Green The Portfolio or Green The Planet?

Green the Portfolio or Green the Planet?

Barnaby Wiener – Equity Portfolio Manager, Head of Sustainability and Stewardship, MFS Investment Management

Speaker 1: Brilliant. Let's move it on. We've got lots more happening now. We've got our climate leader insight. Green the portfolio or green the planet. I want to invite up to the stage Barnaby Wiener, equity portfolio manager, head of sustainability and stewardship at MFS Investment Management. Big round of applause for Barnaby. I'm going to join you. Let's keep making it intimate. How are you?

Barnaby Wiener: I'm very well, thank you. How are you?

Speaker 1: Yeah, founded in 1924, MFS, one of the oldest asset management companies in the world, credited with pioneering the mutual fund.

Barnaby Wiener: I wasn't there.

Speaker 1: You weren't there. You don't look that old, but it's quite an achievement, helping to pioneer the mutual fund. Let's start with exclusion and engagement, Barnaby. In your eyes, which one has the greater impact?

Barnaby Wiener: Well, I think it's very clear where the greater impact lies and it's already been discussed by others this morning. But I mean, maybe we can just back up and address the bigger question of how do we create impact in the investment world? Because I think it depends a lot on what part of that world you're working in. If you are in the business of deploying capital to young growing businesses that desperately need your capital, then how you invest is the critical area you have agency.

Barnaby Wiener: But the bulk of investment assets are actually invested in large listed companies. And that's certainly our line of businesses is in public equities. And there, I would say that the impact you create through investing or not investing actually have very little, is limitless. I mean, ultimately, you're trading shares on the secondary market. You're not putting capital to work. But where you can, obviously, have a material impact is as a responsible owner. I mean, particularly if you have larger stakes in companies.

Barnaby Wiener: And I think there's a real danger that everyone is viewing this, or many people are still viewing this through the lens of you express your sustainability credentials through what you're investing in. Whereas, actually, you express them through how you act as an owner. And I totally agree with, I can't remember who it was who sat up here earlier saying that we actually are creating, potentially, a huge, a negative consequence of forcing investors to scrub their portfolios clean because all it is doing is offloading dirty assets onto owners who frankly don't care.

Speaker 1: Yeah. Did you agree with that comment earlier, dirty assets owned by, bad assets owned by bad owners?

Barnaby Wiener: Well, I do agree, although I would actually couch it because I think it's a little more complex. They're not necessarily bad assets. So, for example, we all know that we need to drastically reduce our consumption of fossil fuels. There's no way we're going to get to net zero without doing that. But then to say, "Well, fossil fuels are inherently bad," seems, to me, disingenuous. Because if we stop producing fossil fuels today, we would unleash a catastrophe that's infinitely worse than anything that will be created by global warming. We depend on fossil fuels for every aspect of our material needs.

Barnaby Wiener: So, really, what we should be focusing on is devising ways to reduce that dependency as quickly as possible. But that doesn't necessarily mean that a company that owns a coal mine is necessarily a bad actor. It depends what they do with the coal mine. So, I'm going to give you one example of this. A couple of years ago, Glencore, I'm not here to parade the virtues of Glencore necessarily, but I think this is an interesting illustration.

Barnaby Wiener: Glencore bought out the minority shareholders who were a couple other miners, Anglo American and BHP, in a large coal mining asset. In doing that, its emissions profile went up, its credentials as a green actor went down. Conversely, Anglo and BHP enjoyed a positive boost. But Glencore's argument was that we're going to run this asset into the ground by 2035, I think, and then we're going to shutter it in such a way that it would be completely uneconomic to reopen it. Had they not taken on that asset, there would've been a buyer out there. No doubt, a Chinese company or a private equity or whatever would've bought it without any of that incentive to manage it responsibly.

Speaker 1: Mark Carney referred to this the other day. He said it's nuanced, this bad asset argument, isn't it? And that's a fantastic example.

Barnaby Wiener: Absolutely. It's very nuanced.

Speaker 1: To highlight that, the former governor of the Bank of England. You talked in a recent podcast, Barnaby, about embracing complexity in ESG. For those who didn't listen to the podcast, can you expand on that?

Barnaby Wiener: Sure. I think that ESG itself is such a complex field. Let's focus this just on the climate question, which is, after all, as Catherine, just one strand of this. But if we think about the challenge around climate, in some respects, it's very simple. We know we've got to get to net zero by 2050, and we need to get halfway there by 2030, which feels like a very daunting challenge. We know that's what's necessary.

Speaker 1: Emissions have to peak by 2025. Of course that's even more stark.

Barnaby Wiener: But how you get there is extremely complex. And it requires a confluence of many different actors, corporate, financial, government, consumer, as we've discussed. To some extent, it requires regulation. It also requires significant technological development, which at this stage isn't really clear. So, when we look at when we're interacting with the companies we invest in, we would love to have a very simple blanket approach. We could say to them, "This is what you need to do."

Barnaby Wiener: And there are some things we can ask them to do. It would be great if we had a simple formula that would work for all companies, but we find that doesn't work. And actually, the reality is that every company is different. It faces unique challenges based on the business model it's in, the regions in which it operates. And it's very complex. And I think one of the struggles we all have is that there's rightly this idealist fire that burns in many of us that we realize there's a problem, and we realize that drastic action is necessary, but at the same time, we need to combine that with a cold realism about what's workable. Because sometimes, we need action, but not all action is always ...

Speaker 1: And it was touched on in the last panel about the cold realism about what works, when we bring in war, Russia-Ukraine, ESG's been put through the ringer, hasn't it? It's been a real focal point of debate. How constructive has that debate, and how will the ESG community come out to the benefits of society? The other side of this debate?

Barnaby Wiener: I prefer to think about the community rather than the ESG community. I think the ESG community was relevant at a time where no one else was thinking about it. I think one of the things that's positive now is that it has gone mainstream. Everyone is thinking about it. So, the whole financial investment community and the corporate community. I think that, in the near term, obviously everyone is focusing on the immediate challenge at hand, which is how on earth do we get the energy we need for society to function.

Barnaby Wiener: And I suspect there will be more coal burnt in Germany this year than would have otherwise. In the near term, it's not positive. Hopefully, in the long term, it reinforces the need to move faster, in terms of creating ingenuity. And I think it's almost an obligation to remain optimistic here. I mean, life is not worth living if you can't have some hope.

Speaker 1: Is it going to be used, though, the war, as in excuse to backtrack, maybe plan projects that shouldn't have been planned? Using it on, let's say LNG projects, which take years to actually build, but to have these long term projects, which probably wouldn't have been put in place if we hadn't had the war. So, it's bad actors again.

Barnaby Wiener: Well, in the short term, yes. But again, it should also act as a spur to greater. And coming back to the nuance thing, and when it comes to take power generation, which is one of the biggest sources of emissions. I would argue that it was a mistake for countries to be shutting down nuclear over the last 10 years. However much we hate some of the tail risk in nuclear, the reality is it is carbon free power. And for the time being, it's essential.

Speaker 1: Does our audience agree with that? Do you agree that it was wrong for Germany to shut down its entirety of its nuclear operations post-Fukushima? Hands up. Yeah. It's interesting. Yeah. Interesting. So, they share your view. And data. It's enough to get a room to run out the door, but no, don't you dare. Stay there. We have to discuss it." How do you think about data, ESG data, in your investment process? We know it can be poor. We know it can be limited, but how do you deal with that, Barnaby?

Barnaby Wiener: I think data has a very important role to play, and particularly around understanding where the emissions are. So, one of the, I'll say, primary challenges at the moment is just getting companies to disclose properly, so we can see what their emissions are. But I also do feel that we live in a world which has become somewhat enslaved to data, and data is not a panacea. Simply because a lot of important stuff is unquantifiable. And the most important thing, in my mind, is, firstly, understanding what individual companies' transition plans are. And secondly, evaluating what they're doing, what the steps they're making.

Barnaby Wiener: And I don't think there's any substitute there for rigorous, qualitative conceptual analysis. And I think we desperately want simple metrics on which we can evaluate every actor in the system, whether it's a corporate, whether it's an asset manager, whether it's an asset owner. And I think that's a false objective. And the problem with bad data, and particularly bad data that, then, is used not just to report on, but becomes a target, then that trigger. Then you start getting adverse outcomes. So, I think people need to be realistic about the limitations of data.

Speaker 1: On the subject of disclosures, you said that some disclose, some don't. What percentage of the companies that you invest in, deal with, are you happy with the disclosures?

Barnaby Wiener: I'm happy with the rate at which they're growing. So, the majority of companies we invested in do disclose at least their scope one or scope two emissions. I mean, obviously, the problem is, for many companies, scope three emissions are the largest source. And they're also the hardest to measure, and the easiest to probably measure inaccurately, in a way that puts you to an advantage. So, the direction of travel and the speed of travel is encouraging.

Speaker 1: Yeah. I'm just going to see if there's any questions there. Right there. Yes, with engagement versus exclusion. I'm going to ask this now. How do you deal with the problem of stranded assets? We've touched on that, but go for it.

Barnaby Wiener: Well, to be clear, as an investor, and we're an asset manager. We manage over $600 billion. None of it's ours. It all belongs to our clients. So, we have an obligation to invest their money responsibly. And if we feel an asset is stranded and that's not reflected in the valuation, we've got no right to be in that. We shouldn't be invested in it. So, absolutely. I mean, we have to look at this at least partly through the lens of financial return, so if it's not…

Speaker 1: And why is there a disconnect, Barnaby, between the pledges that all sorts of governments and companies, banks, asset managers are making? And what is clear is a continued flow of cash into fossil fuel producers. The stats are quite clear. Major asset managers still hold about $550 billion in fossil fuel producers. Why is there still that disconnect?

Barnaby Wiener: Well, I think it comes back to what I said at the beginning, which is the pledge is clear we need to get to net zero. But equal, we can't do it today. And so, those companies still have a role to play and we should be encouraging them not to invest in new explorations. They're going to leave them with stranded assets and therefore will be a poor investment. And their shareholders will lose out.

Barnaby Wiener: But really, I think there's too much focus on the supply side here, which is, the easier way to get the net zero is to stop producing coal and oil and gas. But if we stop producing these things without figuring out alternative sources of energy, you only have to look at what's happened this year, when those resources are suddenly in tight supply and energy costs are going through the roof. And the average person in this country is seeing significant deterioration of their living standards as a result. Just tackling the supply side will be disastrous. We've got to figure out the demand side. And if we figure out the demand side, the supply side will look after itself. Because if there's no demand for these products, then no one will be looking to produce them.

Speaker 1: Let's get our audience involved, Barnaby. Questions. Come on, Barnaby's here. Absolutely brilliant guest from MFS Investment Management. Stick your hand up. Let's ask Barnaby a question from our audience. While you're getting some courage, with the ongoing energy crisis, our online audience, by the way, is defeating you all. Come on. Let's have some physical questions. With the online energy crisis, Barnaby, do you think this will slow down the transition?

Barnaby Wiener: I think that's the question around the current crisis.

Speaker 1: Yeah.

Barnaby Wiener: In the short term, yes. In the long term, I think no. I mean, I think one thing that I think was mentioned by a previous speaker. The primary reason we'll talk about energy transition is to stop producing carbon emissions. But there is a secondary reason, which is we will live in an infinitely safer world if we are not dependent on sourcing our primary energy from countries like Russia or the Middle East or anywhere else. If we're self-sufficient in energy, then we'll be in a safer world. And I think horrendous situations like we're in today bring that to light, and hopefully inject some momentum behind long term policy making.

Speaker 1: Yeah. Ah, yes. Oh, two, three. What's that, four? Excuse me. Oh, there's one there. So, the light's blinding me, but I can see you. Please tell us your name, where you're from and fire away.

Fran Brown: Fran Brown from Mercer. I just wondered, Barnaby, what do you see as your role in terms of encouraging that demand side and encouraging the development of the technology that will be required to transition away from fossil fuels?

Barnaby Wiener: So, I think, in a general sense, our primary agency in this whole process is through how we communicate and engage with the companies we invest in. And so, it tells me what they do that matters, but we can play a part in that, perhaps. And I think it comes down to a combination of investing in technology and encouraging them to do whatever they can to expedite the process. I'll give you one example because it's a good one. Rolls Royce produce aircraft engines, as you all know. Aviation is one of those industries that is definitely in the hard to abate category. It's not clear to anyone what the end solution is here, but at the very least they can invest in research into things like sustainable aviation fuels, into hydrogen power, into electric engines, and just make sure that they are at the cutting edge of that process. By doing that, not only will they expedite the process of weaning us off the demand for fossil fuels, but also they'll put themselves at a competitive advantage. That's basically our approach with every issuer. What are you doing to expedite it?

Speaker 1: Our audience is on fire. Online audience has got so many questions, but there was a lady here. Yes, hello. If you'd like to tell us who you are. Do you have a microphone? There you go. Oh, is it on?

Tanya Reynolds: Can you hear me?

Speaker 1: Try again. I think it is on.

Tanya Reynolds: Is it on?

Speaker 1: Yeah, yeah, yeah.

Tanya Reynolds: Hi, I'm Tanya Reynolds, I work for Sustainability Habit Limited. I want to set up a new green bank that's focused on nature based solutions, and I have two questions. One of them is the circular economy, and whether this is a factor that you consider when you are speaking with the portfolio people, and materially what are they doing towards implementing the circular economy? And more specifically, what are they investing in R&D to make a transition, so that we don't have to jump to distress. We can go on a more phased transition.

Barnaby Wiener: I think it obviously varies by industry a lot. A few examples come to mind. In the consumer space, we spent a lot of time talking to companies around plastic use and increasing the content of recycling in their packaging. There's a building materials company called Trex, which produces building materials that are made out of recycled plastic. So, depending on the relevance of the company we're investing in, I would say circular economy is part of a broader conversation around sustainability. And I would agree with you, it's critical, but it's very company specific. I wouldn't say that it's necessarily relevant to all the companies we invest in.

Speaker 1: Barnaby, I have to wrap it up. It's my job in life to keep things moving on, and apologies to George, who is messaging us from Bucharest. He had a couple of wonderful questions. Apology, George, but please don't give up. Please fire in questions our way. George is one of our online audience. Barnaby, brilliant. Thank you so much. Big round of applause for Barnaby Wiener.

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