George Serafeim: Good morning. It's a great pleasure to be here with you. As Lee mentioned, we'll be discussing about climate solution investments and when people are thinking about climate change in the investment space. They tend to think about risk. They tend to think either about adaptation risk from the perspective of natural disasters, or they tend to think about from a risk perspective for high carbon emission companies and how regulations might disrupt their business models. What gets me very, very excited is actually thinking about opportunity, is actually thinking about the innovation side of things when it comes to climate change. And as a result, this is what I'm going to be discussing here with you. But when we're thinking about innovation and accessing that innovation that will be needed in order to decarbonize the economy from the energy perspective, from a housing perspective, from a transportation perspective, from an agricultural perspective, the question is how can one access this innovation and those opportunities? How can those opportunities be identified, and then how those opportunities are performing over time. So I want to show you a methodology that we have developed in this space, some data that we have collected about how those investments perform over time and critically also important about how where those opportunities are located. So let's look at that. The first one that is really, really important is to recognize the magnitude of the challenge that the world has ahead of it. So this is the historical CO2 intensity in terms of CO2 intensity per unit of GDP, and this is basically how it will look over time in a business as usual scenario, meaning that we don't really do much to decarbonize the economy.

George Serafeim: And this is what the two degree scenario requires in terms of GDP in ten, in terms of CO2 intensity over time. So that basically curve, that change in the curve is not going to happen in the absence of pretty significant level of innovation. And of course, when we're thinking about that, we need to be thinking about it in the context of moving towards mid-century to a net zero that the scientists are saying we need to get to. Most of the countries are now committing to that by mid-century. For example, the US, the European Union, China and India have committed net zero a little bit after the mid-century about 2060 to 2017. But the critically important to think about is one that we need to reduce carbon emissions pretty significantly too, that not all carbon emissions will be able to be abated. Some of them are just too costly and as a result, we need to develop what is called negative emission technologies. Negative emission technologies come in two forms. One are technologies such as, for example, carbon capture and storage to nature based solutions, such as, for example, reforestation or reversing soil degradation. So both of those things are needed in order for us to basically decarbonize the economy. And what I want you to see on the right hand side is that not all the technologies that are needed in order for us to decarbonize the economy actually exist, or they are commercially and scalable, viable.

George Serafeim: Some of them are, and they are very mature technologies. They can be scaled, they can be deployed at a very, very large to a very large extent, such as, for example, solar and wind energy and now of course, lithium ion batteries and so forth. Other ones are in earlier stages of development. For example, solid state batteries. When you're thinking about hydrogen in large commercial industrial applications, those are earlier stage technologies. So again, that makes the point that actually we need a very, very significant amount of innovation that is going to happen in the future. And when we're thinking about where the investment is trending, of course, we're observing a pretty significant uptick in global investment in the energy transition, not only actually in renewable energy, but increasingly also in terms of energy storage, electric vehicles, thinking about, for example, nuclear and sustainable materials in terms of low carbon cement and low carbon steel and so forth. And that needs to accelerate in the future. Just to give you a sense of what will be needed in order to go to net zero, that needs to look about four times what you see right now. So we need to move upwards of 2 trillion a year present. And when we're thinking about where those investments are happening, they are happening also unequally around the world. Pretty significant actually, uptake in the APAC region.

George Serafeim: And that is driven to a large extent by China. So when we're thinking about this climate transition or. Community perspective and innovation perspective. The question becomes how do we identify those opportunities? One and then how those opportunities are located in different parts of the world and how they are performing over time, both in terms of growth and profitability, but also in terms of their investment partners and of course, in terms of their stock performance over time. So one of the things that we have concentrated in doing is actually trying to understand how we can construct a portfolio that access broadly this innovation and growth opportunity as we are moving to reduce carbon emissions in the economy and develop those technologies that is going to create trillions of value for the economy. So the question is where are those companies and how they are performing over time? One of the things that we did as part of the research and first of all to recognize is there is other identification problem, meaning that you need to identify those companies, you need to identify where the innovation is happening. So one of the things that we first did is we reviewed reports and academic work and so forth to identify ten central areas to create climate solutions. And I will show you each one of them. Then we assess the landscape of climate technologies and innovation in order to develop a dictionary and identify key words that relate to each one of those ten themes and ten areas.

George Serafeim: Then after we generate the keywords, we looked at the business descriptions of companies and what are the products that they are providing in the marketplace. And then of course, we audited our Climate Solutions companies in the sample, and these are the ten themes that we identified. They range from agriculture and food, for example, thinking about plant based food that is much lower carbon emissions because of upstream in the supply chain of the agricultural supply chain, thinking about building and housing in terms of green buildings, thinking about electrification of both transportation, but also in terms of battery storage, thinking about issues, for example, in materials as a sustainable cement and so forth. So the important element to recognize here is that the portfolio that we are constructing is not a pure play renewable energy portfolio or clean energy portfolio that most of the broadly accessible, pure play indices are actually it's a much more diversified portfolio across many sectors. And as part of that, we have identified 164 key words and phrases that allows us to actually go and understand in business descriptions what are the products and services that companies are offering. And once we did that, then we unleashed this this technology that we have developed to find as part of business descriptions of companies, all the climate solutions firms that we could identify. And as you can see here, the red boxes are a little bit out of place from where they should be.

George Serafeim: But you can see that we identified 946 of them that are globally publicly listed companies. And within that we identify then the ones that have some reasonable amount of liquidity around them. So they are actually tradable. And we identified 632 of them critically important. We looked for pure play climate solutions companies, meaning that we looked at companies that actually all their products and services, meaning all of pretty much all of their revenues are are coming from those climate solutions products. Why did we do that? Why did we exclude actually transition companies, some companies that might be offering climate solutions products, but not all their products are coming from that because we wanted to identify an index and a portfolio that actually most of the business performance is coming from those climate solutions. Otherwise, if we would be including companies that might be in transition, such as, for example, General Motors, then actually we would be polluting our sample because we wouldn't be able to identify what actually drives that growth, what actually drives our profitability, because most of the performance for those companies is still coming from their legacy products. So we wanted to identify a clean sample where it would allow us to study the development of this market. The first significant result is how many of those companies are actually in emerging markets relative to developed markets. And that is actually a very, very important result because traditionally most people would think that most of that innovation is happening in developed markets.

George Serafeim: That is actually not true. A significant part of the companies that are producing those innovations are actually in emerging markets. You can see that about 54%, about 55% of the average number of stocks are in emerging markets, and that represents about 44% of the market capitalization of the portfolio. The second thing that is really, really important is where most of those companies are in emerging markets and they are in China. That has developed very, very significant competitive advantages when it comes to both energy generation in terms of the solar panel industry, but increasingly also in terms of battery battery manufacturing with companies like Seattle and of course increasingly with electrification of the transportation sector, with companies like BYD. So and but you can see there that outside of China, there is a pretty significant actually a number of companies that are located there and of course, significant activity both in the US and in Europe as well. Then the question is how are they performing over time, both from a fundamentals perspective, meaning that growth and profit, but also from an investment profile perspective. What I want to show you there is both on an valuated basis, but on an equal weighted basis as well, how those portfolios are performing. With the blue chart, you can see actually the performance of those companies in terms of revenue growth. And then we have industry adjusted the performance of this portfolio by subtracting the average sales growth, for example, or the average return on assets for other companies in the same industry.

George Serafeim: What you can see pretty clearly from those charts is that basically this is a portfolio that is exposed on superior revenue growth, meaning that those companies are growing at a first faster pace in general than the rest of the companies in their industry. But at the same time, they haven't achieved the same profitability margins as the other companies. So this is truly a portfolio that is exhibiting superior revenue growth. But still many of those companies haven't achieved the profitability margins of their competitors. So and why this is happening to a large extent because they are investing a lot of money actually to scale up production, to build brands, to scale distribution channels, to hire people. So we're looking at actually the percentage of sales, general and administrative expenses as a proxy for how much money these companies are spending on hiring talent building engineering teams and so forth, but also building their brands. You can think basically a classic example when it comes to that is Tesla that has been investing extremely high amounts to build basically both the engineering teams but also the manufacturing capacity and the distribution capacity. But also they are spending quite significant amount of money. When you can see, for example, in terms of capital expenditures as a percentage of revenue and that is again manifestation of actually building and industrializing those firms, but also when you can see actually R&D over
revenues.

George Serafeim: So these are truly high innovation companies that are investing very aggressively to build capacity to expand revenue growth. But at the same time, they have actually not built necessarily all the profitability margins in order to be profitable right now. The other thing that becomes important, as if after you understand growth versus profit and then the investment profile and where they are investing is to understand how valuation ratios are moving over time. We have had the same thing that we have done building book to market and earnings yield as valuation ratios. And one of the things that you can see here as well is that they are actually trading at higher multiples. So investors are actually giving them credit increasingly for the growth that they are being able to access. And you can see that here. And of course, you can see that on an equal weighted basis, earnings yields are turning negative for the portfolio. That is a reflection that most of the smaller climate solutions companies are even more unprofitable than the large ones that have been able to scale and reach profitability. So that's why you're observing this asymmetry. Once we actually build, both are valuated and are equal weighted climate solutions portfolios. One question that we're asking is how those portfolios actually behave relative to other portfolios that you might be able to access in the marketplace and other pure play indices, but also other climate change indices out there. So we're comparing the global value weighted climate solutions portfolio relative to Regional Climate Solutions portfolios and also climate solutions portfolios that are either equal weighted or value weighted. And that's what you can see on the first panel. On the second panel, we're comparing those portfolios after stripping out the market portfolio effect to two pure play climate solutions indices that are concentrating specifically on green energy. And you can see there one from NASDAQ and one from S&P. And the correlation between the portfolios is about 53%, 52%, meaning that actually the portfolio that we have constructed, again, remember, it's more broadly diversified across more sectors of the economy exhibits a correlation of about 53%. And it's actually fundamentally different. Now. Even more striking is the very, very low correlation with, for example, indices that are advertised as low carbon indices or climate change indices. The the the correlation with those portfolios is about 3 to 7% only pretty much they are completely uncorrelated. Once you strip out the market portfolio effect, you can ask the question, why is that? Well, actually it's because those portfolios are fundamentally doing a very, very different thing. So, for example, when you actually hear a low carbon index, what this is, is basically an optimization of a carbon footprint index. It's basically excludes high carbon emissions companies, but it doesn't necessarily invest in climate solutions organizations. So actually it's doing something very, very different and it links to our work on decarbonization factors, those decarbonization factors, that's exactly what they're doing, actually. They are optimizing the carbon footprint of the portfolio by actually accessing low carbon emission companies and going short high carbon emission companies.

George Serafeim: But this one is not necessarily investing in climate solutions, investments and innovation. The same thing when you are looking at, for example, MSCI ACWI climate change. In this, again, it's actually seeking to exclude high carbon emissions companies from a risk perspective, but it's not necessarily seeking to invest in the innovations and the solutions that are needed in order to decarbonize the economy. And that's why you're observing those low correlations right there.When we are moving forward. The other thing that is actually really important to take into account is the tracking errors of the portfolios. And I want to start from the bottom. For example, when you look at those other climate change indices, they exhibit tiny tracking errors relative to MSCI ACWI. That is by construction. Those industries have been constructing intentionally to have a very low tracking error, to basically be able to give you a portfolio that has a lower carbon footprint but pretty much give you the same risk return profile. Climate solution investments don't do that. As you can see there, the tracking error of these portfolios are very high, 16%, 21% because they're unconstrained portfolios. They invest where innovation is going to happen. They are not looking actually to construct a low tracking error portfolio. And that's why you see this big asymmetry between the bottom and the top out there as well. So I like to say that climate solution investments are actually investing in growth innovation and they are high conviction portfolios.

George Serafeim: How they have performed over time. So we have looked at their performance over the last 11 years that we have available data to be able to understand their performance. And one of the things that you can see there is that both evaluated in the equal weighted portfolio, they have performed actually in many ways pretty well. And of course that is intuitive given what has happened in the last 11 years, for example, in observing the performance of companies like Tesla. But the question is, is that actually something that generalizes to other climate solution investment companies as well? And one of the things that you can see there from the portfolio perspective is that the portfolio has performed reasonably well and actually it has exhibited a pretty high Sharpe ratio. For example, when you are thinking about it from the perspective of risk, return to risk. Perhaps even more interesting is the recent performance of the portfolio. And for example, in the recent the last two years, one of the things that you can see is that the pure play indices, the pure play, clean energy indices actually have had pretty significant drawdowns, but actually the Climate Solutions portfolio has performed actually pretty well given what has happened in the marketplace, which again, is a testament to the diversification effect when you're actually accessing those innovation opportunities across many different sectors of the economy instead of concentrating just in the energy market.

George Serafeim: And you can see there down there some statistics as well. One of the things that you can see in more recent times as well is the relatively better performance of the equal weighted portfolio relative to the value weighted portfolio. To a large extent, that has been driven by the fact that more much of the smaller firms have performed better in the Climate Solutions portfolio relative to some of the very large firms like Tesla and the fact that you have more of a diversification effect within the equal weighted portfolio as well. Another interesting decomposition of this performance effect is where the effect is being driven from a geographical perspective. And you can see here that in general, the US portfolio has performed quite well actually from that perspective. In general, the developed markets portfolio has performed better than the emerging market portfolio. But in the last four years the emerging market portfolio has actually shot up pretty significantly as well. And you can see a pretty significant uptick in the performance of both Europe and China in the most recent years as well. Equally interesting is that the composition across themes and which themes have contributed more to the performance of the portfolio. Perhaps not surprisingly, given everything that has been happened, both in terms of the innovation in the battery manufacturing value chain but also in terms of growth and demand for batteries. You can see that actually the batteries theme has performed remarkably well and of course the transportation theme has performed quite well.

George Serafeim: But also in more recent years, the energy theme, the biggest detractor from the performance has actually been agriculture and food. Perhaps not surprisingly, when you're observing, for example, the stock market performance of companies like Impossible Foods, for example, that has experienced pretty significant actually declines in value. But this is because those companies were traded at such high valuations that they have come down, but that has actually detracted from the performance of the portfolio. The other the other detractor has been in materials because still a lot of the technologies that are needed to decarbonize materials such as steel and cement are in earlier stages of development and they haven't actually created the large uptick in revenue growth as in other as in other technologies. So that's to conclude. I think one important element here is that investors can increasingly access those opportunities in public markets to have very significant extent. I showed you before that we have about 650 companies in our portfolio. But when you look at how many companies we have over the years, you observe actually an increasing number of companies that are included in the portfolio. I think it's a really important message that many of those companies are in emerging markets and that is happening actually that innovation is happening to a large significant extent in an emerging market. Of course, from an investment perspective, this is important because that exposes an investor to potential governance risk, political risk, currency risk and so forth.

George Serafeim: So all of that is actually really important to take into account. The exposure itself has changed over time. Initially, in the initial years, it was mostly exposure to renewable energy, but increasingly over the last few years it has become a more diversified exposure across many different solutions and we discussed about that in general. So far, this has been a high growth, high investment, lower profitability and higher risk strategy. And the last point that is important is that it's actually really important to differentiate when we are thinking about climate change in the context of investment from a risk perspective and from an opportunity perspective. Most of the products and most of the investment strategies out there are really risk based strategies. They are seeking to lower the carbon emissions of the portfolio in order to hedge against their regulatory risk that might be coming in the future. In terms of cap and trade systems, in terms of carbon taxes and so forth. And some of that regulatory risk is happening. We went from a world where we had pretty much close to 0% of greenhouse gas emissions having some rise to now about 22% of global greenhouse gas emissions having some price. But those portfolios are very, very different from portfolios that are trying to access growth and innovation from what is happening in the economy. And that's what I wanted to concentrate here with you today. Thank you very much for your attention. Leigh, back to you. Thank you.

Lee Ferridge: Thank you very much, George. We have some time for some questions and we have a bunch that have come in. So let me ask you, there's a number about portfolio construction. So one that came in was is there a point where the transition companies that you mentioned are going to be included in the analysis? So you mentioned GM for an example. If GM revenue starts to become mostly from electric vehicles, would you then consider putting them into the portfolio?
Yeah.

George Serafeim: Actually, we would like to construct transition portfolios as well. So to have pure play portfolios and transition portfolios and the important consideration there becomes at what point, what is the inflection point that a company becomes a transition company? And you can think about it from the perspective of the investments that are making. For example, most of the R&D in GM actually is going to electric vehicles. So is this an inflection point where you include them or do you actually need to see materialization in terms of sales revenues, which can be a different signal? Those are the types of things that we're considering right now. Are we thinking about investment as a signal for transition or are we thinking about actually realization of the revenues from the products and services? Because these technologies that just show you it is the latter. It's about the realization. It's actually when the revenues that you're booking are coming from these products. But we're definitely working on that, and I think it's one of the most exciting things that can happen, because many companies actually in the transportation sector, in the energy sector, in materials, in real estate, in food and so forth, are going to be going through that transition. The question is how can you credibly identify them also because you need to mitigate the the challenge that exists because of cheap talk and greenwashing and so forth. So one of the things that is also a challenge is that you say most of the companies now will have some labeling around that, but you need to identify them either from an investment perspective and where the investments are going or from a revenue realization perspective. This is exactly what we're working right now.

Lee Ferridge: So which way you lean into the revenue side by the sounds of it, because there's a lot of green talk rather than delivery.

George Serafeim: You need to think about it from the perspective of the trade off, right? Once you actually link it to the revenue side, you're more certain that indeed the technologies have been developed and the technologies are actually working, the customer is actually buying the product, but at the same time it's more of a lagging indicator. If you concentrate more on the investment side, it's more of a leading indicator about where the company will go. But at the same time, you have no guarantee that those products and services are actually going to sell.So it's almost that the risk appetite that you can have, I could imagine us actually building a transition portfolio that is an investment transition portfolio and a transition portfolio that's a revenue transition portfolio as well. And those two things are actually interesting for different reasons.

Lee Ferridge: So another question on the sort of construction is how often do you plan to rescreen the data? So to update the portfolio you have right now, because obviously new companies are listed all the time and and the sort of potential companies will change over time.

George Serafeim: We want to move to a perspective where actually we have built in natural language processing that allows us to actually update the portfolios even daily. Right. Are we there yet? No. So right now we are actually at this cadence where we had to build the technology. We did it and we're updating like a year yearly, but we want to build the MLP so we can update actually daily and that is certainly something doable and we're already working on it.

Lee Ferridge: So we have I think we've got time for one final question. In an environment where Exxon will top the combined earnings of Amazon, Procter and Gamble and Tesla, how can ESG investors keep pace with the carbon outperformance?

George Serafeim: It's a great question. And I think when you're actually thinking about that, you need to be thinking about where the world is coming and why the performance is right now or the way it is. We're experiencing a very high level of energy prices. Of course, lots of any company that makes revenue out of energy prices will have very high revenues and very high profits. Right now, the question is, is this going to be the future that we will experiencing? And my prediction is probably not actually just yesterday, the the International Energy Agency. The International Energy Agency. Actually, I just want to say that again, the International Energy Agency moved forward the moment that actually we will have peak gas, not peak oil, that will happen already, but peak gas actually in. And said even gas will actually pick up by 2030. So the question is, if you're actually want to assess where the economy is going, where innovation is going to happen, where growth is going to happen, the question is how do you allocate capital to access? What is going to be the opportunity in the next five years and the next ten years and so forth. I think that is a very different perspective than saying what is the current profitability right now.

Lee Ferridge: George, fascinating topic to talk all day about it, but unfortunately we don't have time. But thank you very much. Please thank George.

Thank you. Thanks.