WEBVTT - Make Money, Save the Planet 0:00:13.480 --> 0:00:16.680 Hello, and welcome to a special holiday edition of What 0:00:16.800 --> 0:00:20.439 goes Up, a Bloomberg weekly market podcast. I'm Sarah Pontac, 0:00:20.520 --> 0:00:23.320 a reporter on the Crossset team, and I'm Mike Reagan, 0:00:23.440 --> 0:00:26.159 a senior editor on the Markets team. And Sarah, it 0:00:26.239 --> 0:00:29.520 is the day after Thanksgiving this podcast comes out, so 0:00:30.000 --> 0:00:32.360 we should probably speak quietly. We don't want to wake 0:00:32.400 --> 0:00:35.040 anyone up from a food coma if they're in. If 0:00:35.080 --> 0:00:37.800 you ate too much turkey, UM, I can't say I 0:00:37.800 --> 0:00:40.280 feel bad for you. Probably did Thanksgiving right, But happy 0:00:40.320 --> 0:00:43.639 Thanksgiving to everyone. That's right, That's right. And yeah, Thanksgiving 0:00:43.760 --> 0:00:45.800 is a time to sort of take stock of your life. 0:00:46.000 --> 0:00:49.599 And we're not gonna focus on the week in of 0:00:49.680 --> 0:00:52.320 markets like we normally do, because let's be honest, I 0:00:52.320 --> 0:00:54.560 think most of us were probably more focus on that 0:00:54.600 --> 0:00:58.160 turkey than we were on the markets. Instead, we're gonna 0:00:58.200 --> 0:01:01.200 focus on, as the name of the show implies, what 0:01:01.320 --> 0:01:05.040 goes up, something that unfortunately has been going up in 0:01:05.120 --> 0:01:08.920 recent years, in in recent decades is the temperature of 0:01:08.959 --> 0:01:10.800 the Earth. I hate to I hate to be a downer, 0:01:10.840 --> 0:01:13.840 but we're going to talk about climate change, very touchy 0:01:13.840 --> 0:01:18.440 subject for a lot of people. Um, Obviously, uh President 0:01:18.480 --> 0:01:20.280 of United States is not a big believer in it. 0:01:20.680 --> 0:01:23.240 Some people are not big believers in it. Others are 0:01:23.360 --> 0:01:27.120 very enthusiastic believers in it and believe now is the 0:01:27.240 --> 0:01:30.800 time to act. We're gonna save that sort of controversy 0:01:30.840 --> 0:01:34.480 for another podcast because you know, ideally what this podcast 0:01:34.640 --> 0:01:38.199 is about is how to invest um and climate change, 0:01:38.240 --> 0:01:40.959 like so many other things in the world, is creating 0:01:41.120 --> 0:01:46.200 opportunities for investments. So don't send us angry emails about it. 0:01:46.200 --> 0:01:49.680 It's it's our job to talk about angry emails. No 0:01:49.880 --> 0:01:53.120 angry tweets. If you have something rough to say, don't 0:01:53.120 --> 0:01:57.920 even call our podcasts. Maybe maybe you can. You can 0:01:58.000 --> 0:02:00.960 leave us a message and as a reminder, that number 0:02:01.000 --> 0:02:04.720 is six or six three two four three for nine zero. 0:02:04.880 --> 0:02:07.280 All right, So let me read something for you here 0:02:07.560 --> 0:02:10.440 a bit of it again a downer, but here's the 0:02:10.480 --> 0:02:14.280 take on climate change from a recent white paper by 0:02:14.360 --> 0:02:20.240 our guest who all introduced after this. Hurricanes, typhoons, droughts, wildfires, 0:02:20.320 --> 0:02:24.240 and other extreme weather events are causing record damage Increasingly. 0:02:24.480 --> 0:02:27.680 Climate change is impacting the economy and our daily lives 0:02:27.720 --> 0:02:30.600 and has come into focus as an existential threat to 0:02:30.639 --> 0:02:33.639 the world as we know it. The author of that 0:02:34.400 --> 0:02:37.720 very Looking on the bright Side report is with us here, 0:02:37.800 --> 0:02:41.600 Lucas White. He's a portfolio manager with GMO. Welcome to 0:02:41.600 --> 0:02:44.280 the show, Lucas, Thank you, thanks for having me. And 0:02:44.400 --> 0:02:48.480 you're basically you manage a strategy at GMO that is 0:02:48.639 --> 0:02:53.480 investing in climate change and sort of the potential winners 0:02:53.520 --> 0:02:56.760 of climate change. Could you just walk us through, UM, 0:02:56.840 --> 0:03:00.600 when did the strategy start? Kind Of obviously at GMO, 0:03:01.360 --> 0:03:03.919 everything has to go through Jeremy Grantham, I assume. So 0:03:04.440 --> 0:03:08.640 was this uh something he championed, um, and just just 0:03:08.680 --> 0:03:11.680 tell us how it all came about. Yes, So, actually, 0:03:12.240 --> 0:03:15.720 maybe ironically it evolved out of our natural resources strategy 0:03:15.800 --> 0:03:19.480 that we launched back in two thousand eleven. Jeremy Grantham 0:03:19.480 --> 0:03:21.919 has been focused on resource scarcity for a number of 0:03:22.000 --> 0:03:25.960 years and the dynamics that that poses for the commodity markets. UH. 0:03:26.000 --> 0:03:28.560 In other words, there's growing demand for natural resources, and 0:03:28.639 --> 0:03:32.320 yet there's a finite supply, in particular finite supply of cheap, 0:03:32.360 --> 0:03:36.040 easy to access UH natural resources that that is low 0:03:36.120 --> 0:03:39.720 cost and affordable. When we went to launch that strategy, 0:03:40.040 --> 0:03:42.640 I was involved in thinking about and researching the risks 0:03:43.400 --> 0:03:46.160 for investing in the resources sector over a long period 0:03:46.200 --> 0:03:48.200 of time, and I could find a lot of risks 0:03:48.240 --> 0:03:51.080 that you could diversify away. I could find a lot 0:03:51.120 --> 0:03:53.280 of risks that were short to medium term in nature, 0:03:53.280 --> 0:03:55.320 and as a long term investor, you could wait out. 0:03:56.000 --> 0:03:58.200 But there was one big risk that that kind of 0:03:58.200 --> 0:04:01.240 stood out, and that was stranded assets for the fossil 0:04:01.280 --> 0:04:04.040 fuel companies. Uh. And those assets could be stranded in 0:04:04.040 --> 0:04:06.040 a number of ways. We don't know exactly how it 0:04:06.120 --> 0:04:08.760 might happen, but it could be through carbon regulation, it 0:04:08.800 --> 0:04:10.960 could be carbon pricing, or it could just be pure 0:04:11.000 --> 0:04:14.720 technological disruption when and solar becomes so much cheaper than 0:04:14.800 --> 0:04:16.800 coal and natural gas that you just don't need all 0:04:16.839 --> 0:04:20.440 the coal and natural gas assets on your books. Um. 0:04:20.480 --> 0:04:23.240 So when I was thinking about, now, I'm going to 0:04:23.360 --> 0:04:25.640 launch a strategy and I'm I'm kind of the portfolio 0:04:25.760 --> 0:04:29.520 manager for that strategy. Uh, how do I manage that 0:04:29.680 --> 0:04:33.360 risk when the sector is seventy percent fossil fuels are 0:04:33.440 --> 0:04:37.039 competitors are eight to nine fossil fuels running global natural 0:04:37.040 --> 0:04:41.040 resources strategies? Um, what do you do? And we did 0:04:41.040 --> 0:04:43.599 a few things to manage that risk. One is we 0:04:43.600 --> 0:04:47.960 have a dramatically lower exposure to energy than our competitors 0:04:48.040 --> 0:04:51.560 or the cap weighted sector. We're about thirty energy, so 0:04:51.680 --> 0:04:55.480 half that of the broad market. UH. Within energy, we've 0:04:55.520 --> 0:04:58.440 always excluded the coal companies, the tar sand companies, the 0:04:58.440 --> 0:05:01.560 heavy oil companies, so the company these producing resources that 0:05:01.600 --> 0:05:05.480 have the highest UH risk of having stranded assets because 0:05:05.480 --> 0:05:08.320 they have the worst emissions profiles. UH. And the third 0:05:08.360 --> 0:05:11.960 thing we did, which is most relevant for climate change investing, frankly, 0:05:12.080 --> 0:05:15.080 is we've always targeted some of that energy exposure to 0:05:15.160 --> 0:05:18.600 be too clean energy. So of that thirty energy exposure, 0:05:18.640 --> 0:05:21.040 we have ten per cent of it is clean energy. 0:05:21.080 --> 0:05:24.080 And so we've been investing in wind, solar, clean power 0:05:24.120 --> 0:05:28.000 generation and the like UH since two thousand eleven. What 0:05:28.160 --> 0:05:31.320 happened is the costs for all of these clean energy 0:05:31.360 --> 0:05:33.800 technologies dropped in a way that really nobody could have 0:05:33.839 --> 0:05:36.560 foreseen in a very short period of time, so that 0:05:36.600 --> 0:05:39.839 around two thousand fifteen I started to make the case 0:05:39.960 --> 0:05:43.039 that the opportunity set is mature enough. There are enough 0:05:43.040 --> 0:05:46.480 companies that are making money, have been cash flow positive 0:05:46.600 --> 0:05:49.880 and and UH generating strong earnings and have strong balance 0:05:49.920 --> 0:05:54.120 sheets and aren't totally reliant on public policy support that 0:05:54.160 --> 0:05:57.560 we should launch a strategy that's less focused on kind 0:05:57.560 --> 0:06:00.760 of traditional natural resources and more focused the clean energy 0:06:00.800 --> 0:06:03.679 transition and where we need to go with the world. 0:06:03.720 --> 0:06:06.839 So it was really about approaching these inflection points where 0:06:06.839 --> 0:06:09.560 at some point in the not too distant future when 0:06:09.760 --> 0:06:12.680 solar electric vehicles other clean energy solutions are going to 0:06:12.760 --> 0:06:16.160 be cheaper uh than their fossil fuel based uh kind 0:06:16.200 --> 0:06:20.119 of more traditional forms. So that was something that jumped 0:06:20.120 --> 0:06:21.800 out to me. In one of the white papers that 0:06:21.880 --> 0:06:24.760 you did co author with Jeremy Grantham, there was a 0:06:24.839 --> 0:06:28.080 chart that you guys included showing the price structure of 0:06:28.240 --> 0:06:31.520 many of these types of energies and these companies, and 0:06:31.560 --> 0:06:35.320 you see the price coming down. However, there are many 0:06:35.320 --> 0:06:38.479 people out there who will still push back, and a 0:06:38.520 --> 0:06:41.960 common rebuke or refrain is that it's still pretty expensive. 0:06:42.320 --> 0:06:44.880 What is a time frame on something like this if 0:06:44.880 --> 0:06:49.039 you really wanted to take advantage of this change going 0:06:49.120 --> 0:06:52.400 forwards and the companies that are driving the change against 0:06:52.560 --> 0:06:55.919 climate change? How long is the timeframe actually in a 0:06:55.960 --> 0:06:58.920 realistic sense. Well, in some ways, wind and solar are 0:06:58.920 --> 0:07:02.760 already the cheapest for of electricity generation. Um. The problem 0:07:02.839 --> 0:07:05.640 is the intermittency. So our grids weren't designed to handle 0:07:05.680 --> 0:07:09.160 intermittent generation. They were designed around the idea that we 0:07:09.160 --> 0:07:12.760 would have centralized persistent generation, whether that be nuclear, coal, 0:07:12.880 --> 0:07:16.200 natural gas, doesn't really matter. Uh. Then long distance transmission 0:07:16.240 --> 0:07:19.840 to a distribution local distribution network. Well, now we have 0:07:19.880 --> 0:07:22.120 when turbines all over the place. We have solar panels 0:07:22.120 --> 0:07:25.040 on our rooftop. Sometimes they generate, sometimes they don't, and 0:07:25.040 --> 0:07:28.440 the grid wasn't really designed to handle that. So when 0:07:28.520 --> 0:07:30.960 and solar, the generation side of things is already in 0:07:31.000 --> 0:07:34.160 many ways and in many areas, significantly cheaper than color 0:07:34.240 --> 0:07:36.720 natural gas. The problem is you either have to store 0:07:36.760 --> 0:07:39.800 that energy or you have to enhance your grid and 0:07:39.840 --> 0:07:44.200 modernize your grid and make it more sophisticated and interconnected. UH. 0:07:44.360 --> 0:07:46.320 Our belief is that there will be secular growth for 0:07:46.360 --> 0:07:49.560 decades and both of those areas, as trillions of dollars 0:07:49.600 --> 0:07:53.560 need to flow into energy storage and and into modernizing 0:07:53.560 --> 0:07:56.320 our grids. UM. Just to give you a sense, energy 0:07:56.360 --> 0:08:00.480 storage sounds good, but it effectively doesn't really exist UH 0:08:00.600 --> 0:08:04.200 in today's world, at least at a utility scale. About 0:08:04.280 --> 0:08:08.320 one or two percent of energy is stored globally today 0:08:08.360 --> 0:08:12.559 and ninety five to tent of it is pumped hydra 0:08:12.640 --> 0:08:15.240 where you pump water up a mountain into a reservoir 0:08:15.560 --> 0:08:18.000 and then let it flow back down and generate hydro power, 0:08:18.280 --> 0:08:20.280 which is brilliant if you're next to a mountain with 0:08:20.320 --> 0:08:23.280 a reservoir. But for for most people, uh, that isn't 0:08:23.280 --> 0:08:26.800 a great solution, and it's not scalable for many locations. 0:08:27.080 --> 0:08:29.480 Someone from Florida I can say that there are no 0:08:29.560 --> 0:08:34.000 mountains around clearly, so be difficult exactly because how much 0:08:34.000 --> 0:08:36.439 of a headwind or as hail wind is the government 0:08:36.480 --> 0:08:38.680 when it comes to this strategy. I mean, obviously President 0:08:38.679 --> 0:08:42.440 Obama was a big advocate of solar energy. President Trump, 0:08:42.480 --> 0:08:44.719 on the other hand, is I think safe to say 0:08:44.760 --> 0:08:49.040 basically a climate change DENI or does that cause you know, 0:08:49.240 --> 0:08:51.960 a head wind of the strategy? Where is it? The economics, 0:08:52.000 --> 0:08:55.360 as you say, are getting so clear on the side 0:08:55.360 --> 0:08:58.720 of clear energy that it doesn't really matter who is 0:08:58.880 --> 0:09:01.920 controlling Congress or who's in the White House. I think 0:09:01.920 --> 0:09:04.720 with every passing year it matters less and less because 0:09:04.720 --> 0:09:07.520 the economics are just becoming more and more compelling. Uh. 0:09:07.679 --> 0:09:09.760 That said, there's no doubt about it. You want public 0:09:09.800 --> 0:09:14.040 policy support behind you. There's nothing but upside from having that. 0:09:14.280 --> 0:09:18.720 The federal government of the United States is one government entity, though, 0:09:18.760 --> 0:09:20.960 and people make too much of an issue of it, 0:09:20.960 --> 0:09:24.400 in my opinion. With with Donald Trump announcing that we're 0:09:24.400 --> 0:09:26.600 going to pull out of the Paris Agreement, there's been 0:09:26.600 --> 0:09:28.680 some wavering and it's not entirely clear where that's going 0:09:28.720 --> 0:09:32.800 to go. But even if the US government does, city states, businesses, 0:09:32.880 --> 0:09:36.120 universities around the country banded together and said that they're 0:09:36.120 --> 0:09:38.120 going to abide by the terms of the Paris Agreement 0:09:38.160 --> 0:09:40.800 and make sure that the United States does regardless of 0:09:40.840 --> 0:09:45.480 what the federal government does. In California is, you know, 0:09:45.559 --> 0:09:48.240 the world leader in my opinion when it comes to 0:09:48.280 --> 0:09:51.880 clean energy. If California were its own country, it would 0:09:51.880 --> 0:09:55.160 be something like the sixth or seventh biggest economy in 0:09:55.160 --> 0:09:58.680 the world. So it's not kind of small potatoes. So 0:09:59.240 --> 0:10:02.840 I think it's great to have US federal government support. 0:10:03.400 --> 0:10:05.720 But every other government on Earth, for the most part, 0:10:05.800 --> 0:10:08.240 has signed onto the Paris Agreement and is committed to it, 0:10:08.280 --> 0:10:11.520 and has really recommitted in the wake of the unit 0:10:11.720 --> 0:10:15.200 United States announcing that we may pull out. So in 0:10:15.240 --> 0:10:17.760 the long term, I really think Uh, it's it's not 0:10:17.800 --> 0:10:20.559 going to be a moving factor. Over the last few weeks, 0:10:20.600 --> 0:10:24.080 the US has formally begun to withdraw itself out of 0:10:24.120 --> 0:10:27.199 the Paris Climate Agreement. I'm looking at the top holdings 0:10:27.360 --> 0:10:30.440 in your strategy though, and the top four I see 0:10:30.520 --> 0:10:33.360 right here are still US companies, So maybe it matters 0:10:33.360 --> 0:10:36.440 more what corporations themselves are doing. From your perspective, though, 0:10:36.440 --> 0:10:38.680 when you guys are looking at companies across the globe 0:10:38.720 --> 0:10:42.280 doing your research, where do you really find companies at 0:10:42.280 --> 0:10:44.560 the forefront of this change? Where does it look like 0:10:44.600 --> 0:10:47.720 there is the most opportunity. Well, most of the companies 0:10:47.760 --> 0:10:50.599 that we have in our universe are global companies and 0:10:50.600 --> 0:10:54.200 they're serving a global marketplace. The only times you really 0:10:54.240 --> 0:10:57.400 see regional things for the most part is is China 0:10:57.720 --> 0:10:59.640 does have kind of its own wind market. There's the 0:10:59.720 --> 0:11:01.880 Chinese is wind market, and then the global wind market 0:11:02.480 --> 0:11:06.199 excluding China. So you do see a few um kind 0:11:06.240 --> 0:11:11.120 of domestically oriented opportunities here and there, But ninety nine 0:11:11.160 --> 0:11:13.160 percent of the companies that we look at are really 0:11:13.360 --> 0:11:16.040 in the global marketplace. So whether they're domiciled in the 0:11:16.120 --> 0:11:19.800 US or in Europe or Asia, or or South America, 0:11:19.880 --> 0:11:24.080 doesn't matter all that much. Uh. Most of the opportunities 0:11:24.120 --> 0:11:27.199 that we see are outside the US, so our strategy 0:11:27.280 --> 0:11:30.160 since inception has been about a quarter to a third 0:11:30.200 --> 0:11:33.160 in the United States, UH and and the rest outside 0:11:33.200 --> 0:11:36.400 the United States, including UH you typically about twenty and 0:11:36.440 --> 0:11:39.280 emerging markets. So we're seeing opportunities all around the world, 0:11:39.559 --> 0:11:41.800 both in terms of where the companies are domiciled, but 0:11:41.840 --> 0:11:44.440 also in terms of the markets that you're selling into. 0:11:44.679 --> 0:11:47.240 So Sarah beat me to that. List of the top 0:11:47.240 --> 0:11:49.000 holding is always one of the my favorite things to 0:11:49.040 --> 0:11:51.839 look at when looking at a funder strategy like this, 0:11:52.240 --> 0:11:56.559 and UH several of them, um are pretty obvious. Solar 0:11:56.720 --> 0:12:00.000 Edge was a top holding as of the end of September, 0:12:00.040 --> 0:12:04.559 I believe, obviously makes equipment for the solar industry. Vestas 0:12:04.600 --> 0:12:09.560 the Danish wind energy company, Renewable Energy Group another clean 0:12:09.679 --> 0:12:12.120 energy group in the US. A couple of surprises to 0:12:12.160 --> 0:12:13.920 me at least, so, so I'm curious if you could 0:12:14.040 --> 0:12:18.240 help us explain how these are climate change plays. Freeport 0:12:18.320 --> 0:12:21.920 mcmaran the minor I'm assuming it's the metals used in 0:12:22.040 --> 0:12:25.640 solar equipment, is that is that the main reason that's there. Yes, 0:12:25.679 --> 0:12:28.360 a copper is at the heart of clean energy. When 0:12:28.360 --> 0:12:31.680 you look at wind and solar because of the distributed nature, 0:12:31.720 --> 0:12:34.880 you now have wind, a series of wind turbines, you 0:12:34.960 --> 0:12:38.560 have hundreds of or thousands of solar panels. That's a 0:12:38.559 --> 0:12:41.080 lot of wiring and a lot of connectivity that you 0:12:41.120 --> 0:12:44.560 need to operate. So wind and solar projects, UH we 0:12:44.679 --> 0:12:47.160 use about four to twelve times as much copper, depending 0:12:47.160 --> 0:12:49.520 on the specifics of the project relative to a color 0:12:49.600 --> 0:12:52.880 natural gas power plant. Electric vehicles use three to four 0:12:52.920 --> 0:12:56.480 times as much copper as an internal combustion engine vehicle. 0:12:56.760 --> 0:13:00.520 Electric buses, for example, UH uses something like eight hundred 0:13:00.520 --> 0:13:03.840 pounds of copper. UH. We also need to overhaul our 0:13:03.880 --> 0:13:07.280 electric grids, as we've been talking about. That's incredibly comper intensive, 0:13:07.679 --> 0:13:13.720 energy efficient electrical components, appliances, etcetera, etcetera. We needed an 0:13:13.760 --> 0:13:17.040 electric vehicle charging infrastructure, and just copper is at the 0:13:17.080 --> 0:13:20.199 heart of clean energy. It's brilliant. They want to get 0:13:20.240 --> 0:13:22.640 off of fossil fuels. I'm on board, even though I 0:13:22.679 --> 0:13:26.360 run a natural resources strategy. I'm I'm with it, you know, 0:13:26.400 --> 0:13:28.040 I'm with the program. We need to get rid of 0:13:28.080 --> 0:13:31.920 fossil fuels over some period of time. But you're just 0:13:32.040 --> 0:13:34.880 moving the burden from one set of materials to another 0:13:34.880 --> 0:13:38.720 set of materials. There is no magical kind of clean 0:13:38.920 --> 0:13:41.959 free energy out there that doesn't rely on materials. You're 0:13:42.000 --> 0:13:46.240 just moving the burden to copp or, lithium, nickel, cobalt, vanadium, 0:13:46.720 --> 0:13:49.880 and other clean energy materials. So for listeners out there 0:13:49.920 --> 0:13:53.040 that are sort of environmentally minded, uh, you look at 0:13:53.080 --> 0:13:56.200 a company like a heavy mining company like that, and 0:13:56.280 --> 0:14:00.520 you don't really think of a great environmentally friendly company. 0:14:00.600 --> 0:14:04.480 But it's so crucial in the future of of solar 0:14:04.520 --> 0:14:07.560 and wind and climate change that I guess the pros 0:14:07.600 --> 0:14:10.880 of it outweigh the negatives. Yeah, I mean, Jeremy always 0:14:10.880 --> 0:14:14.560 says that if you get climate wrong, nothing else matters. Uh. 0:14:14.600 --> 0:14:19.080 And so the local environmental impact of mining operations is 0:14:19.120 --> 0:14:22.920 an ideal. The labor issues aren't ideal. These aren't things 0:14:22.920 --> 0:14:25.720 that you love as an investor or a human being. 0:14:26.160 --> 0:14:28.720 But the reality is we need these materials. Mining is 0:14:28.760 --> 0:14:33.240 a dirty game. Uh. We we obviously evaluate the environmental 0:14:33.280 --> 0:14:35.760 impact and the E s G profiles of the companies 0:14:35.760 --> 0:14:37.840 that we invest in and make sure that we're comfortable, 0:14:38.040 --> 0:14:40.040 and if we're not comfortable, we won't invest in in 0:14:40.080 --> 0:14:43.840 those mining companies. But generally speaking, you're, in my opinion, 0:14:43.880 --> 0:14:46.320 putting your head in the sand. If you say, oh, 0:14:46.400 --> 0:14:48.480 I want clean energy, but I don't want to be 0:14:48.520 --> 0:14:51.640 involved in the mining industry. Well, if you don't believe 0:14:51.640 --> 0:14:54.280 in copper mining or you think it's bad, Uh, first 0:14:54.280 --> 0:14:56.840 of all, you're condemning one point two billion people or 0:14:56.880 --> 0:14:59.880 so who don't have access to electricity to very low 0:15:00.360 --> 0:15:04.080 uh standard of living, very low quality of life because you, 0:15:04.600 --> 0:15:07.080 uh don't think that copper miners should be out there. 0:15:07.200 --> 0:15:09.440 And I don't see anybody going and ripping the copper 0:15:09.480 --> 0:15:11.920 out of their walls in their house and throwing it 0:15:11.960 --> 0:15:15.280 back into the global market because they don't believe in it. 0:15:15.960 --> 0:15:19.920 The other I think it's the fourth top holding a 0:15:19.960 --> 0:15:24.360 little less than four percent mosaic, basically a fertilizer company. Right, 0:15:24.640 --> 0:15:27.720 walk us through how that fits into the strategy. Yes, So, 0:15:28.320 --> 0:15:31.080 in terms of our strategy, we look at companies that 0:15:31.120 --> 0:15:33.400 are helping to mitigate climate change, but we also look 0:15:33.440 --> 0:15:35.160 at companies that are going to help the world adapt 0:15:35.200 --> 0:15:38.240 to climate change. The two big things on the adaptation 0:15:38.320 --> 0:15:42.000 side of things are our food and water. Agricultural productivity 0:15:42.040 --> 0:15:45.040 is incredibly impacted by a world or in a world 0:15:45.080 --> 0:15:50.080 of climate change, you have droughts, floods, extreme temperature events 0:15:50.080 --> 0:15:52.960 which are death for crops because it's not just that 0:15:53.040 --> 0:15:55.920 the average global temperature has risen, it's that there used 0:15:55.920 --> 0:15:58.760 to be a normal distribution around a lower average temperature, 0:15:59.000 --> 0:16:02.400 and now there's a skewed distribution around a higher average temperature. 0:16:02.640 --> 0:16:05.600 In that skew is towards the extremely hot days. Uh, 0:16:05.720 --> 0:16:08.680 you have extreme downpours which wash away your soil nutrients. 0:16:08.720 --> 0:16:12.000 You're basically taking farming which go talk to farmers. You're 0:16:12.000 --> 0:16:13.680 not going to find a farmer who says, oh, it 0:16:13.760 --> 0:16:15.800 used to be so easy to farm, but now it's 0:16:15.800 --> 0:16:18.400 starting to get difficult. It's always been a difficult game. 0:16:18.720 --> 0:16:21.760 Now you're making it much much more difficult. So companies 0:16:21.800 --> 0:16:26.000 focused on keeping agricultural productivity as high as possible, whether 0:16:26.040 --> 0:16:31.479 that be irrigation, drought resistance, seeds, precision agriculture, machinery and equipment, 0:16:31.720 --> 0:16:35.760 or fertilizers which is where mosaic comes into play, are 0:16:35.800 --> 0:16:54.280 all within scope for our strategy. So you mentioned in 0:16:54.280 --> 0:16:56.720 an acronym earlier E s G. And essentially what you're 0:16:56.720 --> 0:17:01.720 talking about is people who are investing in environmental, social 0:17:01.720 --> 0:17:05.360 and governance issues well against ones that would be a problem, 0:17:05.480 --> 0:17:09.760 And lately the exchange traded fund environment that industry has 0:17:09.760 --> 0:17:12.240 really latched onto it, on pace for a record year 0:17:12.280 --> 0:17:15.440 of inflows into so called E s G funds. UM. 0:17:15.480 --> 0:17:18.119 But I think you've made it very clear in the past, 0:17:18.200 --> 0:17:20.439 and you also alluded to it in your answer that 0:17:20.520 --> 0:17:22.960 what you guys are doing is different than E s G. 0:17:23.280 --> 0:17:26.119 So can you explain to us the difference in what 0:17:26.320 --> 0:17:29.320 E s G investors do versus what you guys do 0:17:29.400 --> 0:17:33.840 and investing for climate change? Yeah, that's an interesting question. 0:17:34.520 --> 0:17:36.879 I would argue that our strategy is in the s 0:17:36.920 --> 0:17:39.920 G strategy, but not because of its focus on climate 0:17:40.000 --> 0:17:42.840 change as as kind of the area that we're investing in, 0:17:43.119 --> 0:17:46.439 but because we are considering E s G issues E 0:17:46.640 --> 0:17:50.280 s G risks uh in, and we're integrating those issues 0:17:50.320 --> 0:17:53.560 in those risks holistically in our investment process. And to me, 0:17:53.680 --> 0:17:56.520 that's the spirit of E s G in our industry. 0:17:56.560 --> 0:17:59.720 I think E s G has gotten mistaken for sounding 0:17:59.800 --> 0:18:04.919 good moral and ethical investing avoiding controversy, But to me, 0:18:05.000 --> 0:18:06.560 that's not the spirit of E s G, or at 0:18:06.600 --> 0:18:09.040 least it shouldn't be uh and so I think we 0:18:09.119 --> 0:18:12.200 are running an E s G strategy from the perspective 0:18:12.240 --> 0:18:15.719 of we are incorporating E s G risks and concerns 0:18:15.920 --> 0:18:18.760 in positioning the strategy. Uh, it's not E s G 0:18:18.880 --> 0:18:20.960 if your definition of E s G is sounding good 0:18:21.000 --> 0:18:24.760 to everybody and avoiding controversy at all costs. So I 0:18:24.800 --> 0:18:27.400 noticed that the benchmark for the strategy is actually the 0:18:27.520 --> 0:18:30.920 m s c I All Country World Index. Um, that's 0:18:30.920 --> 0:18:33.200 a pretty broad group. I assume there was no sort 0:18:33.240 --> 0:18:37.639 of benchmark. Uh, that's just dedicated to climate change. To 0:18:38.080 --> 0:18:41.359 the benchmark. The fund to HSBC did have a climate 0:18:41.400 --> 0:18:44.399 change index. They discontinued it in two thousand sixteen as 0:18:44.440 --> 0:18:47.320 part of a broader dismantling of their index line, so 0:18:47.359 --> 0:18:51.160 it wasn't specific to their climate change strategy. But other 0:18:51.240 --> 0:18:54.800 than that, there are a few other environmental type indexes 0:18:54.800 --> 0:18:58.240 out there, But there's so much, um, so much of 0:18:58.240 --> 0:19:01.240 a gap between what their reppersenting and what we're doing 0:19:01.280 --> 0:19:04.600 that they wouldn't be a good benchmark for what we're doing. 0:19:05.160 --> 0:19:07.480 Benchmarking to the All Country World Index is kind of 0:19:07.480 --> 0:19:09.119 throwing our hands in the air a little bit and 0:19:09.160 --> 0:19:11.480 saying this isn't a good benchmark for what we're doing 0:19:11.520 --> 0:19:14.240 in the short to medium term. But our goal is 0:19:14.280 --> 0:19:16.959 to perform better than than the broad equity market over 0:19:17.000 --> 0:19:19.920 a long period of time. UH and and AQUA. The 0:19:19.960 --> 0:19:23.399 All Country World Index is the most commonly accepted global 0:19:23.400 --> 0:19:26.520 equity benchmark when it comes to climate change. I also 0:19:26.520 --> 0:19:28.800 found interesting in your primer when you think about other 0:19:28.880 --> 0:19:31.840 reasons to think about climate change as a way to 0:19:31.880 --> 0:19:37.439 find opportunity to invest. One was actually inflation protection. And yes, now, 0:19:37.760 --> 0:19:39.959 many people when you think about the economy and you 0:19:39.960 --> 0:19:42.320 think about what we're going through, people talk about the 0:19:42.359 --> 0:19:45.919 lack of inflation. Um, so can you break down how 0:19:46.080 --> 0:19:50.440 actually a strategy like this can provide protection against inflation 0:19:50.800 --> 0:19:54.400 even if we are in a low inflation environment. Yes. So, 0:19:54.880 --> 0:19:58.359 one thing I'll say is that energy historically has been 0:19:58.400 --> 0:20:01.040 a very difficult thing to give up. Investment gets talked 0:20:01.080 --> 0:20:03.760 a lot about in our industry these days, divesting from 0:20:03.800 --> 0:20:06.960 oil and gas and coal and fossil fuels and whatnot. Uh. 0:20:07.000 --> 0:20:10.200 The problem with divesting for many investors is that historically 0:20:10.280 --> 0:20:13.440 energy companies have outperformed the broad equity market. They've given 0:20:13.480 --> 0:20:16.919 you diversification. There have been whole decades UH, in the 0:20:17.000 --> 0:20:19.360 nineteen seventies and then two thousand and two thousand and ten, 0:20:19.640 --> 0:20:22.000 where the broad equity market was down in real terms, 0:20:22.240 --> 0:20:24.520 and yet energy companies were up over a hundred percent 0:20:24.520 --> 0:20:27.159 in real terms. That's the kind of diversification that you 0:20:27.200 --> 0:20:30.680 want in your portfolio. UH and and certainly in the seventies, 0:20:30.720 --> 0:20:34.080 that's a huge inflationary period. UH and energy companies didn't 0:20:34.119 --> 0:20:36.600 just protect you in that period, but you actually grew 0:20:36.600 --> 0:20:40.000 your purchasing power investing in those energy companies because once 0:20:40.000 --> 0:20:42.480 again they were up well over REEL. So it's a 0:20:42.520 --> 0:20:45.560 tough thing to give up. But when you invest in 0:20:45.680 --> 0:20:49.480 clean energy solutions that compete with fossil fuel solutions, you 0:20:49.520 --> 0:20:52.879 get indirect exposure to fossil fuel prices. So if coal 0:20:52.920 --> 0:20:55.359 and natural gas go through the roof, wind and solar 0:20:55.400 --> 0:20:57.880 become much more competitive, much more economic, in the world, 0:20:58.240 --> 0:21:03.040 mobilizes much more quickly to to rotate to them. UH. Similarly, 0:21:03.040 --> 0:21:05.960 with electric vehicles, there's a connection between oil prices and 0:21:06.000 --> 0:21:09.000 electric vehicle sales that we've seen in the US over 0:21:09.040 --> 0:21:12.600 the last few years. So because of that indirect exposure 0:21:12.640 --> 0:21:15.760 that you get to fossil fuel prices, investing UH in 0:21:15.920 --> 0:21:19.160 clean energy solutions, then more direct investments that we're making 0:21:19.400 --> 0:21:25.120 into clean energy materials, agriculture, water infrastructure, other real asset 0:21:25.200 --> 0:21:29.359 type businesses. We think our strategy would do well in 0:21:29.400 --> 0:21:33.400 a world where inflation was driven by commodity price rise. Now, 0:21:33.400 --> 0:21:36.840 if if inflation is driven by global trade wars or 0:21:36.880 --> 0:21:40.959 something like that, or or massive money printing, uh, you know, 0:21:41.000 --> 0:21:43.400 it's not as clear that our strategy would would give 0:21:43.400 --> 0:21:46.560 you a lot of inflation protection. But in the developed markets, 0:21:46.600 --> 0:21:50.360 at least historically, most inflationary periods have been driven by 0:21:50.359 --> 0:21:54.040 commodity prices rising. Just to get back to those top 0:21:54.040 --> 0:21:56.639 holdings for a little bit. Uh. And I'm fascinated by 0:21:56.640 --> 0:21:59.199 this because one thing you cannot accuse the strategy of 0:21:59.240 --> 0:22:02.080 being is a closet index or you know, it's it's 0:22:02.119 --> 0:22:08.400 definitely you know, taking a stance on the stocks it picks. Um. 0:22:08.480 --> 0:22:10.320 So if you were to sort of blindfold me and 0:22:10.359 --> 0:22:12.560 say what would you think would be one of the 0:22:12.600 --> 0:22:16.880