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Climate solutions can nudge the wealth distribution curve
Intersecting the trends of growing participation in the financial markets and a need for climate investment dollars is a once-in-a-generation opportunity.
Wealth inequality remains at historic levels within the US and across the globe. As a result there are growing calls for government mandated redistributive measures and bubbling resentment of the uber-wealthy from both ends of the political spectrum. A wealth tax might one day narrow the gap but there's a more immediate starting point that doesn’t require government. As participation in financial markets continues to grow, companies working on climate mitigation and adaptation have a once-in-a-generation opportunity to reshape the wealth distribution curve by bringing in new market participants as shareholders. To better understand what's possible more needs to be said about why participation in financial markets is growing and why there's a near infinite need for capital when it comes to funding climate solutions.
More Americans opened a brokerage account in 2020 than any previous year. The pandemic was the main driver but two underlying shifts will continue to create an ever larger group of new market participants. One shift is the rapid decrease in barriers to entry to financial markets. Robinhood singlehandedly caused the death of fee based trading while simultaneously making it much simpler to invest money. And while there’s certainly a dark side to Robinhood’s success, no one can debate that it’s easier to buy a stock now than ever before. Outside of the public markets, AngelList is similarly making it easier than ever to access private market deals. While these deals are available only to accredited investors today, the SEC recently loosened the definition for becoming accredited. All it takes now is passing a single exam as opposed to making over $200K per year or having a net worth above $1.1M. Then there’s the next wave of crowdfunding platforms like Republic which don’t even require accreditation to participate. Like with Robinhood the user experience is intuitive and the regulations are changing in a way that makes it more appealing for companies and investors to use such a platform. And finally beyond the strictly regulated public and private markets looms the entire crypto market which has the promise of providing access to financial services without any requirements other than a smartphone with an internet connection. The tooling for participating in buying and selling assets of all types has improved drastically in the last 5 years and will continue to do so.
The second underlying shift driving more participation in the markets is a growing awareness of how the game of capitalism has to be played. Beyonce said it best in APESHIT - “Pay me in equity”. We live in a time where the mechanisms of capitalism are nakedly exposed in every aspect of our lives. There’s no way to build wealth on just an income. And this realization is more widespread than ever before. Putting wealth creation aside, ownership also means more control over outcomes. The meme stock sagas of Gamestop and AMC aren’t just funny anomalies but represent a new relationship between investors and firms. Call it shareholder activism, digital organizing, or whatever else, but ultimately it’s an effective way to get corporations to listen without relying on the government. While it starts with AMC, where a subreddit drives up the stock price leading the company to offer it’s shareholders free popcorn it quickly leads to Exxon where a more organized activist fund gains 3 board seats which now creates actual pressure for the company to take action on climate. People are participating in the markets because there’s a bleak understanding that lucking out on a few investments might be the only remaining shot at economic mobility. That's paired with the understanding that coming together as shareholders provides much more leverage than just signing online petitions or sharing posts on Facebook. The biggest obstacle now that access is easier and interest is there is simply the amount of savings people have. The most recent statistics from before the pandemic show that most stock wealth is still held by the top 10% of households. Nevertheless, ownership is everything in the world we've constructed and awareness of this fact is further driving interest to participate in the financial markets - even if it's just small amounts of money today.
At the same time as this shift in the financial markets is taking place, there’s also the growing need to invest in climate mitigation and adaptation solutions. Over $16 billion flowed into the climate tech sector last year but it will take an order of magnitude more to make a real dent in emissions. The excellent Climate Tech VC newsletter offers a glimpse of the range of solutions needed with its weekly catalogue of companies raising funding. These companies span alternative meat producers to worm based waste removal services. As the popular refrain in climate circles goes, stopping climate change requires changing everything - and changing everything means investing in a lot of new stuff. Consider that to move off of our fossil fuel dependence in the US, we have to replace approximately 1 billion machines with electric versions of themselves. The economic opportunity is staggering. Smart investors already understand that climate mitigation and adaptation businesses will provide outsized returns in the coming decades. Look no further than the performance of EIP’s climate tech index compared to the S&P 500 over the last few years. As long as we collectively believe that working on mitigation and adaption is worth our effort, the financial returns will be there. Most climate solutions are simply better than their fossil counterparts - it’s just a matter of lowering the “green premium” by scaling up these businesses. So if we zoom out, there’s a massive investment opportunity just when we’re also seeing a new wave of participation in the financial markets. That’s where the potential for shifting the wealth distribution curve can be found - by directing that participation into climate positive solutions. To do this however it will take an active effort on the part of those working within the sector.
The reason the climate sector is positioned to nudge the wealth distribution curve is because those who work within it are more attuned to the shortfalls of our economic system than the general population. My hypothesis is that there’s more willingness to engage in diversifying who profits from the success of a business in the climate sector than compared to other ones. Having talked to numerous people over the past year, I’d say it’s a group where there’s a definite willingness to grapple with the fact that the neoliberal experiment of the past 50 years has some fundamental flaws. Climate meetups and communities are some of the few places where activists and investors are routinely in the presence of each other. Or at least it’s a much more frequent occurrence than at say an AI meetup. As you learn more about climate change and its origins you almost have to stare down the extractive foundation of our economic system when it comes to the natural world. And as you stare at that, it’s only a matter of time until you start questioning whether the same economic system is also out of balance in terms of who benefits and who gets left behind. There’s this environment within climate that’s less dogmatic about the greatness of capitalism which creates the conditions for taking meaningful action towards fixing some of its less desirable outcomes.
If the trend of increased participation in the financial markets continues, the aggregate amount of capital representing those outside the top 10% of households will grow to be substantial. And as this happens, climate companies and climate fund managers should seek to be more inclusive of this new source of capital. For companies this means using platforms like Republic or setting aside an allocation in their fundraising round for frontline workers in their specific domain. For fund managers this means looking to bring on these new groups as partners. In our world of near-zero interest rates there will continue to be tons of capital searching for returns. Which means companies and fund managers have more discretion when choosing their sources of capital.
In more concrete terms consider the following. A new low carbon cement startup is seeking investment and has identified two similar funds with domain expertise and favorable terms. One fund however has a crypto-based DAO consisting of construction workers as a financial backer while the other fund has just a traditional mix of high net worth individuals. Which group gets chosen? For the startup, the construction worker backed fund not only has the benefit of a redistributive effect but also provides more incentive alignment. Its product will ultimately be used by its own investors. Additionally the company can use that fact to gain market share against competitors. Why not purchase cement from the company whose profits will flow back to your fellow construction workers. For the fund, they’re winning deals because of their differentiated capital structure. And for the construction worker / investor, the benefit is a pathway to building wealth that was previously unavailable. Ultimately this is a return to a stakeholder model of corporate governance done through the ham-fisted method of converting stakeholders into shareholders.
It’s still very early days for this kind of model but companies like Carbon Equity and the Komorebi Collective offer a vision for the future. The former is trying to lower the barrier to entry for individuals to access private market climate funds while the latter is a group of women looking to fund women and nonbinary founders. This new direction of companies choosing to raise diversified capital and funds seeking to pool together diversified capital can only happen through sustained intentional effort. Participation in financial markets will continue to grow regardless and without focus its effects will be diffuse. The climate sector has the the unique opportunity and mindset to provide the necessary direction. And if that direction is followed by the financial success of these companies, wealth can accumulate amongst new groups thereby shifting the curve.
Wealth inequality is a problem that will take multiple solutions. The government has the most agency to effect change if it ever musters the willpower to do so. But in the meantime, connecting this new wave of financial market participation with the need for climate investment dollars could very well kickstart new pools of wealth outside the traditional top 10% of households. There are many assumptions worth calling out here - namely that enough people can actually participate in these markets to create a substantial financial block, that climate companies manage to deliver returns that outcompete other sectors, and that capital can become differentiated in terms of who’s supplying the dollars. Deeper than that is an a priori assumption that extreme wealth inequality itself is undesirable within a society. Climate companies and fund managers have an opportunity to make an outsized impact in this regard. I’ll emphasize again that it will take effort and it’s not so easy at the moment. Most companies today are still desperate for any funding, most companies also fail, and fund managers struggle to raise capital to deploy. But the future has a way of sneaking up on us in these exponential times. We’re at an inflection point in human history across a number of dimensions and the most consequential may very well be the increase in financial market participation along with the existential effort to mitigate climate change. All the problems of the Anthropocene are interconnected, so we should make a concerted effort to intersect the solutions that we’ve traditionally thought to be independent of each other.
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