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Sustainability Perspectives

Episode 64: Sustainable Investing - The Pivot to Renewable Energy

Edward Mason is Director of Engagement and Impact Reporting at Generation Investment Management. In this episode, he explores the energy sector (specifically oil and gas) pivoting to renewable energy, company net-zero goals, shareholder activism and the lead up to COP26. What themes and outcomes can sustainable investors expect?

Guest - Edward Mason, Director at Generation Investment Management

  • KEESA (00:02): Edward Mason is director of engagement and impact reporting at generation investment management. Generation is a sustainable investment firm with approximately 30 billion of assets under management. It was established by former vice president, Al Gore and former CEO of Goldman Sachs Asset Management, David blood in 2004. We're going to be talking about pivoting to renewable energy, as well as strategies and sub goals leading up to big goals around net zero and the like, and even what can we expect leading up to cop 26. But first Edward, before you joined generation IM you headed up the church of England's endowment. Wow. Now, many people see impact investing as a moral imperative. What was the primary perspective that you had during your time at the church of England? Did you feel that you had to shift from an emphasis on the moral imperative piece over to the value creation piece?

    EDWARD (01:32): Yeah, so I started out in responsible investment as secretary to the church of England's ethical investment advisory group. So there was very much a moral angle then to the work that I did. And I worked on the church of England's ethical investment policies on issues like defense tobacco high cost lending and so on. But I think what we saw over the decade that I was involved at the church commissioners was that the responsible investment movement was really gathering pace in the mainstream of investment. And the church of England national investing bodies were really keen to play a part in that. And in 2014, the church commissioners who run the church of England's endowment decided to create a head of responsible investment role. So I then applied for and moved into that role, which was really the start of of my work in, in responsible investment, encouraging the church commissioners managers to take into account environmental, social, and governance issues, and really trying to position the church commissioners at the very forefront of responsible investment on a, on a global basis with a particular emphasis on climate change, which Rose up the agenda enormously in my time and was a massive stakeholder issue.

    KEESA (02:51): So you're talking about some of the sectors and some of the issues of climate change. You mentioned defense tobacco clearly sectors That are really in the forefront right now. And with that being said, let's discuss the energy sector, specifically oil and gas. Now we know that some oil and gas firms are investing in research and development at work, really focusing on focusing those R and D dollars toward renewables. Do you think it's really too little too late in terms of alternatives and what alternatives do investors have outside of complete divestment from oil and gas?

    EDWARD (03:28): Look, it certainly would have been helpful if we'd have started sooner. That's for sure. It's, it's, it's not for, for no reason that we talk about a climate crisis at the moment. We are on an unsustainable path. We are heading to exceed the goals of the Paris agreement. We're heading for a temperature rise in excessive of two degrees Celsius. So this decade has rightly been called the decade of delivery. Our task, this decade is to halve global emissions, which is a massive, massive task, and it needs urgent focus from all of us, including in the financial sector. There's been a lot of progress in the oil and gas sector over the last six, seven or eight years which is really the time that I've been engaging with the sector. If I look back to when I started, it was really about convincing the sector of the relevancy of the well-being of low two degrees goal for them something that they should be aiming for, something they should be aligning their businesses with.

    EDWARD (04:31): I think we've now got past that, as you say many of the major oil companies are thinking about the role that they play in a radically different energy system. And we have oil and gas companies that are starting to talk about net zero goals becoming net zero companies by 2050. I don't think we have any of them that are the finished article. There's one company that's made an incredible transition. That's the company that used to be called Danish oil and natural gas dong and has since transitioned to become a renewable energy player and a leading force in offshore wind as a new company or stirred. I think we'll see lots more exciting transitions, potentially spin out companies from the oil and gas companies, but there are companies that are still not moving. One company that I did a lot of work with when I was at the church.

    EDWARD (05:28): Commissioners was ExxonMobil, who I think are widely regarded as the company that really are a laggard in the industry who haven't really accepted the implications of the Paris agreement for their business and are not working to align their business with the goals of the Paris agreement. So I was involved in shareholder resolutions there and there was a very important shareholder resolution that was passed in 2017, really quite an unprecedented event in responsible investment when shareholders required the company to start undertaking two degrees scenario analysis. So to report to shareholders every year on the implications of a two degree scenario for ExxonMobil's business, but they need to go a lot further. And in fact, frustration among many shareholders has reached the point where there is now a challenge to the board of ExxonMobil. An activist called Engine Number One has put forward an alternative slate of candidates for the board. They've got four candidates up for election at the company's annual general meeting in late May this year. So it will be very interesting to see how the responsible investment industry responds to that. And whether shareholders are ready to be forceful and to show that when a company isn't responding to shareholder requests on climate change, then shareholders will take action and change the makeup of the board.

    KEESA (07:03): So, and you raise a really good step here as a really good scenario, as it relates to shareholder activism, are there specific steps that should be taken? So is there some sort of guideline in terms of, if you don't want to divest, if you think that we can, as investors can work with the corporations, work with the firm to make that move, are there certain steps, Edward, that you would recommend that an investor take in order to get from the point of the company, maybe not even realizing where they are being a laggard, as you say, and moving toward a more open arrangement to move toward that sort of net zero commitment. Are there three steps that you would say that investors should take to get there or something of that nature?

    EDWARD (07:48): I tend to talk in terms of engaging as if you mean it. So what investors need to do is to have a clear sense of, of where companies in their portfolios need to get to to communicate that clearly to companies and to support them on the journey and if necessary to challenge them so that they do take the steps that are needed. So generation, as you said, in your introduction is a sustainable investment manager. So we only invest in companies where there is a strong sustainability thesis for making the investment, but even so we are encouraging companies in our portfolios to go the extra mile to go further on sustainability. So if we stay on the theme of climate change, what we've done is to develop a climate change framework and we've identified four levels of action for a company on climate change. The first is pretty straightforward and most companies are doing it these days, which is disclosing their emissions, but then moving beyond that, it gets increasingly challenging.

    EDWARD (08:53): There's reporting in line, the recommendations of the task force on climate related financial disclosures. The TCFD that we hear so much about, and this kind of reporting is increasingly becoming mandatory. So we expect our companies to comply fully with that. But most importantly of all, there is climate action and climate action that is aligned with the science. So we encourage companies to set science-based targets, and we encourage them to set science-based targets that are aligned with a 1.5 degree scenario, so that the high ambition outcome of the Paris agreement, we're encouraging companies to set targets for greenhouse gas emissions reductions over the next 10 to 15 years, that are consistent with the goals of the Paris agreement being achieved. And finally, we're looking for companies to set net zero targets. We've set a goal for our entire investment portfolios to achieve net zero emissions by 2040. So this is what we're communicating to our companies. We need them to, to achieve that themselves so that we can achieve our overall sustainability goal. And obviously long-term sustainable investment returns are supported for us and, and more broadly in society.

    KEESA (10:17): So now how do you track against that? So that's the goal. We have the timeframe. Are there sub goals that you have in place? How do you track to make sure that year over year are month over month, even quarter over quarter, that the companies are making headway. So that goal is really feasible.

    EDWARD (10:37): Yeah, that's a great question because it's important not only to set the, the medium and long-term goals, but to track how your portfolio is doing on a, on a live real time basis. We tried to be quite pioneering in terms of encouraging forward. Look, looking metrics on portfolio alignment with the Paris agreement. So our senior partner, David blood has been leading some work in conjunction with the run-up to the, the Glasgow climate change summit for setting out what best practices in this area. And the TCFD is showing increasing interest in this as well. So the idea is that you assess companies in your portfolio for the extent to which they are aligned with the Paris goals, and you assess the implied temperature rise that is implicit in their business strategies and in the targets that they have have set themselves.

    EDWARD (11:36): This is a complicated thing to do. We're still learning how to do it. The ESG service providers are still learning how to apply the best methodologies, but we think this is a much more powerful tool than simply taking a snapshot carbon footprint of a portfolio. At one point in time, what we need to get is a forward-looking view of the assets in our portfolios, what kind of temperature outcomes they imply and where those are out of line to work with companies in the portfolio to ensure that they get back into line. So we think this is the future of good practice on climate related investment.

    KEESA (12:16): And in terms of moving forward, what can investors expect as we're getting closer to cop 26? I know there's a lot of enthusiasm. You're seeing a lot of thought leadership around it. What is your assessment of some of the main themes and what can investors expect leading up to it, or even coming out of it?

    EDWARD (12:34): This is a tremendously exciting time for sustainable investment. The pace of change, the pace of uptake is increasing all the time. It's really quite phenomenal to see where we're at today. Th the big theme in the run-up to cop 26 is net zero. This is the, the emphasis of the UK government as, as presidency designates of, of the conference of the parties. And it's really the emphasis that's being put on interactions with non-state actors. So we're trying to play our part in that generation, as I said, we set our own net zero goal last summer, actually for 2040, but what we wanted to do once we'd set our own goal was to work with our peers in the investment management industry, to see if we could get a movement going to encourage other asset managers to set net zero goals for their investment portfolios as well.

    EDWARD (13:33): We worked with investment organizations who could help us. We worked in particular with the institutional investors group on climate change and the principles for responsible investment. We did a series of convenings of asset managers, and we built from a bottom up basis working with other asset managers or robust commitments that, that set a high, but achievable standard for targeting net zero portfolios for asset managers. And in December last year, the net zero asset managers initiative launched it launched with 30 asset managers with $9 trillion of assets under management interest in it really grew after that. And just this week, we announced the second wave of signatories, and it was even bigger than the first really quite remarkable. We had a further 43 asset managers join up, and the initiative now represents assets of $32 trillion. So we recommend that this is over a third of the assets in, in global asset management already.

    EDWARD (14:44): So we are really passing a tipping point on this net zero is becoming the norm in terms of an expectation in asset management. Of course, there's a huge amount that we need to do. What asset managers are required to do under this initiative is to set a target for the portion of the assets that they manage, that they will be managing in line with net zero by 2050. So they need to make an initial commitment to that in advance of the Glasgow climate change summit. And then the idea is that over time they will gain confidence in the transition and be able to commit more of their assets to net zero by 2050, with a view, we hope that all their assets will be, will be managed to be on track with, with NetZero by mid century. So that is the long term trajectory for our industry.

    EDWARD (15:39): It's what we need, as I said earlier, to achieve sustainable investment outcomes in a, in a, in a planet where we have a stable climate system, because there aren't good investment returns in a climate system that is dangerous and destabilized the science that we're seeing gets ever more concerning on this. We've been doing quite a bit of work with, with McKinsey recently, we've seen their projections for things like heat stress. The fact that humans just won't be able to live and work outside in, in periods of extreme heat stress in, in, in, in significant parts of the world. The fact that agriculture is likely to be disrupted sea level rise will cause significant problems for property and in parts of the United States, for example, in, in Florida. So this problem is, is urgent. We need to get, get on board with it. And increasingly the fund management industry is doing that. And, and we're really keen to be at the heart of that process.

    KEESA (16:43): And finally, Edward, one of the things that you touched on clearly partnerships, how it's not just a corporate piece, or it's not just something that governments are involved in, but not just something, not for profits or NGOs are involved in, but clearly this is a huge ecosystem that's being impacted. And so partnerships are really one tool that we're using to help us get out of it. Could you let us know the role of partnerships your thoughts in the next five years or so? How do you see partnerships being really critical in terms of progressing against climate change?

    EDWARD (17:17): That's a fantastic point. Partnerships are incredibly important. They're very important to us as a, as a boutique asset manager, because we have big ambitions on sustainability. Our mission is to make sustainable investment, the norm and sustainable capitalism. The norm, we can't achieve that on our own. So we need to work in partnership with other asset managers in our industry. We need to work in partnership with asset owners. We need to work with, with companies that we invest in and that others in the industry invest. And obviously government policy needs to, to work in in, in, in the right direction as well. So partnerships are absolutely vital on climate change. And I think there are more and more initiatives that, that recognize this investors are increasingly coming together. Even if you look at the principles for responsible investment that I mentioned earlier, that now represents over a hundred trillion dollars of assets, which is quite phenomenal.

    EDWARD (18:17): We've recently joined the climate pledge, which was started by Amazon. It's a group of companies that are committed to, to net zero emissions no later than 2040. So that's a group of companies that are aligned with our own net zero goal. It's a group of companies that are committed to being at the forefront of ambition, pushing the envelope, collaborating, creating new technologies, where those are necessary and really making it happen and, and showing the way to others. One of the companies that we invest in is Microsoft as well. They're a great example of a company that works in partnership, and they've helped to establish an initiative called transform to net zero, which is finding practical routes for companies to achieve net zero emissions, including in, in hard to abate sectors where technological improvement is needed. One concept that we apply in our investments actually is the idea that companies can be system positive.

    EDWARD (19:17): So, as I said earlier, we put all our companies through sustainability analysis before we make any investments or before a company can even get onto our focus list of companies that we can invest in. So we're looking for companies that get the sustainability direction of their industries, understand the partnerships that they need to work in and understand the way in which their system needs to change asset managers, asset owners need to behave like that as well. We need to think about the system that we're in and how we can move it in a more sustainable direction.

    KEESA (19:53): Great information, and edit what I told you that clearly I believe that there is a focus on the future here. I mentioned to you that Al Gore, not only the vice president, but the Senator from my home state and was kind enough to chat with me when I was a brownie girl scout. So I'm back. And when we took a trip to DC, so always clearly interested in this work, and clearly there are a lot of opportunities and a lot of avenues in which you've laid out in terms of meeting those goals from your role as the head of responsible investment. Really focusing in on the oil and gas industry and seeing oil and gas companies really make progress such as the Danish oil and natural gas company. Now a renewable energy player, and also seeing companies that have a little more work to do.

    KEESA (20:38): And your conversations around shareholder resolutions for companies that have been laggards in moving towards net zero, and the role that shareholder can play. You mentioned that one key of really making progress is to engage as if you meet it, no matter what your role is. You're a holder in institutional investor, have a clear sense of where the company needs to get to communicate that if you're an investor communicating that goal to the companies and then challenging them. So the companies can really get there at the time for him to get there and generation, I am has a clear focus with the climate change framework disclosing emissions as a part of that reporting, align with the TCFD and really aligning with the science. We've heard a lot about that in the past. And importantly, companies should set those net zero targets very important to meet short term, as well as medium and long-term goals. Thank you so much for this information and really giving us a step-by-step at what Mason from Generation Investment Management.

    EDWARD (21:40): Thank you so much.