Make Money, Save the Planet

Thanksgiving to everyone. That's right, That's right. And yeah, Thanksgiving is a time to sort of take stock of your life. And we're not gonna focus on the week in of markets like we normally do, because let's be honest, I think most of us were probably more focus on that turkey than we were on the markets. Instead, we're gonna focus on, as the name of the show implies, what goes up, something that unfortunately has been going up in recent years, in in recent decades is the temperature of

the Earth. I hate to I hate to be a downer, but we're going to talk about climate change, very touchy subject for a lot of people. Um, Obviously, uh President of United States is not a big believer in it. Some people are not big believers in it. Others are very enthusiastic believers in it and believe now is the

time to act. We're gonna save that sort of controversy for another podcast because you know, ideally what this podcast is about is how to invest um and climate change, like so many other things in the world, is creating opportunities for investments. So don't send us angry emails about it. It's it's our job to talk about angry emails. No angry tweets. If you have something rough to say, don't

even call our podcasts. Maybe maybe you can. You can leave us a message and as a reminder, that number is six or six three two four three for nine zero. All right, So let me read something for you here a bit of it again a downer, but here's the take on climate change from a recent white paper by our guest who all introduced after this. Hurricanes, typhoons, droughts, wildfires, and other extreme weather events are causing record damage Increasingly.

Climate change is impacting the economy and our daily lives and has come into focus as an existential threat to the world as we know it. The author of that very Looking on the bright Side report is with us here, Lucas White. He's a portfolio manager with GMO. Welcome to the show, Lucas, Thank you, thanks for having me. And you're basically you manage a strategy at GMO that is investing in climate change and sort of the potential winners of climate change. Could you just walk us through, UM,

when did the strategy start? Kind Of obviously at GMO, everything has to go through Jeremy Grantham, I assume. So was this uh something he championed, um, and just just tell us how it all came about. Yes, So, actually, maybe ironically it evolved out of our natural resources strategy that we launched back in two thousand eleven. Jeremy Grantham has been focused on resource scarcity for a number of

years and the dynamics that that poses for the commodity markets. UH. In other words, there's growing demand for natural resources, and yet there's a finite supply, in particular finite supply of cheap, easy to access UH natural resources that that is low cost and affordable. When we went to launch that strategy, I was involved in thinking about and researching the risks for investing in the resources sector over a long period of time, and I could find a lot of risks

that you could diversify away. I could find a lot of risks that were short to medium term in nature, and as a long term investor, you could wait out. But there was one big risk that that kind of stood out, and that was stranded assets for the fossil fuel companies. Uh. And those assets could be stranded in

a number of ways. We don't know exactly how it might happen, but it could be through carbon regulation, it could be carbon pricing, or it could just be pure technological disruption when and solar becomes so much cheaper than coal and natural gas that you just don't need all the coal and natural gas assets on your books. Um. So when I was thinking about, now, I'm going to launch a strategy and I'm I'm kind of the portfolio

manager for that strategy. Uh, how do I manage that risk when the sector is seventy percent fossil fuels are competitors are eight to nine fossil fuels running global natural resources strategies? Um, what do you do? And we did a few things to manage that risk. One is we have a dramatically lower exposure to energy than our competitors or the cap weighted sector. We're about thirty energy, so

half that of the broad market. UH. Within energy, we've always excluded the coal companies, the tar sand companies, the heavy oil companies, so the company these producing resources that have the highest UH risk of having stranded assets because they have the worst emissions profiles. UH. And the third thing we did, which is most relevant for climate change investing, frankly, is we've always targeted some of that energy exposure to

be too clean energy. So of that thirty energy exposure, we have ten per cent of it is clean energy. And so we've been investing in wind, solar, clean power generation and the like UH since two thousand eleven. What happened is the costs for all of these clean energy technologies dropped in a way that really nobody could have foreseen in a very short period of time, so that around two thousand fifteen I started to make the case

that the opportunity set is mature enough. There are enough companies that are making money, have been cash flow positive and and UH generating strong earnings and have strong balance sheets and aren't totally reliant on public policy support that we should launch a strategy that's less focused on kind of traditional natural resources and more focused the clean energy transition and where we need to go with the world.

So it was really about approaching these inflection points where at some point in the not too distant future when solar electric vehicles other clean energy solutions are going to be cheaper uh than their fossil fuel based uh kind of more traditional forms. So that was something that jumped

out to me. In one of the white papers that you did co author with Jeremy Grantham, there was a chart that you guys included showing the price structure of many of these types of energies and these companies, and you see the price coming down. However, there are many people out there who will still push back, and a common rebuke or refrain is that it's still pretty expensive.

What is a time frame on something like this if you really wanted to take advantage of this change going forwards and the companies that are driving the change against climate change? How long is the timeframe actually in a realistic sense. Well, in some ways, wind and solar are already the cheapest for of electricity generation. Um. The problem is the intermittency. So our grids weren't designed to handle

intermittent generation. They were designed around the idea that we would have centralized persistent generation, whether that be nuclear, coal, natural gas, doesn't really matter. Uh. Then long distance transmission to a distribution local distribution network. Well, now we have when turbines all over the place. We have solar panels on our rooftop. Sometimes they generate, sometimes they don't, and

the grid wasn't really designed to handle that. So when and solar, the generation side of things is already in many ways and in many areas, significantly cheaper than color natural gas. The problem is you either have to store that energy or you have to enhance your grid and

modernize your grid and make it more sophisticated and interconnected. UH. Our belief is that there will be secular growth for decades and both of those areas, as trillions of dollars need to flow into energy storage and and into modernizing our grids. UM. Just to give you a sense, energy storage sounds good, but it effectively doesn't really exist UH

in today's world, at least at a utility scale. About one or two percent of energy is stored globally today and ninety five to tent of it is pumped hydra where you pump water up a mountain into a reservoir and then let it flow back down and generate hydro power, which is brilliant if you're next to a mountain with a reservoir. But for for most people, uh, that isn't a great solution, and it's not scalable for many locations.

Someone from Florida I can say that there are no mountains around clearly, so be difficult exactly because how much of a headwind or as hail wind is the government when it comes to this strategy. I mean, obviously President Obama was a big advocate of solar energy. President Trump, on the other hand, is I think safe to say basically a climate change DENI or does that cause you know,

a head wind of the strategy? Where is it? The economics, as you say, are getting so clear on the side of clear energy that it doesn't really matter who is controlling Congress or who's in the White House. I think with every passing year it matters less and less because the economics are just becoming more and more compelling. Uh. That said, there's no doubt about it. You want public policy support behind you. There's nothing but upside from having that.

The federal government of the United States is one government entity, though, and people make too much of an issue of it, in my opinion. With with Donald Trump announcing that we're going to pull out of the Paris Agreement, there's been some wavering and it's not entirely clear where that's going

to go. But even if the US government does, city states, businesses, universities around the country banded together and said that they're going to abide by the terms of the Paris Agreement and make sure that the United States does regardless of what the federal government does. In California is, you know, the world leader in my opinion when it comes to clean energy. If California were its own country, it would be something like the sixth or seventh biggest economy in

the world. So it's not kind of small potatoes. So I think it's great to have US federal government support. But every other government on Earth, for the most part, has signed onto the Paris Agreement and is committed to it, and has really recommitted in the wake of the unit United States announcing that we may pull out. So in the long term, I really think Uh, it's it's not going to be a moving factor. Over the last few weeks, the US has formally begun to withdraw itself out of

the Paris Climate Agreement. I'm looking at the top holdings in your strategy though, and the top four I see right here are still US companies, So maybe it matters more what corporations themselves are doing. From your perspective, though, when you guys are looking at companies across the globe doing your research, where do you really find companies at the forefront of this change? Where does it look like

there is the most opportunity. Well, most of the companies that we have in our universe are global companies and they're serving a global marketplace. The only times you really see regional things for the most part is is China does have kind of its own wind market. There's the Chinese is wind market, and then the global wind market

excluding China. So you do see a few um kind of domestically oriented opportunities here and there, But ninety nine percent of the companies that we look at are really in the global marketplace. So whether they're domiciled in the US or in Europe or Asia, or or South America,

doesn't matter all that much. Uh. Most of the opportunities that we see are outside the US, so our strategy since inception has been about a quarter to a third in the United States, UH and and the rest outside the United States, including UH you typically about twenty and emerging markets. So we're seeing opportunities all around the world, both in terms of where the companies are domiciled, but also in terms of the markets that you're selling into.

So Sarah beat me to that. List of the top holding is always one of the my favorite things to look at when looking at a funder strategy like this, and UH several of them, um are pretty obvious. Solar Edge was a top holding as of the end of September, I believe, obviously makes equipment for the solar industry. Vestas the Danish wind energy company, Renewable Energy Group another clean energy group in the US. A couple of surprises to me at least, so, so I'm curious if you could

help us explain how these are climate change plays. Freeport mcmaran the minor I'm assuming it's the metals used in solar equipment, is that is that the main reason that's there. Yes, a copper is at the heart of clean energy. When you look at wind and solar because of the distributed nature, you now have wind, a series of wind turbines, you have hundreds of or thousands of solar panels. That's a lot of wiring and a lot of connectivity that you

need to operate. So wind and solar projects, UH we use about four to twelve times as much copper, depending on the specifics of the project relative to a color natural gas power plant. Electric vehicles use three to four times as much copper as an internal combustion engine vehicle. Electric buses, for example, UH uses something like eight hundred pounds of copper. UH. We also need to overhaul our electric grids, as we've been talking about. That's incredibly comper intensive,

energy efficient electrical components, appliances, etcetera, etcetera. We needed an electric vehicle charging infrastructure, and just copper is at the heart of clean energy. It's brilliant. They want to get off of fossil fuels. I'm on board, even though I run a natural resources strategy. I'm I'm with it, you know, I'm with the program. We need to get rid of fossil fuels over some period of time. But you're just moving the burden from one set of materials to another

set of materials. There is no magical kind of clean free energy out there that doesn't rely on materials. You're just moving the burden to copp or, lithium, nickel, cobalt, vanadium, and other clean energy materials. So for listeners out there that are sort of environmentally minded, uh, you look at a company like a heavy mining company like that, and you don't really think of a great environmentally friendly company.

But it's so crucial in the future of of solar and wind and climate change that I guess the pros of it outweigh the negatives. Yeah, I mean, Jeremy always says that if you get climate wrong, nothing else matters. Uh. And so the local environmental impact of mining operations is an ideal. The labor issues aren't ideal. These aren't things that you love as an investor or a human being. But the reality is we need these materials. Mining is

a dirty game. Uh. We we obviously evaluate the environmental impact and the E s G profiles of the companies that we invest in and make sure that we're comfortable, and if we're not comfortable, we won't invest in in those mining companies. But generally speaking, you're, in my opinion, putting your head in the sand. If you say, oh, I want clean energy, but I don't want to be

involved in the mining industry. Well, if you don't believe in copper mining or you think it's bad, Uh, first of all, you're condemning one point two billion people or so who don't have access to electricity to very low uh standard of living, very low quality of life because you, uh don't think that copper miners should be out there. And I don't see anybody going and ripping the copper out of their walls in their house and throwing it back into the global market because they don't believe in it.

The other I think it's the fourth top holding a little less than four percent mosaic, basically a fertilizer company. Right, walk us through how that fits into the strategy. Yes, So, in terms of our strategy, we look at companies that are helping to mitigate climate change, but we also look at companies that are going to help the world adapt to climate change. The two big things on the adaptation

side of things are our food and water. Agricultural productivity is incredibly impacted by a world or in a world of climate change, you have droughts, floods, extreme temperature events which are death for crops because it's not just that the average global temperature has risen, it's that there used to be a normal distribution around a lower average temperature, and now there's a skewed distribution around a higher average temperature.

In that skew is towards the extremely hot days. Uh, you have extreme downpours which wash away your soil nutrients. You're basically taking farming which go talk to farmers. You're not going to find a farmer who says, oh, it used to be so easy to farm, but now it's starting to get difficult. It's always been a difficult game.

Now you're making it much much more difficult. So companies focused on keeping agricultural productivity as high as possible, whether that be irrigation, drought resistance, seeds, precision agriculture, machinery and equipment, or fertilizers which is where mosaic comes into play, are

all within scope for our strategy. So you mentioned in an acronym earlier E s G. And essentially what you're talking about is people who are investing in environmental, social and governance issues well against ones that would be a problem, And lately the exchange traded fund environment that industry has really latched onto it, on pace for a record year

of inflows into so called E s G funds. UM. But I think you've made it very clear in the past, and you also alluded to it in your answer that what you guys are doing is different than E s G. So can you explain to us the difference in what E s G investors do versus what you guys do and investing for climate change? Yeah, that's an interesting question.

I would argue that our strategy is in the s G strategy, but not because of its focus on climate change as as kind of the area that we're investing in, but because we are considering E s G issues E s G risks uh in, and we're integrating those issues in those risks holistically in our investment process. And to me, that's the spirit of E s G in our industry.

I think E s G has gotten mistaken for sounding good moral and ethical investing avoiding controversy, But to me, that's not the spirit of E s G, or at least it shouldn't be uh and so I think we are running an E s G strategy from the perspective of we are incorporating E s G risks and concerns in positioning the strategy. Uh, it's not E s G if your definition of E s G is sounding good

to everybody and avoiding controversy at all costs. So I noticed that the benchmark for the strategy is actually the m s c I All Country World Index. Um, that's a pretty broad group. I assume there was no sort of benchmark. Uh, that's just dedicated to climate change. To the benchmark. The fund to HSBC did have a climate change index. They discontinued it in two thousand sixteen as part of a broader dismantling of their index line, so

it wasn't specific to their climate change strategy. But other than that, there are a few other environmental type indexes out there, But there's so much, um, so much of a gap between what their reppersenting and what we're doing that they wouldn't be a good benchmark for what we're doing. Benchmarking to the All Country World Index is kind of throwing our hands in the air a little bit and saying this isn't a good benchmark for what we're doing

in the short to medium term. But our goal is to perform better than than the broad equity market over a long period of time. UH and and AQUA. The All Country World Index is the most commonly accepted global equity benchmark when it comes to climate change. I also found interesting in your primer when you think about other reasons to think about climate change as a way to

find opportunity to invest. One was actually inflation protection. And yes, now, many people when you think about the economy and you think about what we're going through, people talk about the lack of inflation. Um, so can you break down how actually a strategy like this can provide protection against inflation even if we are in a low inflation environment. Yes. So, one thing I'll say is that energy historically has been

a very difficult thing to give up. Investment gets talked a lot about in our industry these days, divesting from oil and gas and coal and fossil fuels and whatnot. Uh. The problem with divesting for many investors is that historically energy companies have outperformed the broad equity market. They've given

you diversification. There have been whole decades UH, in the nineteen seventies and then two thousand and two thousand and ten, where the broad equity market was down in real terms, and yet energy companies were up over a hundred percent in real terms. That's the kind of diversification that you want in your portfolio. UH and and certainly in the seventies,

that's a huge inflationary period. UH and energy companies didn't just protect you in that period, but you actually grew your purchasing power investing in those energy companies because once again they were up well over REEL. So it's a tough thing to give up. But when you invest in clean energy solutions that compete with fossil fuel solutions, you

get indirect exposure to fossil fuel prices. So if coal and natural gas go through the roof, wind and solar become much more competitive, much more economic, in the world, mobilizes much more quickly to to rotate to them. UH. Similarly, with electric vehicles, there's a connection between oil prices and electric vehicle sales that we've seen in the US over

the last few years. So because of that indirect exposure that you get to fossil fuel prices, investing UH in clean energy solutions, then more direct investments that we're making into clean energy materials, agriculture, water infrastructure, other real asset type businesses. We think our strategy would do well in

a world where inflation was driven by commodity price rise. Now, if if inflation is driven by global trade wars or something like that, or or massive money printing, uh, you know, it's not as clear that our strategy would would give you a lot of inflation protection. But in the developed markets, at least historically, most inflationary periods have been driven by commodity prices rising. Just to get back to those top

holdings for a little bit. Uh. And I'm fascinated by this because one thing you cannot accuse the strategy of being is a closet index or you know, it's it's definitely you know, taking a stance on the stocks it picks. Um. So if you were to sort of blindfold me and say what would you think would be one of the top weights in a climate change strategy, I would say, well, maybe Tesla would be there. I'm just curious, I don't see Tesla in the top holdings. Is it anywhere in

the fund um? And if not, kind of what is what you see as far as the transportation space. Um, you know, a lot of the holdings seemed to be very much energy infrastructure rather than transportation. Um. Is there is there something in the fund to reflect sort of the future of automobiles. Yes, so there's a lot there. Let's say, let's start with Tesla. So Tesla, if you invest in Tesla, you're paying outrageous valuations for the automobile

manufacturing industry. Uh and and increasingly, a play on Tesla won't be a play on electric vehicles. That will be a play on vehicle manufacturing because over the next five years, Mercedes, BMW even four and GM, which are pretty dopey auto manufacturers, are going to be coming out with their electric vehicle lines. Every single auto manufacturer on Earth is going to be rolling out electric vehicle line. So Tesla is not going

to be the only game in town. So you're paying a huge multiple in an industry that's an extremely low multiple industry. The big auto manufacturers are five six seven times earnings generally speaking. Then you have Tesla, which, if they made money for long enough to measure their pe would be you know, extremely expensive, like a hundred or two hundred or whatever it would be. Um, this is

kind of what I suspected the answer would be. So yeah, yeah, So it's very expensive and you're playing a very uncertain market share game. Uh, you have all these other manufacturers coming along, and Tesla, in the grand scheme of the global automobile market, barely sells any vehicles. Well, how many are they going to sell when they have a lot of competition. It's a it's a huge question mark. So it's highly speculative. I wouldn't even consider investing in Tesla

and investment. It's really speculation at this point and in the maturity of their business and the market. And the third thing I'll say is that you guys haven't given me any pot, which is unfortunate. But Elon Musk is like smoking pot on podcasts and talk about s g risks and concerns. There's a huge governance risk there. He's not the most stable, uh figure to have running your company and being the leader for your company. So we we have pot available for the guests, and I think

we'll have to producer. Yeah, I don't think we can give an answer on that unfortunately. Um, this would also probably be a stretch and a bit speculative. But lately when people think about the alternative meat space, somehow people bring that back into the climate conversation and sustainability. Does that ever come up in conversations when you were thinking about investing in changes going forwards as it relates to

climate change or trying to combat that. Yes, certainly. We we consider the alternative protein sources so impossible, Uh, foods and and um, there are a couple others. Uh, they're so expensive right now they trade at fifty times sales, not fifty times earnings, fifty times sales. It's very difficult for a value investor. And and at my company and in my group, we're we're pretty focused on value and valuation. Uh, it's very difficult to get comfortable with those kinds of

of lofty valuation levels. Well, it's an interesting point you bring up, though, that these sort of uh combating climate change plays, the real obvious ones tend tend to really do draw in a lot of investor interest to the point where you know you're not interested in fighting climate change at any price. It sounds like reasonable reasonably valued equities. Um. Uh,

is that is that's a fair summary of your strategy. Yeah, we're looking for company that are treading at a discount to the market, that look cheaper than the average company out there, but are still exposed to decades of secular growth.

It may sound counterintuitive, but you can find companies, wind companies, solar companies, companies in the automobile manufacturing industry who may not be the manufacturers, but they're producing the lithium ion batteries that go into the electric vehicles, or they're um working on energy efficient or gas efficient UH internal combustion engines and rotating their business towards the electric vehicle market

and electric vehicle power trains. Could you give us a few names in that space, so companies like Borg Warner, Delphi, et cetera. There are one or two others that we look at. UH. These are companies that we think are are kind of exposed to electric vehicle growth, but you're not playing the same market share game that you are when you invest in a Tesla or a b y D. Going back to your question earlier about the transportation market,

how else we invest in it? You can also invest in in kind of railroads UH and and railroad companies h and there are other ways of investing in transportation beyond just the the obviously obvious Tesla's and b I d s of the world, by D being the Chinese electric vehicle manufacturer. Uh. To be honest, though, we don't see much hype and hysteria beyond the areas that you guys are mentioning. So the news that's where we tend

to latch onto. Exactly. The the kind of plant based meat replacements are are kind of uh really really, you see a lot of hype and hysteria there. You certainly see it in the electric vehicle manufacturers themselves. But you move beyond that, uh, and you can find companies. Let's put it this way, investors are not very comfortable and optimistic about solar and wind. A lot of early investors

in the solar and wind markets have been burned. There was a real bubble there about a decade ago and exactly, and investors have a long memory for losses, right, for getting burned. Uh. So you find companies. In the last year we were able to buy invest Us Wind Systems, in our opinion, the biggest best wind turbine manufacturer in the world for thirteen times. Learnings trailing or forward, whichever way you looked at it, at thirteen times earnings, you

don't have to bake in growth expectations at all. Dest This could never grow, uh for the rest of its life, and you're gonna generate a strong earnings or cash flow yield from owning that company if it grows. And we know that it's exposed to decades of secular growth. So it's hard for me to imagine, not impossible, but very hard for me to imagine a world where ten years from now Investus isn't making more money than it is today. So if you believe there's going to be growth, then

at thirteen times earnings, it's a no brainer. Well, sir, you're mentioning beyond meat has gotten me hungry. I think it's time for a leftover turkey sandwich. Uh. And that's about all the time we have for this week. Lucas White. Great to have you, really fascinating stuff. Thanks for coming on the show, Thanks for having me, Thank you what goes out We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app

or wherever you get your podcasts. We'd love it if you took the time to rate interview the show on Apple podcast so more listeners can find us, and you can find us on Twitter, follow me at at Sara pont sec and Mike is at Reaganonymous. You can also follow Bloomberg podcast at podcasts. What Goes Up is produced by tober Foreheads. The head of Bloomberg Podcast is Francesco Levie. Thanks for listening, See you next time.