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The ESG Update Episode 27: Thumbnail

The ESG Update Episode 27:

Transcript

This transcript has been edited for clarity.

Dan Carreno, Change Finance:
Welcome to the ESG update presented by Change Finance. I’m Dan Carreno.

Brittany Damico, Change Finance:
And I am Brittany Damico.

Dan Carreno, Change Finance:
Brittany and I manage the business development efforts at Change Finance. We are an ETF provider dedicated to sustainable and responsible investing, and our mission is to help investors align their portfolios with their values without sacrificing returns. Brittany, how are you today?

Brittany Damico, Change Finance:
I’ve had a busy house the past two weeks. I just recently adopted two little five-week-old kittens. So I have my little kittens running around the house, which is so much fun.

Dan Carreno, Change Finance:
Good to hear things are well there. I wanted to frame our show today. We’re doing something a little bit different. The last six to eight podcast episodes, we’ve had some really great guests on to talk about wonderful new products and platforms that are being developed in the ESG world. And I think because we’ve had such great guests, we’ve gotten away from our typical format of talking about current events and what we’re reading at Change Finance. So, Brittany and I decided not to have a guest on and talk about some of the current events articles that have been building up in our queue that we’d like to discuss. 

Brittany Damico, Change Finance:
Sounds like a plan. So, the first article I chose is titled, “No More Carbon Havens and ESG Greenwashing” published in Forbes on September 10th. In summary, the United Nations Climate Change Conference, COP26, will kick off in Glasgow, Scotland on the 31st of October to accelerate action toward the goals of the Paris Agreement. The article proposes one simple question: what could move the world from talk to tangible action? To date, we’ve already seen 1.1 degrees Celsius warming of our climate. And according to the IPCC, which is the Intergovernmental Panel on Climate Change, the plethora of climate disasters we’ve seen, from heat domes to droughts, to wildfires, to tropical storms and floods, are the new normal. The Washington Post recently reported that one in three Americans experienced a weather disaster this summer. I know I did. The article continues by stating that ESG integration needs to step up its game. The existing government subsidies for fossil fuels and the various available tax breaks create an environment that results in false and tilted narratives from corporations that continue to invest in fossil fuels. It just ends up as greenwashing. The author proposed three steps that could be put in place to ensure that we can be fully divested from fossil fuels by 2050. They begin with a set of national quotas for fossil fuels to tie compensation to emission targets. He lays out a framework for minimum taxes and rebates for investors. Personally, I think the idea of tying compensation to emission targets is interesting. I’m not sure if the author’s proposition would be the right avenue forward, but I do agree that we, as a global society, cannot afford two, three or four more degrees of warming. So what are your thoughts Dan?

Dan Carreno, Change Finance:
I’m thinking about this from the perspective of a financial advisor.  This is going to be in the news over the next few months as the conference is going on. So, a lot of individuals, investors, and clients out there that are concerned about climate change are going to be more conscious of this issue. Of course, one in three people have been impacted by some sort of climate disaster this year. And they’re going to be hearing about potential solutions during the course of this conference. So, I think the probability that advisors may be hearing from clients about this is going to be increased. In our experiences as of late, more advisory firms that we work with that are developing special models for their clients that are entirely divested of fossil fuels. I think that number of advisory firms since the beginning of the year, for me, has tripled. It’s becoming much more popular to have a baseline ESG model, and then a deeper green, shareholder advocacy focused, and completely fossil fuel free model as well to cater to those individuals that are especially passionate about climate change.

Brittany Damico, Change Finance:
I totally agree. I’ve seen the same thing.

Dan Carreno, Change Finance:
My first article dovetails really well with your article. This is a report that came out a few months back from a think tank called RethinkX. The name of the report is “Rethinking Climate Change: How Humanity Can Choose to Reduce Emissions 90% by 2035 Through the Disruption of Energy, Transportation and Food with Existing Technologies.” 

It’s a longer report, but I’ll give a few highlights. The authors are asserting that just eight technologies across energy, transportation, and the food sectors can reduce greenhouse gas emissions by that 90% by 2035, and those technologies include things like solar, wind, batteries, autonomous electric vehicles, precision fermentation, and cellular agriculture. They provide some great data about how technologies often track an S-curve. There can be a very slow adoption period when things first rollout, and then all of a sudden you hit an exponential growth rate and that technology really ramps up. We always tend to overestimate how quickly things are going to be adopted during that beginning part of the S curve, and then we tend to underestimate how things will be adopted during the more exponential growth part of the S-curve. This paper is asserting that we’re approaching that exponential curve and that most analysts and thinkers are underestimating the way that these technologies are going to be adopted. And they provide all kinds of great analogs like digital video that followed this pattern. Ultimately, there’s a lot to be excited here, but I’ll close a quote from the report. “Investing now in older technologies would be an extremely costly mistake as the acquired assets will be inevitably stranded within the next decade by disruptions. For example, our research shows that at least $2 trillion in recent investments made over the last decade in coal, natural gas, and nuclear power assets throughout their value chains will be stranded by this disruption of the energy sector alone.” There are similar quotes that apply to things like food and transportation as well. It’s interesting to look at a report like this, and to think about how this may translate to risk within investment portfolios.

Brittany Damico, Change Finance:
I actually looked at this report as well, and it gave me a lot of hope. A stat in particular that stood out to me was that changes in the food sector could make protein 10 times cheaper by 2035. So, this presents a lot of potential for investors. This also has obvious, positive social implications. From a land management standpoint, this disruption could free up 2.7 billion hectares of land from animal agriculture. That’s a land area equal to the US, China, and Australia. That creates a ton of positive implications for biodiversity and things like reforestation and the restoration of grasslands. And then that equals more carbon sequestration. As a whole, these changes are looking really positive for the future.

Dan Carreno, Change Finance:
This report is worth taking a look at if you are an investor. It depicts both pitfalls and opportunities, but why don’t we move on to the next article?

Brittany Damico, Change Finance:
So my second article was published in Bloomberg and is titled “New York Stock Exchange Develops an Asset Class Tied to Sustainability Amid an ESG Push.” So it turns out that the New York Stock Exchange is helping to develop a new class of publicly traded assets that are tied to ecosystem services. They have partnered with the Intrinsic Exchange Group, or IEG, to create natural asset companies, which hold the rights to ecosystem services provided by corporations, which include things like biodiversity and clean water. Investors would be able to access these rights by buying shares, helping the corporations raise capital that they can then reinvest in environmentally beneficial ways. The article states that the goal is to unlock value from natural resources, which produce an estimated $125 trillion annually. The IAG will provide reporting metrics that will determine the value of the assets, which will then be listed on the NYSE. The idea being that a corporation’s ecological performance will be measured in the same way that a business provides a balance sheet. The companies are currently seeking SEC approval for this new asset class. This is a fascinating concept, but I have so many questions. Will there be a standardized monitoring agency? Measuring ecological changes is wildly difficult as these systems are an interconnected web. How do you determine the geographic range that will be measured for things like biodiversity? Are they focusing strictly on production and supply chain or distribution and product life cycle? I don’t know if you can tell, but environmental evaluation is a passion of mine. It’s something I’ve studied in depth. It’s fascinating that they’re working on a product like this.

Dan Carreno, Change Finance:
Moving on. Another interesting article comes from MarketWatch. And it is titled, “ESG Investors Struggle to Find the Right Balance in Doing Good and Solar Panels Show Why.” The bottom line is that a lot of the raw materials used in solar panel production come from a Uyghur labor camps. So, on one hand we have a potential solution for climate change, but it may come at the expense of an entire demographic of human beings. There are huge negative social implications. This is something that is really difficult for investors who care about both social equality and the environment, Brittany, what do you think?

Brittany Damico, Change Finance:
I don’t think it can be considered a solution if slave trade is part of the supply chain. I don’t think it should even qualify as a solution. I think solar panels are necessary. I think we need to figure out a different avenue for the materials. I feel very strongly that you can’t really have one without the other. It can’t be an environmental solution if it is so detrimental to human life on another side.

Dan Carreno, Change Finance:
I totally agree. I do believe that it’s important to invest in renewable energy for all the implications that that has around climate and environment, but I want to make sure that I invest with asset managers that are particularly focused on this issue of Uyghur labor in China. I want to make sure that the asset managers I work with are engaging solar companies like Sunrun to make sure that they have policies in place at their companies to make sure that they’re not buying solar panels that could be tied to that type of labor.

Brittany Damico, Change Finance:
There’s a key element there in that all of this data is becoming more transparent, which has not always been the case. So now that people have more of an awareness of how all of these things are connected and what, what supply chains look like, it’s really imperative that people utilize this data to make good decisions.

Dan Carreno, Change Finance:
I can’t speak for every mutual fund or ETF company out there, but I can speak for Change Finance. We are extraordinarily interested in the hearing from shareholders of our ETF and the financial advisors that we work with about the issues that they are most passionate about. I encourage everyone to make sure that they’re communicating their concerns to the asset managers that they work with. Let’s wrap it up. We’re going to do a mini campfire. Brittany, what do you have?

Brittany Damico, Change Finance:
I have not had a lot of time to dig into any other podcasts or books because of my newly adopted little kittens. I’ve had pets my entire life, but it’s been a few years and I almost forgot how much joy that can come back into a household with little souls running around. It’s just been so lovely to have them, even though it’s a little chaotic. For all of our listeners who have pets, I’m sure you can relate. It’s so nice to be able to put your attention somewhere else and watch these little innocent beings run around. That’s been my whole world lately.

Dan Carreno, Change Finance:
I have a pet. I’m a dog guy, but as of late, I’ve been obsessed with another animal due to the very popular documentary on Netflix called My Octopus Teacher. That documentary has spurred me to do more reading about the species. These creatures are wildly intelligent, and it really feels like they have a soul. If anyone has not seen My Octopus Teacher on Netflix, I can’t recommend it enough. It gives you such an appreciation for an amazing creature that we just get to think about or see enough in our lives. Brittany, thanks. I want to remind anybody who’s listening, if you want to find the links to the articles that we referenced, those live in the transcript of the podcast which is on our website under the INSIGHTS tab. Of course, if you have any questions or feedback for us, you can always get in touch with us through the website. And thank you for listening, and we’ll be back soon with another episode of The ESG Update.