Insights
Our “Insights” seek to identify actionable investment themes and carefully articulate the logic behind why such themes are important and how they should evolve over time.
January 23, 2023: Anti-ESG investing and the Economics of Climate Change
This year Environmental, Social and Governance (“ESG”) and climate investing came into the white-hot glare of the political spotlight. However, the “Anti-ESG” movement, a politically motivated pushback against “woke capitalism,” was not an attack on asset managers doing too little, but on those doing too much.
October 25, 2022: Extreme Weather Is Not The “New” Normal
Redwood Grove was founded on two simple, divergent views. First, climate change is not accurately priced in the public equity markets. Second, the climate’s mispricing is one of the last widespread sources of alpha for active managers. This letter is going to discuss why we believe Redwood Grove’s divergent views are enabling it to outperform and why we believe it is a durable advantage.
August 3, 2022: Redwoods, Agriculture and Climate Change
Redwoods, which have been around 240 million years and can live over 1000 years, are dying at an unprecedented rate due to human caused climate change. This loss highlights that even our most resilient plant species are strained. Our less resilient food production system is under tremendous stress to feed the planet’s population before accounting for the impacts of climate change. Redwood Grove has been looking for undervalued food production companies that can generate nutrition more efficiently, are highly resilient to the changing climate and have a lower CO2 impact.
May 4, 2022: IPCC Sixth Assessment Report
On April 4th this year, the IPCC third working group released the final contribution to their Sixth Assessment Report. Our investment approach stays close to the science and that is confirmed in the latest IPCC report.
February 2, 2022: Redwood Grove’s Net Zero Portfolio
Redwood Grove is a member of the Net Zero Asset Managers Alliance, a group of international asset managers committed to promoting net zero emissions by 2050. The recent rise in Net Zero commitments from publicly traded companies has provided an avenue for Redwood Grove to understand a company’s approach to climate change.
November 2, 2021: Climate Change and Public Equity Investing
As fundamental value investors, clean tech’s high valuations can present a challenge. However, Redwood Grove continues to find opportunities in unlikely places. Finding attractively valued companies that will help mitigate the impacts of climate change means evaluating second order impacts.
September 28, 2021: Ted Roosevelt V discusses climate investing on Experts Only Podcast
John Powers and Ted Roosevelt discuss the history of climate investing, problems with ESG data and the climate change mega trend.
August 2, 2021: Adaptation and Migration
It is not hard for Redwood Grove to find companies that are helping reduce carbon emissions. The challenge is finding ones with attractive valuations. Despite clean tech’s high valuations, volatility has allowed us to find pockets of opportunity. There are two common scenarios in which we find value in clean technologies.
April 28, 2021: Microchip Shortage
Over the past decade the rise of ESG investing has been dramatic. According to US SIF, a trade group for sustainable investing, U.S. based sustainable investments are $17.1 trillion at the start of 2020, up 42 percent over the past two years. Unfortunately, the lack of standardized information, untested investment processes and the novel nature of this type of investing make it difficult to determine who is approaching it with integrity. We welcome the new funds but worry they may not be meeting the investors’ expectations.
January 26, 2021: Clean Tech Rally
Despite a global pandemic, several stock indices were up meaningfully in 2020 including the S&P 500 which returned 18.4% and the NASDAQ which was up 43% (having doubled over the past two years). Both of those index gains were more than lapped by clean energy stocks in the second half of 2020 which rallied on increased expectations for a more favorable regulatory environment from the Biden Administration. While we believe in clean tech’s long-term growth prospects, we also think there will be more attractive entry points in the future.
November 3, 2020: Regulatory Change and Climate Investing
We started the year with Larry Fink’s annual letter to the CEOs of the world’s largest companies, in which he declared that “climate change has become a defining factor in companies’ long-term prospects.” While investors are starting to account for climate change, the Federal Government may play an important role in how the markets respond.
July 29, 2020: Economic Impacts of Climate Change
Redwood Grove Capital launched in 2017 because we had a differentiated, contrarian market view. There was compelling evidence climate change was real. Within our 5-year investment horizon, we reasoned that the economic costs and opportunities would manifest in the capital markets. We also believed, contrary to the market’s perception, that the market’s re-pricing of carbon risk would not happen gradually over decades.
June 4, 2020: Ignoring Climate Change Risks Market Chaos
The Fourth National Climate Assessment, released in 2018, predicted that the U.S. economy could shrink by up to 10% annually if significant steps are not taken to rein in global warming. Leaders in the world of business and finance have begun to recognize and warn corporations about sizable economic near-term risks from climate change. Like the threat of a pandemic, these warnings have been largely unheeded by investors and many governments, as human-caused emissions of greenhouse gases continued to increase through 2019.
January 27, 2020: 2020, The Climate Decade
In this letter, we are going to discuss why climate issues have become increasingly important for long term investors. In addition, we will share with you some thoughts about “value” investing and why it may be poised for strong relative returns prospectively. Finally, we’ll explain how our portfolio combines the two in a way we believe is particularly well positioned for the coming decade.
October 31, 2019: Three disruptive technologies in transportation that will meaningfully reduce emissions.
In this letter, we dive into the technological shifts that are de-carbonizing transportation. Transportation alone accounts for about a third of Greenhouse Gas Emissions and consumes about 45% of the annual global oil supply. Unlike in other sectors, efficiency has not offset increased demand. The first Model T in 1908 got 21 miles to the gallon, the average vehicle today gets 24 mpg. This is a .1% compounded annual growth rate in MPG improvement over the past 110 years.
September 23, 2019: Redwood Grove Capital’s Keynote Address at Climate Week NYC
Incorporating climate science into an investment model can help investors, not just drive capital to much needed mitigation solutions, but also capture the last major market inefficiency and active alpha opportunity. Put simply, you can help the planet and your investment returns.
August 7, 2019: Smart Cities and how the IoT will help increase resource efficiency
One of the greatest potential areas to reduce GHG emissions is urban design. Today 55% of the world’s population, 4.3 billion people live in cities. By 2050, it is expected to be 68% of the world’s growing population or approximately 6.8 billion people. Cities have a voracious appetite for energy, consuming about 66% of the world’s annual energy, and emitting 70% of its emissions. Making cities more efficient is so important that “Sustainable Cities” is the title of one of the United Nation’s four Sustainable Development Goals focused specifically on climate.
May 1, 2019: Climate Bubbles and Value Investing
This quarter marked the end of our second year investing for Redwood Grove Capital’s clients. As we reflect on our first two years, we are increasingly confident in our central thesis: climate change is unpriced in the capital markets. A failure to account for that inefficiency will result in reduced returns prospectively.
January 29, 2019: Climate Change Risks Increase for Investors
In Redwood Grove Capital’s first 22 months, there was growing evidence that the impacts of climate change are accelerating as are the economic costs to corporations. We are just starting to see equity prices reflect these risks and opportunities, but only in the most extreme cases (i.e. Pacific Gas and Electric which we’ll discuss later in the letter). In the last month alone, two scientific reports came out affirming the accelerating impacts of climate change.
October 26, 2018: A Different Kind of Short-Term Risk
The portfolio is designed to be diversified, with aligned management teams and undervalued long-term prospects. We are invested in 8 of the 11 S&P 500 sectors (we do not currently have exposure to Energy, Materials or Real Estate). Because of our emphasis on valuation our portfolio has a weighted average P/E less than 13x forward earnings and 10x EV/EBITDA, 20% and 30% discounts respectively to the S&P 500 Index average valuation. Each of these companies has a profitable long-term strategy and is well-prepared for the impact of climate change.
July 26, 2018: Socialization of Climate Change
So why is climate change still not part of the mainstream investment process? We’ve found five primary reasons: (1) the long-term horizon problem; (2) lack of reliable data; (3) the natural biases of the human mind as described by behavioral economics; (4) the political polarization of climate change; (5) the increasing socialization of climate change. Here we discuss the socialization of climate change and its investment implications.
April 18, 2018: Climate Changes Economic Themes
Every company in our portfolio is, in our assessment, both undervalued and a leader in preparing for climate change. In the past, we’ve discussed the four main economic drivers for climate change: the changing regulatory environment, the physical effects of a warming planet, changing consumer behavior, and technological advancements in efficiency and energy production. Here we want to share with you more detail about how these themes are expressed in our portfolio.
January 15, 2018: ESG Data Aggregators and Sustainable Investing
Sustainability themed managers typically rely on ESG data from aggregators (i.e. Sustainalytics/Morningstar, MSCI KLD, Thompson Reuters) to incorporate sustainability into their investment decisions. In total, there are over 100 ESG data aggregators. The data collected and provided by the ESG aggregators is the underpinning for many sustainable investment funds. The development of material, quantifiable and comparable metrics is the key for large-scale adoption of environmental factors into mainstream investing. Unfortunately, the latest research confirms that this data is problematic and mainstream institutional investors rightly remain skeptical.
October 16, 2017: Secular versus Cyclical Trends
One of the biggest challenges facing value managers today is identifying industries that are in cyclical not secular decline. The retail and coal sectors act as cautionary tales that mean reversion is not assured. Low multiples in a vacuum can dangerously mislead investors. We incorporate many secular trends into our investment thinking, including themes related to AI, automated vehicles, cybersecurity, e-commerce and aging in developed countries. We believe the single most disruptive secular trend to the global capital markets over the next 20 years is our transition to a low carbon economy. We are loathe to use Silicon Valley’s most overused word, disruption, but in this case it is appropriate.