Business manager

ESG investing ‘can make you a better business leader’, says professor

Bruce M. Usher, professor of professional practice at Columbia Business School and faculty director, joins Yahoo Finance Live to discuss ESG investing, new ESG product development, the Cut Inflation Act and opportunities and challenges in the age of climate change.

Video transcript

AKIKO FUJITA: Well, we’re sticking to the ESG investing theme here. A new study from PWC found that nearly 9 in 10 institutional investors believe asset managers should be more proactive in developing new ESG products. But less than half of asset managers plan to launch new ESG funds. So what’s an investor to do?

Bruce Usher, a Columbia Business School professor and author of the new book, “Investing in an Age of Climate Change,” joins us now. And Bruce, you argued that despite the economic backdrop, now is kind of the time to invest in some of these green names. Explain this thesis to me.

BRUCE USHER: Absolutely. It’s really about macro trends, about climate change. We know climate science. We know that after 300 years of building a global economy that emits emissions into the atmosphere, we have 30 years to decarbonize to avoid catastrophic climate change. So you have consumers pushing to buy more sustainable products. You have employees who say they want to work for sustainable companies. You now have investors watching these trends, business leaders saying we need to respond to these trends.

You have government measures like the Inflation Reduction Act that support this. And finally, you have physical risks of climate change manifesting – more severe storms, heat waves. So all of these macro trends are all pushing in the same direction. They will be with us for decades to come.

AKIKO FUJITA: How do you break that down, though, for investors looking at this and saying, well, OK, there are questions about ESG funds, and we’ll get to that in a moment. But in terms of names, there are electric vehicles, which some would argue is actually not a long-term game in terms of climate change impact. There are many other names that can potentially be overlooked.

BRUCE USHER: Okay, so when I looked at this industry 20 years ago – that’s how long I’ve been in it – the big challenge then was that there was nothing to invest in. If you look at the whole solar power market, all on a global scale, there is less solar power than just one coal plant. Last year, investment in solar energy, more than 100 coal-fired power plants worth and earning. So the big picture here is that the opportunity to invest is now trillion dollar sectors. We have the electric vehicle sector. All car manufacturers are turning to electric vehicles. The key question is why.

The reason is that these products are better than the historical product because [INAUDIBLE] before. So you’ve been looking at electric vehicles specifically since you asked about it. Why are EV sales so good? Because consumers love them. Consumers prefer EV products. They fly away from showrooms. In fact, automakers can’t keep up with the demand.

AKIKO FUJITA: They prefer produce, but it’s still a very small portion, right? We’re talking about, what, 5%.

BRUCE USHER: Around 5%, but the analysis shows that around 5% you get a tipping point in these markets. And that’s what the automakers say. You’re going to have to wonder why are they all rushing into this market? What do they see? What they see is five years ahead. When they plan new cars, they look five years into the future. This is the time it takes to deploy a new model.

And what they see is an all-electric future because it’s a better product, consumers love it, and then we have these trends around climate change. So that’s what really drives this. And that’s what creates the investment opportunities. When consumers and businesses move in this direction, the market opens up to investors.

AKIKO FUJITA: We’ve seen an incredible amount of inflow into ESG funds over the past few years. A little math some will say what’s going on right now not only is that politicized but you also have those like Deutsche Bank, other names, that are now being called to eco-wash the funds than the names that were included in these funds were not necessarily some kind of green, so to speak.

What do you think… I mean, what do you think is going on here? How does that manifest– from the perspective of investors, those who put money behind these things, they were anticipating some impact coming from these funds. Well, turns out that’s not really what ESG investing is, is it?

BRUCE USHER: That’s right, exactly. And there is a real misunderstanding around ESG. ESG investing is really quite simple. That is to say, look, when I look at potentially investing in an asset, I look at financial numbers, I look at management, I look at all of those things. And then also, to be a wiser investor, what else could put that investment at risk? What else could change the results? Examine risks such as floods, hurricanes or wildfires. How might this affect my investment?

If you want to go buy a house, a second home on the coast, would you like to know if there are going to be floods? Would you like to know? That would be a smart thing to know. This is what ESG investing is. It can make you a better business leader. It can make you a better investor. The challenge, however, is that it doesn’t really tackle climate change. Just because you buy it– just because you decide I’m going to leave this house– that I’m going to pay less for it because it might flood– doesn’t reduce the risk of flooding. So it’s a challenge.

AKIKO FUJITA: So how do you invest from an impact perspective?

BRUCE USHER: So from an impact perspective, it’s much more about going beyond ESG investing. And there are really two strategies that I write about in my book. One is what we call thematic. So choose a theme that you are passionate about, with which you are comfortable. If you are really interested in renewable energy, invest in solar or wind funds. There are many there. It’s a way to really channel money into a solution.

Or if you are interested in electric vehicles, in shares or funds of electric vehicle companies. These are thematic funds. There are also now new funds coming out in green hydrogen and other advanced technologies. So you can have a thematic focus on equity, debt, venture capital, whatever you want, or you can have what we call priority impact. Now, it’s very special in the sense that it’s really only for wealthy investors.

Impact first does not follow fiduciary responsibility. He says, I really want to fight climate change. I’m going to put my capital into it. I could get a return. The return could be decades away. But it will have a big impact. And that’s where you really invest in technologies that aren’t commercial yet. It goes far beyond, say, solar and electric vehicles. These are some new technologies such as direct air capture, for example.

AKIKO FUJITA: And very quickly, what about green bonds?

BRUCE USHER: Green bonds are therefore issued by companies because they see these trends coming. They see these sustainability trends. Consumers want it, and investors want it. It is, once again, a question of thinking about how the world is decarbonizing? And what does this mean for my business? The green bond makes perfect sense, although, again, a green bond won’t have a huge impact on the environment. It’s just a very reasonable investment.

AKIKO FUJITA: OK, good to differentiate these two. Bruce Usher, professor at Columbia Business School and author of the book “Investing in the Age of Climate Change”. Thanks for joining us today.