1 00:00:00,320 --> 00:00:03,120 Speaker 1: This is Dana Perkins and you're listening to Switched on 2 00:00:03,400 --> 00:00:06,880 Speaker 1: the podcast brought to you by BNF. Back in twenty 3 00:00:06,920 --> 00:00:11,320 Speaker 1: twenty three, BNAF released its inaugural report on Energy Supply 4 00:00:11,480 --> 00:00:15,159 Speaker 1: Investment and Bank financing Activity. We introduced a series of 5 00:00:15,280 --> 00:00:18,560 Speaker 1: ratios to highlight the volume of bank financing to low 6 00:00:18,600 --> 00:00:22,200 Speaker 1: carbon technology when compared to fossil fuels. Is a ratio 7 00:00:22,280 --> 00:00:25,560 Speaker 1: format proved to be a game changer, with multiple financial 8 00:00:25,560 --> 00:00:29,640 Speaker 1: institutions either adopting or creating a ratio of their own. 9 00:00:30,040 --> 00:00:34,080 Speaker 1: Today we discuss our latest metric, the Energy Supply Fund 10 00:00:34,200 --> 00:00:37,120 Speaker 1: enabled CAPEX ratio. It's a bit of a mouthful, so 11 00:00:37,200 --> 00:00:39,800 Speaker 1: we'll refer to it as the ESFR for short for 12 00:00:39,840 --> 00:00:42,599 Speaker 1: the rest of the show. Note this ratio focuses on 13 00:00:42,840 --> 00:00:48,320 Speaker 1: climate alignment of investment portfolios, focusing on specific products and institutions. 14 00:00:48,680 --> 00:00:51,800 Speaker 1: In the report, the team analyzed over sixty seven thousand 15 00:00:51,920 --> 00:00:55,200 Speaker 1: credit equity and multi asset funds. They looked at the 16 00:00:55,200 --> 00:00:59,600 Speaker 1: capital expenditure enabled for energy supply activities and created a ratio, 17 00:00:59,600 --> 00:01:01,959 Speaker 1: which we'll talk about later in the show, and we'll 18 00:01:02,000 --> 00:01:05,279 Speaker 1: also discuss where that ratio might be going. We also 19 00:01:05,400 --> 00:01:09,080 Speaker 1: looked at the regional picture, with North American funds enabling 20 00:01:09,120 --> 00:01:12,520 Speaker 1: the largest amount of energy supply capex in terms of volume, 21 00:01:13,000 --> 00:01:17,840 Speaker 1: but their ESFR significantly lags behind Europe and China. We'll 22 00:01:17,880 --> 00:01:20,959 Speaker 1: also get into a discussion around private markets. We're playing 23 00:01:21,000 --> 00:01:25,000 Speaker 1: an increasingly important role in capital deployment to low carbon 24 00:01:25,120 --> 00:01:28,880 Speaker 1: energy assets, but with little publicly available data, how large 25 00:01:28,880 --> 00:01:31,280 Speaker 1: could the ratio be for some of these funds. To 26 00:01:31,360 --> 00:01:35,160 Speaker 1: learn more about esfrs today, I'm joined by finance and 27 00:01:35,280 --> 00:01:39,319 Speaker 1: Investment associate Ryan Lockhead. He discusses the report Energy Supply 28 00:01:39,480 --> 00:01:43,280 Speaker 1: Fund Enabled Capex Ratio. BNF clients can find it alongside 29 00:01:43,360 --> 00:01:46,640 Speaker 1: its accompanying interactive data set at benof Go on the 30 00:01:46,640 --> 00:01:50,640 Speaker 1: Bloomberg terminal or at BNF dot com. Okay, let's talk 31 00:01:50,640 --> 00:01:55,680 Speaker 1: about the climate alignment of investment portfolios through esfrs with Ryan. 32 00:02:05,840 --> 00:02:05,960 Speaker 2: So. 33 00:02:06,080 --> 00:02:08,680 Speaker 1: I haven't been on the show in quite a number 34 00:02:08,720 --> 00:02:10,280 Speaker 1: of weeks, so it's nice to be back with a 35 00:02:10,280 --> 00:02:13,520 Speaker 1: friendly face. We've done this a few times, Ryan, welcome. 36 00:02:13,200 --> 00:02:14,400 Speaker 2: Back, Thank you. Den So. 37 00:02:14,400 --> 00:02:16,680 Speaker 1: We're here to talk about some of the ratio work 38 00:02:16,720 --> 00:02:20,400 Speaker 1: that we do. It's the Energy Supply Fund Enabled capex 39 00:02:20,480 --> 00:02:23,320 Speaker 1: ratio really rolls out the tongue, so we call it 40 00:02:23,760 --> 00:02:27,239 Speaker 1: ESFR for short. Yes, But before we talk about the 41 00:02:27,280 --> 00:02:29,720 Speaker 1: specific ratio, let's zom out a bit and talk about 42 00:02:29,720 --> 00:02:31,800 Speaker 1: some of the ratio's work that we started a couple 43 00:02:31,800 --> 00:02:34,040 Speaker 1: of years back, because this was a new concept at 44 00:02:34,040 --> 00:02:37,400 Speaker 1: the time. We started with the energy supply banking ratio, 45 00:02:37,520 --> 00:02:41,240 Speaker 1: then moved into the energy supply investment ratio, and now 46 00:02:41,320 --> 00:02:44,880 Speaker 1: where the new Energy Supply fund enabled CAPEX ratio. So, 47 00:02:45,240 --> 00:02:48,080 Speaker 1: first of all, why did we start thinking about the 48 00:02:48,160 --> 00:02:51,440 Speaker 1: investment in the energy transition in terms of ratios? To 49 00:02:51,440 --> 00:02:51,840 Speaker 1: begin with? 50 00:02:52,280 --> 00:02:55,440 Speaker 2: Yeah, it's a I think a really important place to 51 00:02:55,440 --> 00:02:58,000 Speaker 2: start here, But why are we bother doing this? Suttle 52 00:02:58,080 --> 00:02:59,760 Speaker 2: because it was a big lift on our part to 53 00:02:59,800 --> 00:03:03,040 Speaker 2: try and I start calculating these ratios for financial institutions. 54 00:03:03,080 --> 00:03:06,280 Speaker 2: So the concept of the investment ratio is measuring the 55 00:03:06,320 --> 00:03:09,400 Speaker 2: proportion of low carbon energy supply capital investment as a 56 00:03:09,400 --> 00:03:12,200 Speaker 2: proportion of the same thing for fossil fuels. And the 57 00:03:12,880 --> 00:03:15,440 Speaker 2: basis for this is that we have a theory of 58 00:03:15,680 --> 00:03:20,079 Speaker 2: change a BNF that the energy transition is an industrial revolution, 59 00:03:20,360 --> 00:03:23,880 Speaker 2: and the way industrial revolutions work is that you need 60 00:03:24,000 --> 00:03:27,680 Speaker 2: a disruptive technology to grow and scale and expand and 61 00:03:27,760 --> 00:03:33,000 Speaker 2: start displacing incumbent technologies to provide services that incumbent was 62 00:03:33,040 --> 00:03:36,120 Speaker 2: previously providing. That's exactly the same way that we see 63 00:03:36,160 --> 00:03:41,800 Speaker 2: the energy transition. So whereas the traditional energy services were 64 00:03:41,840 --> 00:03:45,280 Speaker 2: provided by conventional energies and fossil fuels, so gas fired 65 00:03:45,320 --> 00:03:47,960 Speaker 2: power plants are called fire power plants, our transportation system 66 00:03:48,040 --> 00:03:51,040 Speaker 2: is fueled by petroleum. Really, the other in order for 67 00:03:51,160 --> 00:03:53,560 Speaker 2: us to actually get to your world where those services 68 00:03:53,600 --> 00:03:56,240 Speaker 2: are still provided but the emissions are low, is that 69 00:03:56,320 --> 00:03:59,200 Speaker 2: there is enough flu carbon energy supply present in the 70 00:03:59,240 --> 00:04:01,600 Speaker 2: system that can actually then go ahead and displace that. 71 00:04:01,800 --> 00:04:03,960 Speaker 2: So the reason they then decided to apply that to 72 00:04:03,960 --> 00:04:06,600 Speaker 2: financial institutions is because they're the arbiters of capital and 73 00:04:06,640 --> 00:04:09,520 Speaker 2: the flu of cap and that investment has to be 74 00:04:09,640 --> 00:04:13,280 Speaker 2: channeled somehow, coming from somewhere, and that somewhere is usually 75 00:04:13,480 --> 00:04:16,760 Speaker 2: institutional investors, and then the banking system is there to 76 00:04:16,800 --> 00:04:20,760 Speaker 2: help funnel that capital to its most productive places and 77 00:04:21,000 --> 00:04:24,160 Speaker 2: hopefully along the way, hopefully to facilitate that capital flowing too, 78 00:04:24,560 --> 00:04:26,440 Speaker 2: or we think it needs to go in order for 79 00:04:26,440 --> 00:04:29,400 Speaker 2: the transition to transpire, which is blue carbon energy supply, 80 00:04:29,560 --> 00:04:33,240 Speaker 2: so a renewable electricity generation or even nuclear or just 81 00:04:33,360 --> 00:04:36,599 Speaker 2: anything that's generally going to help with electrification of the economy. 82 00:04:36,839 --> 00:04:39,360 Speaker 2: The other side of this is the reason we started 83 00:04:39,360 --> 00:04:42,240 Speaker 2: tracking this as a sort of system wide, market level, 84 00:04:42,640 --> 00:04:45,560 Speaker 2: top down piece of work in the energy supply investment ratio. 85 00:04:45,600 --> 00:04:48,720 Speaker 2: But we also wanted to apply this to the entire 86 00:04:48,760 --> 00:04:53,039 Speaker 2: spectrum of financial services and starting with the banks, because 87 00:04:53,440 --> 00:04:55,920 Speaker 2: to date, up until that point, the research that we'd 88 00:04:55,920 --> 00:04:58,400 Speaker 2: seen going into how banks were aligned on climate was 89 00:04:58,480 --> 00:05:01,919 Speaker 2: really my opic. Almost they look at fossil fuel financing 90 00:05:02,040 --> 00:05:06,080 Speaker 2: of financial institutions at research lets from engineers would look 91 00:05:06,080 --> 00:05:09,320 Speaker 2: at who is financing fossil fuels and whoever is financing 92 00:05:09,320 --> 00:05:11,600 Speaker 2: fossil fuels should be beaten with a stick until they 93 00:05:11,600 --> 00:05:13,279 Speaker 2: stopped doing that and the world will be good. 94 00:05:13,400 --> 00:05:16,000 Speaker 1: It's almost like an all or nothing with this point 95 00:05:16,040 --> 00:05:19,200 Speaker 1: A and point B and kind of new perspective on 96 00:05:19,240 --> 00:05:21,200 Speaker 1: what it takes to get from point A to point B. 97 00:05:21,320 --> 00:05:24,480 Speaker 2: Yeah, exactly that, exactly, exactly right. I couldn't have put 98 00:05:24,520 --> 00:05:27,520 Speaker 2: it better. And a lot of that research basically would 99 00:05:27,560 --> 00:05:30,159 Speaker 2: find that the biggest banks in the world were financing 100 00:05:30,240 --> 00:05:33,000 Speaker 2: mist of the fossil field in the world. Because obviously 101 00:05:33,200 --> 00:05:35,760 Speaker 2: we did research then in the energy supply banking ratio 102 00:05:35,800 --> 00:05:37,600 Speaker 2: which looked at who was financing the other side of 103 00:05:37,640 --> 00:05:39,400 Speaker 2: that on top of the fossil fueld, so looking at clean 104 00:05:39,520 --> 00:05:42,720 Speaker 2: energy side of things, and we find that okay, JP Morgan, Yes, 105 00:05:42,800 --> 00:05:45,279 Speaker 2: they are the biggest finances the fossil fuel in the world. 106 00:05:45,480 --> 00:05:48,599 Speaker 2: They are also the biggest financiers of clean energy in 107 00:05:48,640 --> 00:05:50,880 Speaker 2: the world because they are the biggest bank in the world. 108 00:05:50,920 --> 00:05:54,080 Speaker 2: So it's not an unintuitive finding. So the way we 109 00:05:54,160 --> 00:05:57,680 Speaker 2: then wanted to apply this to the banks is to say, Okay, 110 00:05:57,720 --> 00:05:59,920 Speaker 2: if we were actually going to analyze how these banks 111 00:05:59,920 --> 00:06:02,919 Speaker 2: are doing on climate and net zero alignment, what we 112 00:06:02,960 --> 00:06:05,760 Speaker 2: need to normalize for that size. So let's look at 113 00:06:05,760 --> 00:06:08,440 Speaker 2: the ratio of clean energy to fossil fields. And then 114 00:06:08,480 --> 00:06:10,719 Speaker 2: the third thing I would say about the ratioes is 115 00:06:10,760 --> 00:06:13,120 Speaker 2: that there needs to be the scale up of investment. 116 00:06:13,160 --> 00:06:15,680 Speaker 2: We know that if we track how much investment is 117 00:06:15,720 --> 00:06:19,240 Speaker 2: going and classic BNF chart up into the right as 118 00:06:19,279 --> 00:06:22,400 Speaker 2: time progresses, more investments going into clean energy in every 119 00:06:22,520 --> 00:06:26,680 Speaker 2: aspect of the transition, be that power supply or transport 120 00:06:26,839 --> 00:06:31,280 Speaker 2: or grids. Until there is enough deployment in these solutions, 121 00:06:31,560 --> 00:06:34,800 Speaker 2: we don't see a world where general populace is going 122 00:06:34,839 --> 00:06:36,920 Speaker 2: to accept the fallen living standards. And there's a direct 123 00:06:36,960 --> 00:06:40,640 Speaker 2: correlation between energy consumption and living standards, particularly in the 124 00:06:40,760 --> 00:06:43,040 Speaker 2: developing world, or well. 125 00:06:42,880 --> 00:06:45,960 Speaker 1: An energy consumption looks like it's going up for many 126 00:06:46,000 --> 00:06:48,720 Speaker 1: of our charts anyway. So there is the electrification of 127 00:06:48,880 --> 00:06:52,760 Speaker 1: heavy polluting things like electric vehicles replacing internal combustion engines. 128 00:06:52,800 --> 00:06:55,520 Speaker 1: But then there's the energy demand associated with things that 129 00:06:55,600 --> 00:06:58,680 Speaker 1: have nothing to do with a cleaner, greener future, which 130 00:06:58,680 --> 00:07:01,280 Speaker 1: has to do with the use of a and data 131 00:07:01,320 --> 00:07:05,960 Speaker 1: center demand overall increasing. So energy demand is increasing, and 132 00:07:06,200 --> 00:07:09,920 Speaker 1: a more resilient system, one could argue, is a more 133 00:07:09,920 --> 00:07:15,320 Speaker 1: diverse system, which has some aspect that interrelates and interlocks 134 00:07:15,320 --> 00:07:17,920 Speaker 1: in with the energy transition. You're thinking about it also 135 00:07:17,960 --> 00:07:20,880 Speaker 1: from a decarbonization standpoint, because those are the new technologies 136 00:07:20,880 --> 00:07:23,480 Speaker 1: that are coming online. So this concept of the transition, 137 00:07:23,600 --> 00:07:26,600 Speaker 1: for whatever reason you may think that it is or is, 138 00:07:26,760 --> 00:07:29,280 Speaker 1: you know that it is happening. We're now tracking kind 139 00:07:29,320 --> 00:07:32,840 Speaker 1: of what that direction of travel is for those who 140 00:07:32,880 --> 00:07:36,120 Speaker 1: maybe are trying to be more actively involved in this process. 141 00:07:36,440 --> 00:07:40,040 Speaker 2: Exactly that if we look at BNFS, net zeros and 142 00:07:40,160 --> 00:07:42,840 Speaker 2: AR from the New Energy art or our flagship report 143 00:07:43,080 --> 00:07:46,240 Speaker 2: on the Emissions Abatement to curve the chart that shows 144 00:07:46,320 --> 00:07:50,080 Speaker 2: you which technologies are going to be emissions as energy 145 00:07:50,080 --> 00:07:53,520 Speaker 2: system decarbonizes. Even under the net zero SNARI by twenty fifty, 146 00:07:53,680 --> 00:07:57,000 Speaker 2: there is still the presence of fossil fuels in that 147 00:07:57,080 --> 00:08:00,560 Speaker 2: system right up until twenty fifty. That's twenty five years away, 148 00:08:00,560 --> 00:08:02,720 Speaker 2: So it's going to require some level of investment. So 149 00:08:02,760 --> 00:08:06,160 Speaker 2: when we calculate ratioes looking at clean investment the fossil 150 00:08:06,200 --> 00:08:09,880 Speaker 2: fuel investment, it's something to one, not something to zero. 151 00:08:10,040 --> 00:08:12,600 Speaker 2: Like there's still going to be a place for investing 152 00:08:12,680 --> 00:08:15,840 Speaker 2: in gas fired power, for example, in certain parts of 153 00:08:15,840 --> 00:08:18,840 Speaker 2: the world, and it's obviously there's it's regionally disparate, but 154 00:08:18,880 --> 00:08:21,960 Speaker 2: the overarching point is that there is still some place 155 00:08:22,080 --> 00:08:24,680 Speaker 2: for fossil fuel investment over the next two and a 156 00:08:24,720 --> 00:08:27,200 Speaker 2: half decades. But what we really really need to see 157 00:08:27,200 --> 00:08:29,560 Speaker 2: in order to get to this net zero world is 158 00:08:29,600 --> 00:08:33,200 Speaker 2: a massive scale up of investment in the low carbon site. 159 00:08:33,280 --> 00:08:37,320 Speaker 2: So that's where financial services and the entire ecosystem comes 160 00:08:37,320 --> 00:08:40,160 Speaker 2: into play. So looking at these giant institutions who control 161 00:08:40,200 --> 00:08:44,280 Speaker 2: the allocation of capital because they whether deliberately or otherwise, 162 00:08:44,440 --> 00:08:46,079 Speaker 2: they will have an impact. 163 00:08:46,360 --> 00:08:49,560 Speaker 1: So as we're living in the Industrial Revolution the sequel, 164 00:08:49,800 --> 00:08:52,439 Speaker 1: and as with many summers, this is a summer of sequels. 165 00:08:52,440 --> 00:08:54,920 Speaker 1: We've got Jurassic Park, so I would say the Superman 166 00:08:55,040 --> 00:08:57,280 Speaker 1: wants more of a remake. But here we are Industrial 167 00:08:57,320 --> 00:09:01,959 Speaker 1: Revolution the sequel. Why are we working specifically? It's fund 168 00:09:02,080 --> 00:09:06,600 Speaker 1: enabled cathex ratio. So we looked at banks and now 169 00:09:06,760 --> 00:09:09,800 Speaker 1: you're looking at that mix of equities and debt. Who 170 00:09:09,840 --> 00:09:12,960 Speaker 1: were you speaking to here? Who are you expecting to 171 00:09:13,040 --> 00:09:17,199 Speaker 1: read and glean insights from the painstaking work you've spent 172 00:09:17,440 --> 00:09:19,840 Speaker 1: on data and charts and graphs in order to bring 173 00:09:19,840 --> 00:09:20,480 Speaker 1: this to life? 174 00:09:20,679 --> 00:09:23,400 Speaker 2: Good good questions. So we started with the banks because 175 00:09:23,440 --> 00:09:25,480 Speaker 2: they were they were the headline grabbers, really and there 176 00:09:25,520 --> 00:09:28,000 Speaker 2: was this sort of idea that the banks were causing 177 00:09:28,160 --> 00:09:32,720 Speaker 2: climate destruction, which we didn't necessarily agree with, but it 178 00:09:32,720 --> 00:09:34,800 Speaker 2: felt like the most natural place to start. Most of 179 00:09:34,840 --> 00:09:37,680 Speaker 2: what we were measuring for the banks is capital market activity, 180 00:09:37,760 --> 00:09:41,720 Speaker 2: so that they're underwriting of security is onto capital markets, 181 00:09:41,720 --> 00:09:45,120 Speaker 2: so bonds and listed stocks. They were usually just responding 182 00:09:45,200 --> 00:09:47,319 Speaker 2: to what their clients were doing. For asset managers, so yeah, 183 00:09:47,360 --> 00:09:50,320 Speaker 2: the energy supply fund enabled capex ratio where we're measuring 184 00:09:50,559 --> 00:09:53,160 Speaker 2: the same concept. It's an absolute mouthful, so I'm going 185 00:09:53,200 --> 00:09:55,800 Speaker 2: to refer to it as the ESFR from here on o. 186 00:09:56,000 --> 00:09:59,000 Speaker 2: The asset management community is more like the client side 187 00:09:59,120 --> 00:10:02,760 Speaker 2: for the banks, So the people who are actually deciding 188 00:10:03,120 --> 00:10:06,360 Speaker 2: which securities they're going to put into their pulled investment 189 00:10:06,360 --> 00:10:09,720 Speaker 2: products like ETFs or mutual funds, who are serving their 190 00:10:09,760 --> 00:10:13,480 Speaker 2: clients as well. Who are the institutional investors, so pensions, 191 00:10:13,520 --> 00:10:18,680 Speaker 2: sovereign wealth, endowments, insurance, whoever. So THEESFR it's a slightly 192 00:10:18,679 --> 00:10:22,080 Speaker 2: different concept, which I can explain further later, but it 193 00:10:22,120 --> 00:10:24,520 Speaker 2: is the sort of companion piece to the EsBr. It's 194 00:10:24,559 --> 00:10:27,640 Speaker 2: a different part of the cm ecosystem. So whereas we 195 00:10:27,640 --> 00:10:30,480 Speaker 2: were looking at banks who provide primarily at their debt 196 00:10:30,559 --> 00:10:35,520 Speaker 2: capital through loans and underwriting services for securities, we're now 197 00:10:35,559 --> 00:10:39,800 Speaker 2: looking at asset managers who provide investment products for investors, 198 00:10:40,000 --> 00:10:43,360 Speaker 2: and they do typically just respond to to client demand. 199 00:10:43,600 --> 00:10:46,719 Speaker 2: Up until quite recently, a lot of these groups had 200 00:10:46,840 --> 00:10:51,000 Speaker 2: lent into the sustainability theme, having specific departments on it, 201 00:10:51,040 --> 00:10:53,080 Speaker 2: starting back in the days when it was all called 202 00:10:53,320 --> 00:10:56,480 Speaker 2: ESG or Environmental, Social and governance factors and then sort 203 00:10:56,480 --> 00:10:58,840 Speaker 2: of becoming more and more granular as the utility of 204 00:10:58,840 --> 00:11:02,800 Speaker 2: that term win bit. So we thought this was a 205 00:11:02,840 --> 00:11:07,480 Speaker 2: pretty natural next step for this ratio suite of research 206 00:11:07,640 --> 00:11:08,600 Speaker 2: products that we're making. 207 00:11:08,760 --> 00:11:12,080 Speaker 1: So zeroed in on the energy transition. Okay, Ryan, so 208 00:11:12,600 --> 00:11:15,560 Speaker 1: tell us how you count the beans. Give us the 209 00:11:15,640 --> 00:11:18,840 Speaker 1: detail on how you think about this and how you 210 00:11:19,040 --> 00:11:21,720 Speaker 1: arrive at these ratios, because invariably there's a ton of 211 00:11:21,800 --> 00:11:23,839 Speaker 1: underlying data and theory that goes behind it. 212 00:11:24,040 --> 00:11:27,160 Speaker 2: We're partially doing this because we think this is a 213 00:11:27,240 --> 00:11:30,320 Speaker 2: metric that is better at measuring net zero alignment than 214 00:11:30,360 --> 00:11:33,480 Speaker 2: something like financed emissions, but we're actually being pretty pretty 215 00:11:33,480 --> 00:11:36,760 Speaker 2: inspired by the calculation of financed dimissions and where we've 216 00:11:37,040 --> 00:11:40,959 Speaker 2: used and massaged the methodology that they Partnership for Carbon 217 00:11:41,000 --> 00:11:44,559 Speaker 2: Accounting or PICA used to develop this. So the fund 218 00:11:44,640 --> 00:11:48,360 Speaker 2: enabled copex aspect of this mouthful of a term is 219 00:11:48,400 --> 00:11:52,560 Speaker 2: about attributing the capital expenditures of portfolio companies and non 220 00:11:52,559 --> 00:11:55,360 Speaker 2: financial companies who are in the energy sector. So the 221 00:11:55,400 --> 00:11:58,520 Speaker 2: exons or the vestass or whoever of the world they're 222 00:11:58,520 --> 00:12:02,760 Speaker 2: making capital expenditures annualized bases into real tangible assets. So 223 00:12:02,880 --> 00:12:07,200 Speaker 2: wind turbines or oil directs or LNG terminals, and we're 224 00:12:07,240 --> 00:12:13,720 Speaker 2: attributing that capital expenditure to funds ETFs or mutual funds 225 00:12:13,760 --> 00:12:16,160 Speaker 2: and then mapping that up to the institutions that offer 226 00:12:16,200 --> 00:12:19,000 Speaker 2: those products. We do that in much the CM way 227 00:12:19,200 --> 00:12:23,480 Speaker 2: that financed missions calculation is performed for portfolios by looking 228 00:12:23,480 --> 00:12:26,000 Speaker 2: at how much of the portfolio company is owned by 229 00:12:26,000 --> 00:12:28,959 Speaker 2: the fund. So say say a fund owns ten percent 230 00:12:29,000 --> 00:12:32,400 Speaker 2: of the entire capital structure of Exon, and Xon spent 231 00:12:32,679 --> 00:12:36,280 Speaker 2: a billion dollars last year on oil and gas capital expenditure. 232 00:12:36,480 --> 00:12:39,720 Speaker 2: We would then say one hundred million dollars of oil 233 00:12:39,760 --> 00:12:42,440 Speaker 2: and gas CAPEX was then attributable to that particular fund 234 00:12:42,440 --> 00:12:45,280 Speaker 2: because they owned ten percent of the enterprise value of Exon. 235 00:12:45,400 --> 00:12:48,400 Speaker 2: Those are entirely made up illustrative numbers, but that's the 236 00:12:48,559 --> 00:12:52,559 Speaker 2: that's the concept, that's what we're measuring. And because something 237 00:12:52,600 --> 00:12:56,040 Speaker 2: like finance missions is only looking at the high emitting assets, 238 00:12:56,120 --> 00:13:00,480 Speaker 2: so the oil and gas and coal infrastructure on the 239 00:13:00,480 --> 00:13:03,240 Speaker 2: fossil fuel side. Back to the ratio concept, we then 240 00:13:03,520 --> 00:13:06,000 Speaker 2: wanted to look at CAPEX because then that brings into 241 00:13:06,040 --> 00:13:07,880 Speaker 2: the folder, allows us to bring into the fold the 242 00:13:07,920 --> 00:13:10,480 Speaker 2: clean energy side of the things, the low carbon capex 243 00:13:10,559 --> 00:13:15,319 Speaker 2: into wooden turbines and solar PV farms and battery storage, 244 00:13:15,400 --> 00:13:16,240 Speaker 2: et cetera, et cetera. 245 00:13:17,240 --> 00:13:19,400 Speaker 1: So now that we know how you put it all together, 246 00:13:19,679 --> 00:13:23,800 Speaker 1: there's the results element of it lay the foundation where 247 00:13:23,800 --> 00:13:25,439 Speaker 1: we are now, so we can talk about where we're 248 00:13:25,480 --> 00:13:27,360 Speaker 1: going and what does this ratio look like. 249 00:13:27,960 --> 00:13:30,960 Speaker 2: So I will add caveats to this afterwards, but the 250 00:13:31,080 --> 00:13:34,760 Speaker 2: upfront answer to this question is that as of twenty 251 00:13:34,800 --> 00:13:38,280 Speaker 2: twenty four, inaggregate, where the asset management market is at 252 00:13:38,320 --> 00:13:40,720 Speaker 2: the moment, is that for every dollar of fossil fuel 253 00:13:41,000 --> 00:13:43,880 Speaker 2: capital expenditure that they've enabled us of twenty twenty four, 254 00:13:44,120 --> 00:13:48,080 Speaker 2: we've associated or attributed to them forty eight cents of 255 00:13:48,320 --> 00:13:51,400 Speaker 2: low carbon energy supply capital expenditure that's been enabled. So 256 00:13:51,440 --> 00:13:53,360 Speaker 2: that's a ratio of zero point four eight. On the 257 00:13:53,400 --> 00:13:57,280 Speaker 2: direction of travel, is that the ratio is declining over 258 00:13:57,360 --> 00:14:00,400 Speaker 2: the previous three years to that. So we started measuring 259 00:14:00,400 --> 00:14:03,120 Speaker 2: this as of the end of twenty twenty one. That's 260 00:14:03,160 --> 00:14:05,400 Speaker 2: the time series data we have, partially because of just 261 00:14:05,480 --> 00:14:08,000 Speaker 2: the granularity of the data that we have that was 262 00:14:08,640 --> 00:14:11,040 Speaker 2: different sources. That's as far back as they allowed us 263 00:14:11,040 --> 00:14:11,280 Speaker 2: to go. 264 00:14:11,360 --> 00:14:13,199 Speaker 1: Is that the caveat is that the catch. 265 00:14:13,280 --> 00:14:16,280 Speaker 2: There is there is a caveat there because the way, 266 00:14:16,480 --> 00:14:19,320 Speaker 2: and this is one of the concerns about calculating something 267 00:14:19,320 --> 00:14:21,400 Speaker 2: like financed the missions is that we're doing this as 268 00:14:21,440 --> 00:14:23,840 Speaker 2: a how much of the enterprise value does a fundown? 269 00:14:23,920 --> 00:14:27,520 Speaker 2: And the enterprise value includes market capitalization, which is subject 270 00:14:27,560 --> 00:14:29,760 Speaker 2: to the whims of the market, so it is in 271 00:14:29,960 --> 00:14:33,960 Speaker 2: part dependent on the stock market. So there's a specific 272 00:14:34,080 --> 00:14:37,040 Speaker 2: dynamic in the energy related stock market that has occurred 273 00:14:37,080 --> 00:14:40,120 Speaker 2: since December twenty twenty one has partially resulted in this. 274 00:14:40,200 --> 00:14:42,880 Speaker 2: Now it's not necessarily entirely done to this. There are 275 00:14:42,920 --> 00:14:45,720 Speaker 2: some other reasons, but we basically started at a point 276 00:14:45,840 --> 00:14:49,520 Speaker 2: where if we look at any clean energy stock market index, 277 00:14:49,800 --> 00:14:52,840 Speaker 2: which became very very popular up until through past the 278 00:14:52,840 --> 00:14:55,200 Speaker 2: pandemic to the end of twenty twenty one, that was 279 00:14:55,240 --> 00:14:58,960 Speaker 2: sort of their zenith, where from December twenty twenty one 280 00:14:59,080 --> 00:15:02,520 Speaker 2: the stock market for most clean energy indices was falling 281 00:15:02,640 --> 00:15:06,640 Speaker 2: and has continued largely to fall to this point, while 282 00:15:06,640 --> 00:15:08,840 Speaker 2: the started twenty twenty five has looked a little bit better, 283 00:15:08,880 --> 00:15:11,640 Speaker 2: so maybe it's going to change. Conversely, December twenty twenty 284 00:15:11,680 --> 00:15:15,240 Speaker 2: one was only three months before Russia's inversion of Ukraine, and. 285 00:15:15,400 --> 00:15:18,320 Speaker 1: Is that the hypothesis as to why, well, it had. 286 00:15:18,320 --> 00:15:21,120 Speaker 2: An obvious impact on commodity prices in particularly in oil 287 00:15:21,120 --> 00:15:23,640 Speaker 2: and gas markets. So a lot of the listed firms 288 00:15:23,680 --> 00:15:26,120 Speaker 2: that we're looking at here, their prices, their stock prices 289 00:15:26,160 --> 00:15:29,080 Speaker 2: reacted to that they were heavily exposed to commodity prices 290 00:15:29,120 --> 00:15:32,160 Speaker 2: which spiked, and therefore, over that timeframe, the cash for 291 00:15:32,320 --> 00:15:36,119 Speaker 2: the companies increased as well and correspondingly suited their stock valuations. 292 00:15:36,280 --> 00:15:38,120 Speaker 2: The other side of this is that this is not 293 00:15:38,240 --> 00:15:40,720 Speaker 2: necessarily just the measure of how much capital expenditure is 294 00:15:40,720 --> 00:15:44,120 Speaker 2: actually going towards these assets in total. It's the capital 295 00:15:44,160 --> 00:15:47,680 Speaker 2: expenditure that we can attribute to fund managers, and what 296 00:15:47,680 --> 00:15:49,600 Speaker 2: we can attribute to fund managers is how much they 297 00:15:49,600 --> 00:15:52,600 Speaker 2: own of securities. So what that means is that they've 298 00:15:52,640 --> 00:15:56,320 Speaker 2: got this dynamic going on where what listed firms are 299 00:15:56,320 --> 00:15:59,240 Speaker 2: doing is important to this metric because that's what these 300 00:15:59,320 --> 00:16:02,960 Speaker 2: mutual funds needs can actually get exposure to or debt securities. 301 00:16:03,080 --> 00:16:05,440 Speaker 1: And is there quite a bit that's not listed and 302 00:16:05,440 --> 00:16:06,720 Speaker 1: you're not able to track. 303 00:16:06,840 --> 00:16:10,080 Speaker 2: Exactly right, So there are a few reasons for this. 304 00:16:10,240 --> 00:16:13,480 Speaker 2: So one, not a lot of a lot of energy 305 00:16:13,520 --> 00:16:16,840 Speaker 2: expenditure capital expenditure is coming from state owned enterprises, particularly 306 00:16:17,120 --> 00:16:21,400 Speaker 2: in the OPEC region and in China in particular. So 307 00:16:21,840 --> 00:16:24,600 Speaker 2: obviously anyone who pays attention to the energy transition and 308 00:16:24,760 --> 00:16:27,760 Speaker 2: investment trends, generally, China is a big part of the story. 309 00:16:27,960 --> 00:16:30,760 Speaker 2: A lot of the investment coming out of China is 310 00:16:30,800 --> 00:16:35,080 Speaker 2: coming through state earned enterprises as well as some securities 311 00:16:35,080 --> 00:16:37,800 Speaker 2: based or listed firms. But that means that if it's 312 00:16:37,800 --> 00:16:40,360 Speaker 2: a state owned enterprise, then it can't sit in a 313 00:16:40,640 --> 00:16:44,280 Speaker 2: mutual fund or an ETF that is investing in stocks, right, 314 00:16:44,320 --> 00:16:46,440 Speaker 2: So that means that anything that's coming out of China 315 00:16:46,560 --> 00:16:48,840 Speaker 2: in terms of leu carbon investment, it's not going to 316 00:16:48,840 --> 00:16:51,520 Speaker 2: be able to be attributed to the stock market funds 317 00:16:51,560 --> 00:16:54,000 Speaker 2: that are becoming more and more popular. 318 00:16:54,120 --> 00:16:57,120 Speaker 1: That's really interesting though, because one of the regional findings 319 00:16:57,200 --> 00:16:59,320 Speaker 1: from this report, which I want you to talk about more, 320 00:16:59,440 --> 00:17:02,800 Speaker 1: is where China lands in this ratio. They actually come 321 00:17:02,880 --> 00:17:04,639 Speaker 1: up near the top. So you have a number of 322 00:17:04,680 --> 00:17:08,800 Speaker 1: state owned enterprises which, as you mentioned, whether it's manufacturing 323 00:17:08,840 --> 00:17:13,920 Speaker 1: solar panels or refining different metals for electric vehicles or batteries, 324 00:17:13,920 --> 00:17:16,280 Speaker 1: actually written large. China is a dominant player in the 325 00:17:16,359 --> 00:17:19,679 Speaker 1: energy transition when it comes to technologies that are used 326 00:17:19,840 --> 00:17:22,800 Speaker 1: as part of it, and much of that from being 327 00:17:23,440 --> 00:17:26,159 Speaker 1: some of them state owned companies. But yet even for 328 00:17:26,200 --> 00:17:29,480 Speaker 1: the publicly listed end of it, they're coming out on top. 329 00:17:29,600 --> 00:17:32,920 Speaker 1: So what's China's ratio compared to other parts of the world. 330 00:17:33,200 --> 00:17:35,560 Speaker 2: Zi, Yeah, zero point nine er, that's what we're talking 331 00:17:35,600 --> 00:17:38,400 Speaker 2: for these particular these particular companies. A lot of these 332 00:17:38,400 --> 00:17:41,480 Speaker 2: companies like solar mudile manufacturers as well. And the other 333 00:17:41,520 --> 00:17:43,760 Speaker 2: thing with this with China though, if anyone is actually 334 00:17:43,800 --> 00:17:46,760 Speaker 2: to look at our regional split of charts, their ratio 335 00:17:46,880 --> 00:17:50,399 Speaker 2: is second highest by region, only behind Europe. The data, 336 00:17:50,680 --> 00:17:53,360 Speaker 2: the actual volume of copecks that these funds are enabling 337 00:17:53,520 --> 00:17:56,320 Speaker 2: is very very small in China, even though that's where 338 00:17:56,320 --> 00:17:58,720 Speaker 2: most of the energy transition investment is coming from. 339 00:17:58,760 --> 00:18:01,520 Speaker 1: So your data set is just as smaller it is. 340 00:18:01,560 --> 00:18:06,040 Speaker 2: And that's partially just because we can't capture necessarily even 341 00:18:06,080 --> 00:18:08,520 Speaker 2: for the securities that are issued by Chinese firms, we 342 00:18:08,560 --> 00:18:12,639 Speaker 2: can't capture the ownership for them because the disclosure requirements 343 00:18:12,640 --> 00:18:15,399 Speaker 2: on holdings isn't a stringent there as it is in 344 00:18:15,400 --> 00:18:18,639 Speaker 2: perhaps Western markets. They have, for example, two different types 345 00:18:18,720 --> 00:18:22,040 Speaker 2: of shared classes, one called the H class, which is 346 00:18:22,240 --> 00:18:25,080 Speaker 2: usually listed on the Hong Kong Stock Exchange, which are 347 00:18:25,119 --> 00:18:29,000 Speaker 2: typically bought by the international investment community. Or they have 348 00:18:29,040 --> 00:18:31,440 Speaker 2: something called A class shares which are listed in mainland 349 00:18:31,680 --> 00:18:35,080 Speaker 2: China whatever stock exchange they choose to, which are typically 350 00:18:35,080 --> 00:18:38,600 Speaker 2: the reserve of domestic investors as well. Those shares, we 351 00:18:38,720 --> 00:18:40,800 Speaker 2: don't get a view on the ownership to the same 352 00:18:41,000 --> 00:18:43,760 Speaker 2: level that we would for for example, US or New 353 00:18:43,840 --> 00:18:47,119 Speaker 2: York Stock Exchange listed companies. So there is there's definitely 354 00:18:47,119 --> 00:18:50,159 Speaker 2: a data reason behind the results that we're seeing, and 355 00:18:50,160 --> 00:18:53,119 Speaker 2: that data issue is also probably what partially contributes to 356 00:18:53,160 --> 00:18:56,240 Speaker 2: the fact that the fund enabled capex ratio of zero 357 00:18:56,240 --> 00:18:59,480 Speaker 2: point four it to one is lower than the real 358 00:18:59,560 --> 00:19:01,919 Speaker 2: economy ratio which is actually over one to one at 359 00:19:01,920 --> 00:19:04,359 Speaker 2: the moment. So by rail economy, what I mean is 360 00:19:04,400 --> 00:19:07,399 Speaker 2: the project level investment that we are tracking, either at 361 00:19:07,400 --> 00:19:10,720 Speaker 2: PNF or we look at other organizations like the IA, 362 00:19:10,760 --> 00:19:13,040 Speaker 2: are showing that actually there on a year to year 363 00:19:13,080 --> 00:19:17,280 Speaker 2: basis in physical assets, the actual the things that are 364 00:19:17,320 --> 00:19:20,359 Speaker 2: really important. There's more blue carbon investment than there is 365 00:19:20,359 --> 00:19:22,639 Speaker 2: fossil fuel investment, but what we are tracking here for 366 00:19:22,720 --> 00:19:26,199 Speaker 2: fund managers, specifically, we're seeing less than half of the 367 00:19:26,240 --> 00:19:29,000 Speaker 2: amount of fossil fuel investment going into lu carbon. So 368 00:19:29,040 --> 00:19:32,520 Speaker 2: there's lots of different dynamics at play driving this divergence. 369 00:19:33,200 --> 00:19:35,960 Speaker 1: Regional dynamics are going to come down to your point, 370 00:19:36,320 --> 00:19:39,400 Speaker 1: what is and is not public, what natural resources you have, 371 00:19:39,680 --> 00:19:43,399 Speaker 1: and then of course policy and how governments are able 372 00:19:43,440 --> 00:19:46,159 Speaker 1: to really tip the scales one way or another, and 373 00:19:46,440 --> 00:19:50,320 Speaker 1: some well, perhaps a good two regions to juxtapose on 374 00:19:50,400 --> 00:19:52,920 Speaker 1: this would be Europe, which you have coming out as 375 00:19:52,960 --> 00:19:56,119 Speaker 1: the leader, followed by China, and then you've got Latin America. 376 00:19:56,119 --> 00:19:59,200 Speaker 1: Then you've got North America, so natural gas exporter. North 377 00:19:59,240 --> 00:20:03,040 Speaker 1: America also part of the world where certain states in 378 00:20:03,280 --> 00:20:07,040 Speaker 1: the US specifically have really turned away from any sort 379 00:20:07,040 --> 00:20:09,800 Speaker 1: of clean energy mandate, and that as a fund manager 380 00:20:10,000 --> 00:20:13,680 Speaker 1: you actually are not able to use other factors other 381 00:20:13,760 --> 00:20:15,879 Speaker 1: than just what's happening in the market in some of 382 00:20:15,880 --> 00:20:18,520 Speaker 1: your investments. So the point is really clear that there 383 00:20:18,560 --> 00:20:22,160 Speaker 1: is a lot of different factors which may influence these numbers, 384 00:20:22,280 --> 00:20:25,879 Speaker 1: everything from how many companies are actually publicly listed, to 385 00:20:26,000 --> 00:20:28,560 Speaker 1: what natural resources a region may have, all the way 386 00:20:28,560 --> 00:20:32,080 Speaker 1: through to policy as that has a really handy way 387 00:20:32,080 --> 00:20:35,160 Speaker 1: of tipping the scales for or against something in various 388 00:20:35,200 --> 00:20:38,119 Speaker 1: parts of the world, which then leads me to another question. 389 00:20:38,200 --> 00:20:40,320 Speaker 1: And so, if you are a fund manager and you're 390 00:20:40,359 --> 00:20:42,640 Speaker 1: looking at this, how much agency do you really have 391 00:20:43,000 --> 00:20:44,240 Speaker 1: to make decisions? 392 00:20:44,760 --> 00:20:48,639 Speaker 2: I like this question a lot because it depends on 393 00:20:48,680 --> 00:20:51,720 Speaker 2: who you ask. So ultimately, an investor, so the person 394 00:20:51,760 --> 00:20:54,760 Speaker 2: who owns the capital in theory, should have complete agency 395 00:20:54,800 --> 00:20:56,920 Speaker 2: over what they do with their money. So most fund 396 00:20:57,000 --> 00:21:01,399 Speaker 2: managers aren't that, though they are fishes. They look after 397 00:21:01,640 --> 00:21:04,640 Speaker 2: their clients money and they allocate it as their clients 398 00:21:04,880 --> 00:21:07,800 Speaker 2: ask them to. Essentially, that said, most of their clients 399 00:21:07,880 --> 00:21:11,280 Speaker 2: aren't security selectors, so they're not stock picking or picking 400 00:21:11,280 --> 00:21:15,399 Speaker 2: individual bonds. They're allocating so they're looking for exposure to 401 00:21:15,440 --> 00:21:18,480 Speaker 2: equities or US large cop equities to be specifically, or 402 00:21:18,560 --> 00:21:22,720 Speaker 2: high yield credit mandates, or infrastructure and private equity and 403 00:21:22,720 --> 00:21:26,840 Speaker 2: private credit. So that then leaves fund managers with a 404 00:21:26,880 --> 00:21:29,360 Speaker 2: degree of agency about what securities they're going to put 405 00:21:29,359 --> 00:21:32,320 Speaker 2: in their investment products. Now there's a dynamic going on 406 00:21:32,720 --> 00:21:35,560 Speaker 2: which we've seen in this research as well, but it's 407 00:21:35,640 --> 00:21:38,520 Speaker 2: kind of well known within the investment community. That increasingly, 408 00:21:38,560 --> 00:21:43,120 Speaker 2: passive investment has become a much more popular investment strategy. 409 00:21:43,240 --> 00:21:47,280 Speaker 2: Or what passive investment is is investing in securities so 410 00:21:47,320 --> 00:21:50,360 Speaker 2: that they track an index or the broader market, which 411 00:21:50,400 --> 00:21:54,160 Speaker 2: is usually represented by a stock index or a bond index. 412 00:21:54,440 --> 00:21:57,200 Speaker 1: Like an ETF would be an examples an exchange traded fund. 413 00:21:57,920 --> 00:22:00,760 Speaker 2: Exchange treated funds tend to be possibly managed, their exclusively 414 00:22:00,800 --> 00:22:03,360 Speaker 2: passively managed. You can get active dfs, and they're actually 415 00:22:03,480 --> 00:22:06,880 Speaker 2: becoming a little bit more popular. But yes, the growth 416 00:22:06,880 --> 00:22:10,480 Speaker 2: in ETFs coincided with the growth in passive management and 417 00:22:11,160 --> 00:22:14,280 Speaker 2: we've picked that trend up as well here. So even 418 00:22:14,320 --> 00:22:16,879 Speaker 2: actually as recently as twenty twenty one. So our first 419 00:22:17,240 --> 00:22:19,320 Speaker 2: data point that we were looking at, the total volume 420 00:22:19,320 --> 00:22:22,080 Speaker 2: of enabled cap X was higher for actively managed funds 421 00:22:22,080 --> 00:22:25,520 Speaker 2: than it was for passively managed funds. That has since switched. 422 00:22:25,840 --> 00:22:29,760 Speaker 2: So now passively managed mandates are bigger, they're a bigger 423 00:22:29,760 --> 00:22:31,960 Speaker 2: part of the story than actively managed funds. And what 424 00:22:32,000 --> 00:22:35,480 Speaker 2: that does is it makes it a lot more important 425 00:22:35,760 --> 00:22:38,720 Speaker 2: for this ratio as to whether or not firms sit 426 00:22:38,800 --> 00:22:41,600 Speaker 2: inside major stock in disease. So, for example, the most 427 00:22:41,600 --> 00:22:43,919 Speaker 2: popular stock index in the world is the one that 428 00:22:44,000 --> 00:22:45,840 Speaker 2: tracks the US large cap market the S and P 429 00:22:45,920 --> 00:22:48,720 Speaker 2: five hundred, and within the S and P five hundred, 430 00:22:48,840 --> 00:22:52,040 Speaker 2: the ratio of anyone who invests in that is zero 431 00:22:52,119 --> 00:22:54,440 Speaker 2: point four eight to one, which is the same as 432 00:22:54,480 --> 00:22:57,359 Speaker 2: the total market. And the reason for that is because 433 00:22:57,400 --> 00:23:01,280 Speaker 2: some of their major constituents include Exomobile or Chefron or 434 00:23:01,280 --> 00:23:04,560 Speaker 2: oxy and they do have some element of clean energy 435 00:23:04,560 --> 00:23:07,199 Speaker 2: exposure in there. I think it's next era energy is 436 00:23:07,240 --> 00:23:10,560 Speaker 2: its biggest contributor to the carbon copex within that index, 437 00:23:10,640 --> 00:23:13,879 Speaker 2: but it's something that is probably going to continue this 438 00:23:14,320 --> 00:23:17,439 Speaker 2: sort of downald trend, particularly inequities anyway, listed equities on 439 00:23:17,480 --> 00:23:21,040 Speaker 2: the fund ratio side, unless there is a big shift 440 00:23:21,200 --> 00:23:25,679 Speaker 2: in listed renewable energy companies getting access to some of 441 00:23:25,680 --> 00:23:28,120 Speaker 2: these major industries. Obviously, the S and P five hundred 442 00:23:28,200 --> 00:23:30,320 Speaker 2: is one index. There are lots of different ones that 443 00:23:30,359 --> 00:23:33,280 Speaker 2: are tracked, but they tend to be pretty well diversified 444 00:23:33,640 --> 00:23:37,880 Speaker 2: across region indices which are dominated usually by large US companies. 445 00:23:37,920 --> 00:23:40,640 Speaker 2: So even things like the MSc AQUI, the Old Cup 446 00:23:40,680 --> 00:23:42,720 Speaker 2: World Index, the top companies, they are the same as 447 00:23:42,760 --> 00:23:44,400 Speaker 2: the top companies in the S and P five hundred, 448 00:23:44,440 --> 00:23:46,760 Speaker 2: the big Magnificent seven stock industries, so a lot of 449 00:23:46,800 --> 00:23:50,199 Speaker 2: capital is moving into these these mandates, primarily driven by 450 00:23:50,240 --> 00:23:52,800 Speaker 2: the lower fees and the fact that active managers are 451 00:23:52,840 --> 00:23:56,360 Speaker 2: struggling to outperform the markets. And there is this dynamics 452 00:23:56,400 --> 00:23:59,320 Speaker 2: well within energy, where oil and gas companies, oil and 453 00:23:59,359 --> 00:24:03,120 Speaker 2: gas majors, these big listed firms which sit inside these industries, 454 00:24:03,160 --> 00:24:05,720 Speaker 2: and therefore, as more compital goes into, the more copex 455 00:24:05,800 --> 00:24:08,399 Speaker 2: is enabled by the fund monitors who are running these 456 00:24:08,480 --> 00:24:12,679 Speaker 2: passive mandates, whereas the renewable firms typically sit outside of 457 00:24:12,720 --> 00:24:15,040 Speaker 2: those big industries, and therefore they've got this sort of 458 00:24:15,119 --> 00:24:17,520 Speaker 2: tool dynamic of you know, it's a vicious bit of 459 00:24:17,520 --> 00:24:18,280 Speaker 2: a vicious cycle. 460 00:24:19,160 --> 00:24:21,720 Speaker 1: So let's talk about another trend. But on the investment side, 461 00:24:21,760 --> 00:24:25,320 Speaker 1: we've already discussed how there are non listed companies and 462 00:24:25,359 --> 00:24:27,040 Speaker 1: how that can skew some of the data. But how 463 00:24:27,080 --> 00:24:30,000 Speaker 1: about this move towards or a rise of probably is 464 00:24:30,040 --> 00:24:32,840 Speaker 1: a better way to put it private markets. And you know, 465 00:24:33,040 --> 00:24:36,359 Speaker 1: big companies like Exxon, like you'd mentioned, the big listed 466 00:24:36,400 --> 00:24:39,360 Speaker 1: companies like the oil majors, they're a huge part of this. 467 00:24:39,920 --> 00:24:41,960 Speaker 1: Is there a trend, how are you seeing it emerge 468 00:24:42,000 --> 00:24:43,760 Speaker 1: and how are you tracking it? When it comes to 469 00:24:43,880 --> 00:24:47,600 Speaker 1: the involvement of private markets and money in that direction. 470 00:24:47,840 --> 00:24:49,399 Speaker 2: Yeah, this is this is a good question. And I 471 00:24:49,400 --> 00:24:51,399 Speaker 2: think actually the last time you and I have spoken 472 00:24:51,440 --> 00:24:52,480 Speaker 2: the podcast. 473 00:24:52,040 --> 00:24:55,320 Speaker 1: This was the theme refresh my memory, Ryan. 474 00:24:55,359 --> 00:25:00,480 Speaker 2: We spoke you and I with Pietro Rool about the 475 00:25:01,200 --> 00:25:04,280 Speaker 2: emergence of private markets and renewable energy and that part 476 00:25:04,480 --> 00:25:07,840 Speaker 2: beautiful relationship that was emerging at the time. But there 477 00:25:07,880 --> 00:25:10,080 Speaker 2: is actually there's definitely something to be said, and you're right, 478 00:25:10,119 --> 00:25:12,359 Speaker 2: there's a there were. If I could talk about two 479 00:25:12,480 --> 00:25:16,399 Speaker 2: big trends in investment writ large over the last two decades, 480 00:25:16,440 --> 00:25:18,040 Speaker 2: one of them would have been the shift from active 481 00:25:18,119 --> 00:25:20,520 Speaker 2: to passive in terms of popularity. The other is the 482 00:25:20,640 --> 00:25:25,199 Speaker 2: growth and popularity of private markets in a globally investable portfolio. 483 00:25:25,359 --> 00:25:29,480 Speaker 2: So the start of the century year two thousand alternative 484 00:25:29,560 --> 00:25:32,680 Speaker 2: assets as they are so called, which are pretty much 485 00:25:32,680 --> 00:25:35,360 Speaker 2: anything other than listed debt and equity securities or maybe 486 00:25:35,600 --> 00:25:38,920 Speaker 2: even under five percent of global market portfolio. Today they 487 00:25:38,960 --> 00:25:41,640 Speaker 2: are probably north of twenty five percent, so they've grown 488 00:25:41,640 --> 00:25:43,800 Speaker 2: in absolute terms, but they've grown in relative terms as 489 00:25:43,800 --> 00:25:46,879 Speaker 2: well quite quickly. Private markets can refer to a whole 490 00:25:47,160 --> 00:25:49,760 Speaker 2: range of different subasset classes, so that can be buyout 491 00:25:49,920 --> 00:25:53,159 Speaker 2: or growth or venture capital strategies that sit in private equity, 492 00:25:53,280 --> 00:25:56,080 Speaker 2: or they can be private credit, which is essentially non 493 00:25:56,320 --> 00:25:59,560 Speaker 2: bank lending for masset managers, which is a very hot 494 00:25:59,560 --> 00:26:02,800 Speaker 2: topic at the moment. And then there is real assets 495 00:26:02,800 --> 00:26:07,160 Speaker 2: see infrastructure type funds and assets like renewable energy, renewable 496 00:26:07,160 --> 00:26:12,680 Speaker 2: electricity specifically. Actually really those infrastructure funds doing to a tea. 497 00:26:12,760 --> 00:26:16,480 Speaker 2: So we're seeing these private market funds when we try 498 00:26:16,560 --> 00:26:18,920 Speaker 2: to measure them on the same basis, on the ratio basis, 499 00:26:19,000 --> 00:26:21,480 Speaker 2: most of these asset classes and most of the funds themselves, 500 00:26:21,480 --> 00:26:23,800 Speaker 2: we're seeing a ratio of over one. So there's more 501 00:26:24,040 --> 00:26:26,720 Speaker 2: renewable exposure than there is fossil fuel exposure. And that's 502 00:26:26,720 --> 00:26:31,720 Speaker 2: not just dedicated sustainable funds or renewable energy specific funds, 503 00:26:31,720 --> 00:26:34,040 Speaker 2: although they're present as well, but even the suit called 504 00:26:34,080 --> 00:26:38,879 Speaker 2: core infrastructure, which would traditionally include things like airports or 505 00:26:39,119 --> 00:26:43,040 Speaker 2: water utilities or hospitals anything like that, there's a lot 506 00:26:43,080 --> 00:26:46,520 Speaker 2: of increasing renewable energy exposure to them as well. That's 507 00:26:46,560 --> 00:26:50,080 Speaker 2: because there'sn't really a regular definition of what constitutes infrastructure 508 00:26:50,119 --> 00:26:51,600 Speaker 2: as an asset class, but the kind of rules of 509 00:26:51,640 --> 00:26:54,320 Speaker 2: thumb you would look for are high barriers to entry, 510 00:26:54,359 --> 00:26:59,440 Speaker 2: which means big physical copex intensive assets, and usually a 511 00:26:59,600 --> 00:27:03,159 Speaker 2: risk could turn profile that is characterized by a regular, 512 00:27:03,520 --> 00:27:07,240 Speaker 2: steady stream of cash flow rather than sort of valuation fluctuations, 513 00:27:07,280 --> 00:27:11,480 Speaker 2: so pretty non volatile. So renewable energy typically hits those 514 00:27:11,560 --> 00:27:15,639 Speaker 2: markers because most of the sort of wind farms of 515 00:27:15,680 --> 00:27:18,240 Speaker 2: solar panels that come on at like utility scale will 516 00:27:18,280 --> 00:27:22,080 Speaker 2: be subject to contractual cash lows through things like feed 517 00:27:22,200 --> 00:27:25,800 Speaker 2: entires or PPAs or CfDS if they're their government supported. 518 00:27:25,960 --> 00:27:29,080 Speaker 2: So they've found their way into these portfolios and they 519 00:27:29,359 --> 00:27:32,160 Speaker 2: hit the similar kind of ir R targets that these 520 00:27:32,160 --> 00:27:34,960 Speaker 2: funds are looking for, which is usually just touching the 521 00:27:35,000 --> 00:27:38,640 Speaker 2: ten percent market, and that is seemingly a major source 522 00:27:38,680 --> 00:27:40,960 Speaker 2: of capital for these types of asset. I would caveat 523 00:27:41,000 --> 00:27:43,280 Speaker 2: here though, that these funds that we are tracking, and 524 00:27:43,640 --> 00:27:46,920 Speaker 2: we're looking at maybe a thousand different funds from Bloomberg's 525 00:27:47,200 --> 00:27:49,640 Speaker 2: own database, this is probably the area where we're least 526 00:27:49,680 --> 00:27:52,040 Speaker 2: confident in the data because by the nature of these markets, 527 00:27:52,080 --> 00:27:55,040 Speaker 2: they don't have to disclose the specific holdings that sit 528 00:27:55,200 --> 00:27:58,439 Speaker 2: inside of their portfolios. So if you are listening and 529 00:27:58,440 --> 00:28:00,280 Speaker 2: you're from one of these funds behind you. 530 00:28:00,240 --> 00:28:02,200 Speaker 1: Care about this, Ryan, want's your data? 531 00:28:02,280 --> 00:28:05,600 Speaker 2: Yeah, get in touch. But I think given that even 532 00:28:05,600 --> 00:28:07,680 Speaker 2: with the limited data that we do have, we're still 533 00:28:07,760 --> 00:28:10,720 Speaker 2: relatively confident that the sort of direction of travel is 534 00:28:10,760 --> 00:28:14,240 Speaker 2: one where clean energy can definitely get a foothold. 535 00:28:14,359 --> 00:28:16,280 Speaker 1: I mean we are seeing and this is a separate 536 00:28:16,320 --> 00:28:18,680 Speaker 1: piece of work in a separate podcast, but a focus 537 00:28:18,760 --> 00:28:22,360 Speaker 1: on these new energy producing assets that are in some 538 00:28:22,400 --> 00:28:26,359 Speaker 1: circumstances not connected to the grid, that are addressing data centers. 539 00:28:26,400 --> 00:28:29,360 Speaker 1: These are big projects. So the hyperscalers have a role 540 00:28:29,400 --> 00:28:31,240 Speaker 1: to play in this and we'll see how this actually 541 00:28:31,320 --> 00:28:33,919 Speaker 1: changes your numbers in the years to come. Because we 542 00:28:34,000 --> 00:28:37,600 Speaker 1: have predictions, other people have got predictions, and they do diverge. 543 00:28:37,640 --> 00:28:39,720 Speaker 1: I mean, this is a future that people are not 544 00:28:40,120 --> 00:28:41,239 Speaker 1: really certain of. 545 00:28:41,560 --> 00:28:44,080 Speaker 2: Yeah, what is the phrase? All models are wrong, but 546 00:28:44,160 --> 00:28:46,800 Speaker 2: some are useful. Yeah, we don't know exactly how this 547 00:28:46,840 --> 00:28:48,200 Speaker 2: is going to go. We do know that there are 548 00:28:48,960 --> 00:28:51,920 Speaker 2: large players in that infrastructure space who are working with 549 00:28:51,960 --> 00:28:54,560 Speaker 2: some of the big tech companies in order to start 550 00:28:54,600 --> 00:28:57,960 Speaker 2: investing in low carbon assets that can then connect to 551 00:28:58,040 --> 00:29:00,720 Speaker 2: data centers. And to be honest, even that might even 552 00:29:00,760 --> 00:29:02,920 Speaker 2: just be the most economically sensible thing to do at 553 00:29:02,920 --> 00:29:04,360 Speaker 2: the stage. I think if you do, go and listen 554 00:29:04,400 --> 00:29:07,680 Speaker 2: to the most recent Trumponomics podcast with our own Ethan 555 00:29:07,760 --> 00:29:10,600 Speaker 2: Zindler on it. Everybody is struggling to get connected or 556 00:29:10,720 --> 00:29:13,320 Speaker 2: get a gas turbine to produce electricity. For these there's 557 00:29:13,560 --> 00:29:16,840 Speaker 2: the order books too long, and now in a lot 558 00:29:16,840 --> 00:29:19,400 Speaker 2: of markets around the US, things like solar combined with 559 00:29:19,400 --> 00:29:23,320 Speaker 2: storage are actually cost competitive options that can provide an 560 00:29:23,320 --> 00:29:25,120 Speaker 2: element of dispatchability as well. 561 00:29:24,960 --> 00:29:27,480 Speaker 1: Which creates a different tipping point for some of this. 562 00:29:27,680 --> 00:29:30,240 Speaker 1: So you know your ratios may change for reasons that 563 00:29:30,480 --> 00:29:34,680 Speaker 1: are beyond decarbonization, which then goes back to energy security, 564 00:29:34,760 --> 00:29:35,640 Speaker 1: security of supply. 565 00:29:36,000 --> 00:29:38,720 Speaker 2: Yeah. Yeah, the energy, I mean, the energy trilemma is 566 00:29:39,360 --> 00:29:41,520 Speaker 2: always a core fixture of the way we think about this. 567 00:29:41,680 --> 00:29:45,880 Speaker 2: It's affordability, sustainability and security, and thy low carbon energy 568 00:29:45,920 --> 00:29:49,080 Speaker 2: solutions and particularly renewables are kind of heading all three 569 00:29:49,280 --> 00:29:51,520 Speaker 2: at the same time. I mean, there's not a cabal 570 00:29:51,640 --> 00:29:54,240 Speaker 2: of countries who can switch off the tops of a 571 00:29:54,440 --> 00:29:58,560 Speaker 2: solar panels. We're still seeing solar and batteries in particular 572 00:29:58,840 --> 00:30:01,520 Speaker 2: riding the experience curve. They have experience rights of walk 573 00:30:01,600 --> 00:30:04,600 Speaker 2: around twenty percent or so or between twelve and twenty percent. 574 00:30:04,800 --> 00:30:07,440 Speaker 2: So as they continue to scale, they're going to continue 575 00:30:07,440 --> 00:30:09,840 Speaker 2: to get more and more economically competitive. And then I 576 00:30:09,840 --> 00:30:12,520 Speaker 2: guess the sustainability element doesn't really even need to be 577 00:30:12,520 --> 00:30:16,200 Speaker 2: talked about. And one one is producing carbon emissions at 578 00:30:16,240 --> 00:30:19,200 Speaker 2: the point of use and one one's not, so they're 579 00:30:19,240 --> 00:30:20,400 Speaker 2: hitting the big three. 580 00:30:20,640 --> 00:30:23,560 Speaker 1: Well, Ryan, thank you very much for doing the painstaking 581 00:30:23,640 --> 00:30:27,360 Speaker 1: work of tracking what's actually happening between point A and 582 00:30:27,400 --> 00:30:29,960 Speaker 1: point B, or in some circumstances, between point A and 583 00:30:29,960 --> 00:30:32,600 Speaker 1: point Z and the energy transition, but really what's happening 584 00:30:32,600 --> 00:30:35,640 Speaker 1: in this investment space and what fund managers and investors 585 00:30:35,640 --> 00:30:39,560 Speaker 1: are doing, and how that's then reflected in an overall 586 00:30:39,600 --> 00:30:42,400 Speaker 1: portfolio basis. It's also nice to have a reunion with you, 587 00:30:42,680 --> 00:30:45,360 Speaker 1: so thanks for joining me in the pod studio for 588 00:30:45,520 --> 00:30:47,360 Speaker 1: you know, my first episode in a while. So it's 589 00:30:47,400 --> 00:30:48,200 Speaker 1: been really nice. 590 00:30:48,840 --> 00:30:52,720 Speaker 2: It's it's been wonderful. It's been very nostalgic. Thanks thanks 591 00:30:52,760 --> 00:31:01,280 Speaker 2: for having me, don It's been great. 592 00:31:01,840 --> 00:31:04,960 Speaker 1: Today's episode of Switched On was produced by Cam Gray 593 00:31:05,160 --> 00:31:10,000 Speaker 1: with production assistance from Kamala Shelling. Bloomberg NIF is a 594 00:31:10,040 --> 00:31:13,160 Speaker 1: service provided by Bloomberg Finance LP and its affiliates. This 595 00:31:13,280 --> 00:31:15,959 Speaker 1: recording does not constitute, nor should it be construed, as 596 00:31:16,000 --> 00:31:19,720 Speaker 1: investment a vice, investment recommendations, or a recommendation as to 597 00:31:19,800 --> 00:31:22,640 Speaker 1: an investment or other strategy. Bloomberg anif should not be 598 00:31:22,680 --> 00:31:26,480 Speaker 1: considered as information sufficient upon which to base an investment decision. 599 00:31:26,560 --> 00:31:29,560 Speaker 1: Neither Bloomberg Finance LP nor any of its affiliates makes 600 00:31:29,560 --> 00:31:33,320 Speaker 1: any representation or warranty as to the accuracy or completeness 601 00:31:33,320 --> 00:31:36,320 Speaker 1: of the information contained in this recording, and any liability 602 00:31:36,360 --> 00:31:39,040 Speaker 1: as a result of this recording is expressly disclaimed.