The Sustainability Market is No Longer a Promise in the Future

December 11, 2020

When we formed Huck Capital, it was with the belief that capital markets can and must be a driving force for positive impact on climate change. The energy transition would not only be a smart investment proposition but one that delivered on the promise of sustainable returns.

That promise is taking hold with even greater speed than we anticipated, as broad trends around climate and sustainability are now the smart and almost becoming an obvious bet.

Sustainable technology companies have demonstrated tearaway growth over 2020 with enthusiasm unseen in over a decade. Huck benchmarks the NASDAQ Clean Energy Index against S&P daily, which has shown a growing outperformance of 167% increase over the last twelve months vs. 17%1. The rapid rise of energy transition companies brings back some memories of the Mid-2000’s Cleantech bubble. But the momentum seems to be on the side of companies that deliver on sustainability.

This year, ESG frontrunners Tesla, SunPower and Enphase stock prices climbed 817%, 427% and 568% over the last twelve months2. The Array Technologies IPO, with stock prices surging 65% on first day of IPO, was a strong signal given it is a solar hardware company.

What has driven this broader momentum of the ESG sector and how is it different to last time?

First, the fundamentals of technology have improved as cost declines continue and innovation flourishes. In many cases, technology has reached a tipping point and is more of a case of “when” not “if” such as electric vehicles, residential solar, and microgrids. This contrasts with the mid-2000’s focus on “biofuels” and hardware technology 1.0 that were just economically uncompetitive (e.g., utility solar at ~$400/MWh LCOE in 2005 compared to ~$35/MWh today). We believe that the energy transition will be driven by software, which has helped to digitize just about every other sector.

Second, there has been an explosion of capital. In the first half of 2020, sustainable fund flows in the US came to $20.9 billion, just shy of the annual record of $21.4 billion in sustainable fund net flows set in 2019, which were already four times the previous record for a calendar year3. Another free-flowing source of capital is “Sustainability SPACs”; backed by large PIPEs. In 2020, there were ~30 SPACs with a connection to sustainability in 2020, up from a nominal few last year. With ~240 SPACs ($78 billion) currently searching for targets plus another ~90 SPACs ($25 billion) filing for IPO, it seems this source of capital still has lots of runway left. Huck believes this a megatrend and that climate change has become an ever more pressing issue that financial leaders are choosing to put weight behind it.

Last, there is an aggressive political stance to decarbonize. President-elect Biden’s proposed $2 trillion plan to drive decarbonization of the energy sector by 2035 and dramatic reduction of emissions from transportation and buildings, has signaled a very serious change. Further, his expected re-entry into the Paris Climate Agreement further shows that climate and energy will be a top priority at the federal level.

At the state level, California continues to lead the charge mandating zero non-EV passenger vehicle sales by 2035. Couple these policy moves with massive corporate sustainability mandates – GM’s bold announcement last month to move to an all-electric vehicle lineup – and we believe sustainability is not just something people talk about but driving force behind their investments and companies.

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