Investing in the Era of Climate Change

dollars a year. So that's the level of investment needed to reach the international climate goals of net zero emissions by twenty fifty. And our next guest him as a guide to the risks and opportunities for investors as a worldfaces climate change. Very pleased to have with us this afternoon. Bruce Usher. He's professor of Professional Practice at Columbia Business School. He's also the author of his book Investing in the

Era of Climate Change. And I should note full disclosure he was my professor when I took a course from him all the way back in what Maybe Business Right. Yeah, this was a cool class investing for social ventures. We got to like essentially serve as consultants for these startups and decide whether or not they would be awarded money pressor Usher. Great to have you with us this afternoon. How are you? Thank you for having on the show and nice chat again. Yeah, it's good. It's good to

have you with us. Hey, help us understand in a time where we're seeing global upheaval, the worst energy crisis that we've actually seen in decades, uh, and investors are fighting for returns anywhere. How should they be thinking about investing when it comes to climate change. Well, there's no shortage of volatility in the markets these days, but they should think about climate change from a longer term perspective.

If they're looking for stable trends, it's going to be here with us for years, if not decades, and affecting businesses for decades to come, and therefore affecting investors investor returns for years to come. Climate change is the macro trend of the next several decades. There's just no question about that. So okay, and I do feel like it's going through a reckoning. Tim and I talked about E S. G. Right.

We've seen so much money, Professor Usher go into this space, but we're getting to a point where people really want to understand what they're investing in, and that that money ultimately makes a difference when it comes to E s G metrics, How do we make sure that investments that we make really are making a difference and are good for the climate. Well, there's plenty of discourse or any s G these days, no question about that. And the challenge the B s G is the concept is very simple, right.

It's simply saying that when you make an investment, you would normally look at financial metrics, and manage metrics and competition all these other metrics. In addition, add to that analysis the environmental or social factors that are material to the company you're considering. If you're buying into real estate on the coast, you might want to think about floods and storms in the life, right. So that's the s G analysis. It's very important for investment perspective. It makes

makes for better investment decisions. It doesn't have a tremendous impact though, on addressing climate change, because what you're really doing is investing in companies that are doing better for managing climate risk. But those decisions don't necessarily reduce emissions as gases. So that's what you're focused on. It I think it's prettymportant to be focused on it. There's really two strategies to consider. One is a thematic act investing strategy.

Pick a theme or sector that contributes to addressing climate ching, say renew energy, solid wind, or electric vehicles, and put some investments into that sector in a smart way to maximize risks to adjusted returns and also contribute to reducing emissions of greenhouse gasses. The other strategy that's unique to really high net worth altra high net worth individuals is take what's called impact first strategy. So here we're really focused on climate change and invests with that lens in mind.

Now that means big, very long term investments and and perhaps some additional risk, but some investors are willing to go as well. What I find a little puzzling in this day and age, in you know, October, is the market has rewarded this year companies that are the antithesis of these climate friendly companies. You could argue, right um

oil and gas companies. And when you look at the best forming stock in the SMP five D this year, Occidental patrolling about on number for the first, third, fourth, fifth, six, seventh, eighth, ninth, and tenth companies that are the only that they are the best performing in the SP five hundred. They are all oil gas natural resources companies. So what's an investor

to do in this environment so to days? But with the oil and gas, First of all, they were that was from very low price points a year ago, right, So the multiples on those companies are still very well. Secondly, many of those oil and gas companies are aware of climate change and aware that their business models and how they're going to change them. So Ocidental Petroleum as an example, has invested heavily and direct their capture and some other

technologies to ideally reduce their emissions over time. So they're they're also thinking long term. I'm not saying where their business model is the right one. Actually, we don't have much clarity on on the oil and gas UH strategies around climate change yet, but it's not as if those companies are ignoring the issual to at least the best

majority of the n take action on that. That being said, you know, I said a few minutes ago, climate change is a long term trend and lower seeing the markets right now is short term volatilly right, oil gas prices are up dramatically in the past year, and those stocks are into well in the short term. But is there going to be you know, it's interesting on a day when we heard from Cathy Wood of our convest to obviously stresses disruption innovation. You know, is there going to

be this uncomfortable pivot? Forgive me for using the p word you have to drink, but is there going to be an uncomfortable pivot at least in the public markets as we do shift away from carbon based fuels, as we move to alternative energy more e vs, because we really are turning our backs on companies that have been so much a part of our public markets in some ways, and there will be new leaders in the market. So

will there be some dislocations, some discomfort as that happens. Absolutely. Look, climate change is two words, right, the second words change, and there's going to be environmental change, but there's also going to be a lot of change in the in in business as decarbonation takes place through the global economy. There are going to be companies that are winners and companies that are losers. There's just no question about that. From an investment perspective, the key question, of course is

who's going to win is going to lose. And here it gets a challenging because in some sectors, the disruptive companies new technologies really have an advantage. I mean, just look at the auto automotive sector and Tesla. It's completely disrupted it and we so it happened to value us both in Tesla and then competitors. Some other sectors are the incumbents have big advantages. And sectors where there's a lot of regulation or big balancies are required, for example,

utility sector. You know there are companies have tried to disrupt utilies for the number of years. Now next Era took a look what's going on, starting investing heavily, and Renewables is now the largest owner of renewable energy astics in the country and more importantly, is the most valuable utility in the country today and when most valuable energy comverst utility. So, you know, picking those winners and losers. As this transition happened us the word pivot, I would

use the word transition. But this this change that's coming, it's critical. How much do you watch It's funny when Tim and I were at Milkin, was it in the spring? You know, we spent so many of our conversations talking about the private markets versus the public markets. How much do you watch what's going on, especially when it comes to disruption, innovation, that pivot that's happening as we think

about the climate. How much of what we really should be keeping an eye on is where those investments are going on in the private markets to give us an idea of who will be ultimately the leaders in the public markets in the years to come. Absolutely, the private markets where a lot of the innovation occurs, as where venture capital flows. That's where a lot of private capitalists

flowing from from mindor worth individuals. We should look at what's going look at what Bill Gates and break your energy ventures are investing, and look at what the number of the DC fonds are putting into. Figure out called climate tech and let's see, you know which which of those become the winners in the very sectors. Sectors that

would focus on green hydrogen. Whole new sector could absolutely revolutionize a lot of industries today direct or capture much risk, you're much harder, but could revolutionize the way we address climate change. And then there a whole lot of other technologies around energy storage and transportation all early stage, not competitive commercially yet with the incoment companies, but a lot of opportunity and promises. So don't make fun of I don't know riv and or like whoever is out there. Right,

we love you. No, I'm just saying no, no of you at all. But I mean there's going to be stumbles right as we make this change. Absolutely. Yeah. Look the parallel here is you know, I I teach a business school, right, and we if we go back thirty years when I graduating business school, the big thing that came and we didn't see it coming really was technology. Technology changed all businesses, and we looked at telligent. Even when we saw technology coming, it was often hard to

know which companies we're gonna win. You know, Netscape was the biggest internet company there for a while and doesn't exist anymore. Google paying along and it's still dominant. Those changes in the world of technology, and specifically digital technologies have revolutionized business in so many ways and results in a lot of a lot of change. We look forward

thirty years, that's climate change. Climate change is going to have a similar impact on businesses, and it's it's tough to predict which specific companies are going to come out on top, Bruce, Where is the drive going to come from? When you think about investors, when you think about just business risk, where you think about the government. Is this something that so that these companies are going to do on their own or does the government need to step

in and create regulations that guide them. Yes, So this is an interesting moment and the reason why I wrote the book. Now, I could have been working in second twenty years. I could have written it some years ago or waited a little longer. We're at a various moment in time here because there's multiple drivers going at once. Right, one driver is a Pisco risk. The climate change are manifesting themselves increasingly, we're seeing climate change play out physically

instead that affects people. Consumers are starting to man more sustainable products. Employees they want to work for companies they believe are sustainable. These are all real trends and there's a lot of economic researchers show that these actually effective businesses. That you've got government government stepping up more than ever.

It's it's it's not consistent particularly here with parties change, but the inflation reduction acts by far the largest government support ever in this area, and that's as big implications. And then the greatest change of all is around the innovation. So we have products like solar and winds and electric vehicles that are revolutionary and revolutionizing industries and also really

starting to bend the curve on emissions. Uh. I mean here in the US, most people don't realize we actually peaked in our greenhouse gas emissions back in two thousand seven. We actually are in a det work not nearly quickly enough. We have to be we have to accelerate this, this this transition. But this innovation and technologies is really making a big difference. So we've had a minute or so left here, and there's a line in your story with

a graphicum or a picture. Investors should climate proof their investments by mid century, in line with the recommendations of climate scientists. So I'm thinking about our investors, you know, people who are listening to this show, listening to you speak, listening to this interview. What's the takeaway at this point when they think about their investments and maybe their their strategy, their their time frame and the like. Yeah, so the the initial reactions that maybe, well, mid century is an

awfully long time. Now it's almost three decades and I'm gonna be I'm gonna be pretty old. Hope, hope, I'm still here talking to me then. But investments are priced their value on future cash flows and future expectations on the value in those assets most companies, and it's becoming increasing at parent that the world is going to decarbonize by the way, whether or not governments make it happen, is going to happen these climate change is basic physics. When you do to its going to force us to

do this. So you're looking at your your investments, think about how they're going to be affected not thirty years from now, and how they're going to get affected in the the last a couple of years as these changes really start to manifest themselves, and then reposition around that. Fascinating and I think it's just so relevant to so much going on, especially as we continue to see the impact of climate change and then think about how it plays

certainly into investing strategy. Bruce A sure, thank you so much. Hopefully we can catch up with you soon again in the future, professor of professional Practice at Clubby Business School. Check out his new book, Investing in the Era of Climate Change. Uh, it is just at