Driving the Success of the Global Energy Transition
Path to Decarbonization
Sustainable factors play an important and natural role in our investment research process
The rapid growth of electricity production from clean energy sources in recent years has been, and continues to be, a major source of disruption to, and structural change for, the electric power sector
The need by municipalities to ensure the supply of clean water and growing demand from specific industries (e.g., food & beverage) to meet stringent product requirements create investment opportunities in our sectors
Climate change and adverse weather events necessitate the need for extensive capital expenditures to rebuild, revamp, and harden the electric grid
Expansion of new, innovative consumption technologies (e.g., EVs) necessitates further growth of clean energy production
Strong positive ESG policies are frequently proxies for good management and go hand-in-hand with ethical corporate culture and best practices, helping create enhanced corporate performance
As investors in the energy transition, decarbonization and electrification are extremely important to us. To that extent, we maintain a robust, yet flexible, ESG policy aligned with our core goal of achieving significant risk-adjusted returns, while limiting volatility in the sectors and regions which we invest in.
We believe that ESG integration and engagement is the best path forward to build (i) a more sustainable future and (ii) identify attractive alpha opportunities, particularly in the clean energy, infrastructure, and utility sectors. Without engagement, a binary view on ESG performance would lead to unsustainable practices. Thus, when we have identified a company that is not adapting or publishing their efforts towards transitioning generation, we have historically elected to privately engage with management in order to encourage more disclosure and/or determine if the risk profile is in line with our views.
Electron engages directly with companies regarding sustainability factors and ESG practices; however, we are not activist investors and do not seek control. Instead, we would label our communication methods with management teams as more “suggestivist”. Upon discovery of a controversy, the investment team will discuss impact on reputation and valuation directly with company management. The severity of the issue will determine a decision to immediately exit, vocalize to management, or conditionally maintain the position.
Unlike many other firms, we believe that excluding holdings in companies that score unfavorably on ESG screens is an overly simplistic approach that may not serve investors well. In our investment process, we seek to understand the impact on our companies of structural change, one of the most powerful drivers of stock prices.
Structural changes can include improvements in environmental practices, better social metrics, and more stakeholder-friendly governance. We seek to identify those changes that are trending positively in companies that may otherwise have poor ESG scores, moving beyond exclusionary screening toward a more forward-looking evaluation. This is an approach the firm has taken historically, and with multiple investment criteria – including ESG factors – in which we try to understand and anticipate those critical changes that will drive stock price rerating.
We implement our ESG policy throughout our investment process and hold ourselves accountable using a system of checks and balances. We apply an active approach toward companies in our portfolio through direct dialogue with management, proxy voting, and other means to encourage companies to implement ESG policies or to continue to improve their existing ESG policies, with a goal of achieving best practices and enhancing shareholder return.
Our Investment Team
Due to the depth of experience of our investment team – within a well-defined universe – we are very familiar with most, if not all, management teams for our largest positions. As a result, we often engage with management on their approach to ESG, perceptions of the company from the sell and buy side, and provide recommendations to publicize existing efforts or improve non-existent ones.
Electron frequently assesses risks of climate change throughout the investment process
A few examples of the scenarios we analyze include: (i) carbon emission trends of the current portfolio (metric CO2 / $MM invested), (ii) generation fuel type exposure (as $ of long current market value), MSCI ESG ratings, internal score card ratings, among others.
Electron is a signatory to the United Nation Principles for Responsible Investing (UNPRI). Per the 2018 UNPRI Impact Investing Market Map, we invest in the impact areas of Green Buildings, Energy Efficiency, Clean Energy, Sustainable Forestry, Sustainable Agriculture, and Water.
Once a quarter we update our investable universe using third party data. With this information as a baseline, we equip ourselves with an updated view of ESG risks and how the sustainability community may view our companies. When dealing with companies that are not rated by third party data, generally as a result of either market or size, we determine if the position would be a longer dated holding, in which case we initiate our own internal scoring system. With this data, we update our ESG presentation quarterly.