Sustainable and Impact Investing: Net Zero - How investors can evaluate pledges and support low carbon.

Net Zero: How investors can evaluate pledges and support low carbon.

Gus Grefthen: 
Hello everyone and thank you so much for joining us today. This marks our fifth collaborative sustainable investing webinar with Saturna Capital, Green Century Funds, and Impax Asset Management. Our first collaborative efforts began several years before COVID as in-person symposiums, with the spirit of gathering our peers in the advisory community to progress the sustainable impact investing segment of our industry, share the unique expertise of each of our firms and to help advisors have more meaningful conversations with their clients. The sustainable and impacting space continues to grow and change, and we’re really excited to organize these discussions quarterly to share new developments in the market, as they come. Before we move on to today’s discussion around net zero, we’d like to do a quick round of introductions of the participating firms and panelists who joined us. For those of you who may not have met me before or heard of Saturna Capital, my name is Gus Grefthen. I’m a part of the Business Development and Advisor Relations team here at Saturna Capital. The panelist joining us today from Saturna is Patrick Drum. Patrick currently serves as portfolio manager at Saturna’s Global Sustainable Bond Fund and Amana Participation Fund. Prior to Saturna he led ESG research and was director of fixed income portfolio management at UBS Consulting, which specialized in investment management for global conservation and national wildlife park endowments. Additionally, he was former Adjunct Professor of Finance for the Sustainable MBA program at MBA Graduate Institute and has also served as former chair of the United Nations Principles for Responsible Investment Fixed Income Outreach Subcommittee. He is a current member of the UN PRI Advisory Committee, whose work is meant to elevate important ESG considerations and best practices among issuers and investors. As for Saturna Capital, we are rooted in values-based investing with a global lens. Since its origination 30 years ago, we’ve deepened our commitment to environmental, social and governance considerations with the goal of creating long term value for our clients. We view the integration of ESG factors as critical components in providing a holistic assessment of an issuer’s credit worthiness and future value to investors. We see ESG considerations as a multidimensional frame. They help us determine what factors may inhibit an issuer’s ability to meet its obligations to bondholders and stockholders, and to assess how management is approaching material risks while addressing broad stakeholder relationships. The integration of material ESG factors not only helps us to identify veiled risks, but also to opportunistically identify issuers that are better positioned than their peers. This enables us to choose the best investments that not only diversify the portfolio, but also have an impact in areas of the world that truly need it. With that, I’ll pass it over to Erin Gray with Green Century.

Erin Gray: 
Great. Thanks so much, Gus, and thank you all for joining us here today. We really appreciate you taking the time to be with us. I’m Erin Gray with Green Century Funds and we are the first family of environmentally responsible and fossil fuel free mutual funds in the country. And our mission is to provide positive environmental impact to investors. And we do that through a three part strategy. First is by offering our sustainable investment portfolios through our three mutual funds. Second is through our shareholder advocacy program. And this is where we work with companies to improve their environmental performance. And third is our unique ownership structure. We were founded by environmental and public health nonprofit advocacy organizations over 30 years ago, and I’m really excited to be joined by my colleague Andrea Ranger. Andrea is a shareholder advocate in our Boston office. She’s a member of our four person shareholder advocacy team. Last season, this team engaged over 60 companies, filed 32 shareholder resolutions, and earned 20 policy changes, which provides a significant amount of positive impact for our investors. They’re on pace for mid-season for shareholder advocacy this year, and we are on pace, to keep a similar breakneck speed. So really excited to see how this season plays out. At Green Century, Andrea works on a variety of issues, including reducing carbon emissions, responsible sourcing for companies, supply chains and greening insurance companies. Really appreciate you joining us here today, Andrea, during the height of shareholder advocacy season, and we’re looking forward to the conversation about net zero today. And with that, I’ll turn it over to Emily.

Emily Lee: 
Thanks Erin. Hi, everyone. Thanks again for joining. I’m Emily Lee. I’m based in California as a business development representative for Impax Asset Management. I’ve had the pleasure of probably working with a lot of you on the phone. So thanks for your continued support and for your time today. Impax is a specialist asset manager focused on the opportunities arising from the transition to a more sustainable global economy. At Impax, we truly believe that capital markets will be profoundly shaped by global sustainability challenges. Think climate change, pollution and essential investments needed in human capital, infrastructure and resource efficiency. These trends will drive growth for well positioned companies, while also creating risks for those unwilling or unable to adapt. At Impax we aim to invest in companies that are well positioned to benefit from this shift to a more sustainable global economy. With over 25 years investment experience, over 80 sustainably focused investment professionals working globally, Impax represents one of the largest, most experienced teams dedicated to sustainable investing. In addition, Impax seeks positive social and environmental impact through our shareholder engagement and public policy works. We offer a diversified array of investment options from equity, fixed income and thematic portfolios, as well as a wealth of sustainable investing focused thought leadership, which you can find on our website at impaxam.com. I’m really excited today that joining this conversation, we have my Impax colleague David Loehwing. David serves as head of sustainability and stewardship out of our New Hampshire office for Impax. In his role, he oversees Impax’s sustainability and ESG research, as well as our firm wide engagement work. He’s worked in the sustainable investing space since 1998, and he’s been at Impax since 2007. So really excited to have him on. So thanks for joining us, David. I think we’ll kick off the conversation with that so that we can have kind of a conversation about net zero between the three main speakers, Patrick, David and Andrea. So I think, David, we’ll start with you. Net zero. Right. It’s a term we’re seeing we’re hearing about our advisors on the line here are hearing about it, as are their clients. Given your role, at Impax and your experience working with net zero, what does it mean in terms of how Impax evaluates companies and why do we think it’s so important to look at?

David Loehwing: 
Sure. Thanks, Emily. Net zero, yes, incredibly important, but maybe we should just take a quick step back to understand the background about why net zero is important. The Paris Agreement from 2015 really outlined what we need to get to get to a place where we can limit global warming to 1.5°C and really avoid the most catastrophic aspects of climate change. So to do that we really need to get to a place where we’re not emitting any net carbon into the atmosphere. That’s absolutely essential for us to limit that, that warming to 1.5 degrees. But the trick is we can’t put that off until 2049. This is not a term paper. We have to really reduce emissions fast. We have to reduce them now. And to do that, we need to cut our emissions by roughly half by 2030 and then get to, over the following 20 years, get that down to to net zero. And one of the reasons that’s particularly challenging or really important is because of how long greenhouse gas emissions stick around in the atmosphere. Carbon dioxide persists in the atmosphere for up to 100 years. So anything that we put in the atmosphere today in 2024 will be around in 2124. And the other piece to be mindful of is that carbon dioxide is not the only greenhouse gas. Methane, for example, persists in the atmosphere for much less time than carbon dioxide. But according to the EPA, it’s 28 times more powerful than carbon dioxide at trapping heat in the atmosphere. So what does this mean? With the idea of net zero, what does that mean for companies? Most essentially, it means that emissions need to fall. There needs to be a focus on energy efficiency. There needs to be a focus on switching from fossil fuel based energy to renewable energy. And it also means that as we get closer and closer to 2050, that there needs to be some technological advances that enable carbon to actually be removed from the atmosphere, as there will be some sector, that at the moment are considered hard to abate or perhaps expensive to abate at the moment because of their unique greenhouse gas emissions profiles. So net zero is essentially that. It’s getting from where we are, the emissions that we have today, transforming what companies do and how they do it so they can reduce their carbon emissions to a point where the small bit that’s remaining, if there is any remaining, can be offset by technological advances to remove carbon from the atmosphere. And one of the phrases that’s often used in tandem or often associated with net zero is science based targets. And that’s really about looking at what some of the sector specific pathways need to be to get to net zero. As you might imagine, what getting to net zero looks like for an electric utility, it’s probably very different than what it looks like for an application software company. And so there was an organization created called the Science Based Targets Initiative. And that organization was really formed around the idea of designing specific criteria, universally understood criteria, for getting to net zero. So taking into account some of the scientific needs to cut emissions very quickly but also an organization that can help align the latest and most up to date climate science for setting, verifying and validating company targets is actually producing meaningful reductions that are going to help us get to net zero. So that’s really the background that we’re talking about here and the work that we’re doing at Impax and the work that other investors that are focused on this issue of climate change is really about is identifying which of the companies that have a role in that. What are they doing to reduce their own emissions? So the emissions from their operations, and we’ll talk a little bit about scope one, scope two, and then also scope three greenhouse gas emissions, I’m sure as we go along. So it’s really thinking about what companies are doing in that sense, but it’s also thinking about what types of products and services those companies offer. What can they do in terms of helping their clients, their customers, get to a place where they also are able to reduce their emissions to be in alignment with that net zero goal by 2050?

Emily Lee: 
Really great, great background, David. And I think, you know, as you were mentioning, right, there’s different, different attributes of different sectors in the economy you’re going to have. How could you share maybe what’s an example of a company that that Impax has really identified as being kind of a leader when it comes to net zero and how maybe is that going to change over time in terms of how we kind of define a leader when it comes to this important issue?

David Loehwing: 
Great question. I think in terms of the characteristics of what do those leader companies look like, there’s actually a roadmap that’s been created and that roadmap is, is really, the recommendations of the Taskforce for Climate Related Financial Disclosures, or TCFD. And the four main components of the TCFD are what are companies doing in terms of governance? Who at the organization is responsible for thinking about and responsible for implementing strategies related to climate change and emissions reductions? What is the company strategy? What is the company’s risk management approach to climate change? And then lastly, what are the metrics and targets, that the company can offer to show us, that it is, in fact, managing these issues well and setting goals and targets that are aligned with that net zero objective? And so some of the companies that we see as being very advanced in this regard are those that have management incentives that are aligned with emissions reductions. Strategies such as evidence of investments to reduce greenhouse gas emissions or transform their business to be more aligned with net zero. When thinking about the risk management aspect of things, it’s about evaluation of physical climate risks on company operations, and also scenario analysis, thinking about carbon pricing and how that’s used for internal decision making. Then the last part, those metrics and targets. It’s about companies that are really providing very detailed reporting on their scope one and scope two emissions. So scope one emissions are emissions directly from your company operations, burning diesel fuel in company trucks or coal fired electricity power plants within the company’s operations. But it also means scope two emissions, which are the emissions that come from electricity used to power operations. And then lastly, scope three, which is the impact downstream of your products and services, and then the impacts upstream, the carbon embedded in the materials used to make your company’s products. So we find that the companies that are really leaders on this are providing that detailed reporting, they’re engaging with their supply chain to understand and also help reduce those emissions throughout their supply chain and those that are making progress against the goals that they’re setting.

Emily Lee: 
Thank you for defining those scopes. I want to bring in Andrea. But maybe I’ll ask you another question, David, just quickly, if it’s fair to ask, you know, given the metrics you just lined out, are you seeing, you know, a positive sort of progress in those attributes among companies we’re looking at? Good trends in terms of adoption, or...

David Loehwing: 
We are. Some of the engagement that we do with companies, partly just to engage regularly with them to understand how management teams are thinking about these issues. So I was mentioning earlier the Science Based Targets Initiative, you know, part of the work of that organization is to keep on top of the latest climate change models. And there’s a similar thing happening with companies, how they approach these issues, continues to evolve. So one company that we invest in, Aptiv, makes a lot of drivetrain products for electric vehicles. We see that that company is certifying more and more of its sights to higher and higher environmental standards. They’ve also set goals for reducing their scope one and scope two emissions and those targets have been certified by the SBTi. So really, indication that companies are taking this very seriously. We’re seeing more and more companies go to external verification, like the SBTi, partly because they need to know that their plans have rigor. Increasingly those goals are becoming more and more rigorous. But also that external verification is, we take it as a sign of confidence that we can be sure that the company’s goals really are meaningful and that their plans for getting there are also very robust.

Emily Lee: 
Thank you. Yeah. Andrea, let’s pull you in. And I know, at Green Century, you’re also talking about what you referred to as climate transition plans. Can you just kind of talk about how what that means? Why you find it valuable from an investor perspective and maybe how that aligns with, with some of the points David’s already shared?

Andrea Ranger: 
Absolutely. And, thank you, Emily. And it very much does dovetail with what David just said, talked about like having the governance in place, risk assessment, robust risk assessment, target setting. A climate transition plan, like, is really I use the same analogy as a roadmap. So for a company that has goals and what we want them to have as net zero goals, particularly science based net zero goals, it’s the forward looking action plan that we’re looking for to describe how are you going to get from A to B? So and I think that’s a really important point that a lot of things that we see when we’re dealing with companies are basically disclosures. So sustainability plans this is what we just did. This is what we’ve done in the past but not necessarily the roadmap that’s forward looking. And so some really important things. Of course you have to have robust governance in place. You have to have robust risk assessment in place. But those are sort of the two bookends. But in between those you want to look at a couple of really things that I think are critical. At least three, right, are near-term action time frames. So what is your plan of action for the short term of 3 to 5 years and for the medium term 5 to 8 years? This is really important, because for companies that have say, their goal is, you know, X amount of emissions reductions by 2050, it’s, you know, a few years still between now and 2050. So you need to know that they actually have something that they’re doing right now and not delaying taking those initial first steps. Another important piece—capital allocation. So in your plan tell us whether your capital allocation is aligned with your decarbonization goals. Is it the right amount of money and in the right places? How will you know? So what are the, what’s the framework you’re putting in place there for methodology for assessment. And then another critical aspect is tell us the unknowns. And I think that companies are reticent to talk about like challenges they might have, barriers, but that’s exactly what investors need to know in a climate transition plan is like, it’s not all going to be roses. You need to provide a narrative on the assumptions, uncertainties and challenges. That way, we’ll know that if something you run a barrier in the future, you were anticipating that. So it’s not a surprise to those of us who are like, why didn’t you make your goal? Why didn’t you make your target? So I will say briefly, we’ve been working with the semiconductor industry on climate transition plans, which I’m not sure whether it’s the industry itself, but it’s been a pretty successful engagement. So we’ve worked with six semiconductor companies and one semiconductor equipment manufacturer. And I’d say out of these, ON Semiconductor company and Intel really have provided the most robust plans. Onsemi still plans to, Intel just released their first inaugural plan in the fall. So we’re hoping to expand to other industry sectors, too. Actually we have a little bit. But it’s not all public yet. So.

Emily Lee: 
That’s really helpful, Andrea. Thank you for kind of explaining what that climate transition plan is and as you were just kind of getting into talking about the semi space is there, maybe another example you can walk us through from more of an engagement perspective, how you begin to get a company, just start on this process of a climate transition plan? And do you all at Green Century sort of see that as a future focus of your engagement work?

Andrea Ranger: 
It’s a natural extension of our engagement work in the last few years, as everyone’s come to learn that we really do need science based targets, and we really need to act now. And then so the climate transition plan is sort of like what I see is like an insurance plan for your targets. And I say that because there have been recent high profile removals from the Science Based Targets Initiative list of the dashboard of committed companies and companies have set targets and one of those has been Amazon. And it has a really high profile. And you know, I can pontificate on why I think Amazon did it or not did it. But sure, we can guess what. And there are a bunch of others too. Even Microsoft got removed from its net zero target removed, and it doesn’t mean they aren’t going to do it. It just means like they’re hiccups along the way, right? So I would say, when companies are putting together their thought process just like they would with a business plan, because it is kind of a business plan, they’re thinking through all the ways that they…all the things they need to put in place to make this plan work to get to their target. So I think it helps, at least us as investors understand the extent of the companies have really been thinking through what they need to do, studied it, forecast, modeled, and the companies that aren’t producing these types of things publicly, the transition plans, I would have less confidence. I’d actually have, you know, have put in all of that I just mentioned to go forth and actually reach their target. So when we asked for, you know, originally it was all like disclosures, how much greenhouse gas are you disclosing? And now that’s like table stakes way back when. And then it was greenhouse gas targets and it was like, oh, we’ll get 10% by in ten years from now or something like that. But now it’s, you know, so important, so critical, so urgent. And we want companies to make those ambitious targets and we want them to do show us how they’re going to do it.

Emily Lee: 
And I know we talked about that Impax, right, sort of meeting companies where they are, but also really getting that public plan, getting that transparency, getting those time bound commitments around that. So that was that was a really interesting example. Patrick, with let’s bring you in. I know from, you know, your role at Saturna, right, you’re coming from more of a fixed income perspective, a global perspective. What would you like to add just in terms of kind of what we’ve talked about so far or maybe what we haven’t touched on yet?

Patrick Drum: 
Yeah. I really appreciate what Andrea and David have been sharing. It really offers a real comprehensive sort of thought process. And I think Andrea really kind of captured what was more important is this is a journey. It’s not easy. It’s a business plan. It’s evolving. But from the fixed income side, there’s different ways to approach. There’s different ways to approach this process from an equity standpoint and a fixed income standpoint. Basically, different parts of the capital stack are ways of expressing and supporting this financial transit, rather this climate, this transition to a low carbon economy. In particular, our area, or at least my area of focus in particular, isn’t so much on the advocacy as is characterized by equity, but on fixed income side. And really one of that mark is substantive…has experienced substantive evolution, substantial evolution. Right now about qualified bond proceeds are one of the primary tools that are out there. At this point, there’s about there’s north of 7 trillion outstanding and there are eight types of bonds. And you can cut them in half because they’re the same thing with bonds and notes. You know, you have green bonds which are very common and well known. You have transition bonds which are lesser known, but they’re really kind of, they’re aiming to help those hard to transition industries. And then third is sustainably linked bonds and those are performance based. So and the final one is sustainable. But bonds fall into two characteristics. They’re either activity based bonds or what are known as behavior based bonds. And I’ll be talking a little bit about the sustainably linked bonds. Because one of the backdrops or shortcomings with regards to, the activity based bonds is that they’re voluntary. There’s no sort of teeth if they fail to perform. It’s really on kind of a good faith effort. While sustainably linked bonds, if they don’t perform in meeting certain target reductions such as climate mitigation or adaptation targets as measured by greenhouse gases. What you’re going to particularly find is that they’re going to have to pay a penalty. At this particular point in time there’s a little more a little north of 275 billion outstanding. But you would even think in this particular market they would be lending itself is to a big key solution provider. And in fact, there’s a lot of nuance in this particular space that investors might not be aware of. Over half the issuance is really embodied by about, 50. There’s over 115 bonds, corporate issues, and that represents more than half the outstanding issuance. Of those half, half of them are failing to meet their targets. And if all of them didn’t, there would be a cost an accrued extra cost of about 1.6 billion. So what it means is that a sustainably linked bond, if they’re not able to reduce their carbon emissions by certain times and points, investors are compensated either by higher coupon payments or in particular, say, a maturity in excess of par. But what’s particularly interesting is kind of a little bit of the gaming, and it requires some tension. Some issuers will issue a sustainably linked bond really near to their target of their GHG emissions targets. So it sort of negates and creates the sort of greenwashing. A particular issue is Wesfarmers, They’re an Australian operation, they do retail, insurance, and they do mining. But in the same year that they issued it, the sustainably linked note, they essentially they had already acquired that at target sort of diminishing the return. Enel, which is the first issuer of sustainably linked bonds, they’re the multinational energy company out of Italy. They have 30 billion outstanding, half of which are, excuse me, a third of which are far from meeting their targets. And there’s still a large part of reporting issues you would anticipate and this is even the challenge with companies making this financial commitment, over 20% still have yet to really formalize ongoing reporting. Some have yet to even report for the 2022 period. So this market is evolving. But fixed income in conjunction with equity are different tools and mechanisms that investors can help to derive this attention and derive sort of this this change towards a lower carbon economy.

Emily Lee: 
It’s really interesting to hear it from that fixed income perspective. What you’re referring to the sustainability linked bonds. What was the activity bonds you mentioned?

Patrick Drum: 
Activity bonds are where they’re specifically to a certain climate mitigation or such as green bonds, transition bonds and sustainable bonds. So there are six qualifiers. It’s either a bond or note, a green bond or green note, sustainably sustainable bond which deals with social and can also do environmental. And then then there’s the transition which is really a small market. And it’s an interesting market per se because so they’re really aimed for those hard to transition. And it’s not necessarily they’re going to meet a target, but they’re going to be positioning themselves in that business to pay for abatement. They might not be hitting certain agendas, but specifically a tie to an activity outcome. Well, sustainability linked bonds are we promise to meet a reduction of carbon emissions. For example, one company, Odfjell is one example. They’re a shipping company of all sorts of materials and they’re Norwegian. And they issued their sustainability linked note in 2021 for about 100 billion, 100 million. Excuse me. And it’s a Norwegian krona issue. And their goal was to reduce the greenhouse emissions in addition of the IMO standard of a 40% reduction. Their goal was to reduce it by 50%. So in and above. And if they don’t, they’re going to be I’ll make a payment in excess of their standard payment schedule and they’re meeting their targets. In fact, they’re just about, probably a year or two within meeting their current targets in excess about four years before the 2030 goal. So there’s kind of these nuances. I could go on, but I’ve really admired and appreciated some of the shares that have been hearing, because there’s a different tool, and a lot of times it’s viewed as just an advocacy. But the fixed income market is really where sovereigns, government entities such as municipalities, supranationals, and corporations are funding this transition. And so the evaluation of these bonds is a means for investors to align their values if they’re set. And we report this in our impact report, because while I’m hearing a lot of this qualitative analysis, there’s this quantitative that we’re all sort of kind of looking for. What’s the number? And under the sustainable, Science Based Targets Initiative, the net zero, SBTi, they minimum to meet these to meet their the target of 2030 reduction, you need to have a minimum of a GHG emission of 4.2%. So that’s the bar minimum we’re looking to attain to meet the goal of 1.5°C increase, or at least keeping things below. So these are just yet many tools of trying to make that transition. And so what we do in the impact report is, well, what to what percentage of our constituent holdings are meeting in excess of 10% over three years. How much of the investment portfolio has 10% or more of the renewable energy? And like the sustainable bond has over 80% when we compare it to the MSCIE, for which at this particular point is about 30%, excuse me, 56% as of our last reporting. So we try to show both our historical and a comparative. The emerging markets, and I’ll close on this, is very interesting. The S&P report’s scope three is the real challenge. And the SEC kind of dodge dive and ducked this one on scope three. You know we got one and two which are important. So I’m not knocking the successes. But you know we’re always sort of hopeful of the next inning to make a turnaround. Scope three emissions can be ten times the true emissions. I mean, the auto industry scope three is 90% of GHG emissions. So scope three is an important factor. And the S&P only 38% of the constituent issues report scope three. The world the world MSCI index is 37. Emerging markets only does 18. So we’re still in early innings on this unfortunately, yet facing an important deadline.

Emily Lee: 
That’s really interesting. And kind of to that end point about early innings. Any sort of trends, you’re seeing, is it, geographical where there’s more

Patrick Drum: 
There’s been a bit of pushback on sustainably linked bonds. It’s in some part of a little bit of plug and play, some of them where they’ll have callability issues well before they have to meet their targets. So a bond will say be issued in a five year, two year call. So meaning in two years it can be called but really they’re trying to make targets in seven years. It’s like, well, you know, kind of you know that. So there’s the sort of like your hope was that this intention is it has sort of a purity to it, a sincerity. And then again, devil’s in the details. And that’s why I admire the advocacy because there’s an expertise and value in that, in the nuances. Globally, North America is only 15%. Europe is over 50% on reporting along the SPTIs. I really view them as sort of the gold standard. Asia is really an interesting plan. We are very active there. Elizabeth, my colleague on the portfolios, we regularly visit that region, at least about a month, each of us, and we, we’re, we’re active in that area for managing, private mandates as well. But that’s 20%. Asia is really finding a particular, very aggressive trend that’s kind of off the notable radar. But those just to provide context, it’s still very early.

Emily Lee: 
Yeah. That’s interesting. And maybe we can, come back to that point of sort of where we’re seeing trends globally from David or Andrea but maybe Andrea, I’ll turn to it you. You know, Patrick was just mentioning engagement, right? Which is something you’ve touched on already. Any other stories you want to share in terms of engagement around maybe the scope three emissions or on the climate transition plans that we haven’t touched on?

Andrea Ranger: 
Sure, sure. Well, I’ll hit on the scope three emissions. We still really think it’s such a valuable exercise to go through and understand where your value chain, so upstream and downstream emissions are coming from. And one of the engagements that we’ve had with was with Costco. And we had asked Costco to set a science based target. And and in doing that you have to basically know what your scope three emissions are. And Costco I believe is 98% scope three emissions if it’s looking at the totality of its emissions. So a lot obviously upstream with where the you know, how the products are created and shipped to Costco. And also a lot of impact in terms of, deforestation that could possibly be related to their products. And that’s something that we’ve really been working with on a lot of our portfolio companies that are food and beverage in particular. So when you think about it, it’s not just the kind of nuts and bolts like, you know, the logistics companies or whatever that have big footprints. It’s also can be related to things like, you know, natural resources as well in terms of food. But I would also say that, we particularly look at this too, in terms of scope three emissions as, as I just mentioned at the top is like it’s basically an exercise to determine where are your vulnerabilities in your supply chain or downstream, with your downstream partners, customers. And when I say vulnerabilities, I mean, in terms of it could be what kind of fuel you’re sourcing or do you have a lot of there are emissions hot spots in your value chain? Can you interact with that part of your value chain to work to reduce that risk? So if they’re using renewables or truly investing in energy efficiency, that’s the way that you could hedge their risk against volatility of fossil fuel market as well. So it’s not and just I think some people think it’s just an accounting exercise. Well there is that. You also have to use common sense about it too. Like if you have, you know, if you’re a company that creates, products made out of steel, it’s highly likely and all your products are made out of steel, it’s highly likely that the emissions, upstream emissions from the steel manufacturer that you or manufacturers that you sourced from, that’s going to be a big chunk, right? So we find a lot in in our engagements that companies say like, oh, we don’t you know, we don’t have the bandwidth to do this. And we’re very reasonable. Meet us halfway and say, okay, we’re good. We think these are where majority of our emissions are coming from. We’ll start there. Sometimes the companies aren’t really willing to do that.

Emily Lee: 
Yeah. Often talk about meeting companies where they are. Right. And then going down the path. But that was interesting. And I, I like I talked about vulnerabilities. Right. As David knows at Impax, right. We talk a lot about kind of those risks. Right. The business risks the company’s facing. I don’t know, David, if you want to add anything to that from an engagement perspective or even from kind of the investment perspective in terms of, you know, how do we really, truly verify if a company is kind of on the right path of doing the right thing. Anything we haven’t maybe touched on you want to add?

David Loehwing: 
Just to build on Andrea’s point there about working with the companies to figure out what their emissions are throughout their supply chain. I think it’s also an opportunity to, for the company to exert some of their own pressure and bring some of their suppliers in line with some of these greenhouse gas emissions reductions goals as well. We certainly have seen that with a company like Walmart, for example, putting pressure on its suppliers to reduce the shipping weight of a lot of its products. So increasing the concentration of laundry detergent, for example, decreasing the amount of water that’s being shipped and more focusing on the detergent piece. That’s really helps reduce packaging. It’s helped reduce emissions throughout the supply chain. So I think that’s it’s just one illustration of how companies by engaging with their suppliers on those scope three emissions can effect additional reductions throughout the value chain.

Emily Lee: 
We’ve covered a lot of things. We talked about kind of the, the backdrop, why net zero is important, how we look at it from a company perspective. And I know Patrick threw out the greenwashing term, also is there maybe, you know, from the advisors listening on the call as if they’re seeing, you know, other investment managers or they’re seeing, you know, companies talk about net zero, you know, are there other areas they should be looking for or kind of thinking about how to really verify if a company’s doing the right thing and anything, maybe again, that we haven’t touched on that you all want to share?

Andrea Ranger: 
Well, I mean, one of the sort of the right off the cuff if we’re looking, okay, does a company have a target that is on the Science Based Targets Initiative’s website. So they have a dashboard and it tells you whether a company has committed to set a target or actually has set a target. So that’s sort of a very, you know, if they don’t have that sort of we could consider sort of the basic, because we’re, you know, we know that science based targets are the most valuable, and so are sort of the, you know, I guess they’re almost table stakes at this point rate terms of really figuring out how we’re collectively going to cut down on climate emissions. But that’s the resource that we go to just as a like, right off the cuff is that they even have that. And if they don’t like, okay, we know where we need to start.

Patrick Drum: 
Because our focus is a little more global and as clearly but also a footprint in the United States is 95% of, I found this fascinating, 95% of GHG, greenhouse emissions growth is occurring from both emerging and developed markets, developing markets, develop markets based on some of the MSCI stats and the research are particularly Europe, North America is a laggard, are coming in line with about a 2 degree metric. You know North America is a little higher I think 2.4. But when you look at Latin America, when you look at Asia in particular and other regions, there’s really a long ways to go. And this really is an important factor, because 85% of the world’s population does not live in the developed world. And so there’s been a long time, you know, focus of, of this massive underinvestment in really that is part of that solution. So whether it be through an equity so the engagement or the fixed income allocations. And we’ve certainly we have quite a lot of content in sort of the business case of why to think about global fixed income or global equity, because it’s a holistic approach. But really in part of this journey is that a huge part of this journey is needs to take place. And consideration of our global success is dependent upon both emerging as well as developing as well as developed markets all coalescing around this. And our hope is on our team, as we what we really focus where we can make those differences in the emerging and developing markets.

Emily Lee: 
And I think at this point, maybe I’ll turn it over to Gus to hop on. We’ve gotten a few questions from the audience. It might be a good time to turn it there. And then I’ll hand it over to you, Gus.

Gus Grefthen: 
Absolutely. Yeah. Thank you. And thank you for to the panelists for, for those great, great thoughts. So the first one here is actually for you, David, that came in. Question’s regarding the verify and body that you mentioned, surrounding Science Based Targets Initiative. If you could kind of talk a little bit about what that that body is.

David Loehwing: 
Sure. It’s the Science Based Targets Initiative. And the goal of that initiative, again is to be sure that company greenhouse gas emissions reductions goals are credible, but most importantly, are going to lead to meaningful greenhouse gas emissions reductions. That organization is the product of a number of environmental organizations coming together to really help, you know, provide some backbone, essentially, to make sure tha, those goals again, resulting in real progress towards meeting the goals of the Paris Agreement. The organizations that it was really formed by or the CDP, which is the Carbon Disclosure Project, the UN Global Compact, the World Resources Institute and the World Wildlife Fund. Yeah, that’s the background on on the SBTi.

Gus Grefthen: 
Excellent. And I think maybe to to build off of that it might be helpful, I believe, Andrea, you throughout TCFD maybe explaining the difference between that and the Science Based Target Initiative might be helpful for the, for the group.

Andrea Ranger: 
Sure. well, TCFD stands for Task Force on Climate Related Financial Disclosures. And this sort of, it’s a disclosure framework to just look more broadly at not just a target, which is something that would be coming out of the Science Based Targets Initiative. But as you know, David touched on earlier, like, what’s your governance approach? How are you assessing risk? It also could include climate scenario analysis, which is actually a pretty complicated approach to understanding at what level temperature rise would impact your business, like what kind of physical impacts that would affect your business. So along the qualitative side of like how are you addressing climate as well as the quantitative side of like, you know, we have set metrics and targets.

David Loehwing: 
I would just say to really to emphasize what Andrea has said, but also to say that climate change can manifest itself in different ways. There can be extreme drought. That might be the scenario. What the scenario analysis, reveals. It could be that there’s extreme rainfall and flooding that results, it could be sea level rise. So there’s a couple of different ways that climate change can manifest itself. And I think that’s the importance of looking at these various climate models and understanding and testing, to see which of these various impacts companies will really be affected by.

Andrea Ranger: 
I did just want to add in one thing, Gus, that, you know, we touched on earlier, the SEC just released its climate related disclosure rule after two years of, you know, tug of war. But anyway, and I think one good piece about that, that just dovetails with what David just said is that companies are going to have to disclose whether severe weather has an impact on their financials. And I think if it’s a 1% change and somebody can fill in the difference here. But, so that used to be like if it was caused by climate change, which of course everyone was like, how do we know if it’s this was caused by climate change? Could just be a storm. It could be enhanced by climate change. But I thought what was interesting about the severe weather, footnote to the financial statements is that we’re really going to see over time, like, how companies are reporting on severe weather and start to be able to put together like, oh, this is what the financial impact of doing this, you know, of this is and I think that puts a finer point on it that maybe we haven’t had in the past to really link it to an actual company’s you know, profitability.

Gus Grefthen: 
Yeah. I think you bring up a good point to, to build off of and it’s talking about the financial impacts on client portfolios and whether or not they are climate resilient. Maybe, does anyone have any comments about that?

Patrick Drum: 
If I may, yeah, there’s actually the comment really kind of resonates with me. And yeah, it the materiality is particularly interesting. I remember a couple of years ago, I was looking through the CDP reports trying to see both potential constituent companies and as well as holdings that we have is to, well, how are the companies saying, you know what, they’re financially...and the CDP report will actually it provides the issuer the opportunity to voluntarily disclose what they think the financial impact of the climate change is. And, you know, I remember, large financial institution asset managers saying 2 billion, this big scary number. And this very large coffee producer, I won’t say the name, said nothing. Now pause and hold and I’m thinking, oh, how can that happen? And so we’re just releasing this recent white paper, and it was sort of the impact of El Nino on CPI. So follow my story here. So we know El Nino is the seasonal kind of this global seasonal activity warming or cooling. El Nino is the warming. And there’s various ways this can be measured. There’s both kind of a mild to severe. El Nino is any time where water surface temperatures rise more than half of a 0.5 Celsius degree severe is north of, like, I think, 2, 2.5°C. Well, we’re in another period of scientists believe over 70% this quarter next we’re going to experience El Nino on a severe case. So wheat production right now is being anticipated to be reduced by Australia by the by over 30%. Palm oil out of Malaysia is going to be reduced by 20%. And we’re this kind of gets a little nerdy from our world on the fixed income side is CPI because we’re all kind of waiting on this, you know does Mr. Powell is he going to extend or is he going to put it’s going to extend or he’s going to put? Where this goes is countries like India have already over 45% of their CPI indexed to food. Well, if Australia also having a 30% reduction of food, global food prices rise. Different countries have different exposures. Now developed world like the United States is like around 7%. So it’s not as impactful. Asia though, it’s very different. Egypt is another one that’s over 40%. So you’re creating the cyclicality of where it might even cause them to increase yet more rates further tightening the global economy because of the food and food pricing because of this sort of global changes in weather patterns, we’re talking about climate change. And the materiality goes back to this company coffee producer. Like, nope, we don’t think it’s anything. Like, wait a minute. So you know, it’s this linkage you don’t sort of think about.

Gus Grefthen: 
Patrick, there was a question, kind of specifically for you regarding, a percentage of companies that you, you suggested in the S&P 500, all country world index and, and the emerging that are reporting scope three currently. And they’re curious of the reference or source that you pulled that from.

Patrick Drum: 
Yeah, October of 2022 of the IEA reported 38% of S&P companies disclose, scope three emissions. Actually it was the US Securities Exchange Commission February 1st of 2023. Got that one there. So they were reporting that information. And so I kind of track it through various sources of reading. MSCI Net Zero tracker published in July of 2023. The MSCI world of 37%, as well as the emerging markets at 18% scope three measurement.

Gus Grefthen: 
Question for David here. And were you seeing any trends for net zero with public companies in the United States, any momentum kind of moving that that you’ve noticed?

David Loehwing: 
That’s a tricky question. I think we’ve seen the companies that are committed to setting net zero targets particularly for their own operations, they are certainly continuing to work towards those goals and the sophistication of their modeling around climate scenario analysis, etc. we’ve anecdotally, we’ve been impressed by what we’ve seen. I think the piece that’s a little harder is when you start thinking about companies in the asset management industry and their net zero goals, we have seen some large, large by virtue of assets, large banks and the like have withdrawn from the net zero asset managers initiative. And I attribute that to partly to the complexity of this task. I think it points to what Andrea and Patrick have been talking about, where, some of this is, is difficult and, really need to make sure that you companies understand the underlying pieces. But I also think that there are some elements of, it’s, it’s difficult to do this and, and perhaps it’s difficult to do in this political environment. but there are challenges as it relates to, what’s in favor, what’s out of favor in the marketplace and what that means for large global banks and their ability to adhere to the some of those commitments they made around net zero.

Gus Grefthen: 
Great, great. Yeah. Thanks, David. I had, one other one that I think is always quite helpful since, you know, examples are always very key and having client conversations and, and, Patrick, you kind of have a global lens when it comes to sort of science based, targeted, initiatives of companies. Are there any sort of case studies perhaps you’ve come across that might be able to sort of, you know, that could be weaved into a client conversation, around that?

Patrick Drum: 
Oh, heavens, yes. Oh, boy. You open up the. Oh, yeah. And this is where it’s kind of fun. So I was just in the Middle East for an extended period. It’s part of the coverage and there’s a company that I find particularly fascinating. It’s called Majid Al Futaim or MAF. MAF. Majid Al Futaim. It’s akin to a Walmart. I’m just giving an example. They do a bit more than that. They own the Carrefour rights. The French firm. So they have hypermarkets, grocery store akin to our Costco, but a lot, 17 different countries, over 300, 360 operating stores. But they also do hotels. And so sort of, sort of kind of hospitality and entertainment. I’ve come to known the team over the years and particularly the sustainable team, because I found them particularly interesting. They’re making these very strong and bold commitments. And I ended up talking to the chief sustainable officer, the name’s slipping my, I apologize. and it’s all kind of...they started this firm, started its journey back in 2010. They’re part of their goal by 2030. Actually, their goal to set this by an end to 2040 is to have be both net be positive carbon as well as positive water, which you when you think in the Middle East it’s like, wow, tell me, help me understand that. And so there’s a lot of sort of remediation of activities in Africa and so forth. They have a very large exposure into Kenya. So part of this, though, their existing properties, their goal is to employ by its own properties and the lease properties are by 2020, 40. So they own properties are to meet these targets on the carbon to be net zero, to be net zero by 2030. If memory serves me correctly, but what’s particularly interesting, they have long engaged the SBTi in 2018, 2019. They are aligned in particular on this and it’s a particularly interesting business model. So no plastics can be used in the store. So I kind of stomp around there and I know the management and so forth. But it’s an interesting solution. They don’t offer equity. They only issue fixed income, but they have a very large operating footprint, because it’s in a large influence. But to be a thought leader in 2010 in the Middle East was sort of like, wow, help me understand this journey. And there’s another company, Tabreed, which is another example. In these parts of the world, in particular in India, they have formed a partnership with the IFC, which is the World Bank’s International Financial Corporation. It’s a dual mandate of both... It imports a social good, as well as sort of raising the standard of sort of the economics of emerging economies, focuses on air conditioning. It’s an important factor when it’s hot. I mean, it’s hot, hot. And so what they do is they provide these industrial cooling facilities for like a mall or so forth to give you an idea. But what they do is because of this, they have abated a lot of carbon emissions in the akin of 1.3 million metric tons, or equivalent to over 850,000 cars in their last reporting. So, I mean, these are interesting solutions that are a little more, you know, sort of associated to off regions where that are hotter, that are drier, that are more conducive and more known to sort of the emerging market communities.

Gus Grefthen: 
I think we did have one other question. Hopefully we have time to address. Just coming up to the end of the hour here for Andrea, regarding some of the work that you’ve done. Are there any other companies you’ve worked with that really embrace the idea of climate transition plans and really leaned into doing them?

Andrea Ranger: 
One of we talked a little bit earlier about, sort of there’s been a gradation of establishing greenhouse gas. Well, doing disclosure first and then targets and then a climate transition plan. And I think one company that’s really outstanding in this, aspect is Corning. And they have Corning, you know, makes, you know, other than CorningWare which they don’t even make anymore. Somebody else bought it. They do like a lot of fiber optics and screens for iPhones. So a lot of heavy industrial. And we approached them in 2021 about setting a science based target. At that point, it was only we only asked for a report about whether they could do science based targets or not. And that has to do more of the what shareholders could get past the SEC at that point in terms of a no action process anyway. So and they were very circumspect and just were like, yeah, no that’s okay. Well we’ll tell you will look into it. And so they didn’t really have much leverage then. And we kind of went away. Well shortly thereafter they, they contacted us and said, oh, by the way, we’ve set, committed to set a science based target with SBTi. A year later, oh, by the way, we’ve set a target with SBTi. So we set up a meeting with them to say, hey, tell us about your target and say, wow, we know that, climate transition plans are increasingly important to investors. Is it something you’d be willing to do? They were not interested in that, at least their CSO was not. But I was interested in it. So I kept getting it, kept being, persistent. And they did, they did agree to it. And I think that that speaks well to them that they sort of, you know, maybe initially when they, they have something they don’t want to do, they’re not embracing the idea. But they did several times come to the table now. So I think they deserve a lot of credit for that.

Gus Grefthen: 
That’s amazing. Yeah. Thanks for that example. I know we’re up to the end of the hour. As everyone can see, this is a very deep and broad topic. And all three of our firms p kind of look at it from slightly different perspectives and do slightly different work. And we hope to kind of bring more of these conversations to you all in the future and thank you so much for joining us.

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The Financial Stability Board (FSB) created the Taskforce for Climate Related Financial Disclosures (TCFD) to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change. 

The Science Based Targets initiative (SBTi) is a corporate climate action organization that enables companies and financial institutions worldwide to play their part in combating the climate crisis. Their partners are CDP, the United Nations Global Compact, the We Mean Business Coalition, the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). 

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