Why Green Alpha?

Garvin Jabusch, co-founder and chief investment officer, and Jeremy W. Deems, co-founder, chief financial officer, and chief operating officer, of Green Alpha® Advisors, LLC explain why they started their company.

It's a big deal to start your own company. To leave behind a regular paycheck and solid benefits, to risk your savings and future, takes a bit of fortitude (or insanity, depending on the day you ask), and understandably, most people never do it. When the business is investment management and you start it in 2007, during the beginnings of the worst global recession since the big one that began in 1929, the risks are magnified and the odds become longer. So, seriously, why do it? Why found Green Alpha?

Because it was time for an investment manager to take the long view. Time to realize that the Earth's ecological systems and economies must ultimately operate in a state of mutually tolerable equilibrium. Time to make investment decisions based on the hard realities presented by a world of finite resources, seven billion increasingly affluent people, security concerns, and a warming, erratic climate. Because the frankly banal ephemera such as LIBOR interest rates and the consumer price index that constitute the macroeconomic inputs of traditional portfolio management are short-sighted and fail utterly to contemplate a vision of the future world economy that can coexist with its host planet. We're doing this to serve as a conduit for capital to flow into the green economy: Green Alpha Advisors, LLC is our way to participate in the Next Economy, and a great way to help our clients do the same.

So, specifically, what are our macro-economic inputs? Earth science and demographics. Anything and everything that can credibly inform us about the true state of the world climatologically and socio-demographically and that can subsequently show us not only what civilization's greatest problems are but also what technologies, systems, and approaches are most likely to help mitigate those problems.

To cite just four examples of our information sources, we're huge fans of the work of James Hansen, one of the world's preeminent climate scientists, whose books and papers are required reading at Green Alpha; Bill McKibben and 350.org's vision of differing futures both above and below their eponymous atmospheric carbon totals provides guidance; we're daily (okay, hourly) readers of Joe Romm's www.climateprogress.org; and one of our favorites is Lester Brown and his Earth Policy Institute. I'll borrow a couple of examples from Brown's work to illustrate the importance of incorporating a realistic climate assessment into portfolio construction. There are, of course, hundreds of data vectors that come into play in the attempt to model the Next Economy, but the following examples hopefully will provide a high-level idea of how we get things done.

On the topic of global electricity generation, Brown provides this summary of current production sources right next to his vision of the grid we'll need in the near future to avoid the worst economic and climate problems:

Now, we may disagree with Brown on the relative merits of wind, solar, and geothermal, but the basic reality that these are the three cheapest and most abundant renewable electricity sources Earth has to offer is inescapable. So for the portfolio manager who believes civilization will ultimately do what it can to preserve itself, it's obvious that a well-selected basket of companies providing energy from these three sources has every chance of generating competitive investment returns. Realizing that these three together must jump from providing their current 4.1% of all output to 65% or more and, further, that world electricity demand will double by 2030, it's likely that the better-positioned providers of wind, solar and geothermal will experience rapid growth. If Brown's numbers are even in the ballpark, these industries will have to grow 20 to 30 times their present size within two decades. Honestly, when we hear of an analyst downgrading, for example, solar companies on short-term data like the news that Italy might suspend its solar subsidy, we just chuckle and view it as a buying opportunity.

But, of course, the world's problems are hardly limited to its current power grid. This is why our Green Alpha Next Economy Index (GANEX) seeks investments in all sectors where climate and population solutions can be found. So, what about the water/food nexus? Here, we are warned that climate change is decreasing supplies while population growth and rising affluence are increasing demand:

If heat, drought, over-plowing, and a growing population are putting pressures on food and water, where will we turn for remedies? Where should the prudent investment manager place his clients' assets? Well, the depletion of aquifers Brown refers to can't be solved in itself, as aquifers take centuries to regenerate, so we'll have to be conservative with the water we do have and, simply, make more fresh water. A lot more. This has led us to seek out the best names in desalinization technology and implementation and also to look for companies providing smart metering of freshwater flows, which allows farmers and other heavy users to reduce their consumption without affecting yields or output. Finally, it might also make sense to invest where folks have developed approaches to help crops thrive in warmer, drier climates.

Not all solutions are created equal. Sometimes a seemingly good idea can have unintended negative consequences. Here's a slide from Brown on biofuels:

 

Clearly, even though they provide a lower-carbon, cleaner, and more-secure alternative to fossil fuels, biofuels made from food crops are not a great long-term solution in a world adding 80 million new people every year. From an investment-management point of view, then, we think it's better to focus on alternatives such as transportation (e.g. electric cars) that don't require liquid fuel at all, and on biofuels (such as algae-based) that don't compete with food, or even with arable land.

The Earth is changing. We, civilization, have been the agents of that change. It is within civilization's technological reach to mitigate the more dangerous of these changes before they come back to threaten us and our way of life. We believe that as the worst effects of these changes become apparent, people will increasingly clamor for solutions, and capital will flow into the sectors, industries, and companies capable of delivering true solutions.

Green innovation, as we define it, is the biggest opportunity since the invention of the steam engine kicked off the industrial revolution. It is the next wave of innovation, and it should dwarf prior waves in terms of value generated, jobs created, and impact on civilization and the planet. The asset-management industry, like many, is largely stuck in the old, business-as-usual economy. "Innovation" in this industry has traditionally been new structures and strategies that are just different versions of the same general-asset classes and models, defined by a focus on short-term time horizons and ignoring critical macro factors beyond traditional financial metrics.

What makes Green Alpha unique is a wide picture of the planet and its culture and economics viewed in detail, but as a coherent whole. This is something that's been missing from investment management, and it is fundamental to Green Alpha's reason for being. Nothing is more exciting than creating something from nothing. Green Alpha is pushing the traditional boundaries of investing, yes, at one of the worst economic times in history, but also at the brink of the biggest wave of innovation civilization has ever seen.

We started Green Alpha Advisors to create a company for people who love what they do: To create a place where people are happy to work, innovate, and thrive… to truly make a difference in the lives of our clients, employees, partners, and planet. And, finally, we are starting it from scratch. There are no previous clients to move with you when you are inventing a new strategy. What's more entrepreneurial than that? Green Alpha gives investors the opportunity to conclude that what we believe in and stand for is a better investment model than what they have had, or than what "business as usual" can offer.

Garvin Jabusch and Jeremy W. Deems are the cofounders of Green Alpha Advisors, LLC, which manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.

Comments

[Portfolio Analysis]

Thanks, will definitely keep an eye out on this sector.

[LaRoy and Mary Seaver1]

For one who is concerned about the welfare of the planet and its people and had tried to be a socially conscious investor, Green Alpha is exciting news.