How Sustainable Investing Can Impact Climate Change
Zach Stein, co-founder and CEO of Carbon Collective, a climate change-focused online investment advisor, talks about the three ways sustainable investing can make a positive impact on climate change, as well as the trends shaping the climate tech space. Stein also shares what more investment in climate-focused companies will lead to and the top companies investors may want to keep an eye on.
What is the most important issue facing the world today?
Climate change is the single most important issue facing the world today. If we invest in solving it, we can avoid catastrophic levels of rising temperatures. If we don’t, the levels of chaos our global civilization will face will be truly unprecedented.
There has been a rise of climate tech investments – what does the next five years look like for this space?
Many prominent business leaders from Larry Fink to Bill Gates have dubbed climate tech the next Internet. Why? The amount of capital -- and more importantly, talent -- flowing into the space feel similar to the early 90s during the Internet boom. Following that trend, we should expect that over the next five years climate tech will emerge from its perception today as new, novel and niche (and largely just for nerds) into an economic powerhouse.
What are the trends shaping the climate tech space?
When I graduated from college in 2011, the number one destination for top talent was Wall Street, with consulting being number two. If we skip ahead to 2022? It’s climate tech. We are in the middle of a technological revolution. The world is coming to grips with the realities of climate change, both the significant downsides, but also the significant opportunities in solving it.
Capital markets play a significant role in the solution for climate change. To us, the stock market is neither adequately pricing in climate risk, nor climate opportunity. Focusing on the opportunity, the zero-carbon revolution is here. Not because of climate change, but because it’s better tech. Solar, wind and batteries are the cheapest form of generating electricity in most places in the world. Electric cars are faster, safer, roomier, quieter and more convenient than gas-powered cars. They have the same lifetime cost and will cost the same up front within the next five years.
What will more investment in climate-focused companies lead to?
To avoid catastrophic warming, the globe needs to increase its investment in climate solutions by 5-10x current levels. Climate change is a solvable problem, but only if we build our way out of it. The pathways to a post-carbon world are either to fall dramatically backwards into pre-industrial technology or leapfrog forward to a global civilization that thrives without needing to burn stuff to power it.
More investment into companies building solutions does two things: 1) It helps them move faster, and the faster they move, the faster up the “S-Curve” of adoption of zero-carbon tech we will go. 2) It helps overturn the narrative that sustainable investing is somehow charitable, and instead focuses on the opportunity.
What are some top companies in the climate space?
There are tens of thousands of amazing private companies working on solutions. Many of these companies will eventually make their way onto public markets.
On public markets, we often get excited by some of the less obvious solutions. We devised a Climate Index that identifies public companies that are building climate solutions here.
Badger Meter’s products help catch water leaks. We use a lot of energy to generate fresh water and move it around. The more of it we can save from wasting, the more energy efficient our water system will be.
Comfort Systems USA makes the majority of its revenue by replacing old, inefficient HVAC systems with new highly efficient versions. As climate change worsens, the usage of HVAC will only increase, making their energy efficiency even more important.
How can sustainable investing make a positive impact on climate change?
Investments in public markets can have three areas of impact: voting, cost of capital and narrative.
Voting: Your shares have votes and can push the managers of a company to change direction. But unless you specifically opt into a fund that votes ethically on your behalf (or you vote yourself), your votes most often are just used to support management’s position.
Cost of capital: When a company’s share price falls, it gets more expensive for it to raise debt or sell more equity. To use an extreme example, the Dow Jones Coal Index fell 99% from 2011 to 2020. When do you think it was easier for those CEOs to raise money? In 2011 or 2020?
Long-term investors (pension funds, endowments, your retirement, etc.) have the power to shift a company’s stock price because of their time horizons. They don’t participate in much active trading, so when they choose to divest from a stock, it effectively increases the number of actively traded shares. This is why it is critical to closely evaluate what is in your 401(k).
Narrative: The narratives investors have about sectors can be powerful. It is still pervasive that fossil fuels are necessary for performance even though an S&P 500 portfolio divested from fossil fuels from 1989 - today would have outperformed. It is also still pervasive that sustainable investing is charitable and will yield lower returns over the long term. These narratives only change when enough people challenge them.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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