Decarbonisation and Smart Energy Monthly Report | October

RUSSIA WEAPONISES FOSSIL FUELS, DRIVING INFLATION AND FEARS OF A SEVERE EUROPEAN RECESSION, WHILE THE US IRA GIVES FURTHER IMPETUS TO THE ENERGY TRANSITION

Markets hope for a short and shallow recession, but the last bulls standing cave in as it seems that the bear market may not find a bottom. Meanwhile US Fed continues to raise rates. Only Climate Tech may be recession proof. The third quarter of this very eventful year comes to an end in hurricane mode. All eyes were on the Fed Jackson Hole Conference on August 25/27 and the hawkishness of Chair Powell made many analysts compare it with Volcker’s commitment to controlling inflation in the 80s. On 21st September the Fed raised benchmark interest rates by 75 bps, killing any hopes for a soft landing. The Fed signalled the intention for further increases until the funds level reaches a “terminal rate” of 4.6% in 2023. The depth of the recession this fast increase will cause is of course what economists are now trying to forecast. On the 26th, the UK GBP crashed to a point of almost parity to the USD after the new UK PM announced a plan of tax cuts and borrowing that surprised markets. The month ended with Hurricane Ian devastating Florida and reminding the world of the economic consequences of global warming and the need to adapt to a climate that is already changing.

Despite the rally from September 1st to September 12th the indices had another negative month with the iClima Decarbonisation Enablers Index down -12.81% in the month and -29.91% YTD, while the iClima Distributed Renewable Index was down -13.63% in September and is down -28.54% YTD. [1]

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.

SOLAR GAINS MONUMENTAL MOMENTUM

Bloomberg referred to the US pipeline of PV investments as a “mind bending" amount of solar PV and clean energy storage projects. It is not only the volume of renewable energy and storage capacity that is remarkable, but also the location of the assets that indicates a structural transformation of the grid towards decentralization. The companies leading the offering of the key products and services for the energy transition are thus likely the most recession proof areas to find growth. Here is a summary of the huge ambition.

Solar rooftops to represent the largest share of solar PV in the EU: The REPower EU strategy has increased the bloc’s ambition for solar energy. If the European Union Solar Rooftop Initiative yields its full results, the countries will be adding 58 GW of “local solar” by 2025. A key part of the push is a solar rooftop mandate for all new public and commercial buildings by 2026, all existing public and commercial buildings by 2027 and all new residential buildings by 2029. That brings us to the end of the decade. By 2030, the share of wind and solar energy in Europe is expected to double from the current total of 33% to 67%. By then, solar installed capacity in the block will likely be ca. 600 GW, representing the largest electricity source in the EU - with more than half coming from rooftops.

In the US, 1,000 GW of solar is expected to be added by 2035: The Inflation Reduction Act accelerates this adoption. If we consider the U.S. Department of Energy Solar Studies report, the U.S. could be adding ca. 1,000 GW of solar to its grid by 2035, of which over 25% could be “local solar." Between 300 GW of solar rooftops in Europe and 250 GW in the U.S., the world will have reshaped its grid by 2035, with over 500 GW of solar capacity installed at the point of consumption. As Bloomberg pointed out, the vast majority of new power generation under development in the US is renewable. The pipeline of renewables adds to the enormous figure of 1,450 GW (including energy storage projects), of which 46% is solar PV. Not all of these projects will be built, but the size of the existing pipeline showcases that the 2035 DoE figure of 1,000 GW of solar, while ambitious, is within reach. Of this renewable pipeline in the US, 674 GW is solar and 42% represents projects that are hybrid and have clean energy storage assets combined. This showcases that LDES is already receiving investment.

INFLOWS INTO PRIVATE CLIMATE TECH INCREASES – PRIVATE AND PUBLIC VALUATIONS SEE OPPOSING TRENDS

Investors pricing shares in the equity capital markets are only looking at the very near future. Like drivers on a road with thick fog, they can only see what is right ahead. Future cash flow is currently deeply discounted, and fossil fuel surplus is seen as a “safe” way to invest. However, if we look at the private market, a different dynamic is at work. The numbers for CleanTech VC investments showcase the discrepancy. Venture capital funding continues to flow towards Climate Tech, Bloomberg Green estimating that over $35 billion was deployed last year, a figure almost twice that of 2020. There is no world where the relevant solutions in green energy, green transportation and sustainable products do not benefit from the material tailwind. The US IRA provides an additional $370 billion in climate spending, with incentives for solar and wind, but also for emerging technologies, like long-duration energy storage. What does that tell us? That investors with a short term focus are selling clean tech and valuations are depressed, while investors with a longer-term horizon like those that invest in VC, find in green solutions a very robust investment strategy.

GREEN GROWH AS A RECESSION PROOF STRATEGY

Earlier in the year, the US Securities and Exchange Commission put forward three key proposals: The Names Rule proposal, the Climate Disclosure proposal, and the ESG Strategy proposal. The motivation is to minimize greenwashing and, through higher disclosures, allow investors to better quantify (and price) climate change risks and opportunities. Under the proposed rules of the SEC, companies listed in a US exchange would need to disclose Scope 1, 2 and 3 emissions. In the next months we will see if Congress will give the agency statutory authority for disclosures or if the SCOTUS will, as it did with the EPA in June, rule climate disclosures to be out of scope of the SEC. A win for the SEC will be another material win for the Biden administration and for the mitigation of climate change.

ANAEMIC PERFORMANCE FOR PLANT BASED NAMES

Rising raw material costs, increased competition from incumbent packaged food names, and affordability concerns which mean consumers have less disposable income for healthier alternatives due to higher energy costs together create a perfect storm impacting valuations for plant based alternative companies. Concerns of pandemic sales levels not being sustainable are also impacting German meal kit provider HelloFresh.

AppHarvest, Inc. (APPH, down -31.60% in September, down -49.36% YTD) Despite increased tomato quality and a lower distribution fee, the company's 2Q22 earnings were rather underwhelming, with a 15% QoQ decline in revenue, albeit a 40% increase as compared to 2Q21. The company also witnessed a 30% YoY and a 13% QoQ decrease in the sales volume of premium tomatoes at 6 million. Despite the disappointing results, the company reaffirmed its plan to quadruple its farm count and diversify its portfolio. Later, in August, the company announced that salad greens, strawberries, and tomatoes were being planted at its Berea, Somerset, and flagship Morehead facilities. The company also announced that it had secured $50 million in funding through USDA loan guarantees to help fund the construction of its 30-acre high-tech indoor berry farm in Somerset, which should ease up its liquidity for the year. It expects its three new farms to be operational by the end of 2022, an estimate that considers potential supply chain or timing delays. Despite the addition of the three facilities by the end of 2022, the company revised its net revenue guidance from $24-32 million to $20-25 million, causing the decline in stock price in September.

Beyond Meat, Inc (BYND, down -41.93% in September, down -78.25% YTD) In September, the company's stock price continued to fall, reflecting market sentiments following its earnings announcement in August. Despite recording the company's second-best quarter when net revenues reached $147 million, the figure was 1.6% lower than the same quarter last year. In addition, Beyond Meat reported a larger-than-expected net loss of $97.1 million this quarter. Furthermore, management revised its revenue guidance to $470-520 million, down from its previous forecast of $560-620 million, resulting in a downward revision of analyst estimates. A 14.6% increase in sales volume and a 35.6% increase in distribution points across all sales channels provide a glimmer of hope in the midst of disappointing results. Beyond Meat may face headwinds from the waning decline of the plant-based/alternative meat products segment, as well as mounting pressures from competitors from both peer alternative protein producers and cheaper traditional proteins in a period of high food inflation.

HelloFresh SE (HFG, down -8.84% in September, down -67.80% YTD) The German-based meal kit delivery service reported strong second-quarter results, with revenue increasing by 25.90% compared to 2Q21. HelloFresh reported a 4.1% increase in active customers. Despite the fact that the US is experiencing its highest food inflation, the US market accounted for a 5.5% increase in active customers, a 6.50% increase in the number of orders, and a 37% increase in revenues, accounting for nearly 60% of the Group's revenues. Regardless of its strong second-quarter results, the company's stock fell on margin concerns due to looming inflation.

Kerry Group ( KYGA, down -8.54% in September, down -19.47% YTD) The Group's revenue increased by 13.3% to €4.1 billion in the 2Q22 period, reflecting a 6.8% increase in volume and an 8.3% increase in pricing. Its Taste & Nutrition division saw a 10.3% increase in business volume across regions, channels, and end use markets, driven by increased demand for Kerry's range of food waste solutions and plant-based solutions. Emerging market volumes increased by 10.7% during the period, and the challenging conditions in China due to localised Covid restrictions was partially offset by rapid expansion in the Middle East, Southeast Asian, and Latin American markets.

Koninklijke DSM NV (DSM, down -7.77% in September, down -40.68% YTD) The global purpose-led science-based company reported a strong financial performance in 2Q22, with revenues increasing 18% year on year. It's Health, Nutrition, and Bioscience segment reported a steady quarter with sales up 19%; Animal Nutrition & Health reported an 11% increase in sales despite impacted consumer demand in China; and Food & Beverage reported a 10% increase in sales. The company also made two significant announcements this month. It completed its acquisition of Prodap, a leading animal nutrition and technology company in Brazil. The acquisition contributes to DSM's ambition of a double-digit reduction in on-farm livestock emissions by 2030. It also concluded the sale of its Protective Materials business to Avient Corporation, with a book profit of around €1 billion and an approximate net cash payment of €1.35 billion.

Local Bounti Corporation (LOCL, down -23.66% in September, down -55.97% YTD) Local Bounti's stock has recovered after falling throughout the year. Due to the integration of the Pete's acquisition in April, the company recorded an impressive revenue of $6.3 million compared to $108,000 in 2Q22. The company also stated that revenue from its Montana facility increased by 52%, and annualised yields increased by approximately 20% compared to the prior year period. On the back of its ambitious expansion plans, Local Bounti reaffirmed its full-year 2022 sales guidance of at least $20 million. With Phase 1A of the Georgia facility completed, the company announced that it had begun construction on Phase 1B and had identified Texas as the location of its new facility, which is currently undergoing due diligence.

Novozymes A/S (NZYM B, down -9.96% in September, down -28.67% YTD) The Danish-based global biotechnology company reported a solid 2Q22 performance, with sales increasing by 20%. It also announced that it had achieved double-digit growth in Bioenergy (19%), driven by strong demand in North and South America for its innovative and value-added solutions, as well as biodiesel production. Agriculture, animal health and nutrition, and grain and technology processing all increased by 17% and 13%, respectively. Following the completion of the non-recurring accounting gain from investing intellectual property in 21st.BIO, the company announced that it was narrowing its organic sales growth outlook from 4-8% to 6-8% and raising its EBIT margin outlook to 26-27%.

Oatly Group AB (OTLY, down -18.58% in September, down -66.96% YTD) Oatly stock has been in a relatively consistent downtrend since its IPO a little more than a year ago. It has lost more than 80% of its value since its peak. Despite the fact that the company announced strong second quarter financial results with sales growth of 22%, compared to the same quarter last year, revenue growth has declined for the second quarter in a row this fiscal year. Oatly also witnessed a 5% increase in EMEA, its largest market, while recording the lowest revenues in the previous four quarters. Revenue growth in the Americas and Asia was 25.20% and 66.30%, respectively, indicating a decline in revenue growth when compared to the previous quarters. Furthermore, the volume of produced goods sold increased marginally to 124 mn litres, a 17% increase over 2Q21, but a volume decline over the previous quarters of 3Q21 and 4Q21, where the volume was in the 130-140 mn litre range. Sales in its retail segment fell by 4.7%, offset by marginal gains in its foodservice (1.8%) and ecommerce (2.9%) channels.

Tattooed Chef, Inc. (TTCF, down -25.23% in September, down -67.95% YTD) Yet another food solutions company under pressure from rising inflation, slowing revenue growth, and wider net loss margins. The company reported relatively strong sales - net revenues of $58.million (a 15.6% increase over 2Q21), but only by 20 basis points QoQ. While the company maintained its revenue guidance of $280-$285 million, it reduced its gross margin guidance to 8-10% from 10-12% due to pressure on costs. On the bright side, the company announced the launch of 30 new SKUs, as well as the expansion of its distribution, adding more than 35,000 new points in 2Q22. The company extended its agreement with Walmart, increasing the brand's frozen shelf presence from 5 to 13 SKUs and expanding accessibility to 2,000 Walmart stores from 300, both of which will be reflected in 3Q22 results. The company is also on the verge of completing its acquisition of certain assets from Desert Premium Group, which will significantly expand the company's manufacturing footprint, consolidate distribution activities and add economies of scale. Management anticipates that the new facility's operations will be accretive to earnings by the beginning of 2023.

Source of all performance data: iClima Earth / Bloomberg. Data as of 17/10/2022. 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. Source of all data: Bloomberg / iClima Earth.

Climate Change ETF Performance (As of 30.09.22)

Smart Energy ETF Performance (As of 30.09.22)

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 30.09.2022 Please note that all performance figures are showing net data.

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