Sustainable Investing in Energy, Electric Vehicles, and More

More than 90% of S&P 500 companies publish sustainability reports. But what's real and what's just greenwashing? Bruce Usher is a professor at Columbia Business School and the author of Investing in the Era of Climate Change. Motley Fool analysts Maria Gallagher and Alyce Lomax talked with Usher about:

• Opportunities in sustainable investing.
• Renewable energy technology.
• How electric vehicles can help solve green energy's intermittency problem.

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This video was recorded on October 16, 2022.

Bruce Usher: The most dramatic growth and electric vehicles is not the US or Europe. It's in developing countries already, and mostly around two wheelers and three wheelers. That's where it's being used. In some countries today over 90 percent of two wheelers and three wheelers are electric today and four wheelers traditional automobiles are rapidly catching up. Why? Because they're more efficient vehicle to drive and they're better to drive and they're cheaper to drive. Those cost advantages are really reflected in developing countries.

Chris Hill: I'm Chris Hill and that's Bruce Usher, professor at Columbia Business School and author of the recently released book, Investing in the Era of Climate Change. Maria Gallagher and Alyce Lomax caught up with Usher to talk about renewable energy technology, the opportunities and challenges in sustainable investing, and one under-the-radar benefit of electric cars.

Maria Gallagher: To get started as someone who started in a more traditional finance route, how did you pivot into a more sustainable investing mindset?

Bruce Usher: My background wasn't just on finance, I worked initially in Tokyo and then here in New York and Wall Street. I pivoted just up 2002 I had the opportunity to join a small company that was investing in climate change projects in developing countries all over the world. What was interesting about 2002 and I didn't recognize at the time was that in fact there was very little to invest in. That's what's changed in the last 20 years. I think people are unaware of just how dramatic the change has been 20 years ago. We're well aware of the challenge of climate change. The science was already pretty good 20 years ago, but what we didn't have were any solutions to actually decarbonize global economy. There was no way we could have done it at any reasonable cost.

Today we're in a dramatically different situation from renewable energy, which is the cheapest form of power in many countries in the world today if not all countries, electric vehicles which are preferred vehicle from any drivers at better car, to other more exotic solutions like green hydrogen. There's lot of technologies out there, many of them are commercial. In fact, if you just look at what's commercial today, that gets us about halfway to what's called net zero. It's about halfway to reducing emissions we need to reduce to avoid catastrophic climate change. That's how I got into this sector 20 years ago from the financial industry and actually why I'm still in it because it's actually a far more attractive place to be today.

Maria Gallagher: Something that I loved reading your book is it's basically as you're talking about a primer on the existing technologies and the challenges that all of these technologies face and how we need to scale them, what is a renewable energy that you're really excited about and where do you see that going in the next 5-10 years?

Bruce Usher: Let me just start with this, the boring stuff which is renewable, wind and solar. I say it's boring because it's already at scale. It's the fastest-growing source of power on the planet, not just here in the US. It's already highly competitive with fossil fuels, with any other form of power generation today. But as if from an investor's perspective, it's very attractive because it's so well-known. Technology is very stable. It's very long-term. Investors can make very long-term, very stable investments. Particularly given all the market volatility we're all facing today, that investment, those kind of returns are attractive. They're low returns, but they're very low-risk as well. I think so that's an attractive area to be focusing on. Electric vehicles are a little more challenging because what electric vehicle demand is growing dramatically, very exciting space. We're still short of some charging infrastructure, there's still a lot of questions about how that growth is going to continue to accelerate.

From an investment perspective of this opportunity, there's challenges and is challenges around which companies are going to dominate those sectors as well, Is Tesla going to continue staying in the lead or will GM or Ford or other companies that really committed to it are they're going to be catching up? I think of the then are riskier, but far more exciting technologies. Green hydrogen probably leads to list at this point because is using renewable energy, which is as I mentioned a moment ago, very cheap and scale to produce hydrogen. Hydrogen is a really useful gas and industrial application, also for heating, for transportation, and so there's enormous potential for the gas but the cost today is still too high, it's uncompetitive with fossil fuels today and the infrastructure is lacking. Lot of challenges to growing the green hydrogen space, but tremendous opportunities for those to get it right.

Maria Gallagher: I was wondering if you could touch a little bit on nuclear which is an interesting area in the renewable space, if you could talk about the pros and cons there.

Bruce Usher: Sure. Nuclear is controversial subject It has been for a long time, but I think the controversy is actually misplaced. It's a very safe form of power generation. When we look at historically despite some very serious mishaps over the years, the challenges is in the security issue, the challenge is really very simple. It's expensive form of power generation. Today, traditional nuclear is currently built, is in theory costly way of generating power. Now, operating plants can be fairly low-cost. Those that are operating continue to operate and I expect they will continue to operate here in the US and in much of the world. But building new plants is just one of the most expensive ways of generating new power today. The caveat being that there are some new nuclear technologies and development.

There is mostly foreign category of SMR nuclear, small modular reactors. Those technologies have the potential to be both much lower cost, have much better security and safety if you are concerned about that to be smaller and more distributable, which is a big advantage as well. That being said, no SMR nuclear is yet in the commercial market. In fact, the first commercial SMR facility is forecast to be online in 2029. The price points a little hard to know with certainty, but based on what we're hearing from these developers, it's still going to be a fairly costly even at that point in time. I think nuclear's interesting potential, but I will describe it as a long shot on this point.

Maria Gallagher: That's really interesting because I feel like nuclear has been a hot topic of reviving the era of nuclear. That's really interesting the way you're talking about that. Can you speak to the way that all of these green energy options interact with each other?

Bruce Usher: Yeah. This is a really key point Maria. Most investors and policymakers as well, they tend to look at these climate solutions, I call them, mostly energy, but there are other solutions as well. They'd look them as silos. They look at what policy would support say, more solar or what investment producing more electric vehicles. But in fact, these technologies are really connected and that's both the complexity of them, but where I think gets particularly interesting. Let me give an example I mentioned a few minutes ago that as the price of renewable energy comes down, green hydrogen becomes more competitive, green hydrogen has all applications in the industry. Let me give you another example. It's a simpler example but one actually more relevant today. As the cost of electric vehicles come down, more people buy electric vehicles. Electric vehicles are essentially energy storage on wheels. The average driver dries in America for less than an hour a day, actually 48 minutes a day.

The remaining 23 hours of vehicle is not being used. When it's not being used, its tremendous store of power. That's store of power can be used to address the issue of intermittency in renewable energy. I think most people know solar and wind a great source of power when it's sunny or windy, which is not always. Electric vehicles stores powers that when it's not sunny or windy, you can use that power. The new Ford F150 Lightning, which is very popular electric pickup truck. It has the ability to do what's called vehicle to grid or V to G. It allows you to literally plug in your pickup truck into your house, not to draw power to charge a car, but actually to take power from your vehicle into your house.

In places that have had blackouts or because of storms or other reasons, Texas has had this recently, the power that's in that F150 Lightning could provide enough electricity for average American home for three days, you get three days of power stored there. This is really interesting and useful side benefit because is not the main reason people are buying these, but another benefit of EV. These things are very connected, renewable energy, electric vehicles, hydrogen, I'm talking about directly air capturing. Some of these other technologies, they're actually all linked together. As any one of these technologies, any one of these sectors scales, it actually accelerates growth in the other sectors as well.

Maria Gallagher: You touched on about how governments have an interesting challenge because you have to regulate everybody all over the world. You see this disconnect between the developed markets like in the US and in Europe as how we're trying to rework all of our existing infrastructure, and then you have emerging markets who are being asked as people who are not strong emitters to jump the middle section that we've been in for hundreds of years. How do you think about the challenges that are posed to different countries around the world?

Bruce Usher: Yeah. Let's first begin with the big challenge here. Climate change is a global problem. You and I make greenhouse gas affects everyone globally, and same for anybody else. We're all in this together. In a perfect world, we all cooperate, figure out how to solve the problem. We don't live in that world. We never will live in that world, and that's why the international negotiations to reduce greenhouse gas emissions don't have the outcome that more would ideally hoped for, which is everyone agreeing to and it's not going to happen, I don't believe that. That's a bad news and it's a challenge. Here's the reality. The reality is, in developing countries, the big challenge is non-implementation of these technologies because in fact there's an opportunity there to leap-frog the use of fossil fuels, which frankly is pretty inefficient way of generating power to leap-frog these internal combustion engines and go right to electric vehicles and so on.

The most dramatic growth on electric vehicles is not in the US or Europe, it's in developing countries already. Mostly around two-wheelers and three-wheelers, that's where it's being used. In some countries today, over 90 percent of two wheelers and three-wheelers are electric today and four wheelers, traditional automobiles are rapidly catching up. Why? Because they're more efficient vehicle to drive and they are better to drive and they are cheaper to drive. Those cost advantages are really reflected in developing countries. Here's the real challenge when you really drill down and understand what the challenge is in getting developing countries to decarbonize, and that is mobilizing Capital.

Capital investment in developing countries is especially challenging. It's challenging investing in the US, challenging investing in Europe, your investors or all investors it's hard. But in developing countries, is that much harder. It's as much harder because you have much greater long-term risks. The legal infrastructure may not be as strong There may be more political instability and so on that makes long-term investments harder to make or are made it a much higher cost of capital and that makes these projects less attractive. The real challenge in developing countries is not the technologies themselves, it's making sure that capital is finding opportunities to invest in those countries. That's a big challenge, we don't have easy solutions now and today.

Alyce Lomax: Speaking of that theme, your book did such a great job of going through the history and going through different energy sources, it was so enjoyable. But you also talked about investing in a way that could help combat climate change and a few of the areas that you went into were environmental, social and governance or ESG investing, divestment, and thematic impact investing. We were wondering if you could maybe touch on those areas and the pros and cons that you see and the challenges.

Bruce Usher: Sure. Alyce, you mentioned that there are a number of different strategies in the book. As an investor, what are the opportunities to actually put capital to work to address climate change and make an attractive financial return? The book goes through those strategies. That's really the heart of the book. Some of the strategies are frankly pretty controversial. Let me address each in turn very briefly. Let's start with divestment. Divestments become popular strategy, particularly among university endowments where I am here at Columbia University and many of our peer schools. Divestment is a very simple concept. Look, let me give you an example, I don't smoke. I actually don't really like being in a room full of smokers.

If I don't like smoking, why would I invest in tobacco? It's pretty simple. Well, when it comes to climate change, if I'm really concerned about climate change, why would I invest in companies that are the worst polluters? It's the same concept. Bill McKibben, the founder of who put it, ''If it's wrong to wreck the planet, it's wrong to profit from that wreckage.'' That's a powerful statement. The problem with divestment is that it doesn't do much to address climate change because if I sell my shares in a company that's polluting the atmosphere, someone else is buying those shares. But if there's a transaction for companies, they may be owning the largest public companies, and most fossil fuels today are not in public companies. They're actually in sovereign companies, national-owned oil companies, for example, private equity. Divestment isn't very powerful.

What divestment is good for though is aligns your personal values with your investments and that could be very important personally. Just not that important to the planet. Same strategy, you mentioned ESG. ESG has become quite controversial and this is fascinating to me because controversial for all the wrong reasons. ESG is a really simple concept. Look, if you're picking stocks and you want to make an investment, you look at many function of a company. You'd read the financial statements, you can see the management, equality, you look at the competitive products, you do all these analyses. All ESG is doing is saying, in addition to the analysis, not instead of, in addition to, you should also consider some additional factors, some environmental factors, some social factors, some government factors and how are those putting the company at risk or creating opportunity, but more around the risk side of it. Factor zone is ensuring analysis when you're making your stock picks.

That's just smart investing and that's what ESG is all about. ESG is really about risk management for companies and for investors. It's become political. It's all upside down because the reality is ESG also like divestment doesn't do much for addressing climate change. Just because I pick companies that have strong ESG, that might make me a better investor. In fact, there's a decent amount of academic research today suggesting that ESG investors showing that they can outperform and that companies that are starting ESG do better. Climate change, all those companies are doing is managing their risk. The third strategy, and now we get to actually adjust in climate change is thematic.

This is saying look, I really care about climate change. I really want to make good returns, good market risk-adjusted returns on my money. What themes can I invest in? And I mentioned a few minutes ago, I could invest in renewable energy, renewable wind, and solar. It's very low-risk. Every wind and solar project that's built helps us address climate change by reducing greenhouse gas emissions. That's a theme I like and that's a theme I'm going to invest in. That's a thematic type investment and that does address climate change. The fourth strategy is just to touch on it but doesn't apply to most investors is what's called impact first.

Impact first is when an investor says look, what really matters to me is addressing climate change. I'd like to get a financial return. I wouldn't mind getting my money back. I don't expect to get a market risk adjuster. I'm willing to take additional risk. I'm willing to accept a lower return. That's impact first. The most famous impact first investor today is Bill Gates. Now, Bill Gates' pensive advantage of having very deep pockets, and he can take that additional risk and if it doesn't work out, it's not going to affect his lifestyle. But any investor can be an impact pensive investor. You just have to be aware that this is additional risk, and you shouldn't expect market returns.

Maria Gallagher: It's really fascinating. So Alyce and I both focus in the ESG space and I feel like what we've noticed, at least in the past 5, 10 years, is it's really shifted to now talking about sustainability as table stakes for companies. Most companies have sustainability reports. Most companies say they want to be net zero. Sometimes they report on their own, sometimes they report with different initiatives. How do you think about being critical when you're looking at individual companies or thinking about the space because so much of it now is just filler words that a lot of companies are saying because it sounds good, and it's what everyone else is doing. How do you think about companies in that way?

Bruce Usher: So first of all, let's understand what the problem. The problem here is there are no regulations around sustainability reporting. Put a mindset, imagine there were no regulation amount finance reporting. You could have put anything you want, the 10-K, 10-Q financials and just go ahead. Whatever you think the investors should know, put it out there. Well, we would have an insane cacophony of financial information. It would be really hard to compare, and we'd have a lot of exaggeration. Well, that's where we are on the sustainability situation today. There are no regulation. Now the SEC is considering regulating it, but it hasn't yet, and we don't know if that's going to happen. As a result, companies are trying to report, make themselves look the best they can. I don't think that's unreasonable, but it creates a lot of problems for investors. So what's the advice that I would have for investors? Number one advice, be aware of green-washing.

Companies that green-wash, made it a short-term gain, but in the long run, that almost always turns out to be a bad plan. I think companies green-wash for one of two reasons. Either because they intentionally green-wash, they know what they're saying isn't true and they just trying to look better, and I think that's a very bad outcome for everyone, including the planet. Then they come and say accidentally green washed. What do I mean by accidental? What I mean is these net-zero goals these companies are setting, many companies, through my research, these goals are real. They are real because these companies recognize that the world is going to decarbonize over the next several decades. They recognize the trends are underpinning this.

This is not a moment, a political moment or a consumer-driven moment. This is a moment driven frankly by physics of climate change. It's not a moment. It's going to be this way for the next several decades. Any company that's got management who thinks long-term, understands decarbonization is going to change their business, and it's going to change virtually every business in the world today. It is the big macro trend to the future. If you're sitting there, and you see that macro trend, you go, OK, we have to decarbonize. What the scientists tell us is we got to get to zero. How do we do that? We'll put in place a plan and one way to put up a plan is to have a goal. Without a goal, you don't know what you're shooting for. These net-zero goals, I believe in many cases are real.

The problem is, many companies are setting them without a clear idea, a clear path on how they're actually going to achieve it. This is where the accidental green-washing comes in. They want to achieve these goals. They believe it's actually necessary for business perspective to achieve these goals. But they may be mistaken in terms of their ability to reach these goals and the timelines and the costs of doing so. Then when that tension shows up, say it's too costly, then they're going to find themselves in a green-washing situation. As an investor, you don't want to be back in that kind of company either.

Chris Hill: If you're interested in reading more, good news, The Motley Fool has an article about five stocks taking on climate change and we've got a link to the article in the notes for this episode. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.