Podcast Transcript - Jim McDermott- ESG Mini Series

11/11/2021

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

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To coincide with the UN Climate Change Conference – or COP26 for short – which is happening in Glasgow this month, we are launching a short spin-off series to The Value Perspective podcast, focusing solely on environmental, social and governance or ‘ESG’ considerations. This is a discussion we have become very familiar with as it has been a hot topic for the investment sector for the past couple of years but in this miniseries, which we will release on Thursdays, we are specifically interviewing experts who approach ESG and sustainability issues from a different angle or challenge some conventions within the field.

Our  next guest in this series is Jim McDermott, who rose to prominence in the first tech boom as the co-founder of stamps.com. After its sale, Jim pivoted into more eco-focused projects, including electricity and natural gas markets, solar energy and, most recently, as the founder of an investment firm that focuses on resource efficiency and leveraging waste streams as new resources. He is also the founder of a company which turns garbage into clean domestic biofuels. In this episode, Juan Torres Rodriguez and Andrew Lyddon talk to Jim about carbon-emission management, the tension between developed and emerging markets in the climate change debate, and hydrogen versus nuclear energy.

JTR: Jim, welcome to The Value Perspective podcast – it is a pleasure to have you here. Can you please give us a little bit of background about yourself – and especially, given you started in a very different investment sphere, how you ended up working in climate tech?

JM: Yes. As a very quick background, I started off my career working for First Boston, on energy and infrastructure, in 1989 and I did that for about five years. I also did a lot of credit derivatives, before it was all kind of scary voodoo and, in 1995, I decided to move back out to California from New York City. I am originally from the West Coast so I did not feel any particularly strong reason to remain in New York.

They were going to do a big deregulation that was going to be largely wind and solar and I had built and financed a lot of coal and natural gas power plants. And it was pretty clear to me at that time that we were on a big, long, slow march to decarbonise things. I figured the next wave would be wind and solar so I actually moved out to California, got out here and the deregulation went very wrong – ended up with Enron and a whole bunch of litigation and whatnot.

And the joke is in California, if you cannot make your original dreams happen, start a software company! So I started a software company because I was unemployed – I got print and postage, because I was sending out resumés – and I built that up into a company that is still here in Santa Monica, called stamps.com. It actually just went private – again – and has 93% market share.

By about 2000, I had made a fair amount of money that I did not anticipate ever making so I took that and I formed US Renewables Group, which was a private equity firm that I ran for 16 years with a focus on stationary power generation, clean fuels and energy infrastructure. So I came at the climate thing mainly from a long-held belief the history of what we do is to decarbonise slowly – starting with anthracite coal and moving all the way through solar, you could see it happening.

But I got to climate really because, in about 2009, I met David Keith, who was the founder of carbon engineering. And he wrote a pretty seminal paper that was really about the chemistry and the kinetics of removing carbon from the atmosphere. And it became very obvious to me at that point that, despite all of the great work that had been done in wind and solar, we were nowhere near the goal of having a net-zero economy – much less a negative emissions economy. When I started to do that math and look at that, really in 2009/10, I realised not only was it going to require one of the biggest lifts humanity could dream up, it also represented the single biggest economic opportunity I had ever seen.

Maybe I will close with this: I tell my kids all the time I never thought I would live long enough to see the internet twice because I believe the economic opportunity that carbon – and particularly removal of carbon –represents is on a scale larger than the internet. And I was fortunate enough to show up right as the internet got going and I feel like I got lucky and then here comes another wave that, is interesting.

JTR: That is a great segue into our first question, which is to please explain the difference between controlling carbon emissions and doing carbon management? I think I have heard you in the past mention the world is very much focused on the issue of emissions but, actually, the largest problem is the pollution that is already part of the environment and what to do about it – because, you have said, you could stop all emissions tomorrow and you would still have a very large problem.

JM: I think what really hit me – in the kind of 2012 timeframe – was that ... I started looking at the total dollar amount of capex [capital expenditure] that would be expended globally on wind and solar. And to frame it for you, we are spending about $300bn a year right now on wind and solar globally – if you think of it as the total addressable market for low carbon assets. And that is to get the 3ppm [parts per million of CO2] increase that we are having every year to zero.

I hate to admit this but I have been reading the IPCC stuff for 15 years – which makes me boring – but when you look at that, what you realise is that, pre-industrial revolution in the UK and coal, we were at about maybe 280 parts per million, give or take, and now we are at 420. So, you take three over that number and you realise that 3% of the problem is commanding $300bn a year. And just as with anybody who has ever spent any time think about capital allocation, you are like, wait a second, we are spending $300bn to address 3% of the problem.

And then, when you go into the physics and the chemistry of it, what you realise is that CO2 – because it is a very stable molecule – has an enormous inertia to it. So where that gets you mathematically is, if we went to zero emission tomorrow morning, we still are 97% too high. And where that takes you, is, wow, we have to get into the negative emissions business very, very soon – like, I mean, immediately.

And so what I have said in past is that the carbon management business ... here is another way to say it – I think the atmosphere is the largest superfund site humanity has ever created and we have to get busy cleaning it up. Because even if we go to zero-emission tomorrow morning, the superfund site that is above all of our heads exists, and will have profound climate effects for hundreds of years if we do not do something about it.

That is a really sobering thought, right? But I am a big believer in trying to meet reality where it is and then figure out how to engineer your way out of it. Do not kid yourself about how bad it is – take a very sober look at it and then say, all right, what are the financial engineering and policy tools that are available to us to deal with that problem? That is really that carbon management concept, which is to say, look, it is not an insurmountable problem but we are going to have to first move it from a critical problem down to a chronic problem, right?

My goal, really, is to be part of turning carbon into a chronic management problem, rather than fixing it. I do not think that is possible in my lifetime – but I think it is possible to get it to a place where we are on a trajectory that we can see what we have got to do and we are doing it. Not fix the problem wholesale – I do not think the stoichiometry of it makes it possible.

AL: Just coming to that stock-and-flow issue for the carbon in the atmosphere that you have mentioned, in terms of what has been accumulated already and what incrementally is going up, we would be interested in your thoughts on how that plays into the idea of developed market versus emerging market and the balance there between social issues and quality of life on the one hand, and environmental progress on the other? The developed world being the ones who have put that stock in place and the emerging markets perhaps being the ones that are under more pressure to reduce the flow, even though it is much smaller?

JM: It is a good question. And it is a question that obviously, if you have followed any of the COP discussions over the last 15 or 20 years, it is front-and-centre. You have a number of economies who ... the blunt truth is, growth equals CO2 emissions. So if you tell someone they must reduce CO2 emissions and you do not offer them any growth mechanism, the answer is going to be the same every time, which is – we are not going to do that because growth fixes so many other social problems. We cannot afford to not grow and, if you are telling me we have no method for growing without emitting CO2, then it is a non-starter question.

So I think, for me, the issue is how do we turn carbon management into a growth opportunity, such that everyone can benefit? That is a thorny problem but I think it is probably a problem that looks something like the developing OECD countries essentially saying, look, we will provide capital markets access for you to build projects in your country so you can get the employment and the M2 circulation and that sort of stuff to grow ... because we need you to participate. We need you to decarbonise but we are going to have to provide some form of, at least to my mind, economic support in the form of cheap financing or capital markets access or otherwise to make it happen.

It is an untenable ask, in my mind, to say, all right, we are already in the boat, let’s pull the ladder up and you guys figure out how to survive – that is a ridiculous stance on which to operate. So I think, really, the question is going to be – how do you derive a set of economic incentives that benefit emerging markets to participate? Whether that is, finding places where they can store large amounts of CO2 or whatever – but I do not really believe in a tax-and-spend way. One of my favourite expressions in America is, you subsidise what you want people to do and you tax them on what you do not want them to do. Do not think a taxation strategy, given the speed with which we have got to get this done, is a good answer. It is more of an incentive-based strategy, which will be – how do we incentivise emerging markets to participate in the asset growth and the build-out and the employment associated with all this? Simply telling them to stop it is a it is a fool’s errand.

JTR: You mentioned in the past that, when you measure carbon intensity coming from developed countries, actually that has been coming down – but the bigger problem is the very large populations in less developed countries, which are hoping to be connected at some point in the future. If one thinks about a country like China, to certain extent, it has already moved towards trying to become more clean but the problem is so large they will still need to use fossil-fuel resources going forward. So how long can OECD countries keep doing their thing, while the emerging market world comes out of poverty so they can benefit from a transition to a cleaner environment or take the measures to transition to a more clean environment?

JM: I think your question is, how do you manage the fact that the gross number of people in emerging Asia dwarves all of the US and the EU? Look, it is a huge lift because the per-capita GDP in most of emerging Asia is nowhere near what it is in Western Europe or the US. In my mind, again, this is where collaboration really has to play a role, right? It is figuring out some coordinated way to engage in tech transfer and capital transfers so you can accelerate the development of their low-carbon economies.

And I do not purport to have a perfect answer to that, Juan. I do not know the answer but I do know the traditional ways of, for example, developing intellectual property portfolios and then trying to charge massive prices to transfer that tech will not work – given the timeframe. I see a very interesting, analogous situation between what we have been going through with COVID-19 in terms of, OK, a certain number of people have the know-how to do this stuff – and they want to be paid for it because they invested in it – but we have this more pressing problem, which is, if we do not roll it out fast enough, then we get variants, and then all the money that got spent on delivering all these vaccines to everybody becomes obsolete, and that is not good either.

So I think there is going to be an ongoing campaign of – how quickly can we take the technical insights from these firms that are basically North American or European-based and move them into the rest of the world in a way that we get the carbon reduction we all desperately need, but the companies and the investors get returns on. That is a thorny problem but it is one we are going to have to tackle head-on.

And it may well be that, in the end ... I mean, there is talk in the US that, maybe, some of these technologies are going to end up on what is effectively a kind of war footing, The US has a thing called ‘march-in’ rights, where the government can basically march in and take something from you. They can expropriate it – even though they have to pay you – but just say, OK, look, you guys are building these things too slowly because we need we need thousands of them and you guys can only go at tens per year, because only so many people will pay for it. But we are going to pay for it and we are going to push it out and make it go faster.

I think ultimately, as things get worse, you are going to see government intervention to increase the build rate – I just do not see how that does not happen. I mean, you are seeing it at the state level – particularly on the West Coast, right? There is an entire municipal bond finance market that exists and there are people already moving and saying, look, the same way we do pollution control bonds and sewer bonds and water bonds in California, we are going to have to have carbon bonds because this is an environmental problem that threatens our economic outcome.

If you do not have water in California, you cannot have farmers ... well, if there is too much carbon, you cannot have other things. I would not be at all surprised if what you are going to start to see here is people essentially changing the government rules in terms of how you treat carbon so that it gains a very preferential cost of capital in various regions. Basically, they are going to turn to the US government markets or the tax- exempt markets in the US to speed things because, if you take 400 basis points off something for 20 years and put 80% of capital structure at 400 basis cheaper, then all of a sudden a whole universe of things opens up to you.

AL: You mentioned the pressing need for action to be taken so how do you think about it in terms of timeframes? As you said, each year is only adding a small amount of extra CO2 relative to what is already there and the impact of that stock of what is already there will gradually increase over time. So it is not like, in three years’ time, it is going to be a whole lot worse than it is now. How do you balance up that the need to be measured with the need for quick action?

JM: It is a really good question, Andrew, and I do not know that I have a perfect answer to it. But the way I tend to think about this is that, oftentimes ... maybe I will give you some examples that will be helpful. So, when I first saw this problem, if we need to be taking 10 gigatons out by mid-century, what does that mean in terms of a building? Is it even feasible? Can we do it?

Well, come to find out, if you look at the build-rate for natural gas powerplants in the US, starting in 1989 through to 2000, and you look at the coal build-rate in the US, between 1950 and about 1965, if you follow the trajectory on that – the slope of that curve – and you hold it constant through 2050, we could actually do it. So it is not like we have not had build-rate before.

So if you look at the natural gas build-rate and the coal build-rate in the US – and I did not look at the rest of the world because it is easier to get data on that sort of stuff here – it is really just a question of, can we get on that trajectory? And that really means that, between now and 2030, we have to get on that slope of the curve, which is a compounded growth rate of in the high-20s, low-30s. So it is not a joke – I mean, you have to move but it is achievable.

So, if I had to put a number on it, I think we are going to have to get on compounded annual growth rate of high 20s for direct capture by the end of the decade – and if we get on that, and stay on that, then I think we have a shot, right? That is not a joke. I looked at the growth rates on dark fibre and storage, from 1995 through to about 2005 and we definitely hit that globally. I mean, I invested in it personally at ‘level three’ – I was in Global Crossing and all these companies where people made a lot of money, right?

So, if you can people to think, look, this has been done in the past and here are concrete examples of it – and, if you do that and you pick companies carefully in those sectors, you will benefit economically. It is not like you have to do this for social good only. But, yes, it is probably high 20s, low 30s, which is aggressive – but I think we have to be aggressive if we are going to get it done.

But it is not like you have to be doubling it every year for 30 years. You guys are in finance and I was too ... the compounding nature of 20% or 25% per annum – the ‘Rule of 72’ says that means the industry is doubling every two and a half years. That goes on between now and 2050, there are going to be a lot of bad plans out there.

AL: Thank you – that is a really interesting answer. You mentioned just now about companies doing it for the benefit of mankind, rather than for economic goals, and we are getting asked a lot by clients about that tension at the moment in terms of what we should be doing as investors about listed oil companies. Should we be asking them to divest? Should we be working with them to push change? Do you have any views on the ways that investors can best take us in the right direction?

JM: Yes, I do. Juan and I talked about this and I have said this on other people’s podcasts – although I am not on them very often. The best example I will give you is ... first of all, I do not think it is a useful exercise in any way, shape, or form to revisit the past. It is unequivocally true and there is tons of data, that every oil company out there – whether it is BP or Exxon or Chevron – all knew and they all equivocated ... going over that ground is just like, OK, I got it. We all got it. There were bad actors – OK.

Question is, does continuing that line of questioning and sort of browbeating do us any good? The answer is, it does not. So I am very much in the camp of saying ... or the example my dad gave me – when the US invaded Iraq, we go in there, we take down the whole country and the first thing they do is they say nobody who was a Baathist can be engaged in any form of government.

Well, the problem with that was – and I am not saying Saddam Hussein was a good guy – but the Baathists were the party that ran everything. They knew how to run the powerplants, they knew how to run the civil service – everything – and, all of a sudden, we are like, nobody can be involved. The place deteriorates into chaos – very quickly. But we went in there and we straightened stuff out but, like, well, did we?

And I feel very much the same way about the oil companies – which is, look, if you look at where the resident knowledge for managing CO2 currently exists today, it is without question within the oil companies. Whether that is Saudi Aramco or BP or Chevron, these are the people who know how to take CO2 out of the atmosphere, how to manage it subsurface, how to characterise subsurface and they know how to manage large capital asset build-outs. So why would you, if those are absolutely critical elements – and they are changing their tunes, because they are being forced to – why would you spend your time berating? It does not make any sense, given the scale of the problem.

Now, I do not think that means you have to admit they were up to good things in the past – because they were not. And the other thing that is really important about this is there is a tendency, I think, in public markets to want to vilify other people and effectively abdicate any involvement you personally have. And the way I always try to summarise this is, you drove your Prius down here to complain about the oil companies. So this idea that, somehow, all of a sudden, these people are all bad and I and the people who are complaining about it had nothing to do with it ... the entire world is built on hydrocarbons – and it has built an amazing world, right?

We have this amazing network of things that are built from the electrons created from hydrocarbons so the idea you are going to vilify the people who have delivered those more than the next guy is, I think, a waste of time – and time is what we do not have much of. So it is much better to simply say, yes, it happened – kind of truth and reconciliation, if you want. We know they did it, it was bad thing to do and they are now being incentivised to do something else.

And this goes to the incentive thing – you want to give them as many incentives to not resist. Rather than spending your time vilifying them and trying to tax them out of existence, I think it is much better to say, hey, we are going to make a tax incentives to figure out how to take all those empty holes and put CO2 back into them and be the storage mechanism and the central players are the fix – rather than spending our time talking about, you know, how Exxon’s internal memos show very clearly it knew what was up and it lied about it. I just do not see the point, given the urgency.

AL: That is very much a discussion for public markets, which we get a lot. You mentioned Aramco in your answer there and, obviously, some of the other national operating companies – is there a way to change their behaviour?

JM: I think there is a way and you are seeing it. There are a couple independents in the US – for example, Talos Energy. I am actually an investor in a small company called Carbonvert that just won the first offshore subsea [contract] to do storage under the Gulf of Mexico and Talos was a joint venture. So Talos is moving into CO2 storage, subsurface – the stock is up 40%.

Or you look at like Denbury. Denbury does a lot of CO2EOR [enhanced oil recovery] stuff and is now talking about how it is going to reposition and try to get into the storage business. And I think that the answer is, public markets should be, like, what is your carbon strategy? But tell us how you are going to get into the carbon management business – and you had better tell us right now because, otherwise, we are going to continue to pull capital out of your stock and we will rotate somewhere else.

But the idea we are just going to rotate out of the oil and gas business forever – I mean, that is ridiculous. The other one is they also have so much free cashflow – cashflow that can be reinvested. One of the things I constantly say to any oil or gas CEO is, look, tell people you are going to reinvest all that free cash into low-carbon assets. Start doing that because then people at least can see the future – and they do not have to give you such a massive discount rate on the out years because, OK, it is 10 years out but ...

Because all you need to be competitive – I mean, if you are the CEO and your mindset is, I need to have the stock price higher – if you can demonstrate a low carbon strategy or a plan to get to a lower-carbon world, then maybe all the public market guys are going to stop discounting you at, say, 17%, and you get a 14% discount rate. And that equals, x number of market cap divided by my share price and my option prices are now higher.

You get that that virtuous cycle up, if you have a plan and start executing it. Again, to me, that is much more incentive-based. Analysts should be all over these guys about, OK, you said, you are going to be carbon neutral? Check – I like that. Now, what are you actually doing?

JTR: But when you say they should invest their free cashflow, do you mean they should diversify into renewables?

JM: This is an interesting question. I think one of the reasons a lot of the oil and gas people are going into renewables is because you can get cashflow now. That is not what is needed, right? What the public markets, I think, need to do is to give the oil and gas guys enough headroom to let them put money out into assets that will not be immediately cashflow positive – like direct air capture.

Where the capital markets can help is if someone articulates an actual plan – like, I have done a lot of work with Occidental and its work with 1PointFive and Carbon Engineering. Those assets they are trying to build in West Texas, where they are going to be direct air capture plants in West Texas – those are not going to be cashflow positive till 2025 or 2026. But they are going to do it – they are actually going to build a 500,000 tonne-per-year facility west of Odessa. I was running it before I sold it back in them?

Those companies should be rewarded but they have to have a plan – and it cannot just be like, hey, we care ... If I was an analyst, I would be, like, show me the engineering designs. I want somebody on the phone who is actually in the weeds. When is this thing going to be delivered? How big? How long is it going to take to fire up? Stuff like that which is the way, when you are running a private equity shop and management shows up, you are like, all right – great! Love the idea! Where is the execution?

JTR: The markets do not seem very aware of carbon sequestration as a potential solution. They seem obsessed with the whole renewables side, which I guess is important but does not seem the whole answer.

JM: This is the single biggest problem, I think, in public markets – the idea you are going to have to get into the wholesale business of CO2 removal is in their mind, it is not even ... if you sit down and think about it, Juan, basically, what renewables are really is just a carbon management tool. If you want to think about it as a base principle or a first principle, CO2 is the issue, right? A renewable is just producing an electron without CO2, but CO2 permeates everything – and I do not think the public markets really recognise that.

It is, like, renewables are ‘low carbon’ – well, yes, but really it is more ‘lower carbon’. But we still have this huge looming problem of all the carbon that is already up there – and that is direct air capture. And that has not quite got into the public imagination. And it is partially because there are no public stocks to buy, right? If you want to express that interest right now, you can only do it privately.

JTR: But it is interesting as well that – I am not an expert and Andrew might correct me – the oil and gas industry does not seem to publicise carbon sequestration as a possible solution.

JM: I think if you were to delve in there are people who ... again, I am dealing at the working level with a lot of these big oil companies and they totally get it at the working level – 100%. They are moving as fast as they can. So I would disagree with you in the sense that, at the working level, BP, Chevron, Occidental, Saudi Aramco – all these guys – are working very, very hard on CCUS [carbon capture, utilisation and storage], which is direct capture at point source, as well as DAC.

Their CEOs are a little reticent to maybe talk about it because they are not really certain when the cashflows are coming. Or it is maybe too far out for what the average hedge fund wants to see. But it is going on. And by the way – maybe to get on my soapbox a little bit – but, when I was a kid, I was super-terrified the Soviet Union and the United States were going to have this gigantic nuclear war and then, all of a sudden, one day in 1989, in the middle of college, the Wall came down and the whole thing came apart.

And what I realised after the fact was there were thousands of people around the world working on the problem – I just did not know who they were. I thought, oh, the world is filled with super-scary things that are going to happen but what I did not see – and I see this now in carbon management – is there were and are armies of people out there who are like, damn, we have got to get on this, right? And they are working day-to-day – the engineers, the accountants, the policy people.

But you do not really see that and, then, all of a sudden, there is a big change. It is sort of like that. It is almost like a black swan moment, where all of a sudden there is a big seismic shift – and then we are on that path, and it is moving super-fast and people go, where the hell did that come from? And you are like, well, it came from a decade of thousands of people all chipping away at the problem. And I think that is exactly where we are right now, which is that there is a whole army of people inside oil companies – in many cases – who are working really, really hard on getting these things going because the inertia to start an entire industry is high. But it is happening – I mean, I see it every day.

AL: Just interested in your thoughts – if you were running an oil company and directing that cashflow ... with renewables, wind and solar, on the one hand, and the burning of hydrocarbons alongside carbon capture for blue hydrogen and that sort of thing, on the other, is there a choice that needs to be made there or is there room for both? How do you see those two different groups?

JM: Personally, if I was running an oil company, I would have a two-prong strategy. I would be taking all the natural gas I could get my hands on, I would be turning it into hydrogen at the wellhead and I would be reinjecting the CO2 back subsurface so I got a true zero-emission hydrogen molecule and I would be figuring out how to how to either pressurise that or go there.

And the second prong is, I would be building direct air capture plants as fast as humanly possible and offering that as a service to the rest of the world because – and, Andrew, I firmly believe this, by the way – the way the direct air capture business is going to work is basically there is going to be a series of hubs around the globe, based on a combination of low-cost electricity, large bulk-storage and then the right policy and financing – and the US will be one of them for sure.

What will end up happening is, if you are in the UK and you are running your local car manufacturer or whatever, you want to be in the CO2 business, right? The UK government has said you must calculate your CO2 emissions so what is going to end up happening is you are going to disaggregate the physical from the financial, and you are just going to buy from a hub – you are going to be, like, I am going to take 10,000 tonnes of West Texas CO2, I am going to take 10,000 tonnes from the Empty Quarter in Saudi, and I am going to get a little bit of the stuff down there in Australia. I am going to buy it, they are going to do the physical removal away from me and I am going to disaggregate the physical from the financial, which is the way oil trades, natural gas trades, money trades – everything else trades.

That is how this is going to end up playing out, right? So if you are an oil company and you are sitting on top of a big old CO2 reserve, your move is to turn yourself into a waste management company as fast as you can – and continue cashflow because we are going to continue to need the energy embedded in a hydrocarbon for a long, long time. So, figure out how you can offer a zero-emission product.

The thing is, electricity is a horrible business in terms of returns, right? The oil companies cannot do this because then they are in the utility business – and the utility business does not get the same level of returns as the oil and gas business. You do not have to be a rocket scientist to figure that out – so I would be all about hydrogen that was zero-emission, by putting it subsurface, and I would be all about getting incremental emissions in different sectors – for example, we are going to continue to use jet fuel. You talk to the big airline companies and the engine manufacturers, they are not going to be making a hydrogen engine anytime soon. So as long as there is jet fuel being burned, you are going to need to be building an offset somewhere. So I think it is direct air capture and low-emission hydrogen.

JTR: It is interesting you mentioned the hydrogen technology because my understanding is the technological developments for it to go forward are not there yet – it is very promising but it might take many years for it to come through. What would be your take on that?

JM: The journey of 1000 miles starts with the first step – that is my answer. Like, yes, it might. I mean, I am 51 and, if we are all still working our asses off, when I am 81, we will probably be doing well. But the answer is, we have got to start now. And to me, I hear that a lot and the other answer I have is, the enemy of the good is the perfect. We do not have time for perfect so let’s get after it. We know it will work.

I will give you an example. People are very, very worried about the cost of hydrogen – making hydrogen and stripping it from a natural gas molecule or electrolysis is expensive now. And by the way, compressing it and moving it around is also quite expensive. But I have already seen stuff where people are using formic acid ... there are other energy carriers. You can convert it into formic acid. You can do all sorts of stuff and you can already see people coming in and looking at electrolysers and finding ways to optimise electrolysers. Wright’s Law is a thing, man – I mean, it is real, right? And the thing about Wright’s Law [essentially, ‘Progress increases with experience’] is that you do not know, when you start off, how it will play out – like, what the actual innovation will be.

But what you know is, if you look at it on statistical basis, once you start doubling an industry, price starts dropping – and it becomes asymptotic [approaching a curve] at 0.6. And I believe in statistics, so do I know how hydrogen will be cheap in a decade or two decades. No. But do I know that it will be? I think there is a very high probability of that

JTR: One thing you have not really mentioned is nuclear as part of the solution. Do you think there is a place for nuclear while many of these other technologies are developed?

I do. I think ‘SMR’ – small modular reactors – whether that is a NuScale Power or all the stuff Bill Gates and these guys are in, I think those are absolutely going to happen. I think they are real. I think a lot of money and time ... and again, I live in West LA so I know this is one that is super-deeply unpopular, right? But if you look at it statistically, how many people have died from nuclear accidents relative to, say, people dying from mercury poisoning from coal? The answer is definitively – it is way more dangerous to be near a coal plant.

Now, I live downwind of San Onofre, the big PG&E nuclear plant on the coast, and we are also in an earthquake zone ... like, I think a lot of thought has to be put into how we develop a lot of safety around these things. But, again, this is one of those hard choices – if you really want to have zero-emission, baseload energy and you do not want to cover the planet with wind turbines, nukes are a really, really good option.

The public imagination around nuclear has been largely shaped, in my opinion, by a couple of movies in the 1970s – and, when you get into the facts – I am not saying it is not dangerous, but we deal with dangerous things every day. And I think it has to be part of the mix, because we can build them quickly, there are zero emissions and they last a long time.

And again, I feel like, if we invested and gave incentives as an example on how to repurpose spend on nuclear fuel, I am sure we could have people who would come up with ways to de-escalate the dangerous by-products and things like that. So I think it is a viable option and I think it is going to come to pass. By the way, I do not think that will be at the expense of everything else – I think it will be nuclear and a lot of other things.

AL: Have the COVID-19 conditions over the past 18 months changed your views on anything, Jim? The pandemic has obviously accelerated some technological trends and perhaps held back others and shown us things we can and cannot do without – does it have any significance in the long run or is it just a blip?

JM: I do not know that it is changed my views on climate. I know it has changed a lot of my more rightward-leaning colleagues – and I will tell you exactly how it did it. I think this stretches across the political spectrum but I think there are a lot of people who would just rather this was not a problem – because it is, like, super-intractable and it is hard and it is beyond our lifespan. So there are all sorts of reasons that everybody was just like, hey man, can we just go on holiday, go to a beach and have a good time?

But I think what COVID has served ... if I can summarise – I have had a lot of friends be like, hey, man, this feels like a dress rehearsal for what happens when a scientifically-driven thing gets out of control ... and it feels like climate is getting out of control – and it feels like it might even be bigger than then COVID. And I am like, yes, I think that is a pretty good way to think about it, guys. I think a lot of people – particularly, like I said, my more rightward-leaning friends, who tend to be, you know, financially driven – are like, so what happens to my ...? You can see them being, like, so if I cannot get insurance for my multimillion dollar pad in South Florida, is it really worth $10m or $20m? And you are, like, you might want to think about that.

I think it is making people realise that, if you ignore what we will call a science-based system, you do it at your peril. Or maybe say it another way: science does not give a damn what you think – it is going to happen. And so I think there are a lot of people who have that in the back of their mind, like, yes, that is the problem with all those, you know, ‘greenies’ or whatever. And now, after they have been confined to their house for a year and a half on something that we actually do have the technology to deal with and we still did not do that great of a job, they are looking at climate and thinking, I am not even sure these guys have a technology fix for all this.

And it seems to touch everything. Boy – that is kind of scary. Maybe we have got to do something about that. And, again, I am trying to not browbeat them – I am just like, yep, you have arrived at the right conclusion. So let's get on with it. Rather than spending my time yelling at them for not seeing it my way, just be like, great. You are here. Glad you are here. Let's go.

AL: Just to move on, we would like to ask you about a study that has been produced for the Lancet and has been covered on the BBC website recently. It took the views of 10,000 16 to 25-year-olds on climate-related areas and there are some pretty depressing statistics in terms of the views of that age group on the prospects for the future, their inclination to have children and those sorts of things. So, if you were to sit down with somebody in that age group for five minutes, what would you say to them to maybe make them a little bit more optimistic about the future?

JM: It is a really good question. I did an undergraduate degree in philosophy and mathematics, and I spent a fair amount of time thinking about philosophical issues as an undergrad. Here is what I would say and it has maybe a philosophical bent. There is a very famous story about French mathematician and philosopher Blaise Pascal and what has been called ‘Pascal’s Wager’, after he was asked if you should believe in God.

Effectively what Pascal said was, well, I am going to choose to believe in God because, if I get to the end of my life and I die and I go up to the pearly gates and Saint Peter is there and I have been a good believer, they are going to let me in. And so that is a great outcome for me. Conversely, if I have lived my whole life, doing good works and good deeds in the hope of getting into heaven and I get to the end and it turns out it is just lights out and there is nothing else coming, then I have lived a life that made me feel good. And I had faith and friendship and involvement and all these things from doing all these good works, because I thought I was going to get in.

In either case, right, it is a life well-lived. And so what I would say to someone who is 16 to 18, is, look, climate is super scary and you may feel very helpless in the face of it. But the reality is, if you take Pascal’s Wager and you overlay it on climate, you arrive at some interesting things ... which is, if you choose to be part of trying to fix climate and you spend your whole life – and we all do it, collectively: you, the next generation – trying to fix the problem, and you all take a piece of it, and it works out, then you were part of one of the greatest seminal changes of humanity, which is we saved ourselves from a pretty dire situation.

Conversely, if it turns out it is all just going to end in environmental degradation and darkness, then at least you lived your life in a positive way, with the belief there was going to be a good outcome. In either situation, that will allow you to not live with what I would characterise as ‘climate depression’. And so you need to make the bet and engage in an act of faith that the problem can be solved.

And I am here to tell you – the technical piece already exists so it is a question of political will and money. And those are human creations and you can fix them. But you have to make the bet – the decision – that your action, in conjunction with other collective action, will get us there. The one thing I can tell you for certain is, if we all decide that we cannot, then it will not happen. So you have to engage in the act of faith. And I do not mean it in a religious way – I just think you have to believe that that which is not yet here can be if we will it to be so.

JTR: As a closing question – and in a similar vein to what Andrew just asked and you just answered – if you had the same five minutes, not with young people, but with the investment community at large, what would your pitch be and what would you be telling them?

JM: Take 1% of your portfolio on an annualised basis, invest it in direct air capture technologies across the board – just anything that comes across that is either technology or asset finance or otherwise – and then put it in a bucket that has a 20-year time horizon.

JTR: That is very interesting. Jim, thank you very much.

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team and manage Emerging Market Value. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet, I was a member of the Customs Solution Group at HOLT Credit Suisse.  

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010, I joined Kevin Murphy and Nick Kirrage on the UK value team and manage the European Value, European Yield and Global Recovery funds.

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