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Investors should lean into climate solutions to find opportunities over the next decade: expert

Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss the importance of sustainable investing with Katie Koch of Goldman Sachs.

Video Transcript

BRIAN SOZZI: Socially conscious investors are looking for ways to put their money to work. But they want to evaluate companies on how far advanced they are with sustainability, also known as ESG investing. Joining us now is Katie Koch, Goldman Sachs co-head of fundamental equity.

Katie, always good to see you. So why now? Why is this the right moment to focus on ESG?

KATIE KOCH: Yeah, so taking a step back, what a lot of our clients are struggling with is that in a traditional 60 to 40-- 60-40 balanced portfolio, 60 equity, 40 bonds, which a lot of your viewers probably have as well, it's actually really tough to get the returns they want over the next decade. Predictions are somewhere between 3% to 4%. So really big picture, we think clients need to lean in to a bunch of secular growth themes-- millennial consumer, future of tech, future health care. But climate solutions is definitely something we think's going to be a great place to find opportunities over the next decade.

So maybe I'll just tell you a little bit about how we're positioned there. We are underweight in our portfolios traditional hydrocarbons. We have been for a while. Just to give people the story there, you've got oversupply. We're still oversupplying at 78 million barrels a day.

Demand is really tough, because the world's weaning itself off of oil, effectively. Even in the best of times, they were challenged business models, because they struggled effectively to out-earn their cost of capital. And then, of course, we have asset owners, to your comments, Brian, divesting from that part of the market. And so that's putting pressure on the stock.

Just to give people a sense, energy is now only 2% of the Russell 1000 broad US market index. It used to be 16% at its peak in 2008. Tesla is actually itself 1%. So think about that. Tesla is actually half the size of the energy sector.

And so what we're doing, to answer your question, is we're overweight some of the solutions providers to climate, which we think is the big growth opportunity over the next decade. That includes stuff like renewables, but maybe less obvious places, like packaging and also sustainable agriculture. So in the renewables space, a big position for us is NextEra, who's one of the world's-- it is actually the world's leading provider of wind and solar. Some of your viewers might know it as Black Florida Power and Light. They've totally reinvented themselves for this space.

And then in the packaging space, we own an aluminum can company called Ball Corp. And that probably doesn't sound very exciting. Aluminum was not an exciting sector for a long time. Their packaging was used mostly for beer, domestic beer, and soft drinks, which were out of favor with millennials.

But then the consumer kind of woke up and the images of plastic in landfills and the ocean were bad. And so they started to provide much more packaging to more-- to more consumer products. Now 70% of drinks launched are actually launched in aluminum cans. And it's gone from an ex-growth industry to a growth industry.

Plastic has a recycling rate of 9%. They have a recycling rate of 70%. So hopefully that gives you some context of just tremendous long-term growth opportunities that are available by investing in this space.

ALEXIS CHRISTOFOROUS: And speaking of energy, I mean, we just found out days ago that California is now mandating no gas-powered vehicles by the year 2035. Some are saying that's a little too ambitious. But sometimes, as goes California, so goes the rest of the auto industry.

So for investors hearing this, this is really great actionable news you're offering here, Katie. But they're confused by all of-- they don't really understand ESG. Or they say listen, I don't follow these companies closely enough to feel confident making a good decision here. What's the best way for them to go? I mean, is it an ETF, some sort of a mutual fund that focuses on these kinds of companies?

KATIE KOCH: Yeah, so I'll just say at the outset, I'm going to be very biased on this answer, because I run an active management business in equities. But this is really what active management can do for you. It can look at the energy sector and say this is in secular decline.

We don't want to move capital in that direction, and, in fact, actually overweight climate solutions providers. So you can get that in a broad market portfolio, global or US, that is actively managed. And then, of course, you can find some active portfolios in the climate space.

My final comment on active management is I've told you a lot of exciting stuff. And I do think it's a great growth opportunity over the next 10 years. But whenever you're on the precipice of a growth opportunity, you're also going to have a high failure rate. And so you're really going to need someone who has the expertise to weed through what is going to succeed. And then, again, there's going to be stuff you want to avoid, because there will be a failure rate.

But we are at the cusp of a sustainable investing revolution in our view. It could have the scale of the Industrial Revolution and the speed of the digital revolution. And yes, people should be invested, but they should be invested actively.

BRIAN SOZZI: Katie, based on what you-- well, I'm sure you've studied from Joe Biden's proposals to go green. It's not Green New Deal, but what he has put forward is very encouraging on the climate front. Would his presidency mean that ESG finally becomes more mainstream, ESG investing?

KATIE KOCH: Yeah, so I think this is a really important question. So let me just by saying we have zero edge in predicting elections. One of the most important things for successful investing is to have humility and take risk where you have an edge-- no edge. Let's just walk through the two scenarios quickly.

If Trump gets re-elected, that is going to keep traditional hydrocarbons on life support for longer. So you might get some near short-term rally. But we all we don't think it's the place to commit long-term capital. Even if that happens, this story is not dependent on a Biden victory, although it would be turbocharged by it, which I'll come back to.

Actually, in the US-- Alexis, you just mentioned California. So we have state leadership driving this forward in the US. And then also in addition, the corporate sector-- so we've got the FAANGs. They have $8 trillion of market cap. They're all committing to do more in the renewable space. And so the states and the corporate sector are going to be a tailwind for this, regardless of the election.

If we get a Biden victory, Brian, to answer directly, yes, that is going to turbo charge this. We have a $2 trillion infrastructure plan, a lot of it on climate solutions. And that's going to make this even more of an attractive place to be.

ALEXIS CHRISTOFOROUS: What about just your thoughts on Amazon, co-founded the Climate Pledge, a commitment to be carbon neutral by 2040. Why is it important for American companies to head in that direction? Are we going to see more big-name companies do the same?

KATIE KOCH: We're absolutely going to see more corporates do the same. And why are they going to do the same? First of all, the price has gone down. So actually, from an economics and a margin perspective, it makes sense for them to transition to some of these alternative sources of energy.

Second of all, the consumer demands it. These companies have to be responsive to what their consumer cares about. And we're seeing a lot more consumer focus on this space. And that is going to be a catalyst for companies moving in that direction, too.

And so Amazon actually already is using about 42% renewables as of last year. This year, it's obviously a bit higher. And they're pledged to be carbon neutral I believe by 2025 in their own operations. So, I mean, imagine-- again, just the scale of spending that will happen on the back, as these FAANGs will lead, but other companies will follow.

BRIAN SOZZI: Katie, I'm sure you saw the news out of California, signing-- or now mandating that boards have greater racial diversity. How do you think that decision will shape investing more broadly looking out into the future?

KATIE KOCH: Yeah, so sure. Two things I'd say about this. The first is that our operating belief on diversity is really simple-- diverse teams perform better. So we like diverse boards, because they unlock shareholder value. So that's how we come at that issue.

Then there's the second consideration of do we need all these policies around diversity? And I'd love to expand on that quickly, because my thinking has evolved on this. I kind of started at the place that thought about do we need these bureaucratic policies to force people in this direction or will they just get there over time? Our experience has been on gender.

Quickly, we engage companies for a long time to add more women to the board. There were still several hundred companies in the US with no women on the board. In 2019, we said you know what? We've engaged, we've pushed, we pleaded for long enough. We're going to put a policy in place.

So we voted against the nominating chairs of any company in the US with no woman on the board. In 6 to 12 months-- we voted against 200 companies. In 6 to 12 months, 40% of them added a woman to the board. And so that suggests to me that we need to do two things-- frame this around an issue of performance and unlocking shareholder value, one, and two, yes, we have to put some of these policies in place to see the progress that we all want to see. We've done it on gender.

And California's law-- announcement last night was focused more broadly on underrepresented communities. We're working on that. And we expect to evolve our policy in that direction. And hopefully, you'll have me back to talk about that when we're in a position to do that in the coming weeks.

BRIAN SOZZI: You better believe. It's always a pleasure talking stocks with you. Katie Koch, Goldman Sachs co-head of fundamental equity, good to see you.

KATIE KOCH: Great to be on. Thanks, guys,