Join us for an insightful discussion with Andy Raikes, Co-portfolio Manager for TT International's Environmental Solutions Strategy. Discover how their solution strategy invests in companies solving environmental problems, the seven key environmental themes they focus on, and the importance of emerging markets. Learn how their advisory board of experts influences the strategy, and their unique approach to impact measurement. Finally, find out how they're making a real difference by donating one-third of investment management fees to environmental causes. Don't miss out on this fascinating conversation!
Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.
We recommend that individuals seek professional financial advice before taking action.
Join us for an insightful discussion with Andy Raikes, Co-portfolio Manager for TT International's Environmental Solutions Strategy. Discover how their solution strategy invests in companies solving environmental problems, the seven key environmental themes they focus on, and the importance of emerging markets. Learn how their advisory board of experts influences the strategy, and their unique approach to impact measurement. Finally, find out how they're making a real difference by donating one-third of investment management fees to environmental causes. Don't miss out on this fascinating conversation!
Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.
We recommend that individuals seek professional financial advice before taking action.
Welcome listeners to the Premium Investment Leaders podcast. I'm your host, damian Chilmi, head of investment managers and governance with premium, one of Australia's fastest growing platforms. Today we have the great pleasure to be joined by Andy Rakes from TT International, who has joined us from their London office In the program. Today we're going to talk about environmental impact investing and doing it with purpose. Whilst the first iterations of their ethical investing focus on not doing anything bad arguably didn't mean that you were necessarily doing something good, with greater focus and interest in this area, strategies have needed to develop and articulate their environmental outcomes. A little about our guests today.
Speaker 1:Andy Rakes is co-poultry manager for TT's environmental strategy and head of European research. Andy joined TT in 2002 from Deutsche Asset Management, where he was director and head of global retail and leisure team. Andy graduated from University of Oxford with a BA and a Masters in Engineering. And about TT International the group was founded in London in 1988 and is a specialist high-alpha equities global asset manager with a focus on style agnostic, high-conviction investing. The group managed over $10 billion in funds under management and the TT Global Environmental Impact Fund is distributed in Australia by Copia Investment Partners. Andy, welcome to the show. Thank you very much. Great to be here, great to have you in Melbourne and hopefully nicer weather than London. I understand there was some snow today, I think in London that's right.
Speaker 2:My wife sent me a video yesterday of frolicking around in the garden with some dogs in a little snow, so it's nice to be here in warmer clims Very good.
Speaker 1:Very good. Well, let's get into it and we'll just open up with, I suppose, some context and scene setting throughout of this and across the responsible investing spectrum. There's many terms and many acronyms out there, and I think you've added another one to the lexicon because you call this a solution strategy. So what do you mean by this?
Speaker 2:Yes. Now you're absolutely right that there's definitely a lot of jargon out there. So solution strategy for us means that we're only investing in companies that have a product or service that is solving an environmental problem. So we're not a low carbon strategy, so we're not investing in things like big tech because they've got a low carbon footprint. We're not a transition strategy, so we're not investing in big oil because they're investing a lot in renewables. Those strategies have their place, but it's absolutely not what we're doing.
Speaker 2:So we're only investing in companies that have a product or service that's making a significant contribution to solving an environmental problem.
Speaker 2:And also, I should say it's a very pure player strategy of investing in those solutions companies.
Speaker 2:So more than at least 80% of capital at any one time is invested in companies where the product or service that is solving the environmental problem is the majority of their business, ie more than 50% of revenue or profit.
Speaker 2:And then we have another bucket, which is up to 20% of the capital invest in. The fund is reserved not for having a free hit to invest in anything, but to invest in companies where they still have a product or service that's making a significant contribution to solving an environmental problem. But it's not yet the majority of their business. So that 80% threshold that you talked about before, so the 80% threshold applies to that's the amount of capital of the fund at any one time where we're investing in companies where the product or service is the majority of their business and the 20% is where it's a smaller part of their business. But we think it's a really significant interesting technology they have that is making a significant contribution to solving the environmental problem. But at the moment it's a smaller part of the business and obviously our hope and expectation would be that in time it will grow to be a bigger part of the business because in all likelihood it's going to be a very fast growing part of the business because it's going to be solving an environmental problem.
Speaker 1:So let's get on to those problems, and so I suppose the starting point for the strategy and process is identifying companies that address environmental problems, and I've seen your work and you've got seven of them. So can you discuss those seven problems that you've identified and a couple of follow up questions within it? Is there a desire to seek equal allocation across those seven issues and contributing to those environmental problems?
Speaker 2:Yes. So we have these seven themes that we've identified, so I'll list them to start with that I'll help to set the scene. So clean energy, water, forestry and agriculture, responsible consumption, clean transport, recycling in the circular economy and electrification, energy and industrial efficiency. And so, to start with, why have we chosen those themes? So, really, we've chosen these themes because they address what we think is a wide range of some of the most pressing environmental issues out there and where the biggest environmental problems are. So it's not an exhaustive list of every environmental problem out there, but for us those are the seven key themes addressing seven significant problems. So, and importantly to say, those also cover both areas like climate change, which is obviously where a lot of the I guess the focus is in this environmental space, but also, importantly, areas like sort of broader nature areas and biodiversity, and for us we think that's really important. We think these are mutually reinforcing in a way, the areas of biodiversity and climate change.
Speaker 1:Responsible consumption as well would feed into that.
Speaker 2:Absolutely so. Yeah, so some of the more kind of the climate change sectors would be things like clean energy, clean transport are some of the more obvious ones. But you're absolutely right, things like responsible consumption, things like recycling, the circular economy and things also like forestry and agriculture play to a slightly different theme, and particularly things like biodiversity. So, for example, one of the biodiversity is an area where people find it intuitively harder to think about what are the obvious investment themes For us.
Speaker 2:We have an independent board that we maybe will touch on later, but within that we have an ecologist and we spend a lot of time talking to the ecologist about biodiversity and his strong conviction is that by far the biggest impact on biodiversity negatively is the impact of mass agriculture. So, for example, if we can find ways to do agriculture more efficiently whether that's growing the same amount of product with less land or using less water, less herbicides, pesticides, fertilizers then that is all a very good broad environmental outcome, but also specifically for biodiversity. So those are some of the themes that play to the sort of more of the biodiversity broader nature rather than necessarily just climate change.
Speaker 1:Yeah, no, I think that comes through and I think you're right that there are many strategies are probably too focused on the climate change elements, and it's quite refreshing to see that this has got other legs to it as well. So question I'm curious about the seven that you've got. I don't know the answer to this, but are any of those objectives conflict with each other?
Speaker 2:I don't think they conflict. In many ways. I think they're more complimentary and it sort of goes back to what I was saying just now about the fact that we think they're very sort of interlinked to the themes of biodiversity and climate change, so, for example, and we think that they're mutually dependent and mutually reinforcing. So, for example, climate change leads to damage to ecosystems. Damaged ecosystems lose their ability to sequester carbon, so, and as they lose their ability to sequester carbon, that in turn leads to more climate change. So we think a lot of these themes are actually very, very complimentary and interlinked. So yeah, so definitely not, and in fact, more so than them being sort of competing. In many cases, we find stocks that actually we have debates as to which sector they should go and which themes that they should go in, because they sit across several different themes.
Speaker 1:Yeah, fair enough. And so you touch on that advisory board before and because it's full of industry experts and very well-credential individuals and very experienced, I'm kind of curious. So they obviously helped you with set the seven environmental problems. I'm kind of curious, like if you can lead us into some of the discussions you're having internally, like what other areas are they talking about that they say maybe you should have a look at this one here? What are some of the emerging thoughts that are coming?
Speaker 2:through. Yeah, so maybe, if I just set the scene a little bit, about giving a bit of background about why we've got a board. So one of the things that Harry and I, when we launched the strategy, we were very cognizant of the fact that the technological regulatory policy landscape in this space is one that is going to evolve very quickly and for us, having an independent advisory board was a great way for us to stay on top of a lot of those trends. So the board's role is to A bring insights in their areas of expertise, but also, equally importantly, to challenge the investment team on positions we've got in the portfolio and, really crucially, to ensure that they're meeting our environmental objectives and the stocks are aligned with the principles of the fund. So we have these four advisors across four verticals, which are policy, technology, ecology and green finance.
Speaker 2:So maybe to give you some flavor of some of the discussion, so under policy, we have a person called Dr Jun Ma, who's China's most senior green policymaker. We spend a lot of time talking to him about environmental policy coming out of China, but also broader economic policy coming out of China as well, and clearly that's been very topical, with things like zero COVID now coming out of zero COVID, but going back specifically in terms of environmental policy, going back to the latest five-year plan and what the environmental objectives were going to be in cooperation with that, was clearly very important. I mentioned Joe Bull, who's our ecologist, just now. So Joe has a specialization in the environmental impact of economic development and his key area of expertise is looking at things like biodiversity and, as I mentioned earlier, the impact of mass agriculture on biodiversity. So we spend a lot of time talking to him about that. In terms of some other topics, so we have James Brown, who's our technology expert. One of the recent conversations we had with James at our last round of board meetings, which was really fascinating, is James is currently involved in an offshore wind company. We asked him to take us through a case study of actually what is involved in getting a wind farm from concept of idea to turning it on, all the steps involved. That was through concept, environmental permitting, procurement, well, final investment decision, procurement and then all the issues associated with connecting to the grid, etc. All the way through to turning the wind farm on. For us it was fascinating because with the best wind world, Harry and I and the rest of the investment team. We've never launched, we've never opened a wind farm. We sit in a desk, and so that gave us a very interesting insight into actually the practicalities of what's actually involved To sort of topics. You were talking about some of the recent discussions.
Speaker 2:I think nuclear has been a really interesting discussion we've had because I think it's been an evolving debate we've had with the board. I think nuclear tends to divide opinion quite a bit. For us, we've always been pretty clear that we think nuclear is an environmental solution. But we definitely wanted to debate with the board. That was our view, our belief, but we wanted to debate it with the board and see if they agreed and to kind of flesh out some of the controversies. Actually, as it happened, the board were universally behind our view as well that nuclear, we think, is an environmental solution. I mentioned that because it's very topical, because attitudes towards nuclear have changed quite a lot over the last 12, 18 months, with things like the energy crisis in Europe, for example, and that's definitely into some changing thinking around attitudes to nuclear. We think nuclear is an investable theme. Unfortunately, it's hard for us to find ideas to invest, so we currently don't actually have any exposure in the nuclear space.
Speaker 1:Added curiosity, timeline-wise, because SFDR brought that in to classify that nuclear is clean energy. Did that come pre or post to Ukraine war to?
Speaker 2:MENCY? I don't know the answer to that question to be precise around the timing.
Speaker 1:Obviously it's a big piece that people are working through now and definitely getting on there. You also touched on China and the world's most emerging markets in beauty. Now that one there, because probably a lot of strategies that we see out there are very developed market focus. Do you think that you've got a better handle on the emerging market sphere?
Speaker 2:Definitely, I think, for us again. When Harry and I were designing the product, we always felt that having good exposure or at least good capability to invest in emerging markets was really important. The reason that that is the case is because so much of the important technology areas of development in a lot of the environmental space is happening in the emerging markets. Pretty much 100% of the global solar value chain comes out of China. Pretty much 100% of the global EV battery chain comes out of Northern Asia in one form or another. If you're not investing in emerging markets, you're not capturing a lot of that. The other aspect of why we think emerging markets is important because they have a lot of the best renewable assets around the world. If there are wind farms and solar farms, they don't tend to be in Melbourne or indeed in London. They tend to be often in emerging markets. They might be in South America, they might be in the Indian subcontinent, for example. Again, often if we're investing in a renewable generating company, their assets may actually be in emerging markets. For us, having an understanding of the local dynamics in that market are very important. That's why we think investing in emerging markets is really important. Crucially, we're also aware of some of the pitfalls that can come with investing in emerging markets. In certain countries there can be elevated governance concerns, for example. For us, crucially, we think we're very well placed to invest in emerging markets.
Speaker 2:Emerging markets is the biggest part of TT's business. It's by far the largest piece of our assets under management. We have a very large and successful emerging market strategy with a very strong investment team. Crucially you mentioned SFDR just now We've relatively recently launched an Article 8 version of that emerging market strategy. That gives you a sense of how important ESG more broadly is within that emerging market strategy and obviously also the focus within environmental within that. That means that absolutely incorporating things like putting the high standards in terms of governance social as well as environmental are absolutely critical to what we've done in emerging markets. Therefore, we have that capability, we have that expertise that when we're going into investing in emerging markets, we're doing it with that resource and able to be very eyes-wide open about the potential pitfalls and risks in emerging markets and very well placed to address those and be on top of them.
Speaker 2:Certainly also, harry and I are both based in London, but we have a very important role. We have, as I said, a broad-based team. Specifically, we have four analysts based out of our Hong Kong office, three of whom just look at China. So you mentioned China just now. China is a very important market for us. We definitely feel at all times we want to balance the opportunities in China with some of the negatives around China potentially elevated geopolitical risk, for example but we do think China is an important market and therefore having that dedicated resource three analysts just looking at China based in Hong Kong we think is incredibly important. It would totally lack credibility if we were doing that from London. Obviously.
Speaker 1:Yes, fair enough. So I just want to turn a bit to an interesting topic, which is around data and measurement, Because this is, I suppose, one of the things that people are asking about what are the outcomes? And it's because everyone wants to see the proof and the outcomes of the strategies that they create in impact. So, just broadly, before we get on to, I'm sure you'll talk us through some of those measurement elements, but kind of take us back about how do you collect all the relevant data and how much effort is involved to collect all that data.
Speaker 2:It's a very good, it's an interesting question and it's a very good topic to discuss because I think there are definitely. It's definitely a good question to ask how do you actually measure and quantify the impact you're having with this investment strategy? And I think I'll make a few points. Definitely, in the broader concept of having impact, I think there are some important points to make. I think, first and foremost, we absolutely recognize that the concept of having impact and claiming impact when you're buying and selling secondary market equities is a bit nebulous. Claiming that we're saving however many tons of carbon by investing a certain number of shares in such and such a company, I think is a bit of a tenuous claim. We do think we do have direct impact through participating in primary capital raisings and we have participated in a few IPOs. But much more significantly, actually, we've participated in follow-on capital raises for companies that are already listed, where they're raising capital to accelerate their environmental investments, for example. So definitely, in as far as we are providing primary capital to accelerate that green transition, that is definitely having impact. To your question of how do we measure that impact, though, that's very difficult we're alongside a lot of other investors providing that primary capital and potentially this might be to build such and such a factory making the next generation of electric vehicles. The factory won't be completed for three, four years. Vehicles then be sold over a long period of time, so it's very difficult for us to measure that and to quantify it, but we can claim that we're having impact.
Speaker 2:I think some of the other areas where we look at also having direct, also where we can measure how much impact we're having, is we look at this concept called avoided emissions and there are some caveats around the data in terms of avoided emissions and it's to your point about how much resource and time does it take to look at this data? A lot of the avoided emissions data is self-disclosed by companies, so we put a lot of effort in scrutinizing the methodology and making sure that it stacks up and is logical, but in the vast majority of cases we're satisfied that that is the case. We then aggregate that data and we look across our portfolio and look at measuring not just the carbon emitted so the carbon footprint of our fund but also avoided emissions. And the reason this is important, particularly for this strategy, is that because this is a solution strategy I said before it's not a low carbon strategy. It's a solution strategy. So in many cases we're investing in companies that are industrial processes that are making these products or products that are solving the environmental problems, and therefore those industrial processes have a carbon footprint. And therefore we're not going to be the lowest carbon fund around, but in all the companies where we're investing, where they have a carbon footprint, we're 100% confident that there is a very significant net environmental gain.
Speaker 2:And one way of looking at that is through this concept of avoided emissions. So, to give you an example, the area of insulation, which we think is a really interesting theme. Buildings account for something like 30% of global emissions, mainly through heating and cooling them. So having buildings properly insulated is a really cost effective way to materially reduce emissions. Now the process of making insulation depending on which type of insulation it is, can be very energy intensive, and at the most energy intensive end is mineral wall insulation. So there's a company called Rock Hall we don't currently own it in the portfolio, but that makes stone wall insulation. It is very energy intensive, the process. But they had an independent management consultant doing that. Did they avoid emissions data? They calculated that the carbon saved over the life of the product is a hundred times more than the carbon emitted in the production process?
Speaker 1:What's the lifespan on that kind of insulation?
Speaker 2:so, off the top of my head, I don't know exactly what life cycle they were using for someone installation, but I would guess that would have been 20, 30 years, something like that. So if we look at our fund, so roughly half the companies that we own have a disclosed avoided emissions number and if we just take that avoided emissions data from half the portfolio and compare it to 100% of the portfolio which has a carbon emitted data, we find that that gives an answer of 23 times. So that means that the carbon avoided, the carbon saved, is 23 times the carbon emitted across our company. So you know directionally. You know directionally. We think that's very clear. You know whether these numbers are self disclosed. So whether that number is 15 or 30, you know you can be some debate around the quantum of the number, but I think the directionality is clear.
Speaker 1:And is the quality of disclosure and data provided by companies that being getting better over time?
Speaker 2:Definitely. You know, I think, in all areas associated with this environmental space, that the quality of the data is improving.
Speaker 1:That's partly because the companies recognize that they have to and partly because investors such as us are putting on, putting pressure on to make sure the quality, and I suppose they get into a rigour as well too, because they're getting used to supply and they're probably getting better too.
Speaker 2:Exactly, and for a lot of companies you know particularly, we find you know, with the emerging market companies is that actually they are potentially behind, you know, further behind, if you like, in terms of areas like disclosure, versus a lot of developed market companies, because I think developed to develop technology markets have been further advanced in terms of areas like disclosure and investors putting pressure on the companies to disclose more. So one of the areas we spent a lot of time is engaging with the companies and emerging markets precisely to get them to improve their disclosure, which is often in their, in their best interest, in fact, in the vast majority of cases, in their best interest because it's just that you know they have good data, they have, they have a good storage to tell, but often they haven't done the work, they haven't done the analysis and they haven't published the data.
Speaker 2:So we, you know it's a sort of softer area of engagement, but it's an area we've actually had. A little success is persuading these companies to improve their disclosure.
Speaker 1:Very good, so we'll get towards the end on this one here. This has been a fascinating discussion, I think worthy of a follow up one as well too. But and when I looked at this strategy, I thought you know one of the the unique elements to this TT business and the strategy is the donating a one third of investment management fees to environmental causes, and you know, I suppose that's probably another part of the impact of the difference that you're making as well. So can you tell me how that came about and how you select the causes and what kind of outcomes you've observed through this program?
Speaker 2:Yes, Well, I mean, it really came about. Going back to the conversation we were just having about, about impact as well, so you know, in a way acknowledging what I was saying about buying and selling secondary market equities, you know, and the potential claims around having impact there can be a bit tenuous. I talked about the other ways. We definitely are having impact. But another way to kind of cut through that debate is we wanted to have, we thought, with a charitable donation we can have clear, irrefutable, direct impact. And you know I should also say you were talking about in terms of measuring impact. You know that's, that's something very clear that we can measure. We know exactly how much we have given to these charities and, as you know, by the end of this quarter, by the end of this month, you know, we think that that figure would have got up to about half a million dollars that we would have given to environmental charities that are aligned with with with the principles of the fund. And I should also say that you know, if we're successful in scaling the fund to where we think we can, that will be a very significant annual annuity in terms of charitable donations that are having real direct impact. So that was really the genesis of why we wanted to do it, in terms of how we've chosen the strategies and how we've chosen to allocate that, those charitable donations. So we have a charity committee, internal chat committee which I'm not on, I hasten to add so they do a lot of due diligence looking at potential charities. You know where where might be the most impactful donations that we can give.
Speaker 2:One of the other things is we are definitely looking to align our charitable donations that are relevant, you know, align them to and that are relevant to our investors. So you know, as an example, you know Australia is a really important market for us. We recognize that. On the strategy, so we deliberately chosen one of our charitable partners is an Australian charity. It's the University of Western Australia Oceans Institute, which does Marines, marine research. So that's a little bit about how we you know how we've chosen that the strategies to make sure they're aligned with the interests of the fund and also aligned with the interests of our investors.
Speaker 2:And in terms of measuring the impact out of out of our charitable donations. You know, obviously there's a range of, there's a huge range of charities. There's a huge range of what they do. You know one of the things that we also want to do in selecting the charities is actually have charities where we can actually have an impact, so our donations are actually going to make a difference. So you know, we don't necessarily want to be investing in the world's largest environmental charities because actually they're potentially the people who don't need our money.
Speaker 2:We're going to have more impact with some smaller charities and, as a good example here, one of our charitable partners is a is a rewilding charity called Heal rewilding in the UK and they've just recently bought their first site. They've been around around for two or three years. They were a partner of ours right from the beginning of the strategy. They literally just bought their first site, which is a large plot of land in Somerset in the UK which they're now going to rewild. And you know one of the really gratifying things about that is that TT's charitable donation formed the vast majority of the equity they use to buy that site. So I don't think it's overstating to say that, had we not been their charitable partner, you've made an impact.
Speaker 2:They wouldn't. They literally would not have been able to buy that site. So you know, for us that's a. It's a small example, but it's a very real example about actually having impact.
Speaker 1:Great, now, that was excellent, andy. Thank you very much. We will wrap it up there. Please come and see us again next time you're in Melbourne.
Speaker 2:I'd love to and thanks again for having me Thanks.