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Climate Collective talks moving sustainable investing beyond ESGs



Zach Stein believes that sustainable investing needs fixing. Many investment products marketed as being built on environmental, social, and governance principles (ESG) do “not align with what [we have] to do to solve climate change,” he tells AFN.

In his view, more individual portfolios need to be divested away from companies that rely on the fossil fuel industry – with capital reinvested in those building, or relying on, climate solutions.

Stein co-founded investment advisory firm Carbon Collective in 2020 as a way to enable more individual investors to do this. His company believes that offering climate-forward portfolios with the same price and diversity as generic ones can give individual investments more collective power and force major corporations to decarbonize faster.

Read on for AFN‘s recent conversation with Stein (ZS).

AFN: Pleas give us an overview of Carbon Collective’s objective.

ZS: Carbon Collective’s mission, at a very high level, is to solve climate change – and we cannot do that without fixing sustainable investing.

[The world needs] to be investing 10- to 20-times more than we are today into climate solutions. We also need to completely stop investing into new fossil fuel expansion and be on track to wind that down by 2050. If we do both of those things, we will be on track to avoid catastrophic warming. If we don’t, it’s hard to see how we’re going to avoid it.

So broadly our mission is to offer products and services that enable individuals, companies, and institutions to invest in ways that are aligned with that reality, and use that to fundamentally re-educate the market.

AFN: What led you to start the firm?

ZS: In 2020, James [Regulinski, co-founder of Carbon Collective] and myself set out to fully focus on climate change. In particular, we saw that so many of us as individuals got stuck in this emotional loop where we would see icebergs reaching a record level of melting, record heat events, and so on. So we said, “How can we build better tools to collectivize our climate impact?”

We interviewed 120 people in and around our network. Again and again, investing was this place where ESG was just simply not enough. It did not align with what people perceived we had to do to solve climate change.

One thing that we understood from the start and from these interviews is that first and foremost, we had to make this style of investment make sense for individuals. In the end, your IRA [individual retirement account] is not charity. There’s a very limited number of people who are going to take a financial hit or do something that they perceive to be financially inferior. Now, our average account size for the individual platform is basically the same as other generic online investment advisors like Betterment or Wealthfront. So people are moving over their whole financial lives, full IRAs, retirement accounts, to us. It’s not just another form of climate charity. It’s a real investment.

AFN: You argue that many ESG portfolios tend to be poor options for sustainable investment. Why?

ZS: ESG was initially invented by institutional investors, for institutional investors, as a way of accounting for ethical risks in the same way an investor would look at a company’s credit score, or PE ratio, or something like that. An investor said, “Hey, there’s this other type of data that we want to make sure we’re able to diversify around from an ethical perspective because we see this impacting companies.” That quantification quickly got adopted for other use cases.

For values-based investing, people want to see their portfolio match their personal values; for impact investing they want the portfolio to create tangible change in the world. Unfortunately, ESG was never built for either of those.

Right now with ESG, [many people] don’t see how their portfolio aligns with their values. There’s no theory of change of how making this switch to this fund or this portfolio will actually create change in the world. And fundamentally, it doesn’t help them feel connected to something broader, which I think is what value investing or impact investing are fundamentally about. We think that ESG has risen because not because it’s a great product but because [there have] not been great alternative options.

AFN: What do you say to those who view this kind of investing as riskier?

ZS: We get people coming to Carbon Collective that say, “I know I’m going to perform a percentage point or two worse, but that’s okay.” And we just think that’s wrong.

One underlying narrative in the investment world is that fossil fuels are a necessary evil as a part of a portfolio. When we go back and look at the data, fossil fuels have not been an important part of a balanced portfolio for a long time. If you had divested from the S&P 500 energy stocks from 1989 up until the present, you would have made more money than if you had just held the overall S&P 500. And we’ve seen some pretty big collapses during that time. The US coal index from 2011 to 2020 fell 99% in value during that time because investors lost confidence in the long term, which made it that much harder for those coal companies to get a bank loan or to sell more shares to expand. We argue that is what is in store for oil and gas, as well.

When we look ahead from now, we believe we are in the middle of a significant technological transit transition where you just have a fundamentally better technology that does the same thing as what came before it. So 50% of the oil that we use in the US is on our roadways. We have a better technology [with electric vehicles]. And within five years, it’s going to cost less upfront to buy, so the overall experience of owning an electric car will just be financially far superior. Same thing for solar, wind, batteries. It is the cheapest form of generating electricity in many places in the world, and that is likely only going to increase. To us, it makes a lot more sense to divest from that and and hold the companies that are replacing them.

AFN: How do your investment portfolios work?

ZS: We divest from about the 20% of the stock market, or companies that are technologically dependent on the long term use of fossil fuels for their core business. So oil and gas obviously, but also petrochemical companies, cement, steel, airlines, dirty utilities, and more.

Step two, we reinvest into the companies that are building solutions to climate change. We do that by looking at the best independent plans for solving climate change from groups like Project Drawdown the International Energy Agency. Then we see which companies are building those solutions. We remove those that generate more revenue from products or services that are dependent on the fossil fuel industry. We don’t use [emissions reduction] pledges or anything like that.

Step three is we hope to engage the remaining 80% of the stock market. These are companies whose core businesses can exist in a zero-carbon world. The example I like to use is Coca-Cola. There is no reason that Coke can’t sell me a beverage using the “secret recipe” in a world where we have solved climate change; it’s just doing so with 100% renewable power and they’re protecting, instead of abusing, their natural resources. These are the companies where we believe we should use our shareholder votes and voices to pressure them to get to that point. Because we’re not saying, “stop selling.” We’re just saying change the background behind it. If you do that, we’ll hype you and help you from a PR perspective. And if you don’t, we can use our voices to do the opposite.

AFN: How might you put pressure on those companies to change?

ZS: There are three ways that changing what you’re invested in, [can create] tangible change in the world.

The first is just that cost of capital, especially in a retirement fund. When you hold something, you tend to hold it for a really long time, so you are effectively reducing the supply of actively traded shares of that company on the market. When the supply of something goes down and its demand goes up, the price goes up for it. That helps that company decrease its cost of capital and it can sell shares more easily, more cheaply, and it can also be easier to get a bank loan.

The second thing is [shareholder] voting. The types of efforts and the type of votes that we want to see aren’t focusing on fossil fuel companies. For example, getting ExxonMobil to become a solar company is unlikely to be very successful because ExxonMobil has a great business and they have customers lined up outside the door to buy their products. Instead of spending our efforts trying to do that, we should be using our shares to focus on Exxon’s customers, especially those whose business models can exist in a zero-carbon world. These companies just happen to have a carbon footprint today because of how they source their electricity, transport their goods, and how they treat their natural resources. So that to us is where we should use our shares and pressure both as shareholders and as consumers.

The third point is narrative. The tipping point is where we get from green folks like us who are doing it for ethical reasons to where capital with a capital ‘C’ does it for financial reasons. How do we share that narrative – that this is not a sacrifice for the long term, to invest sustainably? You can make an argument that it’s a smarter way to invest. The more that we spread that narrative, the more it becomes true.


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