This article is part of TPM Cafe, TPM’s home for opinion and news analysis.
Last month, much of the continental United States was wrapped in a bearhug of ice, cold and electricity anxiety. Texas, unused to extreme cold, particularly suffered, and early estimates are that the cold spell there could be one of the most expensive natural disasters of 2021 — in the world. And while this cold spell was within the bounds of past episodes in Texas, it is — at a minimum — a premonition of the costs that climate change will increasingly exact on societies if it is not arrested soon.
The Biden administration has already revealed an aggressive set of executive orders to curtail oil and gas leasing on federal lands and boost offshore wind in a bid to put the U.S. back on track to meet its commitments under the U.N. Paris Accord. General Motors announced this year it aims to switch some of its vehicles over to electric by 2035. This is all fine, but our most effective lever to combat climate change remains under-used: the financial industry.
Big finance continues to invest heavily in oil, gas and carbon industries broadly. Even when major financial institutions do consider climate impact in their portfolios, it tends to be in the context of ESG (Environment, Social, Governance) funds, which focus on filtering out the worst offenders. What this means is that a firm such as BlackRock, the largest asset manager in the world with some $6.8 trillion in assets under management, can boast about its green investing leadership while keeping companies such as ConocoPhillips, Hess, Occidental Petroleum and Baker Hughes in its ESG index funds. Nevertheless, BlackRock CEO Larry Fink made headlines in January with his annual investors letter wherein he called on companies to present plans to decarbonize by 2050 — the same timeline already called for under the Paris Accord.
There’s a big difference between the common ESG approach, which closely resembles business as usual, and an actually proactive approach to green investing where the emphasis is placed on divesting from carbon industries and rewarding environmentally progressive companies. Funds such as the Fidelity Select Environment and Alternative Energy Portfolio, New Alternatives Fund and Calvert Global Energy Solutions Fund, which invest narrowly in renewables, all demonstrate that the latter approach is not only possible, but also potentially highly profitable. At the forefront of the post-carbon investing space, though, is Green Alpha Advisors, a Boulder-based firm headed up by CIO Garvin Jabusch. While the firm is still relatively small — managing some $625 million — Kiplinger ranked it second out of all large-cap US mutual funds in 2019, when it delivered a 43.7 percent return. And 2020 proved to be even bigger. The firm’s Shelton Green Alpha Fund had returns of 114 percent in 2020, making it one of the best performing funds on the market. And it goes beyond investing solely in renewable energy, targeting companies with post-carbon promise in a variety of industries. For context, the overall U.S. market was up a hair over 20 percent for 2020 while the overall energy market actually tanked 32 percent, according to Morningstar.
“Renewable energy,” Jabusch says, “is at a scale where it’s become so economically competitive that it’s hard to put the toothpaste back in the tube.”
Economies of Scale
Jabusch doesn’t have the typical background of an investor. He studied physical anthropology at the University of Utah and was a field director for the American archaeological expedition at Petra in Jordan, before joining Morgan Stanley and then managing funds for the Sierra Club. He founded Green Alpha in 2007 on the premise that smart investors should be putting their money in the next economy — post-carbon companies — that he believes will ultimately win as climate change becomes more acute and renewable energy cheaper and more plentiful.
There’s some debate over this approach. “If you think about the question of how do we hedge against climate change risk, it’s natural to think the easiest thing to do is to go long green and short brown companies,” Stefano Giglio, a professor of finance at Yale, told the New York Times earlier this year.
“What we found when we tried to aggregate all the information was the optimal portfolio that hedges climate risk is not a long-short bet on green,” he added. “It’s much more nuanced. You want to go into each industry and look at the firms that are the most and least exposed to climate change.”
Jabusch and fund managers like him are skipping over that step entirely by using a long-only strategy that eschews short plays against fossil fuel laggards. Instead, they focus solely on the companies that can push us toward a post-carbon future. It’s a bet that, from a macro view, the financial institutions with positions in the carbon economy are at this point holding a losing hand. While they will continue bringing in profits in the near term, not only is post-carbon investing better for the world, it also appears to be the better long-term play. Even when the Trump administration sought to roll back renewable energy initiatives and prop up coal, it continued to pursue a broad shift to renewables.
“Coal did not get cheaper, but renewables got dramatically cheaper,” says Former Colorado Governor Bill Ritter, founder of the Center for the New Energy Economy at Colorado State University and an adviser to Green Alpha. “Coal became non-economical when compared to cheaper renewables and cheaper natural gas.” The trend towards renewables, he said, is likely to accelerate as federal and state governments bring regulatory levers to bare. Energy and power are highly regulated industries, and new clean energy standards at the state and federal level can further incentivize investments in renewables.
In the case of Colorado, the state government set increasingly strict renewable energy standards, boosting the requirement for utilities from 10% to 30% during Ritter’s tenure from 2007 to 2011. “There was a convergence of policy levers that had been used to really push clean energy into the market enough for them to take advantage of economies of scale,” he says, adding that Excel Energy, the largest utility in Colorado, aims to retire its two remaining coal power plants and be 80 percent carbon free by 2030, increasing its target from 55 percent where it stood in 2018. It’s a trend which Ritter credits to market forces and falling prices.
New Policy and Market Levers
We are still in the early days of decarbonization, and there are ways to accelerate the transition away from carbon. The government can and should push clean and renewable infrastructure options and boost funding for places like the National Renewable Energy Lab. And there are still huge constraints that are undermining our shift to renewables. The cost of rooftop solar, for instance, is falling, but it still costs three times as much to install it in the United States than in Australia, according to a January report from the online solar marketplace Energy Sage. The difference is largely due to high permitting costs, and wait times of up to 90 days for certification in the U.S. North Las Vegas recently implemented an Australian-style certification process and cut their rooftop solar wait times down to a matter of minutes. Advocacy groups such as Rewiring America, focused on rapid decarbonization, are encouraging the Biden administration to streamline the process nationwide. “In markets like Germany and England, it costs half as much. The solar panel costs the same,” Jabusch says. “We pay twice as much to cut through red tape that could easily be rolled back.”
And as the shift to electric cars becomes increasingly imminent, we may need more than just expanded tax incentives of the sort moving through Congress. One option could be to introduce subsidies for the purchase of electric vehicles. Tax incentives are effective, yet they risk putting electric vehicles out of reach in low-income communities that would benefit most from the reductions in emissions. “The Biden administration is bringing on an environmental justice lens,” Ritter notes. “For transportation to be affordable to people in marginalized communities, there’s going to have to be real thought put into incentives or a build out of mass transit.” An electric car subsidy would help get internal combustion engines off roads quicker, and certainly forward-looking auto manufacturers like General Motors wouldn’t complain.
Finally, we should be cautious about a headlong rush into carbon capture technology. This tech, which aims to suck CO2 out of the air, is expensive and acts as a band-aid, covering up a wound but failing to cure the underlying problem. Currently, the Federal government provides a tax credit called 45Q for companies, including those in the oil and gas industry, to capture and sequester carbon. The credit was implemented under the Trump administration, and while Ritter notes that carbon capture hasn’t proved economical yet, it is probably still too early to tell if it can compete with renewables.
The risk with carbon capture, of course, is that rather than switching to cleaner options, major companies will continue business as usual — pumping CO2 into the atmosphere — and will seek to compensate with carbon capture, rather than fixing their underlying business models. Occidental Petroleum (one of the oil companies in BlackRock’s ESG portfolio) has already announced such a plan. Long term, carbon capture means oil and gas companies will either have to pass the additional costs on to consumers at the pump or Americans will have to foot the bill with tax credits. Or it may be a moot point since it appears that companies relying on renewables will have lower costs overall and will operate more cleanly.
It’s long been clear that making gains against global warming will require simultaneous government and market action. And the world’s investors must wake up to reality. They should beware of attempts to splash a little green on dirty, old industries. And they should realize they have good options besides investing in the carbon economy.
This article initially described GM’s electric vehicle goal as a commitment and it has been updated.