Injecting Hope into the Climate Change Discussion

00:11 - 00:57

Hello and welcome to On Purpose, I'm your host, Travis Allen, senior investment strategist and national director of purpose driven strategies at Bernstein. Many of today's climate driven portfolios focus on the winners and losers from increased greenhouse gas emissions, but the scale and pace of climate change is unlikely to be solved without innovative technological advances, offering an unusual window of opportunity for patient investors. Today on this episode, I'm delighted to share a conversation between my colleagues, Beata Kirr, Bernstein Co-head of investments, and AB portfolio manager Dureka Carrasquillo. They discuss a newly launched, tech focused climate strategy that brings hope to the problem of climate change.

01:02 - 01:05

So, Dureka, thank you so much for joining us from London today.

01:05 - 01:07

Thank you for having me.

01:07 - 01:26

Well, I'm excited to have this conversation to talk about your career, your unique philosophy when it comes to investing, and really introduce you to our audience. So thanks again. Let's get started. Dureka, can you tell us about your style, your area of focus? What is it that you concentrate on and has really been your specialty?

01:27 - 02:19

Sure. So I've been doing one thing my whole career, which is fundamental theme creation, which is bottoms up, not top down. It's finding a structural idea and writing the equivalent of academic research papers about it, investing in a very, very deep way with a clear investment process. And I've been combining that with fundamental stock selection. I run very concentrated, high conviction portfolios that are long-short. I define, concentrated by less than 50 names. But the reality is I've really been about 30 names for most of my career at any one point in time. And I seek alpha on both sides of the book, so I don't short to hedge, so to speak, even though it's called a hedge fund. I do seek to get alpha generation from both sides of the book, so that is what I do. In my final two years at CPPIB,

02:20 - 03:05

I was asked to take our approach and see what could I make of climate change. And for me, the journey started off. I always, I always love "impact"-anything. I'm fascinated by being able to positively impact my footprint as part of the global human community. But looking at climate change was really a gift because it's something that I cared about massively but hadn't expressed previously. And so I got the time and a global team of 15 people across asset classes and age groups, and we got to unpack climate change, the science of it, the fact from the fiction, the what was the most relevant, where should we focus.

03:05 - 03:44

focus. going through that journey in many ways made me realize that the size and scale of climate change as a theme was bigger than anything, any other theme I had ever worked on in my 22-year career. And so it made me be super excited about investing again on something like this. But also I wanted to be so focused on climate change. And that was really when I hit the reset button to think about, you know, in a post-COVID world, hopefully we can say that soon, what kind of difference could we make by focusing on this. And that's what I'm going to do at AB.

03:45 - 04:42

Thank you for that. That's very helpful. And couldn't be more timely, this week we're recording at the beginning of COP26, so clearly climate change headlines are going to be front and center this week, and I'm sure by the time we release, they will remain front and center. So we'll come back to that and the technology-enabled way in which you think about exploiting that opportunity. But I want to go backwards a little bit. You spent decades in the hedge fund world running successful long-short equity strategies, starting as an analyst, rising up to be a PM, at some very well-known organizations. And this is a kind of rarefied, secretive world that we hear about, learn about on shows like Billions, right? I'd say our listeners aren't necessarily in the world day to day. So there's a lot of questions one can ask about that world. But I want to focus in on what was it like being an only in such a male dominated field?

04:45 - 05:25

It's funny, I am...I think I'm a little bit unique in that, on the look back, of course, hindsight is 20/20, but on the look back, I would say I had generally very positive experiences and I think the reason is because, in many ways, even though the cultures can be aggressive and very male dominated, they can also be sort of, a bit democratic capitalism. You do get treated for what you do, not for what you look like, or what your skin color is, or your personality.

05:25 - 05:45

In many senses, it is quite egalitarian in some ways, in the sense that you, you, you get treated on the basis of how you perform numerically, which is full blind. It's gender blind. It's It's race blind. truly phenomenal in that sense.

05:45 - 06:32

However, there's also the cultural aspects. So I remember, the further I got in my career and moved on to different organizations apart from hedge funds...I really started in the hedge fund universe. I was shocked at how nice people spoke to each other or not using profanity in a conversation which wasn't necessarily at all my choice to use, but certainly environmentally what I was used to. So I'd like to think, I started life at sort of the very aggressive end of the spectrum, but... which allowed me to mature and pushed me in lots of ways. And I sort of ended it with a lot of learnings about how culturally to behave differently. But apart from that, I would say it was a pretty positive experience.

06:33 - 06:35

That's great to hear.

06:35 - 07:21

In a recent podcast episode about my own career, I talked about how I started on a trading floor, and I guess we share that in common. I was, of course, not on the buy side, on the sell side, but I would agree with you that there is a lot of profanity. And of course, it was in the 90s for me when I got started. The culture in the era was different than I would imagine it is today, but I totally understand where you're coming from in terms of the numbers speaking for themselves and as a portfolio manager in your perspective and running the assets directly, it is all about the bottom line. So it's great to hear that it was egalitarian and gender blind and color blind, if you will, but what a huge shift culturally to come from this hedge fund environment.

07:21 - 07:44

And then the next step in your career, which was the last step before you came to AB, was to be investing assets at the Canadian Pension Plan or CPPIB for short. So can you tell us about your move from the hedge fund world to a government pension plan and what that was like, before we get to your AB world?

07:45 - 08:44

Yeah. So CPP Investments, which is what they've rebranded themselves now, is actually the largest of the Canadian sovereign wealth funds. So when I first arrived, it was a cultural shock, to say the least, on both sides. I used to joke and say, you know, they tried to beat the hedge funder out of me in every sense of the word. But I actually, you know, I ended up having life coaches, something I didn't really appreciate before. I mean, my colleagues in my former life would have, would have laughed at me or chuckled at me. They actually attributed value to more than just my running the fund. It was in my ability to manage people and to engage culturally and be a representative for other parts of the organization, apart from running the fund. And so I would say there were pros and cons to that entire journey. But on the basis of, one can always

08:44 - 09:18

I'd like to say that I improved. I'd like to think that I got nicer. I'd like to think that I got slightly less aggressive, but women get called all sorts of names, and I would definitely like to think that I've grown and I've become kinder and wiser as a consequence of that without losing any of the investment edge. My average annual returns increased when I was at CPPIB, and I'd like to think that's because of the culture and the research and just a more patient approach to investing.

09:19 - 09:32

And CPPIB really gave you an opportunity to invest at a larger scale, I think, than the assets that you have been allocated within the various hedge fund platforms that you've been a part of. Is that right? A very substantial global investor.

09:32 - 10:04

That's correct. In fact, that was almost the entire reason for the move to CPPIB was to deploy our strategy at much larger scale. Prior to CPPIB, I hadn't hit that billion mark yet in terms of running a billion. And at CPPIB, I reached just over eight billion in assets, and that was a true achievement with predominantly female team for the entire time, which is probably the one achievement that was a surprise and that I was most proud of.

10:04 - 10:09

You had a 15 person team and it was majority female.

10:09 - 10:27

I keep coming back to how we opened with how rare that is in this industry, whether you're in a sovereign wealth fund or whether you're investing in an insurance company or a hedge fund. It is rare. So I want to understand how you did it, how you all came together and how you've been able to break the mold, so to speak.

10:28 - 11:04

You know, it is funny because I get asked this question quite a bit, so both my teams at CPPIB, the equity long-short team was majority female for the entire time that I ran that team, which is just about eight years. And the climate change team was very diversified with women having a high representative, if not majority. And it wasn't by design is what I'll say. It was by both me choosing the people who I thought were best suited by skillset, but also there's a degree of self-selection as well.

11:04 - 11:32

I'd like to think that this is why a lot of women on my team stayed with me, including in some cases asking to join me here at AB, because I think when you sort of create an environment that is enabling, a lot of managers think that it's my job, I'm the head of the team, you have to work to me, actually, there's a common language there that you can flip on its head and say, I think you get the best out of people when you create the best enabling environment for them.

11:32 - 12:11

So, for example, two of my female team members had children. The reality is, I think, where the investment management industry and hedge funds, more so than others, lose women is by not creating a more flexible work environment for that evolutionary part of their career. We're really good at attracting strong female talent. We're pretty poor at retaining them. And so I think my own personal experiences that create an environment where your women can have the flexibility that they need to be as good parents as they are fund managers. It's great to hear you say that.

12:11 - 12:36

I know on one of our early episodes we talked about it. We had talked about the importance of paid leave and frankly, men taking leave as well. And so not only is it an enabling environment for women, but obviously during the COVID era, we've seen more and more how people have prioritized life around work and sharing that life isn't always work. So we're lucky to have you at AB. It's been great to get to know you all through video and phone so far.

12:36 - 12:47

Dureka, but tell us about what attracted you here and what got you excited about ultimately leaving the Canadian pension plan and how you're thinking about the impact you're making at AB?

12:48 - 13:42

Yeah. Well, I think what got me really excited is that, as much as I've, it sort of two things I would say. So one is that when I hit the reset button and allowed myself to entertain other opportunities beyond CPPIB, there were a couple of incomings, AB being one of them. And what I found so interesting about my own personal journey is that I got into this industry because I love grit and I love intellectual curiosity. And I think that I realize that I am more of a player coach than I am a coach player. And as wonderful as it was to manage a really big team and care about their people, at most sovereign wealth funds, the MD level, one is asked to be more of a manager of people or to do both those jobs very well.

13:42 - 14:09

And the reality is that at this stage in my career, there's a passion and intensity and a focus that realizes, actually what I love is being a fund manager, and I love that first and foremost, and that's OK. So I've learned to accept that about myself and everyone who works with me honestly knows that that is what I love. That is my priority. And so I hopefully am also getting people who have that as much of a passion as I do.

14:09 - 15:00

So culturally, that was one shift. And the other thing that is sort of like why AB, that I thought was really different is that AB is really unique as a large organization. It has this incredible entrepreneurial culture. I mean, the reality is that one of the values here is resilience. I mean, that's a really strong word, and it's true to form. There's respect for the individual autonomy of its sort of business owners. Everyone here talks about their individual business units or indeed their funds as business, and that is truly unique for an organization of this size. Every other organization of AB size that I've ever had interaction with focuses on a lot of other verbs in there, but not with that sense of entrepreneurialism. And that's what suits me at this particular moment in time, in my life.

15:02 - 15:06

That's great to hear, a very interesting spin on our culture. So thank you for that.

15:06 - 15:40

So let's talk about your investing style and what you're excited about today. You know, I think it's best to describe you as a climate investor, as a technology investor, as a concentrated investor. All of these themes really come out in your skillset and how you're implementing portfolio allocation today. So let's just talk big picture, OK, how does one invest in climate change? I mean, what do you wish investors really better understood about this emerging set of portfolios that are focused on climate change?

15:41 - 16:22

Sure. So there are a couple of ways I can answer that, but I'll just tell you maybe my personal journey. So when I started looking at climate change, it took a year and a half with the team just to research climate change. I can't explain to you the level of depression I would feel as we unpacked the science and we met with tons of scientists, including NASA and Rocky Mountain Institute. And for the first six months, the level of depression was very high and I consider myself a problem solver. But this problem was a conundrum. And I tell you, the optimism that came out of it was my background.

16:22 - 16:44

I started back in 1998 as a TMT analyst. Technology was at the core of everything that I researched and did, and I like tech because it's a disruptor and it can be applied to any single industry. If I asked you what industry Amazon was in, you would struggle because it's disrupted about 12 of them and the story's still not over.

16:44 - 17:01

By the way, I'm going to jump in for just a moment. TMT. For those of us that don't work in the industry, I just want to define it is technology, media and telecom. So I just wanted to clarify our acronym usage here. But back to what you were saying about disruption and you started in tech. Sorry to jump in.

17:01 - 17:39

So the premise of the approach that we took to climate change was basically to say this problem is so big, we can't solve it without technology. It's going to take the type of exponential leaps that you get from the creation of new technologies to really solve for climate change. And that is the investment philosophy of the fund. We're going to invest in companies with technological solutions to climate change challenges for every single investment that we do, and we're going to short those companies least likely to navigate those challenges successfully.

17:40 - 18:28

So one of the things that I observe as you've come into AB and we've gotten to know your strategy better is, I think, going in before meeting you individually, I and maybe many others around me would have assumed that a climate change fund is effectively long, wind and solar, and short, integrated energy companies. And you've really educated us that it's more than that. It's not that that's not a position one could take, but your bias is certainly around really large addressable markets where technology has to be there in order for change to happen. And how important it is across so many different sectors. It's not like you're really investing in the technology sector. Name some sectors in which you

18:28 - 19:04

you We could invest in cement decarbonization or steel decarbonization or electric aviation. There are a number of things that the whole world has to change. This is a global problem. I like the fact that a lot of people think if you invest in climate change, you are ESG, and that means you're investing in energy. And the reality is, I think we're ESG Plus because it's an integrated part of how we do our research. It doesn't define our research, but we are also technologists. We are looking for technological change. This goes far beyond energy.

19:04 - 19:29

But I'm really happy. I like market dislocation. That typically gives us an advantage because we've done the work from three years ago. So we were talking about methane from three years ago, and it's the first time you've had global leaders at the stage of COP26 today, Joe Biden, amongst others, talking about methane. We've known about methane for 30 years, and we're only talking about it now.

19:29 - 19:38

now. why is that? Why do you think it got kind of buried in the shuffle behind CO2? Is it just that it was easier to talk about carbon?

19:38 - 20:28

? I think it is easier to talk about carbon. It's funny because carbon is the gas, of the five, that heats up the most. If you take all of them, put them in a test tube and put them in the sun, carbon will heat the fastest, but it's not the most potent. Over different time periods, methane has much greater potency for negative impacts in the atmosphere. The reality is that most of the market has been focused on returns of existing cash flows, and at the end of the day, if you have a market as we do that is globally capitalistic, your incentive as management teams is to focus on nursing your cash. Nursing the cash flows and making sure you find a sustained return on investment capital. But without the disruption from technologies, you don't get that wake-up call. And that's what I think is really happening now.

20:28 - 20:58

Now, more investment in venture capital and private equity than at any other time in climate technologies. So that's what's creating this shift now, and that disruption is going to continue to be a wake-up call combined with ESG, combined with regulation, combined with youth movements, combined with declining green tech costs. All of these things are creating a shift in capital allocation to the idea of climate change technology.

20:59 - 21:13

OK, well, that's optimistic and encouraging. I want to move off the depression of the first six months of your research, and I want to leave our listeners with some ideas around OK, so we're getting it. Technology is key. It's not just energy.

21:14 - 21:30

Dureka, can you give us one or two a little bit more specific examples of what do you mean by this technological disruption? What are these technologies that you're unearthing that you think will ultimately drive real change on our current warming trajectory?

21:31 - 22:28

Yeah. So I can probably give you two of note. So one is that much like the way we just in one year rapidly deployed an mRNA virus that is nothing but a synthetic RNA protein, and that's exactly what's going to happen to the food industry. And we have our own view of how that will be deployed and when I say will with such certainty, there are synthetic and alternative proteins today that are regulatory approved in major markets like the United States and some markets in Asia and Europe that are available already on products that are being consumed by human beings. So we're already there. It's at a very nascent stage, but we are already there. At some point, will we have the creation of a fully lab-grown filet mignon? We certainly believe so. That's so interesting.

22:28 - 22:46

Lab grown filet mignon. So I have to admit this is the first time I'm hearing about this and obviously you're ahead of the game, Dureka. I'm sitting here looking out my window in Chicago, thinking about all those steak houses nearby and thinking about how consumers will adapt to that.

22:46 - 23:34

It's going to be a sort of a scaled approach to how these types of proteins eventually find themselves in human consumption. They will start with the easiest cuts first. So we'll see things like fish is easier to make than a fully formed filet mignon. But also, if you can imagine a world where pet food and what we're actually giving our pets will be easier to make and probably easier for a human population to mentally digest before a fully formed filet mignon. But I can definitely see a world, and there are a number of companies working on this. It's just a question of the costs where you will get a more ethically grown piece of meat with lower GHG emissions, no antibiotics and no other additives.

23:34 - 23:56

Another thing that I would think about is that again, to your point, earlier, most of the world is focused on the emissions from the automotive sector, which are today, it's correct, the largest portion of transport emissions. But on our team, we focused on the fastest-growing emissions. So what are going to be the fastest-growing emissions over the next five years? And that's aviation and maritime.

23:56 - 24:50

So take, for example, aviation, and a lot of what we do is investing in waves of availability. So at the moment, we're investing in light-weighting technologies to existing aircraft, and we're focused on things like new technologies, new materials technologies that have a more kind carbon footprint to alleviate transport emissions from aviation. And we've met with several of these companies, but we firmly believe that we are moving to some form of hydrogen aviation or electric aviation. And in both instances, our team is all over the research, meeting with the companies engaging from today in order to best position ourselves for when the right investment comes. So it's a strategy whereby we look for the most interesting technology that is truly protected by IP and yet scalable, so it disrupts multiple industries.

24:51 - 25:16

But also the other promise of our fund is, we believe this requires a public-private partnership. So in that sense, they're also picks-and-shovel plays in the existing public equity markets that will be fantastic enablers of new technology, and in some cases they are necessary for new technology in order to bring them to high volume scale. So this is about being hopeful.

25:17 - 25:43

It's great. I'm just so optimistic listening to you, thinking about the early stage of these technologies, and I'm sure our listeners and ultimately investors will recognize that innovation is here, right. And that your concept of investing in the public markets and government backing the whole array of new investors really looking at what is the disruptive technology and innovation for the future that's going to be needed.

25:43 - 26:40

The other thing that I'll say about is that, I sort of say it's my personal story. I started in 1998 and I really started as a technologist myself, as a tech investor. Technology, the last big thing that we had was sort of the internet and then the evolution of semiconductor and Moore's law. Those have been the two big things that every tech company has had under as a tailwind. But it's a tailwind that after 20 years with all of the improvements that we've made, it's getting a little bit... It's not going to say it's losing steam, but it's matured. Imagine an entire industry of people in Silicon Valley, in Beijing, in Taiwan, in Mumbai who are growing up as technologists that now have the single biggest problem that we've ever faced to our existence. And they can apply technology. That's different. You now have innovators who love to problem-solve that are super excited about a brand new challenge.

26:41 - 26:46

It's great. It's great. So thank you for sharing your passion. We can see it and feel it through the audio.

26:46 - 27:37

Let me just close out for our conversation with a question that I've asked really all of our guests. We've recently focused on a new message from Bernstein Private Wealth: Investing with Intention. Investing with intention to us means really being intentional about the choices that we make. I'd actually say years ago when we started the podcast, we had a full episode around intentionality, around values, around making sure your decisions matter. And you talked about look at the spending on your credit card at the end of the year and make sure that was intentional. Look at where you give your time. Make sure that's intentional. Look at your philanthropic giving and make sure that's intentional. So that's really what we mean about investing with intention. And I'd love to ask you that question. I think I know the answer, but I'm going to wait and see. What does that mean to you? How do you interpret that in your life?

27:38 - 28:07

Yeah, it's funny because I have to give credit. I have a female mentor who I have turned to from time to time when I'm sort of about to embark on something new. And in this case, it was a very dear friend of mine from Israel, and she is the one who pointed out an interesting thing to me. She said, you know, for most of your life, you've been in an industry that prides being a devil's advocate. And she said, and now you have this incredible opportunity to be an angel's advocate.

28:08 - 28:44

And it's a bit of a quip way of saying, it's nice to be on the right side of this problem, and it's nice to bring hope to the problem of climate change because you know, again, my journey started off being massively depressed and then ended up being massively hopeful about what we can do if we apply some of the greatest minds to this problem. We can leapfrog this problem. And yeah, investing for intention with me at this stage means being an angel's advocate.

28:45 - 29:13

Awesome. Thank you so much, Dureka, for your passion and enthusiasm at tackling one of the world's biggest problems, if not the world's biggest problem today. Thank you for spending time with us and our listeners really sharing your trailblazing point of view from the hedge fund industry to the Canadian pension plan industry to us at AB, where we're lucky to have you, I'm excited to partner with you going forward. So any final thoughts for our listeners?

29:13 - 29:20

No, let's just come together and be hopeful. That is one thing women usually do bring to the equation. Hope.

29:21 - 29:23

That's a great way to leave it. So thanks again, Dureka.

29:23 - 29:25

Thank you, Beata, it's been a pleasure.

29:27 - 29:29

This has been On Purpose.

29:29 - 29:45

Thanks for joining us. And remember, we all have values we hold dear. Now you can ensure your investments reflect them. If you've enjoyed the podcast, please rate us on Apple Podcasts, Spotify, or your podcast service of choice. And be sure to subscribe. Thanks again.