Green Alpha and Sierra Club Radio: Special Topics in the Next Economy

Recently, I had the opportunity to be interviewed for Sierra Club Radio by host Orli Cotel. I really enjoyed the chat with Orli, and I felt like she did a great job of getting at some of the key topics in the emerging next economy. She had a way of getting me to address these topics in nice, conversational terms, so I thought posting a quasi-transcript would let us air some topical, next economy banter. I say “quasi-transcript” since I didn’t actually listen to the show and take dictation, but this is pretty close to how it went, except that without the time constraints of radio, I’m elaborating a little more here. You can also hear the broadcast on Sierra Club Radio’s website, March 31, 2012 edition.

Orli Cotel: I've heard in the news that green investing might make you lose money, even if it's a good cause, can you talk about that?

Garvin Jabusch: Well, first of all, any stock investment can and usually will go both up and down in value. Any investment manager should tell you that, right up front. But no, on the contrary, with green/cleantech companies in general, and with carefully chosen portfolios of them in particular, we believe we have a far better chance of earning superior investment returns over time. For example, solar energy is the fastest growing industry in America right now, growing between 70% and 110% per year, depending on whose numbers you believe, and adding tons of jobs, yet, since their stocks have yet to catch on with many mainstream investors, their share prices remain low. So for a portfolio manager, this is a dream scenario: we’re buying into the one of the world’s fastest growing industries at unjustifiably low valuations.

And…it’s not just solar energy, it’s about the economic necessity of ideas and technologies that address our main problems. The companies that provide the best solutions to the risks that come with our new world where there’s increasing resource scarcity, a warming climate, more & more people needing more and more of everything from food to cars…it’s almost inevitable that capital will flow to these solutions, and therefore create investment returns.

Earth’s economies may stagnate or grow; either way, we believe things like renewable energy, clean transportation, sustainable infrastructure and water resources must grow in value. Over time, the value of stocks in our models will not be dependent on things like Wall Street gamesmanship, but on simple necessity.

And, as awareness of the magnitude of our growing resource-climate-security problems advances, so will the valuations of our portfolio companies.

The other reason we believe next economy investments will perform well is that the alternative is continuing, to the extent possible, the growth of the destructive, business-as-usual economy, which is based on finite fossil fuels that destroy health, damage Earth’s climate systems, and undermine our economic and physical securities. You know, the economy that caused all these problems in the first place. So, from this point of view, the green economy is not only a long-term profitable place to invest, it’s really the only place to invest if we want to continue to be able to have economic growth.

OC: What's going on with oil prices, and how do those affect the overall economy?

GJ: Oil is scary. You know, it’s back above $120 per barrel now, and that price may be too high for us to enjoy much economic growth. If you think about it, oil is in everything: we put it in our cars, of course, and it powers the great majority of shipping and transportation around the world from trans-oceanic container ships to 18-wheelers out on the interstate, but it’s also the primary ingredient in plastic, it’s instrumental in agriculture both as fertilizer and pesticides, and on and on. So what happens when the price goes from $80 per barrel to $120? It’s like a sudden 50% tax on damn near the whole economy. You know that every single recession in the last 50 years or so – including the crash of 2008 - was preceded by a spike in oil prices? And it’s no wonder, you can’t just slap a 50% premium on everything and expect the economy to be able to keep expanding. And in the past, which in this case I mean right up until the last six or seven years, what would happen was oil prices would spike, a recession would ensue, which in turn would reduce demand for oil, which would once again become cheap and thus be able to spark cheap economic expansion and the resumption of growth, recession over. But now, in our modern world where India, China and others have risen to affluence, the demand for oil just does not dry up. In this last cycle, oil only pulled back to $80, whereas back in the day, you know, the early 2000’s, it would fall to $20, $30 during a recession.

So as long as we’re over dependant on oil, we will have a very hard time really getting back to appreciable economic growth. So what’s the solution? Over and over, leading economists agree, the best way out of this economy-crushing cycle is to use less oil. And fortunately, there are lots of ways to do that, with existing technologies.

OC: You keep track of the companies evolving the technologies that will help to mitigate some of the big problems of the world, what are some of the ones you're excited about right now?

GJ: Well, speaking of using less oil, we’re excited by what’s going on with battery technology right now. Batteries that are working right now in the lab and that are close to making the leap to commercial viability promise to be as much as three times as energy dense and cost half as much. So think about that in terms of electric vehicles: soon, we’ll have EVs with 500-600 mile range that cost an appreciable chunk less than electric cars to right now. We’ve also got some investments in rapid charging infrastructure that may recharge your EV in under five minutes. So, think about it, if you can get 500 miles on a charge, for which you paid maybe 5% of what you would have paid to fill your tank, and you can recharge in a reasonable amount of time, why would you drive anything else? As this phenomenon advances, the resulting decline in oil demand will help keep oil cheap enough that it doesn’t step on our economy. Oh, and combine that with cheaper and cheaper solar panels (they fell in price 47% in 2011 alone), and soon the standard will be just to have a panel on your garage and drive essentially free indefinitely. This is the opposite of the oil problem: it frees us so much money – capital – that we’ve been spending on gas that it could spark major economic growth.

We’re also excited about – well, we’re excited by a lot of stuff – but we’re also excited by smart ways to manage, conserve and create fresh water, from smart new metering for agriculture, to purification technologies to desalinization. Smart measuring of water for farming is so cool in that it’s allowing farmers to use less water, increase crop yields and save money. That hits everything: water security, food security, population issues, and on and on.

Oh, and we love the emerging generation of LED lights. MIT has one in the lab right now that, seriously, is up to 230% efficiency. It does that by pulling some of energy it needs to light up from the heat that’s just in the ambient air. I imagine utilities won’t love a bulb that really needs very little from the grid, but everyone else will love it.

OC: What about the high-profile resignation of Greg Smith from Goldman Sachs yesterday, does that say anything about the state of the investment banking industry today?

GJ: Well, you know that when even the insiders start not only complaining about the corruption but quitting – high dollar jobs, by the way – quitting over it, that there are serious systemic problems. Greg Smith noted in his resignation editorial that Goldman now actively derides their clients, calls them “muppets” that they can control, sells them securities that Goldman knows have no value – just to get them off Goldman’s books – and refers to that as “ripping the clients’ eyes out.” Well, it’s no surprise that anyone who’s not a sociopath will struggle with working at a place like that, even if it is still, for now, the preeminent investment bank in the world.

But in an odd sort of way, this awful behavior might begin to give smaller guys like us a competitive advantage, since we’re in so many ways (not just in size!) Goldman’s complete opposite.

At Green Alpha, we sort of think of ourselves as the anti-Wall Street investing house option.

If we can speak to the millions of people who have seen the banks wreck the economy and cause foreclosures and joblessness – we have a chance to build a massive grassroots movement. All we have to do is light a match in the right place, and overwhelming public support for real investment banking will follow. And by ‘real investment banking’ I mean the old school approach to the job that investment managers are supposed to be doing: making long-term investments in necessary businesses and watching them grow.

Furthermore, we’ll do it all investing in the emerging next, green economy – which almost by definition has to grow faster in coming years than the legacy, old, fossil fuels economy, and therefore we’ll earn our clients superior investment returns over time AND we’ll be providing a conduit of capital to the green economy which will help it succeed in supplanting the old economy.

You know, it’s like Bill Clinton said the other day at his ARPA-E keynote address: “There are still too few people who intensely believe that the consequences of climate change can be calamitous, and that there are wildly profitable ways to avoid climate change." I love that, it’s so true.

Thanks Orli!

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

Note: SIERRA Club, the Sierra Club logos, and “Explore, enjoy and protect the planet” are registered trademarks of the Sierra Club.

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Green Alpha's Next Economy

The emerging green economy, green investing, and the roles of climate science, policy, and trends.