Multi asset climate investment strategies

Podcast

ABRDN SUSTAINABLE INVESTING PODCAST

Eva Cairns

Hello, 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. I'm delighted to introduce our guest for today, Craig Mackenzie. Craig is Head of Strategic Asset Allocation Research and Multi Asset Climate Solutions at abrdn. He's been working in the industry for over 20 years, most of it in ESG. He was involved in the foundation of the United Nations PRI, Principles for Responsible Investing, the FTSE for good and the Carbon Disclosure Project, and he's been on the board for the Institutional Investors Group on Climate Change. Craig set up the Edinburgh University Centre for Business and Climate Change, and the Climate Finance MSC. Now he's running two new climate solution strategies. Craig, it's such a pleasure to have you with us. Welcome.

Craig Mackenzie

Hi, there.

Eva Cairns

So Craig, you've been thinking about climate investing for over two decades now, long before the industry was ready for this. Can you tell us a bit more about your personal journey and career when it comes to joining up investing and climate change?

Craig Mackenzie

Yeah, I started in the investment industry in the late 90s, and my first job in the industry was a kind of research analyst for an Ethical Investment Fund, the first Ethical Investment Fund in the UK, actually, as it happens. Back then all this ESG stuff was a tiny little niche, sort of a fraction of 1% of all the assets under management in Europe. So, it's been such a huge privilege and pleasure to see ESG blossoming into this, this huge industry that it is today. It's interesting. I mean, even back then it was very clear, back in 2000, that climate was the number one issue, certainly on the S&G side of things. And even then the tiny little industry, we were pretty focused on trying to engage with companies. I mean, I remember meeting companies like Shell, the CEO of Shell back in 2001, and talking to them about the fact that their product was killing the planet. So, it's amazing that they've now adopted a net zero strategy. I mean, still some debate about how credible it is. But the world is certainly changing.

Eva Cairns

Yeah, so as you say, lots of progress and still a long way to go to get us to where we need to. On that topic of climate investing strategies, you're now managing two recently launched Multi Asset climate strategies. Can you tell us a bit more about the concept and what they're trying to achieve, and why is now the right time to invest in the climate thing?

Craig Mackenzie

So, it's pretty clear that the world is going to go through a pretty radical change over the next 20 or 30 years. There's a big debate about whether that change is going to be fast enough, but it's absolutely clear that the combination of really quite rapid technological progress on solar, wind, batteries, electric vehicles, and other kind of green technologies. Plus, much more ambitious government action is going to drive wholesale changes in the energy sector, in the transport sector, in heating, in numerous industrial systems that manufacture steel, manufacturer cement. A wide range of key parts of the economy are going to go through a radical transformation, and these kind of radical disruptive changes are really exciting opportunities for investors, because it's in these changes that you see tiny companies grow into giants of the future. So, kind of back in 2000, companies like Amazon and Google existed, but they were relatively small, tiny little market shares. They've now become the kind of the giants of the global economy, and that's going to happen in some of these green technologies. We're going to see very large, kind of green power companies, green industrial companies, Tesla this week, has breached the $1 trillion mark, in terms of its valuation. So, we think there's a really exciting long term structural investment theme here.

While the a few of the really high profile names like Tesla, I think the kind of the future earnings growth potential of these companies is now fairly fully priced in. That isn't the case for a lot of the kind of below the radar technologies. And so, our approach to this theme is to really look quite hard across the full global opportunity set for Climate Solutions, really delving into the small cap sectors, looking across different asset classes like renewable energy infrastructure, to find opportunities where there is still going to be substantial growth and substantial value, which allows investors to expect higher long term returns.

Eva Cairns

So as you say, there's lots happening in terms of the industry, the investment opportunities it provides in investing in climate solutions. But, I think at the same time, we're seeing a concern in the industry about greenwashing, and whether sustainable investment funds are really investing in climate solutions. Do you think this is a problem? What is your approach, and how do you demonstrate, how you differentiate truly credible investing and climate solutions versus greenwashing?

Craig Mackenzie

Yeah, I think it is a problem. In fact, it's not just me that thinks this, it’s the regulators in the UK. The FCA wrote a letter to asset managers recently, expressing concern about greenwashing. The European regulators have introduced a big new regulatory framework to try and stamp out greenwashing. So, it's a real problem that there are lots and lots of funds out there that call themselves sustainable, that even put the climate word in in their fund title, but end up investing in pretty bog standard companies that don't have a particularly strong exposure to the exciting kind of climate theme that I outlined. And actually, I think that's often for a very simple reason, a lot of these funds are benchmarked against sort of MSCI Global Equity Index, or some other standard equity benchmark, and in order to manage the risk against that benchmark they need to hold the big mega cap names. The big mega cap names are not terribly climate, they're not driving the climate solutions. So, we’re making use of a new regulatory framework called the EU taxonomy of sustainable activities, which provides an objective definition of sustainability and provides a 600 page rulebook to identify business activities and companies that are genuinely driving the transition to sub two degree world. So, we've kind of scoured the global investment universe of 9,000 companies to find those genuinely green names. We only invest in those names, and we won't invest in our climate opportunity strategies in the mainstream mega cap companies. With perhaps a exception of a company like Tesla, where it is a mega cap, but it's clearly contributing to climate solutions.

Eva Cairns

That's interesting, and also your strategies are multi asset strategies. What would you say is the benefit of using those, can you bring it to life for us with maybe a couple of examples of the type of assets you would invest in your multi asset climate strategies?

Craig Mackenzie

Yeah, so one of the downsides of having a really focused approach to climate solutions, is it can be a bit of a roller coaster ride. There are now some kind of cheap and cheerful ETFs out there, that track clean energy indices, and really focus on climate solution type indices, but they can be hugely volatile. The S&P Clean Energy index, for example, in the last 12 months, went up 60% and then fell 30%. For most investors, that kind of volatility is really uncomfortable. So, we've found with our pretty careful modelling, that if you combine green equities with green bonds, green bonds are a huge new category in the investment world, but they're much less volatile, much less risky. If you combine green equities and green bonds, also, things like green infrastructure, there are huge opportunities for investors to invest in operational wind farms and solar parks and battery storage plants. If you combine these different kinds of asset classes, you get really strong diversification, and that reduces the risk. So, we've been able to get pure exposure to the climate theme, with less than half the volatility, half the risk of some of these pure play indices and ETFs. So that's how we think multi asset can help investors have their cake and eat it, have the green exposure, but without the roller coaster ride.

Eva Cairns

What about the challenge of really actually measuring real world impact? So you know, many in the industry are focused just on decarbonisation, for example, and net zero line decarbonisation trajectories, which can sometimes have, you know, unintended consequences that don't really help support the transition to net zero, by just simply, you know, divesting from some carbon intensive industries that we however need in 2050. We need them to transition and be part of the solution. You've obviously talked about the Solution focus of your strategies, but how do you tackle this, this aspect of measuring impact on real world contribution to net zero?

Craig Mackenzie

Yeah, I think that the measurement question is, is kind of quite challenging. There are some new methods for assessing avoided emissions. So, if you if you build a wind farm, you're displacing generation that would have otherwise come from gas or coal, and so your wind farm is avoiding carbon emissions that would otherwise be generated. And we are exploring these methods, because that's essentially what the strategies invest in, it's the portfolios are entirely full of wind farms, solar farms, battery plants, wind turbine manufacturers, solar panel manufacturers, all of their kind of technologies that are driving the change. So, that gives me some hope that we might be able to measure it. At one level, I'm not sure that our customers are all that concerned, if you can demonstrate to them that you're only investing in the companies that are driving the transition to a low carbon economy. So, if I tell a customer that that I'm only going to be investing in wind farms, and solar parks and electric vehicles and battery tech, they're reasonably comfortable to accept that there is a positive impact from those activities, without me having to come up with some number of the sort of tonnes of carbon I've saved the economy. At the end of the day, I do want to try and measure that, but I don't think that it's the be all and end all for this kind of strategy.

Eva Cairns

I think that's a really good point, because the industry is so focused on kind of standardising metrics and measurements, but when you look at what's in the strategy, it's pretty intuitive in terms of the real world impact that it has, as you were saying, so that's quite interesting. Talking about your role as the Head of Strategic Asset Allocation, you've also published an award winning paper recently on how to incorporate climate change as a third dimension into the strategic asset allocation process. So, can you tell us a bit more about that and explain how this should be done.

Eva Cairns

So, strategic asset allocation is quite a kind of wonky technical topic. So, I'll just give you a kind of, I suppose a case study. A number of our biggest clients, including our very biggest client, Phoenix, have committed to net zero for their portfolio. So, they're essentially intending to reduce the carbon exposure of their portfolios towards zero by 2050. But of course, Phoenix, like most of our clients, has legal obligations to serve the financial interests of its beneficiaries. So if you're going to adopt a net zero strategy, you really do need to convince clients and regulators that you've thought through the investment implications of that strategy. So, we've found that if you integrate climate scenario analysis into the strategic asset allocation process, you can provide some proper investment governance to a net zero framework.

So, we've taken our climate scenarios, our best case projections for what we think will actually happen, not kind of wishful thinking that the world's definitely going to hit net zero by 2050, kind of best expected view of the future, and we've run the Phoenix portfolios through those climate scenarios, to sort of stress test their decision, to see whether the portfolios will be robust in the face of a wide variety of climate scenarios. And the results are really, really kind of positive that net zero portfolios can perform under quite a wide range of climate scenarios, and the risk of material detriment to investors is pretty small.

Eva Cairns

That's really great to see how we can think about incorporating climate change into that process. Maybe we will move on to just a final question to leave something inspirational for our listeners. Is there anything, any other any people or any eye opening moment that have inspired you on your journey? Or is there anything you would recommend in terms of books or podcasts for our listeners, for example?

Craig Mackenzie

Yeah, well, the thing that's got me, I mean, way back in sort of 15 years ago, the things that got me really excited about climate, because I have to say, in the early 2000s, it was a pretty depressing place to be thinking about the climate, because at that point, no policymakers were really doing anything about about climate. And you really felt that we were on the road to a four or five degree apocalypse. So, it was quite hard to find optimism. The optimism that I found, and the optimism that has exceeded by some margin the expectations that most kind of analysts had back in the early 2000s, is optimism about technology. We really have seen real radical progress in bringing down the cost of renewable power generation by 80, even 90% over the last 15 years. Something similar is in the process of happening with electric vehicles. By the late 2020s electric vehicles are going to be cheaper to buy than gasoline driven vehicles, and they're already cheaper to own over their lifecycle.

We're going to see this happen, I think, to hydrogen, which will allow us to have renewable heat in our in our homes. Right across the board technology is enabling us to exceed our ambitions on climate and it makes it so much easier for policymakers if you know that your climate transition actually will end up saving you money and being good for the economy rather than a kind of tax burden.

So, probably the biggest sort of inspiration on the kind of technology side, there's an organisation in the US called the Rocky Mountain Institute, which has been working on this kind of technology theme for the last 20 years. Their founder, a guy called Amory Lovins has written a number of books on this, where I remember back in kind of 2005, he was talking about how technological change could increase energy efficiency, resource efficiency by a factor of four, for the same price, and right across the economy. So I think that's a really exciting hope to have that we can we can fight this this kind of climate problem and a wide range of other environmental problems by revolutionising the technologies we use in our lives.

Eva Cairns

And that's such a great optimistic point to finish on. We've now come to the end of our podcast, and it's been such a pleasure to have you with us. So thanks a lot for your time and all your inspirational contributions. Great.

Craig Mackenzie

Thank you, Eva. It's been, it's been a pleasure to join you.

Eva Cairns

You've been listening to the abrdn sustainable investing podcast, a podcast relating to all things responsible and sustainable investing, and today a focus on Multi Asset Climate Investment Strategies. 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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