aware equity portfolios positioned?

Given the thematic nature of climate portfolios, there tends to be a secular growth tilt, so we typically have a structural underweight to certain sectors such as financials, and the portfolio is ex-fossil fuels, so is underweight to the energy sector.

We aim to build a climate aware portfolio that is highly active and well-diversified. Our unique idea generation runs across the three climate categories of Adaptation, Mitigation and Transition with majority of risk being stock specific.

Many of the great climate adaptation companies sit within industrial areas and this remains a large overweight in the portfolio. In this space, we are concerned about the impact of rising inflation and are focusing on stocks that have an ability to pass through cost inflation through pricing.

Market volatility is likely to continue to be pronounced as the world exits the global pandemic and it is during these times that we look to exploit this by increasing our positions in our high conviction ideas during periods of price weakness, and this has been key to our strong performance since inception.

What are some of the benefits of our approach to climate aware investing?

We think the value of investing across the three dimensions: Climate Adaptation, Climate Mitigation and Climate Transition, really stands out. These 3 buckets have allowed us to construct a much more diversified portfolio which is a real strength during periods of increased volatility and market rotation.

While the solution providers in the Adaptation bucket will always make up the majority of the portfolio, the diversification benefits of the Transition and Mitigation buckets cannot be stressed enough.

And we discussed this in our recent paper “The value of a green transition”.

We must also acknowledge that in order for climate change issue to be addressed we really do need all industries to act

We believe that a highly active approach towards engagement both through initiatives such as Climate 100+ and directly, enables us to encourage change across companies at the same time as capitalising on many of the great investment opportunities that are arising as we drive towards net zero.