The prepared remarks of Garvin Jabusch, Chief Investment Officer of Green Alpha Advisors before the House Select Committee on the Climate Crisis in Washington, DC, July 25th, 2019.

Chairwoman Castor, Ranking Member Graves, committee members, thank you for the opportunity to testify and contribute to this important conversation.

Climate disruption and resource degradation present significant threats to and opportunities for American business. Every sector and industry are affected, and my industry of asset management, in its role deploying capital across the economy, is directly exposed to it all, risks and opportunities inclusive.

First, risks. The purpose of investing is to preserve and grow one’s purchasing power. Whatever amount I am investing, I want to be able to buy as much or more with its value in the future than I could have with its cash value today. There are volumes of portfolio theory about how to achieve this, and, overall, those theories have worked well for decades. But many theories of the world work great, until the world changes. Now, the change is climate disruption, and in the full exercise of fiduciary responsibility as an asset manager, I have to think hard about the effects that climate disruption will have on every business I consider placing my clients’ assets into, and inversely, the effect each business may have upon the climate. It is in doing this analysis, no longer optional for the prudent risk manager, that I can minimize investment risk and grow my clients’ purchasing power into the future.

What is the practical application of this? It begins with the realization that even within asset management, it is science that is our path to knowing things. Science tells us that many of our present economic activities, such as fossil fuel development, internal combustion engine manufacture, fossil powered electricity generation, and use of topsoil depleting chemicals, have to decline dramatically, and soon. Thus, the prudent fiduciary knows that holding the securities of companies pursuing these activities is likely to put his or her client assets at risk, particularly in the medium and long terms.

According to experts such as the Federal Reserve of the U.S., former Bank of England governor Mark Carney and noted investor Jeremy Grantham, climate has emerged as “bar none” the most important risk in asset management, and the main threat to investments today is in holding the causes of the climate crisis. To de-risk a portfolio, it is necessary to not own the primary threats undermining economic stability.

Those are the risks within my industry. The main risk to the climate coming from my industry is that the predominant way of investing today completely ignores the climate crisis. A recent CNBC article explains that “80% of the stock market is now on autopilot…Passive investments control about 60% of the equity assets, while quantitative funds — using trend-following models instead of fundamental research — account for 20% of market share.” This means that today, the main reason a stock is bought is because it is in an index, and not because of what the company makes or what services it provides. This is dangerous because the major indices are riddled with the causes of our largest environmental and therefore economic risks. The S&P 500 includes approximately 60 fossil fuels related companies and any number of other risks to water, topsoil and economic equality, to mention a few.

Let me be clear: if you own the S&P 500 today, you may believe you are investing passively, but you are not. You are making an active bet on the causes of system-level collapse. By your actions, if not your intent, you are signaling that you hope to benefit from causing climate disruption and resource degradation. Climate is the most important risk to capital preservation, yet the main overall risk coming from the investment industry is that the vast majority of professionals and their clients are flat ignoring it.

There are those in investment management working to change this, my firm Green Alpha Advisors, among them. It sounds simple to invest for a more sustainable economy, but the problem has been that investment managers don’t have good principles to guide them. Green Alpha’s approach to de-risking portfolios has been to select stocks not because of their presence in a benchmark index, but because of what the company actually does. We believe the best way to begin, and the clearest line of sight, is to look at sources of revenues. Is a company being paid to de-risk the global economy, or is it being paid to help drive it towards the edge? Are the majority of revenues coming from business activities that will help society mitigate or adapt to the climate crisis, or from causing it?

Rather than blindly indexing, investment professionals have to get back to judging individual cases on their merits; and we can use disinterested, objective principles to make better choices. If a company’s net activities do not lower the risk profile of the economy on an ongoing basis, we should wonder why we own it. You get the economy you invest in, and as long as most investors still own the S&P 500, we are going to be living in the fossil fuels economy that it represents.

Those are the risks in and from my industry, and how to avoid them. What about the opportunities? This is the good news, and I think it is generally underappreciated.

Human innovation is increasing in an unprecedented way, and the rate of that increase itself is accelerating. Faster and faster, we’re coming into possession of the means to both mitigate climate disruption, and to adapt to what we have already committed ourselves to. Why? Because innovation means doing things better. It means, as it always has meant, making economic production more efficient: getting more output out of ever fewer inputs. As biologist Edward O. Wilson, who testified here on the Hill just a couple days ago, has noted, the digitalization of the economy is key to achieving environmental sustainability, because the associated expanding efficiency of production can shrink our ecological footprint. But of course indefinite sustainability isn’t emerging only from digitalization, we are also today seeing great strides in advanced materials, biotech, renewable energy and storage, zero emissions transportation, water management, and in key adaptations like indoor agriculture. Investing in these efficiency solutions will lead to competitive performance returns as these innovators continue to gain market share from their legacy economy predecessors, and thus grow faster.

Economic production can be much greater than it is today while consuming far fewer inputs, be those inputs natural resources, person hours or dollars, and can do so with far fewer externalities like greenhouse gasses and other pollution. This will lead to enormous wealth creation opportunities for investors, and will also put us on the path to indefinite sustainability, meaning we can realize a good standard of living for everyone – the 100% – without overtopping earth’s tolerances. The greatest wealth preservation and growth opportunities for my firm come from that; from keeping our eye on, and investing for, that endgame: namely, for a zero-risk economy.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha Advisors. For more information, please visit https://greenalphaadvisors.com/about-us/legal-disclaimers/.

The post Creating a Climate Resilient America: A Green Investment Adviser Testifies To Congress appeared first on Alternative Energy Stocks.

Information asymmetry, climate investing and the active management edge.

By Garvin Jabusch

The theory of efficient markets says all stock prices are perpetually accurate, because investors always have complete and up-to-date information about their holdings.

But as any casual observer knows, information and topical awareness are not evenly distributed, even among professional analysts. Reality is always far more complicated than equity markets can quickly assimilate, meaning information asymmetry is a constant. While usually considered a type of market failure, information asymmetry is frequently used as a “source of competitive advantage.” The person with the most information is best equipped to make the best investment decision.

So what information, currently overlooked in financial markets, can be exploited for long-term gains? One area of unequally shared data hiding in plain sight is climate and environmental information.

In their white paper “The Good Thing About Climate Change: Opportunities,” Lucas White and Jeremy Grantham write: “Current growth projections are likely to dramatically understate realized growth as the world continues to mobilize to address climate change and costs continue to fall for clean-energy solutions … the climate change sector is likely to be a particularly inefficient sector and a disciplined value orientation will be key to harvesting strong returns.” The climate change sector is “particularly inefficient” because of the huge information gap.

One reason asymmetric climate knowledge exists is what might be kindly termed “misinformation.” A 2017 Harvard study, for example, confirmed previous findings that Exxon Mobil Corp. deliberately misled the public about human-caused climate change. Exxon Mobil’s own internal research included commentary affirming the effects of human-caused climate change, while its advertorials (editorial-style advertisements) expressed doubt. These efforts have been serious enough that the attorneys general of Massachusetts and New York are investigating whether the oil giant misled investors about climate change risks.

Information asymmetry also results from understatements about the speed with which change is occurring, in terms of both the climate itself and climate-mitigating technologies. It’s no coincidence that three of the world’s largest solar photovoltaic manufacturers have been taken private or have planned to go private in the past year, since their share prices were demonstrably undervalued relative to their fundamentals. They are simply buying back their shares at low prices. These companies are taking advantage of the asymmetry.

For investors, bridging the asymmetry gap also depends on reactions to information. Take the evolving automotive industry, for example. According to Navigant Research, India — the third-most polluting and second-most populous country in the world — will sell only electric cars by 2030 as part of larger climate goals under the Paris Agreement. France and the U.K. have announced bans on the sale of internal combustion engines by 2040. China has announced a ban, but with no definite date.

These clear trends hiding in plain sight mean big dents in future oil demand, while the value chains of renewable energies and zero-emissions transportation are poised to take off. How should investors react? They should leave behind the industries of yesterday and follow signs of growth. Electric vehicle demand is increasing, electric and autonomous vehicle technology is rapidly improving and becoming much cheaper, and storage technology and infrastructure systems are growing. India and China’s regulatory tailwinds might just expedite the transition.

By triangulating facts from a wider range of angles — scientific, technological, economic, political — investors can hone in on opportunities. And these opportunities largely begin with assimilation of climate science.

Investors don’t need to rely on policy models alone to make judgments about climate change. These trends are unfolding worldwide, and they’re happening now. David Roberts, who writes about energy and climate change for Vox, notes that broad averages often conceal “leading wedge markets,” regionally specific markets where an industry scales up faster and drives down costs in other markets. Analysts who only examine a broad, national statistic like “levelized cost of energy” might miss the boat if they take such estimates at face value. Not only can major systemic change cause differing levels of information awareness, but the rapidity of that change can create knowledge discrepancies as well. Examining the details remains important.

Another place where change data is lacking is in some analysts’ exclusive focus on quarterly reporting. This is true with investing in general, but it is especially relevant to climate change information asymmetry. As climate change mitigation becomes more important and a larger part of the global economy over time, investment opportunities will be revealed. For example, solar power is projected to grow to 50% of the world’s electricity generation by 2050 from 1% in 2015.

Taking a longer-term view could empower investors to invest now in companies positioned as global leaders of tomorrow and reap the benefits as they grow.

Why then aren’t more investors integrating climate information asymmetry into their portfolios? It’s not easy. Many investors, being time and attention constrained, find it convenient to rely on other analysts’ coverage of a stock or simply look at a rating or estimate rather than conduct their own research or begin from fundamentals. While understandable for average investors, this can result in an opportunity lost at best, and mismanagement of risk at worst, for portfolio managers.

As long as there is differing awareness, understanding and application of available information, there will be inefficient markets to exploit for returns. Many scarcely believe that. We’ve lived under the shadow of efficient markets theory and indexing for so long that we’ve forgotten what full sunlight might look like, and we’ve forgotten that it’s possible to take advantage of inefficient markets.

The person with the most information is most well equipped to make the best investment decision; so how can it be less advantageous to work from a unified theory of the totality of economics? Increasingly, given the pace of technological advancement and the daunting scale of globally systemic risks, forward economics looks like what Messrs. White and Grantham call the “climate change sector,” and what we call Next Economics. This is where investment opportunity can be found, even if — and especially because — not everyone gets it.

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This post was originally published by Pensions & Investments.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha Advisors. Green Alpha portfolios do not have any positions, long or short, in Exxon Mobil. For more information, please visit https://greenalphaadvisors.com/about-us/legal-disclaimers/.

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Vote With Money Instead

by Garvin Jabusch

Many people assume that engagement with public companies through proxy voting and resolution filing is the best  if not only  way to see positive environmental, social, and governance outcomes from your investments. For me, this approach misses a fundamental point of market-based solutions: you make in investments in the most compelling ideas that reflect what you think is likely to grow, where you think the economy is headed, and yes, outcomes you support. That means using investments to favor firms that are already making innovative sustainable contributions to the global economy not trying to Frankenstein aging, destructive, legacy companies into healthy new citizens.

Consider the recent case of a major advocacy victory with ExxonMobil. After years of effort, a shareholder advocacy coalition in January succeeded in persuading the company to place prominent atmospheric scientist and climate change expert Susan K. Avery on their board of directors. The theory is that surely Dr. Avery’s appointment signifies a change in attitudes at Exxon, and her expertise will encourage the company to incorporate climate change into its corporate strategies. Meanwhile, Exxon Mobil Corporation announced in February that its “proved reserves were 20 billion oil-equivalent barrels at year-end 2016.” That’s 20 billion barrels of oil they fully intend to extract for purposes of being sold and burned. This is what Exxon is; no new board member is going to change that. Speaking to Inside Climate News, Jamie Henn, spokesman for 350.org said, “It’s hard to believe this is little more than a PR stunt meant to pave over the decades the company spent deceiving the public about the crisis.” A cynic could conclude that shareholder activism’s largest victory to date vs. ExxonMobil adds up to a PR coup for the firm under fire.

Further, a lot of advocacy is ineffectual. For example, State Street Global Advisors has recently made news with a plan to use their proxy voting power to encourage Russel 3000 companies to place more women on their boards. What’s the plan, and will it work? Slate Money’s Felix Salmon explored this from the perspective of a Russel 3000 company with zero women on the board: “In a year’s time …if you still have zero female board members and you can’t persuade State Street that you have made moves to get more female representation on your board, then, if and when the chairman of your nominating committee gets re-nominated for a board seat, they will vote against that individual. I mean, come on.” State Street then seems to be engaging in a symbolic form of advocacy, and not seriously expecting to effect change in corporate behavior.

I’ve written elsewhere that “[r]eal impact depends upon voting with your dollars for the future economy, for the actual catalysts of change, for the viable growth areas where we can reasonably expect to earn good equity growth in this era of rapid change. This means a higher level of due diligence that avoids the trap of thinking public equities are ‘set it and forget it’…it’s not that public equity portfolios can’t have impact, it’s just that they usually don’t” (emphasis added).

So how do we measure the impact of a portfolio if not by activism? I say it’s about looking at the economic impact of your investments. Invest in the firms that are earning more revenue from creating environmental and social solutions, employing more people, and gaining market share from riskier and less efficient competitors. While this may be harder to quantify than tallying up shareholder proposals, these business and economic factors have dollars behind them, and that means they equal impact at scale. At the end of the day, an economy driven by products and services that address the environmental and social risks confronting the global economy has much greater positive impact than an economy of ExxonMobil’s touting their lone climate scientist board member. The traditional metrics of business are the metrics for a reason: they measure real results. Investing in solutions providers exhibiting the best of these metrics is simply the most powerful message we can send.

Clearly, it’s more environmentally, socially, and economically meaningful to vote with dollars rather than proxy ballots, but it also has greater financial potential. Today, business-as-usual investing in S&P 500 companies means buying a flat 12 month forward earnings per share (EPS) estimate average, paired with a high average price to book valuation. On the other hand, many solutions –like renewable energy, organic farming practices, and water management are growing EPS more rapidly, yet many of them remain undervalued. Investors can send the market a powerful signal about which investments matter and have quantitatively better odds at superior returns by opting for these solutions-creators, rather than the overvalued companies of the old economy. Faster growth at a cheaper price? This is what investment managers are supposed to be seeking, but is almost absent from major benchmarks.

It’s easy to keep investing in stalwarts of the old economy like the S&P 500, then reassure ourselves that shareholder engagement will solve our problems. But it won’t. Let’s be honest with ourselves: we know it is time is stop making lazy and, ultimately, destructive investment decisions based on the inherited wisdom of indexing or for fear of not tracking our benchmark, and then justifying those investments by citing engagement. Addressing systemic risks – like climate change, resource scarcity, and widening inequality – means buying companies that are solving big risks and avoiding firms contributing to risk. This sends the markets a strong signal about the economy’s evolution, and also means that there’s a lesser need to engage these companies in the first place.

Shareholder advocacy can certainly have positive impact, but there’s an important caveat to remember. In the end, companies only care about shareholder proposals when they identify ones that already align with the firm’s self-interest and end goals. Limiting fossil fuel use and climate change is not in ExxonMobil’s self-interest, and no number of resolutions, proxy votes or polite letters is going to change that. As such, shareholder engagement can initiate positive change within the existing goals and structures of a company but not in a company’s fundamental reason to exist. Thus, advocacy is most effective when practiced on firms already engaged in a business that lends itself to the goal favored by the activist. You can work with a solar company to help them improve their supply chain or to have more minority representation in leadership, but you can’t persuade an oil company not to drill. Shareholder advocacy can and does have positive impacts around the periphery of big issues like climate change, but its power is trivial next to the power of the underlying economics. And the brightest signal of the economics is markets and returns.

To illustrate, join me in a short thought experiment. Imagine you’re the CEO of an oil major, say ExxonMobil. What concerns you more: a world where everyone keeps buying index funds that bump your stock price every time they do
, but occasionally people file resolutions that you largely ignore, or a world where everyone has decided simply to skip that and invest instead in what’s next, eschewing fossil fuels altogether? I know for sure which of these worlds the CEO of Exxon most fears, and that tells me all I need to know about how to have impact.

An version of this post originally appeared on worth.com.

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, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, “Green Alpha’s Next Economy.”

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Garvin Jabusch

You probably know that index funds have become all the rage in investing over the past several years, as investors flock to their low fees and reject the gospel of active management. But you probably don’t know that investing in a broad-based index fund not only ignores rapid changes in the energy economy but also makes the investor complicit in climate change denial. And just as climate denial ignores the inherent risks of fossil fuels to environment, economy, and society, “set it and forget it” index investing ignores the inherent risks of fossil fuels and related stocks to your portfolio.

If you own an S&P 500 Index fund, you own 65 fossil fuels–related companies. That’s 12.14 percent of the index, or about $12 of every $100 you deposit, going directly into fossil fuels (according to fossilfreefunds.org, which confirms my Bloomberg terminal’s information). This includes producers such as ExxonMobil and Anadarko Petroleum; oil and gas services companies including Halliburton, Schlumberger and BakerHughes; and several fossil fuels–fired utilities like Sempra Energy and FirstEnergy Corp. To boot, you are investing in many of fossil fuels’ project-funding banks (Bank of America, JPMorgan Chase, and Citigroup, the so-called “bankers of extreme oil and gas”), and demand drivers (internal combustion engine manufacturers, coal and gas turbine makers, many of whom, such as Ford, are actively resisting improving mileage standard requirements).

Current conventional wisdom holds that the best and most sensible way to invest in stocks is to buy a broad-market index fund with the lowest fee you can find, and then forget it. More than that, we are conditioned to judge every fund by its performance’s adherence to an index; even non-index funds are routinely judged by how closely they mirror the returns of a major benchmark. The terms “risk profile” and “risk adjusted returns” of a fund usually mean nothing more than a measure of how much (less or more) a fund’s performance varied from a benchmark index. But I would argue that, given the massive risks embedded in the present holdings of indices like the S&P 500, these benchmarks have outlived their usefulness as measures of investment risk, and now present far more portfolio danger than we are led to believe. In short, our yardstick for measuring risk is broken.

How broken? Consider this: In owning that basket of S&P 500 stocks, you are making an active bet that economic growth will be perpetuated by fossil fuel-derived power. This bet is now visibly, clearly not the way forward. As British environmental economist Nicholas Stern recently said, “Strong investment in sustainable infrastructurethat’s the growth story of the future. This will set off innovation, discovery, much more creative ways of doing things. This is the story of growth, which is the only one available because any attempt at high-carbon growth would self-destruct” [emphasis mine]. For its part, and more pointedly, the investment bank division at Morgan Stanley in 2016 advised clients that long-term investment in fossil fuels may be a bad financial decision, writing: “Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels.”

What both Stern and Morgan Stanley understand is that the world has changed and our approaches to investment need to change with it.

I won’t belabor a case that’s already been convincingly made (see here, here, and here), but it has become clear that the age of fossil fuels is beginning to end:

• Costs of renewable technologies continue to plummet while fossil fuels remain volatile commodities
• Consumers, businesses, and investors are shifting
• Policies instituted by national governments (led thus far by China and Germany) and local governments (the U.S. state of California, and others)

The decline of fossil fuels will impact investments as much as it will impact any aspect of the economy. The S&P 500 as it’s now constituted is too packed with fossil fuels and other sources of systemic risk to represent any kind of credible reference for calculating safety of returns or expecting to earn them. In terms of the outcomes it promotes, S&P 500 is functionally the same as climate denial. It is time for a new standard.

How do we realize this new standard? We need to recognize that avoiding indexing isn’t just about putting your money where carbon isn’t; it’s now about putting your money where the future is. Think, as an investor, about the outcomes of economic and technological innovation, combined with awareness of the risks of climate change. Where is investment money flowing in response to rapid changes in both? I believe some of the answers include renewable energies, water, sustainable farming practices, efficient transportation, connected cities and grids, AI and machine learning, robotics, biotech, and new approaches to real estateto name a few.

It is in seeing the world for what it has become, rather than what it was, that investors and markets will allocate capital to manage risks and profit from new opportunities. All of which leads in the opposite direction from fossil fuels.

Enough with the old indices. We should be buying what’s next instead.

This piece was originally published by worth.com at http://www.worth.com/index-funds-are-climate-change-denial/

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.”

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by Garvin Jabusch

The first two weeks under the Trump administration have been a shock to the system. With the change in administration, how will you approach your stock portfolio(s)?

For starters, your fundamentals should remain unchanged. For me, that means looking for great companies in expanding markets that are enabling long-term economic growth, and reducing systemic risks. Of course, this also means buying these stocks at low valuations. Benjamin Graham and Warren Buffett were right about ‘wonderful companies at fair prices.’ That is never going to change.

With that said, let’s look at what has changed and what to do about it.

Unpredictability that’s the first quality worth noting about the new White House team’s leadership style. Trump’s comments and actions concerning topics such as open global trade, immigration and the US-China relationship will cause uncertainty, to which markets usually do not respond well. George Soros recently emphasized this point, adding, “Uncertainty is at a peak, and actually uncertainty is the enemy of long-term investment. I don’t think the markets are going to do very well.” 

It is true that in the short time since Trump’s election, markets have rallied. Traders perceive that uncertainty has actually decreased because the election cycle is over, and they believe a Trump administration will benefit business by removing regulations. The possibility of fiscal stimulus via infrastructure something a Republican Congress never let Obama do has also rallied markets. But as we witnessed on 1/30 and will likely continue to see, uncertainty’s retreat will prove to be an illusion. 

For example, markets have largely appeared to accept the positive business aspects of Trump’s rhetoric but equally, so far, to discount the negatives, such as the possibility of a trade war. Trump also promises to roll back financial oversight and regulations such as Dodd-Frank, which raises the specter of possible asset-bubble deflation, a la 2008. Good markets should not be confused with a stable investing environment.

Beyond Soros, other qualified observers, such as Eliot A. Cohen and Ruth Ben-Ghiat have noted that there is enough personal and political capriciousness swirling within this White House that the consequences could extend far beyond market implications. We should not make the mistake of not taking seriously the administration’s actions over its first two weeks.

So, portfolio defensiveness is clearly warranted. What that means for an individual investor’s portfolio, I leave to your best judgement.

Yet the inevitable market volatility will present opportunity, both in buying oversold securities as opportunities arise, and also in making investments that benefit from volatility itself.

Trump’s worldview often contradicts global momentum, and this can present buying opportunities. Energy policy is a prime example of this. The global transition away from fossil fuels toward renewable energies is now clearly underway. Nevertheless, the Trump administration’s attempts to prolong the fossil age a few more years may meet with some success. It is possible that gas and oil may be about to enter their last, large bull run. If this is the case, some investors may see this as a short-term opportunity, before the much bigger opportunity in being short fossil fuels indefinitely (or until it’s time to cover). For those looking to grow their portfolios beyond the next couple of years, a much larger opportunity appears companies that are trailblazing toward the interconnected, sustainable economy.

Trump’s actions also spell out the need for diversification in light of U.S. political risk. While Trump has removed all references to climate change from whitehouse.gov, approved the Keystone XL and DAPL pipelines, canceled all EPA grants, and caused the CDC to cancel its climate change and health conference, he can’t stop the global momentum of renewable energy (worth a post on its own stay tuned).

So, how does an investor respond? As a fund manager, this looks objectively to me like any other case of political risk in a given country, underscoring the importance of a diversified portfolio. Saudi Arabia has policies against beer? Vatican City has ethical restrictions on imports of contraceptive devices? Maybe place less weight on companies trying to sell those products into those markets. Obviously, these examples are extreme to the point of absurdity, but they illustrate my point about political risks and diversification, because both beer and condoms have huge markets in other geographical areas that can be exploited for investment return. My examples are also less than apt in that there is today a booming market in the U.S. for both wind and solar but, considering both the words and actions of Trump and his administration, it seems only prudent to capitalize on renewable energies’ opportunities in companies with large global distribution networks and thus are not overly reliant on U.S. distribution. Canadian Solar (CSIQ), Vestas Wind Systems (VWDRY), and JinkoSolar (JKS) come to mind. Renewable energies worldwide are booming, and if the U.S. chooses not to participate fully in these industries, at least our portfolios can.

There may be opportunities in renewable infrastructure under Trump’s watch, as he pushes to develop transmission capacity from windy middle America to the coasts.

We are now, as much as at any time in recent memory, embarking upon an uncertain landscape, both culturally and economically. More than ever, investing requires a long view into how the economy is most likely to evolve, regardless of short- and medium-term gyrations, wild and scary as those may become.

In short, that means figuring out what’s next. What’s next in energy? In tech? In consumer goods? The way to earn returns over the long term entails investing in firms that are leading the way to the future, holding and accumulating shares through volatility, and looking for value.

Note: A version of this post appeared previously on Worth.com.

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, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, “Green Alpha’s Next Economy.”

The post The Trump Trade appeared first on Alternative Energy Stocks.

by Garvin Jabusch

Lord Nicholas Stern recently said, “Strong investment in sustainable infrastructurethat’s the growth story of the future. This will set off innovation, discovery, much more creative ways of doing things. This is the story of growth, which is the only one available because any attempt at high-carbon growth would self-destruct [emphasis added].” More pointedly, the Investment Bank division at Morgan Stanley in 2016 advised clients that long-term investment in fossil fuels may be a bad financial decision, writing, “Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels.”

What both Lord Stern and Morgan Stanley understand is that the world has changed and our approaches to investment need to change with it. This is at the heart of what I do working in Next Economics and Next Economy Portfolio Theory.

In thinking about Next Economics and investing, then, it’s worth asking two questions. ”What will the world’s economy look like in 10 and 20 years?” And,” What would I like it to look like by then?”

Our answers should, at a high level, inform where we invest. In arriving at a well-informed thesis hinged on the economy’s ongoing evolutionrather than on the economy of the pastwe can position ourselves to take advantage of high-growth areas, and we can have the effect of advancing a far more efficient economy, one with a better chance of thriving indefinitely. As a pop star once wrote (not the one who won a Nobel Prize), “If it’s a future world we fear, we have tomorrow’s seeds right here.”

Every year since founding Green Alpha, we’ve observed innovations emerge and compound like a fast-rolling snowball. Each innovation, improvement, and tool in the economy is smarter than the last and is immediately put to work in the development of a new generation of smart tools, evidently ad infinitum. I’d write a book with a title like Special Topics in Next Economics 2017, but the pace of innovation is so fast that it would be out of date before I could get it done. Still, there are a few trends that I think merit our attention, and our optimism.

Renewable energies.

They’re cheap and getting cheaper. In 2016, we saw the price of solar-generated electricity fall below that of wind, making it the least expensive source of power generation available, half the price of new coal. Wind and solar, being tech-based (as opposed to commodity-based), will continue getting cheaper, and will generate more and more of the world’s energy until they ultimately have most of the energy market share. At some point, markets will understand solar for what it is and begin to value it appropriately. Companies like First Solar, Inc., and Canadian Solar Inc. are leading the transition in world energy, and if they continue to work on innovation, growth, and maintaining strong fundamentals, they could find themselves among the world’s leading power companies.

Is renewable energy adoption at scale for real? President Obama just wrote about the “irreversible momentum of clean energy” in Science, and many of the world’s largest companies are on the same page, working toward running all operations on wind and solar. The poster firm for this is Google Alphabet, which says it will hit its goal of 100% renewable power for all operations this year. The company is a huge consumer of power, and its transition to wind and solar is resulting in large emissions cuts for the economy, as well as business stability and cost controls for their business. Cities are getting in on this, too, with San Francisco, San Diego and others planning to run entirely on renewables by 2035 or sooner. What about arguments that solar makes electricity rates go up? Well, in some places that use the most solar, the opposite is happening, and utility customers are seeing rates fall.

Inevitably, all this adds up to jobs in renewables. Though coal jobs were a focus of the 2016 presidential election, renewables are where more paychecks are. Wind power supports 88,000 jobs, while close to 373,807 U.S. workers are currently employed in solar, a 25% rise in 2016and that number is predicted to rise to 420,000 workers by 2020. Wind power employs 101,738 workers, a 32% increase over 2015. As of October, coal employed fewer than 54,000, according to the Bureau of Labor Statistics. It has been surprising to many observers, like Jigar Shah, that these remarkable economic changes don’t yet get more recognition.

Across the country, wind power has become the “new corn” for Red State farmers, providing a steady source of income in low-income, rural areas. In fact, the 10 congressional districts that produce the most wind energy are represented by Republicans.   California and other states, meanwhile, vow to push ahead in the fight against climate changewith or without President Trump’s blessing.

China is doing more to develop and install renewable energies than any nation. Already the world leader in wind and solar capacity, China now says it will “plow $361B into renewable power generation by 2020, and create more than 13 million jobs” (via Reuters), leaving the U.S. in the dust. According to The Guar
dian, “China now owns five of the world’s six largest solar-module manufacturing firms and the largest wind-turbine manufacturer.” It’s also far and away the world’s leader in electric vehicle production and sales. Also, China is spending over $500 billion to expand high-speed rail. Its war on pollution and commitments to mitigating global warming are real, and China clearly is happy (and even excited) to accept the leadership mantle in sustainable economics, a title many perceive the U.S. has abdicated. Having taken the reins on renewable energy and technology leadership, China is now shoring up the case for its moral leadership as well, made apparent by Beijing’s recent announcement that it will now ban all imports of ivory.

Renewable energyadoption, transportation, storage.

What about renewable energy adoption, plus zero-emissions transportation, plus energy storage? Well, Tesla. I don’t mention this company particularly as a stock recommendation but rather as a primary catalyst and the firm at the nexus of the Next Economy. It’s close to impossible to overestimate Tesla’s importance. Tesla re-introduced, made sexy, and popularized electric cars at a time when major automakers and oil companies were trying to prevent that from ever happening. Tesla’s ambitious approach to battery storage for cars and renewable energy has resulted in their Gigafactory, capable of doubling the world’s current annual output of lithium-ion batteries and lowering costs commensurately. Don’t think storage is a particularly big deal? Consider just one example: After the massive Porter Ranch natural gas leak, the City of Los Angeles decided to invest in battery backup for its electricity supply instead of gas, and has hired Tesla to provide some systems. LA has been among the first big cities to make this move, but then, it was among the first to be bitten by the risks of overreliance on a fossil fuels.

What of Tesla’s and others’ plan to scale up mass-market electric cars? Will that become huge or remain niche?  Consider these developments: Germany, Holland, and Norway have all taken steps to ban internal combustion engine-driven passenger vehicles between 2025 and 2030; more major economies surely will follow. India, for example, is now considering a similar move. Yes, these are ambitious goals that could easily be missed, but even if these nations get only halfway to their targets, it is not only incredibly bullish for any carmaker selling electric vehicles but also bearish for oil, since ground transportation is its primary source of demand.

Farming.

A New Yorker article said it best, “Vertical farming can allow former cropland to go back to nature and reverse the plundering of the earth.” Vertical farms are revolutionary for a number of reasons:

• They uses a fraction of the water required for traditional farming,
• They’re close to or within urban centers meaning no need for long-haul transport,
• Their indoor location eliminates need for pesticides and herbicides, thereby mitigating multiple systemic risks (e.g., ocean pollution from agricultural runoff),
• They can be maintained at a lower cost than conventional farming,
• And they’re more resilient to climate change.

No question, vertical farming is what’s next. Business Insider has posted a nifty photo essay of an indoor farm in Brooklyn if you’re interested in how it looks.

Additional key areas…

Computing power. It’s becoming so massive that our collective ability to assimilate data is now and will increasingly be unprecedented. The question will become, what can we do with this amazing ability?  And let us not forget the key related areas of cybersecurity and fast-emerging artificial intelligence and robotics, all of which are ushering in an era of heretofore unimagined economic efficiencies. What about the Internet of Things? After a slow start, it is coming into its own: “The falling cost of sensors and connectivity means the internet of things is finally a reality.” Lots of opportunity there. In medicine? Don’t get me started on CRISPR-Cas9, a technique to edit genomes, thus opening up endless possibilities in medicine and biology, with equally endless humanitarian, ecological, and commercial applications.

Okay, enough. We’re overwhelmed with innovations and breakthrough after breakthrough. We get it. For those of us trying to assimilate these changes and find the best path forward, the most important point is this: It’s in seeing the world for what it is becoming and not for what it was that investors and markets are going to allocate capital to manage risks and profit from new opportunities. This all leads, not incidentally, in the opposite direction from fossil fuels.

It is funny and yet poignant that some astrophysicists classify we humans as constituting merely a Level Zero Civilization, with nearly infinite scientific and technological prowess yet to be realized. Well, I’m not qualified to evaluate that theory, but what I do know is that so much progress is being made in so many areas, that I wake up every day excited to think about the world anew and uncover its opportunities.

An earlier version of this post originally appeared on worth.com.

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, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, “Green Alpha’s Next Economy.”

The post Sustainable Investment Opportunity In 2017 appeared first on Alternative Energy Stocks.

by Garvin Jabusch

There’s an argument in the world of impact investing that goes something like, “impact happens only through private investments; there is no real impact, apart from shareholder engagement efforts, in public equity investing.” An associated perception is that investment impact means capitalizing an enterprise beyond what would happen otherwise, meaning private equity alone has the power to provide real impact. But is this true?

Publicly traded corporations are the largest and most visible social and environmental bellwethers of the global economy, and the high allocation to public equities in most investor portfolios means public equity investing is and must remain one of our key opportunities for impact. To cause a positive impact, families, institutions, and individuals can invest in public companies whose primary businesses activities address pressing social, economic, and environmental challenges at scale. This does not mean companies with a pretty sustainability report or that are incrementally making their operations less carbon-intensive, but firms that have made it their purpose to enable a better world with an indefinitely sustainable economy. Skipping traditional investment practices to focus on buying these companies sends the clear signals that markets do value solutions, and that markets will devalue businesses that are the leading causes of our most pressing risks. In addition, flexible, go-anywhere public equities strategies may invest in micro and small cap firms where there may be limited liquidity, and we can have meaningful impact just by being there.

Clearly, how we invest in public equities matters.

A growing number of public markets strategies are being developed to meet investor demand for solutions-focused investing. These strategies (including Green Alpha’s own) are pushing boundaries in terms of how managers define risk, and are challenging preconceptions from traditional portfolio theory in order to invest in the best solutions to the dangers presented by the business-as-usual economy. Public equity portfolios can have real impact, and yet we must acknowledge that the perception that they do not exists. But why is that?

The Index Trap for Impact

Most investment managers have been trained to think about risk-adjusted returns in the same way, and in the case of equity strategies, that means making sure to exhibit correlation with your self-identified and/or assigned benchmark, usually the S&P 500 or other broad-market index. A competitive absolute return can still be considered a poor risk-adjusted return if you have more volatility along the way than your underlying benchmark. This can be traced back to the near-universal indoctrination into Markowitzian modern portfolio and efficient-markets theories, popularized by Jack Bogle and etc.

Bogle’s saying, “Why look for the needle when you can buy the haystack,” has come to mean “if you vary from the haystack, you may be punished.” This index-supremacy has been institutionalized to the point that rating agencies have a hard time imagining risk defined any other way than relative benchmark correlation, or how much a portfolio looks like the broad market. Morningstar, for example, determines its star ratings for equity funds on the basis of absolute return vs. the peer group bench, less any deduction for higher volatility than the peer group. In this way, some funds can and do beat their peer group’s performance over time, yet receive a rating of two or three stars (out of five) despite overall superior returns. Thus, fund managers, fearing for their retail sales, try very hard to mimic their benchmark, ideally outperforming it by a little but not enough to be considered “volatile.”

The overall result of all this is too many dollars chasing the same benchmark constituent companies, leading to unintended consequences such as, for example, the average S&P 500 firm right now having negative 12 month forward earnings per share (EPS) growth rate, yet at a high average price-to-book value near 3. Not great, from a value point of view, which to me shows this culture of index-homogeneity is causing market distortions. Moreover, indexing and index-mimicking generally ignore a lot of interesting innovation that occurs outside of index constituent companies, which is unfortunate because this innovation is where a lot of economic growth occurs, and also where we confront and solve the realities our most pressing systemic risks.

Thus, to have impact, we must recognize that equity investing can actually involve companies not found within traditional benchmarks, and, with some financial analysis, interesting portfolios can be constructed and opportunities can emerge. So it is imperative to look as closely at our public equity holdings as we do at our private equity investments, and also, equally, to stop concerning ourselves with correlation to traditional indexes.

Real impact depends upon voting with your dollars for the future economy, for the actual catalysts of change, for the viable growth areas where we can reasonably expect to earn good equity growth in this era of rapid change. This means a higher level of due diligence that avoids the trap of thinking public equities are “set it and forget it.” Even when selecting funds that market themselves as sustainable, it is key to do your homework. Many green public equity funds correlate very closely with the S&P 500, meaning they are still largely invested in the legacy economy, which of course is a lousy way to have impact with your public equity dollars. In fact, the prevalence of investment funds that hug their benchmark first and think about impact second is why it is so commonly assumed that public equity investing can’t have impact.

Well, it’s not that public equity portfolios can’t have impact, it’s just that they usually don’t. But if we can change the way we think about risk and indexing in public equities, we can and will see real impact ripple around the world.

So, where to invest?

Next Economy, Innovation Economy

If economic history shows us nothing else, it is that innovation and better products and systems that perform better and cost less always win in the marketplace. And this is what sustainability is innovation-led gains in efficiency that mean we can have a thriving economy while lessening our footprint on our required yet delicate earth systems. It’s imperative to direct capital into the future that you in fact see coming, in part through public equity investing. That investment represents real impact and also positions your stock portfolio to grow as that future emerges and grows, supplanting the old fossil-fuels based economy.

For investors, the best Next Economy solutions simply outperform their old economy counterparts and predecessors, all while circumventing our most daunting long-term risks. In addition, there’s now a growing demographic demand from women and millennials for solutions-oriented investments that growing in size and wealth as part of the $40 trillion wealth transfer that is occurring in the U.S. In short, we’re at the early stage of share price appreciation for meaningful, scalable solutions.

In this light, we view investments through a holistic lens, and therefore deploy impact on the world across asset classes of private equity, public equity, and debt. In other words, if you have a commitment to impact, it’s not just a private equity hobby, it’s across all classes. Again, strategies dedicated to seeking equities that are solving big risks by investing in solutions amplify powerful market signals that firms with proven business models addressing challenges around climate and resource scarcity are now highly valued.

In the case of public equities, this does mean letting go of the idea that high correlation to the old indexes is somehow safer or even a good way to measure risk. Investing in public equities that are add
ressing looming systemic risks means looking for companies where financial return drivers and impact are inextricably linked, without regard to how well this tracks the S&P 500 or any other old index.

Public equity is a core component of a diversified investment portfolio why would we not seek maximum impact from this key piece of our total assets? Next Economics, focusing on what the de-risked economy will look like, and building portfolios that reflect that economy now, is compelling both in terms of affecting change and also in terms of financially benefiting from that change: Impact.

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 economics blog, “Green Alpha’s Next Economy.”

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by Garvin Jabusch

Sempra Energy’s leaking gas field in Porter Ranch, CA, near Los Angeles, has been making national headlines recently, as it now enters its third month of being the largest methane leak in U.S. history. How big is that? The LA Times says that, “by early January, state air quality regulators estimate, the leak had released more than 77 million kilograms of methane, the environmental equivalent of putting 1.9 million metric tons of carbon dioxide in the air.”

1.9 million metric tons of carbon dioxide and counting. In addition, methane isn’t only a powerful greenhouse gas, it can have health consequences for those exposed. In reporting that California Governor Jerry Brown has formally declared the leak an emergency, the New York Times on January 6 wrote that, “already, more than 2,000 families have left this affluent suburb because of the terrible smell and its side effects, which include nosebleeds, headaches, dizziness and vomiting.”

What does it all have to do with investing? It tells us more than you might think, and it speaks volumes about how many investment managers think about the idea of a sustainable economy, and also about the limited tools they have to construct a portfolio that reflects actual long-term viability of the global economic system. As economist and sustainability expert Ken Coulsen tweeted recently, “I thought the idea in #trading was to ask ALL the [questions] – most investment groups refuse to go deep on the intersection of #science [and] #economics.”

Coulsen’s right. Investment managers are supposed to be assimilating all the risks, so why do some have a blind spot when it comes to natural gas and other fossil fuels? Part of it is inertia, a sense that doing things the way they’ve always been done must be “right.” Part of it is ideological and a tribal affiliation among some institutions and investors who resist the idea of an economic switch to renewables as simply contrary to the way they view the world.

The fact that Ted Cruz, a  leading  GOP candidate for the U.S. presidency,  recently described  signatories to the COP12 agreement as, “ideologues, they don’t focus on the facts, they won’t address the facts, and what they’re interested [in] instead is more and more government power” tells us all we need to know about both the  politics involved and the power of Orwellian rhetoric in claiming truth in the opposite of reality. 

Finally, the standard tool kit used by most portfolio managers, collectively called modern portfolio theory, doesn’t particularly allow one to attempt to look forward in assessing risk, basing almost all such calculations on the way stocks and groups of stocks have performed historically.

In any event, Sempra’s utility SoCalGas didn’t think too much about the risks, and neither did a lot of energy investors. SoCalGas/Sempra, as reported by Newsweek, had not installed a “subsurface safety valve that was found faulty and removed in 1979but never replaced, because the well was not close enough to residential areas to necessitate such a valve. [Rodger] Schwecke, the SoCalGas vice president, says he does not know why the valve was removed and never replaced, but he downplays the ability of a subsurface valve to stop a powerful leak like this one. “It wasn’t a requirement,” he says without much contrition.”

Zero Hedge reports that, “The Company Behind LA’s Methane Disaster Knew Its Well Was Leaking 24 Years Ago,” and yet the firm was still considered an upright corporate citizen, among the finest and safest of our fossil fuels firms. Many money managers did not perceive a risk. According to StreetInsider.com, on October 30th eight days after the leak was detected, “Standard & Poor’s Ratings Services affirmed its ‘BBB+’ issuer credit rating (ICR) on Sempra Energy (NYSE: SRE) and our ‘A’ ICRs on subsidiaries San Diego Gas & Electric Co. (SDG&E) and Southern California Gas Co. (SoCal Gas). The outlook remains stable.”

Then, on November 16, seven weeks after the world became aware that the leak had begun, the company itself announced that, “Sempra Energy (NYSE: SRE) has been selected for the S&P 500 Climate Disclosure Leadership Index in 2015. The S&P 500 Climate Disclosure Leadership Index lists the top 10 percent of companies within the S&P 500 Index for the depth and quality of climate change data disclosed to investors and the global marketplace.”

Obviously, there is a disconnect between real world, scientifically verifiable risks and traditionally contemplated investment risks, at least in the case of SoCalGas at Sempra. Which is a danger when you get into the business of looking for standouts in an inherently destructive business: even the very best are still destructive. It’s like trying to decide which cancer you would like to get. Maybe you’d select skin cancer because it’s eminently curable if caught early, but the real answer is you don’t want cancer at all.

The risks are real. The Los Angeles Daily News says that “Since Oct. 23, Southern California Gas Co. has spent $50 million to try to stem the flow from the nation’s fifth largest natural gas field, while relocating two schools and some 12,000 residents, many of them sickened by gas detection fumes. A fix may not be in the works until March.”

That means SoCalGas may still be in for more expenses than they thought. Maybe a lot more. Again, from the Los Angeles Daily News, “the researchers recorded elevated levels of the main ingredient in natural gas10 miles away from the nation’s largest gas leak.” A recent essay from the Union of Concerned Scientists adds, “while this is just the most recent in a long history of oil and gas industry disasters, the particulars of this circumstance are unprecedented (sadly not unheard of). Legal experts predict that SoCal Gas will be on the hook for billions over a long period of time,” and “3,000 more [families] are waiting to be relocated…As these houses sit empty, they become vulnerable to crime and decline in value. And beyond paying to fix the leak, cover medical costs, and relocate families, SoCal Gas is already fielding 25 lawsuits with more expected in the coming weeks, months and perhaps years.”

The traditional way of thinking about investment risks
excludes hugely important ones that should have been incorporated into the fiduciary standard a long time ago, begging the question: what is the fiduciary standard for if not to assess these risks? We allow extremely risky activities from a regulatory point of view and then ignore these risks in investment management. But if you don’t include these risks, you’re exposing yourself and your clients to them, and the minute these risks are recognized for what they really are, you could see your value in certain companies, such as SoCal Gas, evaporate before you can get your next statement.  So why build a portfolio with only the ‘good cancers’ in it? Why not build one with no disease at all?

As Newsweek points out, “The methane leak in Porter Ranch, though, is an apt demonstration of our complex affair with carbon fuels. The natural gas stored in Aliso Canyon flows to the homes of about 20 million customers in the greater Los Angeles area. So while we contemplate wind farms and solar arrays, we remain married to an antiquated infrastructure that lets us do what we have done for centuries: extracting energy by burning carbon.” And so, sometimes ignoring all seemingly non-financial risks, do fund managers.

But, increasingly, someone has to answer for those risks. Fossil fuels companies don’t think it will be them. EDF.org says it all when they report that, “none of the 65 oil and gas companies reviewed in a just-released study by Environmental Defense Fund disclose targets to reduce methane emissions, the main ingredient in natural gas.”

You don’t manage a risk you don’t think you’re going to have to pay for, and therefore most oil and gas companies don’t manage them adequately. For portfolio managers it’s different though, we can and should be thinking about risks even when companies themselves don’t. Our clients’ financial well-being is at stake.

Yet portfolio management, populated with professionals who try to leave no stone unturned in rooting out risks and dangers associated with every stock, has a blind spot when it comes to fossil fuels. In a time when it is clear that the beginning of the end of the fossil fuels era has begun, when we know fossil fuels contribute massive risks to the global economy from all the outcomes of warming to failing health to destruction of land and biodiversity, when we can say with certainty that for many purposes renewable energies are now more economically competitive, most investment professionals still continue to hold coal, oil and gas stocks. They have their stated reasons: diversification, historical performance, modern portfolio theory and fiduciary standard requirements. But backward-looking diversification methodology (again, the standard in present day investment management) has allowed construction of portfolios fraught with systemic risks.

What the LA methane leak tells us about investing today is as much about inertia as it is about research and new ideas. This is probably inevitable and to be expected, but it’s a shame, because where capital is invested in this world is where change happens, and it’s time professional investors realized they need to stop investing in the world’s greatest systemic risk.

Given the tools provided by modern portfolio theory, mainstream investment management only seems to be able to think as far as: “we need to be sustainable, so which fossil fuels firms are greenest?” This is shortsighted. The world economic forum at Davos now sees climate as the world’s number one economic risk; why don’t most portfolio managers and other fiduciaries?

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, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, “Green Alpha’s Next Economy.”

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by Garvin Jabusch

Jack Bogle is flat wrong. I mean, within his worldview and that of Modern Portfolio Theory, he’s right, but in the Anthropocene, he’s wrong. Bogle, founder and retired CEO of the Vanguard Group, is known for championing the superiority of low-fee index funds. His firm’s largest product, the $155 billion Vanguard 500 Index Fund is the perfect poster child for his philosophy. It closely tracks the S&P 500 Index of America’s largest companies, and it has a fee of only 0.06% inclusive. The S&P 500 has performed better than most actively managed portfolios over time, so Bogle’s thesis of “don’t look for the needle in the haystack. Just buy the haystack!”, and buy it as cheaply as you can, is brilliant in its simplicity. Elegant, even.

Here’s where it fails: investing in a broad index, Bogle’s or anyone else’s, means owning every sector and company in that index. Every sector and stock. Including oil. Including tar sands. Including coal. Including myriad other causes of major yet avoidable risks around water, agriculture, transportation and many other sectors. All the traditional equity market indexes were built by, of, and for the old business-as-usual economy. Index rules of economic sector allocation demand ownership of all areas of the economy that were important when these indexes were devised in the middle part of the last century, before anyone had heard of climate change, could imagine resource scarcity on a global scale, or could fathom 7.3 billion people and a mass extinction event likely to rival the largest in prehistory. There are massive economic risks now that simply did not exist when our stock market indexes and the body of theory that supports them, Modern Portfolio Theory, were devised.

Modern Portfolio Theory has another big limitation: It requires measuring risk by analysis of past performance. It asks, of any stock portfolio, “what would the return for that have been over the last 10 or 20 years, and at what level of risk?” Here again, this seems eminently reasonable, but it has the negative result of making the economic causes of our most threatening risks appear to be wise investments. Today, though, our primary risks are so obvious, and human innovation is advancing solutions so rapidly, that there’s no economic outcome 10 or 20 years hence that looks anything like the last 10 or 20 years. Where legacy economy stocks have traded historically is irrelevant now. Causes of economic and environmental risks, like fossil fuels, are not the safe source of risk-adjusted returns that they used to be. The world has changed, and following Bogle’s advice to invest in an S&P 500 Index fund doesn’t give you much access to this new world of profitable innovation and investing opportunity, but it does keep you invested in the causes of our problems.

Like it or not, we’ve ushered in a new era. It’s the Anthropocene now, yet we’re still largely investing with old Holocene methods.

It’s time for a new investing philosophy, one that reflects what we have learned at last about how to sustainably inhabit the Earth. So, what updates could portfolio construction theory employ? If we believe we can arrive at an indefinitely sustainable and even thriving economy, here are some ideas:

1. No more blind use of traditional sector allocations. Even some green, SRI, and ESG funds use the old allocations schemes, and then try to screen out some of the objectionable companies. This won’t work. Instead, we must allocate portfolio investments by evaluating forward-looking risk. It’s time we created portfolios from the bottom up, intentionally, by selecting the economic areas to invest in via risk-factor allocation, rather than traditional sector allocation methods. That is, we must stop investing in causes of systemic risks, wherever they may exist, and start investing in the most economically exciting, innovative solutions to those risks, economy-wide. Continuing to invest in all sectors of the economy regardless of the risks that a given sector has to our future viability has no place in today’s investing world.
2. Stop evaluating risk using backward-looking models. In order to create portfolios that accurately factor in today’s and tomorrow’s risk continuums, investors need to change their paradigm and begin using forward-looking economic modeling. Innovation is far more rapid now than at any time in all human history, and we can finally now bring to investing a vision of where the economy is going, and where it should go, in both economic and sustainability terms. Modern Portfolio Theory’s rearview mirror approach to risk evaluation can actually be said to violate the causality principle in physics, in that it expects past outcomes to emerge from present events. They won’t.
3. We must each be aware that the rules, habits, and institutions of the past do not have to bind the future, and indeed they must not. We must be aware of as much as we can, studying science and basic principles, and working hard to suggest new, better ways forward.

We can’t acquiesce into accepting that the framing of investing for the future can be achieved within the terms of Modern Portfolio Theory, which was developed in the 1950s with no knowledge of the world of 2015. We can’t work on evolving our economy from within the terms of that frame. To the extent that we could, it would be far too slow. As Jacob Goldstein, host of NPR’s Planet Money, said of Paul Volcker’s comments to him regarding fighting another systemic risk, the runaway inflation in the 1970s, “Volcker told us that in the ’70s the Fed had tried doing things gently, and it didn’t work because it didn’t convince people. You know, he said gently wasn’t enough to change what was in people’s heads to make them really believe” (Episode 664: The Great Inflation).

Our ability to do all this will depend on the rigor of our economic models in factoring realistic risks related to climate change, resource scarcity, and population growth, paired with innovation and solutions. A holistic model of what it will take to fit human civilization less awkwardly and less destructively into the rest of biodiversity and, beyond that, into the fundamental conditions and physical limitations of Earth, won’t arrive any time soon. The problems and systems involved are too complex.

Nevertheless, we have to take strides toward understanding our place in, and effect on, the world represented by that model. Because in full light of what we now know in 2015, the consequences of continuing to accept investing advice rooted in the outdated dynamics of the legacy economy, even from a mind as brilliant as Jack Bogle’s, will cause our environmental and economic situations to rapidly become unimaginably worse.

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, the Green Alpha Growth & Income Portfolio, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, “Green Alpha’s Next Economy.”

The post Investing For The Anthropocene appeared first on Alternative Energy Stocks.

by Garvin Jabusch

We now live in a global economy with two fundamentally different types of energy: commodity-based in the form of fossil fuels and uranium, and technology-based, represented primarily by solar and wind. That observation is interesting as far as it goes, but what does it mean? The term renewable (as it pertains to energy) gets used so often that it is easy to forget what it really entails. For starters, tech-based renewables become less expensive over time, as demand for them drives scale, innovation, and improves cost structures in implementation (think about the last couple of computers you’ve purchased). This is precisely the opposite of how we have traditionally thought about energy and, how it’s priced. With commodity-based energy like coal and oil, energy costs go up over time as demand increases (population and economic growth necessitates this) and the cheaper-to-acquire sources are used up. The contrast between the old and new means of acquiring energy is nothing less than revolutionary, as it means that economic growth need no longer choke itself off as a consequence of its own success. Since the fuels for technology-based energy (sunshine and wind) are free, it means we’re entering into a fundamentally new economic era wherein traditional measurement of energy costs will no longer apply.

We currently measure energy in units of power from the supply side: gallons, barrels, BTUs, kilowatt hours, and so on. However, if power generation is no longer slave to a commodity resource with its accompanying supply and pricing dynamics, perhaps it’s time to change how we measure it.

Given the amount of power the world economy uses in a day, compared to the available wind and solar power naturally provided in a day, the potential power that can be harnessed is basically infinite for human purposes. To illustrate this, imagine the time in history when everyone thought there was infinite coal and oil in the ground, but we just didn’t have very many wells or mines to get it out. This was, as far as anyone then could see, the situation at the dawn of the 20^th century, when oil rushes and coal booms around the globe redrew borders, sparked decades-long wars, and reshaped human existence on the planet. The future of human productivity was at stake, and people rushed to capitalize on that, similar to how investments are beginning to flow today towards the great transition of our own time – the switch to electrification through renewables.

Of course, there are some crucial differences between the renewable energy future we see today and the beginning of the fossil fuel era that shaped the last century. For one thing, oil and coal turned out to be nowhere near infinite: in fact, the more we use, the more we need, and the harder (read: more expensive) it becomes to get. A similar argument is sometimes made (poorly) about sun and wind: the best spots for wind and solar will be utilized first to maximize investment, and over time more marginal areas will have to be utilized. For instance, Hawaii and California, both very sunny places, are moving quickly on utility-scale solar. Similarly, flat and windy Texas is a world leader in installed generating capacity for wind turbines. However, unlike oil, the amount of sun that falls on less sunny places, like Vermont, is still consistent and never diminishes. The same is true for more and less windy places. To cap all of that off, the amount of wind and sun that occur even in the darkest and least windy places is still in excess, given sufficient deployment of renewables, of current power needs. 

So, what happens now as the equivalent of unlimited barrels and gallons, falling from the sky for free, are increasingly captured and put to productive economic use? Will we remain fixated on measurement only from the supply side? Could we even if we wanted to? Can one put a meter on sunlight? Perhaps a more relevant measure now would be to assess the ability of that energy to do productive work, or in economic terms, to turn material into products and to provide services. Much as supply measurements are used today, this more descriptive production measure would be applied the same to, say, the energy needed by a company like Patagonia to turn plastic bottles into high quality fleece clothing, and the power to operate your television.

Essentially the question becomes: how much of the energy we pour into the economy is productive and how much is wasted? According to economists, notably John A. “Skip” Laitner, about 15% of it becomes economically useful while the remaining 85% dissipates unrequited (here is Laitner’s 2013 paper; free registration required).

Green Alpha’s Next Economy^TM thesis is that our collective and per capita economic activities must ultimately have only a de minimus impact on the economy’s underlying ecosystems, all while we maintain and improve standards of living. In that light, any accounting of global economic activity that suggests we are only getting 15% of the productive energy we generate is, to put it mildly, kind of a big deal. It means that the ability of our economy to grow and to run in a way that won’t overtop earth’s carrying capacity is badly hampered relative to what could be. “You can imagine what a huge array of costs that imposes on the economy and that set of costs just clamps down and makes it harder to provide economic activity and to provide jobs that we need,” as Laitner put it on a recent podcast.

If energy is increasingly coming from a cost-negligible source, and the lifetime of the technology we use to capture it is long enough to easily amortize its capital expenditure, it is time to start focusing on what we do with it, and how. There will, before long, be such an abundance of renewable energy available that we need to start asking how it can best be deployed to maximize economic gains. Measuring where energy goes, and what is done with it when it gets there, will become more important than where it comes from. Laitner has reached a similar conclusion: he believes that our abysmally low rate of converting energy to productive work is a systemic weakness. As he has blogged, “if we miss the big gains in energy and exergy efficiency, focusing instead on investments in costlier and more hazardous new energy resources, we run the risk of a continued weakening of the economy.” (Italics added.)

Energy efficiency and resource productivity are opposite sides of a coin. We need efficiency to do more with less: less material inputs, less person-hours, less water, etc. Doing more with less is key to providing jobs and transitioning to an indefinitely sustainable economy. As the world electrifies, economies will increasingly revolve around renewables to power the factories, shipping, computers and consumers who require those goods and services. What matters now is measuring energy’s ability to functionally provide for society, as opposed to the price per of input on the supply side. Put another way, the 85% of energy we generate and pay for that is wasted is an enormous basket of costs that slows the potential growth of the global economy in all of its manifestations (e.g. job growth).

Growth in global economic productivity is well understood to be slowing. The Organization for Economic Cooperation and Development (OECD) has recently given the global economy a “barely passing grade of B-.” The World Bank and others have agreed that global productivity growth this year may decline to 1-1.2%. McKinsey & Company ag
rees, and reports that the problem is more long-term and systemic: “unless we can dramatically improve productivity, the next half century will look very different. The rapid expansion of the past five decades will be seen as an aberration of history, and the world economy will slide back toward its relatively sluggish long-term growth rate.” 

The primary reason for slow productivity gains is the inefficient use of resources, largely energy, but also water, phosphorus, land and human labor, among many others. Structurally, in terms of our institutional understanding of how to address this, the problem is that we don’t track the right kind of data to measure the effective use of energy in the economy. The conversion of energy to productivity is the numerator in the ratio of human endeavor to global economic growth. We collect energy’s supply side information, but we don’t track how much of that ends up being productive. This is odd, because that’s really the core of understanding economic activity. Moreover, the data we do have doesn’t inform us how individual inputs can help optimize the economic activity that would, in turn, drive sustainability as well as productivity. Knowing how many BTUs we’ve sold doesn’t get us very far; again, it’s not the supply so much as the effective use of energy that runs the world.

What’s required to make best use of the emerging abundance of renewable energy is a transparent flow of rich information to measure, evaluate and direct energy in a way that optimizes use and increases productivity. To get the world thinking outside of a supply-side orientation is a big change, and will require lots of new tools and education. Perhaps the emphasis on the supply-side aspect of energy has been a consequence of the historical commodity nature of the fuels themselves. Since they have been dangerous, dirty, difficult to extract and move around the globe, those responsible have expected commensurate (perhaps outsized) recompense. Increasingly however, energy harvested from renewable sources is freeing the world from those economic handcuffs; you no longer need a multi-billion dollar coal plant to power your house or drive your car. More systematic observation, automation and intelligence in our entire array of systems and devices, with real time measurement driven by machine-to-machine and Internet-of-things technologies, all optimized by algorithms, can now accelerate this revolution.

But present supply side thinking can’t inform any of this because measuring inputs isn’t the same as measuring outcomes. Fundamentally, increasing growth, jobs and standards of living are all about reducing costs of energy, material, services and capital. As with most aspects of holistic Next Economics we have to solve for multiple objectives. So, the transition away from supply-side measurement to outcomes optimization will require a paradigm shift. Understanding what we need as a society and how to line up resources in a way to achieve those outcomes is the critical issue. And incremental improvements to legacy metrics will not cut it.

At Green Alpha Advisors we strive to rethink what we’re doing in our own business of portfolio and asset management in a way that reflects the requirement of the global economic system to evolve to align our energy, material resources and capital with our economic best interests and desires for prosperity. The old, inherited paradigms that only allow us to think in terms of incremental improvements do not help us understand the functional and structural problems associated with unutilized energy, material and capital. As Greentech Media journalist Katherine Tweed recapped from a paper from Laitner, “If we want to understand how to wring more efficiency out of our energy usage, we need to redefine energy use in the first place.”

An economy-wide 15% productive energy use rate is only good news if you’re on the supply side selling all those barrels; the wasted 85% is easy money in that case. But what happens as renewables become the globe’s dominant source of energy and there are far fewer barrels to sell? Laitner’s work seems to be agnostic regarding where energy comes from, emphasizing instead the need to redefine our old ideas about how to measure its impacts and outcomes. For Green Alpha, the fact that the world is increasingly making energy from cheap tech instead of from expensive commodities means it is finally in a position to begin recapturing the lost 85% and realizing a far more sustainable, regenerative and prosperous global economy.

We can now design an economy where a far greater fraction of our energy is put to productive use improving standards of living, accelerating progress and reducing impact on climate and resources. But before we can do that we have to reimagine how we think about energy in the first place. No one can sell a photon, so perhaps it’s time to stop running the world of energy from the supply side, using supply side metrics and talking to each other with outdated language.

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, of the Sierra Club Green Alpha Portfolio, and of the Green Alpha Global Equity Income Portfolio. He also authors the Sierra Club’s economics blog, “Green Alpha’s Next Economy.”

This material is for informational purposes only and is not an offer to sell or the solicitation of any offer to buy any security. Performance data quoted represent past performance, which does not guarantee future results. All returns are total returns net of fees.

To obtain a prospectus for the Shelton Green Alpha Fund (NEXTX), visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.  Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management. 

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