Author Talks: An investor’s guide to the net-zero transition

Investor and Columbia Business School professor Bruce Usher explains the investment opportunities that will arise as demand for climate solutions propels business into a new era of sustainability.

In this edition of Author Talks, McKinsey Global Publishing chats with Columbia Business School professor Bruce Usher about his new book, Investing in the Era of Climate Change (Columbia University Press, October 2022). Rapid technological development over the past few decades has created a new world of investment opportunity for sustainability, Usher says. Now the tools needed to decarbonize the global economy actually exist, but mobilizing them at scale remains a significant challenge. An edited version of the conversation follows.

Why did you write this book?

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I wrote the book for two reasons. One is for investors, and the second reason is for the planet. When I look back 30 years—which is when I graduated from business school—and I think about what had the greatest impact on business and therefore on investors during that period, the answer is pretty simple: technology.

Technology has changed everything in the business world in the last 30 years, specifically digital technologies. If you looked at the ten most valuable companies back then as an investor, there was only one tech company in the top ten. If you look at that same analysis today, seven of the ten most valuable companies globally are tech companies. Technology has changed everything.

Let’s look forward 30 years because that’s what matters to investors: what’s going to happen in the future. Ask yourself what will impact business and investors more than anything else in the next three decades. My answer is climate change.

We have three decades to completely rebuild this entire global economy that we spent the last 300 years creating. That’s going to require an extraordinary amount of investment capital—estimates range from $100 trillion to $150 trillion. Investing that capital is going to create for investors new risks and new opportunities, so the first reason I wrote the book is for investors to understand those risks and opportunities for their own benefit.

We have three decades to completely rebuild this entire global economy that we spent the last 300 years creating. That’s going to require an extraordinary amount of investment capital—estimates range from $100 trillion to $150 trillion.

The second reason, as I said, is for the planet. The actions that investors take over the next few decades are going to change the planet. Investors are going to remake that global economy and reduce emissions to meet those science-based targets. How they go about doing that, how quickly that capital is invested, and how effectively it’s invested are going to make all the difference in terms of allowing us to avoid catastrophic climate change.

The reality is that capital exists, but mobilizing that capital and investing it are pretty significant challenges. My hope in writing the book—and it’s actually how I conclude the book—is that every investor, whether they’re individual or institutional, will understand that these changes are coming and will act for their benefit, which is ultimately for the benefit of all.

That’s not to say it’s easy to solve. It’s really complex. It’s challenging. There are a lot of parts to climate change, but in the context of many of the other great challenges that society faces, this is one where we have at hand the ability to solve it.

That frustrates me because I can see the solutions. I know what we need to do, and it’s not because I know more than anyone else. Those pieces are well understood today. We just need to go do it. In writing this book, I really hope that investors, business leaders, and everyone ultimately get on board with that. Of all the great problems we face, it would be nice to get this one solved.

What are the biggest changes you’ve seen take place during your decades spent in sustainable investing?

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I began in this field 20 years ago, and when I entered it as a businessperson and as an investor, the challenge wasn’t the science of climate change. We understood very well, even 20 years ago, the science underlying climate change, what the challenge was, and what we needed to do to address it.

What was different 20 years ago was that there was very little that we could do about it. We had very few investment opportunities because most of the climate solutions that we need to apply to reduce emissions were uncompetitive with existing products. Think about solar. Solar power was 99 times more costly then than it is today. If you look at, say, electric vehicles, there was nothing we could put on the highway. Golf carts were about as far as you could go.

Today that situation has completely changed. We have technologies and business models that already exist today that we can use to reduce more than half of global emissions. Those products are commercial, and they are scalable already.

What was different 20 years ago was that there was very little that we could do about [climate change] ….Today that situation has completely changed.

We also already have technologies to reduce the other half of the emissions we need to get down to zero. Those already exist, and they didn’t exist a couple of decades ago. They’re not yet commercial, but they’re under development. Many of them are already being financed by venture capitalists and other early-stage investors. We have this extraordinary change in the technologies and the products—what I call in the book “climate solutions”—that are available to us to us to reduce emissions to get us to that net-zero goal in the next three or four decades.

That’s the largest trend, but it’s actually only one of four trends that have happened in the last couple of decades. The second trend is the rising physical risks of climate change. In other words, the reality of climate change is becoming apparent. Many of us are experiencing extreme heat waves, wildfires, floods, storms, and so on. That’s putting assets at risk, and we’re starting to experience those losses today.

The third big change is what I refer to as “evolving social norms.” We’re seeing a lot of this upswell from younger people who are much more concerned than their elders about climate change—probably because they’re going to live to experience it. They’re pushing for action on it, and that’s actually working its way through the business world. We see companies taking action to reduce emissions and setting net-zero targets. Mainly that’s because of the pressure from younger consumers and employees to do something about climate action.

The last trend is government action. Going back to when I started in this area a couple of decades ago, there was some government action—negotiations around international agreements, things that showed a protocol, and the like. But what we have seen since then is government action flow from top-down international agreements into local action—often at the state level, and even the municipal level.

You’ve described a world of opportunity for investors. What challenges do investors also face?

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The challenge as an investor is knowing which companies or projects will succeed in this new world and which ones will not.

If we look at the auto sector, I think it’s pretty clear to say that the disruptor in this case has won. The incumbents, at least to date, have not. For example, GM was, until pretty recently, the world’s largest automobile company. Then there’s this upstart, this disruptor, Tesla, which comes along a little over a decade ago. Tesla is now much more valuable than GM, and it’s by far the most valuable automobile company in the world today. As an investor, one would prefer to have, in that case, picked the disruptor, but this is not always the case.

In another sector of the market, the solar sector and power industry, there was a disruptor called SunEdison. I’m using the past tense because it went out of business. It grew very fast. It went public. It had a very high market cap. It was ultimately driven out of business and went bankrupt.

For investors, understanding how sectors of the economy are going to change and which companies are going to be successful as those changes manifest themselves is challenging. It’s not an easy thing to be successful at.

The company that has become the most successful in that area is an incumbent—it used to be a sleepy little utility called Florida Power & Light. It’s now called NextEra Energy, and it has grown to become the most valuable utility in the world by moving slowly but surely and very aggressively into renewables. The incumbent is the winner in this case.

For investors, understanding how sectors of the economy are going to change and which companies are going to be successful as those changes manifest themselves is challenging. It’s not an easy thing to be successful at.

What does it take to invest successfully in the era of climate change?

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To invest successfully in the era of climate change, I would recommend that investors follow five different tactics. The first of these is going to be pretty obvious to anyone who really thinks about this issue.

Take the long view. Bill Gates famously said a number of years ago, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. 1 ” Of course, he was talking about technology changes. There are a lot of parallels between what’s happened in technology and what’s happened in climate change. You need to take the long view.

The second recommendation is to beware of greenwashing. A lot of companies are greenwashing and will greenwash. They are making promises that they cannot meet or do not intend to meet. In some cases, they’re doing this with the best of intentions—maybe they wish to have these changes occur. I think everybody wants to address climate change, but greenwashing is a risk, and you need to be aware of it and avoid it because, in the end, it’s unsuccessful.

The third recommendation is a phrase I learned years ago when I worked as a trader in finance: “the trend is your friend.” It’s a simple one and easy to remember, but it’s very powerful investing advice. When we see a number of trends that are pushing in the same direction, being aware of what those trends are will help you over the long run as you invest—being aware of those trends and using them to your advantage.

The fourth recommendation I would make is to avoid businesses that anticipate a change in human behavior. One of the things I write about in the book, even though it’s a book about investing, is the challenge that we have as humans in changing the way we invest and the way we build our economies. We’re very set in our ways, and very few businesses have successfully changed our human behavior. In fact, the ones that are most successful are those that look at what we’re doing and essentially improve upon the products that we enjoy.

So far, asset values have moved relatively gradually in most sectors, but there may be a very rapid repricing of certain asset classes. With real estate at risk and certain technologies at risk, it’s better to act early than late.

A good example of that would be Beyond Meat, which I write about in the book. Beyond Meat does not try to say to people, “You shouldn’t eat meat.” It’s saying, “We’ve got a product for you that tastes an awful lot like meat. If you like it as a meat eater, you’re really going to enjoy it, and it’s associated with much lower emissions than meat is.” So that’s my fourth piece of advice: avoid trying to change human behavior. It’s too hard.

The last piece of advice, which is similar to the first one is, is that it’s better to act early than late. There’s an economist named Hyman Minsky who passed away some years ago, and he became known for something called the “Minsky moment.” The Minsky moment occurs when investors suddenly, all at the same time, reprice an asset class. We experienced a Minsky moment back in the financial crisis of 2008, when investors all across the board suddenly repriced certain groups of assets, like subprime loans.

You want to avoid a Minsky moment of climate change. So far, asset values have moved relatively gradually in most sectors, but there may be a very rapid repricing of certain asset classes. With real estate at risk and certain technologies at risk, it’s better to act early than late. Those are the recommendations I have for investors in the space.

What surprised you in your research and writing?

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As an academic and a teacher—and from my investment and business experience—we tend to focus on individual technologies, individual sectors of the economy, or individual businesses. We get very deep in understanding what is happening in that sector and what the opportunities and the risks are there.

What I found in researching for the book was that the connections between these sectors are really important. In fact, I ended up devoting an entire chapter I called “Better together.” And what that chapter addresses is how these climate solutions—renewable energy, electric vehicles, energy storage, green hydrogen, and carbon removal—are very separate industries, but in fact, they’re very closely connected.

More importantly, as we see growth in one sector—as we see growth in renewable solar and wind, as we see growth in electric vehicles, and so on—it will have serious ramifications for other sectors. In fact, this will turbocharge growth in the other sectors for technology reasons and relating to capital and how these sectors work together.

That’s really important because, ultimately, we all have to move in the same direction. The fact that these different sectors of the economy are working better together, not just separately, was new to me, and I thought it was a really important conclusion.

Do you think that humanity can stop climate change from getting significantly worse?

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I’m often asked that question, especially by my students here at Columbia Business School. Will we avoid catastrophic climate change? My answer is that we can avoid catastrophic climate change, but that doesn’t mean we will avoid it—the difference being “can.” We have the tools to do so, and we have the capital to do so, but we may not have the will to do so. The real challenge there is the political will to do so, particularly around the need for countries to cooperate in addressing this issue.

Climate scientists have mulled over many scenarios for the different ways that we can avoid catastrophic climate change. They assign names to these scenarios, and there are four that are best known.

We can avoid catastrophic climate change, but that doesn’t mean we will avoid it—the difference being ‘can.’ We have the tools to do so, and we have the capital to do so, but we may not have the will to do so.

The first of those scenarios is that, starting right now, we begin to dramatically reduce emissions and do so every year for the next 30 years until we drive it down to zero. That is likely to be cheapest, most effective, and lowest risk way of solving this problem, but I don’t think we’re going to do it. I think we’re going to spend more time than it takes to get our act together. We’re going to be very slow.

But there are other ways of ultimately reducing emissions, including carbon removal from the atmosphere. It’s more costly. But it is feasible. And that’s what we’ll probably end up doing because we’ll be a little slow to get there. I’m optimistic, but I’m also realistic, and the realistic side of me says this is going to be a costly process and not well executed overall.

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Bruce Usher on an investor’s guide to the net-zero transition

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