The bear market persisted in May, with the S&P500 down almost -20% in the year at one point.  Interest rates are still low, but in a global coordinated effort, central banks indicate they will continue to increase rates globally. The FT counted 60 rate increases by different countries in the last 3 months, prompting analysts to announce the end of the cheap money period.  If inflation were again a monetary phenomenon, the hawkishness of the central banks would be expected to tame CPI rates in many countries, but the expected stagnation demonstrates that markets are sceptical on the ability of tighter monetary policy to curb increases in oil & gas prices caused by the energy crisis and the war in Ukraine, now entering into a 4th month. Fears of stagflation dominate the news cycle, and concerns of central banks overtightening remain strong, with recession deemed all but inevitable.
The iClima Decarbonisation Enablers Index was up 4.21% in the month, the iClima Distributed Renewable Index 6.5%. Meanwhile, the S&P500 was up 0.01% but the Nasdaq was down -2.05% in what we interpret as, at last, evidence that investors are stopping to discount the acceleration of the energy transition. It is not about defending a growth trend and expecting a pause in hawkishness to give respite to growth stories. Rather it is about realizing that the energy transition is real and higher green investments also boost energy self-sufficiency and security. As we will see below, there is irrefutable evidence of the accelerating adoption of decarbonization solutions, but the share prices of those players providing key products and services does not seem to reflect that yet. We expect investors to begin discerning between broad growth and that which supports the energy transition, as the ongoing energy crisis makes the need for prompt clean energy investments very compelling.
Please note that all performance figures are showing net data. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product.
Regeneration and deglobalization take centre stage at Davos. Our view is that economies will not deglobalize, rather we will decentralize some large & key industries. The World Economic Forum met in-person again at the end of the month for the first time since the pandemic started. Much has changed in two years, and global leaders in Switzerland this month were talking about not just GHG emissions but the bigger need to ‘regenerate’ the planet, a term which is gaining popularity over the limited and often misunderstood idea of sustainability. In Davos this year deglobalization was also centre stage, as economists question how far our reliance on foreign supply chains has taken us in our quest for the cheapest possible products.  iClima has developed the only index that represents the decentralization (and decarbonization) of the grid, by promoting the use of behind the meter solutions. What our research indicates is that the world is not deglobalizing, but rather, in the effort to solve the trilemma of how to decarbonize while promoting affordability and security of supply, the solutions emerging are quite local in nature, like behind the meter renewable energy. The food industry, similar to the energy segment, may also become much more decentralized as it looks to tackle its own trilemma. 
The Californian grid reaches a major milestone. On a beautiful spring day in May, it procured 100% of its electricity from renewable sources. California leads the energy transition in the US, and the state has a target of 60% clean energy generation by 2030 and 100% by 2045. Earth.Org reports that in the state there are 770 solar power plants (adding to just over 14 GW of capacity), 1.3 million homes with a solar rooftop installation, 274 hydro plants (also with over 14 GW of installed capacity), while wind has 5.8 GW of capacity and room to also grow fast.  What comes next? More solar and wind of course but also long duration energy storage, vehicles to grid (V2G) and virtual power plants (VPPs), so that clean energy storage can become dispatchable and the state can retire its natural gas fired power plants. More on that next month.
All eyes on Germany, as the country triggers the decoupling of growth from the energy transition. As the largest economy in the EU accelerates its energy transition it will remain in the spotlight, showcasing how to enable a grid based predominantly on renewable sources. Our view is that Germany will trigger the decoupling of growth from the energy transition, showcasing that regardless of what investors think of growth strategies in a volatile macro environment, Germany is leading the energy transition, and the companies with relevant solutions will benefit from accelerated growth. Therefore, while growth may not be top of mind for a while, energy transition solutions will. We also note that in May, data for 1Q22 was released, confirming that 50% of all electricity in the country was generated by renewable sources, which was 9% more than in 1Q21.  During the month Germany also concluded its third rooftop PV tender, when the Federal Network Agency selected 163 projects totalling 204 MW, with final prices ranging between €73/MWh and €89/MWh. 
EU makes solar rooftops mandatory for new builds. Solar rooftops, together with energy efficiency, are key short-term solutions to the energy crisis. The “Solar Rooftop Initiative” is part of the European Commission’s REPowerEU plan that calls for a phased-in obligation for new residential, commercial and public buildings to have solar panels installed.  The EU plans to entice users of electricity into producing part of their electricity needs, giving rise to “ProSumers”. For us, developing the only equity index that represents behind the meter solutions, solar rooftops epitomize the trend. iClima have conviction that security of supply and predictability of costs are the two main consumer goals that will prompt the adoption of behind the meter solar solutions. Higher fossil fuel prices post the Ukraine invasion translates into demand destruction, making the decision to produce electricity at the point of consumption a very rational one (more on the companies leading local solar solutions below). The EU legislation accelerates the convergence of three of our largest industries, namely electricity, buildings and transportation, all electrifying and embracing behind the meter solutions (that includes the powerful batteries inside the EVs, making V2G and the aggregation of decentralized batteries a very exciting trend). We note that the EU legislation also calls for a dedicated solar strategy that aims to double solar PV capacity until 2025, with 600 GW of new solar being added by 2030. Solar thermal and geothermal get prominence, as well as energy efficiency and heat pumps. Green hydrogen has specific targets set, 10 million tonnes of EU production, as well as 10 million tonnes of imports by 2030.
As expected, May held bad news on the CO2 emissions front. The Mauna Loa Observatory in Hawaii holds the longest record of direct measurement of CO2 in the atmosphere, with figures having been calculated since 1958. Statistics were released this month showing that for the first time ever the monthly average CO2 levels exceeded 420 parts per million.  Its strategic location on top of a volcano allows the lab to measure the average state of the atmosphere in the planet’s northern hemisphere. In March the IEA had warned that an increase in the use of coal was causing a rise in CO2 emissions.  It is paramount that all coal fired power plants are decommissioned and replaced by renewable generation.
Elon Musk tweets makes headlines again, this time when trashing ESG. The media seems to spend a lot of time discussing Elon’s tweets, and we were asked repeatedly if we agree with his points or not. We do. S&P Global announced in mid-May that it had removed Tesla from its S&P500 ESG index, an index that has Exxon as a constituent.  This incident is yet another example of how using backward looking data manipulated into black box filters fails to capture the essence of ESG, which is identifying what companies generate profits that make things better for people and planet. The title of the famous 2004 article that elevated ESG into a powerful acronym said it all: "Who cares wins". This article attempted to demonstrate that companies with sustainable practices would have better share performance. ESG was never meant to equate to opaque scorecards. More impactful investments can be made if ESG is used as a goal, and that is what iClima does. We use tangible and forward-looking metrics to identify solutions, and we believe a new wave of ESG investments is emerging. We call ESG as a goal “ESG 3.0,” this new wave of ESG will focus on companies that are causing positive impact (not merely correlating with impact). Our full article on Nasdaq’s World Reimagined can be found here. 
We are delighted to report that CLMA now votes. Active asset managers like to highlight that they vote on proxy statements and therefore can engage with companies and promote stewardship. We highlight that shareholders have a right to vote, regardless of ownership being via an active or a passive fund. We are delighted to share that, with the support of HANetf, we started to vote on proxy statements for the companies in CLMA this AGM season. We see our companies as climate champions, so voting fulfils two purposes:
- We engage to ensure that these companies are leaders in every way, not just through the solutions they provide. This means a focus on scope 1 and 2 emissions, as well as on social, governance and broader environmentally relevant practices beyond just emissions.
- We include a small number of ‘transition solutions’ in our universe. These are companies that either a) provide lower carbon alternatives that will be necessary in the short-medium term such as waste to energy, but which still produce a notable volume of CO2e emissions or b) provide true low carbon solutions, but do so alongside other high carbon products. We engage with these to ensure that they are moving in the right direction in terms of the caron intensity of their transition solution, or its share of revenue generation.
We highlight that, despite the importance rightly placed on corporate stewardship, voting in itself is very constrained, dependent as it is on the resolutions presented. We have been very clear on governance related issues, which often do come up for vote, and which we believe are a major determinant of long-term value. We are, however, yet to find a specific social or environmental focused resolution. This means that a) filing resolutions alongside other shareholders is clearly the best way to have impact in these areas, and b) when focusing just on voting, you have to be rigorous and sometimes creative in order to influence. We have based our environmental efforts, for example, around remuneration and incentive-based resolutions. A large body of research suggests that linking executive pay to ESG targets is an essential prerequisite for strong ESG performance, just as short time horizons and a purely financial focus are major drivers of environmentally damaging practices. Few other common resolutions offer such leverage potential. We aim to publish a ‘voting policy’ document alongside a summary of our decisions soon, before actively filing resolutions next season.
Can Blockchain help decarbonisation?
Reaching NetZero by 2050 is a herculean effort and solutions that can further accelerate the transition to low carbon and promote systemic change are much needed. Is Blockchain such a solution with great potential for climate change applications? We found evidence that indicates that the backbone of Web 3.0 can indeed accelerate regeneration. We share our findings in a recent iClima Special Edition, where we look at evidence from the field, and find that the solutions developed by four new ventures do indeed bring to market impactful results.  Brazilian based Moss Earth created tokens for Amazon based carbon offset projects, Spanish FlexiDAO uses blockchain to certify that procured energy indeed comes from renewable sources. Swiss based Frigg uses tokens to accelerate investments into emerging markets decarbonization infrastructure, while Australian Power Ledger have developed a powerful peer-to-peer trading solution for distributed renewable generation owners. We believe the convergence of Web 3.0 and ESG 3.0 (as described above, ESG as a goal) could be a powerful development.
Current valuations levels discounting massive capex cycle
The share performance of some names in our universe this month indicate that, despite the challenging macro environment, investors are starting to realize that the depressed valuation of the decarbonization names are not in line with the unprecedented value creation that the energy transition represents. We elaborate on some of the key trends below.
ABUNDANT TAILWIND BUT ALSO HEADWIND: LACK OF PROFITABILITY FOR THE WIND MANUFACTURERS PERSISTING IN 2022
The US announced its first ever offshore wind sale in the Pacific coast, where 4.5 GW of offshore wind could be built along the California coast.  This is in line with the Biden administration target of 30 GW of offshore wind being developed by 2030. Acceleration of permitting process is one of the goals of the REPowerEU legislation. Nonetheless, European players in wind turbine have revised guidance for the year, highlighting supply chain and logistics challenges putting pressure on costs, brining key players to negative EBITDA margins. 
From Vestas Wind Systems A/S (VWSYF, down 0.42% in May, down 14.11% YTD) $25.8 billion market cap and $18.4 billion in sales, to Siemens Gamesa (GCTAF, up 17.97% in the month, but down 18.48% YTD) $13 billion market cap and $12.2 billion TTM sales, to smaller German Nordex SE (down 21.67% in May, down 26.67% YTD) $2 billion market cap and $6.4 billion TTM sales, to Chinese based Xinjiang Goldwind Science & Technology Co Ltd (XJNGF, up 11.27% in May, down 16.06% YTD) $6.8 billion market cap and $7.8 billion TTM sales, all have suffered pressure of building bigger and cheaper, for example Vestas now has a 15 MW offshore structure while Siemens Gamesa 14 MW offshore turbine.  The IEA estimates 390 GW of annual new wind capacity needs to be built until 2030 so analysts are keen to see if the tailwind global growth will manage to translate into profitability. 
GH2 UNFOLDS, NO LONGER A CONCEPT AS ACTUAL PROJECTS ARE NOW IN OPERATION
The largest green hydrogen plant in the EU started operations this month, a 20 MW electrolyser plant located in Spain.  BNEF estimates that 458 MW of electrolysers were delivered in 2021 while shipments in 2022 could grow over 4x to 2,500 MW, with China representing over 60% of the demand.  The EU is targeting 10 million tons/year of green hydrogen production capacity, which S&P estimates would require ca. 80 GW of electrolysis. 
Electrolyser producers as UK based ITM Power PLC (ITMPF, down 9.52% in May, down 28.38% YTD), Norwegian based NEL ASA (NLLSY, up 4.25% in the month, down 12.08% YTD) and French McPhy Energy (MCPHY, down 8.98% in the month, down 28.12% YTD) are all producers of this crucial technology. Risk averseness seems to be discounting the solid growth prospects for the segment and these companies too need to prove that they can scale up profitably, delivering on the promise of no emission green fuel of the future, GH2.
DEMAND DESTRUCTION FROM GASOLINE ABOVE $6/GALLON FURTHER PROMOTES BEV ADOPTION
In a recent report, BNEF estimates that in June 20 million EVs will be on the road.  Furthermore, in the second half of 2022 they expect 1 million EVs to be added to the global fleet per month, so that by the end of the year the global fleet will reach 26 million. BNES’s forecast for 2025 is that a fleet of 71 million EVs will be on the roads. As of now, China accounts for 46% of total sales, followed by EU with 34% and North America with 15%. BNEF expects markets to move away from plug in hybrids and into full BEVs. Tesla Inc (TSLA, down 12.92% in May, down 28.25% YTD) booked over $3 billion in profit in 1Q22 on revenue growth of 81% YoY and continues to lead the race on innovation in the BEV segment.  Many analysts are concerned about the Covid related disruptions in the Shanghai plant. Share performance is similar for Chinese EV player NIO Inc (NIO, up 4.13% in May, down 45.11% YTD) and Xpeng (XPEV, down 4.51% in the month, down 53.31% YTD).
SOLAR ROOFTOP ELEVATED, SOLAR PV ACCELERATES, BUT SOME KEY NAMES NOT YET SHINING
Some key figures to showcase the acceleration of the energy transition: China's National Energy Administration announced it expects 108 GW of new solar PV installations to be added to their grid in 2022 (55 GW were added in 2021), having ended 2021 at 306 GW China is on track to achieve 1,000 GW of solar before the end of the decade.   Germany added 0.55 GW of solar to the grid in April, after adding 0.9 GW in March, total installed capacity of subsidized solar PV in Germany reached ca. 59 GW last month.  The other country with 1,000 GW of solar potential within a decade is the US, where the Department of Energy Solar Futures Study report estimates in their decarbonization + electrification case that the US would get to 994 GW of solar PV by 2035 (from 76 GW of capacity in 2020). 
Meyer Burger Technology AG (MYBUF, up 1.9% in May, up 3.01% YTD) is a German company that produces high end solar modules for rooftop application, designed to be recyclable and produced using renewable energy, the company has pivoted its strategy from an equipment manufacturer and is well positioned for the EU market growth that the REPowerEU plan will trigger. SMA Solar Technology AG (SMTGY, up 12.94% in May, up 15.38% YTD) is also German, trading at P/S of 1.4x while having material growth opportunities as it too serves the behind the meter solar market in Europe. Jinko Solar Holding Company (JKS, up 19.53% in May, up 33.31% YTD) is one of the largest producers of solar PV panels, based in China. The company announced that its second factory (they operate seven plants) in China is now powered 100% by renewable energy, a material milestone in the process of having solar panels made out of solar energy (as opposed to coal, as the industry has been criticized for).  Jinko had committed to the Climate Group’s RE100, a global initiative of companies that have pledge to use 100% renewable energy. We note that part of the clean energy of the second facility comes from on-site solar PV arrays installed on plants large rooftop.
LDES TAKES CENTRE STAGE
The MIT Energy Initiative released a report, three-years in the making, looked at four types of storage, namely electrochemical, thermal, chemical, and mechanical.  Lithium-ion batteries, pumped hydro, and some thermal storage options are proven and ready to scale up. One of their findings is that the hourly marginal value of energy will “change in deeply decarbonized power systems — with many more hours of very low prices and more hours of high prices compared to today’s wholesale markets.” Demand response and LDES therefore is expected to take centre stage. Also, the initiative recommends that existing thermal power plants marked for decommissioning be converted to useful energy storage plants, swapping their fossil fuel boilers for thermal storage and new steam generators. Firming variable renewable energy is the goal of the solutions provided by Fluence Energy (FLNC, up 6.87% in May, down 72.44% YTD) and Stem Inc (STEM, up 20.5% in May, down 54.45% YTD). Billionaire George Soros building a position on Stem seems to be lifting the share this month, as the experienced investor looks for a name well positioned to benefit from “boom potential”.  Earlier in the month Stem announced its 1Q22 results, revenue reached $41.1 million, 166% above 1Q21.  What seems to be hurting Fluence is the availability of batteries. The company had to declare Force Majeure over Chinese supply issues, which is prompting the utility scale energy storage specialist to try to get to 30% of its battery supplies outside China by year end. 
A SEVEN MINUTE SUMMARY
Proactive New York spoke to Gaby about ESG 3.0, the challenging market and what is ahead for green growth. You can see the video here: https://youtu.be/PbX1DfPrtos
Please note that all performance figures are showing net data. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product.
CLMA iClima Global Decarbonisation Enablers UCITS ETF (Acc)
CLMA iClima Global Decarbonisation Enablers Index
Performance before inception is based on back tested data. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Bloomberg / HANetf. Data as of 31.05.2022 Please note that all performance figures are showing net data.
Learn more about our Climate Change ETF