When "Tree-Huggery" Doesn't Cut it -- Sustainability as a Growth Strategy
As recently as my early childhood - I'm in my mid-forties - the ways we communicated in this world were by rotary telephone, pen-on-paper snail mail, and face to face conversation. We knew about computers, but they only existed for use in giant rooms at NASA, IBM, and a few universities. The idea that every person would one day carry a phone the size of their hand, capable of making calls to nearly anywhere in the world (and at an affordable price) was laughable, if not ludicrous science fiction. Further, the idea that that device would also be a computer, capable of hundreds of tasks including a dozen ways of communication ... well, I'm not sure that was imagined even by the sci-fi crowd.
The rise of mobile computing is one way among many that we’ve all greatly multiplied our personal efficiency. Along the way, the economic efficiencies of our societies have grown apace. Now, the continuing, massive acceleration of human innovation is poised to deliver the holy grail of sustainable economics: a world where human needs and expectations can be met, and even exceeded, while not threatening our ecological underpinnings - meaning earth's basic systems. The immense transition to an economic-ecological equilibrium that will define true sustainability has begun. And, much like the rise of mobile phones or the internet, this genie is not going back in the bottle.
Realizing this, we founded Green Alpha Advisors to provide fundamentals-based, science-driven portfolios modeled after the emerging next economy. Green Alpha’s portfolios exist to provide a conduit of capital into the green economy, and more importantly, to serve the interests of investors who understand the importance, financial implications, and magnitude of the inevitable global economic transition towards sustainability.
But therein lies a quandary. There are as many definitions of “sustainability” as there are pundits to discuss it. The word has come to mean everything from “slightly better than the alternative” to “kinda trendy” to “not green at all, but we market our product that way anyway.” A quote I saw recently in the Guardian sums it up: "reinforcing your own [sustainability] message, while not a bad thing if done with the right intention, runs the risk of adding to the ubiquitous 'green wash'."
For us, sustainability is not a sector or trend or meme or story, or merely popular. It is the framework within which everything in world economies operates; and must now operate. Colliding with resource scarcity or runaway global warming will crash economies harder than any mortgage crisis could. As Carl Sagan said, "anything else you're interested in is not going to happen if you can't breathe the air and drink the water. Don't sit this one out. Do something. You are by accident of fate alive at an absolutely critical moment in the history of our planet." Or, as Earth Day founder Gaylord Nelson very practically put it, "the economy is a wholly owned subsidiary of the environment, not the other way around." Earth activist ideologues see these statements as truisms worth observing in their own right. We see them as the context for preserving our economic well-being.
To us, applying this to portfolio construction means that growth will be found in stocks of companies creating, utilizing, or otherwise embracing sustainability solutions (both mitigation and adaptation oriented) in every economic sector, not just energy. Because society cannot have fully functioning economies without all industries becoming populated by enterprises that can exist indefinitely, both economically (in production function and consumption demand terms), and also ecologically - meaning within earth's resource tolerances and climate sensitivities. This is a "both/and" requirement: we look for functional business models that enable societies to thrive, and with comparatively negligible footprints on resources and climate.
Whatever a company does, providing a technology or business idea or process or system, will either allow our economies to thrive indefinitely, or it won't. If it won't, it's not a fantastic long-term investment, and we have no interest in buying it for our portfolios. Simple as that. We model what the indefinitely sustainable economy can look like, and then, to borrow Wayne Gretzky's wisdom, we skate like hell to where that puck is going to be. Where the puck is now is largely irrelevant, except as a basis for extrapolating what can be next.
So, for us, traditional, negative SRI screening, wherein objectionable companies are avoided but everything else is business as usual, isn't something we think about or even necessarily agree with. In Green Alpha’s view, it’s not about screening things out so much as it is about closely focusing on what will serve to create true sustainability.
Traditional portfolio managers are not talking about any of this. They are not debating what’s happening with the economy’s ecological underpinnings or what that might mean for their investments’ future risk profiles. By and large, mutual funds are backward-looking relics invested in the legacy economy that served our fathers but will not work for us much longer. The funds that 99% of investing Americans hold (via such vehicles as their 401(k) plans) continue to support the shares of fossil fuels, depletist water practices, and more; in short, the economic practices that got us into our current precarious ecological state. These funds do not envision, much less act on, a wholesale revision of energy economics, even though that is clearly underway. They are not concerned with resource scarcity or global warming or indeed even science, even though the reality of those things is plain. Your average S&P 500 fund, for example, has not contemplated the merits of getting big money out of politics so that oil and other damaging industries can’t simply buy the policies that keep us dependent on their products.
And yet most folks, paralyzed by the seemingly indecipherable jargon of finance, are not sure what to do to change, to make a difference, or perhaps most crucially, how to invest in and profit from what is now clearly the emerging momentum toward sustainability. And why should they be? Information about the next economy is still hard to come by relative to the pro-fossil fuels rhetoric of most financial media. ‘Stand pat on your S&P 500 fund, or consider shares in Halliburton’ too often seems to be the message. And yet the reality of our fast-changing world and its economics is there for anyone to see if they’re willing to look just a little harder to find it.
I write this blog to provide information about the green economy and how to participate in it. And as I said at the beginning, we manage our portfolios to give people access to the new economy and to apply capital to our best economic-ecological solutions, and away from our legacy problems. Capital is the means by which everything is decided in the human world, and as long as the lion’s share of it supports the fossil fuels economy, that economy will continue to dominate. It will also continue to damage our ecological foundations and ourselves.
So this is where it gets interesting. This is where we make a choice. We, the investing public, decide how our capital is deployed. If we don’t like how the economy works or what’s powering it, we can stop investing in it. One day, if science and fundamentals – in other words, reality – prevail, our environmental and economic policies will be dominated more by information than by political influence peddling and mass disinformation purchased by the likes of the Koch brothers. Until then, we have to educate ourselves, see the inevitabilities before us and act accordingly. There is a contradiction between how many on Wall Street say we should invest and how we can make a better economy and a better world. Fear of loss keeps most of us in our traditional, legacy economy mutual funds, but this begs the question: which investments pose the bigger risk, those looking backwards or those that place their money on the best solutions for the future?
In a recent edition of his column “Wealth Matters,” Paul Sullivan summed up our approach thusly:
“’This doing good while doing well thing is getting to be a bit out of date,” said Garvin Jabusch, co-founder and chief investment officer at Shelton Green Alpha Fund. ‘We’re looking past mere tree-huggery.’ He said E.S.G. investors needed to focus on ways to generate electricity and recycle existing products that could save resources, make a profit and be widely used.”
That’s all true. We’re indeed looking past warm, fuzzy definitions of green and trying hard to define the economics of true sustainability, by which me mean a human society and economy that can theoretically thrive indefinitely. And in doing so, we think we’ve identified an equity growth strategy that, over time, will stand up as well as any other equity strategy – green or not – and better than most. Like I said, this is a “both/and” scenario. We have had enough with both ‘tree-huggery’ and science denial; let’s get real and see sustainability as the true growth strategy that it is.
I don't know how rapidly the transition to an economy that can exist within the tolerances provided by earth will continue to advance, and neither does anyone else; there are serious constituencies allied against this economic transition, but also an increasing number of individuals and enterprises pushing for its advancement. What I do know is that everyone ought to look at the state of the world, its climate, resources, and population, and carefully evaluate their actions against how deep, significant, and meaningful these events are.
Those who cling to the relics of the past, as if that could make everything in their world remain the same, may get the world they deserve. We don't believe in that world. We believe in human innovation. We reject both the fiction that the destructive, legacy economy can keep us safe, and also the insufficient, deceptive practices of greenwashing. Whether you believe in indefinite, innovation-driven sustainability, or you think it’s just preposterous sci-fi, we'll keep striving to make it real, and to help our clients benefit from its growth.
Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha ® Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, "Green Alpha's Next Economy."