The Macroeconomic Realities of Fossil Fuel Free Investing

Originally posted on The Sierra Club’s Economics Blog
By Garvin Jabusch

To attempt an investment strategy that legitimately excludes securities of fossil fuel companies, it’s necessary to reevaluate traditional investment management practices, and then to innovate ways in which that profession can evolve to mirror the rapidly changing times in which we live. At Green Alpha, we call this approach “Next Economy portfolio theory,” and we practice it continually in our workaday job of portfolio construction.

But before I get to some of the details of our method, let me be very clear about one of its key conclusions: If you own fossil fuels, you own global warming. You own the most likely cause of economic and even civilization-level failure and, moreover, you own a power source that is having an increasingly tough time competing economically. This is the opposite of what any fiduciary — with responsibility for the safety of their member and client assets over the long-term — should be doing. Our use of fossil fuels is causing untold degradation to our required systems. Greenhouse gas emissions, release of myriad other toxin,s from mercury to methane, destructive extraction practices, freshwater contamination, and so on. We all know the list, and we should all know that as a result, the continued use of fossil fuels and an indefinitely thriving human economy can’t coexist for much longer. Thus, fossil fuels–free investing can be defined as an economic premise as easily as a moral argument.

And the economics of a long-term functioning global economy are the core of our theory. The Next Economy is one that will allow humankind to maintain and improve our standards of living while simultaneously reducing our planetary impact. The successful shift to the Next Economy rests on the following solutions: Power ourselves entirely with renewable energy, develop a closed loop system where all materials can be recycled with zero waste (waste-to-value), innovate increasing efficiencies to the point that our global economic activities have a negligible footprint on the earth’s ecology, and shift our default setting from short term resource exploitation to long-term resource management.

Using science-driven, fundamentals based research, we must invest in companies whose innovative products and services address an increasingly warmer, more populous and resource constrained planet. At heart, Next Economy approaches to investment management are deceptively simple: don’t invest in the things that have the power to disrupt the economy, our ecology and even our civilization, and do invest in the solutions to those things.

This involves an evolution of traditional investment management. Where conventional portfolios are constructed starting with a list of companies, then screening out firms for various economic, fundamental, and/or social criteria, we start by asking “what are the global economy’s key risks and issues and what can be done about them?” So rather than beginning with a list of companies, we end with a set of companies. Companies we believe represent the future, indefinitely sustainable economy. We do this because we believe that what the global economy needs now are new policies and institutions that accommodate uncertainty and anticipate nonlinear change, both of which are realities of the Anthropocene. This includes — and probably should be led by — investment management.


Figure: mapping the Next Economy onto the present economy

Human civilization is far too complex and has far too many variables for us to be able to predict the future. But we can imagine what may be. And, in light of our belief that rapidly increasing rates of innovation mean that the near future will be very different from the past, we think our most considered projections of the shape of the fast emerging Next Economy are our most likely source of competitive returns, and also a global economy that begins to provide for all people while simultaneously pulling us back from the brink of overtopping Earth’s carrying capacities. My job is to learn from scientific findings to improve risk mitigation in the context of portfolio management. We can (and do) debate which solutions work best or can be scaled most rapidly, but not whether there is a problem, or whether investment at a massive scale is required to address it. Those cases are closed.

We believe that no portfolio should contain the causes of risks that threaten our economy, ecology, and even our civilization. We believe that investing in the solutions to those risks is the clearest path to a sustainable economy and also to potentially competitive returns. As a result, Green Alpha Advisors has never purchased any security of a fossil fuels company since our founding in 2007, long before “Divest” or “Fossil Free” were widespread concepts. We believe the power of human innovation is proving itself to be far greater than the declining power of fossil fuels.

Important disclosures