This week, Dan Grandage, global head of ESG for our private markets investments, discusses the many challenges and opportunities of net zero. He also introduces his innovative Impact Dial – which seeks to score the ESG performance of every asset.

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Amanda Young: You are listening to the abrdn Responsible Investing podcast, discussing all things relating to responsible investing.

I am Amanda Young and today's guest is my colleague Dan Grandage, who is our global head of ESG for our private markets investments. In his role, Dan represents the firm on a number of internal and external industry bodies including as a board member of the UK Better Building Partnership.

Now Dan has been with the firm since 2013, where he joined as head of ESG for real estate and was promoted to lead ESG for the wider private markets business in 2020.

Now, before joining Aberdeen Standard Investments, Dan was an associate director for WSP Group where he had responsibility for the sustainable real estate team, delivering practical sustainability and cost-saving solutions for investors.

Now Dan also worked for RPS Consultants where he focused on the environmental management of corporate mergers and acquisitions. Dan holds an MSC in Urban Geoscience from Manchester University and a BSC in Environmental Geology from Sheffield University. Now outside of work Dan is married with two kids, and interestingly he met his wife on a remote island in Indonesia, during a career break to go traveling. Now his powers of persuasion are clearly great as she left her beautiful coral fringed island to move to rainy Manchester.

I was also intrigued to learn that Dan has an interesting family tradition. All the male line carry the name Hunter as their middle name, a tradition that has gone back for generations. Now Dan's dad told him it was because they were related to the famous Edinburgh Hunter doctors famed for their pioneering work on anatomy, but on further investigation Dan discovered that whilst they were indeed related to an Edinburgh-based doctor called Hunter, he was in fact not famous at all - rather infamous. He had ended up in a penal colony in disgrace so no matter what, Dan thought he would continue the tradition and carried on passing the name down to his kids.

Now Dan welcome to our podcast.

Dan Grandage: Thank you Amanda, that's quite some welcome there.

Amanda Young: Well it's very nice to have you and perhaps we can start with your journey of how you got into ESG or responsible investment, as well as your current role how that's evolved to move beyond real estate and encompass private markets and the investments that that falls into.

Dan Grandage: So as you've kind of just walked through my CV, you can see there's a theme running through there that I’ve been involved in - well environmental I suppose rather than ESG - since university and actually my A Level was in Geology as well, so I’ve actually been thinking about the natural environment I suppose all the way through my career.

As I said I've been involved in that field since before it was called ESG and before probably it was, certainly before it was cool and so I joined, well what was Aberdeen Asset Management in 2013 and was supporting a real estate team integrating what we at that point called sustainability.

That name itself has evolved to ESG more recently and I've been supporting those investment teams since that point and then last year, again as you touched on, my role broadened out to cover private markets so that actually includes real estate, infrastructure, private equity and various other strategies in between. And actually it's kind of the culmination of my whole career in one role because actually throughout this or 15 years prior to ASI, the early part of my career was actually involved in corporate mergers and acquisitions from a private equity funding perspective so I was on site doing sort of environmental due diligence assessments. I then moved into infrastructure and then transitioned into real estate which is where I spent most of my career. So to come to have the role expanded across all of that, it's nice to have that kind of full view of all private markets in investment so yeah it's kind of a nice circular journey really.

Amanda Young: Really it is, it's fascinating. What I'm really keen to get a sense of is what the key areas of similarity across all of these different private markets asset classes, or do you find ESG factors within real estate differ significantly from other areas?

Dan Grandage: Yes, it's a good question. So I think if you think about it as real assets first. So if you think about real estate and infrastructure - and natural resources as well to an extent - in that context there is quite a lot of similarity possibly because our investment strategies are typically direct so we have much greater control within those strategies.

And when I kind of reflect on let's say equities, the ability to control within a real assets environment is so much larger, you know because we directly own it, we're sitting on the boards or we own the building - if we want to change something, we just do. So, we have the ability to actually make a direct change and actually see it and we can actually change the asset, whatever it might be so if it's a building we can make it better and perform better, or if it's an oil pipeline we can work with the operating companies so that may be they're not piping oil any longer and they move to - I don't know - biofuel or bioenergy. So there's a real ability to affect change from that sense.

I think once you move out of the real assets there is a difference. So you know private equity probably not surprisingly looks similar to listed equity - it is companies when all said and done. I think the challenge across all of it is the private, it is so diverse it's so illiquid and getting data is really hard you know. We don't have an MSCI or system analytics, so we have to build up our own data set through bottom-up research, which is very different than obviously what you'd find in equities or fixed income.

I think what's interesting though, is when you when you do mine that data source if you like and you do get a flow of data, actually your ability to get really quite granular and accurate data is far greater than you'd find on the public side because it's coming from source. The challenge is kind of getting to it in the first place but once you've unlocked it, you have this much greater wealth of data, so it's an interesting challenge but it is definitely different I think.

Amanda Young: So, if we get maybe into a specific topic. Net zero - it's a growing hot topic for the responsible investment industry as a whole and one of the reasons is because there is actually quite a lot of data, particularly for the public marketspace but perhaps you can articulate what net zero actually means particularly for these private and real assets we own?

Dan Grandage: Yes, that's a nice easy question isn't it, trying to explain and articulate net zero. Thanks! So, the clue is in the title - it means net zero, and we're not it doesn't mean zero carbon, that's a really important point because some people have that in the mind.

What it is essentially saying is we're trying to balance the emissions on the one hand and the removals on the other hand, so we have a net position and this works particularly well in a portfolio. So let's say you have a portfolio of buildings and real estate you will have some that would be performing better than others. So, at portfolio level, you can have a net perspective.

And just to kind of bring that to life from a real estate perspective, in a building we will have carbon associated with the fabric, so concrete and steel there's this carbon associated with that so we need to include that in our kind of carbon account if you like. And then we have the energy supply to the building, which, this is where it starts to get slightly challenging as well because sometimes we as a landlord will have control of that energy, so we're procuring that on behalf of the occupiers, so we have that data so that's fine but sometimes we don't. Sometimes a tenant has their own supply contract. We don't have access to that data, so we have to either estimate it, or ask very nicely because we have no legal right to that data, so we have to work with them and engage with them to get that, so that needs to be included in the negative pot if you like.

And then on the positive side, either removals, you know there are activities like making a building more efficient transferring to green energy supplies, can we install solar panels on the roof of the building to kind of offset if you like the emissions, and then finally, once you've looked at all of that we're finding that typically there is a pot of what we call residual emissions, so emissions which can't be removed through all those activities are mentioned.

That's when we have to start looking at something like forestry, so how can we remove carbon from the atmosphere through other activities, so we're looking at when can we can we effectively own manage forestry, with the express intention of removing carbon from the atmosphere and then can we then encapsulate that within our carbon fund level carbon account.

So that's kind of what that means in a real estate perspective and we've developed a global approach so that we're trying to transition our entire real estate portfolio to net zero by 2050, but even within that broader commitment, every fund is moving at a different speed, some of them are going to be setting earlier dates and that and having slightly different scope, so yeah - so there's a lot going into that.

Amanda Young: Now, I know one of the things that's really impressed me within the real estate team that you were heavily involved in, was the development of the real estate impact dial. Can you tell us a little bit about what this actually means and a balanced conception?

Dan Grandage: Yeah so it actually came out of an idea of something when I was - before I was working for a Aberdeen Standard - it was actually when I was a consultant. It was an idea I came up with when I was working probably about 10 years ago and I've always had this. No one wanted to buy it actually, so I never managed to sell this idea, but it was this concept that I've been thinking about for a number of years and really very simple.

It's about the idea of trying to score the ESG performance of every asset, so in this case real estate. So what's the ESG performance of the asset? To do that we have 21 material ESG indicators and then we score across all those different indicators on a sliding scale basically from bad to good, but we used a global approach called the Impact Management Project where they have this framework called ABC, which goes from the avoiding harm on the one level, to benefiting stakeholders, to contributing solutions. So the contributing solutions is the good if you like and we just translated that.

Amanda Young: The outcomes, the sustainable outcomes..

Dan Grandage: Exactly, exactly. So that we then can score every asset across all those dimensions but the key part is actually engaging with our clients as well so understanding at a fund level what do they want? What outcome do they want from an ESG perspective?

Because we found that some clients are wanting to really focus on climate change and carbon for example, others actually are more interested in some human capital aspects of labour rights and those kind of diversity issues, so we we're trying to structure the funds to deliver against that so we can score the funds in aggregates across all those dimensions. We have a fund target and we can score each asset both how it is today, but also if we were to change that - because this is real estate and we can change things - what's the target for three years, so that we then know how is it today what would it be like tomorrow and actually how is that going to contribute to the clients outcomes of what they want or targeted outcome.

And it's a really useful way of thinking about this you know, we've had some really interesting conversations with clients who because we've put it on this scale that they're starting to think about - okay well, if I do this how's that going to start affecting returns. If I turn the dial too far is that going to affect my overarching investment performance, and so it's really interesting to help them visualize what we're trying to deliver for them. But it's also really useful as well because we've weaved this in all the way through the investment process. So from a fund strategy perspective all the way through to how we're actually buying and selling assets, to the plans we have for assets, we use the impact dial as that kind of overarching tool to help us keep on track to make sure we're always delivering at the client outcomes

Amanda Young: It's always been one of the things that I've been really impressed with so a huge well done for getting that established. Now it's at this stage of my podcast that I like to explore what inspires our guests. Many of our guests have given us some great books to read or films to watch. Now, I believe you have a person that has inspired you so perhaps you can tell me a little bit about him?

Dan Grandage: Yes, so this is, it's quite a funny one really - funny strange, not funny haha. It's actually my A Level Geology teacher – Mr King.

Amanda Young: Ah Mr King, he is now famous!

Dan Grandage: Yes, Chris King if you're out there, you inspired me. But he was my Geology teacher. I said when I was studying my A levels and he introduced me to the concept of, well, climate change although it wasn't really called that was more global warming and the greenhouse gas effect. He lent me a book to read to explain it and it really - I joined Greenpeace as a result of that - and it just sent me on my whole career has kind of come from that conversation with him. So, I guess I can't talk about myself and my career without mentioning him and giving a nod to him and thank you I guess.

Amanda Young: And do you remember what the book was called?

Dan Grandage: I think it was called ‘The Greenhouse Gas Effect’. It was not very exciting, I've still got it, maybe I should dig it out and find it for you.

Amanda Young: Yeah, it'll be interesting to know what's changed since you initially read it.

Dan Grandage: I think some of the science might have moved on a little bit since then..

Amanda Young: Now, we're drawing to the end of our time together today, so Dan perhaps we can touch on what the future holds. So what do you see as the most significant change coming over the next few years for the private markets business?

Dan Grandage: That's an interesting question. For me, well, from an ESG perspective I think the private markets strategies, I think we're going to see maturity on the ESG journey. I think it's fair to say, ESG's traditionally been more focused on the public markets and to an extent real estate and I think the wider private markets are a little bit more nascent in their journey and I think we will really start to see that taking hold – in more investor questions, more investor interest and more products being developed.

And as I mentioned right at the start, I think within private markets there's a genuine ability to deliver sustainable outcomes, really quite explicit sustainable outcomes, so I think we'll see more of that and more maturity and more ability to report more data. And I think also we'll see the growth of private markets as well to be honest. I think again, reasons as well we'll see more private markets and investments per se and the two aspects together, I think mean it's a really interesting and bright future as we move towards this more integrated world but also more ESG coming into that as well, so yeah those are the things I think will come in.

And I’ll talk about carbon very briefly as well. I think as we start to think about carbon - net zero carbon - I think that's really going to affect the way we're starting to invest, and I think it's potentially going to be transformational the way we're thinking about what we what we buy and sell and hold, so I'm really intrigued to see how that plays out in the market as we go forward.

Amanda Young: Absolutely and how to fix the actual value of the assets that we own.

Dan Grandage: Exactly, exactly.

Amanda Young: Dan it's been absolutely delightful to have you with us today and it's really nice to talk about an asset class where you can have direct impact so thank you very much for giving us your time.

Dan Grandage: No problem at all it's been a pleasure to be here!

Amanda Young: You've been listening to the Aberdeen Standard Investments Responsible Investing podcast aiming to bring you insights into all things responsible investment.

Now to all those who have taken time to tune in, really many thanks for listening to us and you can find all our previous podcasts on our website. Until our next podcast goodbye for now.