The C$23 billion Canadian fund, OPTrust is embracing the power of technology to improve investment outcomes. Wei Xie explained the fund’s focus on two subdomains of machine learning – reinforcement learning and uncertainty modelling – and how they can be used together.

Speakers

As a senior professional with a unique blend of experience across investment domains, Xie is currently focused on novel investment strategies including: digital assets (crypto, blockchain), machine learning enabled liquid strategies, private and public crossover strategies. As co-chair of the incubation portfolio investment committee (IPIC) with a mandate to develop and implement novel strategies designed to accelerate investment capabilities at OPTrust.
With a breadth of investment experience spanning liquid, illiquid and innovative strategies; across traditional and alternative asset classes; he has a broad investment management skillset including: investment strategy, portfolio construction, macro, strategic relationship management, AI/ML, governance design and stakeholder management.

Moderator

White is responsible for the content across all Conexus Financial’s institutional media and events. She is responsible for directing the bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. She is the editor of conexust1f.flywheelstaging.com, the online news and analysis site for the world’s largest institutional investors. White has been an investment journalist for more than 20 years and has edited industry journals including Investment & Technology, Investor Weekly and MasterFunds Quarterly. She was previously editorial director of InvestorInfo and has worked as a freelance journalist for the Australian Financial Review, CFO, Asset and Asia Asset Management. She has a Bachelor of Economics from Sydney University and a Master of Arts in Journalism from the University of Technology, Sydney. She was previously a columnist for the Canadian publication, Corporate Knights, which is distributed by the Globe and Mail and The Washington Post. White is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program consists of 22 fellows and seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

Key takeaways

  • The C$23 billion Canadian fund OPTrust is embracing the power of AI to improve investment outcomes via two new strategies on re-enforcement learning and uncertainty modelling.
  • The pension funds hopes to deploy the strategy at a total fund level and combine it with the equity beta portfolio to create a risk reduced equity allocation.
  • At a high level, AI is used to better understand and inform risk in a scalable approach.
  • AI is challenging for investors because of the need to hire people with the right skills. It also involves investment in a data supply chain.
  • Using AI in risk management is scalable across different types of strategies and doesn’t need exotic data as it mainly involves working with price data.
  • OPTrust sought to design a process that used AI to discover when assumptions might be ineffective due to the function of changes in the market.
  • Reinforcement learning gives greater insight into the factors driving price action. Here AI allows investors to detect the non-linear impacts on prices that humans struggle to track.

This session examined the venture capital landscape and how it has changed due to the pandemic. What is the future outlook for venture investing in the US and globally?

Click here to view Magnus’ presentation slides

Speakers

Todd Cohen is a Director of Investments at NewYork-Presbyterian’s Office of Investments. Todd joined NewYork-Presbyterian in 2016 and has primarily focused on the investment offices’ private investments, including venture capital and direct strategic investing. Prior to joining the Hospital, Todd was a Senior Policy Advisor at the U.S. Department of Treasury (“Treasury”), working for the Financial Stability Oversight Council (“FSOC”) to advise the Treasury Secretary and other financial regulatory leaders on financial policy reform initiatives. At FSOC, Todd led the review of nonbank financial institutions as systemically important, including GE Capital. Prior to Treasury, Todd was a Vice President in the capital markets and derivatives groups at Bank of America in New York and Tokyo. Todd, a CFA Charterholder, graduated with a Bachelor of Science from New York University’s Stern School of Business.

Mitchell Hammer joined Princo in August 2017 after interning the previous summer. He graduated cum laude from Princeton with a A.B. in English and a Certificate in Spanish Language and Culture. He received the Class of 1958 Prize in Honor of Ernest Hemingway for his thesis on the impact of modern media on Virginia Woolf’s fiction. While he has no taste for fine wines, he is a veritable coffee snob, and spends most of his leisure time reading good books at even better cafés.

Magnus Grimeland is the chief executive and founder of Antler, a global early-stage VC enabling and investing in the world’s most exceptional people. He leads a global team across five continents and 14 locations with the mission to fundamentally improve the world by supporting founders, who are building the defining companies of tomorrow. Antler has invested in and helped build over 250+ portfolio companies worldwide and established the world’s largest early-stage investment platform, with an unparalleled global network of entrepreneurial leaders and advisors.
As co-founder and regional managing director of Zalora, Grimeland was responsible for the ZALORA Group markets in Southeast Asia (SEA). He later became chief operating officer of Global Fashion Group (GFG) and was responsible for strategic market initiatives, improving the business and rolling out GFG’s marketplace across 26 countries in SEA, the Americas, Europe, the Middle East and Oceania.
He is an alumni of Harvard University and McKinsey & Company in which he worked for six years. His last role was as a junior partner, working across North America, Europe and Asia in the global telco, media and high-tech industries. Prior to his studies, he served within the Royal Norwegian Navy Special Operations – Marinejegerkommandoen (Navy Seals). Very passionate about the start-up landscape, he is also an active angel/seed investor in Asia, Europe and the US.

Moderator

R. Todd Ruppert is founder of Ruppert International, a firm with diversified interests in various fields globally. He is a board member of INSEAD Business School, Wilshire Associates, Shetland Space Centre, The Fine Art Group, and the Rock & Roll Hall of Fame, among others. He is a venture partner at Greenspring Associates, a $12 billion venture capital firm. He is also an advisor to venture capital firms Antler, Fin VC, Sure Ventures, and Global Ventures. He is an advisor to private equity firms Access Holdings, Motive Partners and BroadLight Capital. He is also a serial early stage investor and advisor to numerous companies globally. Ruppert has over 40 years in the financial services industry. He retired from T. Rowe Price, the global asset management firm with over $1.5 trillion under management, where he was CEO and president of T. Rowe Price Global Investment Services, co-president, T. Rowe Price International, and a member of the operating steering committee of the T. Rowe Price Group.

Key takeaways

  • nvestors should tap venture capital since many companies are staying private for longer. Investors who have backed start-up innovation have played a significant role in helping find solutions in healthcare and technology through the pandemic.
  • The VC space show really high returns from the top decile funds but enduring volatility.
  • Regulatory changes mean more capital is flowing into the asset class.
  • Venture is now a meaningful part of the overall asset allocation at PRINCO.
  • Some investors are increasingly taking their allocation out of buyouts and putting more into venture. Venture will be the risk generation for portfolios going forward, leading out-performance.
  • Although San Francisco and China will continue to produce great companies for years to come, more cities across the US are developing hubs for fast growing companies like Boston, Miami and Seattle. Outside the US, panellists listed Stockholm, Berlin and Singapore as venture hubs alongside Vietnam, Japan and Korea.
  • The pandemic (and travel ban) has made geography less of an issue when backing founders.
  • Investors seeks to fund entrepreneurs and founders with drive to solve a problem and grit to press on when they hit barriers.
  • The SPAC trend holds positives and negatives for start-ups. On one hand, it provides these companies with a new source of capital. On the other it has resulted in some companies going public too soon.

Related reading

Opportunity for asset managers – October 2020

The Case for venture – October 2020

Editorial content

Venture capital: how it adds value in a diversified portfolio

Todd Ruppert in conversation with serial entrepreneur and technology investor, Joe Lonsdale.

Speakers

Joe is a serial entrepreneur and technology investor. While a computer science student at Stanford University he interned at PayPal. Upon graduation he left PayPal to work in a variety of roles with PayPal co-founder, Peter Thiel. In 2004 he co-founded Palantir Technologies, a data analytics software firm, with Peter Thiel and others. Palantir went public in September 2020; it was valued at over $40 billion on April 30, 2021. Joe left Palantir in 2009 to co-found Addepar, a wealth management and data analytics firm, which today administers over $2 trillion in assets. Other companies Joe founded include OpenGov, Esper, Anduin Transactions, Affinity, Epirus Systems, and Zanbato.

Joe has invested in numerous technology, biotechnology, healthcare, logistics, and other companies since leaving Palantir, most recently through his venture capital firm, 8VC, which he founded in 2015. All of his funds were oversubscribed. Notable portfolio companies include Elon Musk’s The Boring Company (where Joe is a member of the board), Joby Aviation, Wish, Flexport, Anduril, and Asana, among others. Joe debuted on the Forbes “Midas List” in 2016 (as the youngest member). In 2020 he was ranked 36th in Forbes’s list of “Top Tech Investors” and in 2021 was ranked 18th on Forbes’s list of “The World’s Top 100 Venture Capitalists.”

In 2018 Joe founded the Cicero Institute, a policy group that delivers entrepreneurial solutions to public problems. He and his wife are also active philanthropists. In 2020 Joe moved from California (where he was a two time scholastic state chess champion) to Austin, Texas. He is working on an experimental Beta City on the outskirts of Austin, which would rival Neom, the $500 billion new city that Saudi Arabia Crown Prince is building.

Moderator

R. Todd Ruppert is founder of Ruppert International, a firm with diversified interests in various fields globally. He is a board member of INSEAD Business School, Wilshire Associates, Shetland Space Centre, The Fine Art Group, and the Rock & Roll Hall of Fame, among others. He is a venture partner at Greenspring Associates, a $12 billion venture capital firm. He is also an advisor to venture capital firms Antler, Fin VC, Sure Ventures, and Global Ventures. He is an advisor to private equity firms Access Holdings, Motive Partners and BroadLight Capital. He is also a serial early stage investor and advisor to numerous companies globally. Ruppert has over 40 years in the financial services industry. He retired from T. Rowe Price, the global asset management firm with over $1.5 trillion under management, where he was CEO and president of T. Rowe Price Global Investment Services, co-president, T. Rowe Price International, and a member of the operating steering committee of the T. Rowe Price Group.

Key takeaways

  • VC investment involves working with the most talented individuals to build companies, which in turn hold the seeds of future companies.
  • It involves being across key trends and their wider ripple impact – like, for example, how smart phones triggered ride sharing.
  • Successful investment involves finding out what is newly possible that wasn’t five years ago.
  • At 8VC recent investment in the biotech sector includes establishing a first-of-its-kind manufacturing and technology company dedicated to broadening access to medicines and protecting the supply chain against disruption.
  • Lonsdale is also at the forefront of investing in financial services, increasingly transformed by data, the cloud and APIs.
  • Addepar is a leading private wealth management technology company.
  • Institutional investors should come together to create a prize to help finance and develop cutting edge carbon capture technology.

Last week’s Biden Summit marked an important moment in the global battle to combat climate change. With more than 70 percent of the world’s economy now committed to carbon neutrality, the Summit inspired a renewed sense of multilateralism. Finally, the US has reclaimed its seat at the table, having nearly doubled its previous pledge by committing to cut carbon emissions by up to 52 percent below 2005 levels by the end of 2030. It is now seeking to lead and inspire others to reset levels of ambition and action worldwide.

The good news is that in many ways the Summit exceeded our expectations; in addition to the return of US leadership, it delivered new commitments from Japan (46-50 percent by 2030), Canada (40-45 percent by 2030), South Korea (stop overseas coal finance), China (peak coal use by 2025) and Brazil (net-zero 2050 and end deforestation 2030). While questions remain on public finance for developing countries and on the level of ambition from China and Brazil, a sense of collaboration was evident and extended to include the private sector. Of course, there were some disappointments, with large fossil fuel producing and exporting countries like Australia, failing to even commit to a net-zero by 2050, let alone set a 2030 target. Yet overall, it reflected the communal approach required to tackle the colossal task ahead of us and the wholesale change to global capital markets required to achieve net-zero.

Shifting NDCs from 2050 to 2030

As President Biden aptly pointed out in opening the summit, the 2020s will be a decisive decade. Last year, 2050 commitments were big news, but this year 2030 is the new horizon and we must continue accelerate action. What determines our success in tackling climate change will be our actions now and over the next five to ten years, not a last-minute push before 2050. Near term accountability for climate targets must therefore be our utmost priority and governments, investors and corporates are already starting embrace this urgency.

Last week’s Summit has reset the clock on what can be achieved at COP26 this November. With the Biden administration racing out of the blocks, other countries have been shown a strong example of what is possible, and even what is expected. This provides us with an opportunity to push for more than just the usual targets and pledges at a COP this year. A number of countries have already made 2030 pledges, but now we need to see near-term commitments in the Nationally Determined Contributions (NDCs) of all nations.

Delivering emissions reduction plans

Nevertheless, commitments and targets alone will not prevent climate change.

Analysis by The Inevitable Policy Response 2021 Policy Forecasts reveals that all G20 countries will need to have a carbon price of between US $40 and $100 by 2030, a mere nine years from now, for us to even have a shot at keeping warming around two degrees. As President Macron aptly highlighted in his speech, ‘there will be no transition without it’.

Furthermore, last week a new report from the International Energy Agency revealed that global energy-related CO2 emissions are set for the second largest increase in history. They are on track to rise by 1.5 billion tonnes in 2021, an increase of nearly five percent. Despite hopes that the pandemic might have a lasting impact on emissions reduction, we have seen a strong rebound in demand for coal in electricity generation. This would essentially reverse the vast majority of the decline we saw in 2020, confirming the decrease was due to temporary changes of behaviour rather than real global structural reform and a true green recovery.

Therefore, it’s more than just commitments that we need—equally important now are signposted pathways to achieving these goals. As our recent country-level briefings highlight, governments must design and implement credible emissions reduction plans this decade to realise these NDC targets to which they have committed. They must respond to the calls of investors to put in place the necessary policy frameworks and mechanisms, creating incentives for the financial markets and encouraging and supporting investors to shift capital into climate solutions and away from fossil fuels.

Investors should act now to protect value

Investors, however, should not delay, waiting on governments to enact these policies and plans. They have a critical role to play in financing the transition and must continue to forge ahead.

The PRI and UNEPFI’s UN-convened Net-Zero Asset Owner Alliance, a group of 37 institutional investors representing US $5.7 trillion in assets under management, is as the UN Secretary General described at the Summit the ‘gold standard on credibility and ambition’. The members of the alliance have pledged to reach net-zero emissions by 2050 for their own operations as well as across their entire portfolios. However, even more crucially, they’ve committed to pursuing near-term targets, including an emissions reduction of between 16 and 29 percent (in line with IPCC analysis) as early as 2025.

Investors are also using their leverage with high-emissions companies though Climate Action 100+, the largest ever investor engagement with 575 investors representing US $54 trillion in assets under management and they’re achieving real results. Over half of Climate Action 100+ focus companies have set a net-zero by 2050 or sooner target or ambition. Their recently released Company Benchmark assesses the performance of focus companies, helping signatories evaluate ambition and action in tackling climate change.

The Glasgow Financial Alliance for Net-Zero (GFANZ) was also launched last week. It brings together existing net-zero initiatives including the UN-convened Net-Zero Asset Owner Alliance and Net-Zero Investment Manager Initiative with new programmes including the Net-Zero Banking Alliance to create one sector-wide strategic forum. This illustrates the level collaboration required to unlock the trillions needed to drive the transition forward. We hope in the coming months the Alliance will avoid any time-washing, aligning with the level of ambition from the Asset Owner Alliance in driving consistency and convergence across the finance industry.

The road to COP26

The harsh reality is that we’re not currently on track to reach the goals of the Paris Agreement and are hurtling toward three degrees of warming. Yet this realisation must not defeat us, but inspire us to move further, faster and increase collaboration across countries and sectors to shape the whole of economy response required. We must shift our gaze to near-term horizons, moving from ambitions of net-zero to action now. Further commitments to 2030 coupled with concrete policies to deliver emissions cuts and drive private finance are the critical next steps. In addition, demonstrable progress from those leading the way by November will be the most effective way of keeping pressure on laggards.

COP26 represents the world’s last major chance to get back on track with a 1.5c pathway. As we continue down the road to Glasgow, the G7 summit in June will be the next key moment, where further announcements are expected. In the meantime, investors cannot sit on their hands and wait for governments and businesses to act. Rather, they should act now to protect value and back the zero-carbon transition.

 

The UK defined contribution fund, NEST has added a number of new asset classes to its portfolio over the past year – including infrastructure with a focus on renewables – but the fund is still missing an allocation to private equity. CIO Mark Fawcett spoke to Amanda White about the fund’s challenge to the industry on private equity fees, its focus on climate-aware portfolios and innovative approaches to portfolio management.

From a standing start 10 years ago the UK defined contribution fund NEST has amassed £17 billion on behalf of 10 million members and has built a diversified portfolio with innovative implementation and fee structures.

This year it added infrastructure to its portfolio lineup with a focus on green energy, and built out its climate change policy to keep pace with the shift to a low carbon economy.

The missing link in the portfolio design is private equity and the fund’s CIO Mark Fawcett has set a task for the industry to come up with a fee structure for the DC fund that is more appropriate than 2 and 20.

“We struggle to pay any carried interest at all, on the terms normally set,” Fawcett says. “We have set a challenge to the industry to say we can’t pay 2 and 20. We are looking to partner with two to three private equity managers to run an evergreen portfolio for us. We are looking for low management costs and no carry, and in return they will get consistent cashflows coming forward and the opportunity to work with us. Defined benefit schemes are slowing closing around the world, the future of pension saving is DC and under UK regulation these traditional 2 and 20 structures don’t work.”

Fawcett says the issue of value is a key consideration for the fund that always puts its members’ interests first, with the average private equity fund too expensive in value terms.

“The average PE fund doesn’t represent good value. It’s fine if you’re in the top quartile maybe, but even then there is opacity around the fees that are really charged – director fees etc are not suitable for NEST and members,” he says. “We are looking for some progressive managers to step up. Everyone talks about impact investing and social purpose – working with us achieves both of those.”
The fund will be running a procurement in the coming months including a manager search. The primary focus is on the growth equity sector of private equity and is where the fund will focus its money. There is a possibility of also including some venture capital and leveraged buyouts.

It’s not the first time the fund has challenged managers to present innovative ideas. When it hired three private credit managers nearly three years ago only those managers able to adapt on fees and help shape innovative fund structures were in with a chance.

Early this month the fund added some more infrastructure managers as part of the plans to allocate 5 per cent of the portfolio to the asset class by the end of the decade.

It appointed CBRE Caledon, a diversified infrastructure fund manager and will also co-invest alongside the fund, and GLIL infrastructure the joint venture organisation between a number of major local authority pension plans. Nest will invest in the fund along with GLIL’s members, with its open-ended fund giving access to new opportunities in UK core infrastructure. GLIL’s investments to date include equity stakes in Anglian Water, Clyde Windfarm, Forth Ports, a rolling stock fleet of 65 intercity trains on the East Coast Mainline, and investments in biomass and anaerobic digestion energy generation.

In March NEST also appointed Octopus Renewables to boost investments in clean energy infrastructure. It has committed £250 million in the first year and has an ambition to get to £1 to £2 billion over 10 years.

“We don’t know our cashflows so we can’t make very long-term commitments. Infrastructure in the UK is closed ended and you have to make a commitment at the start and that doesn’t work for a DC schedule if we don’t know how big the inflows will be. We have done that in private credit as well. Once the manager has a shift in their perspective and see this is how it’s going to work and it’s not traditional, then it is all fine.”

Fawcett says all the managers they have recently appointed integrate ESG well, and are very focused on making sure the investments are sustainable.

NEST set its climate change policy in 2020, aligning its portfolio with the Paris Agreement targets.

“For us the key thing is to go at a proportionate pace, and we are working with all fund managers on how to transition and at what pace.”

The fund has already moved developed equities into climate aware portfolios with carbon tilts built in, with the volume of those tilts increased over time.

“We are aligned with 2 degrees and plan to align with 1.5 degrees. We are working out how to do that and keep the portfolio suitably diverse.”

In particular it is looking at how to increase certain sectors, technology in particular.

“No one has a clear handle on how to do it and measure 1.5 degrees, it is a work in progress with UBS our fund manager and the rest of the industry,” Fawcett says.

The next step is to transition the emerging markets equities portfolio and Northern Trust has been appointed to manage a climate-aware portfolio which also included doubling the fund’s exposure to emerging markets to 6 per cent.

The new strategy, which addresses a range of ESG risks, tracks a customised index produced in collaboration with the manager, and tilts investment in companies based on a score calculated on three key components: energy efficiency, alternative energy, and green building.

Now half of the fund’s portfolio has been transitioned into climate-aware strategies.

“Starting to invest heavily in renewables will be a big step change for us. Just divesting fossil fuels doesn’t make sense, we want to engage with big oil companies to encourage the laggards to keep pace.”

NEST hired Liz Fernando from USS last year as head of long-term investment strategy and strategic asset allocation sits under her remit.

“We wanted to make sure that SAA got enough focus particularly as the number of asset classes we use grows,” Fawcett says.

In November the fund increased its equities weighting to a slight overweight position at 60 per cent (neutral is 55 per cent) and reduced investment grade bonds.

“We went overweight once the vaccines were working and with the election of Biden, we thought it would mean more global growth,” he says.

The fund has also been reducing property since 2016 and that was reduced a bit more in 2020.

“We have been repositioning into things like logistics, but the jury is out on the office market. We don’t want to make any heroic bets at this point. Modern energy efficiency and green properties will do better than old properties, but it looks like demand for office space will be a lower growth trajectory than before.”

The fund has been building its private credit exposure, and during the pandemic Fawcett told its private credit managers “they needed to make sure they were earning the illiquidity premium”.

“Our managers were very selective about what they’ve done. We are pleased with the positions we had going into pandemic and did very well. We picked managers who were more at the core end of private credit, we didn’t want super distressed as highly risky and specialised doesn’t suit our members.”

The fund has also slightly increased high yield and emerging market debt.

 

 

Key Points

  • The impact of the pandemic on the oil sector was unprecedented, with oil demand collapsing in 2020 in the wake of global travel bans.
  • We witnessed a change in mindset, with energy-company management, especially in Europe, committing to energy-reduction targets and increasing spending on renewables and the energy transition.
  • We are seeing some companies looking to spin off separate energy-transition businesses, while others firmly believe that greatest value lies in continued integration.
  • We believe more than renewable power alone will be required to achieve net-zero status: capture solutions, natural sinks, efficiency solutions and renewable fuels such as hydrogen all have a part to play.

With the pandemic and social-distancing measures passing their one-year anniversary, it is sometimes hard even to remember what life was like before Covid-19. For over a year, many of us have converted our homes into personal offices, while our travel habits are a mere shadow of those in our pre-pandemic lives.

It is hard to imagine another scenario that could have blurred the lines between work and personal life – and sent shockwaves across both – as much as Covid-19 has done. With today marking Earth Day 2021, it seems an appropriate moment to reflect on the extreme changes wrought by the pandemic upon the modern global-energy system.

Unprecedented Impact

The impact on the oil sector has been unprecedented, with oil demand collapsing in the wake of pandemic-induced global travel bans. The International Energy Agency (IEA) estimated in its 2020 energy outlook report that global emissions decreased by 5% over the year, returning to levels last seen a decade ago.

The IEA chart below highlights the marked drop-off in demand for energy in 2020 versus the previous year, with energy investment falling sharply, and only renewable energy seeing an increase in demand year on year.

Key Estimated Energy Demand, CO2 Emissions and Investment Indicators, 2020 Relative to 2019

Source: IEA, World Energy Outlook 2020, October 2020

The Age of Peak Demand

Over my five years at Newton, I have had the opportunity to engage with energy companies, and have had the ear of management teams grappling with the realities and difficulties of the energy transition. The emergence of collective international agreement on limiting global emissions at the Paris Climate Agreement in 2015 (ratified in 2016), coincided with a severe oil-price downturn driven by oversupply. Taken together, the two factors led to a pivotal realization in the sector; we were entering the age of peak demand.

When I think back to my conversations with company management at the time about energy-transition strategies, it was certainly a long and progressive process. I recall a good deal of hesitation and conservatism, while in many cases, the reaction was stronger – I remember dismissal, denial and, at times, even outright hostility.

Change of Mindset

At best, management teams promised to move in tandem with society, while others resisted any challenge calling on them to reduce oil production, or to explore different segments of the energy chain, such as power. These conversations continued right up until the initial Covid-19 lockdowns of March 2020, when the industry went into crisis as demand plummeted. We witnessed a sudden change in mindset; the commitments we had sought from energy companies for years through active engagement were manifesting themselves in the space of just a few months. At times, it seemed like I was listening to entirely different management teams, and it was soon abundantly clear that meaningful change was finally afoot.

What was different this time was that it went beyond mere words and communications – we witnessed clear strategic shifts and revised emissions targets across the energy sector. These have been laid out more explicitly than ever before, and, more importantly, capital expenditure has been allocated to energy-transition solutions, which have progressively been increasing as a part of companies’ overall spending.

At the moment, much of this shift remains rather Eurocentric, with energy-sector peers starting to differentiate their strategies. Bigger oil names are looking to adopt broader integrated energy models, while others are focusing on key end markets and product solutions, including renewable-power generation.

Already, we are seeing some companies looking to spin off separate energy-transition businesses, while others firmly believe that greatest value lies in continued integration. We have even seen companies announce aggressive oil-production fade targets, while others have noted their production targets have peaked.

US to Catch Up?

In the US, oil companies are still grappling with this new reality, and the communication from these management teams reminds me of where things had been in Europe prior to the pandemic. But it is clear that with the recent change in administration in the US, and the country’s subsequent rejoining of the Paris Climate Agreement, oil companies can no longer ignore the need for a lower-carbon energy transition. The chart below illustrates how renewables are leading the charge towards lower emissions, and how dramatically the energy mix could change by 2050.

Source: BP Energy Outlook, 2020 edition

Heeding the Warning This Time

We see striking parallels between the global pandemic and climate change, in that many of the warning signs from experts went unheeded, before the full magnitude became apparent. In our view, most nations failed to sufficiently prepare themselves for a global pandemic, and we believe that their slow response has only reinforced the need to act today on climate change; there is no simple cure or vaccine for over-emitting. Our view is that 2020 and the Covid-19 pandemic will be marked down in history as a critical juncture and catalyst for meaningful climate action.

Already we can see policy shifting, and importantly, societal sentiment too. In Europe, emission- reduction targets are accelerating (from 40% to 55% by 2030), while globally, over 110 countries have pledged to reach ‘net zero’ by 2050. However, it is two recent additions to the net-zero pledge that command most excitement: both the US and China are adopting net-zero strategies, which, combined, account for over 40% of annual global emissions, as the chart below shows.

Source: CO2 Emissions, Our World in Data (ourworldindata.org), 2020

There are a number of solutions available in the energy toolkit, and, despite the chaos of 2020, it is encouraging that renewables continued to grow last year. But to achieve net-zero status, we need a holistic approach that goes beyond renewable power alone. We believe that approach needs to encompass capture solutions, natural sinks, efficiency solutions and renewable fuels such as hydrogen.

The Journey to Net Zero

One concern is that a fixation on finding perfect solutions to tackle climate change could impede the ultimate aim, which is to bring cumulative emissions to a peak and then to avoid catastrophic climate impacts. This process may initially need to lean on imperfect substitutions (phasing out coal for low-carbon gas before fully transitioning to renewables, for example), so we must not lose sight of the importance of the journey to get us to net zero, rather than simply focusing on the end destination itself.

Finally, it seems appropriate to end on the pertinence of today being Earth Day 2021. The theme this year is “restore our Earth”, which comes with a stated focus on “natural processes, emerging green technologies and innovative thinking that can restore the world’s ecosystems”. No doubt this presents our energy system with challenges, but at the same time, as investors, this is a very exciting opportunity.

As an analyst within a team which is constantly engaging with oil & gas company management, I have greater conviction than ever that oil companies will successfully be able to build out transition businesses that not only diversify their earnings, but also accelerate the pace of the transition to realize a sustainable and affordable energy system which can chime with the Earth Day focus points above. Despite all the challenges that 2020 threw at us, I am hopeful, and confident, that we are on a better path.

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Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.

In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. [General US and Canada disclosure] This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. ‘Newton’ and/or ‘Newton Investment Management’ brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved. In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.