Friday 13th November 2020
This interview took place over the phone. A total of eight issues were raised.
1) CO2 – A common focus: to trade on CO2 “rights”
High price volatility
Trading rather than focus on investing in assets with an intrinsic value
Typical large emitters of CO2: companies in sectors that “burn” or make use of high levels of CO2, such as:
Energy (e.g. electricity or heat, transportation)
Industrial processes, e.g. cement (MSB had a discussion with Holcim’s top management some years ago, which underscores the effort to become less CO2 dependent, at that time by adding ground tires to the cement.), chemicals
Agriculture
Vs. Mirjam and impact Investing, in general
Focus on financing solutions to the world’s most pressing environmental and social problems , e.g. financing of “green” infrastructure or private equity financing of technology companies
Most recent focus in impact investing: Stewardship
Large investors engage with top managements/boards in large companies regarding transparency of their sustainability risks and in particular climate risks and their mitigation strategies
2) BlackRock (BR)
Strong commitment to sustainable and impact investing. Perhaps the most vigilant player in the sustainable and impact investing space with the objective of become the world’s leading sustainable asset manager
197 companies are on their “watch list” related to climate risk (Nov 2020)
High carbon emitting companies must provide transparency regarding their climate risks and the related mitigation strategies; if not, they risk to be addedto the list!
BR monitors voting activities on the boards, tries to impact re-election of directors, etc.
BRs Swiss business focus:
Distribution of investment products and solutions across asset classes to ealth managers/private banks and pension funds
Private market investment team (infrastructure and private equity) with a global investment focus
BR’s annual letter to a large world sample of CEOs:
Emphasis on climate risk and sustainable investing strategy of BR
Transparency related to stewardship activities of BR
BR’s strategy in general:
Commits, follows through and delivers
Rigorous; no compromises, i.e. no “green-washing”!
MSB:
Senior advisor to BlackRock Sustainable Investing
“Driver” regarding BR’s sustainable and impact investing strategy and implementation
Works on BR’s distribution platform
Access to cheap capital
Increasingly easier for sustainable companies to obtain financing, “clean” capital seeks investment opportunities
3) Tesla
Typically, two competing assessments:
Some focus on electricity as the propulsion: great!
Others focus on that they are a big polluter, specifically when it comes to the batteries
Mining; often open pit; damaging nature; child labor
Thus, a dilemma (“good” or “bad”) – this is the case for many companies; the ESG ratings can differ depending on the ratings approach
4) Ratings/certifications
MSCI is one of the dominant ESG rating providers which grew by acquisition
They try to include firms’ future ESG related development objectives in their ratings
Investors typically follow the ESG ratings of rating agencies (MSCI rates Tesla very positively!)
5) Key evolutionary steps: A lot is happening right now
The “big four” accounting firms have agreed, in cooperation with the World Economic Forum, regarding aligning the sustainability reporting of companies in their annual reports
New Zealand: the first to make it law that sustainability issues are reported in the firms’ strategies
New standards are indeed likely to come:
But it shall nevertheless take time
Fight pessimism! It can be frustrating with the often, slow progress!
In general, public sector regulation plays an increasingly key role
Not only regulation, but also critical evolutions regarding:
Investor behavior
Available investment products available
Technology
6) Oil companies
Demand is apparenty gradually slowing down, driven by lower economic activity due to COVID
Prices are, however, likely to stay relatively low long term – oil supply/over-production and rising production of renewable energy
So, present value of oil reserves is leaning to fall, disposed to lead to significant write-offs, hence reported losses!
Also, investors will gradually turn away from oil companies, i.e. falling stock prices
Impact on financing capabilities: cost of capital is foreseen to go up; more expensive to borrow. This further reinforces the “demand spiral” for oil companies
(PL comment: An analogous argument might be made for many coal companies and mining companies. Key: do they have large reserves activated on their balance sheets? NB: Peter not sure what you mean here, is this a typo: large reserve activities?)
“End point?”: When valuations have been falling to low enough levels, and for a longer period of time, then private equity companies/large private investors might try to purchase these companies, for then to split them up and re-sell assets
An example of an oil company which has changed its strategy: DONG
Danish
Was: Large in Danish offshore oil sector
Now: World’s largest offshore windmill owner/operator (electricity generation)
7) Nuclear
Risks are usually so big that they are uninsurable
Governments are thus typically the major players
However, some debt is sold to the public (government guaranteed)
Also, rare examples of private minority stock ownership in some government-minority owned nuclear plant ownership firms. Example: AREVA (France) – The French government owns 7%
8) Big Swiss Banks
UBS:
World’s biggest asset manager
Launched a strategy with a strong commitment to sustainable and impact investing some four years ago
Strong commitment to sustainable investing; follow through!
Credit Suisse:
Investment banking represents a large part of this bank’s strategic portfolio. Thus, they may find themselves in a situation that they may “have” to underwrite the projects from “brown” companies also
They have launched a “transition financing” program, to support “brown” companies in their efforts to develop more sustainable strategies (Goldman Sachs is also offering this!)
All in all, there seems to be reason for optimism. It appears that quite a bit is changing! It looks as if there is a new sense of urgency.
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