Sustainable Investing Podcast. The pressure to raise ambition and keep the net 1.5 degree goal alive

ABRDN SUSTAINABLE INVESTING PODCAST

Eva Cairns

Hi everyone, I'm Eva Cairns, your host for today and you're listening to the abrdn sustainable investing podcast, discussing all things relating to sustainable and responsible investing. Now I'm delighted to introduce our guest for today, Samuel Grantham. Sam is an Investment Manager at abrdn, responsible for managing a number of global investment grade portfolios, including dedicated ESG strategies such as sustainable carbon mitigation, and the recently launched climate transition bond strategy. Samuel is also a member of the abrdn ESG network and on desk ESG decision making function, and has been a key figure in the development of carbon analysis and co-designing abrdn's fixed income climate transition framework. Sam has got a degree in chemical and environmental engineering from the University of Nottingham. Sam, it's such a pleasure to have you with us, welcome.

Samuel Grantham

Thank you, always nice speaking with you.

Eva Cairns

So shall we talk about a little bit about your journey, and what has inspired you after completing your degree in chemical environmental engineering, to get into asset management and focus extensively on climate related issues in your investment solutions? How was that journey for you?

Samuel Grantham

Well, I think the journey really started at university, as you mentioned, I studied chemical engineering, but I also decided to minor in environmental. Usually you do one or the other, clearly, very, very different sub sectors of engineering. One very much focused on creating and designing processes that convert raw materials into products that we all use every day, but also looking at geology, you know, understanding where and how fossil fuels are formed over millions of years. Whilst on the environmental engineering side, it was all really about producing things efficiently, you know, with sustainability kind of front and center. So, really looking at disposal of waste, recovery of damaged land, and the management of pollutants, etc. To be completely honest, I couldn't understand why these courses weren't combined, I felt they were so interconnected. Thankfully, times have changed, it was really quite a scary realisation for myself. So, when I was leaving the university, and looking for a job, I knew I didn't want to work in the oil and gas space, and environmental engineering wasn't really as big as it is today. So, if you look at the renewable capacity growth rates over the last few years, clearly very quickly growing relative to oil and gas industry, and actually, you know, we're both aware, the IEA report that came out this year suggest no new oil and gas development, and so hopefully, that accelerates that effect. But, at the time, there was, you know, it really wasn't the case. So, I looked at the asset management industry, I thought, I liked the long term nature of investing, I think it ties in nicely to the sustainability angle, you know, not just focused on short term profits, but working with companies, engaging with companies over the longer term. To be honest, I enjoyed really kind of how relevant it was to real world events, and hoped, you know, maybe, yeah, I did hope given the growing concerns around climate that I would actually be able to kind of impact it in other ways. So, I joined abrdn on the graduate scheme, and we actually, you know, once I joined the global credit team, where I am today, we launched one of the first kind of low carbon strategies in the fixed income space. Since then, it's been very busy developing, you know, and progressing with that kind of sustainability mindset. Not just low carbon, but sustainability, and actually, as you've already mentioned, recently launching the climate transition strategy, which we're very excited about, and obviously, you've been crucial part of that as well, so thank you.

Eva Cairns

Yeah, fantastic. It's so nice to see how actually, you know that journey from you know, the caring about sustainability in those aspects and realising that by going into asset management, you can actually have such an impact through the way you invest in that space as well. The other area that you told me about beforehand is you went to school in Singapore, and I believe you've got quite involved in understanding the concept of green buildings. Can you tell us a bit more about that?

Samuel Grantham

Yeah, sure, very happy to. I mean, really, kind of since, I think it's probably about 2005, Singapore has been really a leader in the green building space. They launched a scheme called the BCA green marks schemes, and BCA stands for building construction authority, and that really formed the kind of the backbone of Singapore's green building plan or master plan, so to speak. It's all about encouraging engagement, industry stakeholders to adopt the new green building policies. It's clearly again evolved over time, but the first edition targeted new buildings to encourage developers to embed sustainability as part of the building lifecycle, but from the onset. So you know, as obviously, the built environment expanded, its reach to kind of target the greener of the larger stock of existing buildings engaged building occupants to change their energy consumption behaviour. So it's really you know, at the time really powerful and really kind of ahead of tiers relative to other regions, etc. So yes, when I was in school, basically, our school was expanding, and I was really fascinated at how, you know, purely through design, you could enable more efficient water use, you could enable better energy efficiency, whether that's an air conditioning and ventilation, which is clearly key for Singapore. So, I ended up actually doing my final dissertation on just that. So, I was working with the architects and working with the engineers trying to quantify the impacts of these features, and it was really interesting, and again, not something that had gained huge awareness 14 or so years ago.

Eva Cairns

Yeah, and is this something that you can now use, I guess, in your, you know, mandate and the recently launched climate transition bond strategy? We talked a bit about your background and your work in green buildings and chemical engineering, and obviously, in the climate transition bond strategy, it's all about the need for solutions with real world impact that go beyond just decarbonising the portfolio. So, it would be really good to hear a bit more about that, what is the underlying concept of that strategy, and how you bring in your experience into that?

Samuel Grantham

Essentially, so for this strategy, what we do is we utilise kind of three key investment pillars to identify and also acknowledge the risks and opportunities of climate change. So, the first is the leaders, and this is really about supporting the leading emission reducers in high emitting sectors. So for example, looking at utilities, building materials, etc. but also companies maybe from other sectors, which are so strong in, in their kind of decarbonisation policies, we think it causes like, almost like a ripple effect through the industry, and drives emission reduction improvements elsewhere. This kind of ties back to your question on real world solutions. You know, we're not divesting from heavy emitting sectors, we're supporting those that we think are really doing what is what is needed. Then the next bucket is, and this is actually quite unique to fixed income, and I think it's incredibly interesting, and maybe we can touch on it later as well, but we call this bucket the adapter. So, this is all about facilitating climate change adaptation, so supporting those addressing the physical risks. So for example, maybe looking at climate resilient projects, such as flood defences, you know, we definitely think this is a growing area of importance, given what we're taught, you know, given what we've talked about in the past, and, and really expect this portion of the portfolio to grow over time. Then the final pillar, the final investment pillar is the solution. So, supporting companies helping the wider economy decarbonise through their products or services. So, really kind of looking at companies replacing fossil fuels, improving energy efficiency, you know, looking at the circular economy. Actually, you know, very relevant for the example, just now on green buildings, you know, what we're seeing is an incredible amount of green development from the real estate companies. I've got an example maybe we can touch on later, but hugely relevant, and so what we do, you know, we basically believe, by following this approach, this strategy, we’ll be able to avoid the transition risks whilst benefiting from the investment opportunities. So, in areas such as clean energy, climate solutions, but lastly, obviously, and it's key, but the finance climate change adaptation and mitigation, which we think will benefit the wider society as well.

Eva Cairns

Yeah, and on that topic, I mean, we talked about the physical impacts here, and that we're seeing really, you know, unfold around us, impacting every region. Then the latest IPCC report highlights that, you know, this will only get more severe and frequent in the scene as a kind of code red for humanity. You talked about the importance of adaptation solutions to address that, but how, you know, what does this mean, really, in terms of the investment process, how can this really be considered and maybe not only in a in a climate focused strategy, but also in the wider investment process in terms of really understanding how physical risks can impact for example, their credit quality?

Samuel Grantham

Yeah, yeah, very good question and clearly, hugely relevant. You know, my partner, she's Italian, and she told me the day that in August this year, temperatures in Sicily reached 39, well 38.8 degrees Celsius I think that was almost a whole degree hotter than it has ever been recorded in Europe. So it is scary. So, when we think about the physical risks clearly we can approach this from a number of different angles, and again, as I've mentioned, there's a unique element to fixed income, where we can look at specific project financing, so we could target maybe specific businesses, which we think are addressing the physical risks. But, we can also do that at the issuer level and we can also then, you know, we can look at regions and say, you know, what regions do we think of vulnerable, and we can basically invest via municipals, or via actually government bonds. So yeah, it's an interesting space, and it is, is evolving very quickly.

In terms of the assessment criteria, because I think that's how you'd start from an investment perspective. You know, it's not standardised. We do expect the data to improve but it's definitely an area that is less straightforward. For example, if we were looking at transition risks, you could look at the emission profile of companies or regions through time, you can look at the reduction targets that they have in place, but in terms of the physical risks it is more complicated. So what we do is, we basically break it down, we ensure, first of all, that the focus of the investment is in regions at risk from the physical effects. That's key, and quite obvious. We then look in detail at types of measures they put in place, whether that's by government policy or corporates to address these risks. So what evidence for example did they have that they're actually not being sufficiently proactive respect to these policies? Then, of course, and it just gets back to the question around the data. But, we do look at metrics to track the spending and the impacts of the adaptation projects. So, if we're looking at a company, we might say, okay, well, how material are these activities to the company's future operations. So looking at the capital investment, looking at the contribution to revenue, etc. You know, clearly this framework is essential for something like a climate transition strategy, but we really need policy developments in the space to support wide integration of adaptation of opportunities.

I really hope this IPCC report results in a change which, which is very much needed. I've got an example which I can touch on. So, this is an interesting one. Chile is clearly a country very vulnerable to climate change, and actually, if you look at certain kind of models scenarios, temperatures could increase between I think it's something like one and four degrees across the country by the end of the century, which is material. They expect rainfall patterns to change from north to south, and actually, they expect water shortage, especially in the central part of the region, and that's where obviously 70% of the population is living. Glaciers, which at the moment act as water reserves, are and will continue to retreat. This is a country which has some incredible decarbonisation policies in place. But, they were also the first Latin American country to actually issue a green bond to direct proceeds towards Climate Resilience Project. So, this includes things for example, like flood defense infrastructure, but also looking at irrigation systems, making sure water management is more efficient, but also looking at water pollution prevention measures, as well. So, part of the framework that Chile has incorporated, you know, they commit the Ministry of Finance to track these proceeds and published periodic impact reports. So it's really exciting, you know, and also, it's scary, I mean, given the vulnerability of the region, the proactive nature and the policies that this government put in place, you know, we think it's really powerful, and really leading by example, so a good example of an adapter in our view.

Eva Cairns

That’s, I think, a really important message that there's a lot of focus on the race to zero and the transition, but at the same time, those physical impacts will become more severe and frequent. As you say, they already are impacting so many regions today, and therefore you also have to think about the adaptation aspect. Anyway, you know, in addition to the race to zero, we have the race to resilience. Sam, you mentioned data, and that it can be a challenge to measure really the impact on climate change in the real world. So, what are the main challenges in your view?

Samuel Grantham

Yeah, I mean, there are clearly lots, what we try and do is we try and break it down by the pillar or the investment strategy. So, whether we're addressing the physical risks, looking at solutions, or the transition risks. I mean, for the transition leaders, you know, we expect the companies that we look at and support to be cutting emissions faster than the peer group, and so we actually show the average emission reductions of our leaders relative to the sector, and that’s really important for us. If we look at the solution space, you know, this is not actually that standardised as well. Now you've got energy efficiency, you've got waste material recovery, you've got emission savings, you know, all of this really, really important for the pillar, but the data is it's just not standardised. It's not as easy as looking at a carbon footprint of a portfolio, for example. It's why we actually have to break it down. We kind of look at sub sectors of the data. Again, on the physical risks, we've touched on this it's again, it's not standardised. So you know, again, everyone's very familiar with carbon emissions, but that's only one element of climate change. So we really need to develop other areas, which is why, you know, the IPCC report is going to be crucial, especially around the physical risks.

I mean, on the physical risk, you can't just work out on monetary value to measure the risks. It's the quality of people's lives affected by climate change. It's the loss of biodiversity, but also the impact on life expectancy. So it's hugely complicated. I think what we do at abrdn is we ask the question in a different way, we say how do we measure success? I guess one way we measure success, and I'll use the transition leaders as an example, is seeing companies continuing to raise the bar with respect to their policy commitments. So EDP, this is a vertically integrated electric utility based predominantly in Portugal, and we consider them a transition leader. We actually we looked at the company last year for the transition leader space and had very aggressive targets but also credible short term targets. So, they were looking at renewable capacity increases by 12%, but over a two year period, so after one year, we can really sense check those kind of targets, but they also actually committed to phasing out coal by 2030, which was a very strong kind of message for management. But actually this year, and this is this is where the success comes in, you know, they raise the bar even higher, they were already kind of way ahead of certain peers in the European Space. They've actually decided to have zero coal exposure five years ahead of schedule, they've got 90% scope one and two reductions, but also very strong scope three, and actually, and this is something we discussed as a team recently, you know, I think they're one of the first, if not the first utilities in Europe to officially phase out gas. I mean, this is, you know, in the investment space, very much considered a transition fuel, and they've said, actually there's no place for gas going forward. So, they're going to phase out by 2030, so really remarkable how far they've come. Actually, they're not slowing down either, which is just great to see.

Eva Cairns

Yeah, that's a great example. I think it also shows the power of this active research approach and understanding really, how credible the transition strategies and how ambitious they are to come up with that transition leaders bucket you were talking about. So, we've got COP 26 coming up soon, and obviously, you know, we talked a bit about the need to have all sorts of regulatory environment to support the net zero transition, and so the pressure is on to raise ambition and keep the net 1.5 degree goal alive. COP 26 is focused on five pillars in terms of the content that they focus on, energy transition, finance, adaptation, and then also claimed road transport and nature. Particularly for the last two, a quite specific one is transport in nature, where do you see you can have strong solutions emerging? How do you get examples of how you would think about those two?

Samuel Grantham

Yeah, I think, I’ve definitely got some good examples we can go through. I think, you know, you have to take a step back, sometimes, especially when you're looking at the transport space. If you look at energy consumption by sector, what you would see is the transport sector not only has grown the fastest in the last decade, but also consumes the highest amount of energy globally. Actually, if we look at the energy consumption of that sector of the transport sector, I think it's something like almost, you know, it's only around 1% is consumed from electricity, so it's a critical focus with huge potential. When we think about climate change in its in its broadest sense, clearly, we need to replace the fossil fuel consumption with electricity and generate that electricity from clean energy. But, it's not just about supporting renewables. I mean, clearly very important, but it's about changing how we consume that energy as well. Also on the transport element, you know, you really need to understand the region and get a sense of what's currently in place as well in terms of infrastructure.

So in the UK, for example, very different from, you know, certain Latin American regions with respect to public transport, access to electricity, etc. To start I mean, starting with the UK, the government actually recently introduced a net zero target for GHG emissions by 2050. If you think about buses and coaches, they're responsible for I think it's 6% of pollution from road transport, and then obviously, you know, cars and diesel vans account for something like 71% of that, so that's the focus really. We're looking at the company, Stagecoach, you know, obviously everyone knows stagecoach. Basically it recently completed, I think it was the Europe's biggest electric bus fleet order, and they're really a major advocate on clean transport policy, and they pledged that all new buses to be kind of ultra-low or zero emission from 2025. We actually looked at a research paper by greener journeys, and they suggest that if everyone switched from, you know, a car to a bus for just one journey a month, it would result in something like 1 billion fewer car journeys, and we'd save I think, something like 2 million tonnes of CO2 every year in the UK. So sometimes the simplest solutions are actually the most effective, it's really quite, quite amazing.

It's not just about supporting the transport companies itself, though, you also have to think about the supply chain. So we look at the transport industry, there's a company called Alstom and their entire businesses manufacturing transport products and services, and they're very focused on low carbon trends. It's a growing part and continues to be a focus for them, and actually, the majority of their business is now electric trains. So in Europe, I think it's around 50% of the rail network is not electrified, and actually, to be honest, much of it won't be because of the low density that economies of scale just don't make sense in certain regions, given the volume of passengers. So what they're trying to do is they're trying to develop battery and hydrogen powered trains to replace these old diesel trains. We really think Alstom's an interesting one, it's got kind of first move advantage on the hydrogen train front, they're heavily involved in lobbying for green hydrogen and expanding that market. But also, actually, and this is actually something more interesting that I've read recently, you know, they're looking at digitisation of transport services. So, they're improving the energy efficiency that they're looking at how systems can help. For example, they have a system in place with some Metropolitan transport networks, where one trains braking process generates electricity to power another train running. That's all interconnected, it's really fascinating. So that's transport.

In terms of the nature example, in the Czech Republic, what we've seen in the last 100 or 200 years is the natural ecosystem has largely been replaced by unstable spruce and pine monocultures, which can hardly really play a crucial environmental and social role that natural or semi natural forest ecosystems have traditionally played in the past. What this is, and it's really sad, but this has really led to a dramatic decline in the country's biodiversity. What we found in in recent research reports is they're now suggesting that scientists think that this has resulted in severe flooding as well. So, we've looked at a company and it's called CTP, it's a central Eastern European real estate company, and already they have very, very strong green credentials in Europe. But they recognise that construction is extremely difficult to decarbonize, and so CTP has developed an extensive offsetting scheme, essentially. So, what they've done is they own five and a half million square miles of partially deforested monoculture land, and what they're doing is they're reforesting it know that they're adding diverse kind of native species. So, they're not only improving the biodiversity, they're creating natural capital offsets. Furthermore, they're also protected from the physical risks of flooding, so it's a really nice initiative from the company, and again, simple but really effective, you know, that combination of adaptation, and mitigation using natural capital, which I just think is great.

Eva Cairns

Yeah, I was just going to say that's a fascinating example of bringing all these things together really, so quite powerful. We're coming to the end of our podcast, I just want to ask you the final question, whether there are any people or kind of eye opening moments that have inspired you on your journey, and any books or podcasts that you would recommend to listeners?

Samuel Grantham

I mean, in terms of the eye opening moment, again, I think that has to go back to university and kind of realising whole industries have been educated without considering, you know, sustainability, and the overall environmental impacts that result from these, you know, these intensive industrial processes. Again, I think times are changing, but it was it was a real kind of eye opening moment for me. Yeah, in terms of books, that there are clearly a lot out there now. I think one that stands out is, is a book called ‘What we need to do now for a zero carbon future’, it's by Chris Goodall. It's an urgent book, but it's practical, and actually inspiring, which you don't always get lucky enough to read, given the challenges that lie ahead, and clearly quite scary and real. But what the book does is it kind of draws on actions, policies, technologies, already kind of emerging in the world, and really kind of outlines ways to achieve it, but really keeps it practical, which is really important. Because sometimes you can get burdened by the technology and relying on kind of new technologies which don't exist today. So yeah, very, very good read, I'd highly recommend it.

Then on the podcast again, I'm trying to think of one that's potentially different. So TILclimate, this is a podcast I listen to, and it's really a useful way to get to speed in a range of complex climate topics. What they do is they kind of break down the science, the technologies and the policies behind climate change, but what's really neat about it is it's short and concise. It's I think usually about 15 minutes, and it's clear, something I find very interesting, but you also have them explain it from a scientist perspective. So very relevant, very real, and very factual, and again, only 15 minutes so you can you feel like you can learn quite a lot in that space of time.

Eva Cairns

Fantastic. Excellent. I haven't listened to that one before, so that's definitely on my list now. Thank you, Sam. It's been such a pleasure to have you with us. Thanks a lot for your time and your fantastic contributions and examples.

Samuel Grantham

Thanks and thanks for all the good questions and actually all your help so far on everything climate, huge thanks from me as well.

Eva Cairns

Thank you. Excellent. You’ve been listening to the abrdn sustainable investing podcast, a podcast relating to all things responsible and sustainable investing and today our focus on investing to drive climate mitigation and adaptation forward. Thank you all for tuning in. You can find all our episodes on various podcast channels such as Spotify and Apple, as well as on the abrdn website. Until our next podcast, good bye for now.

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Samuel Grantham, Investment Manager at abrdn, joins host Eva Cairns to discuss COP26, the 5 pillars of content they will focus on and the investment strategies that can support the transition to net zero.