November 24, 2021

ESG Portfolios Series #4 – Transcript

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ESG Portfolios Series

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Fraser Jack
Welcome back, Nathan.

Nathan Fradley
Thank you.

Fraser Jack
Fantastic to have you on this episode, we are talking the changing climate of climate change one of your favorite topics.

Nathan Fradley
Absolutely talked about this all day.

Fraser Jack
You can probably have a good rant about this all day as well.

Nathan Fradley
Yeah, well, yeah. And I think you’ve heard we’ll be on the receiving so many of my rants about the INEC inadequate, or their complete lack of policy at the federal level. And the the handling to the state level where I think, I think in this space we’re seeing in Australia, the people lead everything. So we’ve seen your Harmon but I live next to an environmental engineer, he is ago and he came from Germany to Australia. And he was shocked at how much of the work he was doing was in the private sector, and not the government. Were in Germany government leads most of it. And, you know, it is it’s companies and individuals and the state government as well. The state governments across the country are doing all the heavy lifting. And and the federal government just fly. Hey, look, we’re doing something but don’t actually look what we’re doing flags, which is infuriating. I think for a lot of people, advisors, clients, everyone I speak to I think is frustrated by it. Yeah. Well, look,

Fraser Jack
certainly financial advice is one of those professions that that could have done a lot more earlier. And then when government stepped in, you know, we got handed a whole lot of results that we didn’t want. When it comes to climate change. I think there’s probably the same conversations should be had at Port levels within companies and a lot of companies are moving early or not waiting for legislation.

Nathan Fradley
Yeah, I mean, we’ve just seen Rio and BlueScope, I think it was have signed a memorandum to find lower carbon steel production. So they’re joining forces to reduce their own emissions within bhp divest its oil and gas operations to Woodside. I think that’s at the mining level. But I think individual companies are starting to be really conscious of their own their own emissions. I know super funds, at the institutional level large super funds when talking to external managers, ask them, What are your emissions from your portfolio, it’s a massive topic right now, it’s an easy one to identify. It’s an easy one to manage, I think make value V rest back in 2019. Now, where the 25 year old sued rest superannuation fund for the lack of climate disclosure that drove a lot of this change in institutional level, because it woke people up to this as a material risk. It’s a material risk to members of super funds, who have got 30 year retirement horizons. And therefore, it’s a material risk to financial advisors who are working with clients who have 30 year retirement horizons and need to consider understanding the export implications of their recommendations. So I think it’s it’s a huge area, but it’s also very easily addressed. Because it’s one factor. It’s the climate changes and input output factor. When you start looking at more complicated things of biodiversity, that are these complex systems, it’s so much harder. And so with this, we need to I think we can lead the way I think people are leading the way, you know, the lower emissions products available and super funds are getting huge inflows. Now, the data rate of Reyer is showing that the Responsible Investment Association of Australasia are showing that ethical and responsible funds are growing an alarming rate. And non ethical responsible is actually fell in funds under management over the 2020 timeframe. And this is largely due to demand. I mean, we’ve never had enough the amount of products and choice we have now, two years ago, there was five things now you know that you have to actually properly compare the various ethical products to see which is more targeted to your client, because there are so many options. And that’s being led from consumer demand. And, but these consumers are also management at large organizations. So they’re trying to do things on both sides, which is excellent.

Fraser Jack
You know, and they don’t want to get into this conversation around. So much coming out so many new things coming out. Along with that comes the marketing along with that comes a little bit of greenwashing. What are your thoughts?

Nathan Fradley
I think that it’s rampant. It’s absolutely rampant. So I think what’s what’s key to climate change as an advisor and identifying greenwashing is you want to understand the underlying holdings, you want to understand the suppose benchmarks put in place. So if one fund says we don’t invest in fossil fuels, Asterix, any company that generates more than 25% of their total revenue from fossil fuels, or fossil fuel production, but not servicing companies or those sorts of things. That’s one way to look at it. And that’s, you know, but there’s also something to be said about, we don’t invest in any fossil fuels at all. But fossil fuel companies could be leading the way they could be the transitionary companies because they’re the ones with both the resources, the infrastructure, both human capital and physical capital, and the need to transition into low emissions. So I think engagement and funds engagement is another part of that. It’s a transition or Were out its voting records, did the company or did this fund vote in a holding ExxonMobil? Did they vote against or for alignment to the Paris accord? And what are they doing in that space? Which is which can be tricky to identify as an advisor? Because it’s so it’s so many things to look for. But I think a lot of the greenwashing comes about it, some of the best ethical funds have no ethical marketing at all, and some of the most ethical marketing some of the worst ethical funds. So it there’s a real challenge for us as advisors to be able to see through that. And, and also, we’re just so tired of the word ESG. I think it’s flagged around everywhere, with some really great stuff, but also some very lukewarm things as well.

Fraser Jack
Yeah, you mentioned RIA in that term. You know, they grabbed that you just went through, they talk us through how that something that has helped you and been helping other advisors through these, this greenwashing conversation.

Nathan Fradley
So Ri are a great organization that if you’re not aware of them, you should check out the website, if this is a space you want to start learning about. They’ve got they do annual reports on the market itself. And what’s happening there, they’ve got a screening tool, they look in, you know, they engage with funds to improve, and they hold conferences, they hold educational sessions, they’re a really good place to, to engage and start. They’re also the they manage the certification of ethical advisor. So if you want to push into this space, and and sort of start moving more into, then they’re considering that’s really, really important. And you know, the more membership base, they get the, I suppose the more value they can create. So it’s one of those self fulfilling things. But they do a really, really good job there. And it’s a good place as an advisor, they’ve got an advisor guide, start with their advisor guide and go from there.

Fraser Jack
Yeah, wonderful. Now, let’s go back to government, government can create policy, but as you mentioned, you know, often it’s the the boards of these larger companies, and those companies that are providing investment into those companies that are able to to make real change happen in the lack of government doing so.

Nathan Fradley
Yeah, so we saw earlier this year, there was a case with ExxonMobil, with the four board members, who were all climate change deniers. And in the US, they have a thing called shareholder resolution where basically, you can raise something as an issue and then encourage everyone to vote on it effectively becomes a bit of a campaign. And Tiny fund called engine number one, started this campaign, and ended up getting Blackrock on board to vote alongside them. And that so they overturned management’s decision, and removed four members of the board who are climate change deniers and appointed for us both people who believe in physics to the board. And and it’s helped, it’s going to help the transition of that entity move forward. You know, and we know, a lot of these large, traditionally, fossil fuel and energy based companies are talking about this are engaging and are shifting because they have to. But that’s also done because we are putting the pressure on them. And we had an inquiry earlier this year, the government led an inquiry into why fossil fuel companies can’t get finance, insurance and investment. And, you know, we had fund managers on that inquiry, Robert Nathan Park and from ethical partners were on that inquiry, they spoke at that. So they are seen as experts in this space. And because they are and and I think the investment community of which we subscribe to have so much power to drive this change in the absence of federal government leadership.

Fraser Jack
And the other, the other people involved in driving this change, of course, the advisors, but also the clients from their own personal point of view and being able to make these decisions that we’ve been speaking on the previous episodes. One of the things I want to draw back to because you mentioned it was the the idea of being able to say to your client, you know, your impact has, you’ve taken this many cars off the road, all those sorts of things. Tell us about how that works.

Nathan Fradley
I think when you’re looking at emissions in general, within a reasonable scope, you can say, I think feature super released a study that like 11% of people completely removed fossil fuels from their portfolios in Australia with a percent of super, it would solve our issue with climate change. So I think as individuals, if you’re looking at the things that you can do, you can eat less meat, you can drive your car less, you can turn off your lights, which a lot of the turn off your lights stuff was actually driven by marketing campaigns run by the polluters for years and put the responsibility back on the individual when they have quite a marginal impact. But transportation and to a lesser extent, with trepidation of food really are the two big ones. So you know how you source the power in your home is quite marginal on a small scale. But the next one is how you invest because dollars drive change to a conscious capitalism, we can drive change and that’s if you or someone said to me what The three things I could do to improve my my impact, I’d say before getting rid of all pets, because I love dogs and dogs are probably not the best thing for climate change. It’s saying, you know, eat less meat, drive less where you can, and review your portfolio review, super do something about it go get not just have to remove all fossil fuels, but have a real conscious effort of reducing the carbon emission. So the average the average carbon footprint of the of an index product, like a diversified index products, about 40 million metric tons, it is not difficult to get that down to somewhere between five and 12 million metric tons. So that’s we’re talking about 75% reduction in emissions from your individual money, which is a 75% reduction, we’re aiming to get that to half, you know, and then be carbon neutral by 2050. You know, and half by 2030, every other country, but Australia, we could do 75% through our portfolio alone. And that would push demand because those companies would see a mass divestment, and therefore have to shift the ones that the ones that weren’t coming along. So yeah, I think it’s it’s enormous power.

Fraser Jack
Fantastic. Nathan, thanks for coming on. I love that. I love that saying you just does drive decisions, I think it’s a an incredibly impactful statement. Thank you so much. We look forward to catching you in the next episode where we’re talking about asset classes.

Nathan Fradley
See you then.

Fraser Jack
Thank you for joining us, Karen McLeod.

Karen McLeod
lovely to be here. Thanks, again, for having me,

Fraser Jack
you’re very welcome. We are talking about the environment, in the changing climate of climate change. Tell us about the conversations you’re having with your clients about climate change.

Karen McLeod
I think the main thing that clients are really excited about is that they see like we’re really at this precipice of real transition in, you know how as a planet, we’re working together to really quickly adapt and move together to race towards a net zero. So clients are understanding that technology and innovation has to be part of the solution. And they really wanting to make sure that their portfolios are well set up for that. So we’re talking about sustainability and climate change as a means for innovation. And also, they’re watching closely with all of the innovations that are happening overseas. And we certainly let them know about those and how their portfolio is benefiting. Because it’s we are global investors, after all. And I think that’s the real benefit of connecting with a financial advisor for clients. Because traditionally, you would maybe not go beyond Australia, or if you’re an investor without an advisor. But, you know, there are some wonderful opportunities elsewhere. I’ll just note some milestones that I mean, our clients are benefiting from which have been announced in European Union. So they’ve announced the European climate law has been brought in. So where the EU have announced 55% emissions reduction targets, which are legally binding for member states. So clients within that portfolio, this is a London based portfolio that we’re invested in, I’ve got a holding in the world’s largest manufacturer of wind turbines, which is set to benefit from that. But it’s not just, you know, I suppose renewable energy, it’s also this whole renovation wave. So, you know, the EU has announced that there’ll be a massive overhaul by 2050 of buildings, because they’re massive consumers of power. So looking at improving their environmental performance and cost savings. So holding the clients, having that portfolio is a specialist in efficient buildings and infrastructure design, saving energy and other building materials that are more efficient. And also improving, obviously, safety and durability, all the way through to, you know, more responsible foods and marketing and zero pollution for air, water and soil. So the EU has delivered it a number of noteworthy milestones. So investors are excited that that will, you know, really drive performance going forward and deliver the climate change results we need?

Fraser Jack
Yeah, it seems that the EU is certainly leading the leading the way in this space.

Karen McLeod
Yes, it definitely is. And I think that’s the thing. You know, sometimes clients are a bit despondent or they feel we’re sort of, you know, we are a bit behind the times here. But certainly when you think about their portfolio as an international portfolio, and that’s the way I have always thought about just despite the fact we’re based here, you need to really remember that your clients do have large allocations in their portfolios to international share. So how how are they positioned positively for this future that we’re rapidly transition into?

Fraser Jack
Really like some of the words you’ve been using throughout throughout the series Global Citizen global investors and and what you mentioned the beginning of this the race towards and you said a couple of times the race towards net zero. When you when you say to me the race towards net zero, I think to myself, I want to be, you know, winning that race.

Karen McLeod
Yeah, it’s true. Like, I think the real challenge that advisors will face is actually not is not the question of whether or not to do this for clients, but it’s actually how to deliver the solutions because There are, you know, there are a number of different organizations providing product and certainly the Responsible Investment Association for Australasia is a great tool to go to because they do certify new products that are coming to market. So if advisors want to go and have a look at that, that’s a good place to start. A cohort of advisors that I belong to called the ethical advisors cooperative, we also do a analysis of any fund that that wants to participate, we do a survey, like a research survey, we call that the leaf ratings survey. So advisors are welcome to have a look at that we put that out for consumers, advisors, anyone that wants to have a look. And we talk about all the positive points of the portfolio. So it might be that the portfolio, for example, has great exposure to climate change solutions. The portfolio has great transparency, they list all holdings, the portfolio engages actively, because there will always be problems that will come up from time to time in terms of, you know, maybe its procurement, like how are they procuring the materials that go into the solar panels, for example, are there any human rights concerns, so there’s always going to be an issue, so how transparent are they in their engagement with their suppliers. And then we also talk in that leaf rating section about any areas for concern. And that might be for example, if a manager doesn’t explain how they vote, their proxies, or a manager, for example, has some questionable holdings in the portfolio that would often not align with an average ethical client’s desires to invest ethically. So that will give you a few key things that you can then raise with your with your client and say, here’s what I know about this fund. Is that of interest to you? Or would that not be palatable because of those particular negative points, but it gives you something to talk about.

Fraser Jack
So just on that leaf rating, if you if you go to the ethical advisor Co Op website, you’ll be able to then look at funds and see what the leaf rating

Karen McLeod
yes given to them? Yes, we do. And we have done a number, but there’s many more to still be done. So it won’t be completely comprehensive of the whole marketplace. But it’s certainly a starting point. And the Responsible Investment Association for Australasia also has their own search tool called responsible returns.org, which is freely available for this exact reason for advisors and consumers to use. Yes,

Fraser Jack
yes. Can I say that? So resource advisors or consumers can use or you can use them together?

Karen McLeod
Exactly. Exactly. And there are look, there are many other research houses that are now promoting their wares, I suppose in Australia. So one that’s come to market recently from the States is ethos, sustainable platforms that’s in Western Australia has been around for a few years. There’s also many investment or you know, asset consultants that are now providing portfolios model portfolios in this space, which you could consult with, or independent consultants that specialize in this area. Or, of course, you could look to some of the mainstream research houses like lonsec Sustainalytics, Morningstar, have also got some some research in this regard as well.

Fraser Jack
You mentioned in one of the previous episodes, how even some of our mining companies divesting away from things like coal or fossil fuels or or you know, trying to try to present themselves in a way where they’ve got a greener shade to the writing. Tell us about what does that actually mean? Does that mean that those companies are divesting away those companies, other companies are still running them? So what, what do you say to clients around? How will that company still exists? And

Karen McLeod
I think it’s really that they’ve worked out. It’s not really about who’s running the companies, it’s just that it’s no longer gonna be like, if you if you follow the whole divestment movement from fossil fuels. The point is that to keep to our targets for climate warming to be, you know, one and a half degrees or lower, we know that we need to keep assets such as coal and oil in the ground. So it’s just about preventing the stranded assets issue. So for clients, it’s about protecting their capital from being in a position where those assets are written off. So just talking about divestment from fossil fuels. I think, you know, protecting clients from stranded assets is is a real threat. And that’s why stewardship of their capital is an important concept to remember. The thing with where we’re headed is that a price on carbon and a stronger price on carbon will continue. So the companies that are divesting are really trying to ensure that they remain viable for this new future and the companies that are acquiring the assets. I can’t quite work out why. But there might be there might be obviously some issues with the companies that are acquiring them. But they would probably I would argue have, you know, headwinds rather than tail winds. So that’s a way to explain it to clients is to say, you know, we’re really trying to position the portfolio for those thematics and Akuna provide tailwinds for you. And these are the matters that we see as being positive because we know a price on carbon is coming. And we know we have climate related financial disclosures. And we know that cop 26, you know, there’s been an agreement made, so we just need to make sure that your portfolio is in the best position for this transition.

Fraser Jack
Yeah, it’s interesting terms had been in tailwind. I like the those concepts. And you’re right, the companies that are acquiring those assets. To me, it could only mean short term, short term gain, you know, in sacrificing long term.

Karen McLeod
Yes. And I think the other thing is, when you think about financial performance, there will be a lot of companies transitioning in some shape or form so that that’s a positive thing. So you can also keep your mind open for those clients that are okay with having some fossil fuels exposure. But if the company that is transitioning more quickly than peers, that’s perhaps a good thing. So you might want to retain that holding in the portfolio if you know that. That particular listed company is transitioning quickly compared to peers and has made plans for how they’re going to position their assets for the future.

Fraser Jack
Kevin, thanks so much for being involved in this episode. Love. We look forward to wrapping the series up in the next episode and inviting you along. Wonderful.

Karen McLeod
Thank you, Fraser.

Fraser Jack
Welcome back to the conversation, David.

David Graham
Thank you, Fraser.

Fraser Jack
Now, in this episode, we’re talking about climate change and the changing climate of climate change, which, which has sort of led the way with a lot of this sustainability in within ESG, portfolios. People sort of think about sustainability, they think about climate change. Tell us about how it’s, you know, it’s working with you and your portfolio’s and your clients.

David Graham
It’s an interesting aspect. I mean, it’s all over the place in all the papers, even in US court papers, covering us that moment. So that that’s clearly it’s mainstream. It’s a good hook, I think to get people into the broader conversation about sustainability. It’s very easy with all the publicity out there at the moment to pick a subject like, like coal or, or fossil fuels more generally, and work that back into what is sustainable and what’s not sustainable.

Fraser Jack
Yeah, it’s the absolutely the right, there’s a lot of talk about digging things up from the ground and putting it into the atmosphere. How do you see technology playing a part in this? Obviously, the government have brought out their plans for Net Zero 20 2050. And the technology is playing a big part in that how do you see technology playing a pardon?

David Graham
It feels like a bit of a loaded question. What one thing, one thing about this whole subject, from a client perspective is if people listening get one thing out of this and nothing else, don’t play into the politics of it with your clients. All right, that’s just it’s like politics, religion, all that stuff, leave it alone and move on. Right? So clearly, technology’s got got to play a part. You know, you have your, your tree forest, and those sort of people talking about green hydrogen, and we’ve been talking about carbon sequestration for God knows how long now. But But I think it’s kind of a secondary question. It’s about incentives, and where the money’s moving, and where the investments are going. So which will drive the technology if I was to just say that they talked about cutting out cold in large part of the world by by 2030. So that’s, that’s going to create a necessity to come up with alternatives. So it’ll follow the money, the technology will follow the money, I think, and you know, when when we’re hard pressed, we can do some amazing things can’t wait. But more often than not, we have to be hard pressed before we move.

Fraser Jack
Yep. Yeah. Do you see, we want to talk about politics. How do you see legislation driving this? Or do you think fund managers and investors can drive this? You know, before before the the legislation kicks in and actually, you know, make some make some difference through either influence or only investing in sort of deeper green portfolios?

David Graham
Yeah, I think investors and what companies want generally the people invested in them, the fund manager individuals will continue to drive this. It feels like with only a few exceptions, governments have been dragged along and adjusting, you know, legislation to meet the conditions which are being set by the business world. There’s momentum there that I think governments are generally struggling to catch up with. Now I understand governments have a broad range of interest that they have to look after. And, you know, you can’t go and tell Carmine is going to be out of a job and not have a plan to get them out. But you know, what plan is we know what planning long term planning is about. And I think if you don’t have a plan, you’re going to clearly be dragged along kicking and screaming and have had to endure consequences, which you hadn’t anticipated. So I think as business investors start to drive this more than governments will have to catching up.

Fraser Jack
Yeah, I think you I think you hit the nail on the head when you said, you know, we’re long term planners. And that’s the that’s the role right to keep the conversation about that long term focus. And if the long term use of those fossil fuels aren’t going to be around, then doesn’t make sense to be invested in them. I guess,

David Graham
again, I appreciate that. If you’re your ongoing service agreement goes for three years they did towards the next election. You know, your struggle?

Fraser Jack
Like they had a three ongoing service agreement, it depending on the the timeframe. Fantastic. So what are you seeing in this space? Has there been a change going on with regards to some of the investments in your portfolio in the space? Are they are they moving away? Are they changing? How have you seen the fund managers work?

David Graham
There’s, it varies fund managers, clearly, with the people with the authentic sustainability badges on them. You know, I think that the the money is following the technology more quickly than the ones which are kind of anchored into the old way of doing things. So I think, across that fund, men’s universe, the rubber band has been stretched quite a bit by the people that are taking lead on this and moving into into the newer technologies, or not even necessarily newer technology, but technologies, which are more environmentally friendly, which doesn’t necessarily mean new technology, but existing technology, which which, you know, fulfills a portfolio criteria without having the negatives. So it’s, it’s a very broad church.

Fraser Jack
Yep, exactly. And, you know, you mentioned the word long term planning before, do you think in advisors, role duty responsibility, I don’t know what the right word is, around having these conversations with clients. So you know, about the environment and about the, you know, about their returns and portfolios and how they sit? And I think, as you mentioned before, if they if they’re not, if they’re not sustainable in they’re not sustainable.

David Graham
Yeah, definitely. Now, this can take a couple of directions, you can kind of take that conversation upfront, as we’ve chosen to do, or as the environment changes, you know, taking on that ride with them. So from our perspective, I guess that we want to run this a little bit and make sure clients position before the crowd gets to that there’s a term in technology, we’re talking about the adoption curve. So we don’t want to be first adopters were more want to be in that second tier where, you know, the adoption is picking up. So not only the other other side of the curve when it’s all been priced in already, and you’re kind of playing catch up. So I think, from a returns perspective, and from an outcomes perspective, you might be doing your clients a disservice by not only considering these, these, the practical implications of these changes that are going on.

Fraser Jack
Yeah, in from the previous episode, we talked a little bit about that, you know, what does that mean for the individual client? How is it that we can go around and talk about, you know, you know, your portfolio took this many cars off the road, or that your portfolio made this much difference when it comes to environmental impact?

David Graham
It says this, I think I mentioned in the last episode, that there’s quite some quite in depth reporting, you can get now from fund managers and blend that into a communication for the clients. And going back to the barbecue story, it does give people a little bit of a, an extra incentive, if you like to be going on this journey. But again, I think I’d emphasize that it’s, it’s a nice to have in this field, and you’re doing good for the environment as well. But when the rubber hits the road, I think most clients are still going to say, Well, what what the returns look like and how, how is that affecting my long term outcomes?

Fraser Jack
Yeah, it’s definitely it’s definitely a lot, lots to consider and lots to weigh into that conversation. David, thanks so much for coming on this particular episode and talking to us about it. We look forward to catching the next episode with one of your most whatever your favorite subjects when we’re talking about different asset classes. Okay. Thank you, Michelle and Claudia for joining us again. Hi, Fraser. Hi Fraser. Now we are talking about the changing climate of Climate change, obviously, you know, as it was talked about before, it’s a pretty popular topic at the moment. Oh, it’s it’s massive

Michelle Brisbane
at the moment. We’ve been, we’ve been talking about it, and I don’t want to sound to smoke or anything. But you know, we’ve been talking about it for years, and we’ve been talking about carbon in portfolios and their carbon information. And you know, back in the early days of my previous life, I studied science. And, you know, we did, we did whole things about the greenhouse, the greenhouse story. So, you know, and now there’s, you know, the climate change is just something that’s with us. And I really think, you know, some of those environmental disasters or things that have happened recently, like the fires and the floods, and, you know, it’s all a bit biblical. But climate change is here, and whether or not you’re a climate denier, but a cleaner and greener atmosphere, it can only be good for everybody.

Fraser Jack
Yes, certainly the and why has it taken so long for the scientists to the scientist word to get traction?

Michelle Brisbane
I don’t know. I think that’s, that’s political. And we probably shouldn’t go there on this podcast. But there’s a lot of politics around that. And you know, we live in a country that is still haven’t hasn’t accepted that potentially renewable energy is an option, and that perhaps coal may not be there forever. And it’s a non renewable resource, but it was cheap, providing good energy, but there’s jobs elsewhere.

Fraser Jack
Yep. It certainly did. It was needed at the time, I guess you could say, and so it’s, maybe it’s run its course, there’s a lot of calls for, you know, keep the carbon keep the oil, keep the gas in the ground? Is that the only thing we’re talking about? When we’re talking about environmental, then?

Claudia Mah
No, we, we talk about pollution as well, water waterways. So you know, the results from some of the mining, week mining activities, it touches everything from from the air to the water to the what’s the right word, like, apart from stealing, land grab. So you know, that impacts the communities surrounding communities. So it’s not just it’s not just clean air,

Fraser Jack
it’s really interesting conversations then to be had around, you know, like the, the technology that’s involved in this as well. The some of the announcements recently from the government talked about using technology to filter and take carbon out of the air as it’s being produced and all the way through to, you know, how do we how do we re oxidize? How do we create better air quality, whether that’s through trees, or seaweed, or whatever might be, but tell us about some of this technology that’s coming on, and how you see that as an opportunity?

Michelle Brisbane
Well, we, I mean, the whole new technology, or renewable energy is something that’s very popular with our investors. So we’re always trying to find some sort of investment solution that we can provide in our portfolios. And, and we do, we do have that, but there’s sometimes those technologies take a while to become profitable. So we have to be careful with client’s money to make sure that we’re investing in things that are going to actually deliver something for them. But we’re constantly looking for the technologies that will provide solutions in for a better environmental outcome.

Claudia Mah
We’ve seen we’ve seen quite a few I mean, in the in the renewable space, for example, we’ve seen, you know, not just wind capture and solar. We’ve also, we’ve also seen wave wave energy. But sometimes these technologies, they have to go through a pilot phase, testing phase, and then and then just putting it to the, to the group. Yeah, to the grid. That’s again, another challenge. So there are lots of little interesting, what about bio bio energy as well, you know, using waste, to channel energy, and some of these technologies are actually running in some councils, but it just hasn’t been been able to take off. And there’s a multitude reasons behind that.

Michelle Brisbane
And sometimes, like policy support might be something that’s missing, like governmental policy are very much yeah, yeah. So once the government is pushing for these things, I think that that’s when a lot of a lot more traction will be available. I mean, the government has managed to spend in certain places and if they could spend it in renewables, then I think that would see huge Yeah, huge growth and, and huge acceptance in and development in renewables, because it’s there we have the technology with we’re smart humans, we find out ways to solve problems, and we have the ability just have to have the will,

Claudia Mah
from what I’ve read so far and encountered with investments. It’s all about policy. I mean, we talked about solar. The last few years solar has done better. But if you want back, you know, the Take a look 10 years ago, policy was just not your friend. And as much as there was so much, you know, as much as there’s investor and community support for it, it could not take off because there was not enough support. And, you know, if you want to talk about cost, that, you know, cost was not competitive enough policies, it doesn’t have to be just grants. It just comes down to policy facilitating, and making the infrastructure for these technologies to come through. That’s, that’s really what we need.

Fraser Jack
You mentioned, you did mention councils in that previous grab, and you know, councils and state government, all levels of government, I guess, responsible for that.

Michelle Brisbane
Yes. And, um, you know, if we can, you know, with the amount of rooftop solar that’s out there now, I mean, some small communities in like a small council area, they could run their own little grid, if there was enough support for that, and run their own electricity, and between each other share things when the sun wasn’t shining. And, you know, if we could get to that stage, that’d be amazing. But you know, we also have the power companies who have the power.

Fraser Jack
That’s an interesting way of looking at it. The power dynamic with the power companies, one of the things that probably doesn’t get mentioned a lot in this space, that I’m always thinking in concerned about is the long term like renewable energy, amazing, you know, solar panels, for example, I think we still need minerals out of the ground to create solar panels. But then the recycling of those panels, you know, when their shelf life ends, and you know, 10 years time, for example, or whatever it might be, have you seen any technology in that space of, you know, taking renewables like batteries and solar, and then also renewing the renewable?

Claudia Mah
Yeah, well, there is. There was a recent report that I read that, that recycling, recycling, catering for renewable energy is something that needs to now be looked at and develop very quickly, because we’re not just talking about solar panels, we’re also talking about lithium batteries. And we need a facility that is able to extract that and we knew that we knew those, all those components, we come back to circular economy, we want to promote that as much as possible, very applicable to, to the renewable technology that we were constantly supporting,

Fraser Jack
hopefully, the energy that’s required to renew the renewables. coal power it’s, it’s a, it’s an ever changing thing. So thank you so much for coming on. Talk about climate change. There’s so many different aspects, we could look into this. And I guess, the overarching sort of theme to me is it takes at all levels of business, all levels of government and the desire to make to make it happen. And it looks like we’re on that track. And we

Michelle Brisbane
can all do our little bit for riding bikes, go for walks.

Fraser Jack
Wonderful, thank you so much. We’ll catch you in the next episode when we start talking about the different asset classes. Okay. Thanks, guys. Welcome back. Grover Burthey.

Grover Burthey
Hi, Glad to be back with you, Fraser.

Fraser Jack
Now we’re talking about the climate in the in the changing climate of climate change the environmental aspects of ESG. But the very first part of the conversation, and ESG is around environment. Tell us a little bit about what you’re seeing with the conversations you’re having with, you know, advisors around the environment.

Grover Burthey
Well, this is this is naturally a very fluid topic, and one where we’re spending considerable time allocating considerable resources at PIMCO across our ESG platform. And really being as as front of market and as thoughtful as we can with regards to measuring climate risk, and addressing the issues that the planet faces from a climate perspective. The questions that we are most frequently, either receiving now or proactively asking ourselves are how do you construct strategies, how you measure portfolios, how you measure progress, from a climate perspective, and there’s been increasing over the last certainly over the last few weeks with the cop 26 conference. But really over the course of the entire year to date, and last year, and increasing usage of the phrase Net Zero of the concept of net zero, there are various netzero commitments being made for parts of the market. And that in and of its own right is a phrase that I think some understand what it means others use it as a proxy for environmental progress. Here at Pimco, what we really want to look at is, is not just so simply how much carbon is in a portfolio, but what are we doing what is the portfolio doing to try to make progress in some of these very difficult areas and carbon emissions, carbon intensity are great proxies for that. But it’s also important to identify where, who a carbon, who an environmental climate leader is in a sector sector has a climate leader or laggard. It’s important to acknowledge where a science based target has been made. We heavily encourage The adoption of science based targets and orders of the science based target initiative, it will be increasingly important, as many commitments are made to the measure. If there’s been progress, we don’t expect it to be linear, but there has to be progress made. And then, you know, seeing progress in some of the areas that are hard to abate sectors, that segments, for example, heavy manufacturing, right? Progress in electric vehicles is important. But we’re not going to solve the climate crisis purely by electric vehicles, or light duty transportation, we need to go to some of these very heavy industrial areas and make progress. And so we really believe this is an area where you have to be heavily engaged with a range of different issuers, you have to have models and frameworks in place to to measure progress. And you also have to be mindful of the fact that that areas of the workplace that don’t react can can be a real risk, risk of obsolescence risk of policy and regulators coming against them, risk of their consumers and their own sources of revenue, perhaps moving away as well.

Fraser Jack
It’s very much a work with these businesses in the space. We mentioned earlier on, you know, measurements and writings, and I guess you’re measuring that you’re doing internally is very different to the measurement that the end consumer might see, you know, the end consumer might say, this particular portfolio fund might have a light green rating, or this writing of that writing, where’s your measurements, obviously measuring some pretty intense things within the businesses. Talk to me about that, that writing from a consumer point of view that light green, green type conversations, and how do you? How do you see that sort of, you know, when it comes to consumer conversations?

Grover Burthey
Sure, sure. Well, you know, we, for example, we have our ESG Global Bond Fund, which is one of our flagship ESG products. And I would very much flag it as one where the topic of climate is top priority, and we’re optimizing around around these various considerations. And they’re, you know, we look at carbon intensity with the carbon intensity against a benchmark, we look at carbon intensity versus other comparable funds, whether they’d be at PIMCO or not, and go and are trying to have a degree that’s much more acceptable from from a carbon intensity standpoint. And I think right now, it’s, you know, approximately 25% of the carbon it has of its respective benchmark. But that would be different from a strategy that, for example, says I only want exposure to two companies that are going to have a tremendous impact on on the environment immediately, right, which may be more of your overture calling dark green, or, for example, in Europe, right now, what they’re calling Article Nine under SFDR. Where it’s, it’s, you’re saying that the constituents of a portfolio are almost entirely determined and identified based on the degree of impact, it doesn’t mean that a light green product, or a broader issue product isn’t going to have that impact outcome. But it means that you’re not taking a mandate, and you’re making it solely right narrowly defined by the specific, established criteria you put up front. And so you know, like going darker, I think there can be some sort of connotation that one is better or worse, or that, you know, one is more issue less ESG. The reality is, I think that the way we think about it is, is you know, different different mandates, have different criteria for them. And and it’s about mixing and optimizing what makes sense for a particular need. And also still being very, very intentional about the tools and the utilization of those tools across across the board, just within reason, then within different different degrees of emphasis.

Fraser Jack
In the it very much feels to me like a lot of these big companies, it’s like turning a large ship, it takes takes time. How are you working with those individual companies? And, you know, obviously setting targets and moving towards them and keeping them accountable? Is is their attitude towards change a positive one? Or do you feel like it’s forced, or is it like, is this a proactive thing? Well, it’s it’s,

Grover Burthey
you know, I think, broadly speaking, certainly, there’s been more receptivity on these topics from issuers, right, by with with each passing year. And it’s because first and foremost, that’s reflective of not just, you know, financial markets, but just global population in general, right, there’s more receptivity and acceptance of, of the fact that many of these issues need to be addressed, and that they are creating certain certain underlying problems. Our efforts, as noted, are very, very focused in terms of having some degree of measurability, some degree of commitment and some degree of transparency around it. And I would say that, that generally speaking, those conversations are productive, right. They’re productive, because I think issuers understand why that’s important for an investor, they understand that that we don’t want to have these conversations and then walk away as if the problem has been solved. Now, the other side of it is that there’s they’re oftentimes betting on the sector, not great methodologies or not great tools to actually do that. And so it goes back to my point on And, you know, what our previous conversations on how much you want your capital to try to help be part of the change, right? versus a more exclusionary approach where you’re saying you just don’t want exposure to certain areas at all. There are pros and cons to both. But but the reality is that if there is a risk of being too dogmatic on some of these topics, because if the problems were easy to solve, everyone have solved them already. We do want to we do want to be mindful of the specific challenges that issuers face, what their intent is, and and to the extent that, that they can make real progress, are they trying to do so and they’re trying to do so ambitious manner. But every sector is different, and every country is different? And we’re all from different starting places, and that has to be taken into account.

Fraser Jack
Yep. They mentioned the term Climate Leaders earlier, which I like is, is that something that they’re looking at putting targets in place? That’s, that’s well above say, you know, net, net zero, you know, 2050, for example, that governments are talking about, are they are they looking at like a 10 year timeframe, rather than pushing it out to that far one of the leaders doing?

Grover Burthey
Yeah, exactly. Part Part of it is, is to the extent, I mean, just establishing right at Target science, we started to be specific, anyone can establish a target, it may be something that would have happened organically either way. But adopting one that’s aligned with with, you know, a one and a half or two degree scenario, right, certainly puts one in place to receive that categorization from us. But more importantly than that, it’s about then explaining and giving information about how you’re gonna get there. Right, because even even a topic of science we start getting up itself isn’t necessarily right. And then we were it were the beginning phases of these being heavily adopted, have these strong word of the being more regularly adopted, and over the next five years, and this was a big a big outcome of the cop conference for sovereigns, for governments over the next five years, we really have to shift from making these commitments to measurements and plan and reports and di N and really coming back to measure progress. Because we sort of moved, we were close to moving past the point where we’re commitments are the most important, we’re going to continue to encourage and engage and expect commitments, in with certain targets. But we really are moving to a point where with the time that we have, there has to be progress against these goals.

Fraser Jack
Yep. When When I hear the word one and a half or two degree, of course, but living in Australia, we think of the Celsius metric. And of course, your Fahrenheit metric. I did. I did think about that, when, when the conference was on talking about 112 degree, just trying to get the globe on the same page, when it comes to the the terminology, you’re going over there. When it comes to individuals thinking one and a half two degrees, do they automatically get a Fahrenheit?

Grover Burthey
You know, there there there certainly colleagues we have here at Pimco, who who very much believe that that the whole world, right, this is not a conversation about you know, Fahrenheit versus Celsius broadly. But when it comes to climate, the whole world should move to Fahrenheit because a bigger number hopefully sets off alarms. You know, most of this point know that water that we use, so it says one and a half, they don’t mean Fahrenheit. But I must say I candidly, I’m not sure what the exact the exact conversion is for that, but I’m sure it would make it quite hot in certain places here in the southern US.

Fraser Jack
Yeah, fair enough. And and what are some of the great initiatives you’re seeing from companies in climate change at the moment? Sure.

Grover Burthey
Well, the, you know, beyond the ScienceBase, targets, one, one main commitment that that many are making, which, which, you know, I think we want to see continued adoption of generally speaking, but it’s actually giving information about where we’re capital will be will be invested or capex. So, you know, it’s a follow on to the point on on implementation execution. But okay, you know, this has happened by some of the automakers recently, that they’re, they’re not only making these commitments in terms of, okay, where they want to go, but all right, how much r&d is going to be now attributed to, for example, the electric vehicle space and similar similar concepts in other areas? All right, your utility and you’re saying that you’re moving to cleaner sources of energy will How much do you expect to be from from solar and wind over the next five or 10 years? You know, when exactly do you plan on reducing strain capacity and some of the more carbon intense parts of your business place, and, and giving, giving, really giving the market the ability to, to then judge how that publisher that is, against past capex trends against against, you know, the overall balance sheet and being able to make an assessment about you know, is there some urgency right, or is it something that that ego is really more back at it in terms of the process that that’s coming on board? The other topic that that’s important here, you know, just pure climate, and some very specific carbon topics get a lot of a lot of the airtime. But but it’s critically important that many of these strategies are comprehensive. We make a suitable time this year for exams. On the topic of deforestation, that’s not delinked from carbon emissions, right, we need more forestry just to absorb carbon. But you know, it’s not cleanly in line with some of the more common topics that have been discussed. The subject matter with regards to utilities, oil and gas for the last several years, that areas, for example, in the food space and the agriculture space, various areas, when this this comes some degree to policymakers to, you know, are they protecting some of our natural resources, being able to facilitate more use of nature based solutions, and then that that will extend itself to other areas such as biodiversity, such as ocean security, water, water intensity and water usage. Many other areas that like I said, are still still have direct implications with regards to carbon and carbon emissions, but but are also also taking a blend of other environmental related issues as well.

Fraser Jack
Yeah, absolutely. Couldn’t agree more that biodiversity and deforestation and understanding that how the whole ecosystem works, not just about the carbon piece. Now, technology was obviously a big part of the solution for this. How are you seeing technology and in the space being, you know, the Savior or or the next part of where we go into from here?

Grover Burthey
Well, it’s, it’s, it’s sort of the gift in the curse of many, if you look at many different pathways and the research pieces that have been put out by various market groups, right, there’s there is an expectation and necessity for for certain new technologies or new new alternatives to come on board, whether that be green hydrogen, whether that be a variety of other other tools, whether it be electric vehicles, not just in the, in the individual car, digital auto space, or not even heavy trucks, necessarily, when you’re talking about electric vehicles coming to locomotives, to shipping industries to decarbonize sustainable aviation fuel for aviation, aircraft, there’s so many things that need to happen. And and for some of those, okay, the technology Maybe is there, but it hasn’t become cost efficient yet or cost competitive yet. For others, the technology is there, but it’s hard to scale it, it’s hard to, it’s hard to you know, sort of have it at the level where it can it can apply to major parts of the economy. And there just has to be progress there. And so we certainly want to invest. This goes back to our you know, our our climate leader conversation. We certainly want to be invested in parts of the marketplace, where they’re they’re making progress in these areas, because they’re huge revenue opportunities, huge business opportunities for those that that will be great for PIM COEs, ESG and non ESG portfolios. But the other side of all this is is, you know, this is the private sector has to come through because without progress in these areas, it’s going to be very difficult, if not impossible to achieve some of these Net Zero related objectives that that, you know, from a macro perspective that the industry and the public sector are increasingly promoting, you really do need areas of the economy to be able to shift or it’s just not it’s just not actually possible today is not in a cost efficient manner.

Fraser Jack
Brilliant. Thank you, Grover, for being part of this session. We look forward to catching you in the next time when we start looking at different asset classes.

Grover Burthey
Excellent, look forward to it, enjoyed it as usual.

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