Is Investing in Climate Change Worth It?

It'll be a 'bumpy ride’ but the economic tailwinds are compelling, says the co-founder of a climate-focused investing platform.

By Jerilyn Klein

Editor’s note: Rethinking65 recently caught up with Zach Stein, co-founder of Carbon Collective, an online investment advisor focused on solving climate change. Green stocks have had their ups and downs but Carbon Collective is sticking by its mission to close the climate investment gap. Stein discusses the opportunities, the risks and how to get involved.

Jerilyn Klein: Why did you launch Carbon Collective?

Zach Stein: When we launched Carbon Collective Investing in 2020, we created a complete portfolio solution focused on attracting people like us, millennials in their 30s who wanted to align their long-term goal of retiring with a world they actually wanted to retire into: a climate-stable one.

In other words, we were finding the folks who felt our style of investing was the right thing to do.

And in 2020 and 2021, we were pleased to see the market agree. Our style of investing was the smart thing to do as well. Green stocks had banner years. Energy stocks were in the toilet.

Klein: In September 2022, you launched an actively managed ETF (CCSO), but the market was no longer as hospitable. What happened?

Stein: Green stocks gave up their gains. Energy stocks had their best year in decades, ending as the only positive sector of 2022. Both stocks and bonds were very negative, whereas in other downturns, like the Great Financial Crisis, falling interest rates and the ensuing rise in bond prices helped offset the selloff in stocks.

In fact, 2022 was the worst performing year for U.S. stocks and bonds combined since 1931.

We went ahead and launched our ETF. As we went on our roadshow looking to get larger institutions to make commitments to help seed it, we kept hearing the same thing again and again. Something along the lines of, “This is interesting, but we reserve all of our active management for our private and alternative investments.” For their public equities, they just look for the best cheap beta they can find.

Klein: Your ETF has approximately $21 million in assets. Why were you interested in launching this kind of ETF?

Stein: We wanted to launch an ETF rather than keep our collection as a separately managed account because we saw a need in the landscape for a way to invest in the full breadth of climate solutions, beyond renewable energy and climate solutions, into areas like sustainable foods and the circular economy. Basically, we wanted a basic, low-cost way to not just divest from fossil fuels, but to invest in solutions. We didn’t see anything we liked or trusted, so we built it.

Klein: Can you tell me more about your strategy to pick companies focused on climate solutions? What metrics do you consider? Who is the portfolio manager?

Stein: Our ETF is the productized version of our SMA of climate solution companies. Its construction is pretty simple. We identify the leading scientific plans for solving climate change and the industries they say must scale in the coming decades to avert climate disaster (Project Drawdown is a good example).

We then filter through all U.S.-listed companies on major exchanges and include any that generate more than 50% of their revenue from these industries. We manage the ETF ourselves with our internal investment committee at the RIA making updates quarterly. A company must have IPO’d at least six months prior to the quarterly update to be included. Once a year, we run the full process again, beginning with the full list of U.S. stocks.

While the ETF is technically actively managed, it is all to a rule-based methodology. If a company meets our revenue criteria and passes our other ethical filters, it is included and given a weighting based upon its market cap compared to the rest of the included companies.

Klein: What makes you confident that sustainable investments will be a good place to invest over the long haul?

Stein: Long-term trends supporting sustainable investments have accelerated as a result of several factors. Under the Inflation Reduction Act, the Environmental Protection Agency will distribute $1 billion in funding over the next decade to support clean heavy-duty vehicles. The move toward electric light-duty vehicles is another positive. Surprisingly, the largest consumer segment for oil companies isn’t plastic or airplanes or ocean transport; it’s light-duty vehicles — 48.6% of oil is burned in internal combustion engines on global roadways.

In addition, Europe is pushing to electrify its energy supply to decrease its dependency on Russian oil and gas.

The pecuniary impact of climate change is also increasingly clear. For example, the heatwave that has been setting record-high temperatures in the eastern and central portions of the U.S. is not great for farmers or utility ratepayers trying to manage their air conditioning bills. Record-setting ocean temperatures in Florida, which led to massive coral bleaching this summer, is not great for tourism and the fishing industry. It was over 100 degrees Fahrenheit in the Andes Mountains in August, the middle of South America’s winter, which is pretty bad for the many crops grown in this region.

Yet, on a macro, market-looking level, we’re just not seeing climate risk, nor opportunity, get priced in. The interesting thing about climate change is the only way to solve it is with money. It’s going to take a lot more solar panels, batteries, EVs [electric vehicles], heat pumps and more to transition our civilization to one that doesn’t need to dig up ancient plants and burn them to produce energy.

Current estimates are that we’re falling about $3 trillion to $10 trillion short of the global annual investments needed to avoid catastrophic levels of global warming — the kind where planet earth has a high likelihood of becoming unlivable for a majority of the places where humans currently live. IEA reports that $5 trillion a year is needed for energy transition. McKinsey says average annual spending would need to exceed $9 trillion.

Klein: You launched your platform for individual investors in 2020 and rolled out your employer offering in 2022. What motivated you to expand, and approximately how many clients and assets under management does Carbon Collective have?

Stein: Our client base was a lot of people like us in 2020 and 2021. They started asking for help at work, so we expanded to 3(38) fiduciary services, primarily for mission-driven companies and non-profits. Now we serve over 800 families and 80 businesses and nonprofits, with a pretty

steady flywheel of organic growth and over $65 million in AUM (including ETF assets). To retire in a climate-stable world, my retirement funds, alongside millions of others, need to support the building of that world.

Klein: What are the risks of investing in climate change? And the opportunities?

Stein: The risk of investing in a climate-aligned strategy is that the trends we noted above are, well, wrong. That we will not see increasing warming and chaotic weather patterns nor will we see increasing wildfires and destruction. That the economic competitiveness of renewables and electric cars fizzles. And that the long-term bulls for oil saying “energy is energy” and that XOM [oil and gas company ExxonMobil] will just pivot away from oil when the time is right end up being correct.

Obviously, that’s not how we see things. We don’t know when our changing climate will get priced into stock prices, but the day is coming. A simple view holds that when that happens those investors who didn’t hold oil stocks and instead held renewables, EVs, and other climate solutions will prosper. A more complex view shows how much climate change is going to impact the overall economy from real estate, to insurance, to food security.

Like the recent, devastating burning of Lahaina, Hawaii, demonstrates, the problem with that more complex view is that nobody knows where or when those risks will suddenly emerge. For an investor, diversification is one of the few tools we have to spread such risk. So, stay diversified, while making the obvious changes around the energy transition.

Klein: You mentioned that many of your investors are millennials. What kind of older investors might be interested in an investment like this? What needs might investing in this sort of fund satisfy for an investor?

Stein: We have plenty of older investors in our client-base. We believe our approach appeals to younger investors, because we are ourselves, younger. The way we speak and write sounds more familiar.

But as this summer has demonstrated, climate change is not just a problem for our grandchildren or me in my 60s. It’s here. We see older Americans feel helpless or unsure. We’ve seen them come to us as a way to address their fears both for what is happening in our climate and also for its potential impact on their own, much nearer — or already here — retirement.

We’re in a good time to “divest and reinvest.” Oil stocks are close to their all-time highs. It’s a good time to take profits, exit the industry, and reinvest them into the most significant competitors that oil has ever had.

Klein: Does carbon-free investing have to be an all-or-nothing proposition? How could investors embrace it partially?

Stein: If there’s a truth in the world, it’s that the world is too complicated for all-or-nothing propositions.

Maybe you inherited a portfolio with significant fossil-fuel holdings and you can’t afford to pay the capital gains tax in decarbonizing it. Maybe you aren’t fully sure that fossil fuels are on a long decline like we say, so you want to hedge. Maybe you just want to stay in a target-date fund with your 401(k) at work and invest sustainably personally.

A great way to get started is to build that “divest, reinvest” plan. Fossilfreefunds.org is a great resource. See what you can get out of in a tax-efficient manner. Talk to your clients about how now is the right time to harvest some of those oil profits and that this could very well be the top for the industry. Then reinvest into climate solutions and hold. It’s going to be a bumpy ride. Many of these companies are in their growth phases. But the economic tailwinds are behind them.

Jerilyn Klein is editorial director of Rethinking65. 

 

 

 

 

 

 

 

 

 

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