Global Decarbonisation Monthly Report | September

Key Events in August – The Science is Clear but Next Steps Not Quite

• The IPCC released the first instalment of its Sixth Assessment Report:[1] Focusing on the physical science of climate change. Eight years in the making, the report is expected to be the last of its kind that the IPCC will have time to produce before it is too late to limit global warming to 1.5°C.[2] Indeed, it finds that warming has already hit 1.07°C. The most striking feature of the report, beyond the urgency of its tone, was the depth of scientific understanding that we have now reached. Chapters provide detailed analysis of, amongst other things, sea level rise, glacial melt, ocean acidification, intensification of the water cycle and extreme heating, and link them all, more clearly than in previous reports, to human activity. Scientific progress has also allowed scientists to include an interactive atlas of regional assessments – crucial for adaptation planning and attribution research. Using data from the report, the Carbon Tracker initiative forecast that, globally, we now have 9 years left of emitting at the current rate to have a 66% chance of limiting warming to 1.5°C, and 16 years to have the same chance for 1.7°C.[3] Critically, however, the scientific progress made has also allowed the report to confirm, with an even higher degree of certainty than in previous reports, that emissions reductions in line with the Paris Agreement will lead to temperature stabilisation, meaning that action will be effective, as long as it starts now.
• Countdown to the long-awaited 26th Conference of the Parties: Expectations are mixed for the conference that starts in Glasgow on November 1st, which is realistically the last major chance to secure a safe future below 1.5°C. A key issue for the conference will be clarifying Article 6 of the Paris Agreement on carbon markets, with discussions then and since unable to provide a robust set of rules that induce sufficient action. Further issues for resolution include the inadequacy of current NDCs in meeting Paris targets, justice debates over loss and damages, and the failure of developed nations to provide their promised $100 billion per year of climate finance to developing ones. With the UK’s conference presidency, the government has tried to position the country as a world leader on climate action, making an early statement in becoming the first country to enshrine net-zero targets in law in 2019.[4] In the all too crucial run up to the conference, however, the UK’s activities have been criticised[5] for falling short of its rhetoric. Delays to heating[6] and transport[7] strategies preceded a hydrogen strategy that many felt had bent to pressure from fossil fuel companies,[8] and a recent report from the independent Climate Change Committee showed a significant gap between government strategies and targets.[9]

Highlighting Key Concepts – Offsets, Credits & Avoidances

Investment strategies based on carbon markets and potential avoided emissions (PAE) have the same goal; achieving value whilst reducing carbon in the atmosphere. Despite the similarity in goal, the approaches are quite distinct. As we race towards 2030, we hear constant discussions around decarbonization and net-zero. In many cases terminology is being used interchangeably and creating confusion amongst the investment community. 

We, iClima Earth, believe that the best way to reduce carbon in the atmosphere is by not emitting in the first place. We just published an article focusing on the definition of offsets, credits, and avoidances. Although carbon markets are an important tool in fighting climate change, we show that their impact potential is limited, and if communicated poorly they can obscure more robust solutions such as PAE. The role of offsetting should clearly not be overstated. For the voluntary market, the Taskforce Report on Scaling Voluntary Carbon Markets[10] states “in 2017, some 44 MtCO2e worth of carbon credits were retired, allowing the purchaser of these carbon credits to claim to have offset emissions by financing emission reductions elsewhere. Over twice as much volume of credits, 95 MtCO2e, have been retired in 2020”. That is approximately 0.4% of the required 26 GtCO2e reduction of the global emissions trend by 2030. As voluntary markets gain momentum for use in aviation or in the path to net-zero, their role will be complementary to real avoidance. Net-zero requires no new emissions to be released to the atmosphere, which suggest the role of voluntary markets will be limited to sequestration and removal type projects. In other words, companies making net-zero commitments cannot use offsets to avoid the direct emissions it generates; thus limiting the impact of voluntary market offsets. Please see iClima’s full article here.

Performance in August – The Tug of War Continues

The underlying index of CLMA closed August up 2.32%, and up ca 12.01% in the year. It is pertinent to compare the performance of both iClima’s benchmarks to the S&P500 as stock market in 2021 are being characterised by a rotation from growth to value that started in February. CLMA had solid performance in January, June and August, but the broader market outperformed the other 5 months. Please note that all performance figures are showing net data.

August may be a slow month with European summer holidays, but this was a very eventful one. Consumer sentiment in the US dropped, retail sales dropped, automobile sales data were weak, and the Delta variant spread.[11] The US FED, that in previous months gave signs it would start tapering the monthly purchase of $120 billion of Treasury bonds and mortgage-backed securities, may now postpone that decision.[12] Inflation concerns seem to be subsiding with slow down of the US recovery, while there are still 5.3 million people unemployed in the US. Fears of growing inflation and interest rates stopped the strong performance of growth shares. Sectors that did not perform well in 2020 are having strong share appreciation so far. All the companies in the Waste Management, Water & Waste Efficiency, Recycling & Materials, Pollution Control and Sustainable Infrastructure subsegments (names that are more value players) are up YTD. Sustainable Buildings, Food Solutions, Electric Systems and Electrical Components are also strong in the year. 

Some noticeable performances are Covanta Corporation (up 52.7% YTD), Republic Services (up 28.9%), Waste Connections (up 25.97%YTD), Suez SA (up 21.15% YTD), DS Smith (up 18% YTD), Ecopro HN (up 193.88% YTD), Pentair PLC (up 45.34% YTD), Trimble (up 41.11% YTD), Generac Holding (up 92.16% YTD), MYR Group (up 73.06% YTD), Quanta Services (up 41.77% YTD), Novozymes (up 45.58% YTD), Compagnie de St Gobain (up 63.71% YTD), Kingspan Group (up 68.61% YTD), and NIBE Industrier (up 78.42% YTD). Some growth stocks that had incredible performances in 2020 are struggling in 2021, such as Workhorse Group (down 50.4% YTD), Sunrun (down 36.22% YTD), Zoom Video (down 14.18% YTD), and all but one of the fuel cell makers (Doosan, the South Korean player, is the only one slightly positive at 2.62% up YTD). 

Past performance is no guarantee of future performance. Source of all data: iClima/ Solactive/ Bloomberg. Please note that all performance figures are showing net data.

Past performance is no guarantee of future performance. Source of all data: iClima/ Bloomberg. Data as of 31.08.21. Please note that all performance figures are showing net data.

iClima Global Decarbonisation Enablers Performance Table (As of 31.08.21)

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such a strategy would have been. 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 31/08/21.  Please note that all performance figures are showing net data.  

2Q21 Earnings Newsworthy Results

Arcimoto (FUV, down 24.04% in August, down 6.12% YTD) The Oregon based company manufactures electric three-wheelers, termed ‘Fun Utility Vehicles’ (FUVs). Despite some supply chain complications and a volatile share price, Arcimoto have overall navigated the pandemic soundly to deliver their best-ever quarter, reporting earnings close to the $1MM mark.[13] This follows July’s demonstration of their first driverless vehicle[14] and the beginning of a climate-friendly battery recycling partnership with Redivivus.[15] With initial product offerings focusing on the delivery and first responder segments, two new vehicles are in the offering with a focus on more recreational usage. According to a glowing Forbes review,[16] Arcimoto’s unconventional CEO Mark Frognmayer has a long-term vision of slashing urban transport emissions through the large-scale rollout of FUVs, and legislative updates in Oregon, California, Florida, Hawaii and Louisiana are already making the vehicles more accessible. 

Livent Corporation (LTHM, up 27.47% in August, up 32.01% YTD) The lithium technology company’s Q2 revenue was up 11% from 1Q21 and 57% from 2Q20.[17] The corporation sees increasing demand for EVs and wider electrification as drivers of this growth, with China’s EV sales in particular growing 18% month on month in mid-summer.[18] Looking ahead, forecasts for China’s EV sales have increased 33% from initial projections for this year, and EU forecasts for 2021 are up to double those of 2020.[19] Livent capitalised on this forward momentum, raising $262 million at a public equity issuance in June and channelling funds into capacity expansions in North America and Argentina.[20]

Beyond Meat (BYND, down 2.49% in August, down 4.29% YTD) Pioneering meat alternatives, the Californian brand report net revenues of $149.4 million in 2Q21, up 31.8% year-over-year.[21] While demand for plant-based alternatives grows, companies in the segment are grappling to bring prices down. A Beyond Meat spokesperson said the company aims to under-price the traditional market on at least one type of meat by 2024, and that prices will naturally drop as demand continues to rise.[22] The company received some welcomed news at the end of the month, as scientists as Eastern Kentucky University found that Beyond Meat patties were a ‘clear’ winner out of 8 brands in a smell test versus standard beef.[23] The company announced partnerships with Pizza Hut, Coffee Bean, A&W Canada, Hopdodddy and Tea Leaf in August, meaning yet further penetration of the mainstream market. 

The Tattooed Chef (TTCF, up 7.35% in August, down 7.51%YTD) The exciting Californian brand which specialises in off-the-shelf curated plant based meals has had a promising quarter, with revenues of $50.7 million; up 45.9% from the same period in 2020.[24] Their second quarter has exceeded expectations, leading them to up their goal of having products in 10,000 retail stores around the US to 12,000.[25] The company received a boost earlier in the year with the acquisition of ‘Foods of New Mexico’ which created new manufacturing and production capacity.[26] Riding a positive wave, members of the management team have agreed to partake in a ‘fireside chat’ at the Cowen Health, Wellness and Beauty Summit on September 14th.[27] This will become a webcast which investors can view through the Tattooed Chef website. 

Tesla (TSLA, up 7.06% in August, up 4.26% YTD) A Forbes report[28] provides more evidence that the Californian giant is leading the EV pack, this time on range; one of the biggest determinants of EV uptake. Tesla’s 2020 Impact Report claimed that the company enabled CO2e avoidance of 5 million tons over the year,[29] and the company’s latest target is the sale of 20 million units per year by 2030.[30] Tesla shares received a boost in the last week with reports of the company’s entry into the Indian market.[31] Amongst the constant media coverage of the company’s varied operations, the development of autopilot systems has been a prominent story. Tesla’s latest safety report suggests that a vehicle in autopilot is involved in an accident every 14,530,000 miles, compared to a US average of one every 479,000 miles.[32]

Nibe Industrier (NIBE, up 17.02% in August, up 78.42% YTD) The Swedish group reported their first half of year results, with consolidated sales for the first two quarters up 16.3%, mostly due to organic sales. The company targets three major business areas: Climate, Element and Stoves.[33] We are particularly interested in the Climate line, where heat pumps have the potential to be a key decarbonisation enabler; a fact reflected in their positive first half sales.[34] Capitalising on this trend, Nibe has acquired UK registered heat pump provider Go Geothermal[35] to add to Heat Trace Holdings which it took on board earlier in the year.[36] It is worth noting that we do not support Nibe’s involvement in wood burning stoves, but its fractional percentage of revenue means its impact is outweighed by important offerings including solar panels, heat pumps and water heaters. 

ITM Power PLC (ITM.L, up 18.33% in August, down 5.93% YTD) UK energy minister Kwasi Kwarteng this month opened the world’s first electrolyser Gigafactory in Sheffield, run by world leading ITM Power.[37] It is hoped that the factory will enable the company to fulfil their significant backlog of contracts, the news leading to a surge in share price.[38] While the UK government’s recently announced hydrogen strategy contained a larger role for blue hydrogen than expected, its long term focus remains on electrolyser-produced green hydrogen, which it says could make up 20-35% of the UK’s energy consumption by 2030.[39] The EU has an even more ambitious hydrogen strategy[40] and ITM Power is now poised to capitalise on it.[41]

Past performance is no guarantee of future performance. Source of all data: Bloomberg. Data as of 31.08.21

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