Opportunity and accountability amid the climate transition
The shift to a lower carbon economy should present a tailwind for Long Term Global Growth portfolio holdings. As Tim Garratt explains, most are grasping the nettle but some have more work to do.
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
How we got here and why we must change
In 1776, an English manufacturer named Matthew Boulton and a Scottish engineer named James Watt figured out how to build an engine with separate heating and condensing chambers. This breakthrough transformed the economics of coal consumption and allowed industrialists to augment human and animal muscles with steam power in all walks of life. Productivity took off and energy capture per capita soared sixfold – from about 38,000 kilocalories per person per day in about 1800 to 230,000 by the 1970s.
Per-capita energy consumption in the core regions of the west and east
The age of energy abundance has yielded inestimable societal benefits. But by burning fossil fuels, humanity has emitted about 1.5tn tonnes of carbon into the air since 1750. One quarter of that was within the last decade alone.
Not everyone sees this as a matter of global urgency. Humankind isn’t cognitively attuned to recognising that what begins as gradual warming may give way to more sudden dislocations as shifts in ice flow, ocean currents and methane levels trigger amplifying feedback loops within our decade-long investment horizon.
Long Term Global Growth recognises that we are the first generation to feel the effects of climate change and the last that can do something about it. Wringing the sponge of fossil-powered business models any further risks awful physical consequences and dreadful investment returns. From here, we fundamentally believe that the best investment returns will come from companies engaging in more energy-efficient and less carbon-intensive activities.
Our starting assumption is that if we act decisively global warming can be limited to a 1.5C (2.7F) rise, compared to pre-industrial levels. But time is rapidly running out. Scientists suggest that to have even a 50 per cent chance of success, we must halve global emissions by 2030, halve them again by 2040, and achieve net zero by 2050 at the very latest.
From an investment perspective, it seems appropriate to work on the basis that this should be the minimum level of ambition.
A change of the required pace and magnitude will require not just exponential technological progress but also monumental shifts in society and the structure of industry. It’s daunting to think that we have less than a generation to completely overhaul the way in which we work, play, eat and travel. But from LTGG’s perspective, this notion is also galvanising and invigorating because our stock-picking philosophy is designed specifically to home in on the companies that are best suited to either driving rapid change or operating within it.
 The historian Ian Morris defines this as the full range of energy captured by humans including but not limited to:
- food, whether consumed directly or given to animals that provide labour or are subsequently eaten
- fuel, whether for cooking, heating or powering machines
- raw materials, whether for construction, clothing, product-making or any other purpose
 Who has contributed most to global CO2 emissions? – Our World in Data
Portfolio exposures and opportunities
Carbon footprinting – calculating the total emissions attributed to a person or entity – has rapidly emerged as the main industry shorthand for assessing climate exposures. But the observation that LTGG’s portfolio has a very low carbon footprint relative to the MSCI ACWI index is not especially helpful. That some firms pollute more than others is self-evident. It’s more useful to question whether our holdings are part of the problem or part of the solution, and to weigh up their opportunity to benefit by offering solutions to climate change against their risk of being negatively disrupted by it.
Dealing with global warming will require solutions and technologies with exponential characteristics. As long-term investors, one of our greatest opportunities relates to the stock market’s consistent inability to process and price in the implications of such change.
Wright’s law is the notion that progress increases with experience – that each doubling of the number of units a business produces drives a fixed percentage improvement in production efficiency, with corresponding cost savings. We’ve long seen the consequences in silicon chips, where advances in computing power have decimated demand for shops, photographs, records, books, gyms, offices and all manner of other physical products and infrastructure. We now need to apply a similar mindset to the energy sector. There volume-based price declines, known as ‘learning rates’, are on par with those for silicon chips. Solar is seeing about a 25 per cent price drop per doubling, and batteries about an 18 per cent fall.
The shift from high to low and then near-zero added cost in switching to greener energy tech is profound. That is why the opportunity for our clients' holding in Tesla is so interesting. It also forms the foundation of the case for the stake in Chinese electric car company NIO. And it’s why we have invested in CATL, the Chinese battery company. It has a dominant market share in lithium iron phosphate batteries and aims to grow its production eightfold over the next five years.
New business models and industry leadership
A number of LTGG holdings have well-established and growing operational footprints. The investment cases for the likes of Shopify, Pinduoduo, Delivery Hero, Meituan, Alibaba, Amazon, Coupang, Hermès and Kering are predicated on them processing, manufacturing and distributing their wares at increasing scale. That growth presents environmental opportunities. When speaking to these companies, we focus on how they can become more rigorous in reporting their emissions. We also encourage them to make carbon reduction pledges and have clear strategies to achieve them. We want to support these holdings as they capitalise on the tremendous opportunity to demonstrate leadership and adaptability within their industries – and to recognise that by doing so they will strengthen their brands.
Kering is a case in point. It is deservedly recognised as being a corporate sustainability leader. Its open-sourced environmental profit and loss (EP&L) accounting approach and its industrywide fashion pact initiative could have significant ripple effects. The former involves the firm sharing details of how it measures the environmental impact of both its own operations and those of its supply chain, and then converts this into a monetary value. The latter is a three-pronged commitment it spearheaded to tackle global warming, restore biodiversity and protect the oceans. The release of Kering’s comprehensive biodiversity strategy in June this year, underpinned by EP&L data, was a pioneering move. And further to our engagement, it has started incorporating sustainability metrics in its long-term incentive plan, which links executive pay to performance.
Amazon, meanwhile, needs to do more to influence a shift away from the ‘extract and discard’ production model that underpinned global growth over the past century. Online commerce should be better at matching supply with demand and then fulfilling that demand than traditional retail. Similarly, with its skills in data and logistics, Amazon has a large and growing opportunity to help humankind pivot to a more circular economy. In our view, the days of valuing how quickly we can dig stuff up and turn it into rubbish are over. We are speaking to the firm about recent allegations of it burning unsold goods for the purposes of energy recovery.
Over the past couple of years though, we have seen signs of positive overall progress. In 2019, Amazon co-founded The Climate Pledge with Global Optimism an NGO, and has made three commitments:
- to be net zero carbon across its business by 2040
- to deliver half of its shipments with net zero carbon by 2030
- to power its operations with 100 per cent renewable energy by 2025 (recently accelerated from 2030)
As part of these efforts, it has become the world’s largest buyer of renewable energy. It is also adopting more ambitious internal climate targets, rallying other companies to the Climate Pledge and has committed to report through the Science Based Targets initiative.
Some of these holdings also have a large opportunity to reinvent wasteful supply chains. For example, Pinduoduo’s ecommerce platform removes layers of inefficiency within agricultural and manufacturing supply chains. It connects more than 12 million farmers and distributors directly with consumers via an interactive shopping experience. It’s also investing in the development of environmentally-friendly packaging to be used throughout the agricultural supply chain. Given Pinduoduo’s pledge to sell $145bn worth of farm produce a year by 2025, it could have huge impact.
The considerations above speak to the importance of cultural adaptability. However, if we see signs of enduring flat-footedness, we respond. The recent sale of Inditex, whose business model is predicated on fast fashion, was a case in point. We felt it had a blind spot to the risk properly priced carbon posed to its business model. Furthermore, management was missing a potential opportunity by not taking a leadership position on the matter.
One upshot of the shift to an increasingly information-rich economy is that (with the notable exception of cars) the economy has become ‘lighter’ as we’ve learned to do more with less. We’re on an evolutionary path towards a more digital world of electrons and photons rather than atoms. It’s an essential shift because exponential physical growth on a finite planet is impossible. Jensen Huang, the founder of NVIDIA puts it well:
“I believe that there will be a larger market, a larger industry, more designers and creators, designing digital things in virtual reality and metaverses than there will be designing things in the physical world. Today, most of the designers are designing cars and buildings and things like that. Purses and shoes. All of those things will be many times larger, maybe 100 times larger, in the metaverse than in our universe. The economy of Omniverse, will be larger than the economy in the physical world.”
By way of example, a virtual Gucci handbag was traded within the online game Roblox for more than $4,000, which is more than the price of its real world equivalents. Our online lives will still require matter and energy, but they will use it in a more efficient way. It’s interesting to contemplate the potential travel and hotel related emission savings that might be enabled by video chat and other online collaboration tools provided by Zoom, Atlassian and some of the portfolio’s other enterprise software holdings.
Opportunities to influence
Our work with Professor Mike Berners-Lee has highlighted that our focus needs to go beyond the environmental impact of your holdings’ business activities and extend into their opportunity to shape public behaviours. Many members of the LTGG portfolio run cloud-focused businesses with relatively low direct emissions, which they can minimise by making greater use of renewable energy to power their data servers. But they have a golden opportunity to influence the wider climate conversation.
For example, the concept for David Attenborough’s Our Planet series was rejected by the BBC, among other broadcasters, before Netflix committed to funding it. The series has now been viewed by more than 100 million households and has raised awareness of climate change. Likewise, Netflix’s Seaspiracy documentary raised issues about marine life biodiversity.
Facebook, another holding, has a very ambitious net zero commitment for 2030. But less positively, it still permits adverts by climate change denial groups. There’s a clear tension between the unhelpful consequences this has and the firm’s desire to preserve freedom of speech on its platforms. In recent times, Facebook has started to recognise its responsibility to educate users about the subject and to discourage false information being posted on its apps. An article in The New York Times had helped focus minds by exposing how climate deniers were exploiting a loophole in the social network’s content policing efforts. A previous critique of Facebook’s failure to provide easy access to accurate climate science has been largely addressed through its new Climate Science Information Center and we hope that this new approach stands the test of time.
For us, these intangible elements of a company’s effect on the climate may prove to be both more impactful and of greater strategic relevance than physical commitments to buy renewable power for essentially carbon-light business models.
The exponential downward price dynamic also applies to alternative protein. That’s why we’re excited about the portfolio’s holding in Beyond Meat. The cost of its plant-based burgers continues to fall. On a 10-year view, we think the company could take a meaningful share of the $500bn processed meat market. If cows were a country, they’d be the third largest emitter of greenhouse gases behind the US and China. So by replacing traditional protein sources, Beyond Meat could cut hundreds of megatonnes of emissions every year.
The holdings that are driving new technologies to assist with the low carbon transition will typically endure periods of extreme volatility in their early years as initial hostility and scepticism give way to grudging acceptance on the part of incumbents. Tesla’s share price, for example, has fallen eight times during our tenure by more than 30 per cent. NIO’s shares fell more than 70 per cent after the IPO (before then rallying by 4,000 per cent). For these companies, patient capital and moral support is of particular value.
Our role is to keep management teams focused on their long-term missions. We can also advise them on how to report their efforts. If a company’s products help tackle climate change, there may be metrics they can share to prove this point. For example, when Tesla invited us to provide feedback on its Impact Report, we suggested it give more detail about its operational emissions and corresponding reduction strategies, as well as expanding its disclosures on the relative carbon efficiency of its cars, batteries and solar panels.
 Mike Berners-Lee is an expert on carbon. He’s a fellow of the Institute for Social Futures at Lancaster University and he also runs an outfit which helps companies with decarbonising transitions. Most recently, he’s been helping Microsoft with its commitment to be carbon negative by 2030. The professor’s books include How Bad are Bananas?, The Burning Question and There Is No Planet B. Over the past year, he’s been consulting with us in the context of LTGG and Baillie Gifford more widely
Much more to do
In aggregate, we’d tentatively suggest LTGG’s portfolio has more exposure to the upside opportunities than downside risks of climate change. The complete absence of any fossil fuel related holdings and a leaning towards asset-light business models are helpful in this regard.
But that’s no reason to let either our client's holdings or ourselves off the hook. In this vein, we see several areas for focus and improvement.
Firstly, the quality of emissions disclosure across the portfolio holdings is far patchier than we’d like. Only 17 of the 38 companies actively report scope 1 and 2 emissions, or about half of the portfolio by weight. That’s not good enough. So, in recent months, we’ve been engaging with each of LTGG’s portfolio holdings on this issue, flagging that we expect them to disclose ‘direct’ – meaning scope 1 and 2 – emissions as a minimum standard, and ideally scope 3 emissions as well.
This is important because our holdings need to be on the front foot to understand the financial implications of carbon being properly priced through either regulation or market forces. It should also tackle the fact that currently approximated data is based on multiple overlapping sources that are often contradictory. Estimated scope 1 and 2 data is relatively easy to obtain, but it’s not fit for purpose, with farcically inconsistent estimates from different data providers.
The complexity of scope 3 means its disclosures will take longer to become commonplace despite their importance. Some industries are going to find it easier to do their sums. For example, downstream figures – which take into account the use and disposal of a company’s products – are easier to calculate for a car maker or miner than for an ecommerce platform or even an investment manager. The figures are often not comparable between companies, but they can tell us much about a single enterprise and how that business might change over time. So we need a better handle on what scope 3 can tell us, and expect the issue to increasingly influence how we focus our engagements with management.
Once disclosure has improved, we’d expect to see LTGG's holdings establishing clear carbon reduction goals based on the achievement of ‘net zero’ by 2050 at the very latest, and ideally well before. Net zero for the planet is the point at which the levels of greenhouse gases in the atmosphere stabilise, ending the sharp increase in heat-trapping emissions that have brought us to such dangerous levels of global warming.
We’re aware there are both very good and very bad ways of achieving net zero. In this regard, the ‘how’ is as important as the ‘what’. For us, it doesn’t mean continuing to finance carbon-intensive fossil fuel activities while finding ways to absorb carbon dioxide elsewhere, and then using creative accounting to balance an emissions score. We want companies to reduce their direct emissions as much as possible, only using offsets as a last resort to manage the rump. Those offsets should be credible and verifiable, based on the standards of the Science Based Targets initiative or credible local alternatives.
Over the next decade, in the absence of serious decarbonisation commitments, there’s a good chance a company will be destroyed by some combination of regulation and customer backlash. So, in the future, we plan to report how many LTGG holdings have met our expectations. And we will engage with the laggards.
The current picture on net zero commitments is as follows:
LTGG holdings: Transition readiness
At present, the portfolio’s Chinese holdings are notable for their lack of decarbonisation commitments. However, in recent months we’ve seen significant steps forward on disclosure following the Chinese government’s Net Zero 2060 announcements. Based on recent engagements, our hope and expectation is that in the coming years these Chinese firms will catch up and even overtake many global counterparts in relation to both disclosure and net zero ambitions.
In April, Ant Group revealed that it planned to work with Alibaba Cloud to deliver on a goal of net zero by 2030. Experts from the China Environmental United Certification Centre are advising the firm on its plan. Although Ant is not a portfolio holding, its goals and actions are being closely monitored by other companies in China – most obviously Alibaba.
 Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company
 Scope 3 includes all other indirect emissions that occur in a company's value chain whether upstream – purchased goods and services, employee commuting etc – or downstream in the use and disposal of a company’s products or services
 The quality of offsets is important. Cheap offsets can encourage a company to make limited efforts to address its own emissions while offsetting emissions through projects in other countries, outsourcing any social and environmental risks. Avoiding double-counting of offsets is also a challenge. For example, if a reforestation project in Uganda sells an offset credit to Amazon, this emissions reduction is double-counted if it also goes towards Uganda’s emissions target. The climate, obviously, sees the benefit only once
We are undertaking a series of discussions with each of the companies in LTGG’s portfolio to better gauge their attitudes and adaptability in relation to climate issues. Our approach is not to be constrained by obvious, risk-based assessments of materiality, but to be open-minded and to support each company as it finds its own advantage and influence through the transition.
Some recent examples follow:
Visual computing technology
NVIDIA’s overriding aim is to improve the energy efficiency of graphics processing units (GPUs) and data centres. In addition to this core purpose, a key challenge is whether it can access enough ‘green’ components over the next decade to satisfy the demands of its increasingly aware customer base, and whether this could become a point of competitive edge and/or premium pricing.
Attitudes and operations
Chief financial officer Colette Kress has discussed sustainability with us. This speaks to the importance of environmental considerations to NVIDIA and backs up its strong track record in reporting and climate engagement. The firm currently sources 25 per cent of its electricity needs from renewables and aims to increase this to 65 per cent by 2025. The reduction target for direct emissions is judged to be 1.5C-aligned. Next, NVIDIA is keen to increase coverage of value chain emissions, with expansion across upstream manufacturing and downstream product use/disposal as a priority for 2021. It needs to engage with its own suppliers and customers for better data. Once the company has more confidence in the figures, it intends to set a wider value chain net zero target.
As NVIDIA gathers more scope 3 data, it will be interesting to see how it develops these targets and to monitor the additional supplier engagement that it promotes. NVIDIA is a member of the Responsible Business Alliance, which verifies that the firm engages with all of its major suppliers on energy, waste and water use. While all provide NVIDIA with data, the quality and extent are not good enough and this is a key area for it to influence and work on.
NVIDIA plans further work in relation to waste management and end-of-life recycling/re-use. We will monitor this closely because in our view it could be an increasingly important influencer of design choices. That presents the company with a very large opportunity.
Semiconductor lithography machine manufacturer
By advancing the lithography machines that print tiny patterns on silicon wafers to create computer chips, ASML sits at the heart of semiconductor manufacturing technology, and underpins the continuation of Moore’s Law. While its machines are increasingly power hungry, they enable products that allow greater energy and resource efficiency.
Attitudes and operations
ASML reports its scope 1 and 2 emissions. Its ambitious target for net zero direct emissions by 2025 will require the greening of natural gas for direct combustion and the production of hydrogen. Our engagement with the company has focused on this goal and its strategy of purchasing renewable energy certificates (RECs) to cancel out its remaining electricity-related emissions. A question it faces is whether to continue as a remote purchaser of RECs, which carries the risk of a price squeeze. The alternative is to become a direct investor/purchaser. It has already invested in hydro in Norway and is adding local solar.
ASML began reporting scope 3 emissions in 2019 and refined the report in 2020 to include estimates both up and downstream. It acknowledges that this is still a work in progress, and has made a public plea to those in its value chain to accelerate their own reporting. This applies not only to electricity for manufacturing and cooling, but also to water, to hydrogen and to the fluorine-containing gases SF6 and NF3, which are both aggressive warmers from a greenhouse gas perspective.
ASML has a transparent target for 2025 with scope 3 emissions rising to 11.9Mt, but revenue-based intensity to drop by 20 per cent to 0.5kt/million euros. This goal is based entirely on improving the efficiency of its lithography machines, but it makes no assumption about any change in the electricity grid mix of the customers using the machines.
We have had some helpful discussions with ASML about key actors within the supply chain. It notes the importance of statements and ambitions of its customers’ key customers, such as Apple, which, in ASML’s opinion, adds a climate clarity and focus to the whole ecosystem. In our view, ASML’s reporting, targets and narrative stand out well. It is one of the few companies in our portfolio (indeed the market) to have a pre-2030 net zero target for direct emissions, and yet it knows it must do more.
We will continue to reflect on how properly costed resources, such as energy, water and fluorinated greenhouse gases (F-GHGs), might disrupt the semiconductor supply chain. The global system seems highly efficient today, but that might not be the case in a world of costed natural resources, a scramble for green power, and greater concerns regarding access and national security. We will also continue to explore the physical risks of climate change, both in terms of disrupting access to fresh water – critical for the big chip fabricators – and the 30 to 40 year outlook for sea level rises and flooding.
Indian mortgage provider
As a leading provider of housing finance in India, HDFC could exert extensive influence and leadership. Its biggest opportunities lie in accessing green-linked finance, and the customer loyalty that should come from being climate positive by means of funding sustainable housing.
Attitudes and operations
HDFC acknowledges climate risk, predominantly as a physical issue. It is committed to net zero but has not yet given a date. The company’s climate reporting is very limited and there is much work to do. By way of example, there is no direct link or target for lowering the emissions intensity of the assets it lends against, nor is there any detail regarding potential losses from physical climate change.
One of HDFC’s key attractions has been the quality of its lending standards. It’s encouraging that environmental factors feed into its decision making on this front. For example, the company recently declined to lend to developers around lake, coastal and mangrove areas on environmental grounds.
HDFC has just begun some limited pilot reporting of its own emissions. We need to check the data, and the next step is clearly a reduction target. But this is housekeeping relative to the need to influence both the siting of new builds and energy efficiency standards in construction. To assist, we have shared examples of what other banks are focusing on. HDFC could lead by example – ahead of formal requirements from the Reserve Bank of India, which joined the NGFS (the Network of Central Banks and Supervisors for Greening the Financial System) in April.
The most business-critical climate issue for us as investors is HDFC’s physical risk exposure. This involves how its executive team and its arguably somewhat static and over-burdened board get up to speed with local climate science. Overall, HDFC is engaged and aware. But it’s still at the early stage of collecting information and forming a strategy. It could exert material influence on regulators, developers and customers that could impact the pace of India’s wider emission cuts. It could also be more dynamic in adding interest and expertise at board level, and stronger at leading best practice.
We will also monitor the progress of green housing loans. We have advised HDFC to become a leader in this area.
BioNTech has pioneered mRNA-based cancer vaccines. These work by teaching the immune system to recognise and destroy cancerous cells. Most recently, the company has gained prominence for its Covid-19 vaccine. Husband and wife founders Uğur Şahin and Özlem Türeci have always struck us as passionate, open-minded and committed individuals. BioNTech is their lives’ work. Their perspective is that being climate neutral by 2030 represents an appropriate level of ambition for a company focused on global health.
Attitudes and operations
BioNTech began work on its climate targets in 2019, while the company was still private. This was done in the expectation that it would be pressed for time once it got into the listing process and became a public company. But it didn’t rush to define the relevant topics and assess materiality. Climate came out as the top priority for employees. In its words: “We are a science-based company and we have to take a science-based approach.”
BioNTech has a clear and well-communicated intent to be “climate neutral by 2030”. Reporting of scope 1 and 2 emissions is detailed and robust, while it recognises that the data for scope 3 is a work in progress. There is clear ambition to incorporate the full value chain emissions in the target, but an acknowledgement that it must figure out how to collate the data.
Discussions about BioNTech’s industry influence have focused on the structural challenges posed by single-use vessels and implements within the sector. A shift to steel vessels might be one option, but it poses a logistical challenge as production shifts from region to region. The topic deserves further exploration as it may lead to other opportunities in this part of the healthcare chain.
With production increasing quickly, the immediate focus is on energy sources. BioNTech is conducting an energy audit over the course of 2021 and is aware of the need to shift from renewable energy certificates (RECs) to the sourcing of direct renewables. It has concerns that the price of carbon and RECs may increase significantly, so it needs to be ahead of that shift. BioNTech is seeing increasing competition for renewable energy sources in the short to medium term as more companies make climate commitments. This is an issue in Europe, but even more so in parts of Asia, where it has joint ventures in Singapore and China.
We look forward to following BioNTech’s progress on scope 3 reporting, particularly as it ramps up production facilities in new markets such as Africa.
Online payment platform
Adyen’s revenues and operational footprint are still relatively small. But as a payment platform with a global merchant base, it has an interesting opportunity in regard to its role in purchasing decisions that collectively have a substantial carbon footprint.
Attitudes and operations
In 2019, Adyen back-calculated all its direct emissions to date. It chose a company called South Pole to facilitate a number of international offset projects to match its historic and ongoing emissions. Based on our research, the cost of its offsets tends to be in the $15-20/tCO2e range. While this is less than half the current cost of carbon within the EU and way below the long-term required cost of carbon, it is a helpful start. Done well, voluntary carbon offsets can route funds to low-cost mitigation projects with wider social benefits. Adyen doesn’t yet have targets for direct emissions reduction but accepts that offsets alone aren’t the answer.
A new initiative involves a carbon calculator that enables the customers of its merchants to offset the approximate footprint of their purchases at the point of purchase interface. Proceeds are then routed to South Pole offset projects. It’s currently unclear how much of Adyen’s scope 3 emissions might ultimately be routed through from consumers using the new purchase offset app. So far only one supermarket has joined the programme, but others are talking about doing so.
The point of purchase offset initiative is one to watch. It speaks to the potential influence that ecommerce platforms could have on purchasing behaviours.
Connected home fitness equipment
Peloton places a lot of emphasis on feedback from its community via social media. Being a member of that community is part of a person’s identity, and delivering climate alignment fits with the values of its core user base.
Attitudes and operations
We don’t yet have any climate-related disclosure or expressions of intent from Peloton. It has collected some carbon emissions data but is still in the early stages of determining its plans. Peloton has a real-world footprint through its manufacturing chain. There is evidence of direct thinking about product design and durability. The company is keen to emphasise that much of its innovation is focused on software and content, not endless new bicycle or treadmill models. It sees the bike as more of a one-time purchase and feels that the overall lifetime carbon footprint of choosing a Peloton product would be lower than for the regular fitness equipment manufacturers, whose business models are predicated on selling more kit.
Peloton is exploring calculations that gauge the extent of any offset between owning a Peloton and not driving to a heavily air-conditioned gym. These 'avoided emissions' assessments are complex given the likely utilisation rates of the owner-owned product, but it will be interesting to see what materialises.
We expect to see further progress around disclosure and climate ambitions over the course of the next year.
Online used car platform
The upward trend in how long cars remain in use in the US may partly be due to improvements in quality. But it is also likely that customers are delaying purchases given uncertainties about the shift to electric vehicles and the potential for shared transport. For now, Carvana is a beneficiary of this trend as stock turnover increases and (in the short term) prices rise. However, if the energy transition within transport continues to accelerate and we see dislocating changes in regulation or internal combustion engine alternatives, the second-hand car market also carries a risk of price declines or early scrappage.
Meanwhile, within this complex picture, founder Ernie Garcia sees a long-term opportunity for Carvana to act as a retail funnel for new cars as manufacturers potentially give up on dealership networks given the lower servicing requirements of EVs.
Attitudes and operations
As the disrupter of the US second-hand car market, Carvana’s interaction with the trends of the energy transition is multi-faceted. But it has no disclosure and no observable commentary on the issue. At present, Carvana appears unconvinced that it should nudge customers in the direction of climate-friendly vehicles.
The company has yet to undertake an emissions audit and we have made it clear that we would like to see one.
Carvana’s largest source of direct emissions relates to the cross-country transportation of cars but it has an opportunity to influence customer interest in more fuel-efficient vehicles. We have suggested it consider a related search feature on its site.
We plan to share examples of inspirational, rather than sector specific, climate disclosure for Carvana to consider as we expect the company to be more on the front foot in relation to this issue over the coming years.
South Korean ecommerce platform
Korean consumers typically place much emphasis on recycling and waste given the population density and the generally small apartments in which they live. Coupang’s delivery approach is a direct response to that. The offer to customers is peppered with sustainability strands: eco-packaging and returnable bags, local logistics – 70 per cent of the population is within seven miles of a fulfilment centre – and demand optimisation. The offer of ‘green’ incentives, delivery and information would be well received by customers.
Attitudes and operations
As yet, Coupang has no climate-related disclosure or targets. But it recognises that this is an important area to work on. And it was keen to hear our suggestions of emissions accounting solutions providers.
Coupang’s key focus is on both 'being the best employer' and 'being a positive influence in the operating locations'. It has shown interest in our thoughts about how it could influence its value chain regarding climate change. While the system will have some low-hanging fruit, Korea is a fossil-electricity economy with significant reliance on food imports. This makes full decarbonisation a challenge.
We expect to see basic reporting and direction around targets within the next year.
Cloud-based enterprise software
The ‘carbon-free cloud’ narrative is embedded in the Workday pitch. It considers it important to its customers, less as a differentiator than a core expectation.
Attitudes and operations
Workday has a long history of climate-related engagement. It started buying renewables in 2008 and set a net zero ambition in 2016. As of 2020, it uses 100 per cent renewable electricity and has offset all its past emissions. Workday expects to set wider scope 3 reduction plans by the end of 2022. It is clearly focused on actual reduction ahead of offsets, and is one of the few US companies to have followed Microsoft’s lead with internal carbon pricing.
Workday is a founder member of the Business Alliance to Scale Climate Solutions (as are LTGG holdings Amazon, Netflix and Salesforce).
As a member of the Future of Internet Power initiative, Workday lobbies for data centres to purchase 100 per cent renewable power. At this juncture, the company takes responsibility for the electricity use of its racked machines, but the data centre overhead via Amazon Web Services sits in scope 3.
Workday’s focus is now switching to the other parts of its footprint: hardware, travel etc. We will monitor its progress as a climate leader with interest.
 Business Alliance to Scale Climate Solutions (scalingclimatesolutions.org)
The above engagements, among other discussions, help us get a sense of whether our holdings have the requisite cognitive skills and awareness in the face of the climate crisis. They help us to home in on the material issues for each company. They also explain why, from time to time, we oppose well-intentioned but potentially misguided and overly prescriptive shareholder resolutions on climate change.
In our view, long-term engagement on climate issues usually has much more influence than proxy voting. This is an endeavour that extends well beyond sending a letter to a company and expecting an instant response. It is also about focusing on the issues that are most material and relevant, rather than those which happen to be in the media spotlight at any point in time.
Perversely, in the world of tick-box governance, the very act of only investing alongside the world’s best management teams can lead long-term stock pickers to be marked down by external governance scorers, who may criticise them for not opposing enough proxy votes. Within the LTGG portfolio, we are less likely than some others to oppose management through proxy votes because we only look to invest in companies that we believe share our values and horizons. We see little merit in investing in companies where we know we will have to constantly battle short-term management decisions to achieve good outcomes for shareholders in 10 years’ time.
 By way of example, such resolutions often request the appointment of ‘specialist directors’ to focus on climate issues. Specialist directors may be appropriate for a serious laggard, with the recent Exxon vote a prime case in point. But for the more progressive holdings in your portfolio, we believe that non-executive directors typically need a broader skillset to fulfil all aspects of their role. Furthermore, such polymath directors should take specialist advice from external counsel to ensure they are providing challenge and oversight to the executive in all material areas of ESG
Improving information sources
As with so many areas of investment, we are firmly of the view that the most helpful perspectives on the world’s environmental challenges won’t come from cognitively homogeneous members of the financial services industry or the data providers. We place much more value on the views of experts from outside our industry as we seek to calibrate our holdings’ responses to climate-related challenges and opportunities at hand.
The work of our old friend and archaeologist Ian Morris lends some interesting perspectives on how morals and values might evolve as humankind weans itself off fossil fuels. The foragers of 10,000 years ago tended to value equality over hierarchy and were relatively tolerant of violence. The agrarian societies that followed valued hierarchy over equality, but violence was far less acceptable. The most recent system of ‘fossil-fuel values’ is associated with societies that augment the energy of living plants and animals with the energy of fossilised plants that have been turned into coal, gas and oil. Fossil fuel users have tended to value equality over most kinds of hierarchy. They have also typically been intolerant of violence.
Morris cites the work of the anthropologist Leslie White, who suggested the whole of history could be reduced to a simple equation: Culture = Energy x Technology. White then questioned how this notion might interface with a world of abundant and virtually free renewable energy. If energy capture were to leap from 230,000 kilocalories per capita per day to, say, one million, we might conceivably see a revolution in human values – and some relatively dramatic shifts within our investment time horizon.
Meanwhile, Baillie Gifford’s work with the Deep Transitions Futures Project is focused on how the interface between people and society, governance structures and technology will need to evolve in the face of the greatest systemic change for generations. This is an acknowledgement that technological change in isolation is not enough.
A model of how both breakthroughs and new species emerge
We’re also keen to further our understanding of the systemic changes required in our food systems. Agricultural production accounts for about 30 per cent of current greenhouse gas emissions. Locally, our tie up with the James Hutton Institute in Scotland is exploring new models of carbon-0 negative farming, while in China, our relationship with Fudan University is exploring new models of agriculture.
We are also developing a scholarship and intern programme with the Low Carbon College of Shanghai Jiao Tong University. This partnership will provide a line of sight into the latest technological developments. Our most recent visit there focused on energy-efficient micro-channel technology in air conditioning systems.
Our firmwide relationship with Professor Mike Berners-Lee is also proving fruitful and increasingly wide-ranging. Berners-Lee and his team have provided ‘external eyes’ on a number of portfolio holdings and have helped to shine a light on the greatest gaps and limitations of the data providers. The next focus of their work with us will be to develop better scope 3 estimates, and then to help develop our thinking skills more broadly beyond climate into biodiversity.
 The Deep Transition Futures Project
 The James Hutton Institute
We plan to develop our thinking around a couple of important concepts.
The first is that of ‘avoided emissions’. To our minds, identifying the net benefits of holdings such as Tesla, Beyond Meat and Zoom is important but also highly conceptually complex. It ranges from the 'ownership' of the avoidance, through to potential credit for system-wide, or catalytic, accelerations in deployment. Some holdings are already starting to disclose estimates of avoided emissions. Zoom, for example, lays claim to 55Mt of avoided emissions over the course of 2020. But we need to consider how to attribute the benefits in a robust and rigorous manner. We’re currently working with an external consultant to that end.
The second is that of ‘temperature alignment’ – the notion of assessing company-level climate targets and converting them into a portfolio-level temperature rating. Establishing whether a portfolio is aligned with a 1.5C world or a 3C world is undeniably appealing. But in our view the data and models provided by MSCI and others aren’t yet fit for purpose, so we would like to help develop the concept in a more rigorous and credible way. It may also be that given the increasing importance of climate alignment to capital markets, this may be an area that requires the attention of the audit profession – a conversation we would like to be a part of.
We would also like to conduct further work on the portfolio holdings’ sensitivity to rising carbon prices, either externally imposed by means of regulation or internally introduced. This is another complex topic, straying into price elasticities of demand and the capture of transferred value by new business models. From an external perspective, the world is still some way from establishing appropriate incentives. At present, only about a fifth of global emissions are priced, and most carbon taxing schemes under-price emissions. This means incentives are nowhere near being effective in changing behaviour. The weighted average price of carbon emissions is currently a paltry $2 per tonne, but it is generally recognised that the carbon price needs to reach about $100 per tonne to achieve a 1.5C trajectory. A key question for LTGG is whether we should encourage more portfolio holdings to follow Microsoft’s lead by setting internal carbon taxes.
We also continue to hunt for emerging investment opportunities. Our burgeoning networks within private companies offer a fascinating window into opportunities resulting from the global drive for decarbonisation. Private holdings include:
- Lilium and Joby, which are both developing electric aircraft
- Bolt Threads and Ginkgo Bioworks, two companies using biology to develop new materials and other products
- ChargePoint, which runs an electric vehicle charging network of its own as well as providing its technology as a service to others
- Northvolt, which makes high-performance lithium-ion batteries for cars, renewable energy generators and others
All of these are candidates for future inclusion in our portfolio. In addition, we’re monitoring a range of hydrogen technologies. As always, some of the greatest opportunities will stem from second-order effects and we need to be open-minded. What might abundant cheap oxygen, a by-product of hydrogen production, mean for sustainable fisheries or the economics of space travel? What might abundant free energy mean for water supply and distribution given the energy intensity of desalination? Which industries might emerge if traditional meat farming declines?
A clear set of commitments
We have established a clear set of ambitions and commitments for the LTGG strategy at a portfolio-wide level, and we look forward to engaging with our clients on progress in the years ahead.
- As of now, we commit that 100 per cent of our companies are aligned, or under engagement for alignment, with an appropriate net zero pathway
- By the end of 2023, we expect substantially all (90 per cent-plus) of the companies in the portfolio to report scope 1 and 2 emissions. If they do not, they will be on a specific engagement pathway for such disclosure. Any new companies entering the portfolio will have two additional years to meet this expectation
- By 2025, at least two-thirds of the portfolio by number will be positively aligned with global net zero goals. For most, their preparedness, or indeed leadership, will be demonstrated through public net zero aligned targets encompassing scope 1 and 2 and material scope 3 emissions. If, however, we own an exceptional company that does not yet have net zero aligned targets but already has or possesses the potential to be a transformative enabler of successful decarbonisation, we will provide specific research demonstrating this element of its alignment while we continue to work with it around the appropriate level of disclosure
- By 2030, over 90 per cent of the portfolio will be net zero aligned. Any new companies entering the portfolio will have two additional years to meet these expectations
The LTGG approach couldn’t be better suited to both navigating and benefiting from what might be the most important and urgent transition in humankind’s history. Our holdings have a golden opportunity to step up and lead. As long-term shareholders, it is our responsibility to help them to capitalise on our clients' behalf.
 Urgentum, among others
 One year later: The path to carbon negative – a progress report on our climate ‘moon-shot’ – The Official Microsoft Blog
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