Fossil fuels companies will only change when the market forces them to

oil Coal Fracking Natural Gas Dirty Utilities

In some theories of ethical/impact investing, advisors and fund managers take a "seat at the table" approach to fossil fuel companies. They argue that it's important to hold their stock in order to engage these companies directly on issues like climate.

We believe this strategy has failed. Fossil fuel production has only increased over the past 20 years (source). Why? Because they have customers and it's still profitable. Furthermore, such companies know climate-enthusiasts like us already hate them, so they don't face any additional brand risk from defying us.

Why Divesting Matters: So, we need to convince their corporate customers to decarbonize (see: "Vote & pressure") and make their extraction operations as expensive as possible (by divesting). Divesting increases the supply of available fossil fuel shares. As share demand fluctuates, this higher available share count makes it easier for share prices to fall, which in turn, makes it more expensive for fossil fuel companies to raise capital for expanding their operations.

To solve climate change, the companies building solutions must grow exponentially

Clean Energy Industrial Recycling EVs & Green Hydrogen Building Efficiency Batteries & Storage

From zero-carbon energy & transport, to building efficiency, to the circular economy, we need economically viable alternatives to replace all the processes that rely on fossil fuels. And we need them ASAP.

For publicly traded companies, there are three ways individuals like us can help them scale faster. 1) Buy their products. 2) Get others to buy their products (See "Vote & pressure"). 3) Buy & hold their stock.

Why Reinvesting matters: Long term investors like us have a unique power. We can buy and hold a stock for a long time, effectively removing it from the market. When we do that, we decrease the supply of shares available for daily trading. This lower supply helps keep the share prices higher as demand fluctuates. A higher share price enables the companies to raise cheaper capital and use more of their balance sheet for expansion rather than servicing their equity or debt obligations.

We can use our leverage as individual investors to vote & pressure companies to decarbonize

Coca Cola Walmart GEG Nike Impact
Are they a climate-forward company? No. Coca-Cola is far from an environmental beacon. They have a terrible record on water rights, their products often come in fossil fuel-based plastics, and they transport a lot of water, generating high emissions.

Here's the key distinction, as we see it. While Coca-Cola has a negative impact today, its core business doesn't depend on fossil fuels. Their manufacturing plants and vehicles could run on 100% clean energy. They could use 100% bioplastics in their packaging. And they could even use captured CO2 for carbonation.

If a company the size of Coca-Cola (or Nike or Starbucks) made these changes, imagine the impact on the rest of the economy. How much less demand for oil would there be? How much more demand for solar panels, batteries, and bioplastics?

Thinking pragmatically, we don't believe the Coca-Cola's, Nike's and Starbuck's of the world are going to disappear in a decarbonized world. Which means it's on us to get them to change faster. That's why our core portfolios invest in the ~80% of the market that is already low-carbon (comparatively) and doesn't depend on fossil fuels.

(And if you really don't want to invest in them, you can choose one of our All Green Portfolios!)
These are the companies in which we want to boldly "take a seat at the table." As individual investors, we have a unique power. Not only can we collectivize our shares to propose and vote on aggressive shareholder climate resolutions, we can collectivize our voices too.

For consumer-facing companies like Coca-Cola, much of their stock value is in their brand. By pairing our internal shareholder resolutions with external public pressure, we can force these companies to change or risk their brand's reputation.
Look at how companies like Nike responded to Black Lives Matter in 2020. Or how Coca-Cola and Delta have responded to public pressure around the 2021 voting restriction laws passed in Georgia.

We can push companies to go faster on climate and hold them accountable. We have power. We just need better ways to collectivize our voices into one.

Our Master Plan

1. Make sustainable investing = smart investing
Right now it's too hard to be a smart investor who cares about climate change. You often have to choose between your ethical values and your financial returns. Green funds without fossil fuels are expensive and lack diversity. ESG funds are less expensive, but they're generally just "less bad." They have plenty of fossil fuel companies and no outsized investment in companies building climate solutions.

Our first step at Carbon Collective was to build a new kind of robo-advisor, one that's 100% focused on climate impact. We want to remove every reason to say "no" to sustainable investing. We have no: no minimums, the same fees, similar diversification, similar (and maybe better) performance, and super clear impact—divest from fossil fuel-reliant industries, reinvest in companies building solutions, and hold the rest so we can pressure them to decarbonize faster.
2. Expand our reach with 401(k)’s and DAFs
Next, we plan to bring our climate-focused portfolios to other areas of investing: first, 401(k)'s. It's crazy to us that there aren't good climate-friendly 401(k) options for climate-focused non-profits and startups. This leaves them investing their own and their employees' money in fossil fuel companies through their 401(k)'s. We aim to roll our our own 401(k) offerings with a modified version of our climate-focused portfolios by early 2022.

Another area where great options don't yet exist is climate-focused giving aggregators. We believe there's a big pool of donations waiting to find the most impactful climate-projects. Donor Advised Funds (DAFs) are great because you get a tax deduction this year, but your charitable dollars can appreciate in value over time. Imagine a DAF where the community finds the most impactful non-profits and all donors can upvote which 5 charities the fund donates to this quarter. And/or a fund that gives zero-interest loans that make adopting solar in low-income communities, capping old oil wells, or replanting degraded land an economic no-brainer.
3. Launch our own ETFs
When we say impact investing, we mean that someone advocates on your behalf to push a company you're invested in to change. Impact investing exists today, but it's primarily something only the very wealthy can afford, which means not that many people do it. Mutual funds from companies like Calvert and Parnassus often have high minimums and are usually very expensive to own, often with >1% a year in fees. And while they do pressure company boards, it's across a range of issues, not just climate.

We believe the way to dramatically scale impact investing and the power of our shares is to first, make it a smart investment (low fees, broadly diversified) and second, just focus on one theme, which in our case, is climate.

To get there, we'll take our existing portfolios and make them easy and affordable to buy anywhere (Robinhood, Guideline 401(k)s, Schwab, etc.) by turning them into ETFs: the Climate Index and the Low-Carbon Economy. We'll be able to give our ETFs a head-start by using the assets under management in our non-taxable accounts (IRAs, 401(k)'s, and DAFs), so they can get the necessary trading liquidity quickly. Don't worry, this won't impact your fees or impose any tax burden on our members. You'll just go from holding 200+ stocks and ETFs in your IRA to just our two stock ETFs

Our goal with these ETFs is to dramatically expand our outreach capabilities so folks can do not only pressure endowments, pension funds, etc. to move away from fossil fuels but towards real climate impact.
4. Unleash an unstoppable network effect
Once our ETFs are launched, individuals and institutions will be able to easily invest in low-fee, diversified stock portfolios that are 100% focused on driving tangible climate impact from publicly traded companies. With each new investor who joins, we'll add a new voice that can pressure brands and more shares that we can use to vote on our climate resolutions. Thus we will have started an early network effect.

A network effect occurs when a product or service gets better with each additional person who starts using it (social media is a great example). The most interesting part of a network effect is their style of growth: exponential. That's exactly the type of growth we need to unlock to make the changes we need to see by 2030 to avoid catastrophic warming and be on a path to a stable climate.

Here's how we do it. With every shareholder resolution win we get from pressuring companies, we put our Collective in a strong position to generate positive press about our accomplishment. Such press enables us to expand our reach and bring on new members and investors who didn't know about Carbon Collective before. With them onboard, the service get better because we'll be in an even better positioned to pressure more companies with an even louder voice that has even more shares backing them up. Thus we create an ever-growing upward spiral of impact leading to greater exposure, which in turn, leads to greater impact.
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