20 January 2020

Diego Alejandro Falcone

Climate Change
Portfolio
How to save the planet and make a profit
 Introduction
«Nel mezzo del cammin di nostra vita
mi ritrovai per una selva oscura,
ché la diritta via era smarrita.»
«Midway along the journey of our life
I woke to find myself in a dark wood,
for I had wandered off from the straight path.»
(Dante Alighieri, Divina Commedia, Canto I)
What is the purpose of investing?
Several times along my 20 years of experience as a
professional investor, I have asked myself the question,
why I do what I do. Put succinctly, my job as a portfolio
manager comes down to reallocating capital into the most
lucrative ideas my investment skills enable me to find in the
financial markets. For many years I spent entire days
pondering whether a steepening of the U.S. Treasury yield
curve would benefits banks’ net interest margins and hurt
homebuilders’ bottom line, or whether an economic
downturn could be a likely event in the following year, which
energy stocks would be more defensive for the portfolio,
etc. Despite the fancy investment jargon, I have found that
if there is no purpose behind those decisions, other than
making money of course, your life becomes more
meaningless every day. And when your job doesn’t have a
purpose that transcends you, there is a chance you might
experience some form of boredom from doing the repetitive
tasks the job requires. When doing these tasks repeatedly,
there is an ever-increasing probability of being replaced in
the not too distant future by a machine. As a recent CNBC
article states: “automation is threatening 25% of jobs in the
US, especially the ‘boring and repetitive’ ones…” 1
This feeling of dissatisfaction with my career accompanied
me for almost a decade. It felt weird to be discontent with
such a “cool” job: you get to travel a lot and stay in fancy
hotels, you have meetings with very clever and interesting
people, your colleagues are highly educated and
exceedingly smart, and, of course, you make more money
than the average person.
The question “Why I do what I do?” is not a moral dilemma:
I knew I wasn’t doing anything wrong; however, I wasn’t
doing anything good either. When I use the term good, I
1 Annie Nova and John W. Schoen. Automation threatening 25% of
jobs in the US, especially the 'boring and repetitive' ones:
Brookings study, CNBC, January 2019.
refer to my contribution to the community. For example,
everyone agrees on the importance of doctors and teachers
in a society. But what is the contribution of a professional
investor to others? A few extra basis points of performance
into the retirement account of those doctors and teachers?
This was perhaps the right answer but it wasn’t good
enough to quiet the murmur in my head.
When I started questioning my career in 2011, exchange-
traded funds (ETF) - a type of fund with a passive strategy
which has no active involvement of a portfolio manager,
basically a fund run by “machines” -, were rapidly eating
market share from those active funds that hired
professionals like me (“humans”) to manage them. The
ETFs proved to be better financial vehicles for a wide range
of investment strategies than “old school” funds. But this
threat would result in the opportunity I was looking for to
initiate a change. As the old proverb says: every cloud has a
silver lining.
10-year anniversary of the collapse
In the evening of the 10th anniversary of the collapse of
Lehman Brothers I was writing an article about myself on
that day - September 15th, 2008 – when the world seemed
to come to a halt. It was my first day as a portfolio manager
at Aviva Investors London: that was quite a start. While
doing some research for my story, I came across an
interesting paper written by Michael Porter and Mark
Kramer back in 2011: Creating Shared Value. In their
business review, Porter and Kramer, questioned the
purpose of the corporation in today’s society and asked
business to “reconnect company success with social
progress” 2 in order “to unleash a wave of innovation and
growth” 3. The authors approach the question “Why I do
what I do?” from a broader perspective: they move from the
individual point of view to a more systemic one. Their work
was highly inspiring to me and I was finally able to find the
answer I’ve been seeking all these years: my job as an
investor should be “to allocate capital to those companies
that can fulfill society’s most fundamental needs at a
profit” 4.
The idea that you invest to make money, but while doing
that you have to fulfill your social responsibility to make
2 Michael Porter and Mark Kramer. Creating Shared Value,
Harvard Business Review January-February 2011, p.4.
3 Michael Porter and Mark Kramer. Creating Shared Value,
Harvard Business Review January-February 2011, p.3.
4 Michael Porter & George Serafeim & Mark Kramer. Where ESG
Fails, Institutional Investor, October 2019.
Climate Change Portfolio 2
 Introduction

your community more prosperous and sustainable, made a

lot of sense to me. The future of capitalism will be at risk, if
we, professional investors, use our role merely to extract
rents in destructive ways for the society and the
environment, thus severing the connection between
corporate success and social progress.
In January 2004, Kofi Annan, the seventh Secretary-
General of the United Nations, urged the CEOs of top
financial institutions to take part in an initiative to integrate
Environmental, Social and Governance (ESG) criteria into
capital markets. The ESG criteria’s that emerged from the
Who Cares Wins conference of 2005 5 set the standards for
corporations to help socially conscious investors to screen
potential investments. From these three wide-ranging
criteria, I selected the environmental one in order to
reconcile my job with my social duty.
When all is said and done, the skills and experienced you
acquired after many years in the financial markets should
not result in your leaving everything behind and renting a
boat to clean up the ocean plastics. Our purpose should be
to put our intellectual capacity at work and excel by
allocating capital into those businesses that generate
profits for their shareholder while tackling the threat of
global warming.

5 The Who Cares Wins conference convened in Zurich on 25

August 2005 brought together institutional investors, asset

managers, buy-side and sell-side research analysts, global
consultants and government bodies and regulators to examine the
role of ESG value drivers in asset management and financial
research.
Climate Change Portfolio 3
 Table of Contents

Chapter 1 Chapter 4
How decisive is the role of the government? Climate change sector
Page 5 Page 11
A global transition to a low-carbon economy can deliver, How have investors historically managed the climate-
over the next few decades, strong and inclusive growth and related risk in their portfolios Vs a more holistic approach.
set off a wave of technical progress, and restore the
government in its traditional role for supporting demand
and investing.

Chapter 2
Investment opportunities and climate change
cycles
Page 7
The transition to an environmental friendly economy has
not been smooth and has been characterized by cycles.
Since the early 1980s we have experienced two different
cycles. At the beginning of this decade we may be Chapter 5
witnessing the start of a totally new cycle that could Climate change themes
unleash all the potential of the green technologies. Page 11
1. Electricity
2. Transportation
3. Agriculture
4. Manufacturing
5. Building

Final Remarks
Page 16

Chapter 3 Appendix
The complexities of investing in the climate Page 17
change theme
Page 9 Bio
All investing strategies require a definition and the climate Page 18
change theme is no different.
We analyzed three different approaches to incorporate the Disclaimer
climate change factor into investment and decision
analysis: thematic investing, ESG integration and screening. Page 19

Climate Change Portfolio 4

 Chapter 1
How decisive is the role of the government?
«A reluctance to face the full magnitude of our
task and overcome it is a coward’s part. Yet the
nation is not in this mood and only asks to be
told what is necessary. It is a fool’s part too.»
(J. M. Keynes, How to Pay for the War)
The biggest challenge
The greatest challenge for public policy today is acting on
climate change. For more than 50 years, natural scientists
have been gathering enough evidence to support the view
that the world is warming because of human activity.
According to the latest report of the Intergovernmental
Panel on Climate Change (IPCC) of October 2018, an
increase of the global temperature between 1.5°C and 2°C
would imply an increase in the intensity and frequency of
extreme weather events -droughts, heatwaves, and heavy
downpours. The researchers estimate that the global
economic damages from warming could be as high as $54
trillion by 2100 [Carter and Kaufman, 2019]. On the other
hand, fighting climate change could boost the global
economy and yield benefits for $26 trillion by 2030. That is
why the Paris Agreement (2015) set the target of holding
temperature increases below 2°C. In order to accomplish
this objective, emissions have to be cut 45% below 2010
levels by 2030. We may have as little as 10 years to act on
climate change to reach this target.
With few exceptions, governments and private entities 1 all
around the world are taking the necessary steps to promote
the investments needed to achieve these emissions cuts
targets. Because of its long term nature, the bulk of the
1 Breakthrough Energy, Oil and Gas Initiative, Green Cooling
Initiative (GCI II), Climate Investment Funds (ADB, ECB, IDB, WB
and AFDB).
investment decisions is expected to be made in this
decade.
The upside of the climate change threat is that in a
demand-constrained world, it can deliver, over the next few
decades, strong and inclusive growth and set off a wave of
technical progress.
The role of the government
In the 2000s, the world’s growth was driven by the U.S.
consumer spending and the Chinese investment booms.
The global financial crisis of 2008 put an end to both
booms abruptly: American consumers were forced to
deleverage and China to invest less. Since then, the global
economy has not found new drivers to stimulate demand
growth.
There are structural factors at work that keep global growth
rates depressed, such as demographics and income
inequality. The demographic factor that most affects high-
income countries is the problem of an aging society, which
translates always into inadequate demand growth. Why
would anyone want to invest in an economy with a falling
population and little productivity gains?
In this highly deflationary macro backdrop, fiscal activism
could be the new source of demand and despite the
significant resistance to government debt and deficits,
things could change rapidly.
Labour in the UK and Democrats in the U.S. have embraced
the fight against climate change as an opportunity to spur
economic growth and reduce income inequality. The Green
Industrial Revolution Manifesto (Labour Party) and the
Green New Deal Proposal (Democratic Party) are based on
the same idea: the restoration of the government in its
traditional role for supporting demand and investing.
The inequality factor has its roots in the normalization of
the trade relations between the U.S. and China back in
2001. Since then, the U.S. manufacturing sector has
experienced a massive loss of quality jobs to Chinese
coastal cities. Although the service sector industries in
America have replaced those losses, it has been with lower-
than average income jobs.
How could government spending on infrastructure projects
to deal with climate change fix this situation? We forgot
that until the 1980s budget cuts started by Ronald Reagan,
the U.S. government spending on infrastructure “provided
Climate Change Portfolio 5
 How decisive is the role of the government?

high-paying, full-time jobs for those who might otherwise
struggle to find decent work” 2.
The recent shift we have observed in the U.S. and UK from
the political establishment toward populist leaders and
outsiders who pledge to prioritize national interests and
exacerbate society’s polarization, is the response to the
inability of “old school” politicians to tackle inequality. A
government led transition from a fossil-based to a clean
energy economy, could deal with both issues: inadequate
demand growth and inequality.
purchasing power would need to be withdrawn. Keynes’s
preferred solution was to defer consumption “blocking” a
portion of wages into interest-bearing financial instruments.
The global stock of debt with sub-zero yields amounts to
$11.2 trillion 4, and this is a reflection of the solid and
unsatisfied demand for safe assets (government debt) due
to the lack of good investment opportunities in terms of
risk/reward. So we can leverage onto our global financial
system to handle the reallocation of global savings needed
to transition from a carbon-based to a green-based
economy.
According to the Modern Money Theory (MMT), the only
constrain to government spending is not fiscal deficit, but
inflation. In his 1940 book How to Pay for the War, Keynes
rightly advised the U.K. how to run a 20% plus fiscal deficit
to finance the war effort without a major inflation breakout.
We should always learn from the past to protect our future.

The transition to a cleaner economy

Is it possible to do this with technology as it stands now?
Yes, but it would require a level of coordinated effort of re-
industrialization involving every major country in the world.
As J. Fagg Foster said: “Whatever is technologically possible
is financially feasible.” 3
The issue is not how the government would be paying for
the investment spending on clean infrastructure, but rather
whether the country could produce enough output for the
transition effort while leaving enough production to satisfy
consumption needs.
As John Maynard Keynes asserted in How to Pay for the
War this type of planned investment is not a financial, but a
real resource problem. What is available for consumption is
comparatively fixed and output produce for clean
infrastructure purposes means more income, which, if
spent on the goods and services available for consumption,
would simply push up prices. To prevent the inflation tax
that lowers consumption indefinitely, some of the

2 Gwynn Guildford. The great American labor paradox: Plentiful

jobs, most of them bad, Quartz, November 2019.

3 J. F. Foster, The Reality of the Present and the Challenge of the 4 John Ainger. Bond World Is Backing Away From All That

Future, Journal of Economic Issue 15(4), p.963-68. Negativity as 2019 Ends, Bloomberg, December 2019.
Climate Change Portfolio 6
 Chapter 2
Investment opportunities and climate change cycles

«I am hard-pressed to recall when any sort market to grow from there at double digit rates? Chinese
of bubble was accurately identified in real exports were unable to grow at double digit rates after the
time on the cover of a major media publication. economy recovered from the global financial crisis:
If anything, the opposite is true.» between 2001 and 2008, exports grew at a CAGR of
(Barry Ritholtz) 23.6%, but between 2011 and 2018, the rate went down to
2.8%. When you are small, nominality helps you; when
you're big, it kills you.
The trend
The climate change was still an investment theme for a
In the early 2000s and as a result of the entrance of China niche 10 years ago. Back in those days, it was plausible to
in the WTO, commodities and commodities stocks were the claim that there were no alternatives to fossil fuels. Today,
big play in globalization. Investors were carried away by an array of low-carbon technologies are being deployed at
double digit Chinese growth rates. They invested heavily scale and experiencing double digit growth, and it is
into oil and mining companies, and provided the cheap common to see opportunities to reduce emissions at little
money needed to secure all the natural resources or no cost, or even saving money. Therefore, it is worth
demanded by China to fuel its investment boom in public thinking about possible scenarios in 2030 regarding green
infrastructure and housing. The greatest growth story of the technologies in terms of adoption and widespread use.
beginning of the 21st century was over by the end of 2011
when the Chinese economy slowed down. Accordingly,
investors pull out the money from emerging markets, and
investment and stock prices collapsed.
The following decade saw the return of technology stocks
from the depth of the dot-com bubble burst of the late
1990s. After being in the shadows while the China and
emerging markets story was unfolding, financial markets
were brewing a new growth story: the empowerment of
individuals. The emergence of wireless communications
(smartphones) connected millions of people to the internet
and the outside world without the need to build an
extensive and costly communications infrastructure. At the
beginning of 2007, when the first iPhone was launched, the The cycle
market cap of Apple, Amazon and Google (Facebook IPO
took place in 2012) was less than $400 billion. Today, the When did the climate change story become mainstream?
big mega tech companies stocks represent 12.5% of the Since the Paris Agreement in 2015, the transition to an
S&P 500. The last couple of years have been those of environmentally friendly economy has shown an irreversible
social media, on-line retailing and internet subscription trend. However, this transition will not be smooth and will
services companies. From hedge funds and pension funds be characterized by cycles. For any potential investor, it is
to retail investors, money from all corners of the Earth has imperative to assess how theses investment cycles arise
been poured into the FAANGs companies (Facebook, and what are their characteristics and behavior.
Amazon, Apple, Netflix and Google) as had happened a
Skilled investors promptly realize when a new narrative
decade earlier with the BRICs (Brazil, Russia, India and
suggests growth potential - 3D printing, London luxury flats,
China).
rare-earth metals, and more recently, anything bitcoin
However, at the beginning of the 2020s, the new related – they will experience a series of mini-booms and
technology mega cap boom is facing the threat of tougher busts.
regulation due to monopolistic positions (Google, Amazon)
In the past few years, alternative energy has been no
or the spreading of fake news (Facebook). Another factor
different from others growth stories and we could count two
that prevents the tech story from going on forever concerns
different investment cycles in the last 40 years.
its size: the individual market cap of Amazon, Apple or
Google is close or above $1 trillion. How big has to be your

Climate Change Portfolio 7


The first cycle
From the early 1980s to the mid-2010s, generating
electricity from clean energy sources such as solar or wind
was much more expensive than doing it from power plants
powered by coal or natural gas. The only way to increase
the scale of production of solar panels or wind turbines was
through huge economic subsidies from governments.
But despite this situation, from 2004 to 2010, renewable
energy previously regarded as a niche, saw an explosion of
interest and went from an annual investment of $100
billion to $350 billion. Foolish optimism drove expectations
high, and in particular the solar photovoltaic (PV) industry,
went through a bubble that ended up in tears. The over-
expansion and cut-price competition led to falling share
prices and to a stream of bankruptcies, especially in the
period 2012-2014. The positive outcome of this first cycle
was the dramatic fall in wind and solar costs, and the rise
of the real scale of production in the renewable sector.
The second cycle
In 2015 for the first time renewable energy surpassed the
50% watermark of power generation investment. In that
year, 51.3% of the net new generation capacity added
worldwide was “green”. Although the annual amount
invested plateaued at $280 billion, the capacity added in
terms of GW continued to rise as well as the share of added
capacity (67.7% in 2018). In this second cycle, companies
experienced a growing demand, fierce competition, and
unlike the previous cycle, governments started phasing out
subsidies, and implementing auctions to allocate new
projects, hurting companies’ bottom line. But for the first
time, building solar or wind power plants became cheaper
Investment opportunities and climate change cycles
than building a new coal or gas fired facility, even without
subsidies.
The third cycle?
These cost reductions achieved in the period 2010-2018
was due to a combination of economies of scale in
manufacturing, fierce competition along the supply chain,
the introduction of government auctions, record lows in the
costs of financing, and improvements in the efficiency of
generating equipment. Because of these achievements,
renewable energy is able to compete with conventional
power and cope with market risks. The bubble that
prevailed prior to 2014 is over. There is no crazy run
towards building capacity in the manufacturing sector. So
now what is next? We are very close to making a new solar
or wind power facility cheaper than continuing to operate
an existing coal or gas plant.
But opportunities are not limited to solar PV or wind
turbines; we need to invest more in transmission and
energy storage systems; we need to develop other forms of
clean energy applications - solar water heat collectors,
geothermal district heating or hydrogen and fuel cells -, and
build smart electricity networks. All these investments are
less prone to the boom and bust experienced in the wind
and solar industries in the late 2000s and early 2010s. Has
a new and more stable cycle started? Perhaps. What we do
know now is that although the sector has left behind the
early stages in which there was great growth potential, we
are set to move along a more profitable path and in a more
sensible way.
Climate Change Portfolio 8
 Chapter 3
The complexities of investing in the climate change theme
«It is change, continuing change, inevitable change, that is
the dominant factor in society today. No sensible decision
can be made any longer without taking into account not
only the world as it is, but the world as it will be.»
(Isaac Asimov)
The investment approach
All investing strategies require a definition to narrow down
the investment universe and focus the research. There are
three ways to achieve the incorporation of the climate
change factor into the investment and decision analysis:
thematic investing, ESG integration and screening.
Thematic investing is a very popular strategy among
equity investors but its meaning differs depending on
the end user. According to the most accepted
definition, it is a top-down investment approach that
assists the portfolio manager to pick those companies
that benefit the most from a specific macroeconomic
theme (e.g., cyber-security, artificial intelligence or the
aging society).
The ESG integration method is defined by the PRI1 as
“the systematic and explicit inclusion of material ESG
factors into investment analysis and investment
decisions”. In order to identify those material ESG
factors (e.g. CO2 emissions) that affect a company
business model, the integration model gathers
relevant information from multiple sources (qualitative
analysis). The proceeding data is fed into valuation
models and adjusted financial forecasts (quantitative
analysis) to assess the impact of those same factors.
All the analysis leads to an investment decision on
whether to hold, sell or buy a specific stock.
The screening or “negative screening”, implemented
by SRI1 funds in the mid and late 1990s, is an
investment strategy that consists in excluding those
companies that engage in activities that do not comply
with ESG criteria (e.g., companies that participate in
the exploration for or mining of coal).
Of all these three investment strategies, screening has the
least beta to the climate change trend; a portfolio whose
only investment strategy is to exclude, for example, oil and
gas producers or coal miners, won´t maximize the benefits
from a clean-energy future where the most profitable
companies will be those that successfully implement
cutting-edge technological solutions to climate change,
from improving energy efficiency to renewable storage
solutions. Avoiding is not the way to go; the future is about
getting involved.
What is the difference between the thematic and the ESG
integration approach? The distinction is usually a little
blurry, but it is possible to argue that the main
differentiation may be observed in the type of portfolio that
would result by implementing each of the strategies. A
thematic fund will tend to produce more concentrated
portfolios than the one that follows an ESG integration
process. The latter, if ESG factors are well defined, will
generate a more diversified portfolio because of it invests
in a broader universe of stocks whilst the thematic narrows
the investable field to a few sectors o industries (e.g.,
renewable energy equipment, waste & disposal services,
etc.). But as stated before, the distinction is not that
obvious because you can diversify your highly concentrated
thematic portfolio by adding as many themes as necessary
as long as they comply with your investment thesis.
Sail with the wind
Although the thematic approach seems a more suitable
strategy for a climate change portfolio, we have to be aware
that this type of investing strategy will not only produce
concentrated portfolios but will also assume greater
downside risks that will be compounded by regulatory
changes, shifts in tax policy or new disruptions in
technology.
The thematic fund may have strong ideas; yet, in order to
deliver a solid performance through time, successful
implementation will be a key factor. In general, the missing
link in this type of funds is finding those company names
that capture the ideas and have sufficient liquidity and
quality. It is a difficult, albeit not impossible, task.
Climate Change Portfolio 9
 The complexities of investing in the climate change theme

In the long term, these risks are offset by the advantage of this in turn has reduced the ability to deliver alpha to those
profiting from getting behind future tailwinds, narrowing the same investors.
universe of investable companies, focusing on research
On the contrary, growth is harder to spot than value
while avoiding spot forecasting or market timing.
because it is not merely a forecast about the future.
As happened many times in the past (in the early 2000s Successful growth investors have the ability to synthesize
when the rising demand for commodities from China unstructured data across multiple, often seemingly
started the commodity super-cycle or, more recently, when unrelated, domains. Computers will continue to be better
the widespread use of smartphones powered the social positioned to identify the shift in market conditions,
media boom), the opportunity comes when your investment competitive dynamics or financial reporting tendencies of
strategy generates a concentrated portfolio in ideas that corporate executives that determine what specific metrics
are not fully understood or completely appreciated by the should be used for the implementation of value. But they
market. have not yet shown yet anything similar to the humanlike
intelligence needed for developing creative thinking.
Cooperation between humans and computers
Equity investors are always looking for growth stories (e.g.,
the BRICs 1 or FAANGs stocks), and because these are in
high demand, growth stocks tend to be expensive relative
to the broad market according to different valuation ratios
(e.g., Price to Book, Price to Earnings, etc.). And despite the
fact that every investor has been told to “buy low, sell high”
since the financial crisis of 2008, this recommendation
hasn’t been very helpful: value investing 2 has been
underperforming to growth investing as had happened in
the late 90s.
This “anomalous” persistence of growth over value could be
explained by multiple cyclical factors at play (e.g., reversion
to mean) that have provided strong support for growth
stocks. However, we would like to highlight one in
particular: data democratization. Over 99 percent of all the
data in existence has been created since 2007, which The future for investing should not be seen as a war
corresponds to nearly the same date when the between humans and machines as portrayed in the movie
underperformance pattern of growth over value stocks The Matrix (1999); quite the contrary, it should be
began to be observed in the U.S. markets. Since value- comprehended as in science fiction short story The Feeling
oriented equity funds implement rules-based strategies of Power (1958). American writer Isaac Asimov describes a
(e.g., buying stocks with low P/B ratio), as computers with future Earth that is stuck in a stalemated war with another
high processing capacity become available at reasonable planet in which the computers can counter each other's
prices, and internet speed connection increased by 30x in moves: “If we advance the efficiency of our computers, so
the last 10 years, they have lost the huge advantage they do they, and for five years a precarious and profitless
used to have. The democratization of information has balance has existed” 3. The tie between this future Earth
allowed a significant number of investors to parse the ever- and the other planet, Deneb, could only be broken when
increasing amounts of data in order to find companies that the Earth was able to develop more creative war-machines
are at a temporary discount in the financial markets, and in which computers were coupled with humans.
To some extent, we could view thematic investing as a
1 BRIC is the acronym coined for an association of four major
valuable alliance between active management (humans)
and computers with high processing power (machines).
emerging economies: Brazil, Russia, India and China.
2 Value investing is an investment strategy that involves picking

stocks that appear to be trading for less than their intrinsic or 3 Isaac Asimov. The Feeling of Power, If: Worlds of Science Fiction,

book value. February 1958.

Climate Change Portfolio 10
 Chapter 4
The climate change sector

«I know you've heard it a thousand times before. But it's

Consumer staples and healthcare are in a more
true - hard work pays off. If you want to be good, you have
neutral category. Their activity has a limited exposure
to practice, practice, practice. If you don't love something,
to low-carbon transition risks, but could be affected in
then don't do it.»
more indirect ways because of its dependence on
(Isaac Asimov)
other industries that are in the stranded assets or
transition category.
The methodology Finally we have the solutions category, which
Historically, investors have managed climate-related risk in comprises the renewable electricity or electric vehicles
their portfolios by divesting, e.g., from companies in the companies that have the potential to benefit from the
coal mining or oil production sector, or by increasing their growth of low-carbon product and services.
investment position in those companies that provide
solutions to climate change, such as those in the
alternative energy or waste and disposal services sector. By the time the MSCI ACWI Climate Change Index was
released (June 2019), of its 2,697 constituents, only 7.3%
In order to manage climate change, the MSCI ACWI Climate
where in the solution category. The neutral represented the
Change Index1 risk adopted a more holistic view and
bulk of the index weight with 84.6%. Operation and product
considered “different aspects of these risks: namely, the
transition only represented 5.6% and 2.4% respectively.
risk of stranded assets, transition risks, corporate risk
Asset stranding had 0.07% participation.
management strategies and transition-related demand”.
The methodology chosen by MSCI to build the first
benchmark on climate change investing could be expressed
as follows:

Coal mining or oil sands production companies should

be considered in the category of stranded assets. In
other words, these industries should be avoided at all
costs because regulatory, market or technological
forces arising from low carbon transition are going to
put these companies out of business.
The oil and gas production sector or steel and cement
industries, belong to the transition category. In the not
too distant future, these companies should face a
decline in the demand and be forced to shift their
product portfolio to low-carbon products. Also these The basic question
industries could be affected by an increased in their
operational and/or capital cost due to taxes or limited The purpose of this paper is to answer two simple
access to capital markets due to measures questions: what counts as a climate-friendly investment
implemented by institutional investors to reduce their strategy? And what returns might investors be sacrificing or
investment exposure to these sectors. gaining by implementing a climate-friendly strategy in their
portfolio?
Regarding the first question, we have identified five areas
1 The MSCI ACWI Climate Change Index is based on the MSCI of activity that produce the most greenhouse gases:
ACWI Index, its parent index. The index aims to represent the electricity, transportation, agriculture, manufacturing and
performance of an investment strategy that re-weights securities buildings. Within each of these broad areas, there are many
based upon the opportunities and risks associated with the sub-themes. We have selected those that we believe are
transition to a lower carbon economy, while seeking to minimize going to experience the fastest growth and are less difficult
exclusions from the parent index. to implement.
Climate Change Portfolio 11
 The climate change sector

analysis or anything related to evidence-based investing will

be necessary) but by developing creative thinking to
The solutions sectors: connect what at first glance seems to be unrelated matters,
thus transcending the realm of what is purely linked to the
Electricity business and more linked to the interactions between the
1. Wind Power community and the companies.
2. Solar Power The era of sustainability has already begun.
3. Geothermal Systems
4. Electricity Storage
5. Transmission
6. Flexible Grid Management
7. CO2 Capture

Transportation
1. Batteries for EV
2. Lightweight Materials
3. No Need For Travel

Agriculture
1. Reduced Emissions from Agriculture
2. New Source of Proteins
3. Deforestation

Manufacturing
1. Low Greenhouse Gases Chemicals, Steel, Cement
2. Waste Heat Capture and Industrial Thermal
Processing
3. IT Efficiency
4. Methane Emissions
5. Recycling Solutions

Buildings
1. High-Efficiency Cooling and Refrigeration, Space and
Water Heating
2. Windows and Insulation
3. Building Management

The second question regarding the risk to profitably due to

the adoption of a climate change strategy, will depend on
whether you consider that the transition to a low carbon
economy is an irreversible trend, and it is only a matter of
time until it is evident to everyone, and not only to
scientists, billionaires concerned about the environment, or
qualified investors; and, indeed, on the skills of the
portfolio manager that will have the enormous challenge to
implement those strategies not just by screening financial
ratios in an excel spreadsheet (although models and data
Climate Change Portfolio 12
 Chapter 5
The climate change themes

«Divestment [from fossil fuels], to date, probably has
reduced about zero tons of emissions. It’s not like you’ve
capital-starved [the] people making steel and gasoline.»
(Bill Gates, The Financial Times, September 2019)
Electricity
Solar and wind power or electricity storage and grid
management?
Finding affordable and reliable sources of power without
emitting greenhouses gases is the most important step to
prevent the consequences of climate change. Solar and
wind energy technologies look like clear winners in
achieving this goal. But from the investment perspective,
things are little more complicated than buying a portfolio of
the best solar PV panel or wind turbine manufacturers.
In its latest World Energy Outlook (WEO), the International
Energy Agency’s (IEA), predicts that the amount of
electricity produced from solar PV cells will represent 16%
of global production by 2050. Others expect higher
numbers: as much as 20% by 2027.
Even though the IEA has consistently under-estimated
solar, such a spectacular growth rate comes at a price:
since 1980, manufacturing costs have dropped by 10% a
year and that’s killing solar manufacturers. Why? The cost
structure can’t keep pace with this rate of falling prices.
Things aren’t any different in the wind manufacturing
space: according to KPMG, wind power could supply up to
around 34% of global electric power demand in 2040 (up
from 4% today) because innovation and market scale have
made wind power technology 99% cheaper than in 1980.
Good news for governments (less subsidies) and utilities
companies (cheaper transition to a more sustainable
business model) but bad news for wind turbines
manufacturers.
In both sectors - solar and wind power – technological
progress and competition have squeezed margins and, until
we see some consolidation in the form of M&A, things are
not going to change. Companies with a positive outlook in
the sector are Nordex SE (NDX1), Vestas Wind Systems A/S
(VWS) and Acciona SA (ANA).
We can play the solar and wind power indirectly: both
technologies will require the deployment of increasing
amounts of energy storage to balance out the momentary
and seasonal power fluctuations. The other historic shift is
the end of a one-way power flow, from centralized power
plants to passive consumers. Now a growing numbers of
empowered consumers will have to be interconnected to
the power grid with a two-way power flow so they can offer
energy supply when it is not consumed at home. There is a
tremendous opportunity in the development and
application of advanced information and communications
technologies that will make the grid smarter, more
responsive, and more flexible.
Transportation
EV or lightweight materials and software?
The demand for transportation continues to grow rapidly
but at the same time the European Union is mandating that
fleet wide carbon dioxide emissions drop 20% by 2021 and
India has ordered its industry to meet tough new
developed-country level standards for emissions of
particles and nitrous oxide in 2020. All these measures will
significantly raise the price of a car in markets where
customers are extremely price sensitive. These are the
challenge facing EV manufacturers: how to compete in a
mature market and, in a low margin business with rising
costs. Tesla Inc. (TSLA) looks like an easy choice but we
prefer companies with long term experience in the sector
such as Volkswagen AG (VOW) or Toyota Motor Corp.
(7203).
Just like in other sub-themes, there are indirect and less
obvious ways to play; for example, investing in companies
that manufacture lightweight, strong materials like carbon-
fiber reinforced plastics and metals such as aluminum,
magnesium, and others that would help to increase fuel
efficiency by reducing weight.
Climate Change Portfolio 13

According to a report from Breakthrough Energy “in a
typical light-duty car, every 10% reduction in weight
increases fuel efficiency by 6-8%, with a 30% weight
reduction allowing for efficiency improvements of up to 20-
25%”.
Other opportunities arise within the technology sector:
those companies that focus on developing new routing and
navigation devices, traffic management software, advanced
driver-assistance systems and other transport solutions will
benefit from the need to cope with the fact that cars
equipped with technology aimed at reducing emissions like
carbon dioxide are good for the environment, but not for the
consumer’s wallet.
Agriculture
Fertilizers and Protein
10% of total global greenhouse gas emissions are
generated by agriculture and one of the major sources is
the ineffective application and use of fertilizers.
Opportunities exist in precision agriculture for improved
application of fertilizers and in the development of
advanced crop management.
Another area that will experience an explosive growth is the
demand for protein. Between 1950 and 2009, global
consumption of meat more than doubled. There is a
demand for new ways to obtain the protein we currently get
from meat in order to cut greenhouse emission gasses
generated form meat production. Additionally, animals
need to be fed differently.
Finally, deforestation related to agriculture is responsible
for approximately 10% of global greenhouse gas emissions.
The climate change themes
There are opportunities in the developing of technologies
that can increase livestock and agricultural productivity in
order to reduce total land requirements.
Manufacturing
The creation of the things we use every day accounts for
the 30% of emissions of greenhouse gases. Cement, paper,
plastic and steel are produced using technologies that emit
CO2 and other greenhouse gases far more potent than
carbon.
The production of cement, chemicals, iron and steel has
been designated as the major greenhouse gas pollutant in
the industrial and material sector. To combat this problem
Voestalpine AG (VOE), an Austrian steel producer, is
implementing a new sustainable business model that
implies that two-thirds of all waste and recyclables are fed
back into the production process. In America, US Concrete
Inc. (USCR) developed a process, EF Technology®, which
uses alternative cementitious materials that result in the
reduction of greenhouse gases.
In the chemical sector, Borealis AG (BRLS) has announced
the introduction of a new plastic recycling technology,
Borcycle™. This evolving technology will be used to produce
high-quality compounds made of recycled polyolefins with
over 80% recycled content intended for use in visible
appliance parts.
Capturing or converting low-temperature waste heat
presents an enormous opportunity to reduce greenhouse
gas emissions from the industrial sector.
Climate Change Portfolio 14
 The climate change themes

In China, growing investment across the chemical industry,

heavy metal and cement manufacturing is creating a big
market for the Waste-Heat-to-Power (WHP) industry.
Notable players in this sector are Siemens (SI), Thermax
(TMX) and Ormat Technologies (ORA).
In Europe, the DryFiciency project is leading energy
intensive industries to high energy efficiency and a
reduction of fossil carbon emissions by means of waste
heat recovery.
Two firms that are leaders in this transition are
Wienerberger AG (WIE), a producer of construction
materials, and Agrana Beteiligungs-AG (AGR), a packaging
food company.

Building
The buildings sector is responsible for about 18% of global
greenhouse gas emissions, with cooling being one of the
largest sources of building energy use, second only to
heating.
The green-cooling initiative aims at a reduction of those
emissions and companies like Carel Industries Spa (CRL),
Electrolux AB (ELUXB) and Johnson Controls (JCI) are
developing more efficient cooling technologies that do not
require the use of hydrofluorocarbons.
Climate Change Portfolio 15
 Final Remarks

Laurence D. Fink, CEO of BlackRock, announced on

Tuesday 14th January 2020 that his firm would take
environmental sustainability to the core of its investment
decisions. In his annual letter to CEOs of the world’s biggest
companies he said that BlackRock, the world's largest asset
manager, with $7 trillion in assets under management, would
start to exit specific investments that “present a high
sustainability-related risk”. He also pointed out that “we are on
the edge of a fundamental reshaping of finance”, and that “the
evidence on climate risk is compelling investors to reassess
core assumptions about modern finance.”
Conversely, Vanguard, the world’s second largest asset
manager, has refused to sign up to a group of major investors
demanding that polluters respond to climate change crisis.
At the country level, while the Donald Trump administration
has decided to withdraw the U.S. from the Paris climate
agreement, the European Union has decided to keep its agenda
to comply with the agreements signed in 2015 and achieve a
carbon neutral economy by 2030.
All changes, particularly those that modify the source of
primary energy that has driven the industrial revolution since
the end of the 18th century, experience considerable back and
forth; they do occur in a zigzagging rather than a linear way.
That is precisely why there are opportunities to invest and to
initiate a change. If everything were an obvious and
irreversible trend, then there would very little to be done.
The question we must ask ourselves is whether we believe that
the climate change will be the great event that will mark our
lives as was the advent of the steam engine or the Internet.
Because if such were the case, why leave it only to the
environmental activists? We, the investors, have a great
opportunity and responsibility not only to reconcile our
profession with our beliefs and our community, but also to
make money.

D.F.
January 20, 2020

Climate Change Portfolio 16

Appendix
− Advancing the Landscape of Clean Energy
Innovation. Breakthrough Energy; February, 2019.
− A Mysterious Force Took Over Investing. I Know What
It is. Christopher Schelling; November, 2019.
− A Practical Guide to ESG Integration for Equity
Investing. Principles for Responsible Investing,
United Nations; 2015.
− Breakthrough Energy Ventures Unveils Its 5-Part
Investment Strategy. gtm: A Wood Mackenzie
Business; December, 2017.
− Carbon Performance Assessment in Oil and Gas:
Discussion Paper. Transition Pathway Initiative;
November, 2018.
− Capturing the sun: The economics of solar
investment. EY; 2016.
− Climate change and climate risk: An Index
Perspective. MSCI; July, 2019.
− Creating Shared Value. Harvard Business Review,
Vol. 89 Issue 1/2; Jan/Feb 2011.
− Dynamics of political instability in the United States,
1780-2010. Peter Turchin, Journal of Peace
Research, 1-15; 2012.
− Foundations of ESG Investing. Part 1 and Part 2,
MSCI; November, 2017 and May, 2018.
− Funds Say Climate Change Is Now Part of Their
Equation. WSJ; June, 2019.
− Global Trends 2030: Alternatives Worlds. Office of
the Director of National Intelligence U.S.A;
December, 2012.
− Global trends in renewable energy investment.
BloombergNEF; 2019
− How to Pay for the Green New Deal. Working Paper
Num. 931; May, 2019.
− Lazard’s levelized cost of energy analysis - version
12.0. Lazard; 2018.
− Management Quality and Carbon Performance of
cement producers: update. Transition Pathway
Initiative; September, 2018.
− Past the tipping point with customers and stock
markets. Deutsche Bank Research; September,
2019.
− ‘Peak Car’ Is Holding Back the Global Economy. WSJ;
October, 2019.
− Profiling the risks in solar and wind. BloombergNEF;
2013.
− Renewable energy discount rate survey results –
2018. Grant Thornton; January 2019.
− Sustainable Funds U.S. Landscape Report.
Morningstar Research; February, 2019.
− Tackling climate change – an investor’s guide. FT;
September, 2019.
− The cost of inaction: Recognizing the value at risk
from climate change. Intelligence Unit, The
Economist; 2015.
− The great American labor paradox: Plentiful jobs,
most of them bad. Quartz; November, 2019.
− The role of standards in reducing CO2 emissions of
passenger cars in the EU. International Council on
Clean Transportation (icct); 2018.
− The socioeconomic impacts of wind energy in the
context of the energy transition. A KPMG study at the
request of Siemens Gamesa; October, 2019.
− The Third Phase of Clean Energy Will Be the Most
Disruptive Yet. Ramez Naam; April, 2019.
− Unhedgeable risk: How climate change sentiment
impacts investment. University of Cambridge;
November 2015.
− We All Love Wind Power, Unless You Want to Make
Money. Bloomberg Opinion; March, 2018.
− What is holding back the growth of solar power? The
Guardian; January, 2016.
− What is thematic investing? Nyree Stewart, FT
Adviser; May, 2013.
− Where ESG Fails. Institutional Investor; October,
2019
− Why Will Global Interest Rates Stay Low?
AlpineMacro Special Report; November, 2019.
Climate Change Portfolio 17
 Bio

Regarding my international experience, I worked as Fund

Manager and Macro Strategist at Aviva Investors London
(the United Kingdom) and as Portfolio Manager at
Santander Asset Manager (Spain).
Education
I hold a Master’s Degree in Finance from the Universidad
Torcuato Di Tella and a Bachelor’s Degree in Economics
from the Universidad de Buenos Aires (cum Laude).

Profile
My expertise as a company analyst, economist, fund
manager and institutional sales has been acquired over 19
years of work in leading financial institutions in United
Kingdom, Spain and Argentina, which makes me
particularly skilled in the field of economic analysis and its
application to investment decisions.
I believe my experience, skills, and the ability to explain
financial markets in simple terms enable me to provide
high quality financial advice to both private and institutional
investors.
Professional experience
I am the Chief Investment Strategist at Grupo Cohen Wealth
Management Division (US$500M).
Previously I was the Head Portfolio Manager of Fondos
COHEN (US$150-200M).
My professional track record in Argentina includes
Customer Relationship Manager at BNP Paribas Investment
Partners, Portfolio Manager and Investment Strategist at
GPS Investment.

Climate Change Portfolio 18

 Disclaimer

FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY

The information contained in this document is for
educational and informational purposes only.
NOT FINANCIAL ADVICE
The information contained on this document is not
intended as, and shall not be understood or construed as,
financial advice. The information contained in this
document is not a substitute for financial advice from a
professional who is aware of the facts and circumstances
of your individual situation.
I have done my best to ensure that the information
provided in this document is accurate and provide valuable
information. Regardless of anything to the contrary, nothing
available in this document should be understood as a
recommendation that you should not consult with a
financial professional to address your particular
information. I expressly recommend that you seek advice
from a professional.
I shall not be held liable or responsible for any errors or
omissions in this document or for any damage you may
suffer as a result of failing to seek competent financial
advice from a professional who is familiar with your
situation.

Climate Change Portfolio 19