Innovation and increasing economic efficiency have always been the keys to profits and wealth. Getting more value out of systems without commensurate increases in inputs is the definition of growing efficiency, and it has been the engine of human economies since someone figured out how to use energy from a water wheel to grind grain instead of doing it by hand with a stone bowl and pestle. With that development (to simplify), a couple family members could run the wheel, freeing up everyone else for other pursuits. This kind of gain is the hallmark, to greater and lesser degrees, of new economies. Many times, the extra bandwidth is used experimenting with the next innovation, and in due course, old tech is replaced with new. When James Watt came up with the steam engine, a few individuals could grind the grain for a whole village, and innovation really began to boom. Trains, internal combustion, electricity, chemicals, and thousands of other efficiency-gaining technologies and techniques emerged in rapid succession. In our own time, the pace has only increased. The advent of computers and more importantly networks means we can in weeks or even days develop, test, share, refine and actualize new tech and ideas that would have taken years or even decades as recently as our grandparents’ time.
These efficiency leaps, with their ever increasing power to do more, faster, with less, are the causes of excess output. They come from real-world observation, trial and error, cause and effect. Applied science, in short, is the source of wealth.
At Green Alpha, this is where we start the process of building portfolios, by seeking the new drivers of efficiencies and wealth. Our approach asks, ‘what are the key, game changing innovations emerging now? Of these, which will be in the most demand? Which will be instrumental in addressing our emerging challenges around resource constraints, 9 billion people in the next 28 years, and a warming climate with far more extreme weather events? Which are being deployed most profitably and with the best growth rates?’
We look for companies whose businesses live at the intersection of all these. Because one thing is certain: capital flows – as it always has throughout history – to the best new innovations creating greater economic efficiency. This is especially true when there are overriding needs in addition to wealth creation driving new innovation. We believe our portfolios have outstanding chances of very competitive returns over time because they benefit from the two most powerful tailwinds in human economies: efficiency driven innovation and a critical need for solutions to pressing issues. It’s about identifying solutions and seizing opportunities.
‘Gains in economic productivity’ speaks for itself; the technologies may be new, but the process is ancient. For the other driver, ‘solving key problems’, we identify three key subtopics that are the major, global, macroeconomic conditions currently prevailing:
1) sustainable restructuring for reinvigorated growth of the U.S. and world economies,
2) energy and national security, and
3) economy-threatening climate change
Together, these make a strong case for investing in the best companies leading the way to a next, eco-sustainable, minimal-carbon future economy. By 'next economy,' we refer to the economy as it can function to minimize emerging risks. Our models reflect an economy that maintains security and comfort for society while remaining within the boundaries of what earth’s systems can both provide and tolerate. Far more than investing only in renewable energy solutions, this means looking for opportunities throughout the economy such as in water, smart grid technologies, basic materials research, agricultural improvements, forestry, sustainable commerce, zero-carbon transportation, and so on. All these things are connected; solving for one issue type doesn't make sense when confronted with multi-part problems. Eco-efficiency has become an inherent part of risk and return for businesses regardless of enterprise size or economic sector of activity, and transition to an eco-efficient economy is the only viable path for global financial health. Investing in companies of this next economy is the clearest path to long-term capital appreciation and competitive portfolio performance.
This may all seem obvious. But there are some in this world, primarily those who make fortunes running the old, inefficient technologies of the 19th century (fossil fuels are the prime but by no means only example) who’d like us to believe that we live in the best of all possible worlds, that our technologies are great as they are, that any new innovations should be limited to new, expanded uses and dissemination of their products (e.g., development of the Keystone XL Pipeline). Further, they’d like us to believe there are no climate, population or resource issues on earth today, or, to the extent that there are, that they can be solved with some increase of their old timey technology.
Unfortunately for the people who promote this point of view, it flies in the face of science and objective reality. So, they’re playing the only card they have: a campaign to discredit science and even reality itself (here’s just one of thousands of good recent posts on this). Then, to make it appear that their anti-science position is credible, they portray that position as a legitimate side that must be considered by anyone who thinks of themselves as a reasonable, open-minded centrist.
To be truly centrist is to take the best of both sides, define your philosophy and make your own (as opposed to an authority figure's) decisions based on what you think is right. It's a reasonable approach to living an honest life on your own terms. But in the world we live in now, to claim we need more debate on topics like global warming, scarce resources, income inequality and the policy prostitution resulting from Citizens United is to be complicit in burying the truth. To meet liars, thieves and oligarchs half way is, in the U.S. plutocracy, nothing more than pandering. Or call it fear to speak truth to power, or going along to get along. The problem is that it's a lie. Meeting a lie half way validates it. If someone tells you it’s nighttime at noon, agreeing to debate the subject doesn’t make you centrist or fair, it perpetuates their delusion. There is no reality now wherein warming can be debated or where unlimited burning of fossil fuels can be ‘centrist.’ I understand it can be hard to see positive innovation when there are those who believe that doubting the word of our plutocrats is anti-American, scary and dangerous to our way of life. But, strange as it may seem to some, authority sometimes only has its own best interests in mind. And yes, Citizens United, allowing as it does unlimited contributions to policymakers, is fundamental since policy now follows dollars rather than the best interests of citizens. Parties in America rarely discuss climate because most politicians are afraid to contradict their paymasters, and fossil fuels are the big gorillas when it comes to super-PAC donations. As the richest companies in history, they would be.
But there is a growing crowd, led by some of the most successful businesspeople alive, who see a better world and who are not afraid to invest in it. The myth that the next wave of human innovation has to wait until later while we continue to enrich the fossil fuel bosses is just that, a myth. And it’s stalling progress.
Facts matter. Global warming is real. Evolution, to bring up another doubted fact, is real. If even one of the tens of millions of fossils formed over the last 3.5 billion years of evolution was out of place in its developmental sequence, we could have the ‘it’s just a theory’ conversation, but not one ever has been. Genetic relationships between species prove evolution’s reality even more convincingly than fossils do. All rational evidence one can cite point to the truth of evolution. Common, everyday horse-sense observation shows us that. I’m amazed that some anti-science folks have no problem understanding that wolves and Chihuahuas are related, but fail to see chimpanzees and humans could possibly have had a common ancestor.
The ‘observe, verify and repeat’ approach of science works to explain the world. It's the only thing ever to adequately, reliably and repeatedly help us understand our surroundings and allow us to make more of them. To reject what are by now the basic, undeniable, repeated, objectively demonstrable truths of global warming and evolution is to deny reality. To hold a conviction that repeated scientific conclusion is fraud also means rejecting manifestations of science such as medicine. Evolution is the grand unifying theory of biology, and much of what we know of human health care is the result of what we've learned in the realization of how life takes shape. Yet rare is the ideologue that rejects medicine.
Science now tells us that it is earth’s systems that provide the underpinnings of the human economy. Civilization has now reached a scale where it has begun to threaten the stability of those underpinnings, and we need to adapt. Our economies must evolve to be able to provide us a high standard of living without risking dangerous disruptions from climate and depleted resources.
Similarly, global macro economics informs us that global warming, resource scarcity and all their attendant problems are real and looming, and that running our economies while cooking ourselves and recklessly depleting our ultimate economic underpinnings is not going to work. You go to the doctor if you’re ill, and we change our economics when our economies are threatened.
Fortunately, to greatly improve our means of economic production we need merely embrace the next, now emerging wave of human innovation. Improving efficiencies - getting more out of less - is what people do. From the time we domesticated fire right up through today we've been getting more and more out of less and less. Today is no different. We don't need to rely on things like coal and natural gas electricity plants any more than the developers of the first coal plant needed to rely on their old water wheel. We've moved on. Let's act like humans and capitalize on it.
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."