• |
  • 01 hr 03 mins 26 secs
Three experts discuss the constantly evolving discourse surrounding ESG, challenges faced in standardizing ESG ratings, and ESG-based investing. The panel digs into how ESG can be integrated at an equity investment as well as mineral extraction level, and the reality of what the “energy transition” means in terms of commodity demand, capital expenditure required, and energy sources used.
  • Jason Chen, Research Analyst - DWS Research Institute
  • Edward C. Coyne, Senior Managing Partner, Global Sales - Sprott Inc.
  • Shawn Reynolds — Portfolio Manager, Global Resources, Environmental Sustainability - VanEck


In order to access this quiz you need to provide the following information:

You need to provide at least one CE Accreditation number: *

Please take a moment to provide some detailed feedback on the presentation:

Jonathan Forsgren: ESG has been grabbing headlines over the last few years, and the term ESG is ubiquitous in everyday life. Yet, while most people could tell you the acronym stands for Environmental Social Governance, there remains a wide range in how it's interpreted, applied, and measured. Joining us today to discuss how ESG is interpreted, applied and measured by their organizations in their respective fields of investments are Jason Chen, research analyst at the DWS Research Institute.

Shawn Reynolds, portfolio manager specializing in global resources and environmental sustainability for VanEck. Ed Coyne, senior managing partner for global sales at Sprott. Gentlemen, thank you for joining us.

Edward Coyne: Thank you for having us.

Shawn Reynolds: Good to be here.

Jonathan Forsgren: Ed, to kick us off, can you give us a high level overview of Sprott's business and how Sprott defines ESG?

Edward Coyne: First, thanks for having me today. Sprott's a unique firm. We've got over four decades of experience in the precious metals, real asset and more recently energy transition material and mineral markets. With the four decades of experience focused on precious metals in real assets. It's given us a huge leg up in thinking about just the global economy, how people are using and looking at energy transition materials today and so forth.

At Sprott, with four decades of experience and over $21 billion in assets, we continue to deliver to clients, ways to allocate to the physical market, whether it's traditional gold and silver, more modern, more recent platinum and palladium. As recent as the last year or so in physical uranium. We also have a full suite of equity solutions, whether it's active mutual funds like our Sprott Gold Equity Fund or our factor-based ETS to give clients exposure to both the senior mining companies as well as a junior mining companies.

Then, last but not least, we have a private suite of offerings on the equity side and the private credit side. We're a raised capital and we loan it to small to mid-cap mining companies for operating leverage purposes. We have a full suite of solutions in the mining and real asset space. We've been doing it for over four decades. We're a publicly traded company. We trade on both the front stock exchange and the New York Stock Exchange under the same ticker symbol SII.

As far as ESG and how we define it's really a natural progression of what we've done as a firm. You can't be in the mining business and not think about the environment. You can't be in the equity business and not think about corporate governance, who the best actors are, who the best managers are, and so forth. From a social standpoint, mining in general has been playing a large role in that space for decades.

If you really think about mining in general, in many cases goes to parts of the world where there's not a lot of economic opportunity. There's not a lot of opportunities for development public roads, running water, electricity to get to the basics. From a social standpoint right now, the way we see the social aspect more than anything else, just really bringing a traditional lifestyle or benefit to those parts of the world that maybe didn't have them in the past.

ESG is clearly evolving, but it's really always been part of our industry, our business for decades, and we think that's going to continue to expand over time, and we welcome that.

Jonathan Forsgren: Shawn, can you give us a high level overview of VanEck business and how ESG engagement is integrated into your investment process for VanEck's natural resource funds?

Shawn Reynolds: Well, VanEck was founded in 1995 and a lot like Sprott very focused on natural resources in the real asset space. Over time we certainly migrated towards more resource transition and just the future of resources. As you mentioned at the start, I am responsible for the global resources practice as well as our environmental sustainability efforts. How has it integrated?

How has ESG integrated? Well, it became when you're focused on global natural resources 5, 10, 15 years ago, you realize that we were heading towards what we now call ESG or transition. It became just part of what we had to do. We had to understand it, we had to integrate it into our process. The real integration is, I think the really important part of the integration is to treat it no different than you think about the rest of your investment thesis around a company.

There are operating statistics and there are financial metrics and there are ES and G metrics. Again, I agree with Ed very much that GE has always been there. If you're in the equity business, you always have to worry about the governance, the environmental side. If you're in natural resources it's clear issue, your social license to practice is clear.

Making those an integral part, a key part of the analysis and making it clear to the companies that we were going to be looking at probably more detail with a lot more scrutiny in the future with regards to these targets that they need to start setting. We just integrated that into the overall analysis of these companies and we found that to be in regards to engagement with the companies very, very useful.

Jonathan Forsgren: Thank you. Now Jason, can you give us a broad strokes overview of DWS and how it approaches ESG?

Jason Chen: Of course, thanks for having me, Jonathan. DWS is one of the largest asset managers in the world. Globally, we manage about a bit over $800 billion, but that's divided about three quarters and one quarter to active and passive businesses. Today's focal point will be on the XTrackers business, which is our global passive offering. Your question in terms of ESG approach, it fully differs between the active and passive businesses.

On the passive side, what we will typically do is partner with index providers utilizing their methodology and their standardized framework in particular more recently, which I think is the focal point of this conversation between for my section at least, is we launched three solutions that blend style and ESG. Again, into a bit more detail on those, but they're S&P ESG growth, S&P ESG value and S&P ESG dividend aristocrats.

I will touch on the methodologies more specifically, but in this particular case, we are relying on S&P Dow Jones's ESG score.

Jonathan Forsgren: Ed, coming back to you, how has the ESG discussion evolved over the years in both your direct discussions with company management, boards, industry groups, peers in the context of a potential investible opportunity with clients?

Edward Coyne: A lot of it's still in the fact phone finding mode. We sit, we do a lot of presentations with boards, family offices, state agencies, endowments and so forth. We're in a board setting and a lot of times they're still sort of figuring out where ESG fits and their portfolios. Many of these are self-directed. When we talk about family offices and so forth, it's going to be on a family office by a family office basis.

Sometimes it's how they made their money is how important ESG is to them. It just really depends on the industry they came from and where that importance is. I think we're still very early days and how people are looking at ESG as relates to their portfolio. Having said that, we also do a lot overseas and in parts of Europe in particular, ESG has been a larger focus to the point to where they have mandated X percent of their portfolio has to be ESG-focused or ESG-weighted in the portfolio.

We use services like Sustainalytics to help give us ratings in our portfolios and so forth for that reporting purpose. It's really interesting to see how the clients themselves or the potential investors or existing investors are still really thinking about this. We're not seeing a top down mandate as of yet. Like I said at the start, it's still in the fact finding mode for a lot of these investors.

Then, at the advisor level, which is a lot of our clients as well, the traditional brokerage firms and advisors out there, they're mostly in reaction mode on a client by client basis. The clients that want to have this be a bigger part of their focus, they're looking for solutions that can check that box, so to speak in ESG. I think it's an ever evolving part of the market.

I think returns certainly play an impact on that, and I think over time we'll see us become a bigger part of the narrative, but I still think we're still very much early days in that it hasn't really driven the entire process as of yet.

Jonathan Forsgren: Shawn, how has the ESG discussion evolved over the years for you between internally with your own company management, within boards, industry groups, and then in the context of discussions with your clients?

Shawn Reynolds: I think if you think back a number of years ago when ESG became very much a buzzword, there was a very aggressive move at saying, "How do we measure companies and their ESG compatibility or ESG score?" There are things like Sustainalytics that Ed mentioned and other third party measurements and systems out there.

What we've found is that we've migrated away from those, not completely, but we've migrated away from those because when you speak with managements, what we've found is that they get very tied up with regards to the details of how one company versus another consulting firm evaluates them. There's obviously lots of criticisms that they haven't received the score that they believe they deserve.

What we have defaulted, not really defaulted to have moved towards is hard data metrics. Things that you can't argue about, there's no subjectivity. We can look at the numbers that are very, very clear, and as I mentioned earlier, incorporate that into the overall discussion that you're having with management with regards to their strategy and what they're doing going forward and what their forecasts are.

Again, we integrate them in with all that operating financial and ESG. If you're not giving us a metric goal or aspiration that is meaningful, or if you're not able to hit it just like you're not able to hit an earnings number or a balance sheet number or a production number, it just feeds right into that overall discussion. That's really how it has evolved over a number of years.

That's what I mentioned earlier was it really engenders a much more deeper conversation rather than, "Well, we don't like this rating system." Pretty happy the way that's gone. I think we'll probably talk about this a little bit later because these rating systems have a role, but they aren't the end-all.

Jonathan Forsgren: Yeah, we will for sure get to the standardization of metrics and how to compare me measurements in ESG. Thank you for giving that at a high level. I'm going to come to Jason next. How has ESG as a discussion evolved over the years for you internally and then also with clients?

Jason Chen: I would echo some of the points that Ed and Shawn made, but I think some of the key focal points are the importance of standardization and data transparency. Obviously, in the nascent stages of ESG as an investment universe, there were some question marks. I think reporting standards have improved, but that is still the trend or the general direction I think is required to really build confidence in ESG or sustainability investment processes.

In terms of capital allocation, I think there's also recognition that for engagement purposes, it's more of a partnership with corporations than it is one where investors are necessarily opposed to companies that are not engaging in day one, exactly what investors want them to do. I think there's a recognition in general that it's a coordinated effort. Capital allocation shifts take time, engagement has to be on an active basis.

Capital needs to flow in the direction of companies that are willing to make these changes. I would say a third point as well as individual investors. Oftentimes, they might have more specific or more individualized goals for ESG. Even though ESG is a very good umbrella to catch a lot of different metrics across these three pillars. The ability to customize ESG utility functions.

The ability to measure impact on a more individual basis is also I think generally going to be demanded by the investment community going forward.

Jonathan Forsgren: I'm sure we'll see it. It's always reading about how there's additional regulation and it's constantly being discussed in terms of trying to build a framework out, but I think we're still probably a ways away from that. Shawn, coming to you next, what are specific areas that are often overlooked in the sustainability discourse?

Shawn Reynolds: Well, I think it's really the transition that it is a transition, that it's not an either/or it's an and. We have to move forward with a transition and that you just can't just jump straight in and think that this thing's going to be fixed and that there's investible opportunities around that. If anything, the last three years have proven that. 2020 turned out to be a great year for a lot of energy transition stocks and the last two years not so great.

We think there's reasons why, and that makes sense to us, but this transition means transition and that that's going to take time. The other thing about that is this idea of we're going to hit these net zero targets. I think we need to start understanding that there's more that has to happen rather investing in solar or wind or EVs. To hit net zero or really talking about environmental sustainability, which is a much bigger topic than just emissions.

There's a lot more investing that has to happen, a lot more growth that has to happen. We're in early stages of this realization, I think with regards to the investing public, public at large, but there is a lot more to it than just what we've seen over the last couple of years and we think we're getting there.

Obviously, what's happening in Europe is accelerating this realization that it has to be and, it can't be a zero or one. Unfortunately that's the case, but it's probably better for the long term with regards to this whole sole transition.

Jonathan Forsgren: Ed, with Sprott's focus on mining, do you see any inherent conflicts with Sprott's commitment to ESG? What do you tell an investor who cares about the environment but is also interested in investment opportunities within mining?

Edward Coyne: This has been seismic changes in the narrative in the last four or five years frankly. The reality has set in that all the things we have taken for granted, something as simple as our cell phone today, most of those components in that phone came from the ground. We had to, there's some synthetic parts of the phone as well, but a lot of that stuff came from the ground from real assets, minerals and [inaudible] and so forth.

As we look for this carbon-neutral future, you got companies like Ford and Honda saying they want to be fully electrified by 2030, 2035 that's going to be very difficult to do without having a robust mining industry. There's the perception of a mine, and then there's a reality of its need. I like to define them really as two separate terms. One is the extraction refinement side of the industry, which that's where I think ESG probably has a ways to go, but it also allows for the better actors, better companies to rise to the top.

Makes them hold them more accountable, more transparent, allows these companies to really shine by doing the right things. That part of the industry, the mining part of the industry, we think is going to continue to thrive as more investors start to look at it and say, "I realize that we want wind and solar and battery and electrification of cars and so forth, but we also realize and understand that that has to come from somewhere."

That side of the business I think is benefiting greatly from ESG. So that's the extraction side. Then, you get to the consumption side, and this is where I think people get this idea that like what Shawn said, it's not either/or it's and/or it's really they have to work together. It's this and this. Oil and gas is going to be around for a very long time. This is not being replaced tomorrow. It's the old concept of the hybrid car or anything else they're working together.

We need all base loads, whether you're talking about energy, whether you're talking about electric cars, whatever the case may be, you need base loads like nuclear, and then you need alternate loads like wind and solar, and so forth. For those that want to support and protect and thrive the environment, have it grow and be environmental to be conscious about everything, they're recognizing that mining is a very important component of that approach.

You really can't get away from it. I would argue that ESG has been one of the best things to happen from a narrative standpoint to the mining industry because it's starting to shine a light on it in a more transparent way. Again, like I said, it's allowing the better actors, the better companies, the companies have done great work for decades to start to get recognized and say, "There's a way to do this where you can be environmentally conscious, you can be sustainable.

You can care about the environment, protect the environment, and yet still bring these resources to market and allow for all the things that we've started to take for granted, which is the iPad and the technology that we're working on today. That all has precious metals and real assets and minerals as part of its equation. All the touchscreens we use that that's all comes out of the ground. A lot of those technologies are mandatory, and so you can have a better environmental use of energy and electricity through mining.

There is that whole idea of how do we consume it going forward? You can have an environmental impact and be pro mining at the same time. We think that can exist and we're seeing more investors embrace that.

Jonathan Forsgren: Shawn, when evaluating a current or potential investee company, how do you balance your evaluation of financial considerations against ESG risks? Do you look at companies in isolation or relative to certain industry peer standards?

Edward Coyne: Shawn can speak to this as well, but there's the World Gold Council, they do a lot of wonderful research and they put out a lot of white papers. We reference their work all the time on our website. There's the Silver Institute, and then there's basically every metal and mining industry out there has the specific, the Copper Institute and so forth. They're all out there championing their particular marketplaces.

A couple of years ago, people didn't even think about that. And more and more people are reading about these different markets in a way they haven't in the past. I would say for those that are interested, I would start with World Gold Council. They do a great job and then work your way through there. They talk predominantly about gold and silver, but they're starting to talk more and more about ESG in general also.

They do a lot of great work and a lot of the other companies out there are creating more white papers and so forth and intellectual capital that you can reference. There are a lot of agencies out there that look at this and say, "What are the best practices? What are we seeing from the largest cap companies, the most established companies out there? How are they operating?" They are creating some standards.

Again, I go back to what I said earlier, it's still very early days still evolving. I think Shawn made some good points also about it's not a rating that's a one or a zero, it's an evolving process that you have to look at over time. Yes, those do exist.

Jonathan Forsgren: Shawn, coming to you when evaluating a current or potential investee company, how do you balance your evaluation for financial returns against ESG risk? Do you look at companies in isolation or relative to their industry peers?

Shawn Reynolds: Again, we try to look at these metrics almost as a whole. We look at the whole picture and companies have to come to us with their own outlook, their own forecast, their own strategies. Part and parcel of that strategy is how are you addressing not just the E, but also the S and of course the G. Every company needs to have sustainable metrics or goals right now.

That's just being a public company you have to have that. Every company needs to think about equity and inclusion and diversity. It just has to. Then of course, we are always looking at governance because that's how you create long-term financial value in our view. If a company is not able to articulate what those goals are or if they're not meaningful, if they don't make a change, that can be on an absolute or a relative basis, to be honest.

It works into our investment thesis, but we've found that the companies and the clients that we have love the fact that part of it is becoming a normalized part of the process. It's just integrated right in there and there's certain metrics like you talk about scope 1, scope 2, and scope 3 emissions. We pretty much avoid scope 3 because we're not sure that that can be validly measured at this point.

That gives us some gravitas with the companies because most companies avoid that as well. Again, that's just the normal part of any investment research that we're doing or engaging with the company.

Jonathan Forsgren: Jason, at an equity level, how does ESG factor into styles? When might it make sense for investors to switch between value and growth or dividend styles?

Jason Chen: I think what's quite interesting and a bit of contrast to what Shawn just mentioned, but when you approach ESG more from a formulaic or passive index based standpoint, what you end up is actually with somewhat uncorrelated risks between, let's call it e ESG factor returns. I'm not advocating if they're positive or negative over time. That is an ongoing area of research, but that is largely uncorrelated to styles quality in the states of value growth dividends.

What I think is quite compelling is the fact that when you build an ESG portfolio in a modular way, you're not actually potentially doubling down on any single factor bet. There might be an intuition perhaps that ESG is a quality tilt, but if you look at it empirically, this is actually quality explains very little of ESG aggregate relative performance to the parent indices. I think that in and of itself is quite interesting in that when you're building a holistic ESG portfolio, combining different components, you are not necessarily taking on anything that's not unintended.

From the standpoint of investors, I think it allows them to express ESG views almost separately or independently of the other views they have in their portfolio, which from the standpoint of portfolio construction is actually quite advantageous. You don't really want to be adding in a bunch of things that you're unaware of in terms of factor risks. Now, in terms of value growth and dividends more specifically, again, I think the broad point that I made, which is that they're largely uncorrelated to ESG as a factor is very important.

There are times for each of these in factor timing is quite a complicated topic in general, but value typically does better in early recovery cycles, growth will do better in more monetary easing cycles. I would think about high dividend approaches more of as a general bias towards less risk. In a way, you are mitigating some of the risks of companies that are unable to grow dividends over time, for instance.

Jonathan Forsgren: Jason, can you give us a broad strokes overview of DWS and how it approaches ESG?

Jason Chen: Absolutely, DWS is one of the largest asset managers in the world managing over 800 billion globally. Within that product mix, we have quite a large XTrackers business. It represents about 200 billion AUM at a global level, but about 20 billion of that is within our XTrackers franchise in the US. In terms of the ESG methodology, so we partner with index providers and leverage their resources.

One of the index providers that we use work with very heavily is S&P. They have the S&P Dow Jones ESG score, which is a composite of removal of controversial sectors or segments of the market. It is UN Global Compact principles-based, and then ultimately it is ESG score based on measures that are customized at the single sector level.

Jonathan Forsgren: How does ESG impact indexing if you and styles, if you combine value and growth, do you simply end up with the S&P 500 ESG index?

Jason Chen: No. On value and growth, I think it's very important to have independent methodologies for both. I know there are index methodologies that combine the two such that they are collectively the entire index, but you don't want to invest in value simply because it is cheap necessarily. You don't want to invest in growth simply because it's expensive. The metrics that underlie those approaches are very, very important.

In terms of the ESG implementation, I think it's very important to disaggregate when you're constructing an ESG style index or ETF, is to make sure that there is somewhat independent, let's call it alpha or residual return driven by either ESG or the style itself. That is to say, when you are constructing a portfolio, if you have ESG preferences, you want those to be very much independent of your preferences for style, either strategically or if you have a view on style timing at this current market condition.

Jonathan Forsgren: This is a relatively new term to me. Just for viewers that might not be familiar as well, would you first explain what a dividend aristocrat is, and then for dividend aristocrats, is there any downside to the rigid requirements of the index as it relates to ESG?

Jason Chen: Dividend aristocrats are stocks for the ESG high yield dividend aristocrats specifically, it is screened from the S&P 1500. It's a combination of the 500 and then the 400 midcap and the 600 small cap. It's a broader starting universe. The reason really is that the requirements to be considered an aristocrat are quite intense. You have to have, for a company to be part of this index to qualify under this screen, it has to have increase its dividend per share every year for at least 20 consecutive years.

You can imagine the number of companies that existed for 20 years in the public markets is rather small. That necessitated to the largest starting universe expanded beyond just the S&P 500. They're also market cap requirements, daily trading volume requirements as well. There are other screens just to make sure that the constituents are of a quality that's sufficient to match the methodology. Then, the waiting is also based on the yield.

You are really optimizing for the yield of these companies that have demonstrated the ability to grow dividends over an extended period of time. Ultimately, I think one important component of the index methodology is the fact that there is an effort to make it sector neutral. I mentioned separately as well that sector neutrality or not neglecting certain industries or sub industries is really important in terms of not over concentrating, or removing some of the important risks or investment exposures across the economy or across capital markets.

On the topic of whether the methodology is too rigid, it's an interesting question. It is a very rigid methodology, I think by design. If you look at energy transition for instance, which I know is a very important topic for ESG, there is the reality that over time if energy companies are forced to shift their mix of capital expenditures or long-term investment, it perhaps could mean a cut to dividends, or it could potentially mean that they have to increase investments in those areas.

Which from the standpoint of I guess capital discipline for those companies, they may face a reality where they have to have measure the trade-off between maintaining that dividend growth, the eligibility within dividend aristocrats and the ability to invest in windmills, for instance. I think that's a really important question, we haven't really crossed that bridge thus far, but this is one of the important themes I think for the index providers.

ESG research people need to continue to think about is if we have all of these very ambitious targets for ESG, does the constitution of these indices that have somewhat a traditional requirements for dividend growth, for instance, do they have to be thought about differently? Do those adjustments have to be made to allow for these changes, recognizing that they're important part of ESG achievement over time?

Jonathan Forsgren: Jason, how should investors be thinking about the interaction between ESG and factor or style exposures?

Jason Chen: I think they should be thinking about ESG and style almost independently of each other. ESG is an investment preference. It is based on the desire to allocate to companies that score better on these metrics. There is some empirical evidence in some regions that governance, for instance, is a positive driver of relative returns. In general, in developed markets, it's still an ongoing discussion whether ESG is an independent factor.

I think what is important though is that ESG tracking error, ESG active risk is basically uncorrelated to style or factor excess return over time. When investors are thinking about building a strategy, they can treat the ESG decision making somewhat independently from the decision to either allocate to value, or to growth based on the market conditions, or to invest in a high dividend strategy.

Those should be separate decisions, which allows investors to be much more, I think precise about why it is they want to do either one of those two or both.

Jonathan Forsgren: Jason, are there a couple of portfolio names that you could walk us through that might be able to give us an idea of your sustainable investment process and portfolio differentiators?

Jason Chen: Yes, our methodology has three general steps. The first one being the exclusion based on controversial criteria. The second one being compliance with global compact principles. The third one being the measurement of ESG scores. Elimination of stocks based on sorry, ranking in the top 75% of market capitalization. Just a few examples for instance, within our dividend strategy, general dynamics is screened out because it contains controversial weapons, it violates that criteria.

Within value, Wells Fargo is screened out because it does not meet the UN Global Compact requirements. Then, within growth, Tesla is screened out because it is qualified based on ESG score. When you are combining those different levers, you are getting an aggregate approach that addresses a lot of these concerns.

Jonathan Forsgren: As it's come up in earlier in the discussion, a lot of times we're discussing ESG as a current rating, but as you brought up yourself, capital is often an efficient way to solve problems. Maybe a company might be less ESG affirming at the moment, but has goals too, how do you evaluate them to be included or excluded, or is it only in the present that you can either include or exclude them?

Jason Chen: I think this is one of the big points, which is that transition risk is key. Finding companies that are changing over time and also maintaining a degree I think is especially relevant for this panel, but maintaining a degree of sector, sub-sector neutrality, recognizing that different industries have to, we cannot outright eliminate, we need energy in the future.

We need mining and minerals to function as an economy implementing via these transition measures and focusing on engagement with those companies, either survey-based measures or public information, those are paramount to the collective capital reallocation that benefits these companies that incentivizes the gradual change that need to occur to get to net zero.

Edward Coyne: For us, and this is speaking specifically to the way Sprott looks at it, we're not necessarily running any particular screens and looking at the ESG rating, and then deciding if it gets included or excluded from the portfolio. Having said that, we do have a lot of internal tools and we do use external tools. The external tools mostly look at our portfolio after the fact and then, we look at what percent of it has a higher rating versus a middle rating or versus low rating.

We report that to our investors where that's part of their mandate. We do things like heat maps, for example, particularly in the mining industry where it's green zones, yellow zones and red zones of where you'd want to invest and where you wouldn't want to invest. It's based off very simplistic things like rule of law, risk of being nationalized, that kind of thing.

Even if there's a great deposit, you may not go there because the rule of law is not recognized or they have a history of nationalizing productive minds and so forth. We're looking at all those things as part of our portfolio construction of including and excluding companies, but we're not specifically looking at any one rating. I think that's largely because the ratings are still evolving.

If you think about just two years ago, the most established rating agencies out there out there we're still looking at apples to oranges, meaning they were looking at maybe a car manufacturer relative to a mining company relative to a tech company. Of course, a mining company is going to have a lower ESG score as it relates to environment and so forth on the pure nature of what they do for a business.

Now, we're seeing more and more of these companies say, "Within the mining sector, who are the best actors? Who are the best operators, who has the best corporate governance and so forth within that sector?" We're seeing this evolve literally as we're having this conversation, and that's going to be a much better way to think about it. Certain industries, they're going to have a more negative or positive impact on things like the environment than other industries.

Once you start to categorize these things, I think that we'll all benefit from that because then you can start truly looking at an apple versus an apple versus the mixed bag. I think mining in general will benefit from that as well. As you'll see, again, as I've mentioned a few times, the better managements, the more sustainable types of mines from a construction standpoint and so forth.

How they bring the mine back to or back to its original form, pre-mining, pre-extraction, those types of companies will continue to rise the top. Every evolving, there's no black and white to this yet, but we certainly consider it, look at it, and certainly after the fact we look at our rating and try to understand that rating, but we're not doing that on the front end necessarily because we're still looking for the best companies out there. We want to recognize who we own and why we own them.

Jonathan Forsgren: The next question is for Jason, and I think we've touched on it already about how when you're looking at equities, what are the ESG metrics or benchmarks that you're using? Are there any standardized rating tools that you use?

Jason Chen: For our value growth and dividend approaches, we're using S&P ESG score. Again, it is a combination of the aforementioned components. I think what is important as well is how this is being approved upon or how it's being applied on an individual sector basis. I think generally there's a recognition as at alluded to, that no sectors are created equal in terms of ESG composite ratings.

The weightings of those ESG pillars within each sector are tailored to recognize the specific nature of that sector. In terms of improvements, as I mentioned before, I think standardization is just very key. There are a lot of different approaches that exist at the moment. To some degree, I say this as a finance person, not a scientist, but there perhaps can be more room for science-based approaches being embedded in those measurements.

To a large extent, a lot of the measures you can see are designed by financial people. Tying that in with more scientific evidences I think is really important for increasing or making more effective that the sort of measurements we're using to standardize ESG investing. The last one I just wanted to tie back as well is a lot of this is important in terms of creating custom utility or ESG utility scores or being able to customize or being able to target certain areas of ESG or sustainability more specifically.

I think targeting specific criteria is something that's going to be key for a lot of investors, particularly in institutional space where they're not going to want the broad mandates that I think a lot of are generally offered. They're going to want more specific, more deliverable, actionable criteria over time.

Jonathan Forsgren: Shawn, coming to you, there's a big push globally toward the net zero greenhouse gas emissions. How does this impact traditional resource companies?

Shawn Reynolds: Well, again, I believe that every company needs to have its own goals and needs to be thinking about sustainability and needs to be building that into their business model. The interesting thing about the traditional resource space, particularly oil and gas, is they have the ability to make one of the biggest changes with regards to emissions at least. They are one of the largest emitters of global greenhouse gases.

They therefore can make the biggest change. They also have the greatest skillset to address that, if you really think about it, not maybe not the greatest, but one of the greatest, they have big project management skills. They have a lot of technology skills, huge. If you think about the physics and the chemistry behind a lot of the stuff, they are the experts of these engineering problems.

We actually look at what you can gain from getting a change or an improvement out of these industries rather than what they're doing today. More broadly speaking, we think there's a spectrum of companies that are out there, some that are very, very clear are making an environmental impact to the positive today that's a solar company, that's a wind company.

Then, there's the technology companies that are looking at changing things dramatically, a step change maybe that goes down to the direct air carbon capture or even maybe even the green hydrogen world. Then, you move down the spectrum from there you go towards companies that are truly transitioning. They're fundamentally changing their behavior and maybe even what they do or did before to something that they're doing now.

It's that real super defined transition. Then, there are the vast majority of companies in the world and industries that are just basically improving. They're doing what they do with less impact, with less emissions, doing more with less kind of thing. That whole spectrum of opportunities prevents a lot of investment potential. I would say that in the first two that I mentioned, there's certainly a growing universe of names that are becoming investible, and that's the future.

Then, you look at the transitioning names, those are the really interesting ones that you have to make a decision about it. Are they going to be able to make it? Are they doing something right? Then, the improving ones is the more traditional natural resources names, and again, the traditional oil gas guys, they have the most room to improve and therefore the most value to create in some respects with regards to the environmental sustainability story.

There's a lot of opportunities out there, and that's how we present it to our clients with regards to what are we doing and what are the companies that we invest in, how are they addressing it.

Jonathan Forsgren: Speaking of transition, Ed, Sprott's history has traditionally been in gold and silver, but more recently Sprott has expanded into many more metals and minerals that potentially support a carbon natural future. How do you see silver and gold playing a role going forward?

Edward Coyne: Sprott as you mentioned, with over four decades focused on predominantly gold and silver. Gold being what I used to know, and I still do call the original alternative investment. When you think about gold's role, and it is really an alternative currency out there. It's still a monetary metal. There are some technological uses for gold, and in some cases gold is the only solution for some of the technologies out there, but it's a very small part of gold.

It would be disingenuous to say, well, gold is going to have a huge impact on the environmental future. It's still going to be living in that monetary metal part of the market. Silver on the other hand though, has really bifurcated from gold some ways in forms in that it's used more and more in technology. Whether it's in the 5G network cell towers, whether it's in the reflective technology of solar panels.

The reflective technology of self-driving cars and so forth, silver has really moved into the consumer metal and has started to bifurcate itself away from the monetary metal side of the equation. Platinum and palladium is another great example. I always joked that platinum and palladium was ESG before ESG was cool. Platinum and palladium used for catalytic converters to help clean the air from the tailpipe.

We're seeing all these traditional precious metals in many cases be reinvented silver, probably leading the charge there. Then, of course, all the real assets and minerals out there like cobalt and them in copper, and a metal that we have in downspouts on our houses to wiring in our homes, to electronic electronics that we use in batteries and so forth. Copper is one of the oldest most traditional metals out there, and it's becoming one of the more modern metals.

Really can't do any of this without copper. We're seeing this natural progression into really all metals, all assets, all minerals within our space. I think having the four decade plus track record, having over 21 billion, having the relationships we have has really put us at the front and center of the table, so to speak, to have a voice and to do these deals and create these partnerships with all these industries out there.

We in fact have a ESG-specific physical trust where it is CTF effectively that allows investors to own physical gold that comes from the highest rated mines out there. These things are going to continue to revolve for us, and we're excited about that. Being a traditional gold and silver company, you would think on the surface sort of puts you in the back seat. The reality is it's really put us front and center and allowed us to have a conversation and put us at the table as it relates to all real assets.

We're going to continue to evolve in that, and we've had some tremendous success getting involved with physical uranium, for example, which I know we'll talk about in a bit. We've had some tremendous success with that raising capital both on the physical side and on the equity side. We think that growth will continue as the market seeks further solutions in the real asset market.

Jonathan Forsgren: Jason, how is the energy transition entering itself into equity markets?

Jason Chen: As mentioned before, I think being or maintaining an allocation to energy or sectors that don't necessarily score particularly well on carbon emissions is still a really important part of portfolio construction. There's a recognition that those are just going to be important parts of financial markets and the economy more broadly for the foreseeable future.

With energy transition, I think it is really rewarding the companies that are either better suited in that space or taking necessary steps to move towards more renewables. That is to say that there is, you need to maintain these allocations, these companies need to exist, but you want to incentivize them to change their portfolio mixes over time.

Jonathan Forsgren: Shawn, our technological advances related to sustainability progressing at a fast enough speed to address the future needs and requirements?

Shawn Reynolds: Well, in our opinion, undoubtedly not. They're progressing, the uptake of EVs and solar panels and wind farms around the world is great, much faster than overall energy consumption growth, but it's not going anywhere close enough to reach the net zero by 2050 targets that is the common goal. The reality is huge, much larger investments have to happen between now and 2050.

If you think about the International Renewable energy agency, which is kind of a standard with regards to investment and what is needed with regards to CapEx in this space. A few years ago they estimated that $110 trillion was needed to be spent in energy transition technologies. Well, recently they came out with $132 or $131 trillion. That's just gigantic numbers. This basically points to that I think, which we all are becoming starting to understand is that this is going to be one of the largest industrial revolutions that we've ever seen, $110 trillion, $130 trillion.

We're talking about five or six US economies over the next 30 years. We're talking about a German economy every year over the next 30 years. Those are just massive trillions and trillions of dollars that need to be spent. Whereas, if you look at 2021, just about $500 billion was spent. In 2022, $750 billion was spent basically on three technologies on solar, wind, and transportation, basically EVs.

That's great, that's fantastic, we need to get there and we are getting there, but as I say, it's not nearly strong enough. That's really when you only think about emissions as well and greenhouse emissions. When you put those two together, power generation and transport, you're only talking about 40% of global greenhouse gas emissions. The other 60% needs to be addressed and invested in at the level that you're seeing in the EV and alternative energy space.

Specifically, what is not being invested in on the energy transition or resource transition or environmental sustainability space is things like very hard to decarbonize steel and chemical and papers and cement. The big one that everybody misses is ag. Ag is one of the largest emitters of carbon and other greenhouse gases. It compares itself to power generation. They're both about 20% or 30% of emissions, and that's just looking at emissions.

You think about other parts of environmental sustainability such as land use, water use, pollution, biodiversity, ag, it's a much, much bigger part of that. When you think you get back to your original question, are the technologies there, are they being invested in? Not nearly enough to get to these very aggressive targets. We have to head down that route more and more money needs to be spent.

We also need to start thinking about mitigation around that and adaptability around that, what all that means, and what's the investment opportunities shows associated with that. I think we're a long way away from that, but that will be on the horizon.

Jonathan Forsgren: Jason, I'm going to bring it back to you. As Shawn mentioned, we are a long way from getting the capital that is required to get us to that net zero emissions. How can public markets capitalize this change while reconciling the need for short-term returns and reconciling that with long-term investment and capital required to get to carbon zero?

Jason Chen: We talk about a concept called double materiality, which is the importance environmentally, but also the importance as it relates to financial return. I think clearly the transition over time away from these high emissions industries or segments of those industries is really important driver of making sure that those two measures of materiality coincide with each other.

As capital moves in the direction and regulation also requires this shift in business behaviors, I think naturally people recognize the risks that exist in more traditional energy and mining industries and that the materialization of those risks into potential losses will prioritize the better actors within those segments of the economy and financial market.

It's almost a self-fulfilling prophecy in a way whereas you get more regulation and more compliance, as you get companies moving in this direction, they should behave better in terms of capital return.

Jonathan Forsgren: How do you then reconcile more mature economies with that regulation and how do you keep them competitive if let's say a more traditional energy producer operates and is traded on an exchange on the London Stock Exchange or New York Stock Exchange? Then, you have a company that might be in an emerging market that's also a traditional energy producer that's less regulated, how do you keep them competitive?

Jason Chen: I think there are a couple of ways. One is standardization, things like carbon credits, for instance standardized the price of those emissions. Specifically for a reconciling between developed and emerging markets, there needs to be, I think to your point, a recognition that emerging economies, their transition plans are going to look different than developed.

Perhaps the economic development is to require more allowances for carbon emissions, for instance, for a third emerging economy versus developed one. As much as I think standardization is very important, the regulations need to account for the nuances between the economies, they need to be customized in a way that acknowledges that different countries are in different stages of economic growth.

Jonathan Forsgren: Now, Ed coming to you over a year ago, Sprott introduced uranium and uranium equities to the investment community in a direct and liquid way. How do you see nuclear power and ESG going forward?

Edward Coyne: It's interesting, if you look at what's happening right now, about 20% or so of the US is powered by nuclear and about 10% globally. With France leading the charge, they're at about 70% I believe of their power. Then, you have places like Germany that basically until recently with what's going on with Russia and Ukraine, it has been basically zero or going in or moving to zero.

That's changing drastically, right? I think it's interesting to note that, or it's important to note that it's not one verse the other. We think about a couple of hundred years ago we were heating our homes with wood and then coal. We continue to move more efficiently into oil and gas, natural gas, and now wind and solar and so forth. Nuclear has been coming along the way also. What you need is you need base loads.

You need all of these things to work. I think Jason said it at best that you have to look at different parts of the world, different economies, and then understand what their particular needs are, access to the natural resources they have access to and so forth. There's parts of the world like China that are building 20 plus new nuclear reactors, but they're also building coal plants. It's not one or the other on these things, you need all of them.

Nuclear is proving to be one of the cleanest forms of energy, one of the most dependable that you can run 24/7. It's really the base load. Then, you've got wind, solar, hydro of these other energy sources that can support that as well. Battery technology is way behind as far as storing massive amounts of grid energy. You can certainly do it on a home basis, but to do it from a power plant basis, we have a ways to go on that.

I think you're going to need all these things. We recognize that a few years ago, I sort to be equated to the dog catching the car. We weren't really sure what we had until we had it. Then it really just expanded rapidly. We've raised over 3 billion in the physical market and over a billion in the equity market as relates to uranium. We took it from monthly subscription pricing to a daily nav pricing. We think that's going to continue.

We see the same thing as I mentioned earlier, in the battery metals market, whether it's cobalt, nickel, lithium, copper, all those metals we're getting more and more involved with as well. Uranium was our first test into that space, into that market, and we had tremendous success there. We think the market's appetite for that is going to continue to expand, particularly if we do stay tethered to the 2050 carbon neutrality goal.

If that's a true goal of governments around the world, we can't get there without sources like nuclear. If that remains a viable goal, then we would expect nuclear to continue to play a larger and larger role globally as far as providing power to the world.

Jonathan Forsgren: Shawn, how are you thinking and talking with clients about renewable energy in the context of managing a strategy that also invests in fossil fuels? Do you have a timeline that you're following internally? We just mentioned 2050 as carbon-neutral, so there must be something shorter than that in terms of the transition off of fossil fuels to renewables.

Shawn Reynolds: Yeah, as I mentioned earlier, we're just looking at almost company by company and saying, are they doing something meaningful but also sustainable. I might say sustainable? I don't mean sustainable to the environment, sustainable and that they can keep doing it. Similar to Jason's comment earlier about double materiality, we kind of talk about dual returns or dual sustainability. Sustainability requires sustainability.

If you want to make an impact on the environment and do it sustainably, you need to have a sustainable business model, meaning you have to be around 10, 20, 30 years from now and still doing that. It's great, everybody comes out, has great ideas how they're going to save the earth and huge aspirations, but there's a lot less that think about how they're going to be able to do it forever or for quite a long time.

That's how we think about it is every company to be in the game, table stakes is they have to think about what they're doing to be to one, think about how do they do more with less that's value creation, however you want to define it. Then two, how are they going to come up with new models, new technologies or innovations that allow them to have a much lower impact on the environment?

If you don't have that, if you can't figure it out, again, it's just part of the story. It gets fed into our overall analysis of the company. When we talk to clients, we just say, "Listen, the whole portfolio is moving ahead in this environmental sustainability way, but clearly some are going to be further ahead. I mean solar company's going to be further ahead, we don't own a coal company, but a traditional miner or something like that.

Even a traditional fertilizer companies, which are some of the largest natural gas users in the world. We focus on the path and not the level that individual companies are at, but the path that the whole portfolio's moving.

Jonathan Forsgren: Well, Ed, Jason, Shawn, thank you for digging into ESG with us.

Edward Coyne: Thank you for having us.

Shawn Reynolds: Great to be here.

Jonathan Forsgren: To our viewers, thanks for watching. For Asset TV, I'm Jonathan Forsgren. We'll see you next time.


Show More