The Evolution of a Sustainability Investor

Rick Borden

October 15, 2021

I admit, unapologetically, to being a life-long tree-hugging environmentalist. It probably started on the day of a high school basketball game in Claremont, California in 1963 when there was so much smog in the gym that you couldn’t see clearly from one end of the court to the other. Or, by contrast, the summers I spent at Echo Lake, up near Tahoe, where the sky and the water are so unbelievably clear. In 1992, I read a book What Goes Up by John Nance, subtitled “The Global Assault on Our Atmosphere”. I am convinced to this day that if everyone had read that book, the debate about climate change would have been over long ago.

In the late 90’s I drove an EV1 – the electric car developed (and later killed) by GM, and I thought it was the coolest car I had ever driven. When Toyota came out with the first Prius in 1999, I sold my Porsche and got one as soon as I confirmed that my golf clubs would fit in the trunk. I bought another one in 2005 and drove it until Toyota came out with the fuel cell car, the Mirai, which runs on hydrogen and emits only water from the tailpipe. I’m now on my second Mirai. (Elon doesn’t think hydrogen makes any sense, but maybe he’ll finally be wrong on something.) It’s a phenomenal car.

So, I have my environmentally responsible car and I recycle, but I have no illusions that I am going to save the planet. And it seems to me that the world is so politically polarized that hoping for government-mandated solutions to global warming is a triumph of optimism over common sense. But I’m not discouraged. I’m a capitalist. And it is becoming clearer every day that the corporations of the world are waking up to the fact that their customers, employees, and investors are demanding that they manage their businesses sustainably.

Wall Street, never shy about creating new vehicles to soak up investor dollars, has blown up sustainable investing. Major firms – Black Rock, CIBC, Vanguard, Dimensional -- have all made enormous commitments. I believe that, at this stage of the development, focus is critical. ESG (Environmental, Social and Governance), SRI (Socially Responsible Investing), and Impact Investing comprise too broad and fragmented a landscape, with too many different organizations scoring the game. SRI and Impact investing, by definition, subjugate investment returns to mission. The Social part of ESG requires too much subjectivity. Even getting consensus on scoring Governance is difficult; fund managers attain high governance scores by voting indiscriminately for any shareholder petition with “sustainable” in the title.

We have chosen to focus on the “E”. Reporting on Greenhouse Gas Emissions is growing every day. It is now required in Europe but in the U.S., we are relying upon relentless persuasion. This is one of the main reasons that it’s so important to invest sustainably. I believe that we can have a far greater impact in the war on global warming by deploying our money into sustainable investments than into Teslas. But the challenge, as always in investing, is sorting through all of Wall Street’s bullshit, hype and fees to find the promised land where you can maximize your risk-adjusted returns and minimize the greenhouse gas emissions of your portfolio at the same time. The good news is that the evidence to date suggests that properly-constructed sustainable portfolios can track the performance of their smoggy counterparts very closely – or in fact beat them.

19 years of history: Dimensional’s U.S. Sustainable Core 1 vs. U.S. Core 1

And the reduction of GGE is substantial: Dimensional’s analysis shows a roughly 80% reduction in greenhouse gas emission intensity from the companies they include in their U.S. Sustainable Core Portfolio vs. the portfolio companies in the Russell 3000. These kinds of funds are compelling and effective.

And then there’s the opportunity. In my mind, the most exciting technology of the next 25 years will be in the fields of carbon emission mitigation and carbon capture – removing carbon from the atmosphere. We will figure this out. Check out this presentation by Bill Gross of Idealab. He describes it as the “Trillion Dollar Opportunity”. I’m a passive investor. But as time goes on, I expect that the adventure of the Trillion Dollar Opportunity will beckon for my racetrack money.