The multi-trillion-dollar challenge: Climate change and capital markets

Thomas Mucha, Geopolitical Strategist
Christopher Goolgasian, CFA, CPA, CAIA, Director of Climate Research
2022-03-29T11:00:00-04:00  | S1:E3  | 33:21

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Director of Climate Research Chris Goolgasian joins host Thomas Mucha to discuss the many investment and geopolitical implications of climate change.  


THOMAS:    Today’s episode is about climate change, specifically, its relationship with capital markets. There’s probably no other factor that will have a bigger collective impact on markets, the economy, geopolitics, and technological innovation than climate change. I’m joined today by someone whose job is to make sense of all this, Chris Goolgasian, director of climate research at Wellington and a portfolio manager at the firm. I’ll ask Chris about Wellington’s approach to climate research and how he thinks about the investment implications. We’ll also discuss the growing geopolitical and national security risks posed by climate change and what gives him hope that the world will be able to tackle this existential challenge. Chris, Welcome, thanks for being here.

CHRIS:        Thanks, my friend. Good to see you.

THOMAS:    So director of climate research at Wellington. What does that mean? 

CHRIS:        You know, I think it means one word probably most of all, which is translation. Translating science into finance is really hard. So if I had to recap director of climate research, I’d say it’s mostly translation.

THOMAS:    Great, so let’s start with the science. So, you know, where are we? What do we know? What’s important for this audience to understand about the climate science picture? 

CHRIS:        Yeah, I think what we know is pretty bleak, and we learned it with Woodwell’s help going back now three-plus years, which is a lot of what we face is inalterable. 

CHRIS:        It’s baked in the cake, and I think the marketplace, and I’ll use that term loosely, could be stock market, could be citizens, could be government, either doesn’t want to know that, or isn’t aware of it. And I think that’s most likely because we want to be optimistic, which is human nature. And in certain markets, there’s usually solutions. And I think we may often think that well, there’s a solution to climate, it’ll get fixed, and you know, the scientists have really educated us that that is not the case. There are a lot of things we can do, for sure, to improve future decades, and you know, in the vocabulary of this world, it’s mitigation, which is reduce our carbon footprint, our emission profile, and then adaptation, which is a lot of these physical risks are here to stay. We have defined those as heat, drought, wildfire, hurricanes, flood, water scarcity, and sea level rise. And so I think the biggest takeaway that we have from all this partnership with Woodwell is these seven risks are inalterable, they have a massive impact on economies, governments, infrastructure, society, spending, etc. And our take up until now is that the markets have not priced that in. 

THOMAS:    So of those variables you mentioned, you know, the ones we study with the Woodwell Climate Research Center

from an investment perspective, which of these variables do you think will be most impactful? 

CHRIS:        Well if you think about human need, it all starts with water, people have to have water to survive, it’s a very basic need. And we have already seen major problems with water levels. We saw it this year in the U.S. with Lake Mead and drought levels that we really haven’t seen before. We’ve also seen it globally, we’ve seen it impact the chip industry in 2021. And we also know that over the course of history, food and water usually, when they’re in scarcity points, are what cause migration issues, what cause geopolitical issues, which you know very well and have really, I think, led us into that thinking on what this could mean from a geopolitical perspective. If you go to what, you know, permeates all seven of these, it’s certainly heat. Heat after all is the culprit as to why we are in all of this. And heat, if you just go in the sequence, heat leads to drought, and drought leads to wildfire, drought also leads to water scarcity, so there’s a lot of connectivity. And you are now seeing heat extremes and highs, inclusive of last year, upper northwest U.S., Canada in June where you saw 126 degrees Fahrenheit, somewhere in that range. Records that we’ve never seen before that importantly, climate scientists have proven could not have been achieved without climate change. These are not just random events and cycles, and you know, I think for folks who may still think, isn’t some of this random and not a secular shift, the way that I frame that is, we are setting records of records. We are just setting record after record, even, you can go last year, it looks like it’s going to be the fifth warmest year on record, which is going to mean the last seven years are the seven warmest. Six of the seven largest California fires happened in the last two years. You had a, an area in China last year that had more rainfall in three days than it averages in a year. I mean these are records that don’t happen without climate change. 

THOMAS:    So, so that’s, that tells us a lot about the Woodwell, um, partnership. You’ve recently announced a separate partnership, um, with MIT. Um, tell us a little bit about that. 

CHRIS:        Yeah, it’s really modeled after the success we’ve had with Woodwell. So with Woodwell we have an annual research agenda, we plow through it over the course of 12 months, we have a standing weekly meeting, and then a lot of iteration in between that week. We have a formal monthly presentation to all investors at Wellington, and then a formal quarterly one. So there’s lots of hits throughout the year. And really good feedback loop between investors asking questions that make the scientists think and that makes the work product that much better. With MIT, about a year ago, we decided well, we’ve got all this expertise in physical risk with Woodwell, and the physical risk world is moving very quickly. The transition risk world, which again is decarbonizing, is also moving very quickly. And what we mean by that is, you have policy, regulation administrations, all changing very fast. And you have technological innovation happening very quickly, more at the industry level. So, why not go out and find experts in a very quickly changing area who can help us stay abreast of all of that? And that’s what MIT is going to do for us in a very similar fashion to Woodwell, which is independent thought leaders in the, in their space, very long history of expertise that’s certainly top-notch, and important to us was a lot of cultural equivalency. They’re very similar in terms of their focus on collaboration and in taking the long view. 

THOMAS:    So it’s Woodwell for the science, and MIT for the policy? 

CHRIS:        Yeah, I think that’s a good way of saying it. They certainly have those insights, and then they also have tremendous insight on technology as, as you’d expect.

THOMAS:    So Chris, we have all this great scientific research, we think about it deeply, how do you translate all of this across the firm, and across the various investment strategies we have? Equity, fixed income, alternatives, currencies, commodities, and on, and on, and on, what’s that translation point like?

CHRIS:        Yeah, I think it’s two words, it’s location and duration. And duration is a word with more fixed income background to it. But we’re using it in an equity space now. And the intersection of those two words is as follows. You could have just had the unfortunate luck of building your plants or sites, or banks, or insurance company, in poor locations from a climate perspective. You didn’t know it at the time, but you ended up in really bad areas for the future. Duration is, as more decades roll forward, the projections get worse. So, if you have an asset, uh plant, infrastructure, etc., that you expect to live for 30 years, it’s going to be a riskier asset 30 years from now than it is today, and it may already be risky today. So, this actually turned some of the old Wall Street wisdom on its head, which was, invest for the long-term, you know, have a forever holding period, low transaction costs, low taxes. I would say in the climate world, that actually could be a mistake, where the longer holding period is riskier, riskier, not less risky. And so we have helped investors think about location and duration through this geospatial tool that we talk about called CERA, Climate Exposure Risk Application, where they can visualize any of these risks, heat, drought, wildfire, in the next three decades, at a pinpointed location, and then look at a company at that location, look at its site there, look at its exposure to its property, plants, equipment. And that is really one we have integrated this into the process with a visual tool. 

THOMAS:    I just used it last week to create a list of military bases all around the world. And how they’re being impacted by these specific variables.

CHRIS:        Yes. So that tool, the, the vision that we had there is that climate change is going to need to be visualized and taken out of spreadsheets. And Wall Street, just as a general rule lives in spreadsheets. And the future of climate change is far different than the past, and spreadsheets are usually based on some historical analogue that you’re trying to extrapolate forward. Extrapolating past climate change forward is usually a mistake. Because there hasn’t been a, a long enough window of it. So everything we do is projections. We don’t look backward to look forward, like you normally do on Wall Street. We look forward to look forward. And Woodwell has helped us with 10, 20, and 30-year projections on those seven risks. So, we can look out 30 years on heat, or hurricanes, or wildfire, and then display that in these global maps where you could pull up a company’s locations, its manufacturing sites, its reliance on natural resources, where it underwrites insurance, or where it underwrites bank loans, and then see how sensitive those locations are to future storms, future wildfires, future drought. And then what we do with that is we’ve now, I think, executed this on about 1,500 stocks, we go company by company, and we link the visual of the tool with the disclosure that the company itself has written. So, what is the company saying its climate risk is? And that’s kind of an, a door opening into, is the company aware of the risk they have? And many are not. Some are starting to be. You’re also seeing some movement from the regulators to disclose more about this, because I think there’s an acknowledgement this is a material risk. So, the integration at the firm has been location, duration, visual through the tool, and then a link to the company disclosure, and then the step after that is either putting it into the, the profits and the stock price, because you have new estimates, and/or engagement with the company itself. So, we will say to a company, we have, you know, looked at your sites, and we think the projections on drought, or a wildfire, or hurricanes, might impact your businesses. What are your plans about that? And in many cases, we will share the maps with them, and I will tell you firsthand, in almost all cases, they have never seen maps like this. You know, it's, it’s just not part of their day job. So I think we’re introducing information to them. And then, trying to engage with them about how material this is, and then what are their plans to become more resilient? So, I think that’s where we’re coming from on the location and duration, and I think your work on the geopolitical side and the military awareness of this has really been industry leading, in terms of just how serious the military takes this. 

THOMAS:    Yeah, that’s true Chris. Um, you know, as, as the geopolitical strategist, I spend a lot of time talking with current and former CIA, Pentagon, State Department officials, those on the National Security Council, at the White House, um, those on Capitol Hill. And really, the, the national security piece of climate change, um, is really becoming a much bigger part of the climate narrative. In D.C. and globally, you know, to be fair, the Pentagon and the CIA started looking at climate change 20 years ago. Or even longer than that, 1991. So, a lot of them, you know, and a lot of the senior members of the Pentagon, have seen firsthand, that climate change is a contributing factor in Syria, in, northern Africa east, west Africa. And what the Pentagon is concerned about is that climate change is stressing this already very complex geopolitical backdrop. Second thing is, is it’s already hitting U.S. military capacity. If you look at some of these events that you’re talking about, you know, from the, the science side, um, fires, floods, hurricanes, on, and on, and on, they’re hitting some of the most important U.S. military infrastructure, including Norfolk, Virginia, you know, where the world’s largest U.S. naval base is. Including Tindell Air Force Base in the panhandle of Florida, which, which houses the F-22 wing, combat aircraft wing. Including Camp Lejeune, which is the most important U.S. Marine Corps base, in North Carolina. The Pentagon says there’s been a 60 percent increase in heat-related illnesses among troops over the past decade. And so from the national security perspective, you know, climate change matters. It’s stressing the, the geopolitical backdrop, and at the same time it’s hitting the U.S. military’s capacity to respond to this. And what the Pentagon worries about is, you know, they’re going to have to do a lot more humanitarian assistance, disaster relief missions, in the future. And you know, they think like military people, um, that impedes with their ability to achieve the mission. And the mission is to protect the United States from great power competition, and from all the other threats. And so climate change is right up there, um, with, with the great power competition. 

CHRIS: I think you’ve been spot on, on that. And you know, I, I just think about it simply when you describe how much of the American presence in the U.S. is along the coasts. It’s all along the coast. Coasts have major problems. And then in the world, many of the problems climate-wise are along the equatorial region, which are where you’re going to have hotspots for migration, water scarcity, massive heat events, and then back that up with, if you somehow are not sure about climate change, if you did nothing else but follow the fact that the U.S. military has been preparing for this, and it’s public about it, that should tell you how serious it is that the U.S. military has been on it for decades. 

THOMAS: And from that perspective, it’s all about adaptation. Or resiliency is how you hear it put in, in official parlance. Um, but it’s, it’s pretty logical, if you think about it, because you know, what is the Pentagon worried about? Climate migration, food scarcity, water scarcity. Increased terrorism, more state failures, more resource wars, um, between countries. What’s the best way to, to cope with that? It’s adaptation. Those are the best insurance policies for warding off some of these, um, from some of these national security nightmares that they’re planning for. 

CHRIS:        Agreed. And I think that’s another major learning we had early on with Woodwell, was focus on adaptation. It’s likely been underappreciated, and I would say that again, market-wise, government-wise, citizen-wise, that we have to adapt. So mitigation, everything that is currently in the news about what we need to do to reduce our carbon footprint, and decarbonize, is all critically important, yes, and we have to adapt, both things are true. I think sometimes, we as a society have said, I don’t want to think about adaptation because it’s quote, “giving up,” and I would say no, it’s realistic. If you look at the events already happening, we needed to adapt to those, we have more coming, and there are ways to adapt to flooding, there are ways to reduce our water intake on water scarcity, there’s ways to adapt to heat, and there are a massive number of reports, and plans, and industry groups, and papers on all of these things. And it’s often, I think, discounted, because it’s a very pessimistic thought. And again, I go back to point one, people like optimism, adaptation is pessimistic. It’s saying we have a lot of pain ahead, and we have to adapt to it. I would say realistic, and better to prepare in advance. There are some multiple assumptions, you know, different agencies of the U.S. government have a multiple of like, six to one, roughly, that if you spend a dollar today in adaptation, it saves six dollars tomorrow. This tells you what the significance is to be prepared or not. Now the hard problem is, as politicians or leadership, is getting your constituency to spend money today on savings tomorrow, that’s never easy. And that is likely going to be the debate of climate change. 

THOMAS:    Don’t you think the preponderance of climate events that we’re seeing; you mentioned a bunch of them already, but don’t you think that is leading to a shift in public perception? Certainly in the United States, which has lagged other countries on this issue. And do you see that bleeding into the policy makers’ thinking? 

CHRIS:        I hope so. I think it’s not a great acronym, but we, we use this short code of PAT, which is Physical Accelerates the Transition. And the idea there is if it’s most likely, you continue to have these events increase in frequency and magnitude, unfortunately. But likely to happen. You, you may see that cause the pressure that’s needed to have transition risk policies happen quicker. Said differently, if you went a decade without any horrific floods, hurricanes, wildfires, maybe people would take their foot off the gas pedal on all the need to decarbonize. I don’t think that’s going to happen, just given the evidence we have on these events. So, it’s possible that the physical accelerates the transition, and I think that that’s also one of the two reasons why net zero is credible. And the idea is that we need to get to net zero of emissions by 2050, and the net zero, project, if you will, is attempting to get companies halfway there by 2030. So, there’s an intermediate target. And that’s important because it’s not abstract. It’s going to be hard for any new management team to step away when the events keep happening. And the events will really put the pressure on us needing to have a more aggressive transition. And the stakeholder base today for public companies is very vocal, very strong, much different than it has been in prior decades, and so to imagine that net zero goes away I think imagines that the stakeholder base goes away, too. And I would include that stakeholder base, meaning activists, ESG, sustainability, proxy votes, all of that. I don’t think that goes away in 30 years, it probably just gets stronger. So, I think that’s what provides the teeth to net zero. 

THOMAS:    Yeah, that’s interesting. I don’t think it goes away either, particularly if the national security piece of this continues to play, you know, a larger role in the narrative. So I agree, I see those directionally in a similar way. We talk a lot, or we focus a lot at Wellington, on the ups and downs of the policy debates in Washington, elsewhere. Build Back Better has been, obviously a focus of ours, because it matters to all of these things we’re talking about. You have an interesting take on Build Back Better. Share that with us. 

CHRIS:        So, if you haven’t read Build Back Better, it’s worth reading just to see that the government is now using the term adaptation, and aligning it with spending policies for the U.S. infrastructure and society. That to me is a very powerful signal that the government’s taking adaptation seriously. So, very positive about that. The take, I don’t know how interesting it is, but the take that I have that you think is interesting, is that in, in the industry that we are in, the debate is always in the here and now about a bill. Will it pass, won’t it pass? If it does pass, how much is in it? And if, how much is in it, when will that get enacted, right? These are all the dominoes. And when I take the long view, which I keep trying to do, because climate change is a long-view event, I think that’s probably the wrong analysis of the problem, and the right analysis is how many Build Back Betters are we going to have? And where are they going to be? And I think the answer is, we’re going to have multiple Build Back Betters, and they’re going to be global. And if you take that approach, you are less concerned about is it going to be 500 billion, is it going to get the 51 votes in 6 months, 3 months, or 12 months? Yes, that will all matter in the short-term to the economy, but when you look at the evidence of what’s happening on physical risks, there is no way that we are not going to have multiple Build Back Betters globally to fend off all of these problems. You have to. Otherwise it’s just a give-up by the governments. The governments are not going to give up. They have to protect the constituency, they have voters, and they have, in most countries, some very expensive real estate that’s also a big tax base. And add everything you said about the military, right? So, governments are going to spend significant amounts of money on repeated bills, and that’s the way I would think about it, it’s not just this Build Back Better, it’s multiple Build Back Betters. 

THOMAS:    So, you’re asking investors to change their paradigm in how they think about policy in Washington? 

CHRIS:        I think so. I think, I think about climate change is now a secular spend. And I think in marketplace, companies that have been attached to government spending were thought of as cyclicals, and they tended to be in certain sectors of the economy where the marketplace valued them as cyclicals. So, if spending was up, they’d be up, and if spending was down, they’d be down. I do not think climate change is going to be a cyclical spend. I think it's going to be a secular spend, very large. Again, if you go through water scarcity, wildfires, heat, hurricanes, etc., and you read all of the expansive research on what is needed to fend these off in the future, they are all multi-T problems. T, trillions. They’re not billion problems. They’re all multi-T problems. And they don’t get addressed in one bill. 

THOMAS:    So, Chris, in addition to leaning into the science, leaning into the expert thinking, um, you know, you’ve been a proponent, as have I in terms of how to think about the future. You know, as you said, climate change, you can’t really look at the past to understand the future. And one of the things that, that you’ve done, um, is to search popular culture, to search art, to search literature for people who are imagining the future. Recently you brought in the science fiction writer Kim Stanley-Robinson, to help talk through some of these potential futures. What is it about art, or what is it about literature, that can help us see the future? 

CHRIS:        It’s a great question, Thomas. I think it’s that there’s no time constraint. There’s no binding incentive in literature and in the creative arts. And you certainly turned me onto the fact that a lot of good projections are done in art first before they enter industry. 

THOMAS:    So, it truly is life imitating art. 

CHRIS:        Yes. I think what makes Kim Stanley-Robinson or others like him profound, um, projectors of the future is that they’re not time bound by a one, three, and five-year evaluation period, or a stock option plan that an executive team has. And these are all the practical realities of the world. People have incentives that are short-term based. Artists do not have short-term based incentives. 

THOMAS:    His book is The Ministry for the Future.

CHRIS:        Ministry for the Future, I highly recommend it. I was at Woodwell a few months ago and had the pleasure of meeting George Woodwell, who’s the founder and, and who the organization is named after, and the last thing he said to me when I left, it was almost like plastics from The Graduate, is, “We need to refreeze the Arctic.”  And I said, “I just read that in Kim Stanley-Robinson’s book.”  And so here you have a, you know, one of the world’s leading scientists saying something that a creative artist has said. 

THOMAS:    And they’re trained to be creative thinkers, and to think about different futures. 

CHRIS:        Yeah. 

THOMAS:    So, we should read more, I guess, is what you’re saying. 

CHRIS:        You should definitely read Kim Stanley-Robinson.

THOMAS:    Yeah I agree, it’s a great book. Um, you know, let me end with a couple of sort of personal questions. Um, you know, I get this question a lot too, um, but you know, how do you stay positive in light of so much [00:35:00] data that points to, you know, all sorts of coming challenges? 

CHRIS:        Yes. It’s not easy. I have down days, for sure. And if you go down all these rabbit holes, it can be pretty bleak. So, I would say a couple of things. One is, look to the next gen of stakeholders who are super motivated, and they will get you optimistic. At Wellington, we have something called Operation Moonshot, in which people from other groups can volunteer their time to work on something different. And we opened that up to a climate research project on my team, and we were oversubscribed in volunteers to donate some of their time to work on this project. I met them all last week, and I was going to give them a, you know, “we can take that hill” speech, because it’s a pretty big project in a short amount of time. And I didn’t need to, because we went around the WebEx screen, and one person said they were from Brazil, and this really meant a lot to them, because they’ve seen what’s going on there. Another person was from a different country, they’ve seen what’s going on there. Another person lives in the U.S., impacted. Other people haven’t been personally impacted but they just see the writing on the wall, and they’re very worried about it. I look at that generation and I think man, I was nowhere near as motivated and socially conscious at that age as they are. And I thank God that they exist as a group. So, that is a reason to be optimistic. If you ever get too pessimistic, start talking to young people. So, that would be one. The second way would be to take off the table the existential risk. It’s really hard to think through this if you always think that it means the end, and it most likely doesn’t mean the, the end, you know, big E.   You can’t think clearly if you think that way. And if you go through, you know, the climate science journals and the history of what’s been produced in the last 10 years, there aren’t many people calling for the end. You’re going to see big changes on the coasts, big changes to countries, you’re going to see some massive humanitarian crises that we don’t want to see. All very bleak. Different, though, than the end of humanity,. And then the, the third one would be, I don’t want to rest our case on this, because it could defer the solution too long, but there’s a lot of smart people in the world. And a lot of them are working on technology. And we haven’t seen exactly what we need yet, but that doesn’t mean it isn’t out there, and isn’t coming quicker, and that could come in the form of new energy, it could come in the form of better carbon capture that does what we need. And, I’ve been able to see a lot of those companies come through here from one of the initiatives we have, and again, all of the folks that are running these startups are super passionate. Like, they’re not just in it to grow this company for growth’s sake. They created a climate-focused company because they are worried about the climate. So, there’s a call option there that one of these technological geniuses is going to break through in a way none of us have imagined. 

THOMAS:    I’ll add a fourth, which is and you’re, you’re too modest to say this, but I think there is a role here for the capital markets to play a really positive, um, role, um, in, in how this develops, and you know, can we figure out what’s coming down the road? Can we allocate capital in the best way to mitigate some of these, you know, worst case scenarios? So I think, you know, there is a, there’s a piece of that, that the capital markets can play. That also gives me hope for the future, too.

CHRIS: I agree. And I think, you know, Phil Duffy, who’s the president of Woodwell, and has now been, for the last year or so has joined the administration to work on climate. When we started with him and, and asked him why would Woodwell be interested in joining an asset management firm, he had a very good way of saying this, which is he’s like, I’m tired of giving speeches, and nothing really changes. He said, but I’ve started to think, what if some prices in the marketplace changed, because there was more information, it was more transparent, investors could make more active decisions from a climate perspective? If prices change, policy might follow a lot quicker than through speeches. And I think he's right about that, you know? Capital could definitely move policy. 

THOMAS:    All right Chris, well hey, thank you so much for your time, your expertise, for everything you’re doing in this area. And, onward.

CHRIS: Thank you my friend, and thanks for all your partnership on this, too. You’ve been with us from the get-go. 


Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For  professional/institutional investors only. Your capital may be at risk.  Podcast produced March 2022.

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Christopher Goolgasian
Director of Climate Research