B. G., Opalesque Geneva for New Managers: The global energy transition could require up to $128tln of investment between now and
2050. That means a lot of feet on the ground busily investing in all projects and industries that would promote that transition. Investors who want to partake can join one of these active members; one of which is Tall Trees Capital Management LP, launched by Lisa Audet in Greenwich, Connecticut. Audet has the backing of more than 30 years of investment experience, including 10 years of managing global long/short energy and commodity investments at Discovery Capital Management, a Tiger Cub, and of Tiger Management, which seeded her Fund when it launched in April 2022. According to her, energy transition represents the most attractive investment opportunity available in the market today.
She will present her Fund at the upcoming webinar, Small Managers - BIG ALPHA Episode 11, on Tuesday 13 June (details below).
Audet's fund, Tall Trees Capital Partners, LP is a global, long/short equity thematic fund that invests in businesses that accelerate the decarbonisation of the global economy and enhance long-term energy security.
"We are investing across multiple sectors of the global economy, in renewables,
utilities, industrials, integrated energy and construction materials, to name a few,
looking for the best technologies that increase low-carbon energy resources and reduce
the most CO2" according to Tall Trees documentation seen by Opalesque. The Fund eschews companies that are high carbon emitters, have underappreciated risks from the energy transition or have early-stage technologies that appear overvalued by the market.
Energy transition refers to the global energy sector's shift from fossil-based systems of energy production and consumption - including oil, natural gas and coal - to renewable energy sources like wind and solar, as well as lithium-ion batteries. Carbon dioxide (CO2) emissions from energy and material production can arise from coal, oil, gas, cement production and gas flaring.
The Fund
The Fund employs a fundamental approach to identifying 40-50 high-conviction stocks that
fit within one of the key themes of the strategy. It does not employ an activist strategy.
The four pillars of the strategy are (1) renewables (energy generation and equipment, power), (2) electrification (energy infrastructure, energy storage, mobility), (3) low-carbon energy (LNG, renewable diesel, biofuels) and (4) decarbonisation (automation, green construction materials, carbon capture, hydrogen, energy efficiency).
To make sure the companies it invests in have an impact towards a low-carbon economy, Tall Trees Capital managers use both fundamental and sustainability analyses. "We believe combining these is a key differentiator in terms of how we assess opportunities for the portfolio and ultimately should lead to better outcomes in terms of risk-adjusted performance," Lisa Audet tells Opalesque.
"In our Fundamental Analysis, we include a Technology Assessment to determine where a company's technology is in its life cycle; the cost of the technology and how much CO2 the technology removes from the atmosphere.
"In our Sustainability Analysis, we first perform a Negative Exclusion Screen to make sure that we are not investing in sectors such as tobacco or firearms. We then do a Carbon Footprint Assessment on the company to look at whether they have measured their CO2 emissions, set targets to reduce those emissions, set both short-term and long-term targets and, most importantly, whether executive management compensation is impacted by performance against these targets."
The fund is up 0.17% YTD after returning 0.7% in April. Its top five long holdings are Siemens, RWE, Schneider Electric, Engie and Centrica. The largest country exposures are the UK, Germany and France.
"2023 has been a challenging period thus far for the energy transition space," Audet says. The ICLN, the IShares Global Clean Energy ETF which tracks the S&P Global Clean Energy Index, is down 5.94% YTD (at the end of May 2023). This is relative to the YTD performance of the S&P 500 at +11.5%, the Nasdaq at +26.5%, the EuroStoxx50 at +14% and the MSCI World at + 10.4%.
According to her, the main reasons for the underperformance of companies in this space relative to the rest of the market are many. They include continuing supply chain challenges; low commodity prices putting pressure on power prices; project execution issues; concerns about inflation and a possible global recession; the impact of higher interest rates; European players being disadvantaged relative to U.S. beneficiaries of the Inflation Reduction Act; and concerns around early-stage technologies that are not yet commercialised.
"We see many of these headwinds dissipating into the second half of 2023 and into 2024 and expect certain parts of the clean energy transition space to begin to perform better," she adds. "We are most positive about the Automation, Electrification, Energy Infrastructure and Power segments of the market."
The transition is not straightforward
The transition to a sustainable world and achieving net zero by 2050 is not straightforward, says Tall Trees Capital, as socio-economic, political and historical impacts must be considered, with each market facing its own set of challenges in transitioning its energy economies. Simply divesting from high emitters will not solve the issue of decarbonisation.
Tall Trees Capital believes in a 'Just Energy Transition' (JETP), an approach that considers all aspects of decarbonisation - its contributors and detractors. The manager also aims to publicly support the Task Force on Climate-related Financial Disclosures (TCFD) - which was created by the Financial Stability Board to improve and increase the reporting of climate-related financial information.
Tall Trees Capital is also a signatory of the Carbon Disclosure Project (CDP), a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts, and aims to be a signatory of the Net Zero Asset Managers Initiative, an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner.
According to the International Renewable Energy Agency (IRENA), although global investment in energy transition technologies reached a new record of $1.3tn in 2022, yearly investments must more than quadruple to over $5tn to stay on the 1.5C pathway. By 2030, cumulative investments must amount to $44tn, with transition technologies representing 80% of that prioritising efficiency, electrification, grid expansion and flexibility.
Upcoming webinar:
Small Managers - BIG ALPHA Episode 11
Episode 11 of this ground-breaking live and interactive webinar series presents you with another carefully screened panel of investment managers worth taking a look at.
When: Tuesday, June 13 at 11 am ET (4 pm GMT, 5 pm CET)
Free registration here: www.opalesque.com/webinar/
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