Episode Transcript
Speaker 0 00:00:00 Hello everyone, and thank you for joining the podcast. This is Kea Shrine and I'm here with Alessia Fone of PineBridge, and we'll discuss what's in store for investors with the 2020 solar tax credit update. We'll also get into the Australian forest fires and the near term impact on food production and agribusiness overall. Then we'll get into new industries emerging due to climate changes and how investors can be on the front lines of possible solutions. But first, let's discuss the 2020 solar tax credit. So we know the credit dropped from 30% in 2019 to 26% this year, and that's for both residential and commercial properties. Um, does this de decrease impact institutional investors' outlook at all around alternative energy companies for this first quarter of 2020?
Speaker 1 00:00:51 Hi Kisa. First of all, thank you for having me here and hi to your audience today. Um, I would say that with regard to any incentive associated with alternative energy and solar, um, obviously is not, uh, any different than any other, uh, source of alternative energy from the investment perspective. I don't see that impacting, um, direct, direct, um, opportunities in the public market from one quarter to the other. Clearly, if there's a, uh, specific hike on that from a quarter to the other, then will be certainly, uh, creating more, uh, an opportunity to rethink, um, current, uh, participation in the market, especially if you're dealing with companies or investment in companies that are associated with solar businesses and receive funding. Um, in terms of municipal finance funding or the likes, I think there are other sectors outside just of the alternative energy producers that are obviously looking at these sort of indicators from a quarter to quarter.
Speaker 1 00:01:51 And this is obviously, uh, companies operating, for example, in residential construction or, uh, companies that also all, um, operate in building materials. Why? Because clearly building materials is part of similar budget than the energy consumption, obviously, of a building, so they go hand in hand. Um, I also would say that there are, uh, headwinds in a way to, uh, typical, um, alternative sources of energy that we have seen so far. You hear a lot in headlines about wind, and you need a lot. You hear a lot about solar. Uh, what we don't hear as much is, um, energy sources that are getting a lot of traction, for example, overseas in terms of geothermal, for example, if we are going and associating what is happening overseas, um, in Germany, um, there is, for example, in the Bavaria region and in Munich, a lot of, um, uh, uh, push and, and a strong push to have municipalities going ahead and creating incentives for new source of energy over coming from the ops through the, um, Daniel River and to create out of water and water streams that geo geothermal energy that then can contribute to two things on one hand, um, meeting the municipal, um, the municipality, uh, target for climate for either 2030 or 2040, for example, in the case of Munich is 2040.
Speaker 1 00:03:18 And obviously buildings in municipalities are the most, uh, and their H V A C systems are the ones that are clearly affected by municipal plans for those. So while we hear a lot about incentives for the adoption of alternative energy, we also have to think about how much municipalities are going to finance their climate targets. And they're doing that in very innovative ways and not necessarily just with wind and solar being the only options on their menu. So I would say that investors, um, should stay away from just looking at quarter to quarter changes and, and really putting the perspective of the municipal needs associated with that particular source of energy.
Speaker 0 00:03:56 So, and if we look at it from a global perspective, which mentioning Germany's strong economy and in the US' economy, do we expect that alternative energy investments will have a long-term impact on the economy that maybe we haven't thought about before? Or is this something that you see picking up in the long term? Any short term unexpected activ unexpected activities that we might be expecting or not expecting as a case maybe?
Speaker 1 00:04:22 Yeah, I would say that, um, many of the, um, sort of not only innovations but plans surrounding what to do with budget spending with respect to energy, uh, consumption at the company level and at the same level at the municipality level, are not as surprised, right? For investors, if you're thinking about that, even if a municipality doesn't have a climate, uh, sort of target and us not set up a priority on climate, right? You'll see corporations and the private market really looking at energy efficiencies as a source of obviously, uh, not only environmental externality, but also, um, economic return on the asset, right? The asset being a building or the being obviously like new products and green technologies that are placed in the marketplace.
Speaker 0 00:05:10 So just switching gears here and talking about the Australia Australia's forest fires truly unprecedented, obviously. Um, and clearly there is going to be an impact that will be felt for years to come. We understand that there are direct correlations between these types of natural disasters to food production. For example, can institutional or even retail investors support efforts toward rebuilding toward revitalizing or their agribusiness opportunities for investors to really support these communities in terms of revitalizing these areas?
Speaker 1 00:05:45 Yeah, and, and you raise a very valid point, Keith. I think it's not only needed, it's essential, right? Going forward, obviously as every crisis management, uh, event, um, you have first intervention, government intervention, and obviously raising international awareness as is the case for Australia. But we can draw a little bit of a parallel here from another situation in Latin America with Brazil and Bolivia being subject to the, the, the fires obviously that affected the Amazon Forest right in the fall, the late summer of last year, that is not too long ago. And clearly, if we're thinking about the environmental impact of climate change that has played, although from different, from, from for different reasons in two, um, uh, parts of the world that are, um, so important where rainforest, obviously, especially in, in, in Brazil and Bolivia, they represent 50% of the global rainforest globally, which means also it's 20% of all the oxygen that is available.
Speaker 1 00:06:39 Now, if you're thinking about that agri business, as you see is one of the, um, I think in the case of of, of the Amazon rainforest represented at almost a fourth of the GDP of those economies at risk. Now what can investors do, right? To prepare, first of all, that puts to test the, um, sort of resilience planning of investors, right? So it's really, uh, difficult for me to think about investment opportunities when you're thinking about these tragedies, right? That, that are caused by environmental disasters. But it's also true that there's a lot of capital, uh, that needs to be put in place for the next phase once you have put these, um, low probability events into a higher probability bucket. And once government entities have allowed, um, sort of funding to flow through in the areas that could put the low, that could put that probability of continued repercussions, uh, close to zero, then you can think about, okay, in the rebuilding phase, right, is there anything that can be done to support the regenerative, um, uh, sort of approaches that local corporations are taking?
Speaker 1 00:07:44 And clearly when I'm thinking about global investors, especially the ones that we represent at PineBridge, um, unless you are dealing with a local investor, the local knowledge of what happens and what a company needs is really not, not known by a global institution. What is then needed though, and what the tools we that we do have are due diligence tools and, uh, trying to understand and address whether a company that is highly exposed or has been exposed or suffered for, for example, fires, right? Either in Australia or or in Brazil, has actually reacted and put in, put in place plans to really connect their future growth to sources of a stable, a stable, uh, natural resources in this case. Um, I'll give you an example. In Brazil, right around the fires, we had actually had due diligence with one company that that could be geographically affected by the fires and operating in one important industry, the pulp and paper industry, right?
Speaker 1 00:08:42 So, um, during the time we didn't feel comfortable neither obviously with the ongoing environmental risk that was affecting the region. And on top of that, the country risk affecting the government entities either support supportive, um, to what degree the government was actually supportive, the whole, the whole international efforts to put the, the, the, the fires to, to, to, you know, to rest. Needless to say, we have continued throughout this con the conversations with the company and continued to look at and ask information about what were their plans to build resilience to their portfolios, how were they thinking about, uh, the deforestation trends that were going on in the region? And by the way, not just affected by the fires, think about the fires as being a, um, headwind on supply. So what happenss to commodity prices, when that happens, obviously they spike and during the spike of commodity prices, the, the sort of incentive and the deforestation levers are really high, right?
Speaker 1 00:09:39 Because there is, again, this near term economic incentive of utilizing the carse resource and putting in through, um, obviously the export, uh, sort of food chain, right? In the case of the company I'm mentioning, uh, what we have done is we have taken a really hard look at how they built resilience, how they work with the local, local, um, municipalities in making sure that not just the land that they had in terms of their forestry management, how they actually were taking care of the employees that were working, you know, in their forest, right? So that was extremely important. And therefore, um, I can tell you that there, there are steps toward, um, achieving that resilience planning and putting in place in, in less than two quarters have made it a lot more comfortable in than adding that company, you know, to a potential list of, of, um, investee companies for us, right?
Speaker 1 00:10:31 This year. That's, that's something very, very important for us, right? Making sure that debt due diligence is longer term in nature, right? And there's no company that is excluding simply because it's exposed to a particular risk, but the risk is calibrated. Um, I think I mentioned to you that also it's important having sort of a, um, a longer term view in terms of risk-taking behaviors. And now it's important for us, it's all about risk and underwriting and how much I'm compensated for the risk today versus actually how much I'm contributing to make sure that that particular n entity or that particular asset is becoming even more credit worthy to me in the long term.
Speaker 0 00:11:09 And that's, that's a very interesting point, particularly bringing up how private companies can work with the public to really bring about solutions. And I'm thinking about not just abroad, but even here in the US we had the California fires, for example mm-hmm. <affirmative>, and to give a slightly different example in Detroit with the water issues Yes. That were going on there, are there direct correlations in terms of how public and private can work together in those two examples, would you say that the forest fire is being more of a natural disaster and that water being a natural disaster as well in Detroit, maybe also a social impact issue that needs to be addressed? How can public and private sectors work together to improve those situations?
Speaker 1 00:11:47 Yeah, and I, and, and I think that's, that's another really valid point, and I don't wanna draw too much from the global view, but I think it's extremely important. If you put Detroit and, you know, anything associated with water, either from a flooding perspective or water scar city, and you're looking at economies that actually have been effective, for example, India, you probably heard about the onion crisis and what was, what, what was all about with the onion crisis, right? And if you have enough flooding at a time where you should harvest onions, what you will have is from a basic produce that is so important from local economy that is part of a country where the, the, the outcome, the economic outcome of onion production effects the farmer, the exporters, and also the people that actually are resorting to that lowest priced vegetable that is available to them to sustain their life.
Speaker 1 00:12:39 You're realizing how it is important. In the case of India, what the government did was, first of all, the bann experts, because they realized that making sure the resilience was built locally was extremely important. So they needed to make sure that access to food, and there was no food scarcity associated with that particular, um, ingredient of, of daily life and daily sustains. So that, that, that was important. So thinking about building resilience, first of all, give access to the things that are most important to continue to sustain that economy, which is predominantly the social side of things, right? Second of all, a ban obviously from expert, right? If you have a commodity to make sure that that price goes from, in the case of when you need doubled up, right? And it, it was, was incredible doubling up in, in just a handful of months, right?
Speaker 1 00:13:26 Making sure that that goes at a level that ha is, makes that food accessible on a, on a wide to wide range of people, always makes sure that, um, the farmers on the other hand get compensated for on one hand, having workers that, you know, sustain right? Their efforts and continue in their production of that particular vegetable. On the other hand, you have internationally, uh, you have to make sure that the farmers continue to receive the flows of funding that, that they rely on, right? So there is a two com two-prong component, which is number one, how do you make sure that you do crisis management associated with this? I think public, public entities are, are, are, are an important component of that. Usually our development banks, there's a lot of innovation surrounding, uh, new forms of bonds, for example, coming into place that deal with climate resilience, right?
Speaker 1 00:14:13 And climate transition. And those are overlooking instruments that government entities can opt to adopt in their own treasury management. And obviously those are then, um, put out for purchase by institutional investors like ourselves. And so you serve two types of, of, of outcome, right? On one hand you have the economic of supporting, um, supporting parts of an economy, either local, right, or, or, or global that are strategically important to the economic outlook, right, of the world. On the other hand, you're also making sure that there is access to, to basic, to basic foods and, and, and, and, and all the basic needs that, uh, create, um, lower probability of social unrest, get, get, get abated basically.
Speaker 0 00:14:58 And that's great. And just to, to give a little more, um, validity and just contextualize the examples. India being one of, I think the largest economy in terms of population comparing that to states, um, in the US is kinda comparing apples and oranges there. But at the end of the day, that public-private joint partnership mm-hmm. <affirmative> is important, whether you're talking about a large global economy or a state within, um, an economy. Yeah. So great there. One of the things we want to get to is speaking about climate change, nat natural disasters, there are entrepreneurs, there are new industries that are popping up daily, it seems that really are giving substantial solutions in terms of how we can handle some of these issues from agribusiness to solar. Could you talk to us a bit about those new solutions, these new industries, and how they will make a difference?
Speaker 1 00:15:52 Right? I can tell you that from the investment perspective, you can make a, this difference if you have, you're a source of, of, of attractive opportunities for flows of money, right? That they need capital, right? Uh, so as any startup, even if you are a sustainable innovator, right? You need that kind of capital and that capital stability that you need to seek. So the interesting thing is, asset owners that are the likes of pension funds or insurance companies are looking a lot more deeper in terms of their own environmental and social practices in the way they build their investment portfolios. And they're looking for long term, right? And long term ensuring that there is resilience built in that portfolio. Climate and climate solutions, a adopted at the pension fund level is extremely important. So when you're thinking about sustainable innovations that are coming to market, and you're thinking about, wait a minute, how do do I know whether it is financially material just from a local ecosystem perspective?
Speaker 1 00:16:48 So, or, uh, is it just outside of the mom and pop shop is actually a solution can, can be scaled and then can be adopted by corporations that are large in nature and they are like Fortune 500, for example, corporations, right? And if you're thinking about it in history, the food and beverage sector has done a remarkable job in, um, sort of acquiring, having innovation labs and acquiring, uh, smaller businesses under their umbrella of brands that actually caters to some sort of consumer trends for a healthier lifestyle. A hel uh, healthy, uh, consumer habits. On the other hand, in the case of climate change, you also have parts of regenerative agriculture that are important for the same reason that food and beverage companies were acquiring, you know, other parts of, of, of, of businesses before, right? So it's not a matter of consumer trends any longer.
Speaker 1 00:17:40 It's also a matter of, okay, how do I grow my business in a way that is made to last, right? And so many of these businesses that are, are starting up or popping up, are actually popping up through innovation labs of, uh, bigger fortune 500 companies that, um, sort of take them under the umbrella, right? Every year to make sure that they actually follow that innovation and they put the best, you know, um, sort of in terms of talent and in terms of resources available to them, them clearly that's just a small batch of all the new small and middle enterprises, so to speak, that you would see popping up in the world, right? Um, but clearly it's part of the innovative piece of being in business in the 21st century. Now, from an investment perspective, I can tell you that how do I account that in my portfolios?
Speaker 1 00:18:25 How do I account for the innovation part? Well, it's through the r and d budget, right? And the r and d spending of Fortune 500 companies, for example, if we wanna take the most, the most visible and through these companies, even if you're thinking like main developed markets, fixed income, and so in the, the large space of bond markets, right? Uh, what you see is many of these companies rely on our, and are affected directly by one particular, uh, factor, which, um, we call product lifecycle management. And if you're thinking about that, every single product that you see on the shelf or every single service that you have provided has a lifecycle, and a company needs to manage that life cycle because that life cycle creates either waste that you have to take care of or you have to, um, sort of invest in new designs, right? So when you're thinking about product lifecycle and you're thinking about sustainable and new green technologies or, or again, sustainable, uh, new products that are coming to market, that's great because 70% of the companies that we do due diligence on and they're in our investment investment universe are actually affected by product lifecycle management or in some cases mismanagement, right?
Speaker 0 00:19:38 So, and that's great. And just as we wrap up here, I'd love to know the big idea, if you have a top five in terms of the new types of businesses that we can expect to see 2020, maybe 2021 into 2022, what are we going to see that we haven't seen yet as a result of the climate change and the need to handle things in a more innovative way? If you could have a top five or a top three, what would those top three business types be?
Speaker 1 00:20:05 I think my number one, if we're just dealing with climate change alone, right? Otherwise I have, I'm fortunate for you, Keith, I have tons of ideas, right? So, and
Speaker 0 00:20:14 Next time we have you here, we'll talk about those. Yes,
Speaker 1 00:20:16 Exactly. But if you're thinking about climate change, the first would be an area that is very dear to my heart is the carbon markets, right? How do we revitalize carbon markets and how do we revitalize the idea that you can go beyond carbon offsetting, right? For either regular people or you, you and I or at the corporate level, but how do, um, governments do carbon offsetting? How can we track? So any company or any new business that can come in, especially from a blockchain perspective, and bring solutions that actually are able to track the actual carbon contributed not just at the product level, but at the company level on overall footprint. That will be extremely important, especially when you are dealing with new instruments coming to market, like I said, climate transition, for example, bonds that will need to set targets, right? So beware of the targets.
Speaker 1 00:21:05 We still are in a situation where we actually need to make sure that we are measuring what carbon, you know, uh, uh, emit do mm-hmm. <affirmative>, right? And it's from a product by product and sector by sector, right? And it's the whole, not just the footprint of a company, but how different kind of, of, of emissions are actually reported. Um, so that's, that's number one. I think the technology platforms that aim at really providing a broad perspective on that, it would benefit both the public market and, and private investors. Um, the second one is certainly about agriculture and about food. Um, I, I, I think I would stress the fact that the spikes in commodity pricing that we see with, with the, with the, uh, basic, uh, food items that could go scars is also about, uh, not just scarcity is about access. And so when you have, you know, a number of environmental impacts that affect regions of the world where you may not have access to food, right?
Speaker 1 00:22:03 What you do is, um, you are in need to understand how that could create social unrest. So, uh, an idea of how, for example, government entity of department of defense handle, right? Their, their are their own territory in terms of what happens to our storage of foods, what happens to our, to our access to food. So that, um, mainly you won't have issues surrounding social unrest when, when these things happen, right? And you won't have necessary to be a ban on export if anything happens, right? Like in the case of India. So I think that food security, uh, solutions are extremely important. And the third area, which I think also is extremely important, is healthcare delivery. Um, if you're thinking about, one area that I'm asked a lot is, uh, and deals with, um, earth, uh, earth minerals and rare earth minerals, okay? There's nothing new with or rare about earth minerals.
Speaker 1 00:23:01 They are 17, and some of them come in quantitative is more bountiful than copper. So what makes them unique is the idea that they're rare because you can't find them in one place, okay? They are, they come in this dispersed form, and some are in countries that are really frontier markets. Although when you look at geological studies and surveys, you'll find China, Australia, the us right? Being the, the, the major source of mind production. Now, what is important for healthcare delivery is not just the social piece of, of, of, of healthcare delivery and making sure that it is enough information with the, the service that is provided and the cost of, of the healthcare delivery. But is that these rare minerals are actually part of any components that have, uh, magnetic, for example, uh, properties. So for example, the mics that we're using today, you know, and the speakers that we're using today, they all have rare earth minerals in there. Okay? So these are also very important for mri, for example, or any other type of, you know, healthcare delivery service that we think it's, it's pretty common to have. But, um, should we have an issue with mind production of such, uh, we really need to make sure that we have in place the right tools and particular common informal technology platforms that address the need of how many of these, you know, uh, rare metals ORs are available in what countries they are available.
Speaker 0 00:24:23 Great. So you heard it here first, the top three industries that we're expecting to hear about in the near term carbon targets, industries, focusing on that agriculture and food, and then healthcare delivery. Thank you so much, Alessia, for joining us. Thank
Speaker 1 00:24:38 You, Kisa.
Speaker 0 00:24:41 We invite you to subscribe to the Definitive Sustainability Perspectives podcast on iTunes, Spotify, or wherever you stream your content. What did you think about the podcast? Definitive? Wants to hear your comments on LinkedIn and Twitter. Thank you for joining. See you next time.
