Claire Smith: 0:00

Animal agriculture is a broken business model because it requires subsidies to exist. In the same way as we cannot afford to have the oil that has been identified in the ground coming out and being burned. And those being stranded assets, yes, there could be stranded assets in terms of animal ag.

Tom Raftery: 0:30

That is the sharper question in this episode. Not whether values belong in finance, but whether markets are still mispricing climate risk hiding in plain sight. Good morning, good afternoon, or good evening, wherever you are in the world. This is Climate Confident Stories and Strategies that Cut Emissions episode 281. And I'm your host, Tom Raftery. My guest today is Claire Smith, founder and CEO of Beyond Investing. Claire comes from traditional finance, but her work now asks a tougher question, what happens when portfolios ignore the climate, land use, methane, and supply chain risks embedded in food and animal dependent industries. We talk about where mainstream ESG falls short, why food still gets treated as a climate side issue, and how capital can help build more resilient, lower emission alternatives. Let's get into it. Claire, welcome to the podcast. Would you like to introduce yourself?

Claire Smith: 1:33

Yes, certainly. Happy to do so. So I'm Claire Smith. I'm the founder and CEO of Beyond Investing, which incorporates a couple of other companies Beyond Impact and Beyond Animal, which we may speak about further along. The idea of beyond investing was to create a humane, ethical, sustainable investment platform that vegans and environmentalists could feel comfortable to put their money with. And since 2017 when I created the platform, we now have three funds running. We are just about to launch a fourth and have hopefully made some difference in terms of moving finance in a more humane, decarbonising and regenerative direction.

Tom Raftery: 2:15

Okay. And what made you decide to do this?

Claire Smith: 2:22

I would say that in the mid 2010s there was a bit of a collision between personal and professional Claire. From the perspective that since I would say the seventies I've become very conscious environmentally. I had already changed my own diet to some extent, becoming vegetarian in my teens was very conscious of, of, plastics in the environment, was quite horrified by the idea that plastics were essentially indestructible and continued to be produced and, and disseminated around the world. And I was like, well, what is gonna happen to this stuff? And that continued, throughout my sort of adulthood with trying to make ethical decisions and sustainable decisions in terms of my own personal consumption. And I guess a turning point was maybe in around 2010 when I took over a pension fund and found that it was very, very difficult to find suitable products to put that pension fund into. So I took over management of it from the company that I'd been working for in the 1990s, and that planted the seed of an idea that there was room for, there was obviously an audience because my personal pain point was, was not, could well be other people's personal pain point as well. And so, over the next few years I was thinking about that, tied up with a, a few other people in order to try and, and create such a product. And that led to me leaving the company that I was with through till 2017 in order to be able to focus on that full time.

Tom Raftery: 3:56

And is this something that you think is urgent, matters now? You know what, what's the urgency now, if any?

Claire Smith: 4:06

Actually when, when I kicked this off in 2017 there was a lot of commentary out there saying we had eight years to sort of fix the climate crisis. Well, that eight years has come gone and we still haven't fixed it. And so if it was deemed urgent, then in terms of, and that eight years came from the sort of accumulated amount of CO2 going into the atmosphere over the, the subsequent eight years, which we've already seen occur. Then it's beyond urgent now, and various very much more eminent authorities than myself have done work on this, such as the Stockholm Resilience Centre with their work on planetary boundaries. And we are fast seeing those planetary boundaries being exceeded with the current economy, the current means of consumption and production. So something definitely needs to change and really yesterday, but at the very least we can try and change as much as possible now so that the very worst scenarios don't come to pass.

Tom Raftery: 5:08

Okay, you've mixed two things there. You were talking initially about humane animals and then you launched into climate. So tie those two strands together for me. And, this is the Climate Content podcast. I, I have a fair idea where you're going with this, but just tie it together.

Claire Smith: 5:32

Yes. Well, the reality of the situation is that climate will not be fixed by simply addressing fossil fuels. Something like a third of all carbon emissions and particularly a large amount of methane emissions are coming from the USe of animals. Clearly, I stated from the outset the decisions that I'd made in terms of my own lifestyle. So I have a clear sort of animal welfare and animal concern for animals as a means of production, as a means of profit. But leaving that aside, even if you didn't care a hoot about any of those animals, you should be caring about the environmental impact and the climate impact that that is having. So besides climate, there's also water use, fresh water use waste biodiversity, deforestation, ocean dead zones. There's, there's massive amounts of other negative, what are called negative externalities around the USe of animals, which everybody should be aware of, even to the extent that they don't philosophically feel that there's any problem about consuming animals. So that's how I would tie it together is by pointing directly to that, climate effect. And something which was a real spur to me just coming back to the climate and methane particularly, was how methane, and I go back to that eight year situation. Methane has a much higher warming potential than CO2. And so actually dealing with methane is the most imminent issue as opposed to CO2 especially since the methane actually turns into CO2 ultimately. So it's not as if it just kind of goes away. It doesn't stay in the atmosphere, but it, it transforms itself. And as a result of that higher warming potential, and again, I'm going to point to Professor Strom and, and his work and tipping points as well as the University of Exeter, which has done equally good work. Methanes heating creates the potential or the, not, that's just the potential, but it is a fact that a higher temperature will cause a number of tipping points to trigger, which will accelerate the amount of warming and create actually additional CO2 going into the atmosphere, which is quite a terrifying prospect.

Tom Raftery: 8:05

Yeah.

Claire Smith: 8:06

This is why it needed to be dealt with straight away. And the methane aspect is quite strongly coming from the US e of animals as well as fossil fuels and leakage from gas, terminals, et cetera. But, it's even more of that is coming from animal agriculture. And this is something we can change. We have a choice every day in terms of what we decide to eat.

Tom Raftery: 8:27

Sure, sure, sure. And a lot of ESG funds that are out there today still hold companies that a lot of climate conscious investors would find uncomfortable. So where do you think mainstream ESG lost its way, or did it?

Claire Smith: 9:15

Yeah. I think the classic ESG and I say classic'cause ESG even as a, as a term, has really only been around since about 2015. But we actually did not initially call ourselves an ESG fund because we felt that ESG was a very lukewarm response to an urgent issue. So our fund, the one that is traded in the US that's now about 170 million in assets under management is called the vegan climate, ETF. So although that does create some confusion amongst some people, the term vegan doesn't mean only plant-based meat or plant-based milk or some kind of alternative to an animal product. Vegan actually just means avoiding the USe of animals. And so our fund avoids the USe of animals by imposing screens around animal usage, which are completely absent from the typical ESG fund. And then the climate obviously is because we are also imposing screens around climate rather than make the naming too long. We do also have screens around weapons, defence, human rights various social issues as well. But it is remarkable to me how many of those social issues actually overlap with the animal issues. For example, tobacco you can screen out because it's tobacco, but you could also screen it out because it involves animal testing, which is something we obviously avoid. So, it's kind of interesting to me how many social issues are linked into use of animals as well. So our reaction to those ESG funds, which we felt to be quite lukewarm because they were, completely ignoring this issue. There's some rather more technical stuff around how they construct portfolios through scoring, et cetera, best in class. So it isn't unusual to find some ESG funds with a company like Exxon. You might go, why is that in there? It's because they're not taking a deliberate negative approach. They're trying to build a portfolio by saying, here's a sector, we are looking all the stocks in the sector. They're all doing something bad, but this one is at least worst. And, and that to US didn't make sense. So our approach is much more rigorous, much more stringent and much more, I would say even dogmatic. But that seems to be what our audience wants. And we, we actually get, people contacting US, email US, emailing US, saying, I'm so glad that your product, your ETF exists, because now I know I have something I can put my pension into without being concerned about these type of holdings. So yes, that's where we felt that there was, something of a gap in the market because nobody was catering to that audience that wanted to be far more hard line about the kind of companies that they would or would not invest in.

Tom Raftery: 12:24

Okay, and if you are excluding fossil fuels, animal exploitation, defence, and other damaging sectors, then what becomes hardest? Performance, diversification, investor, education, something else, all of the above?

Claire Smith: 12:43

Yes, let's, talk about each of those in, turn. So what I'm glad about in terms of our track record, which is now since 2019 some seven years almost.'Cause we started in September, so we are coming up to that seven year anniversary. Our performance has at least matched the S&P 500, which is the market benchmark for the US and, it is a US product. I will say it deviates from time to time and it tends to have periods of outperformance and underperformance. So particularly strong periods of outperformance would actually be 2020 into 2021. 2023 was a strong period of outperformance. And actually just the last month it's been a strong period of outperformance. And there were other periods. 25 was not such a great year for performance, but you have to look at things over the long term. And over the long term we've at least matched the market. So, that's a positive because our portfolio does look quite different than the market and primarily due to the absence of certain sectors, almost entirely in terms of large cap US, the energy sector is clearly oil, the oil and gas sector. And our removal of that means that we're underweight oil and gas. It won't be a surprise to you that whenever the oil price goes up strongly, we underperform because that portion which is in the S&P 500 in oil and gas is going to perform strongly and we just don't own it. And the other stocks in the market would not be performing as well. Equally, pharmaceuticals, we would be underweight because of that animal testing and consumer staples is primarily the food companies. And those food companies at this point in time are all using animals to some degree. So those would be absent. So it's a little bit more growth orientated because food companies are defensive, oil and gas is fairly high dividend paying. It's slightly more defensive. Pharmaceuticals is not defensive. That's more of a growth stock. But, it does change the type of performance that it gets. It's a little bit higher beta, overall than the market. But we do manage to get sufficient diversification. We do have something like 250 stocks in, in the ETF, which is, very good from the perspective of diversification. And we do limit the size of any individual stock on our rebalance to less than 5%. We then allow it to drift. So if the stock does really well, and there is one stock that's in our portfolio at the moment that has done extraordinarily well and is providing a lot of the outperformance of the current time, but we are coming up to a rebalance and it will get chopped back to 5% on that rebalance. So we, tolerate that concentration only for six months, and then we trim it back below 5% on the rebalance. So that's how we managed to have something more of a stable performance as opposed to be particularly concentrated at individual stocks.

Tom Raftery: 16:01

Right. Okay. And climate conversations, I know just from having 270 something of them 280 at this point often deal a lot with energy and transport. So why do you think food still gets treated as a side issue?

Claire Smith: 16:21

I think it's just not so obvious because if you're talking about energy, clearly that is about burning fossil fuels. If you're talking about transport, that's internal combustion engine burning fossil fuels. In terms of the animal usage, there is a lot of energy and transport used in, in both of those. But in addition to that, you've got an extra component, which is the kind of physicality of the animals, the biology of the animals, and, what comes outta them? Trying not to get too biological here, but what comes out of them from various ends of their bodies, which contributes to climate. There's another issue, which is land use and the, I suppose the opportunity cost of the use of the land for agriculture as opposed to forests and other carbon sinks. And so to the extent that agriculture has reduced those or is using that land, whereas the land could be compensating for other aspects in terms of emissions. That also is a charge to animal agriculture. And this is why you actually end up with a large amount of debate in terms of how much animal agriculture is responsible for. Because if you, just see transport, there's oh transport, just add everything that's in transport and call it transport, you know that that is to do with things moving from place to place and call it transport. But if you then try and split out within that transport, how much of that is as a function of animal agriculture, then some of that transport bucket goes into animal agriculture.'cause that sector is causing those merchandise to be moved. And actually there's an awful lot of stuff being moved around the world because of animal agriculture. And I'm mainly thinking about, for example, soy. So soy being produced in South America is transported to the US to, to the EU particularly. The EU only produced about 8% of the soy that is consumed by animals. So practically all of the soy feed is being transported. So you should ideally attribute that transportation cost into animal agriculture. And then you've got what happens to the animals. So they don't necessarily stay on the one farm, they maybe get moved around, then they get transported for slaughter. And so that involves a lot of transportation across Europe of animals in trucks. Then when they are slaughtered none of the products, you do not see sides of beef. I've seen them in Texas, but you do not see sides of beef in your supermarkets. You see all of the different components. And so the whole breakdown process of turning the animal into all of the different bits and then transporting them all over the world. Leather is a very good example of that as well. I don't see a lot of cows in Italy, but Italy is the biggest producer of leather. So where is that leather coming from? It's been coming in. A lot of it is coming in from Asia. So all of that transportation really should be taken into consideration in animal agriculture as well. So the lowest number is the FAO, which is the, pure animals side of animal agriculture. If you start loading in all of these other costs, you easily get to about a third. And there are some people who have indicated amounts. There was a report that came out in 2010, which actually took it over 50%. And I've seen numbers even as high as 75%, which seems a little outlandish, but it's not something that should be ignored. But I think the fact that it comes from so many different components and needs to be seen as an entire system from, not just the animals themselves, but from the land, what's grown on the land, how that, is then transported to the animals, the animals consuming the emissions coming from the animals. And then the follow on of the supply chain in terms of the, animal products. If you take that all in context and you see that it could be actually easily over, 50%, it could be, could be a lot, because we all eat every day. And so what we eat has a huge impact.

Tom Raftery: 21:04

Okay, fair enough. And you invest, as you mentioned, beyond food into materials, pharma and other animal free systems. Which of those sectors is the most underestimated, do you think?

Claire Smith: 21:18

Underestimated, I think, food is underestimated because people can't really get their heads around the size of the, the impact from food. And certainly in terms of carbon, but especially in terms of things like water. A kilogramme gramme of beef requires something like 15,000 litres of water. And people can't really compute that because they see that and they say, well, it doesn't contain 15,000 litres of water, so how is, so much water used in the production of it? So I think that globally the food aspect is, underestimated. But it is very important to note that things like pharmaceuticals and materials are very important profit generators that can make the overall system of using animals more profitable or can save it from being loss making. I get a little uptight about things like leather being seen as, oh, it's a byproduct. Oh, it's just be wasted. It would just be thrown away. No, it's an important component of the, value of a, cow generally. And of about 10% of the value. Now the profit margins of producing animals are so fine that 10% makes a difference. So on that basis, yes, the materials does need to be taken into consideration and, and has its own obviously issues of transportation. Also, in terms of processing leather, those skin would naturally degrade. It has to be treated with really, really fierce chemicals that go into the, waterways obviously harm the people who are involved in the tanning industry. So, there are a lot of other very harmful aspects to it as well.

Tom Raftery: 23:14

And what would you say has been harder than expected in building this market?

Claire Smith: 23:22

Okay. Obviously with the, just looking at the two sides of the coin, the ETF has found its audience and done sufficiently well in terms of performance that, the assets have have increased, and we are actually about to launch an international version of it, because currently the existing product is only investing in US stocks. So, slowly, slowly we are building out a, group of investment products. We do have demand from European investors. Various technical regulatory reasons mean that European investors cannot actually easily buy our ETF. The man on the street type of person, retail investors as they're called can't buy the US ETF. High net worth, et cetera, can, because they're treated as sophisticated investors. So there is a vast untapped audience for our products in terms of the, financial products that we provide to savers, which we, we hope to then move on to shortly. The hardest aspect that we've come across in the last eight years or so has really been the massive shifts in venture capital in terms of money that's available for investors, from investors, in terms of well mainly that in terms of the wild swings in confidence and appetite for venture capital. And this has particularly hit this space of animal alternatives, or alternative products ingredients materials because it was a new market and so it needed to establish itself as a market while still raising capital. And so it was acutely vulnerable to any shifts in sentiment. There was a lot of money that flowed into venture capital throughout the 2010s and through till pretty much 2022. I can almost pinpoint the date, well, I can pinpoint the date where people's viewpoints on venture capital changed, and it would be when Russia went into Ukraine and the next few months afterwards where everything shifted because that caused supply chain shortages. It caused the oil price to go up, caused inflation, the authorities increased interest rates. And the last thing you want as a venture capitalist is for interest rates to be rising because then people have other better or less risky places to put their money to get a return than putting money into very, very young companies, startups on the hope that something might, grow from effectively nothing. So venture capital was awash with capital prior to that period, and then suddenly there was a complete closure and nobody was putting money into venture capital. And this has continued to unwind over the last few years whereby funds that were raised during that period have slowly been investing their money, but you can only invest it once. You can only put money into a certain number of companies and as you diminish the pool of capital which you have available, you then have to show some returns on it, which has been very, very difficult. The lack of capital. I always said what gets financed gets done, and with the lack of financing, you can see how these companies have really been constrained in terms of how they can grow. They can't make the kind of investments in infrastructure or in marketing that they need to be making. And so as a function of that, their performance has been disappointing. That's tended to aggravate the issues with access to capital. But in any case, right at this minute we have funds which we are going out to market with at the moment in order to launch our third fund and fourth fund, which are in, two slightly different directions. But it's very difficult at the current time because people are still not feeling very motivated to put money into venture capital. We have seen some diminution in rates, but the recent activity in Iran, spiked the oil price again so people are feeling quite uncertain. And that is constraining capital going into these companies. So yes, that's been the main difficulty over the last years.

Tom Raftery: 28:08

Okay. And what needs to happen for animal free alternatives to move from niche to mainstream, do you think?

Claire Smith: 28:20

Yes. I'm, I'm smiling because we, we actually had this discussion on Friday. I was at an event and chairing a round table. We were talking about not so much the, climate aspects of the food system, but the food supply chain breaking which, is occurring particularly in terms of soy imports to the EU at, the moment plus fertilisers as a function of the Iran, et cetera. So a lot of the inputs to animal agriculture in the EU are becoming under very short supply. I think there needs to be a recognition of these vulnerabilities, and particularly in Europe. And action needs to be done in order to counteract them. And the alternatives that we've been investing in definitely have a part to play in that, because they more efficiently use these resources. The biggest issue with animal agriculture is the amount of resources that it takes in versus a very small amount that comes out the other end. 75% of the land use is for animal agriculture, but it only produces 18% of the calories and maybe into the twenties in terms of protein. So it's a huge consumer of resources. I discussed the water a little bit earlier, so it definitely needs to be addressed and investors certainly could be putting money in. Investors do need to have a clear idea of what policies are and how an emerging industry, which is what it is, is being supported by essentially governments, citizens and the structure is there in place in order to, allow the companies to, grow. And I'm not just talking about subsidies. We certainly would love to have a level playing field where the subsidies, which are going to produce animals, were going more into agriculture or other types of systems which are producing food for people as opposed to subsidising the feeding of animals. I'm thinking back to the kind of support that was put in place for the shift towards green energy, wind, solar, electric cars in order to the transition. That kind of transition needs to take place within our food system. And this should not, does not necessarily mean that it's going to be a drain on taxpayer resources. Just a deviation would be sufficient money to have a huge positive impact on the European economy. And this could go in, in the form of subsidising the creation of biomanufacturing clusters, which would then create jobs and allow Europe to be a market leader in this area, and export that technology around the world. So, yes, I'm aware your podcast is called Climate Confident. So these are the kind of things that I think could make people feel more confident that there is a solution. If the right policies are put in place, some grants, some subsidies, and on top of that, a little bit of education. I mean, I think everybody knows what they should be eating. Everybody's heard the five a day going back, the last 20 years. So a little bit more education around food and health would certainly cause people to think a little bit more carefully about what they're buying at the supermarket or maybe not consume quite as much fast food.

Tom Raftery: 32:07

Do you see this being less a conversation about ethics versus returns and more about whether animal dependent industries are being mispriced in the same way fossil assets were for years.

Claire Smith: 32:23

Yes, I, I would agree with you there that these are broken business models. Animal agriculture is a broken business model because it requires subsidies to exist. So, it's undeniable. And in the same way as we cannot afford to have the oil that has been identified in the ground coming out and being burned. And those being stranded assets, yes, there could be stranded assets in terms of animal ag. Concentrated animal feeding operations, CAFOs, which is what factory farms are called in, in the, industry as it were, are not necessarily terribly usable for another industry, although we have seen some positive shifts. One of our former portfolio companies was working with a chicken farmer in the north of England, and half of the farm was transferred to be a mushroom farm. So you can use some of those equipment installations, barn, et cetera, in, different ways. One lady that I know very well in, in Amsterdam in the Netherlands, whose father actually created some of the very first patents in the area of cultivated meat, which is where you are building, the muscle tissue, fat tissue the structure of meat out of actual cells. She's very involved in this and they have put in place near Rotterdam a bioreactor on a former dairy farm, which is now running, and that is being looked at and used as a, pilot for localised production of meat using existing infrastructure. Obviously they've had to bring in the bioreactor the farmer didn't have that, but clearly the farmer has land, which is available for use. And there's quite a lot of other farmers that, are interested in, doing that. So, yes, these kind of things are, are important in order that we can ease that transition, provide something different for farmers to do. And there I think government, in the same way as we've seen with other industries that have subsided. I'm thinking about the coal industry, for example, in the UK. Those kind of measures and support will be important in this, transition. And we're already seeing it, as I said in the Netherlands, in Denmark, Finland, as well as put some funds towards it. So, yeah, certain countries are already waking up to this and seeing it not just as a kind of nice to have, oh, for the animals. Not at all. The bulk of this discussion and, and justification is really coming around food supply, resilience, IE there being enough food for everybody in the shops. And avoiding well obviously famine and, and civil disruption. I mean, these are, these are things that if I speak about them, sometimes get people are you sure here? But the way that the food supply chain has become so just in time and has been relying on these things moving faster, distances does make it extremely vulnerable. And the climate crisis only increases that vulnerability because it reduces the harvest. Talking with an insurance executive recently within the next 10 years, the harvest will definitively drop by six to 7%. A lot of that harvest is going to the animals. I don't see the animals necessarily being so comfortable in this rising temperature environment either. They're definitely going to be needing to drink more water, and we only produce the amount of chickens that we produce. I very rarely see a chicken maybe in somebody's backyard, but actually outside. Most of them are in these barns. These barn are extraordinarily hot. Fans are running 24 7. But if the outside temperature is warm, having a fan running doesn't help you one iota. And chicken farming is not such a profitable activity that chicken farmers can suddenly afford to put AC in their barns, which in itself would be a big problem for the climate in terms of the energy usage. So yeah, this industry of the food industry, generally, agriculture is amongst the most acutely sensitive to the climate crisis. So it's really in their interest to get ahead of it and to transition as much as they can in order that, they can continue to produce food.

Tom Raftery: 37:13

And a left field question for you, Claire. If if you could have any person or character, alive or dead, real or fictional, as a champion for ethical investing, who would it be and why?

Claire Smith: 37:31

I'm still feeling quite upset about the death of Jane Goodall. And she was definitely a champion for animals. She did speak laterally. She was vegetarian, I think most of her life, and she did speak laterally about it. And equally David Attenborough has started speaking about it as well. I think that there is some commonality amongst almost everybody I know in terms of nature and really loving and valuing nature. And essentially the system that we have where 60% of all land mammals and almost 57, I think it is, percent of all birds, are the animals that we have bred and reared. So, the livestock, so the mammals obviously being, the cow, the sheep, pigs, et cetera, and the birds being primarily chickens. 57% of all birds are chickens. Which is mad. And well, I may include ducks in that and, and geese. So the ones that we use within the system, but chickens are the majority. That is an imposition on nature. If we had fewer of those animals, then nature would necessarily be a bigger component, not just percentage wise, but it would be more, we would have more nature. We would look outside, we would see more wild birds, more wild animals. And so I think these, people in the conservation space and the ones like David Attenborough, Jane Goodall, that bring nature to people in their living rooms, into people's hearts could yes, can certainly be very good figures in, in terms of encouraging changes in consumption and production with the acknowledgement that these need to be financed.

Tom Raftery: 39:25

Sure, sure, sure. We're coming towards the end of the podcast now, Claire, is there any question that I didn't ask that you wish I had or any aspect of this we haven't touched on that you think it's important for people to be aware of?

Claire Smith: 39:39

I think the thing that's important for people to be aware of is that it's not just about what you do in your daily life. Many people I know have moved to electric cars. Some are shifting their diets, people are sorting their trash, et cetera, putting solar on their roofs. Think about your investments as, well. That is a very powerful lever for change. That's what I would like to leave people with. If they're feeling concerned or upset about the climate crisis and don't know what to, do, then that may be something that they haven't really thought about before.

Tom Raftery: 40:13

Very good. Claire, if people would like to know more about yourself or any of the things we discussed on the podcast today, where would you have me direct them?

Claire Smith: 40:22

We are most active as companies are on LinkedIn in terms of social media. So please follow us on LinkedIn and Beyond Investing and Beyond Impact are the main LinkedIn accounts. And do feel free to connect with me and send me a message if you'd like to discuss further.

Tom Raftery: 40:43

Perfect. Great, Claire, that's been really interesting. Thanks a million for coming on the podcast today.

Claire Smith: 40:48

Thank you so much.