Our lead article this quarter focuses on the offshore wind industry. Hosking Partners’ capital cycle approach teaches us to be cautious about high returns, as they act as a magnet which draws in new capital, with the likelihood that those high returns are competed down. Similarly, when the (environment first) wish is father to the (commercial) thought, and capital is mispriced, capital is drawn into projects with uneconomically low returns, and the result is destruction of capital. As our report outlines, soaring valuations in wind equities over recent years reflected an unrealistically low cost of capital, which was the only way to justify the underlying economics of the projects to which it was directed. When plentiful capital flooded the industry – catalysed by well-intentioned regulation, wishful thinking and near-zero interest rates – the red flags were plain to see. In such situations, focusing on the availability of capital helps us see through the noise.

The report also contains the usual selection of voting and engagement examples. This quarter we include an engagement example from Japan – Cosmo Energy – which demonstrates how outcomes do not always materialise in the way we expect. This emphasises the importance of having several ‘ways to win’, which provides a margin of safety and protects against the unpredictable.