Save the planet……for us
What we are doing to the forests of the world is but a mirror reflection of what we are doing to ourselves and one another.
– Mahatma Gandhi
There’s no such thing as environmental investing
This statement might be seen as heresy by my friends and compatriots at environmental focused investment firms or NGOs. But I’d ask that they hold the torches and pitchforks for a moment, as I do believe these groups are doing critically important and massively impactful work, just for slightly different reasons.
When individuals talk about impact investing, the discussion can often break down into whether they are focusing on environmental or social impacts (some people prefer the terms people or planet). Indeed you can sometimes get into semi-heated debates with groups that focus on environmental issues saying that without a planet, all of humanity is doomed, so social programs need to be secondary to environmental concerns. The social chorus responds that while climate change and environmental issues are a problem, their impact is over the next 20-30 years while hundreds of millions of people suffer from lack of water, food, education, healthcare, etc. right now. So social issues are immediate and need to be top of the list. In my opinion, both views are valid, and it really doesn’t matter which side of this you are on as it gets to moral relativism.
The question I would pose to the environmental chorus is – who is your constituency and what are you really trying to achieve? Is it the trees we are looking to conserve for the sake of the trees? I’ve come to the conclusion that when we say environmental investing, we really mean sustaining ecology and ecosystem services for humans to be able to thrive on the planet. We’re not actually interested in stopping deforestation purely for the sake of the trees, we’re interested because without healthy forests, the quality of our air and water is basically shot and we as a species are in a world of hurt. Ture, other animals and plants would suffer as well, but I would argue that many of them will adjust and survive, even if it does mean mutating or adapting rather quickly to a new physical reality.
My view on this really came about several years ago from a study that was done on Chernobyl (National Geographic has an article on the issue here). The silver lining of the nuclear disaster is that it removed humans from a highly developed area for the indefinite future. The fascinating conclusion of the study is that soon after people were removed from the scene, the flora and fauna started returning in amazing abundance, even with the high levels of radioactivity. The long term health of the animals is still an open question with that radioactivity, but initial indications are that they are thriving in this reborn wilderness. A more recent example that has seen similar consequences is the disaster at Fukushima (CNN on Fukushima wildlife flourishing). And it would appear that this isn’t simply a matter of nuclear disasters, as the recent quarantine of roughly 1/2 of the humans on the planet, and most of North America has caused wildlife to encroach on cities and developed areas in ways they normally don’t (This NYT article has some good anecdotes).
So the real punchline is that regardless of what humans do or don’t do (nuclear meltdowns or simply wiped out by a disease), if you remove humans from the equation, the planet will be just fine. Indeed given the radioactivity of Chernobyl and Fukushima, we could basically nuke the planet and the earth would be fine over time. On an intuitive level, this kind of makes sense, as the flora and fauna on the planet has a record of mass extinctions before – meteors strikes creating darkness and the associated extinction of the dinosaurs, etc. And yet, it seems to rebound quite well. So from that perspective, when we say environmental investing or environmental issues, we’re really talking about ecosystem services that will allow humans to thrive, as the planet will be just fine.
So what if there’s no environmental investing?
I have two main take aways from this line of reasoning. First, the importance of these investments can’t be understated. If we don’t have a habitable planet with the ecosystems that enable humans to thrive, pretty much all of our other activities are irrelevant. So the investments that will help mitigate climate change or help adapt to it, as well as establishing clean water cycles and fresh air are among the most important things we can be doing in my opinion. So despite saying that there’s no such thing as environmental investing and it’s really social investing because at the end of the day it’s all about what will be good for humans, this isn’t to imply that ‘Environmental’ investments aren’t critically important. If anything, it would be just the opposite. This is some of the most important ‘social’ investing we can pursue.
The second take away that jumps out to me is the importance of Environmental Justice. If you even remotely agree with my framework that environmental investing is really social investing in making sure humans have an environment to thrive, then if you don’t consider how different communities are impacted, you’re de facto being discriminatory in how you apply this form of social investing. The research on the disparate impacts on different communities is rather damning. This general idea that there is a ‘gap’ between lower socioeconomic communities and upper income communities across almost any social dimension is well documented. This applies to access to quality education, healthcare, nutrition, food deserts, etc. From an environmental point of view, the Climate Gap is also a huge challenge. A quote from a Scientific American article about the Climate Gap really spells this out succinctly.
The report finds that African Americans living in Los Angeles are almost twice as likely to die as other Los Angelenos during a heat wave. Segregated in the inner city, they’re more susceptible to the “heat island” effect, where temperatures are magnified by concrete and asphalt. Yet they’re less likely to have access to air conditioning or cars.
There is similar research across most urban areas that the average temperature in minority and lower socioeconomic neighborhoods is rising faster than other neighborhoods that spend more resources on landscaping and planting trees. There is also ample evidence from the Asthma and Allergy Foundation of America that black children are almost twice as likely to have asthma than white children (13.4% vs. 7.4%). The causes of this are likely numerous, but poverty, dense urban environments and air quality are all contributing factors. The fact that in 2018 roughly 2/3 of black americans lived within 30 miles of a coal power plant is one example of the challenge.
A friend remarked to me recently that we were rapidly eliminating all coal power plants so in the near future almost nobody will be living near a coal power plant. But I’d ask that we hold off on declaring victory. Solar, wind, hydro and even nuclear power are indeed infinitely cleaner than coal and will help our air quality dramatically, in addition to reducing the carbon emissions from power generation. However, if we look at rooftop solar, most developers currently target wealthy, and predominantly white, consumers. Very few rooftop residential solar groups will install solar on a lease or pay as you go model to individuals with less than a 650 FICO credit score, and the average FICO of the pools of solar systems being securitized is closer to 730. The impact of this on the rest of society is potentially dramatic. As utilities now have to amortize their fixed costs of power plants and transmission infrastructure on fewer customers that are purchasing their power, so they need to increase their per unit price to break even. So the power is getting more expensive for those who aren’t considered a desirable market segment by the solar industry. The graph below has average residential electricity rates graphed against the inputs for power generation. Despite coal and natural gas prices falling dramatically over the years, so has residential solar and as a result, the number of customers to amortize fixed costs is declining, leading to higher electricity prices.
Considering that roughly 40 million people don’t have a credit score (~15% of the eligible market) and another 40% have credit scores below the target that solar companies will underwrite, this problem is likely to get worse. So who will be most impacted by this? Mortgage data helps shine a light on that as the U.S. Federal Reserve published a 2010 report on the credit ratings of home borrowers based on their minority status. All groups except for black american consumers had average credit scores above 700. So if you are paying attention to the Black Lives Matter movement, this represents another way that small nudges in a system, even if unintentional, lead to systemic racism. It’s also why innovative solar groups like Posigen are important for serving these groups and saving them hundreds of dollars per year by getting access to solar.
Social inequality is a theme that will be found in future posts as well, so returning to the idea of environmental investing really being social investing…..The key takeaways I focus on are: 1) When we say environmental investing, what we really mean is investments that impact the ecosystem services (air, water, climate, soil, etc.) that we need to survive. So it’s less about the planet as the end in itself, and more as the means to support us in the end. 2) As it’s therefore a different form of social investing, if you don’t take into account environmental justice considerations, the best of intentions to make the planet habitable for humans may actually exacerbate social issues, having more dramatic unintended social consequences than the environmental benefit they deliver. And finally – so it’s not lost in the title of this blog – environmental investing is critically important. I have no doubt whatsoever that if we don’t develop an economic system that will account for environmental and social externalities, our society will not be physically sustainable on this planet.