Welcome back to The Green Investor powered by in Investopedia. This week, we're taking a look at the misconceptions and confusion surrounding environmentally sustainable investing, which has led to some recent backlash against environmental, social, and governance (ESG) funds. The U.S. Securities and Exchange Commission (SEC) has begun its efforts to update reporting requirements for issuers to consistently disclose comparable and reliable information on climate change. The SEC may request explanations of any differences between a company SEC filings and its corporate social responsibility or ESG report. Over time this may lead public companies to expand the scope of their SEC filings, which could be a big win for ESG investors who rely on these public disclosures to choose their investments.
As investors and consumers continue to look for ways to use their money to combat climate change, companies and workplaces are moving quickly to capitalize on their needs. Following the lead of successful green energy companies like Tesla, Ford and GM, the largest automakers in the U.S., have already both pledged to have all electric fleets by 2035. Shares of Ford are up more than 120% year to date, while shares of GM are up about 35%, and shares of Tesla are up about 26%. On the regulatory front, keep an eye out in early 2022 for movement on the Department of Labor's new proposed rule that should make it easier for employees to offer more ESG investing options in their workplace retirement plans. If the rule is finalized, more investment managers may consider ESG risks as part of the effort to maximize long-term risk adjusted returns.
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Meet the Host
Caleb Silver, Investopedia's Editor in Chief, will be bringing you this podcast on Thursdays every two weeks. Caleb is a business journalist with more than 25 years of experience. He has led Investopedia since 2016. Previously he worked at CNN and Bloomberg, and he did work as a film producer. He got his start producing environmental educational videos and documentaries in New Mexico and South America.
Meet David Callaway
David Callaway is an award-winning journalist and media executive with nearly 30 years of experience and a long-standing interest in climate change. As founder and editor-in-chief of Callaway Climate Insights, David focuses his publication’s reporting on the intersection of financial markets and environmental challenges.
What's in This Episode?
It's hard to put a real number on the size of the problem created by climate change. But if you look at the amount of money the world's banks, insurance companies, and asset managers currently have tied up in the fossil fuel industry, it comes to a staggering $22 trillion. Fossil fuel companies are major contributors to climate change on the one hand, but their assets and investments are also at major risk and the investment risk they pose to investors is also massive.
How this dynamic plays out is the question of the next decade, and David Callaway, our guest this week, has been studying this closely. He's a business journalist and executive as well as the founder and creator of the Callaway Climate Insights Newsletter and Substack. Welcome to The Green Investor, David.
"David, you're a business journalist. You're a news executive. You've had stints as the president of thestreet.com. You're the editor-in-chief of USA Today. What led you to covering climate change and the creation of your newsletter?"
"Well, Caleb, I've always been interested in climate change. I've always been interested in extreme weather and environmental extremism, that type of stuff. In my various editing & reporting positions, we did projects around it and I thought it was fascinating. I came to notice about five or six years ago that the media just wasn't really doing a great job of covering climate change. We couldn't get past collectively the political dispute over whether it existed or not.
"So after we sold my last company, I started to look at what did I want to do next. Running another big company or being involved in another big M&A deal, it just didn't seem as exciting anymore, but I was interested in this climate thing. And I thought 'let's just assume the climate change is going to happen no matter whose fault it is and let's cover the business of adapting and what they call mitigation of climate change, because it's already here.' You've seen the disasters that we've had, the cold snap in Texas, the hurricanes, the tornadoes, the wildfires.
"It's already here. How are we going to deal with it? There's a business growing around that and it's called... It has that phrase, ESG, environmental, social, and governance kind of wrapped into everything, but not a lot of folks were covering it in that way. I started Callaway Climate Insights kind of right around the time COVID-19 hit in 2020. I thought this is the perfect time to really get into this subject while everyone's locked down and start a little business. And it's been fascinating.
"I mean, in the last 18 months, I've developed a whole new universe of sources and experts and people that I do business with. It's been all from my beautiful world headquarters here outside of San Francisco."
The Green Investor podcast is for informational and educational purposes only and does not constitute investment advice. We will not make recommendations to buy, sell, or hold a particular security or asset, although we may discuss financial products with our guests. Some of our guests may invest in securities mentioned on this podcast. Some of our guests may sell or market securities mentioned on this podcast, but all listeners should do their own research or consult with a financial advisor or broker before making any investment decisions.
"Like any good business journalist, David, you follow the money and the money's been pouring into ESG, SRI, climate tech, climate finance over the past decade, but it's still so misunderstood by investors. What are the biggest misconceptions most investors have about these themes?"
"One of the biggest things you kind of hit on in your intro is that if we just stopped producing oil and coal and using them to make electricity then everything would be better. You hit it right on the head. There's $22 trillion in fossil fuel assets in the world's banks and insurance companies and outstanding loans in fund management companies. You can't just shut that off. A $22 trillion hole in the world economy would blow things up a lot more than COVID-19 certainly has. I think that's one of the misconceptions that this is just an easy fix, right?
"'If only we could convince the evil fossil fuel executives to just stop or convince the evil banks not to invest in them.' That's one of the biggest misconceptions and we see it over and over again at these giant climate summits, like the one we had recently in Glasgow, where everyone's outside protesting. It's going to be much trickier, Caleb. They call it a fossil fuel transition for a reason. We have to move fast because of the dangers of climate change, but not so fast that we're going to upend the world's economy with this transition to renewable energy.
"Renewable energy costs are generally coming down. Fossil fuel costs are going up. At some point, economics takes over and we will have a transition, but we have to make sure it happens cleanly. The other big misconception, I think, Caleb, that people have is that by just investing in an ESG fund or an ESG exchange traded fund that they're contributing to cleaning up the world from climate change, right? These funds are marketed products. There's hundreds of them, maybe thousands. Mutual fund managers are not stupid people.
"They've sensed the world moving into this direction and they've adapted by introducing new products to sell to us, and so all these products are different—how they look at green finance, how they look at climate change, whether they're even focused on climate change. I mean, many of these funds have oil companies in them. Each fund director, each marketing director can make their own argument over why Amazon should be in that fund or why Exxon should be in that fund or why the car companies, the major polluters should be in the fund. Investors need to really be careful.
"They need to establish what they want to achieve. Do they want to make money? Okay. These funds have done pretty well. Do they want to save the world and clean up climate change? You're going to have to look a little harder to find funds that really hit all those boxes."
"Well, there's been a big backlash of late against ESG and some of the firms that create those ratings for stocks. There are some accusations of greenwashing or that the ESG ratings are really only about the company's bottom line, not about the contribution they're making to reducing climate change. This is bubbling up right now. You would expect that in this industry, which is, again, going through that evolution, not revolution. But what's missing in the conversation, David, about ESG? Is it about that impact, or is it about what companies can get away with? What do you feel like we need to have in place there?"
"I think what we really... You mentioned a couple of previous iterations of ESG in your introduction. SRI, for instance, socially responsible investing, right? These acronyms change over time and the reason they do is because they're all poor acronyms for what we're talking about. And ESG may be the poorest of all. I mean, think about it, environmental, all right, that's something that has to do with the environment. Social, that can be anything. That can be anything from smoking cigarettes to wearing masks in public. Governance is generally kind of defined as corporate governance.
"That's diversity in the boardroom, in your executive ranks, equal pay. Almost anything lumps into this ESG box. The confusion that comes from that is inevitable, as you said. Everybody jumped on the bandwagon, introduced their own funds, their own investment products. Nobody knows what they really are. One of the things that has to change is we need a tighter definition of what investors are looking to do. And in general, people that are investing in ESG funds are mostly looking to have some sort of environmental impact and to contribute to that.
"I foresee as this matures, the fund industry swings like a pendulum. Everybody jumps in and then the backlash happens, the funds stop selling as well and they're going to start to come out with more focused funds, which will have hopefully better descriptive names of what these do. The ones that I think focus on the entrepreneurs who are coming up with ideas to clean up the world—from taking plastics out of the ocean, to carbon out of the air, to sustainable fashion—these are the kind of companies that are going to drive the sales of these more focused funds you in the future.
"And that's what investors will be looking for. Because right now most ESG funds are simply FANG stocks under another description."
"Right, we were saying in episode one that some of the top 10 holdings look a lot like the NASDAQ 100 or the S&P 500 with the biggest companies in the world. You know why the returns are good? Because they've been following the whales. What do you make of the massive multi-trillion dollar asset managers like BlackRock and their ESG in sustainability commitments? We know that's been a big deal especially for Larry Fink, the chairman and CEO of BlackRock, but you see other firms doing it too. Again, that is going to where the money is or where they think young money wants to go.
"But when they make a commitment the size or the scale of a BlackRock or another company like that, does it mean as much as it sounds like?"
"I've covered these fund managers for a long time. Maybe it's because I'm close to them and you know them too, but I don't look upon them as just evil money grubbing people. Some of them maybe. But I take Larry Fink for his word when he says we need to do something. And I think part of that is driven from what we just discussed, from a desire to launch new investment products and bring in new customers and prepare a new generation of customers. A lot of it, I think, comes from concern about risk. BlackRock is arguably the biggest asset holder in the world.
"Maybe Norway Oil Fund is bigger, but they carry a lot of risk in some of these companies that they're holding. They take a lot of abuse for it because they're passive fund managers in many cases, and so they own everything, which includes the fossil fuel companies. But I take them at their word. When I see that they go in there and they actually have negotiations and discussions with some of their holdings and try to influence proxy votes and stuff, I think that we're moving in the right direction. Maybe not fast enough.
"But I think the more you see people like Larry Fink become active in the debate, you'll start to see other financial leaders, especially younger ones, take on that challenge as well."
"I think you're 100% right. Risk is what drives their business one way or the other, so they have a lot of money at risk. As investors or those who part with BlackRock who are our clients, they have that risk as well. But I think that drives a lot of it. But also I think there is something to be said for 'skate to where the puck is going,' and this is where young money wants to go. Venture capital, David, as you know, has been pouring hundreds of billions of dollars into climate tech and finance. Where's the big money going and who's behind that money?"
"Well, I tell you, it's interesting, Caleb. A lot of that money in 2020 was going into battery storage and battery capacity. The idea, can we build better, longer lasting batteries for the expected electric car revolution? Battery companies are a little bit like the biotech companies of the 1980s and '90s when we were young journalists. They're always working on something really sexy and you never really see it develop except in a few cases. A lot of venture money is in battery companies. There are some good ones out there, at least it sound like they're doing stuff.
"They haven't had a great year this year. The money that's going into VC this year has been in carbon storage. Companies that are sucking carbon out of the air and storing it in the ground or making products like plastics and stuff from carbon are drawing a lot of money. It's a little bit confusing to me. I mean, there must be at least three dozen of them I saw on a spreadsheet recently, and they're all getting tons of money from VCs. And none of them have a product that actually does what they say on the scale needed to deal with climate change.
"One fund manager told me recently that if you added up all of these carbon companies that the VC money's gone into... and we're trying to limit the temperature rise in the world to 1.5 or 2%, there's a danger that the way we are going now, it's going to get to 2.7%, which is too hot and will lead to more disasters. But this guy said if you sucked all the carbon out that these companies say they can do, it would come to less than one-tenth of 1% of what we need to do to kind of get the temperature lower. But that said, that's where the VC money's going.
"These guys, they're practiced at throwing money at 20 different companies and hoping one hits big, and then they're profitable. That seems to be the play de jure, at least of 2021."
"What about the companies that are funding? Is this the big Silicon Valley VC firms that we all know about from Internet 1.0 and 2.0, the Andreessen Horowitz's and the Sequoia's and the Kleiner's, or is this a new crop of venture capital firms that has come to this sector in search of those returns?"
"It is a new crop. You don't see the Kleiner's and the Andreessen Horowitz's as much in this game as before. For the most part, they're still kind of doing the old school tech and stuff like that—what we call old school at least. It's breakthrough energy ventures, the Bill Gates product prelude. There's a bunch of different ones out there that are relatively new and they're smaller funds. They're in the hundreds of millions of dollars or so, maybe billions, but not massive like Kleiner. In large part, they are put together by very a wealthy philanthropist.
"Some of them from Internet Tech 1.0 who made all their money and are looking to do something in the climate change space. Bill Gates is a big part of it, Elon Musk, Jeff Bezos. A lot of these folks are contributing huge amounts of money to these funds to find the next big thing, whether it be carbon storage or battery storage or electric vehicles or what have you. It's going to be interesting because some of this stuff will stick. When you look at where we were 15 years ago, there was kind of a burst of money poured into what they called then clean tech companies.
"And for the most part, the financial crisis of 2007 and '08 blew that out of the water. But some of those companies survived and they're some of the solar companies that are big now, Techwell and Electric. Tesla was one of them. Sun Power, one of them, big solar company. Even though most people look back on that era as a bust for clean tech, the survivors are doing great. And we will see... you could argue that the markets are heading into a rough patch. I certainly think they are in 2022. We may see a lot of the sheen come off the ESG story because of that, and the survivors will be the ones that you want to pick up when those clouds have passed."
- ESG stands for environmental, social, and governance criteria that are a set of standards for a company's operations that socially-conscious investors use to screen potential investments.
- SRI stands for Socially Responsible Investing, and it is essentially the practice of investing in companies that are considered socially responsible.
- Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.
"Which countries, David, are leading the charge and turn of investment in terms of the growth of these types of firms? Because those of us living in the U.S. get a little U.S. centric when we're looking at the companies on our stock exchanges or in our private markets. But I know this is a global thing and there's money all over the world pouring into some of these solutions."
"Yeah. Regionally Europe is ahead of everybody. They care more. They're more focused on it. The EU government is way ahead of the U.S. and certainly of Japan, China, and a lot of Asia in terms of new regulations designed to help reduce global warming. Not surprisingly, I think you've seen a lot of the activity in some of those countries in Europe. They're way ahead in wind power, for instance. Spain's Iberdrola is one big example. Ørsted in Denmark is another big example. Vestas Wind Systems also in Denmark, I think. Siemens Energy in Germany.
"These are guys who are making huge progress in wind, and they're doing a lot of it in kind of the North Sea and up above in Scandinavia. As the U.S. begins to move into wind, we're way behind. Biden's administration approved two projects this year: one in Massachusetts, one in Rhode Island. As we begin to experiment with wind energy, those European companies are going to get all the contracts. Any kind of fund or any investor that really wants to look to have an international component would want to look to Europe at least for wind. In solar, I think the U.S. is holding its own a lot better.
"In electric vehicles, I mean, you can go all over, right? China's got some great companies. NIO, for instance. We've got Tesla here and all the ones that went public via SPAC or IPO—Rivian, Fisker, Nickel, all those guys. But my gut tells me that if I'm playing the electric vehicle game, I'm betting on the big boys. The guys that know how to make cars. Rivian is going to miss its production goals of a thousand cars by December 31."
"They have plenty of money. They have Amazon money. They got Bezos' money. They got all the money in the world."
"Ford makes 100,000 cars a month or something like that. These guys, Ford, GM, Volkswagen in Germany, they are pumping tons of money into retooling their plants to do electric. To me as an investor, when I see that type of money going in that type of CapEx, that just says these guys are serious. This isn't just a 'let's go public in a SPAC and see how high we could push our stock.' This is retooling for a new era."
"Right. And for the legacy automakers, there was no choice. There is no choice. Go electric or go home, and we're talking about a hundred-year-old companies here who had basically bet the farm and made promises to be all electric in the next five, 10 to 15 years. It was either do it or fold to Tesla. I wanted to ask you about the Tesla effect because it didn't just get here. Obviously the company's been around for a while. Elon Musk has been on the scene for quite a while.
"But the Tesla effect, especially coming out of the last crisis and when Tesla really started to gain some momentum, how big of a watershed moment was that not just for the EV market but for green investing in general, especially given how big that company's gotten?"
"It's a good question, Caleb, and I think Tesla is a really interesting story because I don't think any of the hype and sexiness about Tesla has to do with the fact that it's green energy. It is a cool looking car with a hell of a lot of pickup that drives really well and that everybody wants to get. The fact that it runs on electricity is an added bonus. It is a wild stock that sometimes seems to go straight up, that goes down well too, but it has made thousands of investors extremely wealthy. It's run by a celebrity CEO. Like him or hate him, everybody listens to everything he says.
"It's a great example of how investors... These companies that are going to be successful are not going to be successful because they're going green. They're going to be successful because they're making cool products, and they're going to be successful because they've got hot stocks and popular CEOs, and then all the reasons that companies have always been successful, right? Investors who were looking, saying, 'I want to invest to have an impact in saving the world,' that's great, but there is opportunity here to have that impact and get in on the next Amazon or the next Google.
"It's really interesting. Tesla was the first company that showed that. Now everybody wants to be Tesla and Tesla's got a huge lead. Not as big as if you get Ford and GM, Volkswagen retooling, they're quickly going to catch Tesla's capacity. But right now, Tesla's looking like it's in a good spot."
"For investors in general, especially folks who are kind of new to this or want to get into it, what do you suggest as the pathway in so they can actually invest along with their environmental conscience or beliefs in the purest way possible? I know that's a really hard question to answer because there are so many funds, index funds, and ETFs, cloaked in the ESG, SRI, or impact label that may not represent where they want to go. Do they have to go single stock selection or are there easier ways to do this?"
"Well, single stock selection has the most homework, but it is the cleanest way to do it. There's a growing data business tied around these funds that will rate them. If you go to Morningstar, you can get ratings of ESG funds and those guys do your homework for you. They'll tell you which ones have this impact, which ones have that impact. They'll give you a better idea what's in them so you can screen out. If you use a screener on any of the big sites, Fidelity or Vanguard, Morningstar, you can screen out funds with fossil fuels and stuff like that.
"You got to do a little homework. Don't just buy an ESG fund because your broker says you should do it or because that's where your 401(k) is and that they're offering an ESG fund. The performance of these, like you said before, a lot of them are riding the NASDAQ 100, so they're going to be up and down. NASDAQ 100 is having a rough couple of weeks now. There's going to be a clearing out of ESG funds coming in 2022, and the cream will rise to the top. You should be able to find that using very basic stock screeners and fund screeners."
"It's never been easier, but you do have to do some homework, especially if you want it your way. David, it's hard to predict climate and its economic impacts, but what will be in your estimation the dominant themes for investors to focus on in 2022?"
"That's a great question. Well, the electric vehicle revolution is real and everything that goes along with that, from batteries to charging stations. This is real and it's coming. That's going to remain a major theme. I think we're going to start to move a little bit more into places that investors haven't looked before, kind of like food and agriculture. We've had Beyond Meat, for instance, and stuff like that, but I think you're going to start to see more companies tied into that, which is important. Water companies.
"There's only a few funds that invest in water right now and water security and they're really interesting because water is going to be a key thing. I'm in here in California, right? And we've just had some rain so everybody's doing rain dances and is happy. But we were rationing water most of the year in drought conditions. Rivers are running dry. As that goes on globally in Africa, South America, you're going to start to see more migration. It's all going to be around the water story. Investors who kind of want to get in on where the world is going and global warming should look at the water sector."
"Right. And I think you're right, that will lead to climate migration. It already has. It will lead to all kinds of natural disasters we haven't banked on. You have the drought in some areas and you have flooding in others, and that is climate change in the 21st century. David Callaway, the founder of the Callaway Climate Insights Letter. Follow David on social media and check out the Insights Letter on David's Substack. Thank you so much, David Callaway, for joining The Green Investor. So good to have you here."
"Happy to be here. Thanks for having me, Caleb."