Energy consumption rises, driven by economic growth and increasing prosperity in growth markets. To ensure adequate energy supply, there are two approaches: Producing more energy or using the existing energy more efficiently. «Old» carriers of energy such as gas or coal are available in large quantities, but cause undesirable CO2 emissions. New sources such as wind or solar are also sufficiently available, but they are expensive and are subject to uncontrollable fluctuations.

The most useful and most environmentally friendly approach is using the existing energy more efficiently. The major trumps of this strategy are that it can be implemented with already established technologies and that it is cheaper than the alternatives. Therefore energy efficiency is a promising investment case for investors.

Building Technology

Building Technology: LED lamps with occupancy halve the power consumption of Illumination and are usually amortized within less than 3 years.

Industrial: Frequency transformer reduce power consumption of pumps, compressors etc. usually at least 30%.

Transport: Weight savings through metal replacement and optimized power trains will reduce the fuel consumption of automobiles by about 25% in the next five years.

Even in global politics clean and efficient energy gets higher priority. This was confirmed by the UN Climate Change Conference in December 2015. The boost comes not that much from the treaty, but rather by the pressure of the population on the governments to take action against global warming.

Energy can be saved, where it is consumed. The global energy consumption is divided about equally among buildings, industry and transportation. That's why we divide the Portfolio into these three segments.

Building Technology

The potential to reduce energy consumption in the building stock is enormous. Over the last 40-50 years, the energy consumption of a newly constructed building could be reduced by over 80% while increasing comfort! This achievement was possible through the use of established products and technologies in the following areas: 

  • Thermal insulation, including windows and doors
  • Heating, ventilation and air conditioning
  • LED lamps
  • Building automation

The big potential is in the existing building stock. Rising energy consts and stricter legal construction standards make the building renovation to the key market of energy efficiency.

Industrials

Many industrial processes consume large amounts of energy, due to a production running around the clock. With rising energy and commodity prices, investments in more efficient and more expensive production equipment offer good returns. The savings over the life cycle exceed the additional investment often by several times. The following topics represent our focus:

  • Engines, motors, pumps
  • Controls, automation, engineering
  • Power plant technology

Consumer standards are also very important in the industrial technology. The European eco-design guidelines are representative for the increasing global requirements.

Transportation

One third of worldwide energy consumption is used for freight and passenger transportation. Here again, the Emission Standards are tightened continuously wold-wide. Key to success are better Propulsion Technology and reduced vehicle weight. The following issues are interesting for us:

  • Use of plastics as a metal substitute
  • Combustion engines and transmissions with higher efficiency
  • Electric mobility
  • Railway technology

Selecting securities we consider quality and valuation. Quality means at first a comprehensible business model and a good corporate governance. Then we focus on companies with a strong balance sheet and resilient cash flows. A special attention is given to the return on capital employed (ROCE). Companies with a high return on capital are able to invest their capital more efficient and are characterized by a higher stability in difficult times. The most important valuation multiple is EV/EBIT, the enterprise value in relation to the operating profit. So we make sure that we don’t pay an excessive price for good companies.

We don’t focus on the development of the overall market and don’t follow stock market trends. Our work is based on the fundamental valuation of markets, products, management, shareholders, etc. We do not orient our portfolio on a benchmark nor do we manage a tracking error. Our goal is a fund performance that exceeds the overall market over a cycle.

The Carnot Efficient Energy Fund is regularly examined by an independent sustainability specialist. The basis forms ESG-data, which is collected from each company by MSCI. “yourSRI” performs the analyses on the Carnot Efficient Energy Fund on a scale from AAA to C, resulting with an A grade (minor ESG risk). Positions with an increased ESG risk are not held by the fund, if any at all the fraction is below 10 percent.

To verify sustainability in the fund we apply positive selection criteria as well as exclusion criteria. Positive criteria are energy efficient products and technology, transparency, financial stability and a good corporate governance possibly free of conflicts of interest. We do not select companies which realize more than 10 percent turnover in military products, nuclear and genetic engineering as well as addictive drugs. We also exclude companies which mainly operate in countries vulnerable to corruption.

 

YOURSRI & MSCI

ESG Rating

Carbon Report

The Carnot Efficient Energy Fund is an impact investment fund. It invests in listed companies that develop and produce energy efficient products and technologies, that reach people all around the world. In addition to the financial return, the fund investor, as co-owner of the portfolio companies, has a substantial positive effect in terms of the UN's sustainable development goals. This impact report aims to illustrate and quantify this effect. Carnot Capital's full impact investing approach also relies on engagement to map, measure and create impact. It is detailed in the research paper titled "Investing into Energy and Resource Efficiency with a Measurable Impact", which can be found here and on Carnot Capital’s website.

Carnot Impact Investing uses a Sustainable Development Goals (SDG) mapping to document the sustainability of external effects for selected portfolio investments in qualitative and quantitative reporting.

Reduction in the consumption of energy (= Energy efficiency)

7. Affordable and clean energy

8. Decent work and economic growth

9. Industry, Innovation and Infrastructure

11. Sustainable cities and communities

13. Climate action

For Carnot, financial return is the primary goal and a measurable part of fund performance. Pure environmental or social objectives at the expense of the financial return are excluded. All of Carnot's selected investments will continue to be subjected to a fundamental value analysis using financial measures.

 

 

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