Next EconomicsTM refers to Green Alpha Advisors’ investment philosophy. It is the analysis of the pathway from the destructive legacy of a fossil fuels-based economy, through the present transition, toward an economy that can perpetuate indefinitely—without colliding with large-scale risk or overtopping planetary boundaries.
Because the climate crisis directly informs Green Alpha’s investment philosophy, it is integral to its portfolio construction processes. Green Alpha addresses the climate crisis not within a traditional portfolio framework, but by building portfolios of stocks whose companies are reducing the risk of local and global economic collapse. Next EconomyTM portfolio construction is not about incrementally improving on approaches like indexing, but about a new paradigm in asset management in the face of the climate crisis.
As such, Green Alpha firsts examines whether a company contributes to raising the global economy’s risk profile or works to minimize the likelihood of succumbing to the threats of the climate crisis, resource degradation, widening inequality, and human disease burdens. If a firm adds more risk than it removes, it is not eligible for inclusion in a Green Alpha portfolio.
To illustrate the concept of Next Economics, let us use a Moore’s Law-like approach to sustainability. Science presently informs us the world has, at most, 30 years to learn to operate its economies in a sustainable way. The nature of compounding tells us that to reach 100% sustainability within that time frame, the global economy needs to make a 2% improvement towards that goal every year. Our ‘climate Moore’s law’ predicates that if a company does not contribute meaningfully to that 2%, it is not doing enough, and the world will miss its opportunity to reach sustainability—possibly forever.
It is important to distinguish between improvement in internal operations and contribution to the overall economy. A company directly causing the climate crisis, such as an oil major, could theoretically improve the efficiency of its internal operations by 2% a year, and yet never approach sustainability. To achieve true sustainability, a company must contribute 2% annual improvement to the global goal. Companies paid to create products or services causing the climate crisis are not eligible for inclusion in Green Alpha’s strategies, no matter their stated goals or pledges to improve internal operations, because sustainability can never be achieved with unsustainable actions.
A New Dynamic
Green Alpha avoids reliance on environmental, social, and governance (“ESG”) scores because they often focus on internal metrics of a company’s practices, rather than how revenue is earned. Most ESG ranking systems give high average marks to oil majors. While these scores may be valid in a traditional ESG sense, they do not mean fossil fuels are not causing the climate crisis and driving us towards collapse.
The first place to investigate if a company is doing more to stabilize or destabilize the global economy is simply to look at what it gets paid to do. If revenues come from sustainable or regenerative activities, the rules of Next Economics indicate that one should look further into the company’s stock. If paid to do anything resulting in risk or destruction, further research is unnecessary as the company is unworthy of Green Alpha’s time and analysis, and moreover is unlikely to make for a profitable long-term investment.
The framework and tools provided by Next Economics furnish a clear path to owning the solutions that will gain market share as global markets become increasingly aware of the acute and various crises confronting us all. Incremental half measures may have some value, but it is Green Alpha’s strong belief that full solution sets will accrue most of the market share growth and most of the intrinsic value appreciation over time. Consequently, Green Alpha believes that Next Economics will impart noteworthy impact in demonstrating over time that solutions to global risks have value while the causes do not, as well as in providing a clear path to long-term competitive portfolio returns.
Sustainability is, finally, rightly viewed as economically attractive, and as the pathway toward more security and stability, better health, and resilience. Instead of the decades-long perception as a burden to pay for, there is now emerging recognition that zero impact—or even positive regenerative impact—are the fastest growing areas in every sector of the economy. While the vested interests of the legacy economy are still powerful, there is a new dynamic at work. One no longer needs to ask if the global economy will be decarbonized but must still worry it may happen too late. Thus, Green Alpha’s reluctance to engage in the incrementalism of traditional ESG investing.
Next Economics Viewpoint
Because of the precariousness of the world in which we live, Green Alpha realized the need to create a new framework for investing; one that disregards both indiscriminate indexing, and the conventional wisdom that low tracking error with a business-as-usual benchmark index is a prudent way to mitigate risk. The climate crisis was a major catalyst that drove the invention of Next Economics.
Core to Green Alpha’s investment philosophy and processes is the understanding that the climate crisis is now the greatest investment risk in every asset class, asset managers can no longer afford to merely consider climate in portfolio construction. It is imperative to view climate risk as the primary threat to our clients’ wealth preservation. Thus, we arrive at the inverse corollary: solutions to the climate crisis are our best opportunity to preserve and grow that wealth.
Green Alpha is a registered trademark of Green Alpha Advisors, LLC. Green Alpha Advisors also owns the trademarks to “Next Economy,” “Next Economics,” “Next Economy Portfolio Theory,” “Investing in the Next Economy,” and “Investing for the Next Economy.” Nothing in this blog should be construed to be individualized investment, tax, or other financial advice. Please read important disclosures here: https://greenalphaadvisors.com/about-us/legal-disclaimers/