Erin Bigley: There are several different ways you can approach investing in the climate-focused space. Can you each tell me a little bit about the different styles of climate-focused investing?
Kent Hargis: One strategy is more of a core-focused approach, being more diversified across sectors, across countries, identifying high-quality companies that are at reasonable prices that are having a positive effect on climate change.
David Wheeler: A solutions approach is thinking about the challenges of climate out there. And there's really two things. One is the need to reduce emissions, and the second is to adapt to the impacts of climate change that are already happening. So our approach is to invest in companies whose products and services are helping to address those climate challenges. And we're seeing massive growth and investment in those areas.
Erin Bigley: You've both described an active investment-management approach. Can you tell me about the benefits of an active approach when focusing on climate investments?
David Wheeler: Active approach is key. Investing in companies that are thematically relevant to climate is not enough. It's also important to invest in high-quality companies that can perform well in any environment. So when it comes to adding alpha over time and generating strong financial returns for clients, we think coupling a thematic approach with a focus on high-quality names is the best way to deliver alpha for clients.
Kent Hargis: We also think it's important in terms of risk management. Passive approaches may have exposure to things like rising interest rates and other style exposures. And we think that an active approach would help us to mitigate some of these macro effects or the style effects to give you what you're targeting in the portfolio that you're choosing.
Erin Bigley: So tell me a bit about the types of companies that you'd find in some of these climate-focused portfolios.
David Wheeler: One of the biggest challenges is the need to reduce emissions. So if you think of something, let's say airlines, and how can that business reduce those emissions, there's one key area, and it's renewable fuels, clean fuels. And so there's companies that produce a sustainable aviation fuel where the emissions are about 80% lower than traditional fossil jet fuel. So companies that can produce that are going to see strong demand for that product in the years ahead, and that can lead to strong return performance for those names.
Erin Bigley: Kent, how about examples from your portfolios?
Kent Hargis: Yeah, we believe names that are in cable solutions are really an underappreciated part of investing; that they are the enablers, the backbone of the transition to renewable energy, as well as building out of the grid. And there are companies that have huge backlogs, so therefore they have strong pricing, and also aren't forced to take speculative projects, and therefore we think will also deliver the cash flows over time as well as having this positive impact on the energy transition.
David Wheeler: Another area that's an attractive solution to climate challenges is infrastructure. Not only is infrastructure aging, but climate change—whether it's extreme weather, rising sea levels, water scarcity—is creating challenges, and building a more robust infrastructure is critical to addressing that. We especially like the upfront engineering, consulting and design companies; we like their business models as being very high quality, and we see demand for their services growing.
Erin Bigley: Tell me a little bit more about what comprises your style. Tell me a little bit more about the characteristics of this style.
Kent Hargis: So we think that you can build a diversified approach to a climate-focused portfolio across enablers, implementers and beneficiaries. We think key enablers would be names in analog semiconductors, which are reducing the cost of some of these electrification and transition to renewable energy.
David Wheeler: Those power semiconductors are picks and shovels that allow companies to implement more energy-efficiency practices. We see that in manufacturing, we see that in the electric grid. It's also critical inputs for EVs and renewable energy.
Kent Hargis: And we see that coming all together with the retailers who are the beneficiaries; and really, the collaboration across the enablers, the implementers and the beneficiaries is how we're going to reduce the carbon emissions of many of those end retailers.
Erin Bigley: How do you see climate-focused investing evolving over the next several years?
David Wheeler: There's been a lot of focus, especially in the media, around things like renewable energy and electric vehicles. But if you think about the challenge of reducing emissions, we're going to have to do that across a diverse set of solutions, including things like heating and cooling, manufacturing, infrastructure, agriculture. So to me, one way that it's going to change is recognition that we've got to do an “all of the above” approach to address the climate challenge.