Eva Cairns

Hello 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. I'm delighted to introduce two guests today, Tony Hood is an investment director on the global equity team at abrdn, Tony has over two decades experience of managing global equity portfolios and researching industrial companies energy sector and utilities. Many of the solutions and technologies that reduce greenhouse gases prevent environment degradation, biodiversity loss are to be phased in such companies. Tony is now using this wealth of experience to manage the Aberdeen Global Climate and Environment investment strategy. We're also joined by Blair Couper. Blair is an investment manager in the global equity team. Having joined the company as a graduate in 2014. Blair has covered the industrial and technology sectors as an analyst since 2018, two sectors that are well aligned to the company's providing solutions to the climate crisis. He's also a portfolio manager on a global innovation portfolio. And as such brings a unique perspective, looking for the new technology companies and innovations that are essential for us to have a chance of meeting our net zero 2050 ambitions. Tony and Blair, it's such a pleasure to have you both with us. Welcome.

Tony Hood

Thanks, Eva. It's a pleasure to be here.

Blair Couper

Thanks Eva, really looking forward to the discussion.

Eva Cairns

Great. So Tony, let's start with you, to understand a bit more about your journey and without wealth of experience in Portfolio Management and Research, how has the industry changed over the last 10 years when it comes to considering the climate crisis that we're seeing unfold around us and other environmental factors as part of the investment process?

Tony Hood

In my experience, the industry has been very slow to evolve. Policy, however, developed earlier and began to react to science in the early 90s. We had the Earth Summit in Rio, and then the Kyoto Protocol some years later, that brought a mandate to reduce greenhouse gas emissions. So climate change, and its negative effects have been recognised by science for decades, the physical technology and market risks are quite evident. But it's only in the last five years or so is this become a mainstream and investment theme. It was perhaps the climate Paris Climate Agreement, and the UN Sustainable Development Goals that brought it into the spotlight. Then, with the arrival of the likes of TCFD, the EU SFDR and the EU taxonomy, have we seen progress towards consistent and transparent climate related financial disclosures to improve the understanding of material risks. Now, we must become more aware of the potential liability risks, the regulatory requirements to assess climate risk, and make the relevant disclosures are becoming much more prevalent. These are growing issues for both asset managers and the companies they invest in. But if I look forward, I'm very certain that asset managers will have an increasingly important role to play here, because they can reflect the changing sentiment of society and investors when they engage with that investee companies and then play an influential role in capital allocation.

Eva Cairns

I think you're rightly seeing that the last five years we have really seen such a significant increase in the focus and how material climate changes as a factor really, across so many sectors and regions. And coming to you know, Blair, maybe you don't have the same number of years of industry experience as Tony, but you've worked in a very different environment for an asset manager in Ghana, at the start of your career. Can you tell us a bit more about that and how your journey evolved from there? How is that experience in Ghana influenced your thinking when it comes to integrating climate change into your investment decisions?

Blair Couper

Yeah, I might not have the same grey hairs just to say that, as you mentioned, I worked for a small asset manager in Ghana for a few months through a programme called Career Journey International, which was just after university and working and living in a Ecran in the financial services sector was a pretty eye opening experience that made me very aware of the ESG risks that are involved in investing in these emerging market economies. So there was quite a lot of corruption and a lack of governance for many of the businesses that I dealt with. But I absolutely loved my time there. I got to meet some amazing people and had a great experience before heading back to Scotland to start my career with Standard Life investments then and following the Graduate Programme, I spent some time on our client facing teams whilst I earned the CFA qualification and then moved across to the global equity team in 2018. Where, as you mentioned in the intro, my sector focus was to look at industrial and technology companies and given the sectors so well aligned to the climate solutions I started working on the on the climate environment funding in 2019 and have had the privilege of working alongside Tony, learning from his vast depth and breadth experience and knowledge as we built the framework for the fund. When I think back to the experience in Ghana, and the inferences may be heard and my thinking when it comes to climate change, when I completed the internship, there was a few others on it, who were doing internships in oil and gas at the time and Ghana had made its first major discovery in oil in 2007, there was very high hopes for the industry and the ability for it to lift the standard of living of the country and provide significant wealth creation And these sorts of all kind of been dashed, as the large oil majors have moved their focus to renewables and kind of highlights to me that the secondary effects from the move to a cleaner energy system that we're witnessing, and you know, how if we're not careful, this can exacerbate some of the inequalities that we see worldwide. I wouldn't be surprised if a lot of the Ghanaian feel hard done by as the developed economies, who are responsible for the majority of the historic greenhouse gas emissions have become rich at the expense of the global commons. So giving these countries access to affordable finance and funding the climate projects and developing countries, which are crucial to achieving our net zero ambitions is, is really key when understanding the best solution providers and how that might impact the companies that who will ultimately provide these solutions.

Eva Cairns

Yeah, I think you make a really good point around, you know, climate justice, and the need for adjust transition that considers the social impact and economic impact on societies and countries and how, as you see how challenging that is to do it in a socially just way. And going back to the climate and environmental strategy I mentioned at the start that you both are involved in, and we get to hear a bit more about the concept, I often talk about the need for, you know, investment solutions to have real world impact that goes beyond just tracking decarbonisation trajectory, and is also clearly linked to financial investment case. So how does the strategy do this? Tony, let's start with you. The concept, that comes from the recognition that there's just been a relentless upward trend in greenhouse gas emissions, population growth, rising living standards, and just simply insufficient sustainable behaviours that come about to exacerbate it. And as a result, we need a very significant reallocation of capital, alongside the significant and meaningful policy changes that we're starting to see, to address the problems. And these together hopefully, can slow the rate of change and to some extent, protect us from the consequences. But our premise is simple here, with the strategy, companies that make climate environment solutions will deliver faster and more sustainable growth than those that do not. So we assess and validate the significance of the opportunity by identifying the areas where the need to decarbonize is greatest. So we look at pillars, we look at how we power and source, such an example would be a company improving the efficiency of the power grid, or providing clean energy, we consider how we build, so we think about energy efficiency and smart building technologies. Or we examine how we transport, here more sustainable transport systems, such as EV, or bicycles are interesting.

How we may can use, we look at the development of ever greater industrial efficiency or the growth of the circular economy. And we also consider how companies operate, we look at the companies we believe, are leading the drive towards environmental efficiency relative to their peer group. So these pillars and their sub themes are a framework for us to monitor exposures, and ensure that we're diversified across the relevant climate thematics. So the themes are considered the risks and opportunities are understood as best we can and managed and controlled.

Eva Cairns

So that covers all these key areas of how we power how we, you know, how we make things, how we use transport, what we eat, which I think is great, and also how that compares to peers. But a key challenge is how do you measure that? How do you measure the impact the fund is having? So Blair may be coming to, you know, what are the challenges when it comes to measuring the impact their investment strategies having?

Blair Couper

Yeah, I think this is a really interesting topic and industry at the moment, because the data around climate impact is still evolving. And we don't feel that there's any single metric that you can use that does a good job of capturing this impact. So that's firstly, why we feel very strongly that you need to have an active approach to managing a climate solution strategy, as you need to attempt to measure both the materiality of the solution to solving the climate crisis whilst also assessing the financial materiality of that to the business. The industry is definitely getting there in terms of scope one and two emissions data. And I mean, that refers to the direct emissions for business operations and from purchase energy. That is definitely improving. And we're seeing far more disclosure in that fund, but the data around scope three, which is emissions from the value chain, both upstream and downstream, and then scope four emissions, which is potential avoided emissions, this is still a very, very nascent stage. And there's no real standardised methodology. For these avoided emissions across many sectors. When you think about investing in climate solutions, the scope three and scope for emissions are the ones that are key to understanding the impact that those products are having. And what's interesting is, you know, over the last, especially even here today, there's been a staggering increase in the demand for low carbon funds. So fund is looking to invest in a fund that has a low carbon footprint relative to a benchmark. But when you think about what that actually means, it means that you're allocating capital towards those companies that have low scope, one and two emissions, which tend to not provide any of the solutions that we need. So financial services, companies, communication services, companies and healthcare, where you can imagine they've got low carbon emissions, but it's purely because of the nature of the business rather than that, any kind of strive towards providing any solutions to those areas that we need to decarbonize. And the premises, as Tony said, of this funders, they can really focus on companies that are providing the products and solutions. And that's where you need to measure it through the scope three, and four. And, you know, just one more point here, it says, you're seeing the industry, turning towards green revenue as a data metric, and almost using that as a proxy for scope for emissions. But this is only telling you that percentage of that company's product mix that's aligned to green solutions, it doesn't quantify the materiality of those products or relations to the climate crisis. The data around green revenue is very sparse, as well and there's differences from different providers, there's even different shades of green. So you know, $1 of green revenue from making a hybrid electric vehicle is the same as $1, of green revenue from making a full electric vehicle and arguably, the full electric vehicle is greener, and so there's no waiting for that figure to account for that. And perhaps most importantly, when you focused on green revenue, it might mean that you're missing potentially impactful innovations, which are not material revenue drivers for the company know, that which may become a material driver in the future. And it's probably best illustrated that with an example and one that we haven't strategy is animal nutrition company DSM, which has developed a new product called Clean Cow. This is a feed additive, which meaningfully reduces the amount of methane that the Cattle emit, shall we say, into the atmosphere, and methane causes 20 times more warming per particle compared to carbon dioxide. And it's estimated that the carbon equivalent emissions caused by cattle globally is about 80% of total carbon emissions. So it's a huge problem. I mean, just to give some context of that, that's about the same carbon emissions from all passenger vehicles globally, it's four times the amount of emissions created from aviation. So DSMs innovative product allows you to reduce that methane that's produced by 30%, from a teaspoon of feed additive, which could in affect if we, if they were to address the entire total market of cattle globally, could help us reduce carbon emissions by 2%. But clearly, this is a tiny portion of the revenue currently, they've just developed it, they're looking to scale it quickly. But it's an example of where we feel you really need to understand the business, the new product lines, the impact that they can have, both from an impact perspective, but also from a financial materiality perspective.

Eva Cairns

And I think that's so exciting to hear about some of these innovations. And as you rightly see, you know, the impact of what we eat and and when you compare some of the numbers to, as you have just done to, for example, transport fingers is pretty significant, but often doesn't get as much attention as the focus on energy, for example. So I think that's a really interesting example. And that the scale of the decarbonisation challenge is absolutely enormous, you know, we reach Net Zero, Net Zero 2050, we would need to reduce emissions by 7% every year. And if we compare this to the reduction in 2020, which was mainly due to COVID, on the whole to economic activity in many regions that only managed to reduce emissions by 6%. So we need to increase that even more to 7% at least to be able to achieve that without such drastic impacts on economic activity is going to be a real challenge. Coming to you again, Tony, what do you think is you know, just listening to those numbers and the scale of the challenge? How can that be achieved in your view?

Tony Hood

First of all, the part that I find quite is when you talk about a 7% reduction in emissions every year. It's that it's the need to decouple that from the economic growth that I find most concerning, because that simply hasn't been achieved before. And the COVID pandemic produced by far the biggest fallen emissions we've yet seen, but it only took until this time last year before we were back where we started. And road and rail stopping and industry shutting down. We can't go forward like that, obviously. So we really need structural changes to the way the economy functions in high society behaves.

So there are obvious things we can consider such as our method of transport. With the likes of a third of UK household emissions from road transport, we can drive less or we could drive an EV, we could walk or cycle more for the short distances, and that can make a difference. Working from home clearly is beneficial and fewer business trips, and the use of video conference calls can help.

I saw a statistic that if we consider flying less a flight from London to Majorca could save the equivalent of co2 from converting to from a conventional diet to a vegetarian diet for a year, we can consider the food we eat, the composition of what we eat, a plant based diet can cut emissions from food and agriculture buy as much as 70%. Or we can look at the source of protein we consume that emissions from red meat 100 times more than from growing fruit and nuts. So those are some of the things we can do know that everybody can do. But in addition to that there's some exciting innovations that will be necessary for us to reach our targets, which Blair might like to talk about.

Eva Cairns

Yes, absolutely. So Blair, you can you can maybe add to that, given your involvement in the global innovation strategy. Can you tell us about some of the most exciting innovations you've seen in your research in relation to climate solutions?

Blair Couper

Yeah, absolutely. It's very exciting in a fast moving space with a wide range of different companies innovating to provide solutions to the climate crisis. And quite often in areas that you wouldn't expect. You know, when you hear about a climate and environment strategy, people automatically go towards, you know, wind turbines or nearby energies. But we've got a lot of different companies in the fund, which are quite different. That ranges from us software companies, who enabled the design of green buildings and the ability to calculate and optimise the embodied carbon emissions from those buildings, to digital textile printing companies, to milk it delivery companies, and even electric forklifts and warehouse automation companies. So we've got quite a wide range of innovative companies in the fund at the moment, and recognise potential areas of future investment, we've been doing a lot of work on the future of hydrogen as a possible green fuel to help decarbonize the global economy and understanding the various fuel cell technologies and their prospects. And we've also been looking at carbon capture companies that could offer a carbon capture service for industries such as cement and steel, with controlled environmental agricultural companies, who will benefit from not only the increase in demand, but the security of the supply, they're able to offer, Emeryville, exploring the likes of electric vehicles where the panelling of the car is made from solar panels, which charge the battery. So I mean, the plethora of companies out there that are coming to market and innovating in this space is it's mind boggling. And in the framework that I've gained from both my coverage of technology companies previously, my involvement in the innovation strategy, and also from a disruptive innovation course that I did at Harvard Business School last year, has given me quite a good background in terms of how to assess these companies from both a financial and an impact perspective, because the opportunities that these companies address are often vast, but you need to think probabilistically about their chance of success, their source of competitive advantage, their long term margin protect potential in order to build conviction in the financial case, as well as being able to assess the impact from such solutions.

Eva Cairns

So the challenge is obviously significant, as we've talked about, and we have got COP26, one of the largest climate change conferences coming up soon, and the pressure to raise ambitions and take action to keep this one and a half degree warmer and go live is very high. And at the moment, the policies that we are seeing are nowhere near Paris aligned. So we need more certainty from policymakers. And Tony, coming to you maybe what do you think are the key actions we need to help deploy the capital that is needed to achieve net zero? What policy environment is needed for that?

Tony Hood

I think I could make three points here. First, the key to the success or the failure of the summit are going to be the national emissions reducing plans known as the nationally determined contribute that's been delayed evidently by COVID and by politics, but an insufficient proportion, maybe a third have submitted a plan. The current plans are woeful relative to the necessary cuts required to limit warming to one and a half degrees.

Secondly, the availability of finance the quality of finance, we've seen policy in Europe such as the Green Deal within the Next Generation EU recovery plan or the pending trillion dollar US infrastructure bill. These are these are critical, then carbon taxation methods need to progress from where they are. And the purpose of the carbon tax is to internalise an externality. So the final price of goods and services include previously external costs, the shooting courage economies to move away from more polluting activities, to promote a more sustainable way of living. However, there's also a necessity to ensure equality. And there is such an example in Canada, where the bottom two thirds of the income bracket, get a rebate, or what you call a carbon dividend to offset these higher costs. So those are three examples that would give us progress.

Eva Cairns

Yep. So as you say, quite a lot to be done still. So hopefully, we will see some good progress be made at COP26. So we'll finish off with a question about personal inspiration for both of you. And Tony, you've mentioned to me beforehand, that the ocean or being under the water is something that is really inspiring and calming for you. And at the same time, you know, we're seeing how the oceans are being polluted and exploited. And that is, it is pretty painful to see. Can you tell us a bit more about that and how that's impacted you and how we can actually think about incorporating protecting the oceans into our investment strategies as well?

Tony Hood

Yes, thanks. Yeah, I used to scuba dive an awful lot that family life takes away from that these days. But being under the water is a very calming place, but where I live, and where I've lived for a while now, there are sand dunes near to my house, and these are suffering significant erosion. And there's a really clear relationship between the rising sea levels and the dune erosion. And then the ecosystem within the dunes becomes destroyed. And beyond that, you have an economic impact both potentially over time, to housing, and then business, or perhaps in the other order. But it's the ocean that shields us from even more rapid heat expansion caused by the greenhouse gas emissions. And the problems with the shifts in ocean temperatures are multiple, the implications firstly, for marine species, the ecosystems then food security, livelihoods, weather patterns, population displacement, infrastructure damage. And it's absolutely no coincidence that the increased frequency and severity of weather patterns stems back this. And I've witnessed this in in the analysis of insurance companies in the past and seeing severe storms like Katrina, Wilma, Rita, that we saw in the past. And as the world warms, the transmission of vector borne disease increases to so we get disease coming from animals to humans that otherwise wouldn't have happened if the temperature hadn't gone up. Now, we're very familiar with an American consulting and engineering services firm. Tetra Tech, I mentioned this firm because they deliver nature based solutions and structural design for coastal communities seeking climate resilient flood risk reduction, and marine habitat restoration. So they'll use computer models and AI to simulate the impacts of climate change on coastal storm surges or sea levels. And they'll design for example, living shorelines. And the living shorelines have proven to be more resilient and solid infrastructure that tend to just pass the problem down the chain. And they improve water quality, they promote recreation, and they improve the habitat and they trap the sediment from the tides. So they grow with rising sea levels and provide a natural barrier while also absorbing the greenhouse gas emissions.

Eva Cairns

Yep so that's a great example of mitigation and adaptation solution and the need for for that, as we're seeing the physical risks increase, and they will be more severe and frequent over time. Even if we decarbonize, we know that the physical risks are going to increase so adaptation is really important to think about. So that's a really good example and I wonder Blair, is there something that is inspires and motivates you in a similar way, or any eye opening moments that influenced your passion for climate change.

Blair Couper

Yeah, so I've certainly always been aware and interested in the issue of climate change. You know, it's primarily been through mainstream media and sources that I'm sure most listeners will be familiar with. But it only really only literally grasp the severity of the issue and the complexity of solving it. When I started working on this strategy, and that was a real eye opener for me. You know, you heard a lot about in the news and documentaries, and you kind of maybe take the wrong approach to thinking oh, there's not much I can do about that. That sounds terrible, but didn't really get to grips with just how severe the issue is, and, and working on the, the financial impact of some of these things has really been eye opening. And obviously, it's, it's far more widely seen than that. But the good thing is, I feel quite empowered in the position that I'm in now to be able to engage directly with company management on their climate strategies to understand the materiality of the solutions that they're providing and to essentially allocating capital to the solution providers that are able to make a difference in solving this issue.

Eva Cairns

Yeah, so with maybe a very final question on any recommendations you would have for listeners, when it comes to maybe people that you follow that have inspired you, or any books or podcasts? Tony, let's start with you.

Tony Hood

From my perspective, it's, it's been my work that's inspired me, it's the companies I've met over the years. And I've, I've always been intrigued by the companies that are relentlessly, just trying to make things more effective and more efficient. It's the engineering companies in particular that are applying science to deliver solutions. They impress and inspire me most. However, working on the strategies taught me that there are so many aspects to delivering a more sustainable way of living than I've ever considered. Some obvious and some not so obvious. But what's very clear, is that we all have a part to play and no one's too insignificant to foster some change.

Eva Cairns

That's a great point to finish on. And Blair from, from your perspective and your recommendations.

Blair Couper

Yeah, so for me, I definitely recommend that all the listeners read the bill gates book, How to solve a climate disaster. I think it's a fantastic read that clearly outlines the severity of the issue, but also talks about some of the solutions that that could help us avoid a climate catastrophe. You don't need a PhD in climate science to understand it. So it's a really good book to kind of introduce it to the topic. And for those who want to be a bit more granular and focus particularly on the new innovations, I'd recommend a podcast called Green Sense radio, that's hosted by the teal green entrepreneur Robert Coen Gallo, and he discusses new innovations every second week. It's a biweekly podcast, it's only about 20 minutes long. They talks about everything from vertical farming to electric vehicles to Robo taxis to offshore wind farms. So it's a great one for those who are interested in the product developments that are that are coming through.

Eva Cairns

Fantastic. Well, thank you both so much. It's been a pleasure to have you with us. Thanks for your time and your inspirational contributions.

Blair Couper

Yeah, thanks very much Eva.

Tony Hood

Thank you very much.

Eva Cairns

You've been listening to the abrdn sustainable investing podcast, a podcast relating to all things responsible and sustainable investing, and today the focus on climate solutions. 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 abrdns website. Until our next podcast Goodbye for now.

Voiceover

Thank you for listening to the sustainable investing podcast brought to you by abrdn. Please subscribe wherever you get your podcasts and for more great content visit aberdeen.com.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The companies discussed in this podcast have been selected for illustrative purposes only or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested past performance is not a guide to future returns return projections or estimates and provide no guarantee of future results.