Q&A

How did you initially become interested in sustainability strategy for investors and companies?

I grew up in Boulder, Colorado where you're considered crazy if you're not an environmentalist of some kind. My parents were very engaged with environmental topics. My Mom joined activists and lay down in the road in front of the nuclear weapons plant to get it shut down. My parents built a company called Jay Medical which made wheelchair cushions that prevent paraplegics from dying from pressure sores. So for me, the idea that business could be a force for good in the world was at the dinner table and being in Boulder, the idea that environmental issues were things that one could work on were certainly in the water.

I didn't start thinking about this more seriously and professionally until I was in my early twenties. I traveled to India in 2001 and encountered air pollution, trash accumulation, and the emerging market context where you don't have the same infrastructure. I saw people very excitedly bringing flat screen TVs and air conditioners on the train to their families and to places where they didn't have that before – comforts that I had taken for granted. That got me thinking about sustainable development and the idea that business could be a force for good. I read an influential book called Natural Capitalism written by Paul Hawken, Amory Lovins, and Hunter Lovins. The book layed out a blueprint for what sustainable business and capitalism could look like. I committed the last 21 years of my career to trying to realize that in some fashion. I've done that through a variety of different mechanisms: as a consultant, as a researcher, as an author, as an advisor, as an investor, as a board member, as a teacher, and as a supervisor of student teams and internships. I've seen a lot of different angles and approaches to advancing corporate sustainability.

What is the main objective of the MIT Sloan Sustainability Initiative? How does this relate to both businesses and consumers?

Our mission statement is to deliver the best education, apply academic rigor to real-world problems, and empower leaders everywhere to take action so that humans and nature can thrive for generations to come.

The first pillar is to deliver the best education. Our key audiences are Master's students across MIT and executives who come in to engage with us for executive learning on sustainable business. We aim to help business leaders understand how sustainability is integral to the key domains of business from operations, pursuing energy and resource efficiency through operational optimization, to entrepreneurship, product development, product marketing etc.. To understand the changing sensibilities of consumers and customers around this, it's integral to human resource and organizational management as people are looking to enact their sense of purpose through their work and it's integral to the financial field as investors come to incorporate ESG factors into their decision-making and their shareholder engagement. How to navigate those waters and how to create business value while tackling the big social and environmental issues of our time. That's kind of the education at work…

The second part of the mission statement is to apply academic rigor to real-world problems. The sustainability field is growing very fast. You can look at assets under management that are considering ESG, the number of companies that have set science based targets, the country-level commitments as part of the Paris Accord, investors signing up to net zero etc.. The way that we look at this is like we're building a skyscraper as fast as we can, but on a shaky foundation. We need to build the skyscraper fast because the challenges of climate, equity, and justice are urgent but the foundation is shaky and that foundation is the quality of our measurement, the quality of our mental models, and our understanding of these complex systems. We have to strengthen that foundation by bringing more rigor and discipline to the field of sustainability so that this edifice we're building can actually last and stand and reach as high as we need it to reach.

What projects are you working on with the MIT Sloan Sustainability Initiative?

We have research projects out of the Sustainability Initiative that are aimed at a couple of key interventions that we think are really important to strengthen the field. One of them is called the Aggregate Confusion Project which is looking at ESG measurements. All these investment firms say that they're incorporating ESG factors, but if you really look carefully, the measurement is super noisy, they don't know what to do with that. They don't know if they can trust it and it's very hard to do ESG integration as a result. We're attacking that problem and figuring out how to improve the quality of ESG measurement so that the capital markets can be a driver of better behavior by firms.

We have a major project called the Climate Pathways Project which is taking aim at the climate action coordination problem. There's a lot of climate action and green-washing problems because there's a lot of climate action that appears to be useful and getting us toward a low carbon future. But, if you really look carefully at their impacts, they either are not very impactful or they're only impactful in combination with other interventions. Planting trees for example: If we plant all the trees we can, on all the land we can, we can get to a place where towards the end of the century we're putting away five gigatons of CO2 a year. But, it takes a long time for those trees to grow and, between now and then, we’re accumulating carbon and that five gigatons is very small compared to the 56 gigatons of CO2 that we're probably going to be emitting from the fossil fuel system at the same time. We use an interactive simulation tool called En-ROADS to help people explore the efficacy of climate actions, the details of different climate transition scenarios, and what the high leverage actions are. We ask: ‘How did they work in combination with each other and what are the transition risks that we face as companies and investors under those different scenarios’ so that we're better positioned to make the wave and ride the wave of transition in the most effective way possible.

What is the En-ROADS simulation tool and how do you use it to promote investor action on climate?

The Climate Pathways Project led by Bethany Patten has a broader objective which is to advance ambitious evidence based climate action through engagement of top decision makers. Those top decision makers include public policy makers, business leaders and investors, and civil society leaders. There's a big component of this project which is about engaging with elected officials. Bethany has led workshops with dozens of senators, house of representatives members, staffers, governors, mayors, and the Biden Administration to drive the conversation about ambitious evidence based climate action.

The part of the project which I focus on is about engaging with investors. For example, I just did an interactive webinar for CFA. CFA Institute is investment professionals from asset managers, asset owners, creative other regulators, and others in the financial sector. Together, we explored the En-ROADS model to look at what climate actions are effective and they think might be worth doing: electrifying vehicles, planting trees, plant based meat, carbon pricing, energy efficiency, renewable energy. We get to see the relative efficacy of those things. As we work our way through these scenarios, we can show the different kinds of economic impacts. We're talking simultaneously about how you can make the wave and ride the wave as an investor. To make the wave we look at: how can you use shareholder engagement to push companies to decarbonize and how can you provide capital to early stage startups to pull technologies to the market. To ride the wave we look at: how can you as those new industries grow, how can you participate in the growth of renewable energy, the growth of electric vehicles, the growth of carbon removal technologies, the growth of energy efficiency technologies in ways that maybe don't change the world with your money, but allow you to have a portfolio that survives that transition and thrive.

What impactful steps can investors take in regards to climate?

Situating investor action within the larger context – the most impactful action that we could see was pricing carbon. Carbon Tax or Cap and Trade System that makes it expensive to pollute changes the incentives for everything. When you notice that you started to ask yourself: What levers do I have to drive carbon prices? That's a conversation about our companies in our portfolio: Can we push them to stop lobbying against carbon price? Are there companies we could encourage to lobby for a carbon price? Are we engaging directly with our elected officials? Are there ways that we can create carbon-price-like mechanisms?

If a company is committed to net zero and they're buying expensive carbon removal technology and carbon offsets to offset their emissions – they are essentially self imposing a carbon price, and so anything they do to reduce their emission is going to reduce their spend on those carbon removals. There's even ways that you can create a virtual carbon price, a voluntary kind of system as a stepping stone on the way toward mandatory carbon pricing. Recognizing that carbon pricing is already happening regionally and also recognizing how I can coordinate my efforts with others and the wider system to try to drive the kind of changes that we need to see.

Have you seen hesitancy when it comes to investment in ESG organizations?

Starting with the clean tech space. Clean tech investors understand the climate challenge and its magnitude and importance. They are spreading their bets across a few different arenas of climate action. En-ROADS can help focus the conversation on the things that are really high leverage or the things that work together in combination. For example, let's not electrify vehicles and buildings unless we know that we're going to be sourcing low carbon electrons and working on grid decarbonization. Those types of combination plays. But also recognizing that methane is a really strong greenhouse gas and if there are plays we could make to reduce industrial methane emissions that turns out to be a really strong lever may not have been on our radar. You know, focusing on efficiency and renewables.

The other part of the world is VCs and PE Funds which are not explicitly sustainability focused or climate focused, who are generalist VCs and PE. The ESG conversation is really arriving in PE-VC in a big way right now… It was happening in pockets for quite some time, and now there's a significant shift… There is a range of different levels of seriousness of the approach, like whether it's a check the box to be able to show your LPs that you're doing something versus people who are really looking seriously at and building it into the way that they think about diligence in companies, increasing the value of companies, selling companies, or exiting companies and at each of those stages: How do you create the most enterprise value possible through sustainability? Some people are taking a much more strategic approach and some will take a more box ticking approach. But, the difference between now and three years ago is that now everybody is doing some kind of an approach whereas before it was only isolated in pockets of a couple of very large PE firms that had the wherewithal and bandwidth to work on it.

How is investment in renewable energy linked to rising fossil fuel energy prices?

Historically, interest and investment in cleantech has followed oil prices. That is a truism about the space that when conventional energy gets expensive, people start looking for alternatives. That's true of the origin of solar energy in the late 1970s with the oil crisis at that time. The fossil fuel exploration and production system has an endogenous oscillation. When prices are high people start investing in production infrastructure. It takes time to come online and by the time it does – all of a sudden there is oversupply and the prices crash. The prices go down, people invest less in infrastructure and so then there's less supply, prices come up. That's an oscillation dynamic that John Sterman identified forty years ago. Those oscillations create boom bust cycles in the clean tech space.

Climate concern is this rising signal underneath that oscillation that has driven more and more attention on this space. When you get an event like Putin’s war driving up fossil fuel prices on top of a concern about climate change, you have this kind of perfect storm of like: hey let's electrify everything, let's go to deeper energy retrofits than we thought we were gonna do. I think the problem is that part of the picture at the same moment that happens is the dynamic I just described, which is that high prices for oil spurs interest in oil and people are making hand over fist money in the oil business right now. BP and Shell just posted record profits.

In the CFA Institute webinar I just did, one of the questions asked was: In the last twelve months fossil fuels have been one of the best investments there is. So are we going to take a haircut if we are trying to decarbonize our portfolios right now? And it's a paradox because if you're in upstream oil and gas you're making a lot of money, if you're in the midstream of industrials that are suffering from those high energy prices you're in a lot of trouble, and if you're in the cleantech arena you're getting a boost. There is going to be more investment in oil and gas infrastructure as a result of this price spike and that will bring these prices back down and that will affect the clean energy economic dynamics. We don't really get to leave this merry-go-round until we start pricing carbon.

Climate change has become an increasingly polarized issue among politicians and the general public in recent decades. In what ways do you think climate change can become depolarized?

I wrote a book with Gabriel Grant called Breaking Through Gridlock on the topic. There's a couple of different pathways. One avenue is that you just do climate change without talking about climate change. There was just a piece of research that was in the Bloomberg Green Newsletter about the political consensus. There is broad political consensus about energy efficiency. Everybody loves energy efficiency and saving money and energy. It's the reason why we can have a bill being discussed, framed as an inflation reduction measure, that includes climate provisions for heat pumps and whatnot. Everybody likes saving money on energy bills and I think there's a lot of stuff we can do which is just about the specific solution. In some jurisdictions you're going to frame it as a climate strategy and in some jurisdictions they're gonna frame it as an inflation strategy. You just have to be politically savvy about that and depolarize the component policies or the component issues without trying to depolarize climate change as a whole. Beyond energy efficiency, it's reducing gas leaks. Nobody wants to be leaking gas, it's scary, dangerous, smelly, wasteful and eliminating gas leaks is a way of attacking methane, which is a very significant greenhouse gas. We don't have to talk about climate change to talk about a leaky gas system, right? That's one avenue that I see people pursuing that is useful and promising from my perspective.

The other piece of the puzzle which Gabriel Grant I really emphasize in our book is that we just have to talk about climate change more and we have to talk about it in constructive ways with people that we have access to by virtue of our social interactions… I see polarization as an issue that is far beyond just climate change. Polarization threatens democracy, it threatens progress on every issue we care about. I think that there is a strategy for just tackling polarization. This strategy involves really talking to and engaging with each other constructively in our families and communities. It gets harder and harder because we have geographically segregated ourselves into enclaves of liberals and conservatives, commercially, there's companies which are sort of pigeonholing themselves as being places for conservatives or places for liberals. I think that the grassroots dialogue approach is a piece of the puzzle.

How can projects you are working on help spur conversations about climate change?

Are there any other research projects you are working on now or in the future?

I'm currently working on a project that’s in its early stage thinking about the impact that capital can have on the world. The people who are at the absolute forefront of that question are largely private wealth because family offices and individual entrepreneurs have the flexibility and capital to take more risk and try and make something happen. What we're seeing is that many of those impact investors are dissatisfied with their experience with impact investing because so much of it is organized around what we call point solutions. Meaning that for example, I'm gonna invest in this one company, doing this one thing, and this one place.

Do you have a favorite dinosaur? If so, what is, if you don't, you can always message me because you know, that's fine too.