Investing in the Future of Clean Energy

Audio Description

Clean energy and the drive to net zero is on everyone's lips at the moment, but are there serious investment opportunities here?


This transcript has been generated by an A.I. tool. Please excuse any typos.

Stacie Jacobsen: [00:00:00] Hi, I'm Stacie Jacobsen. Thanks so much for joining us today on The Pulse, where we bring you insights on the economy, global markets, and all the [00:00:15] complexities of wealth management. In this week's episode, we're talking about clean energy. Recently, the war in Ukraine underlined the fragility of relying on traditional energy supplies.

Meanwhile, recent breakthroughs in the science of nuclear fusion suggest that the provision of [00:00:30] large amounts of clean energy might be nearer than was thought. It remains to be seen whether the recently passed Inflation Reduction Act will do much to reduce inflation, but it is expected to boost clean energy.

So sustainability is clearly [00:00:45] a hot topic. Today I am joined by Beata Kirr, co-head of Investment and Wealth Strategies at Bernstein. Beata recently spoke to Jody Gunderson, a managing principal at AB CarVal, and leading investor in the clean energy space about the case for Clean Energy [00:01:00] investments, tax incentives, the role of Inflation Reduction Act, and why she is most excited about investment in this space.

We'll be back with Beata right after this short break. Stay with us.[

Clare Golla: I'm Claire Golla, host of Inspired Investing, a podcast for those engaged in philanthropy and the broader social sector. Check out our latest episode with Dan Pallotta, entrepreneur, innovator, and bestselling author of Uncharitable, which offers [00:01:30] an unconventional and perhaps controversial take on philanthropy.

Listen to inspired investing on your favorite podcast platform.

Stacie Jacobsen: Welcome back to The Pulse by Bernstein. I'm your host, [00:01:45] Stacie Jacobsen. Today I'm joined by Beata Kirr, co-head of Investment and Wealth Strategies, and host of our own Women and Wealth podcast. Beata, thanks so much for being here today with us.

Beata Kirr: Thanks for having me, Stacie.

Stacie Jacobsen: Now, before we jump into your interview [00:02:00] with Jody Gunderson of AB CarVal, why is it that the conversation on clean energy is important now?

Beata Kirr: Well, through our acquisition of now called AB CarVal, we work closely with our AB CarVal partners to understand where their [00:02:15] best opportunities were to bring forward to our high net worth clients. And there was no question in their mind that their clean energy offering was the one that they were the most excited about.

Why? Fundamentally, because the environment has changed for renewables. , [00:02:30] they are representing a larger share of power generation in the US and we think they'll grow to probably 50% in 2050. The cost of renewables has come down materially and then there was the [00:02:45] IRA legislation and no, this is not your personal IRA that has taxed for growth.

This was the Inflation Reduction Act, which actually was the largest legislation in terms of amount and time period with a commitment to renewables and [00:03:00] lots of credits and incentives for both individuals and corporations. To invest in this space. So the combination of these factors really led CarVal, a longtime investor across many areas of the capital structure to say that the [00:03:15] highest returns they believe are possible in the short term are coming from their clean energy strategy.

So it was very timely and we brought that strategy forward. Um, as a result, our first strategy alongside CarVal.

Stacie Jacobsen: Right, and it also brings in investors' own [00:03:30] personal values. So what do you think makes sustainability such an important value for some investors?

Beata Kirr: Well, I think it's hard to deny that we're in an era of climate change, and I think the investors that care most deeply about clean energy investing [00:03:45] have sometimes been affected personally by that climate change, whether they live on the coast or, in California, I know that's where you are.

You've seen wildfires really at your back door, quite literally. So I think sometimes it's personal, um, but oftentimes it's really [00:04:00] just a commitment to moving forward for themselves and the next generation. On what you can control, where can we make progress?

And in a world where there's so much that is out of our control, this is an area where you can decide how [00:04:15] you invest. And it's not to say that we're gonna have a carbon free future tomorrow. We're not. And in fact, today's traditional energy producers are. Playing a large role in actually moving us forward.

But I think investors are [00:04:30] considering where that next incremental dollar can go. And there's been a lot of development from the technology perspective in our ability to offset climate change and to support alternatives. And so again, back to this question of sustainability and [00:04:45] clean energy really go hand in.

Stacie Jacobsen: Beata. Let's talk about the potential return for ESG and sustainable investing. There's a lot of discussion these days about what the return perspectives may be. Um, what are your thoughts? ,

Beata Kirr: [00:05:00] you're right, Stacie, to ask the question. And you're also right to acknowledge that there's been a lot of quote unquote discussion.

There's definitely a lot of controversy, and that discussion is not only in the halls of investment managers and asset allocators and pension plans, but in the [00:05:15] halls of Congress. So let me just give you our perspective. When we first started building purpose-driven strategies, we put out the view that these should not require concessionary returns.

That there is a way to do this [00:05:30] where you're not excluding such a large part of the market and you can still make progress on your third R responsibility in addition to risk and return, and for quite some time, in fact, purpose-driven strategies. [00:05:45] Outperformed non-purpose driven strategies. And what happened last year was that the energy sector outperformed by almost 70% any other sector.

And so technology and healthcare, which are widely owned in [00:06:00] purpose-driven strategies, underperformed meaningfully. And the outcomes for any active manager in 22 were really determined by how much energy you owned versus how much technology in healthcare you owned. So does that now mean that purpose-driven strategies [00:06:15] should forever underperform, or is last year's 2022 outcome indicative of a new trend?

We don't think so, but we certainly wanna acknowledge that last year was a year where those strategies did underperform. We stand by our view [00:06:30] that over a market cycle, it is possible to build strategies in a way that does not have a concessionary return.

Stacie Jacobsen: Beata, you conducted this interview with Jodi on Women and Wealth.

Why was it that you wanted to have her as a guest.

Beata Kirr: Well in Women and Wealth, [00:06:45] our focus is elevating and engaging women as they go through their life journey with money. I talk a lot about how talking about money for women has historically been taboo, unfortunately, because it's so important we get comfortable with our money where we're at [00:07:00] and talk about it the same way that.guess what men do, right?

But along that journey on Women and Wealth, in addition to focusing on topics that are quite relevant to one's own financial journey, I've also been very focused on elevating women's voices, [00:07:15] and that's both internal to AB and Bernstein Private Wealth, as well as external. So when we acquired CarVal, I was so excited to meet Jody Gunderson.

One of the few managing principles at the organization, a multi-decade [00:07:30] investor in this opportunistic credit space. So rare on many levels, and she's done a terrific job also of fostering an inclusive culture and running D E I initiatives at CarVal. So I wanted to talk to her across many angles, really [00:07:45] highlighting her career and influence as a tenured investor, as well as the clean energy opportunity.

Stacie Jacobsen: Yeah, it's a such a great partnership with her. Let's get to your interview with Jody Gunderson of AB CarVal and hear more about investing in clean energy.

Beata Kirr: Thanks, Stacie for having me. It was [00:08:00] great to see you.

AB acquired Caral early last. Year and CarVal's now part of our private investment platform. So I'm really excited to [00:08:15] talk to Jodi today about her career and her insights really in three decades, investing in the credit sector and really as a leader in the clean energy space. So Jodi, thank you so much for making time for me today.

Jody Gunderson: Thank you so much for having me. I'm excited to, to [00:08:30] participate.

Beata Kirr: Do you wanna just make the case for the asset class why renewables are interesting today? Why clean energy is like suddenly kind of this huge opportunity.

Jody Gunderson: Oh yeah. Happy to. And you're right. I you wake up in the morning and that is what [00:08:45] I'm focused on.

It's my current passion is as you well know, and when you look out over the next 30 years as the world makes this transition to clean energy, it's going to be amazing to, to watch it. So many things need to [00:09:00] happen, and it's also incredibly capital intensive. You look at some of the, the stats and it's going to cost somewhere between.

I don't know, 90 trillion and 173 trillion [00:09:15] to make the transition, which just spells out the opportunity here from an investor's perspective. It's just these are growth markets. It has to happen for purposes of meeting the world's climate goals. So there's a [00:09:30] fantastic element of it from a an impact perspective.

And it's exciting to be involved in it. And then just from a simple economic and commercial point of view, renewables like solar and wind are [00:09:45] among the, the cheapest, if not the cheapest. And most parts of the world now source of electricity generation. And so, it stands on its own right from a, an economic perspective.

But then you've got all [00:10:00] the tailwinds here, as you said Beata about the policies, whether it's the Inflation reduction Act here in the us or similar legislation now that European countries are putting in place to respond to. The inflation re [00:10:15] reduction Act will help to further scale up, uh, renewables and kind of make the, the transition.

Away from, from fossil fuels. So as the market scale, they'll continue to become even more, uh, [00:10:30] cost competitive and cheaper over time, which is the point of all that.

Beata Kirr: And do you see a difference between wind and solar? Is there a preference or where there's been more progress made?

Jody Gunderson: From our perspective, because we like to, to focus on small and [00:10:45] mid-size, um, transactions, we've been more focused on solar just because.

They're smaller assets, definitionally or, or can be a wind transaction is just generally a, by its nature, a large transaction. Those tend to to be a little bit [00:11:00] lower yielding. So we're trying to find more attractive returns, and that's been in the the solar and battery storage process. We have done some wind transactions, but more financings, not as, as owner of the assets, but both are expected to [00:11:15] be significant drivers, uh, globally of the, the transition.

So they're both clearly very important as is battery storage increasingly important.

Beata Kirr: And how big of a deal is the inflation reduction Act?

Jody Gunderson: [00:11:30] It's a complete game changer. it, it really is. Over the, the last few years, there's always been the, are those tax credits going to get extended? If they get extended, are they going to get extended for a year or two years?

and the Inflation [00:11:45] Reduction Act, uh, came along last August with 369 billion to address climate change, and the financial support there for renewables is in the form of tax credits, and the tax [00:12:00] credits are going to last at least 10 years longer. We need to get the emissions from the power sector 75% lower than what they were in 2020.

So the tax credits will run for a long time. They're very [00:12:15] substantial and that gives developers and investors the certainty that they need to move forward with projects. So, like I said, solar and wind, they're cost competitive in most cases [00:12:30] without subsidies like this. But the tax credits will accelerate the, the transition because it makes it even more economically compell.

Beata Kirr: So in short, the the recent legislation, like you said, game changer, it [00:12:45] was the magnitude of it and also the certainty of it. I know there's been a lot of debate about our renewables of a fleeting trend. You know, could this all get rolled back under a different administration? But I think you and others have really commented, no, this is the real deal and this is long [00:13:00] term, and that's making it very possible.

And in fact, leading to. A giant uptick it seems in projects getting done and financings being available. Right. So I just wanna cement that because I think that's where we get a lot of questions. And it [00:13:15] does feel like it, it's real. There's real permanence to it, is what you're saying.

Jody Gunderson: There is. And there's some other interesting elements of it that are very helpful.

Some of these bonus tax credits that are out there that make it [00:13:30] a fair and just. Transition for all parts of society. For example, you can earn additional tax credits if you locate your project in a what's referred [00:13:45] to. In an energy community, meaning a community that has a lot of fossil fuel employment, the point here is let's make the transition fair for people that are in the fossil fuel sector so they can make [00:14:00] the transition to good jobs in the the renewables and clean energy space.

That's very powerful. From a, a social perspective, you can get bonus credits if you locate your project in a low income community, [00:14:15] that's great about it. And, uh, so it has appeal in, in so many ways. And in red states and blue states, I think it's quite positive for every constituency, let's say with, with all those, those bells and whistle.[00:14:30]

Beata Kirr: As we've gotten to know each other, you have talked about this idea that you love the quote unquote cat and mouse aspect of doing these deals in the private markets. And you already alluded to the mystery of the bid and waiting to see if you won and how competitive that is. So you've [00:14:45] obviously done a ton of negotiating in your career, so what are your tips for all of us?

What's your secret to the art of the deal.

Jody Gunderson: and I think the Be yourself notion is, is a useful guide here, as it is with, with most things in [00:15:00] life. And for me, the call it the art of the, the deal is largely around being patient and being comfortable, letting the negotiation play out. Let it e evolve, let it unfold, let it breathe where it needs to to breathe.[00:15:15]

And so that has been, Key for me in being effective. And also I think, um, being somewhat, uh, analytical, like grounding our positions and good logic and good analysis and good data versus [00:15:30] having a more, let's say, blustery style, which might be effective for, for somebody else. Everybody's different, that's for sure.

And maybe I'll, um, conclude, uh, here Beata by saying, uh, being trust. I think is the most important thing. [00:15:45] And I think maybe I come by it naturally what you tell me. Um, but, but that is, I think, key to getting anything done and being effective. You've just got to, to, to be trustworthy.

Beata Kirr: Can you just give us some color on your [00:16:00] career and some of the things that have really kept you going for this long in this specific space?

Jody Gunderson: Okay. Yeah. Happy to. Beata i I do love it and I've, I've always loved it actually, and it's just been an incredible [00:16:15] experience and I think for me, the, the thing that has kept it exciting all these years is, Our multi-strategy approach to investing and the, the global investment scope and, and mandate that we have.

It's [00:16:30] really an incredible sandbox for an investment professional. And we just see a lot of things. Um, just to, to give you a sense of the, the range of things. One day we might find ourselves investing in a restructuring of an India steel [00:16:45] company. The next day we might be trying to buy some high risk assets from a bank in Spain, and the next day we might be making a more call it plain vanilla investment in investment grade corporate bonds in the US in the midst of [00:17:00] a, a dislocation.

And so it's the ever changing element of the, the markets and where's the opportunity? And the broad scope of investment activity here at the, the firm. It just requires a global perspective, [00:17:15] and, and that's a dimension that I've always loved about it.

Stacie Jacobsen: Big thanks to Beata Kirr for coming on the show today, and thanks to everyone for tuning in.

You will hear from us again on April 11th. Don't forget to subscribe to The Pulse by Bernstein wherever you get your [00:17:30] podcast. To ensure you never miss a beat. I'm your host, Stacie Jacobsen, wishing you a great rest of the week.

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