August 12, 2021
In this episode of Engaging Alternatives Spotlight, Elana Margulies-Snyderman, Senior Manager, Publications, EisnerAmper, speaks with Tom Soto, Founder and Managing Partner of the Diverse Communities Impact Fund (DCIF), a Latino-owned lower middle market impact-focused private equity fund based in Los Angeles. Soto, the two time appointee of former President Bill Clinton and Team Lead for The Executive Office of the President’s Transition Team for the White House Council on Environmental Quality for President Obama, shares with us why he is so passionate about climate change, what inspired him to get into politics, his history of activism inspiring more Latinos to foray into money management and more.
EMS: Tom, why don't you start off and tell us a little about your firm, DCIF, and how you got to where you are today?
TS: It's strange. You never really know the path before you, but I have a robust history in environmental activism, environmental justice. And there was a point in time where my activism became more apparent that it needed to be in finance, matching technologies to meet rigorous new environmental standards with the type of financing that was out there and available. And quite frankly, I had a business background. I was an entrepreneur, I knew finance, but I also knew environmental regulations and legislation.
I put that all together and that became the Tom Soto we know now. Part of that has led to my fourth private equity fund, which is Diverse Communities Impact Fund, the lower middle market growth equity fund that you just shared.
EMS:Great. That's a very comprehensive background. Tom, clearly, like you stated, you're so passionate about climate change. What inspires you to keep moving forward with this initiative?
TS:Well, there's a lot of reasons that are out there that inspire me to move what we call DCIF, Diverse Communities Impact Fund, forward. First and foremost, I'm a daddy. I have a 12 year old son who I want to see have the experience of understanding not just what climate change is, but the world that we live in. I want to know that he could maybe see a polar bear in the wild, but also be able to live in a sustainable community that isn't going to be suffering the ravages of long-term heat waves like we've been feeling in the west this week.
Those are personal reasons. The other thing is that there is an incredible opportunity to meet the demands of reducing greenhouse gases, increasing the capacity to live more sustainably in all economic sectors, well generating clean green jobs that are livable wage, while we're generating great risk adjusted returns for the investors who are investing in this space, all while we are loosening the grip of fossil fuels that has had on our economy for the past century. There is an abundance of reasons why we need to do this.
If we don't change our behavior, we know that we're going to exceed our average temperature by 1.5 degrees Celsius. Once we hit that point, it's likely that we can't reverse the effects of climate change and go back to what it may have been 20 or 30 years ago. We're now experiencing the most severe drought in the West, combined with a fire season that essentially hasn't ended over the past two years. And now we're seeing over a million acres in California this week burn as a result of the heat wave and climate change, and so forth.
Those reasons alone are enough to begin to address how we might be able to embark on a sea change of thought, a sea change of economics, and a sea change of investments that we could use to not just combat climate change, but generate huge amounts of returns and create jobs again as we move into a new era of economics that are really forcing us to examine how we behave environmentally on planet earth.
EMS:So inspiring everything you said, Tom. And on the other hand, obviously there's a lot of challenges too you have to conquer with respect to climate change. I thought maybe you could mention some of the greatest challenges you see from your seat at DCIF.
TS:From DCIF's perspective, probably the greatest challenge is getting the investment community to have a more clear understanding of not just the validity of investing in this sector, but understanding the magnitude of return and the capacity for those returns in this space. It wasn't that long ago where the auto companies, for example, were suing the State of California because the State of California has its own independent waiver on tailpipe standards. The big three wanted to end that because they didn't want to produce low emission cars or electric vehicles.
And that was only a year ago. And now we're finding that all three OEMs in the United States are calling on themselves to stop producing internal combustion engines somewhere around 2035 and later. If you could believe that, the fact that the auto companies have agreed that the fossil fuels era of internal combustion engines manufacturing is coming to an end, that is a phenomenal step.
Also, when you see that Exxon, much to the chagrin of Exxon's old board and current executive staff, had a coup d'état of its own board, where climate change activists were able to convince the trillions of dollars of pension money that is in Exxon to vote old members off the board and bring in members that are more climate sensitive and want to see ExxonMobil respond to the types of changes that need to happen. All of this is a clear market signal to Wall Street and investors that this is not a time that is coming.
It is a time that has come. That this is the new normal for them. They're going to have to respond to reduce fossil fuels in the economy and invest in the types of innovations that will help to carry us into the future with the least amount of carbon associated with the economic growth, scale, and activity that we need in order to maintain the type of quality of life, for example, that we might have in the United States and indeed the growing middle class that is consuming a lot of natural resources, including fossil fuels around the world.
This is a new paradigm of thought. These are the types of thinking that 20 years ago folks believed that would never occur. And now here we are. I'm on my third electric vehicle. You've got solar and residential solar. We have storage batteries that could fuel an entire neighborhood. This is a different world that we live in. We have to get the investment community to understand that this is how they're going to generate alpha. You're more at risk investing in coal, natural gas, and petroleum products than you are in solar.
There are five million people who get up in the morning and work in the renewable energy sector. That's twice as many people who go in and work in fossil fuels and coal.
EMS: Tom, to shift gears a little. I'm extremely impressed with your background in the political sector. I like to touch upon what really inspired you to get involved in politics and why you're so passionate about fostering change on this front.
TS: Well, I mean, listen, I don't know if I'm involved with politics. I think that all roads lead to politics no matter whether you are a retail operator, whether you're the CEO of Fortune 500 or Fortune 50 company, or whether you manage private equity. But there's no place where you could go within the investment sectors without bumping into the government. And in my book, government is your friend, they're your regulator, but they're also your source of capital. They're also your market.
And there's no question that with the innovations that all of us are living by right now, we are talking via a computer, a PC, using the internet to have this communication. All of that was first and initially developed by DARPA within the Department of Defense. Government affects our lives in every hour of the day. And to me, it's not only not a liability, it helps to derisk the investments that I'm in. And we're now at a point with respect to the growth of the Latino population where we're able to now have a voice in government.
If you think about California, it's the fifth largest economy on planet earth. And it has a very small legislative body, 120 members total between the Senate and the assembly, and two-thirds of those are Democrat, and of those, 32 members are Latino. The Latino caucus in the State of California has a lot to say about what happens to the State of California economically from the general fund to the pensions, and so forth. This is not about the right to do this or that.
When we have Latino voices and minority voice and diverse voices, we not only see more equitable distribution of wealth and support for the community demands that we have, but we also find that when we have diversity within the C-suites, when we have diversity on boards of directors of public companies, those companies are generating much greater free cashflow, much greater EBITDA, and are much more profitable.
Not to mention they're going to be more efficient and they're probably going to be closer to carbon neutral than those companies that don't recognize the need for women and minorities on their boards or in the C-suites.
EMS:Tom, you're really such an inspiration to everything you're doing with respect to the Latino community and D&I. We're wrapping up here. I just wanted to ask you a couple more questions. What are your future plans looking forward?
TS:Listen, the future plans besides watching my 12 year old son grow into the great and aspiring musician that he is, I think that there's a huge role for increasing more renewables to remove the need for natural gas and coal in our renewable sector. We have solar and wind. But when the wind isn't blowing and the sun's not shining, we need to have base load and peak hour operating capacity.
I become a big promoter of biomass as an energy source to close that gap and to assure that we can meet the economic needs for growth and scale, especially in California and New England, so that we could assure that that energy base load always exists, that we have consistent and dispatchable capacity to serve the energy needs of our economy, but yet not leave the agenda of a fully renewable energy sector. To me, that's a really big moonshot objective where I'm not looking to gain 10%, I want to get 10 times on this.
EMS:Great. Tom, are there any other final thoughts you would like to share with us today?
TS:Not really, except for the fact that keep in mind, when I started out in 1989, when we filed our lawsuit against the US EPA for violation its own Clean Air Act and in 1993 when it went to the federal government and went to the Supreme Court, we won. We were told by the federal court for the State of California and the US EPA to allow for more strict and rigorous measures. And I said that evening on Nightline and on CNN, this is the end of the era where fossil fuels has its grip on our economy. We will see residential solar. We will see electric vehicles.
We will see hydrogen highways. That was in 1993 and a lot of that has come to pass, but a lot more needs to occur in order to assure that humanity can survive. Planet earth will survive climate change. The question is, will humankind? We have to make sure that future generations not only have at least what we have, but are given more than we inherited so that they could have a future for their future generations. So all of that said, I think we're at a unique time, but I'm optimistic. I think we live in a world of abundance.
There's no other point in human history where we could point to where we have the incredible amount of resources to overcome any of the challenges that we've created. So all of that being said, I think we've got a great future as long as we keep our focus on the need to reduce greenhouse gases and respond to climate change.
EMS:Tom, thank you so much for sharing your perspective on climate change with our listeners.
TS:Wonderful. Well, thank you for having me join you.
EMS: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.