Guy:        

• Ok as usual and as the podcast name suggests, let’s “Cut to the Chase”, and let me get right to what I think is the heart of the matter for our discussion, and then we can move to unravel it a bit later.         
• For many asset managers ESG, Sustainability, Impact investing, and such, is clearly a hot area of focus, with strong momentum. And to be fair, there are some who consider it, shall I say, “a necessary evil”, driven by new regulations or reporting requirements, and there are others, who give it focus, simply because they believe it is the right thing to do.
• My sense though during our conversations over the last several weeks is that part of your job is to turn observations and empirical work on climate and climate-related new technologies and apply them – to make them - part of your fundamental bottom-up analysis with the goal generating alpha opportunities. 
• I believe I have that right - can you elaborate and comment?

Jim:         

• I think your characterization is correct. Asset managers, like us, do extensive bottom-up research and analysis to get a sense of a company’s future revenue and cash flows; and then decide what the appropriate credit spread should be based on that analysis. For most asset managers, this has been the basis of security selection. 
• At MIM we believe that type of analysis today cannot be complete without considering the impacts of climate change. And, as you mentioned, we must account for the enormous trends in sustainable investing, whether it be in the trillions of dollars earmarked in this matter or for new forms of regulations and reporting.
• Of course, as you mentioned, not everyone has a desire to integrate ESG into their portfolio, but for clients that do, we can do that. And by incorporating ESG factors into our investment process, my colleagues at MIM and I, believe we end up with many alpha generating opportunities that can capitalize on shifting climatological, technological, and regulatory patterns.

Guy: Do you think your alpha, or outperformance comes from merely avoiding companies with, say, high green-house-gas emissions, or those who are might be involved in other unsavory behavior?

Jim:  

• It’s possible.  And that is what is known as “negative screening” -- which is only a small part of what we do. We prefer companies who are actively taking steps to decarbonize.  Finding those names can hopefully unlock value.
• But it is a more complex process than that simple metric, because “Negative screens” are typically a snapshot in time and backward looking. They are often rigid metrics that removes any judgement-based context and yield only binary outcomes.
• Positive selection, on the other hand, is forward looking and allows judgement to be made based on the direction an organization is traveling. We like to say that positive selection is about finding those companies who are “changing forward faster”. We believe if you can identify names that are incorporating such efforts into their strategy and operations, the business is probably worth more than their current spreads may imply, which could ultimately lead to improved performance over time.

Guy: That makes sense. So, how do you do that? What’s the secret sauce?

Jim: 

• Therein lies the challenge…It’s different for different industries. Some companies might have a large portion of fixed assets that are subject to physical risks of extreme weather along with the difficulties of transitioning to newer and cleaner technology. 
• With that in mind, I’d say one thing we look for with those companies is to see if they are finding clever ways to try and shield themselves from acute and chronic physical risk factors AND see if they are attempting to anticipate forthcoming regulations, legislation, and innovative technologies.

Guy: When you say “anticipating” that sounds consistent with your comment earlier about “changing forward faster”.  Yet, I’d say it seems a bit abstract to me. How best do you identify those companies?

Jim:       

• You are correct, it is often abstract and that is also part of the conundrum. Doing proper due diligence might still often opaque results. Sometimes the right questions are hard to find, and supporting data can be questionable and volatile. 
• To get around this though, we believe it is important to place a heavy degree of emphasis on engagement with the corporate borrower to learn what those companies are doing, what the management teams are thinking, and what their goals and objectives are regarding their carbon footprint. 
• As part of our building a “climate-aware portfolio”, it is vital to learn if they are putting capital and organizational systems behind these goals and objectives, thereby showing real commitment…. or are they just paying lip service to the value of decarbonization.

Guy:  Let me see if I can tie a few things you said together. Fundamental bottom-up analysis must incorporate climate-related risks in order to be complete and comprehensive, correct?

Jim: We believe so, yes.

Guy: And companies that take precaution against climate physical risk and anticipate new regulation or legislation, should in your opinion either maintain value better, or increase value over time - is that correct?

Jim: That is correct.

Guy: I have found that there are some people who truly believe that incorporating climate variables leads to negative alpha?  How would you respond to them? 

Jim: 

• My team and I would respectfully disagree.  On the contrary, we believe for the reasons I mentioned earlier that it is a rare opportunity to drive alpha in a portfolio.
• To me there is no question that global warming, climate awareness and ESG initiatives are having a tremendous impact on how trillions of dollars of capital are being allocated and in turn how issuers are being valued. It seems that those issuers and countries who proactively participate in the journey to a “greener” future will be rewarded.  
• And we believe those managers, like us, who monitor, identify, and invest with them will generate commensurate outperformance.

Guy: Jim, that is a great place to stop. Thank you for taking the time to share your vision and speaking with me today.

Jim: Thank you.

Disclosure
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