Jeremy Grantham and Lucas White on Climate-Change Investing

Jeremy Grantham co-founded GMO in 1977 and is a member of GMO’s Asset Allocation team, serving as the firm’s chief investment strategist. Prior to GMO’s founding, Mr. Grantham was co-founder of Batterymarch Financial Management in 1969 where he recommended commercial indexing in 1971, one of several claims to being first. He began his investment career as an economist with Royal Dutch Shell. He is a member of the GMO Board of Directors and has also served on the investment boards of several non-profit organizations. Along with his wife, Hannelore, he runs the Grantham Foundation for the Protection of the Environment, which was founded in 1997.

Lucas White is the lead portfolio manager for the GMO Climate Change Strategy and a member of GMO’s Focused Equity team. Previously at GMO, he served in other capacities, including portfolio management for the Global Equity team and leadership of strategic firm-wide initiatives. Prior to joining GMO in 2006, he worked as a programmer and analyst for Standish Mellon Asset Management. The GMO Climate Change Fund (GCCHX) seeks to deliver high total return by investing in companies focused on climate change mitigation and adaptation. GMO’s Focused Equity team utilizes a valuation-based approach to select equities for investment. Its universe is predominantly comprised of companies focused on the mitigation of climate change, though companies focused on adaptation to climate change are also considered. Climate change mitigation and adaptation industries include clean energy, batteries and storage, electric grid, energy efficiency, agriculture, water, and companies that service these industries.

I spoke with Jeremy and Lucas on December 12.

What led you to launch the GMO Climate Change Fund and what is the fund’s mandate?

Lucas: The fund’s mandate is to make as much money as possible investing in solutions for dealing with climate change and understanding the science, technology and the companies themselves and their fundamentals. We are trying to figure out how to profit from the activity in this area, which we expect to ramp up considerably.

The idea flowed out of our natural resources fund more than anything else. There were a bunch of short- and medium-term risks or risks that we could diversify away. But the one long-term risk in our natural resource strategy was that fossil-fuel assets would end up being “stranded,” either because there is carbon regulation, carbon pricing or technological disruption and those reserves wouldn’t be produced. Part of how we dealt with those risks in our resources strategy is that we have a lower exposure to energy. We’ve always excluded the particularly offensive technologies, like coal, tar sands, kerogen oil and things that have a really bad carbon impact. But we have also targeted alternative-energy investments as part of our energy exposure. As the costs fell for solar, wind, batteries and storage, our research led us to think that there was a new strategy focused more directly on the solutions side.

Jeremy: I’ve been writing that I thought climate change was the issue of the next 20 years or maybe indefinitely, and suggesting that we develop financial products around this theme. That was a factor when we got into forestry and farmland. But the feeling was we were a bit ahead of our clients, so we better wait for the client world to catch up. In the end that’s what we did. It left me fairly impatient to get going with a climate product.

The good news is at the Grantham Foundation I have a couple of very smart helpers. We spend a good part of our time hobnobbing with serious climate scientists and technologists, keeping up with what’s cooking. We invest 20% of our corpus in what we call mission-driven projects. We are looking at batteries and similar investments. There is a very nice synergy. The foundation has a slightly longer horizon when we are looking at the climate implications, say 10 or 20 years out. The fund’s horizon is a bit shorter than that. But it’s nice to have my passion and hobby intersect beautifully with a commercial proposition.