All Angles Episode 3 - The Great Transition: Sustainability as a Corporate Moat

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  • 47 mins 00 secs
Hear the thoughts of Vishal Hindocha and Nicole Zatlyn on assessing sustainability to identify which companies are likely to survive the climate transition and thrive long term, and how incredible curiosity helps to avoid sustainability traps.
Channel: MFS Investment Management

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Vish Hindocha:

Hello and welcome to another episode of the All Angles podcast, where we look to unpack the wonderful world of ESG investing, one conversation at a time.

Disclosure:

The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only, and should not be relied upon as a recommendation to purchase any security, or as a solicitation or investment advice from the advisor. No forecast can be guaranteed. Past performance is no guarantee of future results.

Vish Hindocha:

Today, I’m joined by Nicole Zatlyn, who’s a portfolio manager of our Transformative Capital strategy, as well as the co-chair of our climate working group. Now, when you’re thinking about environmental and social issues, as I’m sure many listeners are, there is no shortage of very depressing statistics about either where we are today or the progress that needs to be made in the real economy and in society to get to the future that we all want. So I always enjoy talking to Nicole, who has unbounded enthusiasm for progress and opportunity as well as a well-formed view of the risks that we all face. In my day-to-day work, whenever I come across an interesting piece of research, or my curiosity gets sparked by something and I share it internally, without fail Nicole will always come back with links to several other pieces and much deeper, and richer thinking than I have, and it always impresses me that she can maintain a really positive attitude and be really excited about the progress that we’re making. I often think that where we are in ESG is really the reunion of the work of the investment analysis in capital markets with that of the real economy. And I think Nicole perfectly sums up why her perspective is that this is such an interesting field for us to continue to explore.

Vish Hindocha:

So, Nicole, let's begin as we always do. Can you just give us a brief, potted history of your journey here? How did you get to be an investor at MFS and one that's focused on the companies that you are and in the Climate Working Group and all of those wonderful things?

Nicole Zatlyn:

Super, thanks so much, Vish. Well, let's see. I grew up in Canada. Going way back, my house was sort of at the intersection of the most incredible national park, Waskesiu National Park, and a polluting pulp mill that just reeked multiple weeks of the year. I guess you could say from the youngest age I was just very attuned to strategy and environmental impact. My first job was in government. I was initially really interested in policy and policy work and how that could be kind of an avenue. I spent time in Silicon Valley in the late '90s which really further developed my massive appreciation for the power of technology.

Nicole Zatlyn:

And then I joined MFS in 2001 which was the greatest gift, frankly, and it's just been an amazing opportunity to invest as, first, a specialist and now a generalist.

Vish Hindocha:

That's incredible. So, 20 years at MFS. Before we get into that I want to take you back all the way to the pulp mill and to the national forest. You said it gave you an appreciation. It must have been incredible not only within the forest and the national park, considering everything that we're talking about now, but also kind of heavy industry. You said you learned some of those lessons. What are some of those lessons that you kind of reflect on now?

Nicole Zatlyn:

I think that probably the biggest one, especially with the benefit of hindsight is that whether or not we protect what we have on this Earth or we go ahead and destroy it completely depends on who is setting strategy. That was very evident to me as a five year old kind of in that intersection, but certainly now we see it all the time with companies. Those that are investing ahead for the climate transition which we are all a part of and those that are simply not and continue to do business as usual with massive emissions and other things we'll get into. I think that strategy piece is incredibly important.

Vish Hindocha:

Again, just thinking about your journey from there, Silicon Valley you mentioned, and obviously as an investor at MFS and the different roles that you've had at MFS. What is your kind of driving motivation? The interview question of what is your why? Why do you choose to do this when there's so many other things that you have done and could choose to do?

Nicole Zatlyn:

Well, look, in hindsight it wasn't like there was a straight arc from that five year old self to, "Hey, and let's be an investor." There were definitely a lot of different paths along the way. As I said earlier, I initially thought I really wanted to be in policy, so I was really focused on the legal field, I thought I would go into law. I really thought that, that was the avenue that I would pursue. That we really need to change laws and protections in order to strengthen them, as I said, back to that strategy piece, versus weaken them. I was very focused there for a very long time, frankly. There was serendipity in my path.

Nicole Zatlyn:

In undergrad I had a professor. I was talking one day about how I was very focused on writing my LSAT and going to law school, and he literally said, "I think you're making a mistake." I was like, "What? No. No one's ever told me that before." I was like, "I'm well on this journey. I worked in the House of Commons in Canada. I really think this is my path." And he was like, "I hear you, and maybe it is, but I really, really think you should spend some time in finance." He kind of then took me aside and went through kind of just the massive mechanism of the financial markets to create norms and how I could possibly be involved and really kind of create impact in that way, ultimately.

Nicole Zatlyn:

I ended up in an investment bank in New York City as a 21 year old and ended up with some incredible mentors, for whom I'm incredibly grateful, that really did show me that path of how it was possible to become involved through the investment process. And here we are, right? Several decades later. It definitely wasn't a clear, linear path, but one I'm incredibly grateful for and that really has become, yeah, just something I am so passionate about. About how we can create change through the financial markets.

Vish Hindocha:

Yeah, amazing. Building on that and thinking about how you've internalized that into your own investment philosophy. Maybe we sort of start there before we dig into ESG sort of topics. Maybe for a couple of minutes describe for us your own investment philosophy and how you think about building the portfolio that you manage.

Nicole Zatlyn:

Sure. Well, in terms of kind of ESG philosophy I view it as a non-negotiable. I guess, when I say that it's really from a place of first principles. When we think about what's important to a very good investment we have to think about what's actually going to matter. When I think about what matters from a business perspective for most companies people are the most important asset. They're certainly the largest asset for most companies. It just makes a lot of sense to pay attention to the generation engine of the business, that being people. From an S standpoint, very much as a first principle, pay attention to what matters at the business. People matter to the business.

Nicole Zatlyn:

I think from a climate perspective, the E perspective, climate is the biggest risk and also this incredible opportunity for all businesses. It certainly does vary. Sectors and we can get into the materiality of that. We are all completely intertwined. Whether it's a first derivative or a second derivative of impact, climate really has its tentacles across all industries. I just come back to this can't be separate. This can't be something because it is so front and center for every business out there. I have it completely integrated into my philosophy which also includes finding very strong management, finding companies that have very strong moats which is also companies that have strong control over their balances sheets so that they control their destiny and includes very strong valuation parameters. Those all have to be true in order for it to make its way into my strategy.

Vish Hindocha:

Yeah, no, I love that and I love the idea that you're thinking about... Previously you're thinking about the economic machine and your professor sort of saying, "Well, law might be a terrific path, but actually understand how the economic engine works," and then you translate that to paying attention to what matters which is the people, climate... A lot of that though is hard to analyze objectively, right? Maybe a question, before we get into materiality, is how do you look to build sort of an analytical edge over some of those topics that can be inherently really intangible or hard to kind of fully quantify?

Nicole Zatlyn:

Right. This is where I think we talked to a little bit earlier. I spent a lot of time involved in technology, studying technology, and understanding kind of the drivers of it. I am very data driven. I really love that angle of it. So to your point give me numbers, I love them, I love to analyze them. There's nothing like just getting a whole column of gross margins over time. That's fantastic. That's all absolutely important. That said, that also doesn't tell us the whole picture and it never has. It just often feels like it can because it's right there in front of you, right? 43% is 43%, 83% is 83%. I mean, those are just great. They're absolute numbers.

Nicole Zatlyn:

It's much harder, to your point, to say, "What's the number on culture? What's the number on how a company treats its people? What's the number on toxicity within a culture?" I think that's absolutely true that there aren't great, hard numbers. And we can talk about some of the other things that we can get at, but there aren't great hard numbers on a lot of the people metrics. But that's also what makes them so fascinating and important and so possible for a place like MFS where we have analysts across the globe who are talking to companies and competitors every single day that we can get at. What is the process within the company and how are people treated within the company and what are those opportunities?

Nicole Zatlyn:

I think that you're absolutely right, there aren't hard numbers. They're really hard to get at, but that doesn't mean that they aren't important to be working on and thinking about. They're both true, I guess is what I would say.

Vish Hindocha:

Yeah. No, no, no. I think it's, in some ways, more important or potentially you could argue, I think others have argued, that the alpha signal available because it's unstructured data or it's messy data is there for the taking, for people willing to kind of apply a qualitative lens. One thing we've spoken about before and I've heard you talk about before, in the context of moats... You talked about in terms of analyzing companies with moats is a sort of sustainability moat. I wondered if you wouldn't mind just unpacking that for a few seconds in terms of how you think about sustainability as part of the moat, also the sustainability moat concept?

Nicole Zatlyn:

Absolutely. I think that it is part of the moat and it comes back to this idea that we are long-term investors. We are looking to make an investment in the strategy I manage and compound that over multiple years. So when we're looking and we're thinking about kind of that longer term time horizon we're not looking for a quick, "Oh, this is going to be a great quarter, let's invest and get in and out." It really doesn't matter what happens if we're dumping a bunch of chemicals out the backyard because, "Oh, we'll be out of the stock." It doesn't matter how we're treating our people. When you're going to invest over seven, eight, nine, 10 plus years you're really looking at places where, again, people, they want to stay, they want to get involved, they want to work really hard and be productive and really contribute to an outstanding opportunity that they see in front of them.

Nicole Zatlyn:

It really does matter how people are treated with kind of the quality and the fair pay and these different angles. And likewise, it really does matter what's going to happen in terms of that big climate risk, which again we can talk more about, but that is going to be material over that longer term horizon as is the climate opportunity, right? Again, some of these things today are very nascent, but when we're looking out now in the next decade, I mean it's going to be a completely different ball game.

Nicole Zatlyn:

When we're thinking about moat those all absolutely come into play because again you can't just turn around and five years from now wake up and say... And look, we're seeing this right now with the great resonation that's going on. All of a sudden say, "Yeah, I know we've had a really crummy culture for the last five years, but today we're going to have a great one." It just doesn't work that way. These things, they kind of build slowly over time and they're very insidious. You don't see them until you do. Again, we're very focused on downside protection, so it's protecting against the risk of not having a great culture. It's something, again, we're kind of trying to get at especially because over a long period of time you probably will see it even if you don't in the next quarter or two.

Vish Hindocha:

Nicole, I do want to ask you about climate, but before we do and just, again, thinking about your whole kind of process, philosophy, are there times where you feel like your approach has really been tested by the market? And what have you maybe learned through some of those times of test?

Nicole Zatlyn:

Absolutely. First of all I would say it gets tested all the time. The past year has been a perfect example of that. We've seen many of the very heavy polluting stocks up 50-100%, straight shots, and I don't own any of those. They don't fit the strategy I manage that's looking for environmental solutions. The market in the short-term is very focused, often, on the short-term and doesn't pay attention to some of these other things that we talked about. Have been tested many times, will continue to be tested many times. I think stepping back a little bit that's often the greatest opportunity as well.

Nicole Zatlyn:

Over time the strategy looks to invest over a full market cycle, we're looking out over that seven to 10 year period. When the market thinks that we will never again focus on sustainability or we will never focus again on the importance of climate change is exactly when we can get great opportunities in stocks. And as we talked about earlier, valuation is an important component of the overall strategies. These things all work together, but in the short-term it's absolutely a test.

Vish Hindocha:

Yeah. And on the flip side of that, I wonder especially given you're looking for those companies that are solving environmental issues and problems and it can be, I'm sure, fascinating and sort of ground breaking in many respects and business going through transformation. How do you avoid falling in love with the idea? I think everyone's kind of familiar with the idea of a value trap. I wonder if there's a sustainability trap, too, where you can really fall in love with an idea. How do you avoid that and avoid sort of getting drawn into these sort of potential areas of noise or frenzy or bubbles?

Nicole Zatlyn:

Right. That's all of our work and on the team that we're always talking about, again, coming back to those principles of what's the moat? What's the value proposition? Is this better than the alternative? Does it offer a greater product or service than currently exists and why? Those are the types of questions that the team, we're constantly wrestling with. That's the work that we do at MFS kind of day in, day out, to really prevent against exactly what you're talking about. Kind of the story, the great manager that's super compelling with incredible charisma that you don't really understand. That's the kind of stuff where having so many different voices, having such a diverse population, across all the geographies that we really spend a lot of time kind of wrestling with to get away from the mania, if you will.

Vish Hindocha:

Yeah, absolutely. Again, maybe this draws on your experience in Silicon Valley and the technology field, but again this is now, it feels like, a field that's so dynamic. It's changing so fast and the science is not fully baked yet in my view. Again, I'd love your thoughts on that. How do you sort of look to stay, not only current, but look ahead and project, "Are these going to be successful?" Some of these innovations. How do you think about that in something that is moving this quickly?

Nicole Zatlyn:

I think that's right. I guess one of the things that draws a lot of us to investment, ultimately, is incredible curiosity. Going way back, just that pure love of learning is kind of a common trait that most of us share. It's kind of like the greatest part of every single day, just knowing that there are so many things that you don't know at the morning that you're just going to be digging into so that you're getting a better idea on. This is our work. I mean, this is what we do every single day with every single company, with all the different industries. There is more that is new, absolutely. If we talk about climate in particular, the IEA, the International Energy Agency, which makes a lot of these forecasts, I think has estimated that something like, to your point, 50% of the emissions reduction that we're going to need is going to come from technologies and solutions that are, today, in a prototype state.

Nicole Zatlyn:

To your point, that's a really large number. There is a lot to learn and they're not all going to work. Again, I just come back to it, that's our work. And this is where it's day in, day out, and kind of the learning, the talking, doing the deep dives, the reading. There are just no shortcuts to this. There never have been and there never will be, I think.

Vish Hindocha:

Yeah, no, I agree. And again, it speaks to that kind of wider motivation and the role that the capital market, I think, can play in enabling and facilitating that transition. Just how much has yet to be invented and funded and capitalized and moved out. Let's stick with climate then. Nicole, obviously you co-chair our Climate Working Group. How do you kind of stay on top of the climate phenomena? What's your thoughts on how that theme is sort of evolving and playing out? Again, it's sort of, to my eye anyway, going largely sort of mainstream now. It's everywhere in daily discourse as well as our investment conversations, as well as our conversations with our clients. How are you thinking about climate change and maybe tell us some of the work that you think the Climate Working Group has been able to do to bring that to MFS?

Nicole Zatlyn:

As you say, Vish, it's a massive topic and it requires the participation of everyone on the team working collaboratively and working with a lot of different groups globally. It's not, kind of, one thing and there's certainly no one size fits all. There's a lot we could unpack here and a lot we can get into.

Nicole Zatlyn:

I am happy with what you said, that you think it's now mainstream. I would love that to be true. I think that it's been the most mainstream under the radar thing in the history of the world. We've had the science for decades and decades and we're now starting to talk a lot about this which couldn't be a better thing. I think we've seen a lot of companies go from, "This isn't something we have to worry about," to now setting net zero and science based targets. Effectively aligning their emissions so that by 2050 they will align with the Paris Accord. Again, if we just go back a few years, that number was zero. Zero companies had that kind of alignment. To today it's well into the thousands.

Nicole Zatlyn:

There is so much that's going on in the space. Our MFS Climate Working Group is made up of a real cross section of equity specialists and generalists across the globe, fixed income specialists and generalists, and we're really coming at this... Our ESG specialists at the firm, our stewardship leader, and we're really coming at this trying to look at this from many different angles and really, again, back to the materiality of climate for our different investments at the firm. Just a couple of things to bring up that we worked on over the last year.

Nicole Zatlyn:

We set out with the MFS Climate Manifesto which really set out who MFS is on climate and that came out with kind of our three big working ideas which is we're really asking all of our companies to disclose plan and act. Disclose their emissions. We need that disclosure. Back to your point on data earlier, which is so important, so we're all on the same page. We want to see all companies have their scope one, two, and three emissions disclosed. We're looking for that plan that does align with the Paris Accord so we get to the net zero by 2050 and, ideally, earlier. And then, really importantly, we want to see the action. This is where, again, there's just so much work to be done with the action so that we actually hit these targets that are now being set.

Vish Hindocha:

Yeah, no, absolutely. And I think the disclose plan act framework has been really, really helpful. I wonder if, just to take that maybe a layer deeper. In some of your own experiences, either with companies or through the work of that team, maybe could you just talk about how that's helped frame up some of these dialogues with the companies that we own at MFS to talk about that disclose plan act framework sort of in action, if you like?

Nicole Zatlyn:

Yeah, absolutely. Look, I think we're all on a journey. Companies are on a journey and there are some companies that are really far along their journey. They've gone through all these and they're really in the act phase and then it's really helpful that we get in that together and to really understand those different targets. If we just step back, there are companies that are material emitters today and today they don't have their scope one, two, three emissions disclosed. It's just really helpful to say, "We are a major investor in your company, this is something that we see as material, it's something we see as important," and to have that discussion. "Where are you on that journey to disclose your emissions?"

Nicole Zatlyn:

In many cases it's been really helpful. The company will often come back and say, "Look, this was really helpful. We brought it to our board. It's really good to hear the voice of our major investors that this is... We've had it on the agenda, it was further down, but it's something we're bringing up." We saw, through the proxy season last year, we just saw it again recently, a company we were invested in asked... There was a proxy vote on scope three emissions disclosure and these are now passing. A few years ago, again, they were getting kind of much smaller participation, but this is a very broad issue now. Again, we just saw, very recently, another scope three emissions disclosure proxy vote pass.

Nicole Zatlyn:

This is kind of one of those big issues. We are very focused on it as are other participants in the marketplace. Companies, I think, again, they are responding and it's really helpful to lay out our framework so that you can understand, "Okay, where does this sit in terms of priorities for our various shareholders?"

Vish Hindocha:

Talk a little bit more, if you don't mind, about the high quality plan sort of component part of it. What does a high quality plan entail for you? What are the kinds of things that you and the MFS investors like to see from the companies?

Nicole Zatlyn:

Right. One of the things we really like to see at MFS are plans that align with the Paris Accord. Kind of the best in class that we see today, which isn't to say there won't be others, we really love the science based targets. Again, this is a very robust framework and it does align with the Paris Accord. We also very much appreciate the net zero target setting which, again, also gets us to that 2050. One of the big difference between a science based target and a net zero approach are the use of carbon offsets.

Nicole Zatlyn:

With the science based target approach there isn't a use of carbon offsets. We could have a whole separate conversation on those, but I think one of the big issues that is very much a struggle today and it goes back to what we were talking about earlier with the number of technologies and solutions that are still nascent, in some cases some of the pathways, especially for some of the heavy polluting industries, there isn't a simple solution today. It's not like if they just wanted to they could become this carbon free business just by turning a switch. It didn't work like that, it's not going to work like that. There still are many unknowns. Some of the companies that we speak to they talk about this struggle that they can get 75% of the way there with existing technologies today using renewables, using battery storage, changing processes internally, but they can't get the last 5, 10, 20% of the way there with existing technologies.

Nicole Zatlyn:

This is where the struggle is real and this is where these different philosophies, I think, in terms of science based targets and net zero, where there is still a lot of work to be done, frankly, in terms of... Back to what we still need to see happen so for the whole planet we can get to a much different place with our emissions.

Vish Hindocha:

Nicole, I love that framing of sort of climate change and disclosed plan act and where we are. Again, it's helpful that we've got some of these frameworks for climate change. I wonder, just coming back to your earlier comment about the importance of people and the role that they play in many of these businesses, them being economic drivers of value and paying attention to what matters. What's your view of kind of where we are on the social side of things and the S in ESG?

Nicole Zatlyn:

I love that question. I think there are kind of two big areas that we think about here when we're analyzing the company. There's one that we've spoke about a little bit more which is in terms of really paying attention to the composition of the workforce and the investment in the workforce and the opportunities for growth and development within the company itself. One of the things at MFS we ask our companies to disclose around some of the metrics we can get such as turnover, such as gender identification. So we can better understand kind of the percentage of full-time workforce, part-time workforce, contractors, and then we can see some data around accident rates, fatalities. There is some good data. There could certainly be a lot more of it. We do ask our companies to disclose where it makes sense because it is so helpful to try and understand that picture from the company and it is only one part of that view.

Nicole Zatlyn:

The other side of that is also on the supply chain. Again, the indirect S to companies, but that is so, again, so meaningful to their actual delivery of their product and service. Here, in terms of supply chains, it's really trying and understand how the companies are approaching their supply chains. How does that partnership work and is there fair and equal treatment? Are there living wages within the supply chain? These are topics that are, again, to your point, the data is even less good. These tend to be more around conversations and trying to understand the company's perspective on how they work with their supply chain. But these absolutely topics of conversation and come back to this, again, when we're trying to look at whether or not we're going to have a sustainable business over that long run. Again, in the short run some of this stuff may or may not matter, but in the long run it absolutely does matter. So these are the conversations we have around these issues.

Nicole Zatlyn:

I guess just one other thing, because we've talked a lot about data and again there are some numbers we can get, but there is a lot of unstructured data that's coming to the market also that can tell us something around some of these topics as well. In different parts of the world there are some, again, publicly available, this isn't secretive stuff, where we can capture snapshots in time of employees. So in the US there's Glassdoor, in other parts of the world there are other equivalents. Some of the unstructured data, again, it's never going to tell us an answer, but it certainly can be an interesting starting point to understand where are some of the pain points within companies and, really importantly, how is management viewing that, thinking about that and what are they doing around some of the issues that do arise?

Nicole Zatlyn:

Again, these are just some of the ways. The last piece on the supply chain, with some of that unstructured data, what we don't want to see through some of these organizations, the big story in the news paper. At that point it's too late, right? You kind of want to get there much earlier, before they have the crisis situation. Again, it's trying to put together some of these topics and see where it sits within the importance on the management team and where it sits within the board as well.

Vish Hindocha:

And thinking about that management sort of proactivity, or that mindset if you like in terms of thinking about those risks. One thing I really wanted to ask, it comes maybe to your short-term/long-term. To my eye and ear, consumers are now paying more attention to some of these supply chain risk issues or at least they are in theory and there's some good news flow around it. Has that kind of found it's way to the corporate board room? Back to the economic moat and sustainability, but are people viewing this as a potential threat if they don't "clean up their act," quote-unqoute, or actually an opportunity to differentiate versus competitors? Has that happened yet in a meaningful way to your mind or are we not quite there yet?

Nicole Zatlyn:

I think we're absolutely seeing it and it comes back to this point on value proposition. We do have so much more technology and it's ubiquitous globally. Once you've seen the picture of all of the plastic on the shore of your favorite beach anywhere in the world now, right?

Vish Hindocha:

Yeah.

Nicole Zatlyn:

Again, this is a global issue. You can't un-see it. Consumers are a huge part in this and we've seen with the consumer products companies, for example, we've seen some major announcements and target setting around their plastics, plastics use and the changes to the actual product packaging. I think that this is very much back to a first principle issue of the value proposition and what the consumers are demanding. We're starting to see it in some areas of the apparel market in terms of the material production and actually what the materials are for different products. The recyclability. Again, these are all discussions that are so much more front and center right at the product level that, again, five, 10 years ago they were such a small one-off. Today it's just very much in the flow of the discussion.

Vish Hindocha:

Yeah, definitely. I remember reading somewhere, it was in a mainstream newspaper, that... I think it's the Great Pacific Garbage Page. One in 40 pieces of plastic bottles belong to one specific very large beverage company and it kind of does actually change your mindset, actually, as a consumer of that. Do I really want to contribute to that? Like you said, you kind of make that link immediately and now with social media and the rapidity of the news flow it gets around extremely fast. It's good to know that companies are alive to some of those risks and issues. But like you said, they can manifest extremely quickly.

Vish Hindocha:

Nicole, if it's okay with you I'd love to just kind of dive down a layer deeper. So we've talked about some of the kind of big picture and some of the thematic issues and environmental and social space. Are there any kind of company level examples or specific ideas that you think about that sort of help to kind of flesh out the process, the thesis, and how that sort of shifts and the dynamism that we've talked about through time?

Nicole Zatlyn:

Sure. Maybe thinking about a company that we've owned at MFS, working really closely with our analysts. And again, I think one of the things that's so great about MFS, wherever the stock is domiciled it's not usually where they have all of their business. We're a global investment manager. The company I'm thinking about here, the analysts pitched the stock which competes in my parts of the world and then in the discussion we have input from the analysts, the specialists in other parts of the world, who are weighing in on that direct competition and, yeah, "What is it that they're doing differently that does make them the better company in the space?" And then we have, of course, the generalists who are looking at, "I've seen companies like this before."

Nicole Zatlyn:

These dialogues are really robust. The one company I'm thinking about here is a global leader in the area of electrification and really focused on energy efficiency and automation. They provide a lot of the hardware and software solutions for a lot of the sectors within the spaces. This is a company that, again, just coming back to the first principles, has a really, really nice moat. Has a really strong distribution, and has invested a lot. Has paid a lot of attention to their innovation engine. It isn't, again, something like we were talking about, they just wake up yesterday and saw like, "Hey, the world needs more electrification over the next decade." They've been hard at work at this for many, many decades.

Nicole Zatlyn:

I think it's the type of example where it fits kind of on the strong moat, the strong focus on their people, a strong focus on their innovation. A really great balance sheet as well as a really nice valuation. It's the kind of stock where it fits very well into the strategy I manage, it fits well into other strategies across the firm because, again, this is just a really great stock that also is going to benefit from a lot of these tailwinds in electrification over the next many years.

Vish Hindocha:

I love that. That's such a clear example of, again, like you said, a company that's been committed and doing that and now reaping the reward of maintaining an edge over an extended period of time. Nicole, before I ask you some sort of more kind of questions, a little bit more about you, are there themes in this whole space that you're watching very intently that you are looking to kind of play out or excited to see how they may play out over time?

Nicole Zatlyn:

If I could take that in two parts. One, I think one of the things that we haven't talked about maybe quite as much is the G, so the governance, which I think we've talked about in terms of strong management, we talked a little bit of the board, but incredibly important. Coming back to where we start at the beginning about the decision makers at companies and who's saying strategy. These are just such important topics. So, we meet with board members, we vote our proxy actively, and this is really... I think we're going to see a lot of really interesting changes in this space over the next several years where it's not enough for board members anymore to say, "Yeah, we don't talk about climate in the board room." I mean, we can see through various disclosures. The Carbon Disclosure Project. It's all online. Free and open to everyone, right? In terms of how often is this being discussed at the board, for example, is one of the questions.

Nicole Zatlyn:

I think that there is a lot of change to come in governance and I think incentives are super important. Kind of a whole area that we didn't touch quite as much on in this discussion but is incredibly important and something that we do a lot of kind of deep diving into because of its importance. That's just on that.

Nicole Zatlyn:

On the excitement side, I think there are so many changes that we're going to see in all these different areas that we've talked about, but the one that I think cannot be understated is on the climate side. We have this true risk and we're going to see non-linear impacts and there's a lot on the risk side. And at the same time there are incredible opportunities ahead of us. If we just think about, I think in 2021, we've seen some of the numbers now, globally there was approximately $900 billion spent on clean energy. Many of the economists have said that we need to spend something like $4 trillion per year. McKinsey came out this week and I think said $6 trillion.

Nicole Zatlyn:

We have tremendous spend that we need ahead of us and that kind of spend creates tremendous opportunities. And that's both in these nascent technologies that we talked about earlier, but also in many of the areas that are right in front of us today. And again, everything's interrelated, too. There's the first order effects and then there's a second and third order effects of that kind of spend. I am very excited about these changes and the opportunities that many of the companies will have in front of them to be major players in the area, in the climate space.

Vish Hindocha:

Thank you, Nicole. To your first point on governance, maybe it would be fascinating to have you back after proxy season to see what changes have resulted. Last year was such an interesting and, in many ways, sort of ground breaking kind of proxy season. It looks like this year is shaping up to be kind of on a similar trajectory. Maybe we'll have you back on in sort of eight months time to kind of reflect on how governance has shifted through time. You're right, we haven't spent much time on it today. And I'm glad for your optimism on climate change, because there's no end of depressing stories about how far the climate trajectory has already gone and, essentially, if we stopped emitting carbon we'd still be somewhere between a one and a half and two degree trajectory as of today for the next hundred years. We need the technology to essentially siphon the carbon out of the atmosphere as fast as possible.

Vish Hindocha:

Nicole, I want to be extremely grateful for your time, so I'm going to ask you just a few kind of quick fire questions to end, if that's okay. Outside of MFS, when you're not thinking about your portfolio and the Climate Working Group and all the phenomenal investments and the ideas that you're thinking about, what do you devote your time to?

Nicole Zatlyn:

Sure. Well, I am passionate about the world of ideas, so you'll find me reading, reading, reading. My first love and what I spend a lot of time doing. And then I love hiking, so that thinking after... Yeah, after the reading I have thinking. I love trying to understand art and artists and ideas from all different spheres. I guess the other piece would just be the trying to adjust parts of unequal systems with my time, energy, and resources.

Vish Hindocha:

I love that. I've got to admit to everyone, when you came back from Alaska and you had done some wild hiking, I was extremely jealous in the late summer last year of some of your pictures. Speaking of reading, what would be the book or article or piece of literature that you've shared with your loved ones or recommended the most?

Nicole Zatlyn:

I am a huge fan of the work of The Sante Fe Institute. They do a lot of work on complex systems and it covers many different disciplines and I am constantly pointing people to and to the articles to the research that is coming out of The Sante Fe Institute. That would be probably what gets sent from me the very most.

Vish Hindocha:

I love that. Actually, very early in my career I was pointed to Michael Mauboussin's book, or at least chapter, on why zebras don't get ulcers, which actually came from The Sante Fe Institute. He's a terrific author and thinker and I think has borrowed a lot from that system's thinking.

Nicole Zatlyn:

Yes.

Vish Hindocha:

Super interesting their work and the way that they think about it, and what we can learn, actually, from adjacent disciplines and apply it. That makes a lot of sense to me.

Vish Hindocha:

Nicole, earlier you talked about some of the serendipity in your life, in terms of the professor and some of your mentors in New York. I'm curious, in your mind, what is the kindest thing that anyone has done for you? Maybe not the absolute kindest, but a kind thing that someone has done for you?

Nicole Zatlyn:

As you say, there have been many, so it's impossible to pick the, but I will say my first grade teacher was in this pretty remote part of the world and she was just unbelievable and she dragged into our small classroom this old Victorian bath tub which she painted bright red. When you were done your work you could sit in this bright red incredible, in my mind, bath tub and read. I spent my entire first grade year reading books in that bath tub which has created this life long passion for reading. I could not be more grateful to her and the journey she put me on.

Vish Hindocha:

That's incredible. I hope my daughters don't hear that because they'll paint my bath tub red and start reading their books and building forts in there.

Nicole Zatlyn:

Maybe you should be grateful for that!

Vish Hindocha:

Yeah, maybe, but that's my sanctuary. Just to finish, Nicole, thank you so much, what one message do you think's really important to give to our clients from the back of our conversation today?

Nicole Zatlyn:

If I had to sum it up in kind of one sentence, climate is the biggest risk for many of our investments. To your point earlier, Vish, it is mainstream but that doesn't equate action. There are tremendous risks sitting right in front of us and unbelievable opportunities.

Vish Hindocha:

Great. Nicole, thank you so much for sharing your thoughts and ideas. Again, if you have us, we'd love to have you back. Maybe after the proxy season's closed and we can dig into governance and some of the other issues that are front of mind for you. But thank you so, so much for all your time and thought.

Nicole Zatlyn:

Thank you so much. This was great.

 

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