Sustainability Reports Mean Nothing if a Company’s Business Model Won’t Last ~ Bloomberg Brief

Originally published by Bloomberg Brief–_2cz1nl6gpviz15irrh2/qampa-green-alpha

Garvin Jabusch, co-founder and chief investment officer of $50 million asset manager Green Alpha Advisors LLC, says the new economy is developing so fast that even some socially responsible investment strategies are being left behind. He spoke with Bloomberg Brief Sustainable Finance Editor Emily Chasan about how sustainable investors can rethink portfolios to focus more on corporate business models. Comments have been edited and condensed.

Q: Tell us about Green Alpha and your investment model.

A: We launched our first portfolio in 2008 with the idea that we wanted to get out of traditional socially responsible investing. That’s a model that works around negative screening, where you take a traditional index, take out a few things you don’t like, and market it. We thought it would be best to approach responsible investing in another way that more directly relates to sustainability. So instead we modeled what a low-risk sustainable economy might look like and what we could invest in to get there. We focus on technology and innovation that help solve systemic risk.

Q: How do your models address energy?

A: Our models never imagine having fossil fuels. We believe the energy sources powering the global economy and increasingly moving onto the grid will be renewables. We’ve never been part of the divestment movement because we never invested.

Q: Where are you seeing opportunities based on your models today?

A: We’re looking for everything that will be in the next economy. We need to get to a point in the future where we have very low — approaching zero — carbon emissions. Transportation can really improve the efficiency of the economy so that goes to rides on demand, driverless cars and electric vehicles. We’ve also been doing a lot of research on the Internet of things. If we can get more economic output out of fewer inputs this way, then by definition we are decreasing our carbon footprint.

Q: How do you think about the way socially responsible investment indexes are evolving?

A: We have to realize that we are really stuck in this incumbent way of thinking about investment portfolio construction and modern portfolio theory, where the idea is to have very low tracking error to your given benchmark. That has been where socially responsible investing has been all this time. But, if all you’re doing is essentially investing to remain very close to the S&P 500 and you’ve kicked out a handful of companies you don’t like, this can be very limiting. These big benchmarks of the economy are just packed with systemic risks. As responsible investors, we shouldn’t even be trying to think about that anymore. We should be thinking about where the market is going in the future.

Q: How do you put that kind of thinking into a portfolio?

A: Instead of doing sector allocation we prefer to do risk-factor allocation. We try to look at major trends five years ahead. For example, we know that in energy, the single greatest cause of systemic risk is greenhouse gasses. Simultaneously, we are aware that technology can help make renewable energy sources incredibly economically competitive and they don’t cause the same level of systemic risk. When we make an allocation decision, rather than just saying our benchmark has a certain percentage of energy, we say this sector is our biggest risk but it also has the most interesting investment solutions. The world is changing so fast on both the asset side and risk side that even some green portfolios are being affected. If you really want to have a material impact, saying ‘I want my portfolio to be lower carbon’ isn’t the best way to do this. Or even worse, you could be ranking all the fossil fuel companies and putting the top two or three in your portfolio. You have to look at specific risks and find the fast-growing companies that are putting solutions together. It’s so clear that fossil fuels pose such horrible long-term risks, it’s predictable that holding onto them could be proved negligent.

Q: How do you think about the companies in these industries then that are producing sustainability reports?

A: If a company puts out a sustainability report in an attempt to convince the world they are doing a lot of good work around sustainability, for me, that is all secondary. I am not interested in a company whose business model is a large systemic risk that is making itself a little bit more efficient. I do not care. Sustainability metrics within a given company are interesting as far as they go, but what a company does —  its business model —  is more important. If a company is not providing a solution to a systemic risk, it is not in my portfolio. I want to invest in companies that are doing more to diminish systemic risk than cause it. That’s what I care about — not if their fleet is getting one mile-per-gallon faster.

Important Disclosures

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