This year’s RI Digital: USA 2020 conference, takes place on December 2-3. The conference is free to attend.
“The US election result doesn’t matter,” Jordan Waldrep, CIO of TrueMark Investment, tells RI. “Solar and renewables are getting better every day, batteries have only just started to improve. The Trump administration has done everything in its power to support coal, and it’s collapsed. The way things are going it doesn’t make any difference if Trump supports coal and Biden supports green energy, this stuff is already done as far as the trends go.”
TrueMark focuses on exchange traded funds (ETFs) with SRI, artificial intelligence and cannabis sector themes.
But for Waldrep, it is renewable energy and utilities that are undergoing a huge transformation in the US.
“Yes, the utilities are going to be the major supplier of power for a few years yet, but everyone who gets a roof in the next ten years is going to have to seriously consider a solar roof,” says Waldrep, “and it’s not going to be that expensive. Battery improvements – and it’s not just Tesla, there’s a lot of companies out there doing this – are going to bring prices down dramatically.”
While there is considerable concern that renewable energy – primarily solar and wind – will not be able to meet the demand of an economy moving away from fossil fuels, Waldrep says that the estimates for demand are looking at current usage rates and saying that renewables need to make up this amount. “But that’s not the way it works,” he says. “They are still saying, given our peak usage and how much solar we need, we’re going to need this much baseline capacity. But that’s not a reasonable assumption.”
If you have a solar panel on your roof, in other words, you will not need the same amount of power currently provided by your utility.
Waldrep also predicts a transformation of the utility industry. “They have been boring for a hundred years,” he quips, “so there’s no expectation of them doing anything. I’ve always been anti-utility, they are terrible companies, highly regulated, capital intensive and highly leveraged. You should just buy a bond. They will become more green, but why are they investing in green right now? Is it because they care about the environment? Absolutely not. It’s the same reason all these finance companies are suddenly announcing that they will be net zero by 2030. That’s not because they care about the environment either; these are bottom line companies. It’s because they see which way the trends are going and they’ll invest where the money is going to be made.”
Utilities’ legacy businesses, he says, are going to continue, but as we get smarter grids, he predicts that’s going to change: “Wholesale power suppliers are being set up where you can join and get power at a wholesale rate that changes every five minutes. In this environment, utilities are going to become interesting investments.
Instead of building multi-million-dollar power plants, utilities are going to become power brokers, buying power off people with excess power in their batteries and selling it to others at a higher price. That’s a much more interesting company because the capital costs go down dramatically and it almost turns into a Wall St bank.”
Consumers who live in apartments, he says, will continue to buy power off a utility, but the source of that power is going to change from traditional, dirty fossil fuel plants to solar farms, nuclear plants, or, as he notes, someone’s house who bought an extra battery and has excess solar power. The end result, he says, should be lower prices for consumers and better and more effective grids.
Answering a question about the continued construction of fossil fuel power stations, Waldrep said that utilities will likely continue to use them while they make money, but as soon as they start losing money they will decommission them. “Natural gas is cheap and competitive still,” he says, “so companies building new gas power stations are expecting to run them for twenty years.”
Turning to some of the specifics of TrueMark’s investments, Waldrep says: “We don’t own energy for multiple reasons, most of them ESG, but they have structural problems that are far worse. Fracking comes along and fuels suddenly become a commodity. Find a field, extract gas for six months and move on. It’s not like the UK’s North Sea where you have massive investments and the oil flows for forty years. Especially now, COVID has put a tremendous strain on these companies from a demand perspective. They have massive assets on their balance sheet that are going to have to be written down.”
Like a number of other sustainable investment firms, TrueMark is underexposed to the technology sector which currently dominates the value of the S&P 500. “If you look at tech, the carbon issue is not there, but I do care about governance and I do care about the S. So you can’t just look at the green ‘score’. And that’s why the big five [technology firms – Apple, Alphabet, Facebook, Amazon, Microsoft] are massively underweighted in our portfolios, because they score so poorly on S and G.”
And on investment philosophy: “ESG issues are not necessarily quantifiable in the next quarter or the quarter after that, but they will have a top and bottom-line impact over time. You might not have an expense in your balance sheet to shift over from a high carbon power source to a renewable. On the social side, you might not have an expense in your balance sheet for how well or poorly you reach out to different parts of the community because of the diversity of your workforce. On the governance side you don’t have a line item that reflects the fact that you might get sued by your shareholders, but these are things that affect the top and bottom line.”
Describing TrueMark as one of the ‘Next Generation of ESG funds’, Waldrep says that, in his opinion, European indexes are already ESG, and that, in a few years, the S&P 500 will be also because they will all have good scores. But, he says, a lot of these scores are greenwashing because people are just looking at the scores and thinking that’s all that matters: “That’s why you have indexes with good scores that still have oil refineries in them. You could fix the S&P 500 right now by cutting the worst 10% of emitters in each sector and that would cut the carbon intensity of the index by half.”