July 7, 2024 • 1hr 43min

RWH047: Investing In The Era of Climate Change w/ Bruce Usher

We Study Billionaires - The Investor’s Podcast Network

In this episode, William Green interviews Bruce Usher, author of "Investing in the Era of Climate Change" and professor at Columbia Business School. They discuss the massive economic transition underway as the world shifts to a low-carbon future, and the implications for investors. Usher provides an overview of key trends driving decarbonization, areas of opportunity, and how investors can position themselves.

0:00

-0:00

Key Takeaways

Climate change presents both enormous risks and opportunities for investors as the global economy transitions to a low-carbon future
An estimated $150-200 trillion of investment is needed over the next 30 years to finance the decarbonization transition
Key areas driving decarbonization include renewable energy (especially solar and wind), electric vehicles, and energy storage
Technological innovation has made clean energy solutions like solar power and electric vehicles cost-competitive with fossil fuel alternatives
Evolving social norms and consumer preferences are pushing companies to become more sustainable
Government policies like the U.S. Inflation Reduction Act are accelerating the shift to clean energy
Investors can gain exposure through fossil fuel-free funds, thematic clean energy ETFs, or direct investments in climate solution companies
Climate risk is becoming increasingly material for many businesses and should be factored into investment analysis
The transition creates both risks (e.g. stranded fossil fuel assets) and opportunities (e.g. clean tech growth) for investors

Introduction

In this episode, William Green interviews Bruce Usher, author of "Investing in the Era of Climate Change" and professor at Columbia Business School. They discuss the massive economic transition underway as the world shifts to a low-carbon future, and the implications for investors. Usher provides an overview of key trends driving decarbonization, areas of opportunity, and how investors can position themselves.

Topics Discussed

Scale of the Climate Challenge and Investment Opportunity (5:37)

Usher frames climate change as "the greatest reinvention of the global economy since the industrial revolution." He notes that after 300 years of building a fossil fuel-based economy, we now have about 30 years to entirely rebuild it to eliminate greenhouse gas emissions. This creates both an enormous challenge and opportunity:

An estimated $150-200 trillion of investment is needed over 30 years to finance the transition
This is disruptive but creates opportunities for new business models and technologies
The capital exists but needs to be redirected, especially to developing countries

As Usher states: "This change is going to be very disruptive. And analogy to that is the change that we've seen with the digital revolution in the last couple of decades."

Physical Manifestation of Climate Risks (10:57)

A key trend driving action on climate change is the increasing physical manifestation of risks through extreme weather events:

Record-breaking heat waves, wildfires, hurricanes, and flooding are making climate change tangible
This is shifting perceptions as people experience impacts firsthand
Creates urgency to act on what was previously seen as a future problem

Usher notes: "What has changed very recently is there is a physical manifestation of this risk. In other words, we're starting to experience climate change."

Technological Innovation in Clean Energy (20:42)

Rapid technological progress has made clean energy solutions cost-competitive:

Solar power has declined over 99% in cost and is now the cheapest form of new electricity in many regions
Electric vehicles have become mainstream, offering superior performance to gas cars
Energy storage costs have fallen dramatically

Usher states: "We now have the ability to decarbonize at scale with competitive technologies, which when I got into this 20 years ago, sure, we had more time to address climate change back then, and time is our big challenge here, but we actually didn't have the solutions we have today."

Evolving Social Norms and Corporate Behavior (45:26)

Changing attitudes, especially among younger generations, are influencing corporate sustainability efforts:

Employees increasingly prefer to work for sustainable companies
Consumers are factoring sustainability into purchasing decisions
Investors are allocating more capital to ESG and climate-focused strategies

This is pushing companies to set ambitious climate targets. As Usher notes: "Employees wanting to work for sustainable companies makes companies take more action to be more sustainable because they want to get the best people."

Government Policy Support (1:28:44)

Government policies are accelerating the clean energy transition:

The U.S. Inflation Reduction Act provides massive support for clean energy
It aims to make the U.S. competitive in key industries like EVs and batteries
Other countries are following with their own policies to remain competitive

Usher states: "This is the world that we're in, the world we're going to be in in the future...Basically this is the way we're headed."

Investment Approaches for Climate Change (1:03:53)

Usher outlines three main investment approaches for climate change:

Risk reduction: Using fossil fuel-free or low-carbon funds to reduce exposure to climate risks
Thematic investing: Targeting specific climate solutions like clean energy or EVs through sector ETFs or individual stocks
Impact-first investing: High-risk, early-stage investments in breakthrough climate technologies (mainly for ultra-high net worth individuals)

He notes that thematic investing offers the most potential for outperformance but also carries more risk.

Climate Risk Analysis for Investors (54:02)

Usher argues that analyzing climate risks should be part of fundamental investment analysis:

ESG integration aims to consider material environmental, social and governance factors
Climate risks are becoming increasingly material for many businesses
Investors should assess both physical climate risks and transition risks

As Usher states: "If you're an investor and you're considering making an investment, you're going to presumably do a certain amount of analysis...All ESG is, it says in addition to that analysis, you should also consider what environmental factors are going to affect that asset value, what social factors might affect that asset value, and what governance issues affect that asset value."

Advice for Consumers (1:23:01)

For consumers looking to reduce their climate impact, Usher recommends focusing on two key areas:

Electricity: Switch to renewable energy through rooftop solar or community solar programs if available
Transportation: Consider an electric vehicle for your next car purchase

He emphasizes making choices that are financially neutral or beneficial: "I'm not trying to convince consumers to go out and do things that are going to hurt them financially or hurt them in the pocketbook or make their lifestyle less enjoyable. What I'm saying is take the time and effort...to educate yourself and ideally do things that you're no worse off."

Conclusion

Usher is cautiously optimistic that humanity will avoid catastrophic climate change, but expects the process to be messy: "We will do a really crappy job of addressing this problem, but we eventually will avoid a catastrophe, much as we did with COVID. We did not do very well, but we eventually got our act together."

He emphasizes viewing climate change through an economic and business lens rather than an emotional or political one. By focusing on the numbers and economic realities, Usher believes we can make faster progress on solutions. The key is to create better alternatives that can outcompete fossil fuels, rather than relying solely on moral arguments or divestment campaigns.

For investors, climate change presents both risks to manage and opportunities to capitalize on as trillions of dollars flow into decarbonization efforts. By understanding the key trends and taking a long-term view, investors can position themselves to benefit from what Usher calls "the opportunity and challenge of a lifetime."