Investing With a Climate Lens

We also need to basically stop all new investments into fossil fuel expansion. That is what we have to do. We cannot solve climate change without investing. We literally have to put a lot of solar panels on the ground. So what Wall Street labels as sustainable does not really align with that reality. It often even has more fossil fuels than it does climate solutions. So we build comprehensive portfolios that make sense for something like your IRA but that are built with a clear theory of change of every part that's in it to help us build towards that world that we need to solve our most critical sustainable issue.
Ems:Great, Zach, thanks for that overview of your firm, your background. So to dive a little deeper, I'd like you to share your outlook for investing in companies that seek to solve climate change.
Zs:So we get this question a lot and maybe I could rephrase it in a different way, which is we get people coming to Carbon Collective and they're like, Hey, all right, I'm ready. This is super cool. I want to align my invest with my values and I know I'm going to perform a percentage point or two worse, but that's okay. I accept that.

And we think that that outlook is fundamentally incorrect. This is a myth around sustainable investing. The counter-myth to that is that fossil fuels are an important part of a balanced portfolio and, in spite of what has happened in the past year with the energy industry, the trend is very much in the opposite. A portfolio of the S & P 500 that would've been divested from fossil fuels from 1989 to the present would still be outperforming the overall S & P 500 in general, one with fossil fuels in it.

And then looking ahead, we see what's happening with the fossil fuel industry right now and with the large share buybacks, increasing of dividends. This is some extent to them waving the white flag and acknowledging that their prospects for long-term growth aren't great. 50% of the oil that is used in the US is used on our roadways. It's our cars and trucks. There is a better technology that is here that doesn't use oil to do the same thing. It is faster, stronger, much roomier, much safer, costs a 10th as much to maintain because it has a 10th of the moving parts. And you can literally run a Tesla for over a million miles. Within the next five years, electric cars are likely going to be less expensive to purchase upfront than a gas-powered car. We're in the middle of a technological shift and replacement.

So that is a lot of oil's market share that is being transitioned out, same thing in electricity. So when we look at the future prospects of something like oil and energy as it's traditionally been known, it's hard to see where those avenues are for long-term growth. And instead, what we see is the companies that are replacing them, these are the ones that are quickly eating up those market share. And so for us as long-term investors who are saving for retirement, those are the type of companies that we'd much rather be in than an industry that is fundamentally in decline.
Ems:Zach, to shift gears a little bit, where do you see some of the greatest challenges with what you do from an investing perspective?
Zs:It is those underlying myths right now that help perpetuate the fossil fuel industry and hold back a lot of climate solutions. It's changing, but when we look at efficient market hypothesis, it is broadly correct. Stocks are priced based upon largely publicly available information. What we don't often think about is that underlying narratives that we just hold as fundamentally true are a part of that publicly available information. So that narrative that fossil fuels are an important part, that you need them in order to get performance that actually helps perpetuate the performance of fossil fuel companies and those stocks on it.

Similarly, that counter narrative that sustainable investing is only for Greenies like me and is fundamentally a charitable act also keeps those prices down. And so it is those that kind of are the biggest blockers here. I gave a webinar recently to a bunch of students at Cal and these narratives were still very much baked in and those type of questions. So it's even for 20-year olds who very much are seeing ahead, that is the type of thing that we are still coming against. So it's the story that in some ways is still so much the problem.
Ems:Zach, I wanted to ask you, what are your thoughts on the SEC's push for increased transparency? And what would this mean for a firm like yours?
Zs:So we absolutely need more transparency here. Climate risk is not something that is being adequately priced into the overall stock market right now. If it was, then we would be likely seeing a very different landscape of what we see today. Part of the way to get that is through increased transparency in the same way that now banks after the recession of 2008 are required by law to do stress tests and show their ability to bounce back from debt crises and things like that and disclose that type of risk, so investors can know about them.

We need to see the same in regards to climate change, because it is the biggest disruptor of our global economic system that is coming, and it is already here and it is getting worse. So it is something that we absolutely need more of. What we also can't have, though, is on a company-based level. We can't have it getting in the way of action. There are just certain things that we know need to happen, regardless of what, as a company, your specific carbon footprint is. To solve climate change, we need you to use a hundred percent renewable energy. We need you to switch your fleet to being all electric. I think often in the climate space in general, we can let measurement get in the way of action. We need both and we believe that they can be done in parallel path.
Ems:Zach, I'd be remiss if we fail to discuss on today's podcast diversity, equity, and inclusion and how you are integrating it both at the firm level and through your investments.
Zs:Yes, it is absolutely key. At the firm level, the place to address this is in hiring. It is how do you make sure that the top of the funnel of your hiring process is you are getting candidates that match the diversity in terms of not just racial background but religion and economic background and educational background as well, to make sure that we have that in the firm. This is something that I believe for literally every corporation in America should always be seen as a work in progress.

I think any company that says we're done with this is not fully acknowledging the level of historic racism and sexism that we are all born into. So we, Carbon Collective, are very much one of those companies where it's our job, especially as leaders and as a white male who is in this position, to say we always need to keep our eye on this prize and never feel like we have done enough with it.

On the investment side, this is an area where you can use those tools of engagement. So how are we pressuring companies right now? Tesla is in the news, because they were kicked out of the S & P's ESG index. As a side note, this is absolutely ridiculous that it's the case. Tesla certainly has things that it needs to improve on its social and on its governance especially, but the fact that their core product is they are the leader in solving one of the most important issues of climate change, which is electric vehicles and the solutions there, their core product does that.

Whereas we have companies whose core products like ExxonMobil are causing the number-one issue in E still in that is ridiculous and we believe undermines ESG as a whole as a framework. Coming back to your question though, in looking at a company like Tesla, who has a lot that they need to improve on that level, that is where we see the type of engaging, of we need to work with our friends and those companies that are building solutions. And again, that same level of never being satisfied and never saying that any company is perfect because it's impossible to achieve. But that equally means that we need to push to get there.
Ems:Zach, we've covered a lot of ground today, and I wanted to see if you have any final thoughts you'd like to share with us today.
Zs:I think I would like to share two things. One is reiterating the challenge to the narratives of fossil fuels and energy stocks of being a necessary evil in a balanced portfolio. And two, the role of sustainable investing as one that is fundamentally charitable. Zoom out, take that long view, and look at what is the market share. It could be hard to see in a world that is run by fossil fuels today, but when we project 10 to 20 years ahead, if you are an investor, start asking yourself those types of questions.

And then the second thing is, if any of your listeners are deeply concerned about climate change and are looking for how to get involved and what to do about it. The place that we always say to start is do the big things in your life. And those are often the hardest things to do, but it's to change the gears of how your life works to orient with solving our greatest issue.

So for example, where you bank. It's kind of a pain is to change where you bank. You have to look up all your auto deposits and write them down and then set up the new bank and make sure it all gets linked up and do the transfer, close your old one. But once you do it, and you can know that your deposits are no longer being used to finance fossil fuel expansion and instead hopefully being used for something that's on the positive side of the ledger, that is big. And then once you're done with it, it is a big decision. You get to pick it up. You just get to put it down. After that you're just banking. You're not having to think about what you're eating for lunch or what you're doing in the grocery store or while shopping.

So banking, investing, how you generate your electricity, how you transport yourself, how you cook your food. These are a lot of the really big questions that we like to urge people to start with, because once you do it, decision fatigue is a real thing. You'll be on the other side and you'll fundamentally just be living a more sustainable life.
Ems:Well, Zach, I wanted to thank you so much for sharing your perspective with our listeners today. And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics and join us for our next EisnerAmper podcast, when we get down to business.

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