Startup Series: Carbon Collective
Today's guest is Zach Stein, Co-Founder & CEO of Carbon Collective.
Carbon Collective is a sustainable investing platform that provides low-fee, diversified portfolios built for solving climate change. Zach and his co-founder, James, saw a gap in the climate investing market. There were avenues for wealthy people to invest in climate startups directly. Still, the existing paths don't have a climate impact for the average American who wants to invest their 401K, IRA, or general savings. That's where Carbon Collective comes in. Carbon Collective is not an ESG fund. Instead, the startup focuses on divesting from the sectors dependent on fossil fuels, reinvesting that share in companies building solutions, and vote and pressuring the remaining parts of the stock market to decarbonize as quickly as possible. And make it an attractive investment by making it cost the same and with a similar diversity as generic options.
Zach is a serial founder. Before co-founding Carbon Collective, he spent seven years as the CEO and co-founder of Osmo Systems, a company using novel sensing technology to help fish and shrimp farms be less wasteful. He was also the founder and retail director for Urban Worm, a worm farm in the Bay Area. Zach holds a BA in psychology from Hamilton College.
In this episode, Zach walks me through Carbon Collective, how the company was founded, and what sets the startup apart from its competitors. We also have a lively discussion about ESG investing, why it is falling short for the climate, and why divesting in fossil fuels is the future. Zach is a wonderful guest, and it was great to learn more about Carbon Collective.
Enjoy the show!
You can find me on twitter @jjacobs22 or @mcjpod and email at info@myclimatejourney.co, where I encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded October 4th, 2021
In Today's episode, we cover:
An overview of Carbon Collective
Origin story of Carbon Collective and what led Zach to co-found the startup
A discussion about ESG, its impact, why that model misses the climate mark, and the existing landscape
Carbon Collective's approach and what sets the startup apart from ESG investing
Criticisms of ESG and why Zach thinks they are not the future of climate investing
ESG returns and how they compare to non-vehicle returns
How Carbon Collective assesses investments
How Zach thinks of the future of fossil fuels v the future of fossil fuel companies and how he distinguishes between the two
The various ESG modeling software from MSEI to Sustainalytics
Key priorities for Carbon Collective over the next 12 months
Links to topics discussed in this episode:
ESG Investing: https://www.cfainstitute.org/en/research/esg-investing
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Jason Jacobs: Hey everyone, Jason, here. I am the My Climate Journey show host. Before we get going, I want it to take a minute and tell you about the My Climate Journey or MCJ as we call it membership option. Membership came to be because there were a bunch of people that were listening to the show that weren't just looking for education but there were longing for a peer group as well. So we set up a Slack community for those people. That's now mushroomed into more than 1300 members. There is an application to become a member. It's not an exclusive thing. There's four criteria we screen for, determination to tackle the problem of climate change, ambition to work on the most impactful solution areas, optimism that we can make a dent and we're not wasting our time for trying, and a collaborative spirit. Beyond that, the more diversity, the better.
There's a bunch of great things that have come out of that community. A number of founding teams that have met in there, a number of nonprofits that have been established, a bunch of hiring that's been done, a bunch of companies that have raised capital in there, a bunch of funds that have gotten limited partners or investors for their funds in there, as well as a bunch of events and programming by members and for members, and some open source projects that are getting actively worked on that hatched in there as well. At any rate, if you wanna learn more you can go to myclimatejourney.co, the website and click the become a member tab at the top. Enjoy the show.
Hello everyone. This is Jason Jacobs and welcome to My Climate Journey. This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change and try to figure out how people like you and I can help. Today's guest is Zach Stein, co-founder and CEO of Carbon Collective. Carbon Collective is the first climate focused online investment advisor. Zack and his team built Carbon Collective because they couldn't find any way to invest their retirement accounts that was aligned with both their financial and ethical values.
We cover a lot in this episode, including the state of impact investing in public equities, ESG, how it works, what's good about it, where it misses the mark, what some opportunities might be for a better way. We also talk about the Carbon Collective approach, key tenets, the origin story for the company, the benefits of investing with Carbon Collective. We also have a fascinating discussion about some of the trade-offs in terms of impact, profit, how important it is to tell the climate story even when there is one versus just focusing on returns. At any rate, I learned a lot in this one and I think you will as well. Zach, welcome to the show.
Zach Stein: Hey Jason. So good to be here.
Jason Jacobs: Good to have you. Yeah. And it's been a little while as well. So I'm excited to introduce what you're doing to listeners, but I'm also just excited to get the update and hear how everything's going. So thanks so much for making the time.
Zach Stein: Thanks for having me, man. I'm really glad to be here, excited to share both.
Jason Jacobs: So what's Carbon Collective?
Zach Stein: Carbon Collective is an online investment platform that allows people like you and me to invest in a way that is driving true climate impact. So we know we all know we're climate nerds here, one of the biggest things that's blocking solutions to climate change is investment. We have to invest our way out of climate change. Right now we're having about like $500 billion a year is going into climate solutions, which is awesome, but if we're to be on a path to avoid two degrees C of warming, we've got to be closer to $5,000 billion of investment going.
And so right now kind of part of the problem is like, if you're quite wealthy, you know, you could invest directly in climate startups and you can get into on that, but there's just not many ways into that and what Wall Street is selling as climate investment isn't. It doesn't actually have like that real impact and so that's what we're building. Right now we enable you to take things like your IRA or your 401k and align them in public markets in a way that is smart, low fee, kind of fits with like your standard investment principles. You don't feel like you need to sacrifice anything in terms of fees or diversification, but it truly aligned on driving as much climate impact as we can from that. And that's just the start of what we wanna build.
Jason Jacobs: And how did all this come about? What's the origin story for the company and what's your origin story that led you down this path?
Zach Stein: Yeah. So my co-founder and I, we grew up together. We've known each other since we were four years old. We grew up in the Bay Area together. My earliest memory with him is there were sprinklers in his backyard that were running at the time and his mom said like, “Don't you dare go out and run in those sprinklers.” And of course, like a few minutes later we're naked running through the sprinklers.
Jason Jacobs: And this was what age? 19 or 20?
Zach Stein: Yeah. Just like last year. Uh, [laughs] I just really liked sprinklers. So we were very good friends growing up. We biked to each other's houses all the time. Like we spend a lot of time kind of in imagination world. Like we probably spent, I remember his dad, I guess it would be both of his parents, they got, bought a new refrigerator. And so like refrigerators come in a really big box, which is, especially when you're a seven-year-old, like that's a really fun sized box. And so we like basically build a spaceship out of it and like, I probably spent like 20 to 30 hours in there. I think we might've slept in there one night. [laughs]
So yeah, we go way back. When he was 10 though, James, actually he, I say he abandoned me. His parents pulled him out of school and his sisters and they went and bought a sailboat and started with 50-foot sailboat in the south of France and sailed around the world for the next five years. And so he had pretty much one of the most unique childhoods at the same time my, I was in the Bay Area, Peninsula, pretty basic childhood from there. And then James and I, we kind of went our separate ways at that point but we actually reconnected in, I was, this was in my early twenties. I was living in Berkeley.
I was really into pickup basketball and I was walking back from the courts and I'm crossing the street and I see this guy. And for some reason we're just staring at each other. He's on a bike at the crosswalk as I'm crossing cross. And he says, “Zach!” [laughs] I go, “James!” And so that is how we ran into each other. It turns out he was working at a biomass energy startup, like a few blocks away. And so that led us to kind of rekindled our friendship. And we started our, down our startup and co-founder journey together working on our first startup, which was called Osmo Systems. We were working on a different problem within sustainability. We were building a novel sensing and monitoring system to try and help fish and shrimp farmers better monitor what was going on in their water.
It's a very wasteful industry, whereas kind of global protein demand is going up. And so by having a continuous feedback loop where you can know, “Oh, this is what's going on in my water.” You could feed much more accurately, put in chemicals and additives much more accurately. So save farmers a lot of money but also a lot of water pollution and then just energy that was used in it. So we raised a pretty large seed round led by some great VCs and just hired a great team. And by the end of 2019 realized that we were not gonna be able to deploy that tack on a venture scale timeline. It was too hard of a tech stack that we had put together.
And so James and I set out on a new path, kind of with a blank whiteboard when we got started in 2020. Kind of, for me, it was the 2018 IPCC report that really solidified for me that like, “Oh shit, like climate change is here.” That combined with the fires in the Bay Area, I grew up in the Bay Area. There were not wildfires every year. There was not a fire season and just that change and seeing that really solidified it for me. And so we kind of set out at the beginning of 2020 to see, with the thesis that one of the greatest pains of the 2020s and beyond is going to be what happens when you as an individual experience climate change, there's a call to action. And then what you feel like you can actually do about it. This is a global phenomenon and you are one person kind of living within the system.
And so we knew that we wanted to build better ways to channel that call to action into collectivized impact. And so we ended up interviewing over 120 people in our network, outside of our network, trying to understand where their climate anxiety took them and where they got blocked. And it was just clear that investing again and again, was this place where Wall Street was like, “Oh, we have this answer for you. It's called ESG.” And again and again, people were saying, where is the actual impact in this? How is this not just kind of relabeling the same thing?
And so that kind of gave us the insight that, “Oh, we actually need to have portfolios and eventually a platform where you as an individual can still feel like you are getting concrete investment advice, where your, kind of your investment needs are being held.” You don't feel like you're actually having to sacrifice on that front and you're truly matching your values around, you know, for a lot of people, the most important issue of our time.
So we launched in November, we launched the product in November of 2020. It's, uh, online robo-advisor kind of like a Betterment or Wealthfront, not quite as many features yet, but with way better portfolios. And then we raised a pre-seed round and the coupon of 2021 and we've been building ever since. Things have been growing really strong. We just had a really good quarter and we had a campaign specifically around helping people get their old 401ks out of fossil fuel companies and into climate solutions and making that process really smooth. And that seems, it did really well. And so we're kind of riding that high at the moment and laying out what we're gonna do for Q4.
Jason Jacobs: And maybe talk a little bit about the existing landscape, including ESG and where it misses the mark? And then we can switch gears and talk more about the Carbon Collective approach.
Zach Stein: Yeah. So ESG for those, I imagine a lot of people on here are gonna be familiar, but I'll kind of give my explainer of, for people who don't know is, is this quantitative framework in which Wall Street has tried to say, all right, like ethics is just complicated. There's a lot of things people care about. There's a lot of these different metrics. And so they've kind of bucketed that into these three high level categories, in E environmental, S social, and G governance. And how it works is a company like Vanguard or a company like BlackRock will go out and they'll find an analytics company and they'll be like, “Alright, MSEI, Sustainalytics, something like that, you guys go out and you rate every company that's publicly traded on all of these metrics.” Or, you know, usually just the big ones.
In E it'll be like a hundred different things that the rating on a scale of one to 10. So some things will be related to climate, maybe water, waste, other pollutants, things like that. So that then, all those 100 E scores will get averaged into a single E versatile. They'll put that all together, what is their average E? And then they'll do the same thing for S and for G. And so you'll put that all together into one score. And so it gives you like ESG it's due like that does, you are taking something that's really complicated, ethics and you're rolling it into something that is trying to encapture all of that.
The problem is that in doing so you are diluting out the things that people might act- like care about far more and have a far greater impact. There's also the metric systems between a Sustainalytics or an MSEI. There's about eight companies that do ESG ratings. They aren't correlated with each other at all. And so you either as an individual or as an investor or wealth manager have to kind of figure out like who's strategy do I trust here? And the problem of doing that is that it's all proprietary. Like how MSEI or Sustainalytics makes money is they, they make you pay a lot of money to access their data and have it be updated. And so there's not that level of transparency that you want.
And when you think about it, like another way of perspective, and this was helpful for us of being like, “All right, Jason, you really care about this stuff. You're gonna go out and buy a new pair of shoes. What are you gonna look for in a shoe company to be like, all right, I really trust this company from an ethical perspective?” You're gonna say, “All right, I want a company that is transparent.” So they're showing me the whole process and that they have really clear impact in what they're trying to derive from this, you know, Patagonia, Allbirds, et cetera, and things like that. That's, what's allowed them to be really successful. ESG is this opposite. And the problem is it's unclear where they impact. There's very indirect impacts of moving money around like this, but it just leads to a place where it's less bad.
So if you look at like Betterment's Climate Impact portfolio, for example, you know, it's called the Climate Impact portfolio. It's still like 4% fossil fuel companies, which is like, okay, it's better, but that does not, we need to solve climate change now. We need to 10x the amount of investments in climate solutions now that doesn't actually align with that. And similar Wealthfront just launched an SRI, Socially Responsible Investing portfolio, and it's the same thing. There is no outside investment in solutions, which is, I think what a lot of people, when a lot of us think like, “Oh, this is socially responsible.” It means that, yes, it's also taking out the bad actors, but it's also highlighting the good actors and putting that in there, but it's not. And so you're not actually kind of solving these major directed problems.
And the other thing it doesn't do is vote so much of the impact that you can have as a shareholder. And we saw this successfully with Engine No. 1 who voted to get members on to ExxonMobil board is to vote, and you can pressure companies. These are publicly traded companies. It is a strange form of democracy, but you can force publicly traded companies to do things, especially at building coalitions of investors to go and do that. And so ESG kind of isn't taking up that mantle either.
And so what you get is kind of this product that is like mildly less bad with very unclear impact that you're paying two to three times for, in terms of the fees for it. So Wall Street loves it. It's making a ton of money, but in terms of, for individuals like you and me or other people who are really trying to look critically and say like, “Okay, this is my IRA. I can't sacrifice it.” And we know that in the climate community, asking people to sacrifice just doesn't work at least in, you know, the way our Western civilization was structured.
So that's not gonna get you very many assets there. So how can you build something where you're having people be able to not sacrifice, but have that really clear impact? So that, that's the space that we are trying to fill with that also just very clear narrative around climate in particular. If we can focus on this, this one very broad issue, we can double down to create far more impact within it, again, without you needing to sacrifice as an individual investor.
Jason Jacobs: So in there, I heard you talk about how the impact of ESG is questionable. I heard you talk about higher fees. I heard you talk about the lack of voting. What about the returns themselves? Just kind of dollar for dollar. How has ESG been performing relative to non ESG index vehicles?
Zach Stein: Yeah. So overall it has been higher and there's a lot. We're in this like really interesting time in financial markets at the moment and so there's a lot of people who are like, look at what ESG has done. It's outperformed. A lot of that seems to have come down to what it's adding more of and taking less of. So over the past 10 years, although it's done a little bit better recently, the S&P 500, so from August 3rd of 2011 to August 3rd of 2021, so this is a little bit over a month ago, the S&P 500 more than tripled in value, but the Energy Index, so the fossil fuel companies on the S&P 500 and beyond, they lost money. Like if you put a hundred bucks in at the beginning of that time, you'd have about $92 at the end of that date.
And so ESG in terms of its outperformance justify what it is. And again, ESG still does include, largely does include fossil fuel companies. It is baffling that that's the case, but it does. And so things like that and then over-weighting tech, which again, is like tech isn't neither, I mean, it depends where you fall, but bad nor good in this, but in giving more way to tech companies, especially over the past five years, that has led to outperformance. At the same time, we saw, especially over the last five years and especially with the coronavirus crash of March 2020, that's when we really saw in particular climate solutions, significantly outperform the market over that period of time. And so, yes, ESG portfolios held those, but they didn't overweight them in any significant way.
So it's unclear, like I, in reading this, I'm not ready to fall on either side of the debate when it comes to ESG in terms of performance. I do believe that over the long term, like over the next 10 to 20 years, having fewer fossil fuel companies in your portfolio is likely gonna do better over that period of time. And I'm happy to kind of talk about the reasons why and our, our thesis behind that but it's not just, you know, “Oh, because we're gonna solve climate change.” There's a lot of kind of financial tailwinds behind things that are disrupting the fossil fuel industry. So, yeah, I think that's my answer to the question.
Jason Jacobs: Okay. So if I'm hearing right, it sounds like the primary issue that you saw was that ESG was the best place for people that want to make an impact with their capital to go, but that the impact is subpar. Is that right?
Zach Stein: That is correct. And that it is unclear for people who are going in, you're looking to align wealth, your wealth, which is something that we, especially as Americans really struggle with, with solving major issues. But again, in that way where it's like, you're not gonna be challenging, you're not gonna be sacrificing. And so how can we have a way of doing that? And a lot of us who are going and approaching ESG as a framework, it doesn't deliver on that. And so that's the space that we wanna step into.
Jason Jacobs: Uh-huh [affirmative]. And do you believe when it comes to things like our 401ks that we should be optimizing for financial returns?
Zach Stein: Yes. I think that if you do not do that, it's going to be charity and you're not going to be able to get the level of capital into the places that we need to in the amount of time that we need to.
Jason Jacobs: So then why talk about climate at all? Why not just talk about better returns?
Zach Stein: That's a great question. I think it's something we're starting to see the winds turn on this. So like last week there was the California Teachers Pension Plan, one of their fund managers said that investing in climate, he believed for generating significant alpha, which is doing better than the market, over the next 40 years. And this is one of the really interesting things, so it's like, where can we have impact as investors? Because when you think about this, like, especially in public markets and investor is much broader than that, but let's just focus on public markets.
Jason Jacobs: Mm-hmm [affirmative].
Zach Stein: It is the collection of what people who have capital think is going to happen in the future. Like that is kind of the assessment of like, it is a tea leaves reading exercise. And so one example we think is really interesting is what happened to the coal companies on the stock market in the 2010s? So from 2011 to 2020, and this is a period of like, we still use lots of coal. A lot of power plants run on coal, still shipping a lot of coal places, like it sucks, but it's just true. The US Coal Index fell 99% in value on markets during that time, 99%.
And that is because not again, not because we're not using coal, but investors stopped seeding and the narrative shifted about this entire industry. The collective belief shifted that this industry no longer has a financially viable future. And that's incredibly powerful. And that's where it's, I think that where we as climate focus investors can have so much of that power. And I think it goes to your point of like, why not just talk about returns, is that we can make the same arguments and see the same path for the same thing happening to oil and gas.
And what's happened for the coal companies and why this has an impact is when your stock falls by 99%, it turns out it's a lot harder to raise money. It's a lot harder to get debt. It's a lot harder to sell more equity to raise money to go and expand to dig up more coal. And that helps hasten, it becomes a self fulfilling prophecy, and that is kind of what some of the power of the stock market can be. And it's why it's so frustrating that like ESG and climate impact funds and things like that still include fossil fuel companies in them because you're still upholding that self fulfilling prophecy that these companies in their current states still have a place in our future, especially in our future in one that we're actually having climate impact.
Jason Jacobs: So we've talked a lot about where ESG misses the mark. So maybe talk a little bit about the white space that you saw and the Carbon Collective approach and how it's different?
Zach Stein: Yeah. So maybe I'll, I'll share a little bit more of what we wanna build first over the long-term and then I'll talk about like, kind of what we offer now. And I've been alluding to this over the long term, whether you're someone like me who, I'm 32, I am kind of still in that process of kind of building up more wealth, frankly. And to do that, this is a space where like a Betterment or Wealthfront has really stepped in to occupy as an investment management platform, or you take people like, you know, my parents' generation or like other people who are, who are older, maybe they have more wealth. They're working with financial planners and to kind of build of saying like, okay, if we can all picture, we probably see it, that retirement graph where it's like, all right, if you put in this much each month by this point based upon, you know, plus or minus certain risk tolerance, you'll have this much income in retirement.
And so what we wanna build, and this is kind of comes to the themes that we've talked about is merging it all together, where you get the same, either investment advice or financial planning that you would from a online investment advisor, like a Betterment or Wealthfront or, and this is something we wanna build towards, or in a real financial planner that's building you a customized financial plan for you and your family's need, is there to answer tax questions and help you think about that holistically with every offering being around driving climate impact.
And so those need to be put together because there are more really interesting, especially in the financial world products that are coming onto the market. But the problem with that is that you as an individual or you as a high net worth individual or a foundation, there needs to be expertise in how these can all be put together into a comprehensive plan, where you're still meeting your financial goals and in particular, in looking at it of like, this actually could be a very strong way too, to generate alpha. And so that's what we ultimately wanna build is that platform where we're putting that all together.
Jason Jacobs: And when you say that like, what are the components of that? Are we talking about individual public equities? Are we talking about funds? Are we like, what are we talking about here?
Zach Stein: In terms of the long term vision we would like to be as comprehensive as possible. The mission of the company and what I laid out earlier is we are currently at the 500 mark for the billions of dollars that are going into climate solutions. We need to be at 5,000 as quickly as possible. And so the only way to get there is you have to make it like, and that's the crazy thing is that like that extractive capitalism got us into this mess. And in some ways, the only way out, I mean, and, and people will argue with this, you'll have people kind of in de-growth or kind of focused, but if we're having a viable path to kind of maintaining the great things that extract- some of the great things that extractive capitalism has brought about like, you know, much longer lifetimes, advanced medicines, things like that.
The ways that, you know, we can see each other, I can film a podcast like this like you, there's some pretty amazing things that have happened. If we're to maintain that, we need to invest our way out of it. We need to build our way out of it. We actually need extreme growth in these very specific categories. And so how can we? The only way to get capital to say, “Okay, I'm gonna do that.” Is you have to say, “You don't need to sacrifice anything to do that and you're gonna have your cake and eat it too, and you're gonna get impact.”
So when we're imagining in the longterm, your financial statement that you get at the end of the year should not just have, here are your returns. You know, this is how we are in terms of your financial plan. Here's some of the things coming up for tax time and stuff like that. It should also have how many solar panels did your money built this year? What is the carbon impact of that? How has that integrating with your charitable approach around climate change? And the actual, tangible impact of that, what votes did your shares participate in that we were able to extract and get commitments? And what does the actual follow through on those commitments been from those companies? That's what we need to build towards, but the way people are really conservative about money, and that makes a ton of sense.
There's kind of been a tried and true system that's been built and so we can't, the only way to get money to move as quickly as we can, as we have to just be in that system and do just as good of a job. That's it and then add impact. And so that's yes, public equities, but would love to be able to open up for the people who it makes sense for to be able to invest in and, you know, to be LPs in climate funds and to be LPs in solar farms and real estate trusts that is building green housing in the areas where climate adaptation, where we need, you know, more people are going to be moving towards. And the options go on and on, 529, 401ks, et cetera.
There's a lot of room for creativity within that and if we are ultimately successful and this is, you know, potentially pie in the sky dream, but this is what we have to build towards is that, especially in America, we have such a unique and weird relationship with wealth and it makes sense to some degree. I mean, especially as we're seeing a lot of the ills that that wealth has been built upon is that imagine if there could be pride associated with what your wealth is actually being able to build.
It is not just based solely on returns or it's not just like, “Yeah, I know it's not invested in the right places but like my financial plan is important. I just really trust my financial advisor and they're like doing good things and I don't have to think about it.” That could be a much better experience for you. And bringing that, that can unlock so much more of the capital that we needed to go into these solutions. So that's the longterm of what we wanna try and build.
Jason Jacobs: So what about today, where are you starting? Is it individual equities?
Zach Stein: Yeah. So today where we are starting is where most people invest, which is investing in public markets. So how we build our portfolios, we wanted to, when James and I were starting out, we really like index-based investing. We think kind of what Bogle and Vanguard started out with in the seventies. Like it just still makes the most financial sense today for the vast majority of people and institutions. Invest with the market with as low fees as possible, have it be really hands-off, set in amount you're gonna put in it and forget about it and like, it's just gonna have the best overall outcome. If you do wanna, you know, buy and sell stocks yourself, do it with a small percentage of your portfolio and do it for fun. Like that whole strategy makes a ton of sense.
What we couldn't find and still does not exist is a comprehensive way to enable that strategy that is focused on climate change. And it's focused on driving climate impact and is taking that through line of climate change and really say, okay, if we look at the models of what needs to happen by 2050 in our best thinking now, and then we look at the stock market today, what does that mean? What companies need to grow, what companies need to shrink? How do we build that? And how do we as investors position ourselves to advance both of those as much as possible? So how we build our portfolios today is we look at the entire US stock market. And about 20% of the US stock market is, are companies that are dependent upon the long-term use of fossil fuels for their core business.
So fossil fuel companies are one, dirty utilities are one, petrochemical companies are one, and frankly airlines are one, freight companies at the moment. Some of these companies are in the process of transition, but they're very far away from that point yet. And it's really cheap for them to greenwash and to highlight that fact. So we use revenue, actual last year's revenue as our drivers here. So we don't use commitments or look at anything like that because it's really cheap. The talk is cheap in this space and it's really profitable to greenwash. So that's that 20%, we remove it. Because it's just 20% of the overall stock market, we remove it, these companies, and then in their share, we put in the companies that are building climate solutions.
So our biggest heroes is project Drawdown. We just absolutely love the work that they do. And so we wanted to build an index of companies that are building Drawdown solutions. And so we call it the climate index. We originally called it the Drawdown index but we didn't think enough people would get it. And so basically what it is, it is we looked, what does every single publicly traded company that is building a Drawdown solution that is not making more money from servicing the fossil fuel industry? Because there are conglomerates like, so let's take an example of who's a company that, that we cut out.
General Electric. They are one of the largest manufacturers of wind turbines in the world. Heck yeah, that's awesome. We need way more wind turbines. The problem is they make more revenue from building jet engines and natural gas turbines. And so their long-term prospects and future is more tied to things that depend upon fossil fuels than to this transition. So we do not yet include them. We hope that they will either spin out that division or over time that the metrics will change in terms, and then we can include them in the index. So basically what we're enabling is a divestiture and re-invest approach all in one step. And so we are over-weighting the companies that are building solutions to help their share prices in the long run.
Then for the remaining 80% of the stock market. These are the companies who largely don't depend upon the longterm use of fossil fuels for their core business. It's not necessary for them. They just happen to use fossil fuels today because the world still largely runs on fossil fuels. So for us, and this is kind of maybe a difference that we have from some other people in this space, is that it's these companies that we should use our shareholder activism for. These are the companies that we should vote with, especially brands. Brands invest so much money. Think about Coca-Cola Super Bowl ads. They invest so much money in trying to get us to think positively about them and avoid negative consumer sentiment.
This is something that we saw that the BLM movement did really well. They were able to extract these pretty big commitments from these brands around racial equity and justice. It was about $50 billion. The problem though, is that BLM didn't have a seat at the table. Only $250 million of those commitments have been delivered. That's half a percent. And so it's with these companies, how can we take that example, but say, "No, we have to actually be shareholders and stick around for after the words this talk is cheap." You have to stick around and enforce that this is going on and that these commitments are being met.
And so how can we get the Coca-Cola's of the world to switch to a hundred percent renewable energy, to fully electrify their fleet, to change how they are operating in their watersheds, to align them more with climate change? And so that's the position that we wanna be in as a collective of shareholders. And that's how we work on limiting fossil fuel supply is that for us getting fossil fuel companies to voluntarily limit supply is important, but really challenging. Instead, let's focus on demand. Let's get the companies who can switch, incentivize them with carrots and then sticks to do that as quickly as possible as their shareholders.
So that's how we build our public equities portfolios today and in terms of historical performance. So this is a strategy that we can back desk quite easily. So we went back to the beginning of 2015 and are able to do this. You can see it on our website. And basically we met our goals of having that drop in replacement for an index based portfolio at Vanguard like index based portfolio, where you're doing kind of that market tracking hands-off, but in a way that's truly climate friendly.
Jason Jacobs: So it sounded from earlier in the discussion, like traditional ESG tends to use either MSEI or Sustainalytics or another platform to help them with their assessments. How does Carbon Collective do your assessments? And is it in-house or do you use an external provider?
Zach Stein: Yeah. So it's in-house. One of the differences that we see is like, you should be able to double check all of our work. We do not wanna put up paywalls or data walls in between you and what you're invested in. And so we use all publicly available data and we focus primarily on revenue from it. And we just built the, it's not public yet, but the 2022 climate index. And so we're having a bunch of companies, that's really exciting. There's a lot more plant-based meat companies. A lot more companies have come onto the market. And so we go and look company by company. We look at their 10-K, which is kind of like their report that a publicly traded company has to put into the SEC. We look at their ESG reports and then we also just, we look at the investor presentations.
So it's kind of from those we're able to piece together and kind of answer those core filter questions. Is this company driving more money from servicing the fossil fuel industry or its Drawdown solution? And in some cases we don't know. There's not enough information for it until we reach out to the company and contact with them. And if we can get that information in a way that's public we'll include them, but there are companies that we are not able to include because of that lack of public information on them. And so that's how we build, uh, largely how we build our portfolios today.
We then also look, we use, especially at the beginning of our construction for our portfolios, we really like fossilfreefunds.org. We think that from the group as you saw, it's a Berkeley based non-profit that does shareholder advocacy. We vote in coalition with them at Carbon Collective. And so it's a great tool that if you wanna see, “Oh, I have this ETF from BlackRock, what's in them?” You can plug in the ticker and it will show you, here are the fossil fuel companies in it. Here's the carbon footprint of it and you can see it compared to other benchmarks. So we love that as a tool. And so that was a lot of what we used in looking at the scope one and two carbon emissions of the different funds, but really the different sectors of the stock market. It gave us a lot of insight into that and so that helped us build our portfolios.
Jason Jacobs: How do you think about the future of fossil fuels versus the future of fossil fuel companies? Can you distinguish between those two statements?
Zach Stein: That's an interesting question. So let's look at an example, listeners might be familiar with Orsted. So they are Danish company and they were big oil company [inaudible 00:36:10]. They fully divested, saw the future of wind energy, and their stock price like it's done incredibly well over this period of time. So we think that it is, it's hard. Emotionally, I'm like, “No, fuck those guys.” [laughs] Look at like what ExxonMobil has done. Pragmatically it's, “Okay, we need every solution available to solving climate change.” And when a fossil fuel company is a true ally in that, and is not greenwashing, then it could be really powerful. But that's really hard because the CEO of ExxonMobil has to go in front of all their investors every 90 days and say, “Were we as profitable as I said we would be 90 days ago, last quarter, and will we be more profitable next quarter?”
And so it is incredibly hard to do kind of long-term planning in these big pivots. That's where we see, I mean, I think Orsted is the exception that proves the rule here rather than the rule itself. And so that's where it's having external pressures and especially market changes is what can really drive these companies to make a shift. So like yeah, in the world where I think about where we solve climate change and in 2050, we are like clearly on the path that Drawdown does ExxonMobil exist? Probably. I think it's smaller. I think that they will do a lot more to miss the boat, but I think that they will have enough capital that they'll be able to reallocate and shift around into carbon free. And probably they will have a small plastics division or something like that, but like, yeah, I think that they will probably be around.
I can't wait for the next Orsted to come up. I don't know who that will be. I can't wait for the next fossil fuel company that we get to include in the climate index. Like that's gonna be awesome. That will show such progress. And like we're maybe seeing the early stages of it. Like BP is making a lot of noise. Chevron is starting to like look a little bit more like, “Oh, we don't wanna be treated like Engine Number. 1 did to ExxonMobil.” It's just words at this point. We are very much in the we'll believe it when we see it, when it comes to fossil fuel companies, because my entire life, all they've been doing is greenwashing.
So I only have the utmost skepticism [laughs] for it until we see it. But yeah, I think that there can be an important future in it for them. I just think that they, they have a strong financial incentive to highlight their importance in the future to us. And while still doing all the bad stuff behind the scenes, because there's just, they have so much money right now.
Jason Jacobs: Before you landed on the model that you've been describing, did you consider building a model more similar to saying MSEI or a Sustainalytics, but climate focused?
Zach Stein: It was things that we kicked around. We, the hard thing is like, what they do is hard. They go, you know, pretty deep on all of these companies and that's part of the value. That's why it's proprietary and behind the scenes. It's something that we definitely want to build more towards as we go, as we launch our own funds and be able to integrate more of that data. Again, for us, transparency is absolutely key. So there's like really interesting public records around things like environmental, like EPA fines and stuff like that. And so it'll be really interesting to see like the ways that we could bring that into it potentially also around political donations, although that could be skewing a little too far from our overall mission.
The problem with ESG and especially like understanding it as a framework is it's really complicated. And for us kind of the, what we try to use in our portfolio construction is like, could I realistically explain this to, you know, fairly precocious eight year old? And would they be able to like call us out if we got something wrong? If they were like going through and doing a deep analysis of it and be like, “Why is this in here?” That is kind of our goal in how we're building this because we think, again, it's very easy to get into the weeds and then you lose the forest for the trees.
Jason Jacobs: So who do you compete with?
Zach Stein: So at the moment we compete... I mean, we're, we're small. So like honestly the biggest things we compete with right now is just like the fact that people don't know us yet. We are not a trusted entity and when it comes to like your money, you know, Vanguard, super trusted, you know, kind of what they're gonna deliver on. So that is the biggest thing, like our kind of hurdle to overcome. And that's just part of the growing pains, I think for any company that's in any FinTech company in this space is how do you go from the place in which, from when you're not trusted to your trusted and the types of activities you have to do are really different between those two places.
So like for example, right now, and I, I wanna always do this in the future, but like we do, if you join Carbon Collective, you're gonna get personalized engagement. And I think that's really amazing. Like I, as a founder am really interested to experiment with how can we spend our CAC on making you and the onboarding process, feel, seen as an individual and help in that process. We have an assumption and we see, we're seeing the early seeds of this get planted, but that the level of trust that you can build, the type of experience that you can have, that is so different to what else is out there with other platforms that, that can pay for itself and then some.
In terms of like our competitors right now, it is the lack of under the hood. Like what we're competing against is these broad narratives. And like, some of them is like fossil fuels are a good investment. That's like a broad narrative that a lot of people still hold. And from the time, I was born in 1989, if you had invested in the S&P 500 with fossil fuels or without, the without version would have done better over my lifetime than with. That's like a fairly long time in the stock market and its history. So it's that. It's that when you invest in solving climate change, you're financially sacrificing. You're one of those green hippies who are saying like, “Yup, I'm gonna accept lower returns with higher fees because like, that's me and I'm also gonna go, you know, live in my intentional housing community.” Which is awesome. Like, those people are amazing, but most people aren't that way.
So I think that that is the kind of the big trends. And then what we see that get reflected is things like Betterment's Climate Impact, where if you're in Betterment, you could, especially for your retirement accounts, click a button and be like, "Oh, I'm getting climate impact." But like, you don't necessarily dig into it deeper than that. And so there's just a lot of education about what can be, what is the actual ceiling of the impact of your money? Why is it so important to be focusing on that? And why are your priors about what real climate impact and what it will do and how that will conflict with your actual financial goals is probably incorrect. That I think is what we're kind of the most up against at the moment and it's a really fun space to be at.
Jason Jacobs: So in a world where Wealthfront or Betterment or Robinhood or any of these other players decided to get more serious about a climate portfolio and picking, if you will, with similar transparency and the other merits that you described, what stops them from doing in climate what they've been able to do successfully in other aspects of more general investing?
Zach Stein: Yeah. This is a question that we get a lot and I think a lot about it. And I think like what it ultimately comes down to, it's one of those questions where you're like, you ask a tech startup, like, “Well, why can't Google just do this?” And you're like, “Google's got a really fucking big golden goose.” Like there's a reason big companies move slowly because what they're doing works really well. [laughs] They're making a lot of money. And so for them to be able to kind of make a big shift versus just tack on a little feature, it's really risky. And so their ability to do it, like you're potentially sacrificing everything that's made this work entirely. It's like why Vanguard was able to get up and running when all of the mutual fund companies were like, “This is crazy. You can't charge low fees. People want active management and things like that.” Like they were doing really well with their model.
So like they literally couldn't switch to it because it would A, it would eat into their own margins and it just like, it just did not make sense. And so when we look at these big financial institutions or these, you know, like the, the successful crop of personalized FinTech startups that came out in the 2010s, for them to truly align themselves with solving climate change would be a pretty radical departure from where they are now. And this is part of our bet is that climate is not a feature, it is a product than it is a service. And impact is not a feature, it is something that you build an entire company and culture around and vision and, and how you bring people together. And that companies who treat it as a feature, they end up with what they have today.
And so would I like to be in a position to work with a Betterment in the long run, we launch our own funds, we're able to do our shareholder advocacy, we're able to allow that Betterment Climate Impact fund to be invested in climate solutions? Heck yeah. Like let's work together on that. Let's be in that position, but what is missing, and this is clear is that there is not climate leadership in those companies because that's not what their mission is. It's not the same. So again, we get this question a lot, but I think it is just one of those standard startup questions for an early stage company.
Jason Jacobs: So what, what are the key priorities for the company over the next 12 months?
Zach Stein: Oh, man. A bunch. So one of them is what we just recently launched, which is our green 401k program. So we got a lot of founder friends in the climate space and people are like, “This sucks. I wanna offer 401ks to my employees.” Like that's a really important perk. The problem is like the only 401k options, 401ks are traditionally really conservative in how they work because it has to do with like, who's the trustee and things like that and who's taking on the liability for managing those portfolios. And so the only things you have invest your money, if you're matching your employee's money, into fossil fuel companies and not in any additional FinTech climate solutions companies or anything like that. So like, while your company might be working really hard on solar, on the one hand, your money is working on the status quo and doubling down on that. And that just doesn't make sense.
So we launched a option where if you're starting a new 401k plan or if you're reevaluating, like, “Ah, we really need to, we might wanna move to a new provider and then have options.” Come check us out. You'll pay the same fees. All you'll be getting is you're gonna be getting options and that's our goal. Like you as an employer, we don't believe, I mean, it's up to you, but like you shouldn't be in a position of dictating how your employees should invest. What I think the best thing that you can do is give your team options. And so, like, we also offer standard Vanguard retirement date portfolios within that, but we also have our climate focus portfolio. We also, for those who wanted to have ESG portfolios. So that's one of the things that we have just launched. So we're starting to get our first customers into.
Over the next 12 months we're focusing on growing. So getting more people into the collective on the platform, decarbonizing their money and moving it into climate solutions. And we're gonna be, and this is after our next [inaudible 00:47:38] is the kind of next priority is gonna be launching our own funds in this space. How can you have a way that you can not necessarily have to be on our platform. There's a lot of stuff that we're gonna build on our platform. That's gonna really incentivize that and make it a better place to be, but if you're like, “No, like I wanna check this out first on Robin hood.” It's like, great buy one of our funds, super easy, get some money in that. Know we're gonna be voting in this way and that's how we can really start accelerating the voting that we're able to do. Not just participating in coalitions, but being in that position to lead them.
Jason Jacobs: So who do you wanna hear from and where do you need help?
Zach Stein: So if you're listening to this and you're like, “Huh, I'm a growth person or something like that.” I would like, love to hear your thoughts. We're growing, we're running a lot of experiments. We're seeing things work early, but especially if you've been at either a FinTech or a like B2C early stage, like the stage where you're just like throwing shit at the wall and kind of seeing what works and then it, optimizing it and iterating from there, that would be super interesting.
And then on the other side is for the climate founders, if you're listening to this, if you have been thinking about a 401k plan, come talk to me. We're trying to better like understand exactly what your process is in this and how we can best fit into it. And so not from a salesy perspective, but just from kind of like a research perspective, I think you could also probably learn a lot. I'm happy to share everything we've researched about this space if it's like something that you are looking into. I man, think it could be a mutually beneficial conversation.
Jason Jacobs: Great. Anything I didn't ask that I should have or any parting words for listeners?
Zach Stein: Yeah. This has been great. I think my parting words will be a kind of a challenge of how can we and you and the people in your life just think about investment in capital and do you think, am I correct? And that in some ways the biggest blocker to solving climate change right now is where our capital is allocated and how can we do that better? So that would be my parting question for the group.
Jason Jacobs: Awesome. Well, Zach, this is great. Thank you so much for coming on the show and best of luck to you and the whole Carbon Collective team.
Zach Stein: Thanks so much, Jason. Thanks for having me.
Jason Jacobs: Hey everyone, Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey, you can visit us at myclimatejourney.co. Note that is .co not .com. Someday we'll get the .com but right now .co. You can also find me on Twitter @jjacobs22, where I would encourage you to share your feedback on the episode or suggestions for future guests you'd like to hear. And before I let you go, if you enjoyed the show, please share an episode with a friend or consider leaving a review on iTunes. The lawyers made me say that. Thank you.
