May 18, 2022

Active Never Rests™

Rising to Meet the Climate Challenge

Our society is in a race against time to decarbonize. As such, we spend a great deal of time studying how public policy intersects with the actions of the corporate sector to drive the necessary evolution of the global economy. Together with our deep industry knowledge and the bottom-up fundamental insights that emerge from our in-depth research on individual companies, we believe we are able to identify companies that have the potential to catalyze positive change.

March 2022

Portfolio Manager

David Fording, CFA, Partner

Sustainability Analyst

Shivani Patel

Our society is in a race against time to decarbonize. As such, we spend a

great deal of time studying how public policy intersects with the actions

of the corporate sector to drive the necessary evolution of the global

economy. Together with our deep industry knowledge and the bottom-up

fundamental insights that emerge from our in-depth research on

individual companies, we believe we are able to identify companies that

have the potential to catalyze positive change.

U.S. GROWTH & CORE EQUITY

Investment Management

active.williamblair.com

WILLIAM BLAIR U.S. EQUITY SUSTAINABILITY STRATEGY

Rising to Meet the Climate Challenge

RISING TO MEET THE CLIMATE CHALLENGE

Rising to Meet the Climate Challenge

low-carbon economy as a major investment opportunity,

potentially delivering financial returns for well-positioned

companies while also enabling a more sustainable world.

The Climate Transition Presents Structural Changes

The transition to the low-carbon economy represents

a structural change in how the global economy functions,

and therefore in how sectors and markets function as

well. Society will have to transform how it does things

today to make this economywide shift. Some examples

include the wholesale change in our energy sources, a

greater emphasis on the extension of the lifecycle of

goods and materials, and an evolution in our consumption

habits. Customers and employees will increasingly make

different purchasing and employment decisions in line

with their values around climate change and sustainability.

Each company will respond to these structural shifts

in different ways, dependent upon the implications for its

corporate strategy, its asset base and operations, and its

customer preferences. In turn, there will be a broad variety

of downstream impacts. A structural shift in one sector

can trigger a structural shift in another, thus pulling the

whole economy forward in the process.

Our investment research process involves a keen

awareness of sector-level and cross-sector structural

shifts and their implications for investment idea

generation and value creation for the companies in which

we invest. We believe this allows us to identify transition-

related growth opportunities, as well as mitigate risk.

Of the many issues that enter into any conversation

about the long-term sustainability of our planet, few are

as important as climate change. This is mostly a function

of the fact that we are in a race against time, where

failure to decarbonize will have potentially dire long-term

economic and social consequences if left unchecked.

The urgency increases with each passing year as we

experience the impacts of climate change through record

temperatures and more extreme weather events, and

importantly, the disruption, displacement, and losses

that occur as a result.

A Critical Partnership Opportunity for the Public

and Private Sectors

The public and private sectors’ combined actions

create a powerful partnership. One cannot be effective

without the other in addressing the urgency of the

transition to a low-carbon economy.

Global policymakers have a catalytic role to play in the

transition by making new, low-carbon solutions

economically viable. Without price parity, it is often

challenging for companies and individuals to adopt low-

carbon solutions. Economic viability will drive rapid

scale-up of low-carbon solutions, which also drives costs

down and reduces the need for policy intervention in

the long run. Carbon taxes and fees, incentives for research

and adoption of new technologies, and related mechanisms

all help catalyze the economic viability of climate-

friendly solutions.

In the private sector, companies that can develop

solutions for the climate transition, or build operational

resilience in the face of it, will be in a position not only to

survive but to thrive. In contributing to transition efforts,

these companies will influence multiple stakeholders

(such as suppliers, distributors, customers, and employees)

across the value chain, thereby creating a positive

multiplier effect.

As investors, we seek to understand how the long-term

implications of emerging government policies

around climate change combine with bottom-up,

corporate initiatives in influencing long-term sustainable

competitive advantage. We see the transition to a

“We see the transition to a low-

carbon economy as a major investment

opportunity, potentially delivering

financial returns for well-positioned

companies while also enabling a more

sustainable world.”

David Fording, CFA, Partner

WILLIAM BLAIR INVESTMENT MANAGEMENT

Rising to Meet the Climate Challenge

(continued)

By 2030

2031-2040

2041-2050

After 2050

Source: “TA KING STOCK: A Global Assessment of Net Zero Targets.” The Energ y & Climate Intelligence Unit and Oxford Net Zero. March 2021.

EXHIBIT 1

Company Commitments to Net Zero

The number of companies committing to net zero continues to increase and the timeline of these commitments varies.

Percent of Sales with Net Zero

Commitments

Companies with net zero targets represent

$14 trillion in annual sales.

Among these companies, targeted timelines vary:

Target Year

Sector Linkages: A Case Study

Let’s consider how the consumer, materials, and financial sectors

could be linked in the transition to a low-carbon economy.

A major beauty company may identify growing customer concern

about the environmental footprint of plastic packaging and

make a net-zero commitment. In order to effectively address

its sustainability commitments, as well as the change in

customer preferences, the company would need to measure the

carbon footprint of its packaging and improve and report on

the environmental impact of its supply chain. Without a strategic

approach and effective execution, the company risks customer

retention and reputational damage.

The beauty company’s increased focus on sustainability has

implications along its value chain. For example, it may begin

to seek out alternatives to its virgin plastic packaging, putting

its relationships with plastics suppliers at risk. As a result,

companies that supply plastics will need to innovate to meet

their customer’s new needs, or otherwise stand to lose a

top customer.

Packaging companies might also recognize that the beauty

company’s commitment to sustainability is unlikely to remain

unique, considering the inevitable cross-sector structural

shifts that the transition to the low-carbon economy will trigger,

and that their virgin plastics business is likely to decline. In

this scenario, the plastics companies and the beauty company

might collaborate to develop recycled and alternative packaging

solutions, with the beauty company potentially providing

incentives or other financial structures to support the plastics

companies’ research and development processes.

The financial sector may also recognize that plastic packaging

feedstocks are petrochemicals with high carbon footprints

that may fall out of favor with the rise in corporate commitments

to net zero and waste reduction. Companies within the financial

sector might use their lending and investment power to back

companies with low-emission, circular, and biodegradable

packaging solutions as a growth opportunity, while monitoring

the heightened risk of business decline in virgin plastics

companies. This would provide an opportunity to mitigate

transition risk, promote environmental sustainability, and

generate financial returns.

RISING TO MEET THE CLIMATE CHALLENGE

A Dedicated Sustainability Portfolio

Weighing Sustainability and Investment Return

Considerations

Seeking to drive superior investment returns will always

be the core of what we do. We believe in making investment

decisions based on the durability of a company’s business

model, operations, and value chain, and the valuation of the

security. Every company in our U.S. Equity Sustainability

strategy has both an investment and sustainability thesis,

and they are often tightly linked. The sustainability thesis

outlines what makes the company a Sustainability Champion,

Enabler, or Improver, and tracks key details of the unique

sustainability characteristics of the company over time.

The Impact of Enablers

A Sustainability Enabler is a company whose products

or services help improve environmental, social,

and governance (ESG) standards or outcomes in society.

These companies influence the future state of

sustainability for an industry or advance a sustainability

theme. The impact they have is in that influence.

Our approach is to understand the enabling role that

the company plays, develop a sustainability thesis that

outlines that role, and link it to the company’s strategy,

operations, business model, value chain, or industry.

Sometimes the thesis begins qualitatively, and as we track

progress and continue to engage with the company, the

quantitative opportunity becomes clearer.

An example of an enabler of the transition to a low-carbon

economy would be an integrated circuit manufacturer

whose products are used in consumer and industrial

electronic devices, such as cell phone battery chargers and

household appliances on the consumer side, or internet of

things (IoT) devices on the industrial side. The company’s

products enable the optimization of power consumption

during AC/DC conversion or voltage fluctuations. For

example, during a light load, power would be reduced to

an amount necessary to run the device efficiently, and

during standby, or no-load, power is effectively shut down.

It is estimated that in the United States alone, roughly

10% of energy use is a function of standby power

consumption. The sustainability thesis for this company

would center on the cumulative energy saved by installing

its chips in a wide variety of products, which could be

further converted to avoided greenhouse gas emissions.

Improvers to Champions

A Sustainability Champion is a company with leading

sustainability standards and practices, and a

Sustainability Improver is a company with scope for

significant improvements in both of these areas

that has made a commitment to implement such initiatives.

These designations are based on peer comparisons to

allow for variety in progress toward sustainability

standards across sectors and market capitalizations.

Champions have an impact by setting a high bar for

sustainability practices among industry peers, while

Improvers have an impact through the rapid and

progressive enhancement of sustainability practices,

as well as improving disclosure.

A building materials company, for example, could be

considered a Champion given its long history of managing

and disclosing material sustainability issues in its

operations and value chain. The company’s industrial

processes require intense heat and were historically

that having high carbon-emissions intensity was a

material risk for the company in an environment where

policy to mitigate emissions was becoming more

stringent, the company invested in replacing equipment

to reduce its Scope 1 and 2 carbon emissions. The new

equipment was more efficient and could be powered

by alternative energy sources. The company also developed

a vendor sustainability program and worked with

partners along its value chain to set emissions reduction

targets, which helped the company reduce its Scope

3 emissions.

When the climate policies in certain high-risk

jurisdictions changed, the company was already well

positioned to minimize penalties for high carbon

emissions. The company could be seen by others as a

model for transforming operations to minimize

transition risks. So not only are its reduced operational

and value-chain emissions a key driver of its impact,

but by setting a high bar on best practices, the company

is also positively influencing developments across its

entire industry.

WILLIAM BLAIR INVESTMENT MANAGEMENT

A Dedicated Sustainability Portfolio

(continued)

When this building materials company began its

sustainability journey, taking steps to reduce its emissions,

it could have been considered an Improver. Though

the company would have started out with small goals,

our focus is on positive change and whether a company

is committed to, and capable of, delivering best-in-

class reductions in emissions over time. Not all Improvers

become Champions, but there is the potential for them

to do so.

Conclusion

Increased societal awareness around sustainability,

combined with ever-evolving expectations and demands

from stakeholders, is creating structural changes

in society. Our U.S. Equity Sustainability strategy aims

to identify the companies that are in front of the curve

in responding to these changes, and that see their

own internal actions as drivers of sustainable competitive

advantage and thus long-term value. These companies

implicitly recognize the value in leading the climate

transition, both from a societal and shareholder value

point of view.

“Not all Sustainability Improvers

become Champions, but there is the

potential for them to do so.”

David Fording, CFA, Partner

About William Blair

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