Redwood Grove’s portfolio is built with a two-part investment process.
A bottoms-up fundamental and climate trends analysis are equally weighted to identify undervalued companies that are beneficiaries of misunderstood climate change trends.
We look for unique climate mitigation and technological advancement with significant applications that disrupt traditional models. Technological shifts include all technologies that help reduce our economy's carbon footprint or help us adapt to climate change. These technologies include renewable energy, battery technology, Electric and Autonomous Vehicles, 5G, AI, Smart Cities, Smart girds, Smart Ag, IoT, Bio Plastics, and emission detection systems among others. In this area, we find companies in three broad categories: First, pure-play clean technologies (i.e., Electric Vehicles, Battery Technology, Renewable Energy). Second, companies with traditional business models with other structural advantages that have invested heavily in clean tech (i.e., auto manufacturers, building products) which will allow them to pivot more successfully than their competitors; and third, companies with technologies that are key to a low-carbon economy but that are not yet recognized as such by the market (i.e., semiconductors, 5G, IoT).
While this trend is not expected to be a straight line, we do anticipate its arc to bend toward reducing carbon emissions. A carbon price is the most broad-reaching regulatory policy. We have found many companies have proactively started using an internal carbon price. The best will use a price above $80 per metric ton of C02 to inform capital allocation decisions as well as to prepare them for the potential for a more stringent regulatory environment. We believe companies that use an internal price on carbon, in sectors where it is material, will be better positioned economically if we see a tighter regulatory environment. Therefore, we consider corporate policies on carbon when making investment decisions. We also evaluate a company's energy procurement policies, particularly in energy-intensive industries. For example, companies that use purchase power agreements to secure long-term low-cost renewable energy are believed to be better positioned than companies that use renewable energy certificates (which are repriced annually) to “offset” their use of fossil fuels. However, the regulatory environment around climate change is much more nuanced and dynamic than just a price on carbon and its economic impacts can be significant and are not always well understood. Numerous other regulatory changes can materially impact companies' valuations, ranging from renewable energy portfolio standards, and methane emission detection to natural gas bans in cities. We work with several NGOs to better understand the potential for and impact of climate-driven legislation.
These risks in the public equity market are often overlooked. Their economic impact can range from unrealized risk in mortgage pools due to outdated and inaccurate FEMA flood maps, and unstable “just in time” supply chains, to wildfire exposure for utilities with large rural footprints. Opportunities exist due to i.e. the need to adapt the infrastructure to raising sea levels and fixing damages caused by extreme weather events, agricultural companies' need to anticipate and adapt to changing growing seasons, and insurance companies offering products to insure against these risks.
In addition, reputational risk is growing for companies that are agnostic to the sustainability of their sourcing and manufacturing practices. As a result, particularly in customer-centric sectors like consumer discretionary, we work with NGOs, talk to management, read sustainability reports, talk to competitors, and use other publicly available sources to evaluate a company's products' sustainability strategies.