ESG: 'Thanks to Covid-19, Engagement is Zooming'

Ollie Smith: Now, Earth Day may have been and gone, but the hunt for climate change solutions continues in earnest. Here to tell me more is Francesco Conte, Portfolio Manager on JPMorgan Asset Management’s Climate Change Solution fund.

Francesco, thanks so much for being with me. Can I just ask, first and foremost, given that ESG can be as much about what you don't invest in as what you do, what's your approach? What don't you invest in?

Francesco Conte: Yeah. So, our criteria is not actually exclusionary unlike many ESG funds, but is inclusionary. And what we mean by that is that we want our companies to have a minimum of 20% direct solution to the problem of climate change. So, to give an example, to make it more explicit. If a cement company is decarbonising, would we invest in that company? No, because that company is not providing a solution to climate change. We would want to invest in the company that is providing the solution to decarbonise, which in the case of cement is probably going to be something like carbon capture. It could be renewable energy that they replace their gas energy with, et cetera. So, they have to be direct impact to the, let's say, decarbonisation of the companies.

OS: So, it's inclusion, but strict inclusion.

FC: Very strict. And every single company that we identify, what we do is we double check it with our, we call it, Sustainable Investment team. It's our own ESG team, internal team. And so, we write up the investment case, the thematic investment case of why it applies to the theme of climate change solutions, and it's for them to review it. Sometimes they ask more questions and eventually either approve it or not approve it.

OS: I'm just coming on to the topic of individual holdings within the fund, and you've got some big names in there, and notably, Deere and Co, for instance. What's your thoughts on engagement and how does one engage with big companies like that that are making these contributions?

FC: So, you know, we're very fortunate at JPMorgan, because I work very closely with the analysts around the world and I work with our Sustainable Investment team around the world, whether it be London or Hong Kong or New York. And so, engagement happens usually through the analysts and the Sustainable Investment team. They have a luckily actually one good thing about Covid-19 is Zoom and you know today I can get on a call with the US, whereas perhaps pre-panedemic that meeting would have happened in-person...

OS: You feel like you're achieving things more quickly as a result?

FC: I think things move much more quickly now. Because before I suppose the tendency was to organise either a telephone call, which was never very – I don't know, it was difficult to concentrate apart from anything else on a telephone, but also the need to have – go to travel, and you can't just go to New York and have it all in the States and just have one meeting.

OS: Yeah.

FC: So, it's not something you could do just in two days time. But now, fortunately, with the technology that we have, video calling, where we can just have a meeting within a couple of days.

OS: Sure. And then, just finally, I mean, I know you're a fan of energy efficiency, but what's the overlap there with the issue of water, given that that's a kind of finite resource like oil?

FC: So, I think in terms of solutions to climate change, I think that, broadly speaking, there are two solutions. One is really replacing fossil fuels, and that has to be renewable energy. Renewable energy is the cheapest source of energy in the world, although so many people I speak to hear it, but don't truly believe it, but it is the cheapest source of energy. The other – sorry, and (I know, I should say), the whole ecosystem, what I call electrification, because, you don't necessarily need to invest all your money in renewable energy companies. But again, I think I always think of it's the technologies that enable the production of renewable energy, which is the more interesting aspect. Microinverters, you know, which enables solar panels to work more efficiently, et cetera.

The other part of the equation is really to reduce our dependency on oil and gas fossil fuels. In the '70s, we reduced our dependency on oil by about 10% over that decade. And if you think about it, in the '70s, I don't think there were even personal computers around or probably our phones have more computing power today than a computer had in those days. Today, the solutions are there and them have much bigger impact on the climate than anything they could have envisaged in the '70s. So, LED lighting reduces energy consumption by up to 90%. Heat pumps reduce your energy bill by probably 30% plus. And the beauty of these products is that the efficiency or the technology keeps improving, and this is what this is all about. It's progress. Do we want to be burning coal in 10 years' time when solar energy will be a fraction of the price?

OS: Sure.

FC: We'll be making our companies uncompetitive if we're still using coal energy. So, going back to your question on water. Water, it’s so much better to purify it, to use close loops, for example, for semiconductor companies, rather than keep drawing it in and then throwing it back. And therefore, so we don't need to use things like desalination, which uses an enormous amount of energy, et cetera. So, water is very, very big component. So, for example, we have companies that are involved in purifying water. So, not water utilities, but again, those companies that are enabling, say, chemical company to purify its water and reuse it within their plant. But we also have companies providing technology, for example, for precision farming, so that the farmer can better utilise his resources, not just water, but for example, fertiliser, etc. So, resource efficiency is a huge component of climate change solutions.

OS: Sure. I'm absolutely absorbed by this. I love your passion. Thank you so much, Francesco. For more on climate change solutions and ESG investing, check out any of Morningstar's websites across Europe, and indeed, the world. Until next time, my thanks to Francesco. I've been Ollie Smith for Morningstar.