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  4. Episode 10: Through the Eyes of Institutional Investors

Guests Speaker: Alessia Falsarone, Head of Sustainable Investing at PineBridge Investments

Through the Lens of Institutional Investors: Solar Tax Credit Update, Australian fires, and ESG

Episode 10 | Duration: 25 minutes

Join us we discuss the 2020 Solar Tax Update and the way Australian forest fires will impact the agro-business in the next few years. With the help of Alessia Falsarone, we went through the key things you need to know about investing in alternative energy and the outcomes of the global developments affecting financial markets this winter. Finally, you’ll learn about the newly emerging industries triggered by the rise of ESG investing that are creating opportunities for investors around the globe.

  • Keesa Schreane: Hello everyone and thank you for joining the podcast. This is Keesa Schreane and I am here with Alessia Falsarone of PineBridge. And we'll discuss what's in store for investors with the 2020 Solar Tax Credit update. We'll also get into the Australian forest fires and the near term impact on food production and agri-business overall. Then we'll get into new industries emerging due to climate changes and how investors can be on the front lines of possible solutions. 

    But first, let's discuss the 2020 solar tax credit. So we know the credit dropped from 30 percent in 2019 to 26 percent this year. And that's for both residential and commercial properties. Does this decrease impact institutional investors’ outlook around alternative energy companies for this first quarter of 2020? 

    Alessia Falsarone: First of all, thank you for having me here. And hi to your audience today. I would say that with regard to any incentive associated with alternative energy and solar, obviously it’s not any different than any other source of alternative energy.

    From an investment perspective, I don't see that impacting direct opportunities in the public market from one quarter to the other. Clearly, if there's a specific hike on that from a quarter to the other, then we'll be certainly creating more opportunity to rethink current participation in the market, especially if you're dealing with companies or investment in companies that are associated with solar businesses and receive funding in terms of municipal finance funding or the like.

    I think there are other sectors outside of the alternative energy producers that are obviously looking at these sort of indicators from quarter to quarter. And this is companies operating, for example, in residential construction or companies that also operate in building materials.

    Why? Because clearly building materials is part of a similar budget in the energy consumption of buildings. So they go hand-in-hand. I also would say there are headwinds in a way to typical alternative sources of energy that we have seen so far. You hear a lot in headlines about wind and you hear a lot about solar. What we don't hear as much is energy sources that are getting a lot of traction, for example, overseas, in terms of geothermal.

    If we are going in associating what is happening overseas in Germany, there is, for example, in the Bavaria region and in Munich, a strong push to have municipalities create incentives for new sources of energy, coming from the Alps through the Danube River and to create out of water and water streams that geothermal energy that then can contribute to two things. On one hand, meeting the municipal target for climate for either 2030 or 2040, for example, in the case of Munich is 2040. And obviously buildings in municipalities are the most and their HVAC systems are the ones that are clearly affected by municipal plans for those.

    So while we hear a lot about incentives for the adoption of alternative energy, we also have to think about how much municipalities are going to finance their climate targets. And they are doing that in very innovative ways and not necessarily just with wind and solar being the only options on their menu. So I would say that investors should stay away from just looking at quarter to quarter changes and really put into perspective the municipal needs associated with that particular source of energy. 

    Schreane: So and if we look at it from a global perspective, mentioning Germany's strong economy and the U.S. economy, do we expect that alternative energy investments will have a long term impact on the economy that maybe we haven't thought about before? Or is this something that you see picking up in the long term, in the short term, unexpected activities that we might be expecting or not expecting as the case may be? 

    Falsarone: I would say that many of not only innovations but plans surrounding what to do with budget spending with respect to energy consumption at the company level and at the municipality level are not a surprise for investors. If you're thinking about that, even if a municipality doesn't have a climate target or has not set up a priority on climate, you'll see corporations and the private market really looking at energy efficiencies as a source of environmental externality, but also economic return on the asset. The asset being a building or the asset being obviously like new products and green technologies, that are placed in the marketplace. 

    Schreane: So just switching gears here and talking about Australia's forest fires, truly unprecedented, obviously. And clearly there is going to be an impact that will be felt for years to come. We understand that there are direct correlations between these types of natural disasters to food production. For example, can institutional or even retail investor support efforts toward rebuilding, toward revitalizing or are there agribusiness opportunities for investors to really support these communities in terms of revitalizing these areas? 

    Falsarone: Yeah, and you raise a very valid point, I think is not only needed it’s essential, right. Going forward, obviously, as every crisis management event you have first intervention, government intervention and raising international awareness, as is the case for Australia. But we can draw a little bit of a parallel here from another situation in Latin America with Brazil and Bolivia being subject to the fires, that affected the Amazon forest right into the late summer of last year. That is not too long ago.

    And clearly for thinking about the environmental impact of climate change that has played although for different reasons in two parts of the world that are so important, where rainforest especially in Brazil and Bolivia they represent 50 percent of the global rainforest globally, which means almost 20 percent of all the oxygen that is available. Now, if you're thinking about that agri business, as you see is one of the, I think in the case of the Amazon rainforest, represented almost one fourth of the GDP of those economies at risk. 

    Now, what can investors do to prepare?

    First of all, that puts to test the resilience planning of investors. So it's really difficult for me to think about investment opportunities when you're thinking about these tragedies that are caused by environmental disasters. But it's also true that there's a lot of capital that needs to be put in place for the next phase. Once you have put these low probability events into a higher probability bucket and once government entities have allowed funding to flow through in the areas that could put that probability of continued repercussions close to zero, then you can think about the rebuilding phase.

    Is there anything that can be done to support the regenerative sort of approaches that local corporations are taking? And clearly, when I'm thinking about global investors, especially the ones that we represent at PineBridge, unless you are dealing with a local investor, the local knowledge of what happens and what a company needs is really not known by a global institution.

    What is then needed and the tools that we do have are due diligence tools and trying to understand and address whether a company that is highly exposed or has been exposed or suffered for example, fires either in Australia or in Brazil has actually reacted and put in place plans to really connect their future growth to sources of stable natural resources.

    I'll give it example in Brazil, right around the fires, we actually had due diligence with one company that could be geographically affected by the fires and operating in one important industry, the pulp and paper industry. So during the time we didn't feel comfortable, neither with the ongoing environmental risk that was affecting the region and on top of that, the country risk affecting these government entities either, to what degree. The government was actually supportive. 

    They were dual international efforts to put the fires to rest. Needless to say, we have continued throughout these conversations with the company and continue to look at and ask information about what were their plans to build resilience to their portfolios. How were they thinking about the deforestation trends that were going on in the region? And, by the way, not just affected by the fires. Think about the fires as being a headwind on supply. So what happens to commodity prices? When that happens, obviously they spike. And during the spike of commodity prices, the incentive and the deforestation levers are really high. Because there is this near-term economic incentive of utilizing the scarce resource and putting in through the export food chain. 

    In the case of the company I am mentioning, what we have done is we've taken a really hard look at how they built resilience, how they work with their local municipalities in making sure that not just the land that they had in terms of their forestry management, how they actually were taking care of the employees that were working in their forest. So that was extremely important. And I can tell you that there are steps toward achieving that resilience, planning and putting in place in less than two quarters. 

    I've made it a lot more comfortable and then adding that company to a potential list of of investing companies for us this year. That's something very, very important for us, making sure that that due diligence is longer term in nature. And there's no company that is excluding simply because it is exposed to a particular risk, but the risk is calibrated. I think I mentioned to you that it's important having a longer term view in terms of risk taking behaviors and now is important for us, is all about risk underwriting and how much I'm compensated for the risk today versus actually how much I'm contributing to make sure that particular entity or that particular asset is becoming even more credit worthy to me in the long term. 

    Schreane: And that's that's a very interesting point, particularly bringing up how private companies can work with the public to bring about solutions. I'm thinking about not just abroad, but even here in the U.S. we have the California fires, for example. And to give a slightly different example in Detroit, with the water issues that were going on there, are there direct correlations in terms of how public and private can work together? And those two examples, would you say that the forest fires were more of a natural disaster and that water being a natural disaster as well in Detroit, maybe also a social impact issue that needs to be addressed? How can public and private sectors work together to improve those situations? 

    Falsarone: I think that's a really valid point. And I don't want to draw too much from the global view, but I think it's extremely important if you put Detroit and you know, anything associated with water, either from a flooding perspective or water scarcity and you're looking at economies that actually have been affected. For example, India, you probably heard about the onion crisis and what was all about with the onion crisis. If you have enough flooding at a time where you should harvest onions, what you will have is from a basic produce that is so important from a local economy that is part of a country where the outcome and the economic outcome of onion production affects the farmer, the exporters, and also the people that actually are resorting to that lowest priced vegetable that is available to them to sustain their life.

    You're realizing how it is important in the case of India, what the government did was first of all, they banned exports because they realized that making sure their resilience was built locally was extremely important. So they needed to make sure that access to food and there was no food scarcity associated with that particular ingredient of daily life and daily sustenance. So that was important. So thinking about building resilience, first of all, give access to the things that are most important to continue to sustain that economy, which is predominantly the social side of things.

    Second of all, a ban from export. If you have a commodity, to make sure that that price goes from, in the case of onions, doubled up. And it was incredible. Doubling up in just a handful of months. Making sure that that goes at a level that makes that food accessible to a wide range of people. Always make sure that the farmers, on the other hand, get compensated for on one hand, having workers that, you know, sustain first and continuing their production of that particular vegetable.

    On the other hand, you have internationally, you have to make sure that the farmers continue to receive the flows of funding that that they rely on. So there is a two pronged component, which is number one, how do you make sure that you do crisis management associated with this? I think public public entities are an important component of that. Usually development banks, there's a lot of innovation surrounding new forms of bonds, for example, coming into place that deal with climate resilience. And climate transition. And those are forward looking instruments that government entities can opt to adopt in their own Treasury management. And those are then put out for purchase by institutional investors like ourselves. And so you serve two types of outcome. On one hand, you have do economic outcome or supporting parts of an economy, either local or global that are strategically important to the economic outlook. Right. Of the world. On the other hand, you're also making sure that there is access to basic basic foods and all the basic needs that create lower probability of social unrest. 

    Schreane: That's great, and just to give a little more validity and just contextualize the examples, India being one of the largest economies in terms of population comparing that to states in the U.S. is having a very apples and oranges there. But at the end of the day, that public private joint partnership is important, whether you're talking about a large global economy or a state within an economy. So one of the things we want to get to is speaking about climate change, natural disasters. There are entrepreneurs. There are new industries that are popping up daily. it seems, that really are giving substantial solutions in terms of how we can handle some of these issues from agri business to solar. Could you talk to us a bit about those new solutions, these new industries and how they will make a difference? 

    Falsarone: I can tell you that from the investment perspective, you can make a difference if you have your source of attractive opportunities for flows of money. That they need capital. So as any startup, even if you are a sustainable innovator, you need that kind of capital and that capital stability that you need to seek. So the interesting thing is asset owners that are the likes of pension funds or insurance companies are looking a lot deeper in terms of their own environmental and social practices in the way they build their investment portfolios and are looking for long term. And long term ensuring that the reason resilience, building their portfolio, climate and climate solutions are adopted at the pension fund level is extremely important. So when you're thinking about sustainable innovations that are coming to market and you're thinking about wait a minute, how do I know whether it is financially material just from a local ecosystem perspective, or is it just outside of the mom and pop shop is actually a solution, can be scaled and then can be adopted by corporations that are large in nature and they are like Fortune 500 corporations. 

    And if you're thinking about it in history, the food and beverage sector has done a remarkable job in having innovation labs and acquiring smaller businesses under their umbrella of brands that actually cater to some sort of consumer trends for a healthier lifestyle, healthy consumer habits. On the other hand, indicators of climate change you also have parts of regenerative agriculture that are important for the same reason that food and beverage companies were acquiring, you know, other parts of businesses before. So it's not a matter of consumer trends any longer is also a matter of, OK, how do I grow my business in a way that is made to last? 

    And so many of these businesses that are starting up or popping up are actually popping up through innovation labs of bigger Fortune 500 companies that sort of take them under their umbrella every year to make sure that they actually follow that innovation. And they put the best in terms of talent, and in terms of resources valuable to them. Clearly, that's just a small batch of all the new small and medium sized enterprises that you would see popping up in the world. 

    But clearly, it's part of the innovative piece of being in business in the 21st century. Now, from an investment perspective, I can tell you, how do I account for that in my current portfolios? How do you account for the innovation part? Well, it's true. They are in deep budget, right. And they are indeed spending of Fortune 500 companies, for example, for when I take the most the most visible. And through these companies, even if you're thinking like me, in developed markets, fixed income and so the large space of bond markets. What you see is many of these companies rely on or are affected directly by one particular factor, which we call product lifecycle management. And if you're thinking about that, every single product that you see on the shelf or every single service that you have provided has a lifecycle. And a company needs to manage that lifecycle because that lifecycle creates a waste that you have to take care of, or you have to sort of invest in new designs.

    So when you're thinking about product lifecycle and you're thinking about sustainable and new green technologies or again, sustainable new products that are coming to market, that's great, because 70 percent of the companies that we do due diligence on and that are in our investment universe are actually affected by product lifecycle management or in some cases, mismanagement. 

    Schreane: So that's great. And just as we wrap up here, I'd love to know the big idea. If you have a top five in terms of the new types of businesses that we can expect to see 2020, maybe 2021 into 2022. What are we going to see that we haven't seen yet as a result? Of climate change and the need to handle things in a more innovative way, if you have a top five or top three. What would those top three business types be? 

    Falsarone: I think my number one, if we're just dealing with climate change alone, the first would be in an area that is very dear to my heart. These carbon markets. How do we revitalize carbon markets and how do we revitalize the idea that you can go beyond carbon offsetting for either regular people or are you and I or at the corporate level. But how do governments do carbon offsetting? How can we track so any company or any new business that can come in, especially from a blockchain perspective and bring solutions that actually are able to track the actual carbon contributed not just at the product level, but at the company level or an overall footprint that would be extremely important, especially when you're dealing with new instruments coming to market.

    Like I said, climate transition, for example, bonds that will need to set targets. So be aware of the targets. We still are in a situation where we actually need to make sure that we are measuring what carbon emitters do. And it's product by product and sector by sector. And it's the whole not just the footprint of a company, but how different kind of emissions are actually reported.

    So that's number one. I think the technology platforms that aim at really providing a broad perspective on that, it would benefit both the public market and private investors. The second one is certainly about agriculture and about food. I think I would stress the fact that these spikes in commodity pricing that we see with basic food items that could go scarce is also about not just scarcity, it’s about access.

    And so when you have, you know, a number of environmental impacts that affect regions of the world where you may not have access to food, what you do is you need to understand how that could create social unrest. So it an idea of how, for example, government entity of Department of Defense handle their own territory in terms of what happens to our storage of foods, what happens to our access to food. So that you won’t have issues running social unrest when these things happen. And you won't have it necessary to be a ban on exports if anything happens. Like in the case of India. So I think that food security solutions are extremely important.

    And the third area, which I think also is extremely important, is health care delivery. If you're thinking about one area that I'm asked a lot it’s in rare earth minerals. There’s nothing new about rare earth minerals. There are 17 and some of them come in quantity that is more bountiful than copper. So what makes them unique is the idea that they are rare because you can’t find them in one place. They are coming dispatches form and some are in countries that are really frontier markets although when you look at geological studies and surveys, you find China, Australia, the US right behind it. The major source of mine production.

    Now, what is important for health care delivery is not just the social piece of health care delivery and making sure that is enough information with the service that is provided and the cost of the health care delivery. But it’s that these rare minerals are actually part of any components that have magnetic, for example, properties. So, for example, the mics that we're using today, in the speakers that we're using today, they all have rare earth minerals in there. OK, so these are also very important for MRI, for example, or any other type of, you know, health care delivery service that we think it's pretty common to have. But should we have an issue with mine production as such? We really need to make sure that we have in place the right tools and to accompany informal technology platforms that address the need of how many of these, you know, rare metals are available in what countries they are available. 

    Schreane: Great. So you heard it here first, the top three industries that we're expecting to hear about in the near term, carbon targets, industries focusing on that, agriculture and food and then health care delivery. Thank you so much, Alessia, for joining us. 

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