Strategy Insight Climate Investing Roundtable 2Q2019

Collaboration Capital is pleased to publish excerpts of our recently held Climate Investing Roundtable for our Strategy Insight publication. Considering the ever-increasing interest that investors are displaying in allocating their investable assets towards environmental or sustainable solutions, we initiated a roundtable discussion to focus on addressing climate change through public equities. We invited a collection of distinguished investment professionals, each with a long history of working in the space to provide perspectives on the why and how of public equity investments that are sensitive to addressing climate change.

Moderator:George Rooney, CFA, Collaboration Capital

Roundtable guests:Lauren Compere: Boston Common Asset ManagementBill Page: Essex Investment ManagementTed Roosevelt: Redwood Grove Capital Mary Ellen Zellerbach: Martin Investment Management

MODERATOR: Many individuals understand that addressing climate change has more to do with their own personal carbon footprint than their investment decisions. Why would one consider climate change when investing in their public equity portfolio?

BILL There has been a lot of work done over the last 10 to 15 years in ESG circles around the integration and importance of climate change from a risk perspective, which is very noble work that has been well regarded. I've been trying to shift the focus more on the opportunity, which I believe is immense for addressing climate change. Just yesterday the CDP released a report in which 215 of the 500 largest global companies have identified approximately $1 trillion of risk around climate to their businesses. This is basically on the income statements of these businesses, but more importantly, 225 of the 500 companies claim twice that, $2.1 trillion, for the opportunity associated with low carbon products and services. (See chart below).

For further informationplease contact Annelise Bovetabovet@collaboration.capital

Many investors tend to think about clean tech being private equity based, but you can have just as great an impact with less technology risk and more liquidity, more transparency, and regular reporting in the listed equity markets. Importantly, this is a dynamic mega trend and it's coupled with other secular trends like urbanization and the rise of the middle-class consumer. We can't expect success, or even significant progress, without resource efficiency.

LAUREN One of the things we've also been watching very carefully is that central banks’ supervisors and regulators are considering requiring mandatory climate disclosure through the Task Force for Climate-related Financial Disclosures (TCFD). In addition, they are looking at supporting climate stress testing in the financial system. There is now mandatory disclosure for investment managers in France, for example. They must disclose both how they are assessing their risks and how they are managing them. The Dutch banks are also required to disclose how they're assessing and mitigating climate change. (Insert below).

TED I think a common misconception around climate investing is that it's a values-based investing, that you're in effect bringing your own ethos to the investment model as opposed to making a serious scientific or a serious investment analysis, when you

The FSB Task Force on Climate-related Financial Disclosures will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.

The Task Force will consider the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures across industries.

The work and recommendations of the Task Force will help companies understand what financial markets want from disclosure in order to measure and respond to climate change risks, and encourage firms to align their disclosures with investors’ needs. Source: Financial Stability Board Task Force on Climate-related Financial Disclosure

Source: Carbon Disclosure Project

incorporate climate into the decision making process. I think the other major misconception is what Bill mentioned - the mega trend. Climate is a mega trend. I think many people might agree with that but regard it as more of an 80-year mega trend than a consideration relevant to their portfolio today. That is a misconception. The era of climate investing has already started, whether you're thinking about it or not, and that mega trend has started and is likely to accelerate as we move forward.

MODERATORI believe the 2018 SIF report has identified that over $3 trillion dollars is managed with a primary criteria of climate change, which is double that of two years ago (see below). I agree with you that it's no longer a question as to whether investors are considering these things. This serious game is well into the later innings.

MODERATOR Mary Ellen, you have been running a portfolio for more than 10 years with a fossil-free approach, and you've been witness to a nascent fossil-free investing style developing into what seems to be more common today. I'm sure your experience reveals why investors should think about climate change today. Can you tell us a little bit about what has changed since once you first started with your fossil-free approach?

MARY ELLENOne of the things that has changed dramatically is the cost structure. We are focused on the best companies, and the best managed companies use renewables. This not only makes PR sense, it makes economic sense; and the economics are driving our companies to be among the most efficient and profitable.

BILL When you approach it thematically, bringing in agriculture, water, power technology, efficient transport, renewables, clean tech efficiency, smart materials, you get an approach that is predicated on solutions. And with solutions, it's long-tailed and when you get long-tails you have massive opportunity. These technologies are happening now. They're being invested in because the companies that are buying it are creating safer, cleaner, and more productive communities.

TED Because the companies are a lot larger in the public equity space typically than in the private equity space, it's often harder to kind of get a pure play on any of those individual themes, especially in the technology space. And what I think presents a lot of very interesting opportunities right now is that there are numerous larger conglomerates that have quite a bit of exposure to new technologies. For example, everybody knows about Tesla, but Panasonic is the one that's producing their batteries and they're the ones that have reduced the cost of battery technology to $150 a kilowatt hour, and that's become a meaningful part of their overall business. Same for General Motors and Cruise. They have a very attractive automated vehicle business embedded in an old school auto manufacturing company, yet they are seen by the market as a traditional auto producer or auto manufacturer.

BILL LED lighting theory was invented 250 years ago. These are technologies that have been around for many years. The cost per kilowatt hour of a solar panel when we went to the moon with the Apollo 1 Program was over 1200 times more expensive than it is today. In the last decade, solar power has declined from four dollars per watt, on average 10 years ago, to a current price of under a dollar per watt for utility scale solar. Battery costs have come down dramatically in the last 20 years. Consequently, solar power is a good investment because it's fungible, disruptive, and flexible. You don't expose yourself to commodity price, pressure, and risk. It makes sense.

Source: Sunrun, 5/19

TED In 2010, Google led the charge into finding ways to enable corporate purchasers to enter into what are called PPAs or purchase power agreements. The purpose was to add renewable energy to the grid to supply their businesses with fossil-free fuel electricity. They worked with Amory Lovins at Rocky Mountain Institute to develop a plan to approach different regulated utilities and open up the grid for different businesses. A large consumer of electricity could fund the development of a utility scale renewable energy project. This is one of the ways that the public equity markets are driving change, but it may not be immediately obvious to most investors because of its complexity.

MODERATOR Lauren, how do you engage with companies to improve their practices?

LAUREN We are looking at an integrated approach to managing energy, water, and waste. An example is our examining global commitments to reduce plastic waste. We have encouraged numerous companies to commit to reduce plastic waste by 2025. About a dozen of our companies have signed on to that commitment.

When we consider engaging a company on these issues, I think first and foremost, we look at the governance of sustainability. We are looking at the governance structure in terms of the way in which a company is managing their board level oversight and how high up is the reporting. Who's responsible ultimately for setting targets and goals? How are they disclosing it? A big part of our engagement focus has been around goal setting.

We've done a lot of engagements; for example, we asked companies like Home Depot and Lowe's to set targets on reducing GHG admissions and have had some success there. We have examined how a company might be assessing their global water footprint and setting reduction targets, not only for their own operations but for their suppliers. I could give you 50 stories, within the last two years of companies we've touched on a variety of issues. The critical, recurring issues include governance, accountability, and transparency. Also crucial is the notion of metrics and targets and how those metrics and targets are managed within the company.

MODERATOR I would say most managers and advisors are driven by the demands of their client base. What are the institutions looking at and where do you see changes in that space?

MARY ELLEN You can look at institutions from a few different levels; one is the public fund level, and fortunately I'm in the back yard of CalSTRS and CalPERS which are integrating climate change into their entire investment policy and overall corporate management process. If you look across the country at other public funds, there is still a concern about what they might be giving up; unfortunately, there's too much unnecessary concern about it. Apparently, the performance concessions debate is still very much alive and well in the public fund world. Among endowments and foundations, it is a little different. I mentioned the Harvard students earlier and the way student bodies have effectively addressed the issues of climate change. They're very restive and unapologetic;

often they're not polite about it. A better approach might be "These are the facts from a clear investment portfolio point of view” and they would have much more success. Suggesting or demanding that a university get rid of fossil fuel investments without discussing the economics behind it is often short sighted since the trustees look at their fiduciary responsibility and at their funders. Some of their funders are quite concerned about negatively impacting return by paying attention to the climate. Irony and frustration arise because giving up returns is not necessarily a correct assumption. Endowments could do far better by having a more rational conversation among all stakeholders of the institution.

BILL I call it moving the needle.

We were honored to have such a collection of thoughtful and talented investment professionals. We hope that you find the conversation as informative and insightful as we did. A complete transcript and a collection of video excerpts of the Roundtable can soon be found on the Collaboration Capital website.

George W. Rooney, CFAChief Investment OfficerCollaboration Capital

APPENDIX

Lauren Compere heads Boston Common's shareholder engagement program. She has worked in the responsible investment industry for almost 30 years and has 18 years of experience in global responsible investing.  She is a frequent speaker at industry conferences in the US, Europe, and Asia and a guest contributor to the Huffington Post. Ms. Compere sits on the Governing Board of the Interfaith Center on Corporate Responsibility (ICCR) and previously served as Treasurer. She also serves on the Business Ethics and Systemic Risk Committee for the International Corporate Governance Network (ICGN).  Additionally, she sits on the board of Access to Nutrition Foundation and serves as the Chair of the Audit Committee.  Ms. Compere was Co-Chair of the Emerging Markets Disclosure Project (EMDP) and co-lead for the EMDP Korean team (2009-2012).  She received an Master of Science degree from Southern New Hampshire University, and a Batchelor of Arts degree from the University of Vermont.

Bill Page is a Portfolio Manager on the Global Environmental Opportunities Strategy (GEOS). Mr. Page directs environmental investment policy and research for Essex, and is on the Investment and Proxy Voting Committees. Prior to joining Essex in 2009, he spent eleven years at State Street Global Advisors (SSgA), most recently as Lead Portfolio Manager for GEOS and Head of the Environmental, Social and Governance(ESG) investment team. Mr. Page developed GEOS over a four year period at SSgA, and was a member of the Global Fundamental Strategies group. Prior to SSgA, Mr. Page worked in product management for Wellington Management Company, LLC. Before Wellington, he worked for Fidelity Investments in asset allocation. Mr. Page has lectured extensively on environmental investing at global investment conferences and academic institutions. During business school, Mr. Page worked on socially responsible investment research at KLD Research & Analytics. Mr. Page is a founding board member of the Energy + Environment Foundation, focusing on strengthening energy and environmental education and promoting renewable energy. Mr. Page is also on the Advisory Board of the Journal of Environmental Investment, a peer-reviewed, open-access journal that publishes original research at the intersection of the environment and investing. He earned a Bachelors degree in Economics from Boston University and an MBA from the F.W. Olin School of Business at Babson College.

Ted Roosevelt is the Founding Partner of Redwood Grove Capital. Prior to Redwood Grove Capital, Ted Roosevelt served as a Managing Director at GoldenTree Asset Management, a $24 billion hedge fund specializing in high yield, distressed and structured credit investments. From 2001, Mr. Roosevelt worked as a Senior Vice President in Lehman Brothers’ and Barclays Capital’s Distressed Research and Leverage Finance Groups. He is the Vice Chair of the board of directors of EcoAmerica, and served on the board of directors of the New York League of Conservation Voters. Mr. Roosevelt received a bachelor of arts in political science from Princeton University and a Masters in Business Management from the Stanford Graduate School of Business.

Mary Ellen Zellerbach joined Martin Investment Management, LLC in 2003 as a Managing Director. Ms. Zellerbach graduated from Wellesley College with an A.B. in Economics and received her MBA in 1976 from the Graduate School of Business at Stanford University. With over 25 years in the investment management industry, Ms. Zellerbach’s experience includes being a founding principal of Mellon Capital Management.

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