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Charlie Donovan

Senior Economic Advisor

Impax Asset Management

April 4, 2024
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Ep 109: Charlie Donovan - Senior Economic Advisor, Impax Asset Management
00:00 / 01:04

Ben Hoffman [00:00:59] Welcome back to the Energy Impact Podcast. Today, we're here with Charlie Donovan, Senior Economic Advisor at Impax Asset Management and Professor of Practice and Sustainable Finance at the University of Washington. Charlie, it's great to have you with us.

Charlie Donovan [00:01:13] Oh, thank you for inviting me.

Ben Hoffman [00:01:14] Absolutely. So, let's start by getting to know you as a person. Can you tell us a bit about where you grew up, early interests, maybe the life story in a couple of minutes?

Charlie Donovan [00:01:25] Sure. I'd be happy to. So, I have been spending about 25 years now working on climate and energy. I had the really good fortune of working for the US government at the early part of my career during the Clinton administration, which was a really eye opening time. A lot of the concepts we're working with today still were the same things we were talking about then. And perhaps in this conversation we can get into it.

Charlie Donovan [00:01:48] But I spent most of my career in the energy sector. So, working for BP in what was the rise and fall of alternative energy within BP during the 2000s. And then, turned my attention to teaching. I went back and did a doctorate fairly late in my career. And didn't expect to pursue teaching, quite honestly. It was really on the back of knowing the dean at Imperial College Business School and his sparking some curiosity for me about that career path that I had never really considered for myself.

Charlie Donovan [00:02:25] And so, was in London at that time. I founded a center called The Center for Climate Finance and Investment. In 2015, we had a master's program called the MSC in Climate Change Management and Finance, which in 2015 and '16 was still a bit of a rarity. To be trying to blend finance and management concepts into what was a, quote unquote, "environmental" area of climate change. But even up to my work today, the point being that this is about a fundamental transformation of the economy. And so, we need more and more people who are out there who understand from a business and economic perspective what these changes are and grasp the enormity of them, and then speak the right language in order to implement those changes. So, hopefully in a nutshell, that gives you a description of who I am and what leads me up to what I'm doing today.

Ben Hoffman [00:03:17] Absolutely. Yeah, and it's interesting always seeing the public to private sector side of things. And it looks like really from your resume, you've gone public into the private sector. And I would classify maybe teaching and being a professor on that end as being in the public sense. Could you talk a little bit about especially your early early career starting out at the EPA. And then, moving into BP and what that transition looked like. What spurred that? And so, those different branches of the environmental development game.

Charlie Donovan [00:03:52] I just got back from Washington, DC last night, so very hot in my mind what that is. I haven't been outside the US for 20 years. This is not a place that I've spent a lot of time since I worked at EPA in the late '90s. So, it was really touching some roots. As you know, last night we had the State of the Union address. Super Tuesday, and the SEC had a new climate disclosure rule which it released on Wednesday. So, it was an exciting place to be during a pretty consequential week for sustainable finance. And I feel very grateful to have had that grounding.

Charlie Donovan [00:04:26] As we move forward in sustainable finance, there are a lot of folks who work in capital markets who have never really thought about the political economy and have always treated politics or government as something external to how markets work, and almost like an interference. And more and more, I think what we're starting to see is that it's part and parcel. And we probably need a lot more anthropologists or political scientists working in finance, because markets are a subset, really, of how we decide to organize the world and the rules that we make.

Charlie Donovan [00:05:02] And so, I think it was really fortunate for me to have that exposure early on. And in the teaching that I've done in MBA programs, I always tried to impress upon people that you can't understand finance as just a model. It's just not that simple. We've tried over many years to try to simplify these relationships, but they're simplified representations of a reality that's much more complex and much more messy. So, it was a great start, and having been there this week, it really reminded me of what a gift that was to be able to see from the inside how government works. The good, the bad, the ugly. But those are really some enduring lessons for me from that.

Ben Hoffman [00:05:45] On the renewable side and especially on the finance side, we see the IRA, the Infrastructure Act, both those coming out really spurring development growth in the US. Do you see a heavy importance on the interface between public and private sector when we're talking about building out some of these projects?

Charlie Donovan [00:06:09] That's why I'm so fascinated with energy. And I think a lot of people who work in energy have that same belief that we're talking about, ultimately, a public good. [00:06:17]This is not the same as other industries in which consumers can buy it or not. And if they have brand new sneakers, well, there's some discretionary element of that. Energy is is core. It's a fundamental need. It's a core part of development, and it's an element that we all, as consumers, have gotten used to not really being all that worried about. [25.9s] The light switch comes on and I pay my bill and that's about it. That's about the most that people think about it.

Charlie Donovan [00:06:49] But we're recognizing that so much of the wealth that we've achieved in the world and in the US has come as a result of harnessing fossil fuels. It's not that that was wrong, but it's just that it's gone on too long. Now, we're seeing the flip side of that, which is the consequences of having used cheap and abundant energy to our benefit but having not really paid the right price, and not really recognized that there was a cost associated with that and that we've kicked that can down the line for too long.

Charlie Donovan [00:07:24] So, there's this moment of accountability. And the really big choice that we face is how do we want to address that? And the opportunity that we have, in my mind, is that technology has improved to such a rapid degree. And we have lived through a real technological miracle with respect to the cost of solar, the cost of batteries, that now we have actually opportunities that weren't envisioned even five or ten years ago to build an energy economy that replaces the one that we have.

Charlie Donovan [00:07:56] There has always been a sense that we could have a cleaner system, that we could have a safer system. But for the very first time now we're talking about how we have an opportunity to build a cheaper system, actually, over time. And that's really exciting. And so, this influence of where technology has gotten to and changed perceptions about energy from this very boring industry to one in which there's a really cutting edge aspect, clean tech, which a lot of my students are very interested in, that's exciting. It kind of turns it around and takes it from this industry that nobody wanted to be in and suddenly is attracting really some of the brightest minds that we've got.

Ben Hoffman [00:08:33] Yeah, so I think you touched on a couple of things there, including cost allocations, tech improvement, and of that transition that I'm going to want to circle back to. I am curious, your work with Impax and what you're doing now... How does it feed into some of that analysis? I mean, maybe we should have started off with that, but tell us a little bit about what you're doing with Impax and where that research is taking you.

Charlie Donovan [00:08:59] Well, being an academic and working on the confluence between sustainability drivers and financial markets, it felt to me at some point that as a perfection or a practice, having come from the private sector, that there was always some natural link to come back in. Put your money where your mouth is, so to speak. So, I'm really fortunate that I've known the Impax CEO and founder Ian Simm, who started the firm 25 years ago, for a long period of time. He used to be a guest lecturer in a lot of my classes. Really, my role now is trying to just do the same thing, but to turn it much sharper into what are the investment implications from this industrial transformation that we're on the verge of achieving?

Charlie Donovan [00:09:40] So, that involves work with the investment teams. Impax is an asset manager with about $50 billion in assets under management globally. Most of that's in listed equities, but there's a growing fixed income presence, and there's also a private markets business that works on developing renewable energy infrastructure in Europe. So in a lot of ways, it's a gratitude that the stuff that I was working on previously, which seemed, quote unquote, "academic," is now much more of a real concern in financial markets.

Charlie Donovan [00:10:15] So, that's about how is climate change impacting investments? How do we think about portfolio construction in a world in which technology is changing quite rapidly? How are the new regulations going to affect how people ultimately allocate, and the underlying risk return properties of various asset classes. So, it's been a great opportunity to put a lot of that research into practice and to get the real feedback from people about what matters and what doesn't when we think about policy interventions that governments are considering.

Ben Hoffman [00:10:49] And so, let's touch on that in terms of policy interventions and what your recommendations are right now. With a lot of the new emerging tech, where do you see things heading?

Charlie Donovan [00:11:01] Well, we've lived through a big change over the last couple of years in which we had an idea that really, the way that you would move the needle on carbon emissions was to somehow constrain demand. And that was really modeled out by how the EU went about it with its EU Emissions Trading Scheme. And so, you needed to put a price on carbon. And in the economists' model, you put the right price on carbon and everything else sort of flips and there's a solution.

Charlie Donovan [00:11:32] And what the Inflation Reduction Act did in the US... So, the landmark legislation that was passed in a couple of years back went at it from the other side, which is, "Let's push supply. Let's make sure that there are incentives and there is money there so that technology can essentially outcompete." And the reality is probably somewhere in between. So on one hand, it's absolutely necessary for technologies to diffuse in a way and to have a support that allows them to be on the same playing field. Because remember, fossil fuels have been deeply, deeply subsidized over time. And even as we saw during COVID, there was an instinctive response of governments to subsidize again as those costs escalated. I think the IMF put it at $7 trillion worth of subsidy into the fossil fuel sector in 2022.

Charlie Donovan [00:12:26] So clearly, there's a need to... If we're going to subsidize... And we do that in energy, we do it in agriculture, we do it in all sorts of sectors. But to make sure that we're doing that fairly. And then, the other side of the coin is we still need to make sure that we're pricing things appropriately to reflect their true cost to society over time. And this is not just an esoteric concept. This is you and me as taxpayers who are ultimately going to be left holding the cost of climate change and other environmental externalities. And it just doesn't seem right that certain companies would benefit from that while we as taxpayers pick up the check.

Charlie Donovan [00:13:06] And so, these are the two aspects, the supply side and the demand side, that are really the crucial ones in terms of finding the solutions that allow us to continue to grow the economy, continue to make sure that energy is abundant and available, but at the same time ensure that we don't have a huge, huge bill to pay as a result and then really push that onto younger generations to pay when myself and a lot of other people are long gone.

Ben Hoffman [00:13:36] Yeah, that's the difficulty when we look at maybe the past couple of generations. And I would say, maybe there's malicious intent behind it, maybe not, depending on which view you look at. Some would say they knew about climate change, they knew what fossil fuels could do and everybody ignored it. You could also say abundant, cheap energy really helps us grow.

Ben Hoffman [00:14:00] And so, I would ask how do you see the replacement going? I think one of the things that fossil fuels really offered us in the past is you can flip a switch and the lights turn on. You don't have anything to worry about. Maybe it's a bit more centralized and so there's large outages, but realistically, you have a power supply, right? You have spinning reserves; they're able to control the grid. There are a lot of unique attributes that fossil fuels have that with solar and wind, maybe not so much. I think you can tie storage into it, but it gets a little bit pricey. And so, how do you see that evolution taking place? Let's go back to the technology improvements. What's your ideal buildout of an infrastructure grid in the future that maybe doesn't have fossil fuels generating electricity for us?

Charlie Donovan [00:14:50] You're hitting on a really important point, which is that when we think about the transition, as it's called, the energy transition... The idea of moving from dirty to clean is one way to think about it. But I think the much more important way to think about it is moving from hydrocarbons to electrons as the backbone of the energy system. And why that's so important is because you're really talking about a fundamentally different commodity. One that can't be stored like liquid gas or solid fuels can. It can't be stored in the same way, and requires a different technology for that storage. And also one that faces an entirely different regulatory design.

Charlie Donovan [00:15:31] We don't, in the world today, have a really effective way of regulating oil and gas companies profitability. But we do have that for electric power. We have utilities which are under monopoly or quasi-monopoly structures, and if governments don't like how much they make, they say, "Well, you can't have it. We're going to tax that away." So, there are a number of ways in which the shift that we're trying to achieve is really constrained by the way in which we've thought about electric power, as actually in the past, a little bit of an add-on and not the central story. But as we get electrification becoming cost effective in transportation, which is obvious around electric vehicles... Even in home heating. So, this is about heat pumps and all of that, but in other ways as well.

Charlie Donovan [00:16:25] I mean, the growth of AI and of data centers is another way in which electricity demand in the US and globally is going up and is shocking people with respect to how quickly it's going up. And so, this sector... Again, kind of a boring sector. Utilities, nobody really got all that excited about investing in utilities. But we are really now in a place where we need to understand what is the market design? What is the regulatory design that unlocks the power and creativity of capitalism and the creative destruction that can that can happen there? Because at the moment, we don't. And we're really hitting up against a real dichotomy, which is that oil and gas continue to flourish in a an environment in which their returns are not constrained. But electric power comes from sort of a monopolistic regulatory structure in which that's quite easily done.

Charlie Donovan [00:17:23] And that, for me, is a central question, because for a transition to work, ultimately the rate of return, the risk-adjusted rate of return on this new, clean energy needs to be higher than it does on the old, dirty energy. And there are a number of ways that can happen, but if we don't find a way for those prices and the real costs to be accurate reflected, then the transition is going to go a lot slower than it could. And that would, again, have really unfortunate repercussions, not just in the economic sense, but in an environmental one as well.

Ben Hoffman [00:17:57] On the education side of things, in 2015 and 2016, sustainable finance kicking off before its time. As a professor... I like to think my professors are molding our minds, right? Sending us out in the world and hopefully we'd have a positive influence, but at least a decent understanding of what we were doing professionally. What direction would you try to point your students in through an MSA type of course?

Charlie Donovan [00:18:31] I have really found that some of the most exceptional students who I've been able to teach in either MBA or executive MBA programs have had some kind of science or engineering background to start. So, that's one piece of advice. I've spoken with high school students who have said, "I want to get into the University of Washington. How do I do that?" And of course, I don't have a lot of advice for them. But in terms of the choice of their degree, it does seem to me that there is a really strong marriage.

Charlie Donovan [00:19:04] Even those who are interested in business... To not do a first degree in economics or business studies or whatever, but to go do something which gives a slightly more scientific grounding in what it is. Because a lot of these are very interdisciplinary challenges. We talk about that in the university all the time. In fact, we pay a lot of lip service to it. But as you go out, you're going to find that there are not that many degrees in which you can combine today an interest in sustainability that works from, say, both an engineering perspective and a business perspective.

Charlie Donovan [00:19:37] So, one of my favorite classes to teach when I was at Imperial College, London, was an MSC in Sustainable Energy Futures, which was almost entirely made up of engineers, electronic engineers, mechanical engineers. And they knew nothing about business. And my job was to give them a boot camp, if you will, a mini-MBA in a week's time. And the amount of learning and the amount of progress for a bunch of people who had never even opened the Wall Street Journal to suddenly conversing in that language and talking about what they're going to do on their first equity raise is really satisfying.

Charlie Donovan [00:20:13] So, I don't know if there's great advice that can be given. Everybody's got to find their own path towards what it is that they're going to do. But I do see that a lot of individuals who have managed to make that work have taken a perspective that comes from something in science and engineering, and then topped that up with a better understanding of finance, economics, and a broader appreciation for what the role and the limitations are of business and moving us forward.

Ben Hoffman [00:20:43] Would you say that there's been additional interest over the past five or ten years in the sustainable finance space, both from engineers and maybe non-engineers, maybe just traditional finance and business folks?

Charlie Donovan [00:20:57] Explosive change. It was a pretty lonely venture, I have to say, in 2015 at the Center. There was more than a little skepticism that this would work out. And fortunately, it was actually on the back of a lot of private sector funding, banks, asset managers, that came in and saw that vision that I had put forward. And so, I'm really grateful. That was entirely necessary. Because even within the grants and sources of funding that universities usually draw upon, there were not very well-defined channels to create a center based on those kinds of themes.

Charlie Donovan [00:21:38] I have never in my teaching career met an individual who was working in clean tech and said, "How do I get into oil and gas?" But I've had a lot of students who were in oil and gas and said they want to get into clean tech. So, the directionality of this flow is very clear. And it's also clear that there was, in about 2019, a real jump in interest. There are probably a number of reasons for that. So yeah, the past five years has been remarkable from what was a field... You could have a conference, and you'd see the same 25 people at those conferences... To something that is much, much different today.

Ben Hoffman [00:22:21] Can we touch on that 2019 period? It's interesting to draw that, not line in the sand, but just point to that year maybe as things fundamentally shifted. You mentioned maybe there were a few different things that played into that. What would you say the top ones were?

Charlie Donovan [00:22:39] Well, there was a political dynamic, clearly. When the Trump Administration began, there was a reaction. From states and cities in the US, there was the mantra of "We're still in." And for a number of years, there was not much to be done. But it did seem that there was an accumulation of progress, and there was also real progress on the ground. And again, I'd point to technology as being the clearest indicator of that.

Charlie Donovan [00:23:07] So, suddenly... And whether it was exactly 2019 or maybe a couple of years... There was this window into a possibility that maybe this wouldn't be just about additional costs. Maybe there was another paradigm. Maybe there was something to be excited about that was beyond the idea that we would just have to stop using energy or use less of it. And that, I think, brought some people into the opportunity set.

Charlie Donovan [00:23:32] So, we really had spent a number of years, and quite rightly, talking about climate change as a risk. And then, something flipped in which the opportunity side of the conversation became much more prominent. And suddenly people could see a career path for themselves that felt as exciting as going into other forms of tech which are maybe less capital intensive or rely more on software than they do hardware. So, I think that was part of it.

Charlie Donovan [00:24:00] And I think it's also... We've been aware of climate and why climate change is occurring for many, many years, but it's a very difficult reality to face. And I think there's also something to be said for just a slow grind of awareness and the message getting out and people getting access to good information. And a little bit of a generational change in which there's a tipping point societally, in which we see, "Hey, this is not a hoax."

Charlie Donovan [00:24:30] And this is not something new. This is something that's really well-grounded in science, confronts us with a lot of difficult tradeoffs. And so, I think that there are probably some tipping points there in terms of awareness and a confluence of factors that means that suddenly, most importantly, people can see themselves with an opportunity to make a difference, an opportunity to have a good career and also serve some of their really core motivations around environmental sustainability.

Ben Hoffman [00:25:01] I saw one of the papers that you released. I think it was on the returns of oil and gas over the past 10 years compared to the returns of renewable projects over the past 10 years. Just looking at maybe where a flip might have occurred in that. And I'm going to use that as a segue to maybe talk about where you see the investment in clean energy projects in the future going forward.

Charlie Donovan [00:25:27] So, the study that you referenced was a piece of work that we did in 2020 with the International Energy Agency. And it started with having worked in the oil and gas industry and knowing a bit about the returns. It was always striking to me that people had this perception that oil and gas was really profitable and all this green crap was... Nobody could make any money out of it. And so, we set out to do what didn't see in the market at that point, which is a good 10-year historical record. And the short story is, both on an absolute basis and a risk-adjusted basis, clean power and the companies that are listed on stock markets around the world who have a fundamental role in the clean power value chain, had outperformed the oil and gas industry over 5 years, 10 years, risk-adjusted basis, absolute basis, regions. It was like a slam dunk.

Charlie Donovan [00:26:22] Of course, what happened is that when Russia invaded Ukraine and commodity prices went through the roof, of course those relationships changed. But it wasn't that moment of high profitability, which was really a windfall profitability based upon not the exertion of any talent, but just simply that oil and gas became very expensive... That was not a reversion to the mean; that was an exceptional moment in time. And even as we've seen over the past 6 to 12 months, conventional energy has been among the worst performing sectors in the S&P 500. So, I think that was an important study for us. And clearly, working with something like the International Energy Agency is important to that. But to get away from the myths. Let's get down to the data and let's get a debate that actually centers on what works and who's making money.

Charlie Donovan [00:27:17] The second thing you asked is about going forward. Going forward, a lot of what I see as a really interesting opportunity is around systems and integration. It actually returns to more of a software play as much as a hardware play. Because China has really dominated a number of the supply chains, and a lot of the supply chains for, say, solar or batteries have become more commoditized. So, the special sauce, let's say, for a lot of companies is about how do you integrate those into systems? How do you use things like AI? How do you use more intelligent systems? How do you have value capture associated with being close to a customer who is now not just a consumer of energy, but actually sometimes a producer of energy? Whether that's the solar on their roof or an electric vehicle, or it's businesses which have that flexibility to turn up and to turn down appliances as energy prices tell them would be favorable.

Charlie Donovan [00:28:13] So, I think that's the next wave that's coming, a more digitalized energy system that uses more electric power but does it in a much more intelligent way and uses it much more efficiently. And there's a huge opportunity associated with efficiency in just moving from motors that use electricity instead of combusting oil or natural gas, in a car or at home in your furnace. But that system intelligence is a really vast set of opportunities that a lot of very exciting, young companies are pursuing.

Ben Hoffman [00:28:54] You mentioned Russia-Ukraine spiking gas prices throughout Europe and throughout the world. I would say that the European markets may be still feeling repercussions of that a little bit. I think there's also a bit of a fear of energy security, which arguably is one of the things that renewable or maybe on-site resources can have. That is hydro or nuclear, renewable or storage, whatever it is, internally. If you're not trading those hydrocarbons back and forth across the world, you have a little bit more security. How much of that do you think is factored into domestic, or even abroad, when other countries are looking at renewable energy investments?

Charlie Donovan [00:29:42] It's been there from the very start. So, if you go back to the end of World War II and why the gas and oil fields in Saudi Arabia began to be developed, that was a lot about a recognition of, a need for a new world order in energy and the need to bring other countries onside so that the US could continue to develop in a way that was going to be dependent upon access to supply. The country had some domestic supply, but not nearly the volume that it is today, where the US is the world's largest oil and gas producer.

Charlie Donovan [00:30:19] So, that question that you're asking of energy security is really fascinating. And again, it's been around for 80 or 100 years. What flipped recently was, one, the emergence of the US as such a producer. During the Bush administration, there was a famous speech about America's addiction to oil. And at that point, we could have gone in a number of different directions. But the way that we solved that was to cure the foreign addiction by really finding a technological miracle in itself associated with how to get tighter oil and natural gas out of geologic substrates that we never thought was possible. And so, just a really stunning set of stories about technological innovation and drilling and how that played out.

Charlie Donovan [00:31:13] But that brings us to the current day, in which security is a bit messy. Clearly, the security paradigm for Europe is now crystal clear, and there is going to be a lot of change. And that's why Europe is continuing, at least on the demand side, to lead in a lot of ways. On the supply side, though, we have a very tough set of choices coming forward, which is given that for a lot of the supply of clean technology, China has just dominated those industries.

Charlie Donovan [00:31:45] Now, we're going to enter into some really tough times in terms of what are the tradeoffs between the pace of an energy transition versus, say, domestic jobs or domestic manufacturing? And we're seeing that really play out in real time right now in the US, and it's really hard to predict how that's going to happen. But we really need to think carefully now about how we look at collaboration versus cooperation in serving some of those mutual goals around energy security.

Ben Hoffman [00:32:14] Well, and I think that's one of the things. With the IRA, we're pouring hundreds of billions of dollars into real US infrastructure on this clean tech progression to try and boost us forward. I think I heard you say in another podcast that it's all gunked up in the system right now. So, we have all of these assets that we just want to deploy throughout the US, and we're having a lot of trouble doing it. From the public policy background, how do you see us cleaning that up? Is there a path forward?

Ben Hoffman [00:32:48] I think one of the areas where China has really beat us out is they're able to develop large projects without maybe even any technoeconomic considerations. What's one of the most interesting things to see... You'll see maybe a storage plant go up where the economics don't make any sense. But it's first of a kind, and that's fine; they'll keep on deploying them out. Versus in the US, we're maybe struggling to really hit the ground running with development.

Charlie Donovan [00:33:16] Well, and I know I'd rather live in a country in which communities need to be engaged and there is multiple levels of approval that are needed from various levels of government in order to ensure that that's in the best interest of people. So, I hope we'll never turn our back on that, but it does come at a cost. It's a lot more bureaucracy. It means you can't get things done as quickly. And that, for a lot of people, is frustrating.

Charlie Donovan [00:33:42] I would say on the Inflation Reduction Act that some of this was predictable in the sense that you had a piece of legislation which, at its heart, had a huge number of tax credits as the way in which clean energy development would be incentivized. That also means that just like any other piece of legislation which has relied on tax credits, it takes a while for the United States Treasury, and in turn, the Internal Revenue Service, to provide the guidance about exactly how these things should work in practice. And so, Congress leaves a lot of discretion for those things to be worked out, and it's taken a lot of time.

Charlie Donovan [00:34:23] But if you talk to folks in Treasury, they are at the moment... Maybe it should have been this way from the very start, but there's a real focus on getting as much of that guidance completed over the next three months as possible so that they can deliver on what has been some really outstanding commitments, particularly on the manufacturing side.

Charlie Donovan [00:34:41] So, Secretary Granholm yesterday talked about 500 individual manufacturing commitments that have now been made on the back of the Inflation Reduction Act. But those are commitments. And delivering upon that does require some of that tax guidance to get finalized. It's going to require, in certain areas, state and local approvals for those things to be built. Transmission is probably the biggest area in which we see multiple layers of jurisdiction not necessarily in agreement with each other. So, this is the messy world of democracy. And all I can say is, I know that I'd prefer to be living in a country which has a bit of that inefficiency in favor of making sure that communities are well represented in the choices that we're making.

Ben Hoffman [00:35:31] I fully agree with you on that. I think that's one of the things... A lot of this money coming out... There's the Justice40 Initiative, where a lot of it, especially around maybe government grants for new infrastructure projects, it's prioritized to projects that maybe help disadvantaged communities or historically disadvantaged communities. And so, it's one of the things where I'd say we're seeing a shift with the clean tech. We're actually looking out for communities as opposed to maybe a "hush-hush, build now, worry about it later." So, I'd say it's pretty encouraging.

Ben Hoffman [00:36:07] I would ask on the private market side... Just going back to maybe some of the new tech that's coming out. Maybe long-duration energy storage would be a good one as a baseload if we're going to talk about renewables. I am a pretty big proponent of nuclear. I see that hopefully working out maybe on the SMR side of things. But what do you think the role of private markets is in terms of development capital going into technologies that maybe aren't quite proven out yet? Where's the intersection of government versus private capital putting their heads together and working through that?

Charlie Donovan [00:36:46] Well, you'll know that we've for a long time had this idea about a valley of death or valleys of death in the commercialization of new clean energy technologies, and that venture capital is not the perfect solution there. Because we're talking about, ultimately, the payoff being in developing infrastructure which has a really long life, and that's a lot different than the payoff one gets from developing an app that hundreds of millions of kids use every day.

Charlie Donovan [00:37:13] There's for a long time been this recognition that this isn't the technology adoption curve that we'd see. And actually, a series of S-curves that have that have followed other technologies over time. The optimal financing of that doesn't necessarily follow. Because it's much more capital intensive and you don't just do it at the beginning, but you do it all the way through the cycle and you've got to keep building this stuff.

Charlie Donovan [00:37:42] There are some tough choices ahead about about how to do that. And in other countries, clearly there's been a much more aggressive move towards public-private partnership or blended finance structures in order to accomplish that. In the US, we have a little bit more of a private sector mindset about that and that we should create the table but let others invest. But I think some of those fundamental assumptions about how to get this done need to be and are being reevaluated as we see that these gaps are opening up.

Charlie Donovan [00:38:13] And again, it's not because the energy transition costs that much. It's because it would be in our own best interest to invest that much in order to receive those payoffs over time. Because it's not whether we pay or not, it's about what we pay. Do we pay to clean up a disaster, or do we pay and invest in order to get a cheaper and cleaner energy system?

Charlie Donovan [00:38:39] I think the nature of how we even talk about this as cost versus investment, these reflect what have been longstanding assumptions about what an energy transition would be, what kinds of costs or benefits we face associated with things like climate change or water availability, air quality. And I hope that there's still a lot of really important new thinking to be done. Because we're at the tail end of a way of thinking about these problems in which the environment was really treated as a totally separate concern. And, "Here's the economy, it functions, and then somehow, environmental issues plug in."

Charlie Donovan [00:39:22] We're slowly but surely getting to a much more holistic idea about the economy being a subset of the natural environment and how we organize ourselves as people. And I think that when you start to do that, you come to some very different answers about what would be the optimal rate of investment and what would be the optimal way in which we can conduct ourselves going forward.

Ben Hoffman [00:39:46] Really with that, what are the next steps in your work, working through that progression?

Charlie Donovan [00:39:54] Well, the number one step is to keep finding investments that can pay well to investors. I mean, Impax and other asset managers ultimately have a fiduciary responsibility to investors, whether those are institutional investors or retail investors, to make sure that they can save for retirement and that they don't have to make a compromise associated with returns. Now, that's hard to do, and we need to ensure that the world moves with us. And so, we have seen policy evolve in a really remarkable way, globally, over the past five to ten years, which has provided a lot of tailwinds. And the change in technology costs has also been an enormous source of tailwinds. But this job doesn't take care of itself.

Charlie Donovan [00:40:42] And so, on one hand, what I do in the academic realm is articulating, hopefully, what are some of the ways forward? What are our policy interventions that would be useful? What are financing structures that are proven to be helpful in terms of accelerating the deployment of capital? But on the other hand, you have to accept the world as it is and really parse through the value chain that's emerging, which I see as an upstream in clean tech. So, that's solar and wind and geothermal. And there's a midstream, which is around the stuff that you mentioned, storage and transmission.

Charlie Donovan [00:41:20] And there's also a really important thing about the downstream. So, the companies that are providing the system intelligence, that are providing the switches, that are even making the materials for the cables. There's a really, really big base of the investment pyramid which is, maybe not pure plays and maybe not what everybody would call connotate as energy transition names, but actually have really significant exposure to these themes and to these trends. So in that respect, you have to look through and see who's outperforming and why. And does that create for a basis for an understanding about who the winners and losers are going to be in this really great transformation that I'm certain is ahead of us.

Ben Hoffman [00:42:05] A couple of questions left. This is probably going to be one of the more frustrating questions to answer, so I apologize. And the reason I say frustrating is it's going to be a broad scope question. What are the biggest challenges that, as a whole, we face in this transition? What do you see as one of the biggest challenges? And then, do you have a mapped out solution in your head of how we progress through these things?

Charlie Donovan [00:42:34] I think that the biggest challenge is that we begin the discourse and the debate on a shared set of facts. That has been a slightly unexpected turn of the wheel. And there are a number of causes. Social media is part of it, the decline of traditional media is part of it. A lack of trust, general trust, is part of it. In some ways, it was part of why I was really attracted to teaching and to work for great universities. They're one of the few institutions in the world that seemingly does still have a high degree of trust from the public.

Charlie Donovan [00:43:14] So, it's remarkable that... You've probably seen it as well as I have on LinkedIn and Twitter. There are still people out there who are talking about that these are sunspots that are driving climate change. And so, that's never going to go away. But the ability to cast doubt and to move the discussion from solutions back to doubts about whether the problem even exists is really frustrating. And I think that's intentional. I do think that there's a well-financed campaign to help make that happen. I wish I knew what the solutions were. But we're seeing that breakdown in trust across a number of areas, so I don't think it's unique to the topic that we're discussing. But it's really hard to craft solutions when we can't agree on the underlying numbers and the underlying facts.

Charlie Donovan [00:44:05] And I hope that universities play a role. I hope that businesses like Impax play a role in articulating what they see as the reality and having an active voice in the policy debate. And ultimately, it comes down to political leadership as well, to be honest and truthful about about how these challenges affect people and their real day-to-day lives. So, I see that as the number one problem, and I wish I had a really compelling set of solutions for you. That might have to be another show guest in order to tackle that one.

Ben Hoffman [00:44:41] What you just talked about is maybe something that touches every part of our lives right now. I think you're a hundred percent right on the education side. It's encouraging to hear folks like you on the education side maybe teaching these sorts of concepts. And then also, there are some fun debate tactics, I would say, that are used on maybe dismissing a lot of clean tech, environment, this whole energy transition when you start maybe cherry picking different data points and things like that. And the only way to work through those misinformation campaigns is through education. So, I'd say you're a hundred percent correct in that. We need to be able to continually trust our institutions. Hopefully, that isn't something that degrades the way most other media platforms have.

Charlie Donovan [00:45:36] Well, I'll tell you... The first set of whitepapers that I wrote for Impax when I joined the firm... There's a three-part series; it's freely available on the website if folks are interested. It's called "The Transition Will Not Be Televised." And the idea was to take a riff off of a famous song from the late 1960s, "The Revolution Will Not Be Televised," to say that there's a misleading narrative out there in the mainstream. There are some legitimate concerns about what are we understanding? What rises to the top of the headlines versus what's really happening beneath the surface?

Charlie Donovan [00:46:13] And of course, I can't claim to be an arbiter of truth, but at least in that series, we tried to put out what our perspective was on technology costs and where the market was headed in a way that hopefully adds to a fact-based, or at least a numbers-based, data-driven debate rather than one that's entirely about emotions and political perspectives.

Ben Hoffman [00:46:38] That's right. Well, and when we look at climate change as a whole, or just in general... The impact that we've had on our environment, maybe just as a population. And then we look at the different sensitivity analyses that you can run and all the different scenarios into the future. It's complicated, right? And it's really tough, I would say, for somebody who's not in the clean tech space, or not really looking at the energy space or everything else around it. It's difficult to understand. There are a lot of talking heads.

Charlie Donovan [00:47:15] It's difficult for anybody, and even myself who's worked in the industry, to really grasp the enormity of the energy sector. When we talk about changing energy... Right now, we've changed the energy sector, but mostly by taking incremental demand or the growth in energy, and moving that from the traditional industry to the clean energy industry. But we've really not gotten into digging into the base, to the foundation, and the enormity with which that happens. Not just in the way of oil and gas or gasoline at the pump, but plastics and petrochemicals and refining and all of the other infrastructure that goes along with that industry. The enormity of that challenge is just, some days, for me, seems beyond comprehension.

Charlie Donovan [00:48:05] But just on the flip side, it means the enormity of the opportunity is just that much bigger. If we are to even make a dent, much less achieve some of these goals that we've set out to do, it means trillions of dollars of investment. It means a lot of opportunity for people, from small entrepreneurs to big companies. For me, that's the exciting thing. When you grasp the enormity of this challenge, it's no longer just a sideshow. It's a really big, compelling, structural part of what's going to be a new global energy economy going forward. This is not a small game to be playing.

Ben Hoffman [00:48:48] No, the opportunity is enormous, which is really exciting. We're running up on time, so one final question. It'll be a bit of a plug for you. Do you have any upcoming announcements or milestones or anything like that you'd like to share with the listeners?

Charlie Donovan [00:49:08] I can just say a few initiatives that we're working on. So at the University of Washington, we've recently launched a thing called the Climate Risk Lab. This is about providing data and tools for physical climate risk assessment. Seeing that there are a number of great solutions out there in the private sector, but those are a lot of ways beyond the means of, say, public sector agencies. And so, there's a really great project I'm happy to have launched there.

Charlie Donovan [00:49:34] I think on the investing side, a lot of opportunity going forward continues to be the opportunity in private markets investing. And also, in realigning people's portfolios, whether that's in private markets or in or more traditional listed equities and fixed income. And really thinking what is the next step in sustainable investing? From the point of view of asset allocation, I know that I need to save for retirement. I know that I have responsibilities to policyholders or pensioners in order to deliver competitive returns. And where does the Venn diagram overlap with backing companies that are well-governed but also have a clear intention to reduce their impact on the natural world?

Charlie Donovan [00:50:22] And we see that opportunity set expanding. But it does defy some of this narrative, again, that exists around that's a simple tradeoff on returns. We've got our head on straight, but sometimes there will be tradeoffs. But in a lot of ways, this is about structural shifts in the economy. And the earlier that people can spot them, the earlier they can get in on what would be an outperformance over time. So, a lot of my time these days is about the data and the methods that we need in order to spot those opportunities. Because as I said at the outset, if we can't find this to be a transition which is also profitable for companies, and in turn, profitable for the individuals who invest in those companies, we're just not going to get there at the rate and the enormous potential that we could.

Ben Hoffman [00:51:15] That's great. I think that's a perfect note to end on as well. So, thank you so much, Charlie. We appreciate you coming by.

Charlie Donovan [00:51:22] My pleasure.

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