Entrepreneurs Tackling Climate Change: “Invest like it matters what companies actually do” ~ Authority Magazine

Originally published by Authority Magazine
A conversation between Amine Rahal and Garvin Jabusch

I had the pleasure of interviewing Garvin Jabusch, Co-Founder and Chief Investment Officer at Green Alpha Advisors in Boulder, Colorado. Green Alpha is an investment management firm specializing in building sustainability-focused portfolios of stocks for individuals, institutions, and retirement plans.

Amine Rahal: Thank you so much for doing this with us! Can you tell us a story about what brought you to this specific career path?

Garvin Jabusch: Yeah, why would I think of investment management as a key place to take on climate change, right? You know, I have this background in physical anthropology from before I got started in finance, and it’s given me an unconventional perspective as an asset manager. I want to understand the genesis and trajectories of what we’re doing, as opposed to uncritically following the rule book or the conventional wisdom.

It’s become clear that we, meaning humanity, have become a species causing massive global changes and effects, but we lack global agency. There are no binding supranational laws that aim to reign in emissions or fix any number of global problems in a meaningful way. It seems humanity’s domain of influence is wider than our domain of ability to act. Nations, regions, and municipalities each have their own policies — some progressive, some regressive — but none of these policies are global. None of them are equal to the scale of eliminating our main risks.

One place where we come nearest to possessing global agency is markets. New York and Moscow may have wildly diverging renewable energy standards, but people in both see the same prices for stocks and commodities going by on their ticker tape; a share of the world’s largest wind energy company or a barrel of West Texas Intermediate will cost you the same no matter where you are sitting. Perhaps unintentionally, markets are about the only place where there’s global agency — an agreed upon process and code of conduct.

Why does that matter? Because where capital is deployed in this world is where change is generated most quickly. As long as we remain invested in the legacy economy, that’s the economy we’ll get. So we thought, ‘time to change that.’ Let’s pull the lever with the greatest global agency: money. Let’s deploy it where change needs to be made.

Amine: What is the mission of your company? What problems are you aiming to solve?

Garvin: We want to change the way everyone invests, which today means taking on the challenge of changing the way our industry defines risk. Right now, fund management defines portfolio risk as correlation with or deviation from a prescribed benchmark like the S&P 500 or the Dow Jones Industrial Average. Portfolio managers are taught that the returns in their portfolios should be similar to how the big indexes perform, or they will be considered “risky.”

We think this approach to risk is long since outdated, even as it remains the industry standard. Today it is clear that there are way larger risks in the world than whether your mutual fund correlates with the S&P 500 — risks like resource degradation, inequality, and climate disruption.

We manage our portfolios based on our understanding of these real and present risks to the global economy, rather than by mimicking a benchmark. We think that if a company is not doing something meaningful to lower the risk profile of the economy, then that company’s stock won’t make a good long-term investment. By contrast, the companies that are driving the transition to a zero-carbon, less dangerous economy are the ones that are creating the most ingenious products and services. They’re willing to process the reality of a warming world and create more resilient business models as a result.

Changing the way we invest matters in confronting climate disruption but also in earning competitive long-term returns on your hard-earned investment dollars. You can’t have one without the other.

Amine: Can you tell us about the initiatives that your company is taking to tackle climate change? Can you give an example for each?

Garvin: When you’re in a hole, stop digging. For a portfolio manager, that means never buying or owning a cause of climate change. Instead, we will only own solutions to climate change.

We call the companies creating these solutions “Next Economy” companies. A Next Economy company is one that is getting the majority of its revenues from solving for a systemic risk like climate change or resource scarcity — wind energy, natural and organic food, water efficiency technologies, to name a few. We think making this determination based on how a company gets paid — always follow the money, right? — is the key. Depending on things like Environmental, Social, Governance (ESG) scores or Corporate Social Responsibility (CSR) reports without first asking “what’s this company’s core business?” can be sketchy because these reporting methods are often easy to manipulate. They can end up making very risky companies like tar sands oil producers look okay to some investors. We don’t think there’s room to compromise here because a marginally greener version of ‘business as usual’ economics is untenable, and our holdings reflect that.

Here are some pretty clear examples of what I’m talking about: A lot of funds, including many that identify themselves as sustainable, own shares in causes of risk like internal combustion engine makers Toyota and General Motors (GM). For us, this doesn’t make sense. Yes, GM recently rolled out a zero emissions vehicle (ZEV) plan, and for many, this is good enough. But their ZEV plan has them selling electric vehicles as 25% of their total car sales by 2030. To me, this sounds like a recipe to have their revenues and market cap be 25% of what they are today. By 2030, no one will want to buy an internal combustion engine, because there will be no resale value for that vehicle 5 to 7 years later. And GM’s Bolt, while a true EV, is not really moving the needle. America’s leading electric car company doesn’t produce any internal combustion cars and makes as many EVs in two weeks as GM makes Bolts in a year. And in any case, GM’s lobbying to roll back fuel economy standards speak louder than the words of their ZEV plan.

Toyota, despite having pioneered the Prius more than a decade ago, isn’t any better. The Prius made up 0.1% of Toyota’s volume during the second quarter of last year, meaning internal combustion engine vehicles make up the lion’s share of their production. In terms of which companies are actually innovating to solve a massive problem like climate change, these internal combustion companies have little in common with any Next Economy companies.

Never invest in the direct causes of systemic risk. Zero compromise.

Amine: What was the most difficult thing you faced when you first started your company/organization? Can you share how you overcame that? This might give insight to founders who face a similar situation.

Garvin: We were fossil fuels free in all of our portfolios back in 2007 before anyone had heard of fossil fuel divestment. We did that because we knew that, by definition, the causes of our most significant risk make terrible long-term holdings. But back then, not owning oil, gas, and coal was investment heresy. A lot of institutions wouldn’t take us seriously. Now, however, we’re recognized for having climate-investment research expertise and portfolio track records that few others have. The lesson is: if you have a high degree of conviction that you are right about something, the fact that the mainstream can’t see it doesn’t make you wrong, it makes you special. Own that, and stand out.

Amine: Many people want to start a company to tackle environmental issues, but they face challenges when it comes to raising enough money to actually make it happen. Can you share how were you able to raise the funding necessary to start your organization? Do you have any advice?

Garvin: Our capital raises have been small and targeted to allies and philosophically-aligned organizations. When you’re telling an industry they’re practicing their business in a way that doesn’t work in this fast-changing world, well, that industry is a tough place to look for capital support. For us, the answer was to look outside of the financial industry. Perhaps surprisingly, the Sierra Club became one of our seed investors, which we took as a vote of confidence, as the Club had never before made a private equity or venture investment.

Amine: Do you think entrepreneurs/businesses can do a better job than governments to solve the climate change and global warming issues? Please explain why or why not.

Garvin: Climate change and warming are so large and serious that it is going to take all of the above, but business can probably be quicker and more responsive. We’re seeing that the private sector is aligning people’s financial interests with solving the climate crisis. This is attracting a lot of talent and incentivizing the hard work that we need to address climate disruption and global warming. There’s also way more capital in business, and again, where capital goes is where change can rapidly occur. Policy can help, but business will get it done.

Amine: What are some practical things that both people and governments can do help you address the climate change and global warming problem?

Garvin: Invest like it matters what companies actually do, not because a company is in an index somewhere. The S&P 500 has dozens of fossil fuels companies. It has producers of hydrogenated oils and high fructose corn syrup, along with the inventors and peddlers of dangerous pesticides and herbicides such as glyphosate, to name only a few risk causes. You may think you’re being a “passive” investor if you’re buying an S&P 500 index fund or any major index fund, but you’re not. You’re making an active bet on collapse. We need to realize that our investment decisions matter.

Amine: None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

Garvin: My teammates at Green Alpha — Jeremy, Betsy and Arina — believe unreservedly in redefining portfolio management for the better. They work tirelessly to share the message that solving our huge, system-level risks means investing capital in the right areas to ensure solutions are deployed at a scale and speed commensurate with the problems we now face. We’re true partners in spreading the message that economic growth does not have to mean using more stuff and crashing through planetary boundaries — economic growth can simply mean doing things better. I can never be grateful enough to these folks here at Green Alpha.

Amine: What are your “5 Things I Wish Someone Told Me Before I Started” and why. (Please share a story or example for each.)

Garvin:
1. Very few people will care about your effort before you succeed. The fact that you’re doing something hard doesn’t matter to the world, which doesn’t owe us anything in any case. As Sarah Silverman put it, “stop complaining and just be undeniable.” Or in the more blunt words of Sean (Diddy) Combs, “Nobody cares, work harder.”

2. Try anyway. As Virgil wrote, “Fortune favors the brave.”

3. Start with a blank slate and build up. Keep your end game clearly in mind and work tirelessly toward that — toward figuring out what it will take to get there. Starting from an existing construct probably won’t achieve that. We need to think hard about not only primary but secondary and tertiary consequences of how we make decisions.

4. It is impossible to get rid of uncertainty. In our business, we are all taught to correlate with the S&P 500 because we want to get rid of uncertainty, but all an investor is doing by owning the S&P 500 is experiencing the same uncertain outcomes as everyone else. Which might make them feel a little better, but is no less uncertain.

5. “It doesn’t matter what happened in the past. Now is now.” (Kim Stanley Robinson)

Amine: You are a person of great influence and doing some great things for the world! If you could inspire a movement that would bring a great amount of good to the world, what would that be? You never know what your idea can trigger. 🙂

Garvin: I’d really like to start a “first principles” movement, where everyone is encouraged to think through to the end game of everything they do, as opposed to accepting our collectively inherited paradigm of business as usual. It’s the traditional paradigm that got us into this mess, after all.

Amine: What is the best way for people to follow you on social media?
Garvin: @alphaverde, and @Garvin1313 on Twitter.

This was so inspiring. Thank you so much for joining us!