Energize has recruited a group of Summer Associates every year since 2017. We run a rigorous recruitment process and try to give the rising associates as real a full time investor experience as possible.

This summer we had two MBA interns and one undergraduate intern. The effort and contribution from this year’s group has been exceptional and complementary to our existing skillsets.

Both of our MBA candidates are from Columbia Business School and have made intermittent trips to Chicago. Each Summer Associate worked on active investment opportunities (new & follow-on) and created a lengthy deep dive. We begin our summer experience by sharing as much about our thesis with the group and then have the Associates interpret our areas of interest for a “greenfield research idea” that will encapsulate their internship through a 10-week deep dive. I just got the final work product from Honour Masters as she is presenting it to our team later this week. She covered how satellite related applications will impact the sustainability transition. The work product is ⚡️ and we can’t wait to share it with you in a few months. There is no doubt an Energize investment within the thesis and I am sure she has the company in her market map.

I parlayed my undergraduate summer internship into a full time role at UBS. And I had a similar outcome from my first hiring at KPCB and my eventual joining Choose Energy. I believe these programs are the best way to get to know a candidate over a lengthy period of time and imagine Energize will leverage this extended internship structure for all of our post-MBA hires going forward.

(I will cover the other summer associates over the coming weeks)

This morning President Biden and a number of US automakers announced a target of 50% EV market share for new car sales by 2030. The target is voluntary … and mostly meaningless. Why?

#1- Auto OEMs like Ford and GM were already spending towards that figure. GM has indicated a $30 billion budget for EV development. Ford followed suit with a $25 billion EV capex budget and is positioning their iconic F-150 and Mustang vehicles as EVs.

#2- These targets are (correctly) voluntary and OEMs still need to convince the public to purchase these cars. To help consumers make the gas to electric habit shift, these OEMs need to deliver on their platform promises with GREAT cars … but also must better enhance the EV network. That enhancement means providing greater certainty of charging networks and EV-specific services. Gaining mass market momentum is not just about the car, but about creating a travel ecosystem that consumers can trust. I believe all areas will require investment.

There is an article this morning from the Wall Street Journal on this target:

https://www.wsj.com/articles/u-s-to-set-electric-vehicle-sales-target-of-50-by-2030-11628154000?st=hugghglfmc6lpyg&reflink=article_copyURL_share

Perhaps the highlight of the article was the quote below, that just shows how hard it is to predict the future – and how much federal targets have changed in 15 years.

“A decade ago, we were talk­ing about reach­ing around 50 miles per gal­lon of gaso­line in 15 years,” the of­fi­cial said. “To­day for new au­tos, we are talk­ing about reach­ing around 50% of ve­hi­cles that don’t re­quire even one gal­lon of gaso­line to go a mile in less than a decade. This is a par­adigm shift.”

The Biden administration has been vocal in it’s intent to advance an infrastructure bill that will help improve America’s critical infrastructure. The size and scope of the bill has varied dramatically over the past 6 months.

Earlier this week, a bill with bipartisan support finally emerged. The chart below shows the sector-specific capital allocations within the bill, and how the amounts have changed since the first proposal.

One area of critique in the energy community is the decline in scale of electric vehicle (& related) support. Most EV drivers receive a tax rebate with the purchase of an electric vehicle and the scale of that program going forward is going to get smaller.

I think that the lower tax incentive is just fine. Tax incentives are meant to help early adopters: in the 2010s, the cost to develop and deliver a new EV was quite high. By having a $7,500 per vehicle tax rebate for the purchaser, auto OEMs were more willing to commit to EV development knowing that a consumer would pay an effectively lower rate. But now, just read the news: EVs are going mainstream and as the technology goes mainstream, the tax support should subside.

Other areas, like our grid infrastructure, should receive the capital to help asset owners and capital providers increase the rate of return on traditionally low-return investments. EV charging straddles this logic: infrastructure but in the earlier stage of development and deployment. In my opinion, fiscal support should last another 3-5 years there until we have more consistent charging networks. But in general, I suspect the corporate community (destinations, OEMs) will take the reigns on driving EV charging network growth.

Overall, good to see our elected officials get a moderate infrastructure bill across the line.

The costs to develop utility scale solar and wind have dropped by ~10% per year for over a decade. The decline in costs has resulted in the installation of tens of gigawatts of solar and wind and an even larger upcoming pipeline. To-date the majority of economics in the space have gone to developers and those associated with putting new assets in the ground.

Now that the scale of in-ground, operating renewable assets is so meaningful, I expect the emergence of sizable software and technology businesses built around the maintenance and optimization of these newer power units.

One of those scaling software businesses serving the space is Power Factors. Power Factors is a mature (primarily) software company serving the renewables market. The company’s core product, the Power Factors Drive Pro, is a cloud-based asset performance management (APM) solution that integrates all the key data owners, operators and asset managers need to monitor, manage and optimize the performance of renewable energy assets throughout the asset lifecycle.

As seen in the article below, Power Factors was acquired by Vista Equity Partners. Vista is a well-known technology growth equity/PE firm and this acquisition is a signal to the recent maturity of the renewables O&M market. Wind farms and solar farms have 10-20 year operations contracts with their offtakers. Developers and utilities will look for long-term software contracts to help monitor and optimize asset operations over a similar time period. Firms like Power Factors are well-positioned to lock in these long-term deals and capture the many upcoming GWs in the process of being integrated into the grid. I expect Vista will implement a bolt-on M&A strategy to bring more technology solutions to the Power Factors platform and am bullish on the company going forward.

On the surface, ESG-related investing should be immune to attack. The promise of delivering financial and ESG-positive returns are the holy grail to an institutional investor. And yet, the ESG space isn’t exactly squeaky clean. The public market equities screening for “ESG-positive” firms is particularly terrible. Why?

The ability to track and quantify a corporations environmental, societal and governance policies and impacts is actually quite nebulous. Case in point, as see in this Stanford study “The World May be Better Off Without ESG Investing”. This part of the article really capture the problem that originate with fundamentally weak ESG ratings agencies:

“At the core of the problem is how ESG ratings, offered by ratings firms such as MSCI and Sustainalytics, are computed. Contrary to what many investors think, most ratings don’t have anything to do with actual corporate responsibility as it relates to ESG factors. Instead, what they measure is the degree to which a company’s economic value is at risk due to ESG factors. For example, a company could be a significant source of emissions but still get a decent ESG score, if the ratings firm sees the pollutive behavior as being managed well or as non-threatening to the company’s financial value. This could explain why Exxon and BP, which pose existential threats to the planet, get an average (“BBB”) aggregate score from MSCI, one of the leading rating companies. It could also be why Phillip Morris made it onto the DJSI. The company recently committed itself to a “smoke-free” future, which ratings agencies might perceive as reducing regulatory risk even though its next generation of products remain addictive and harmful.

The second problem involves how ratings firms assign weights to each ESG factor. To compute a company’s ESG score, ratings firms score every company on a variety of ESG factors and assign weights to each of these factors, aggregating the results into a composite ESG score. A strong ESG performer might get a triple-A composite score, while an ESG laggard might be assigned a triple-C score. These scores form the basis for how ESG indexes and ESG funds construct their portfolios. This may seem like a legitimate approach, but it’s not. It is subject to human judgment and inconsistent access to ESG information, making for tremendous variability across raters. But more detrimentally, it permits companies to achieve high composite scores even if they cause significant harm to one or more stakeholders but do well on all other parameters.

Take the case of Pepsi and Coca Cola. Both companies get high ESG scores from the biggest ratings firms. They are also typically amongst the largest holdings for ESG funds, largely because they rank high on parameters such as corporate governance and greenhouse gas emissions. However, their core businesses involve the manufacturing and marketing of addictive products that are a major cause of diabetes, obesity, and early mortality. Pepsi and Coke leverage their power to prevent taxes and regulation on their businesses and fund large amounts of research to divert attention away from the health impact of their products. With the cost of diabetes now over $300 billion annually in the United States alone, the human and economic harm caused by these companies may outweigh their economic contribution.”

This ESG tracking problem is admittedly easier to solve at the earlier stage of a company’s life. Policies and impact are easier to measure and a company’s mission can be more directly tied to the product being sold. The “E” in ESG is also more measurable than the S and G. I suspect that better, data-driven products are coming to market to reveal some of these ratings inaccuracies or the whole theme is going to devolve into useless marketing jargon.