Great to chat with Zach Stein, Cofounder of Carbon Collective! Carbon Collective is the first online investment advisor 100% focused on climate change! We discussed the importance of a well-defined customer cohort, how to assess a climate positive company, the intersection of climate and investing and more!
https://carbotnic.com/carboncollective
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James
The unedited podcast transcript is below
James McWalter
Hello today we are speaking with Zach Stein co-founder of carbon collective welcome to podcast, brilliant to start could you tell us a little bit about carbon collective.
Zach Stein
James so glad to be here. Carbon collective is an online investment platform that enables individuals and businesses through their 401Ks to invest in portfolios that are built around solving climate change right now sustainable investing as what wall street sells. It is just a less bad version of the world today. We know what we need to do our greatest issue within sustainability which is solving climate change and we cannot do that with fundamentally scaling sustainable investing but in a way that is aligned with that end goal. So that’s what we do.
James McWalter
And what drove the initial decision to start Carmen collective. Yeah.
Zach Stein
So this is the second company that my cofounder and I have started. We’ve known each other since we were four years old first company was also in sustainability but in a very different space and at 2020 right at the beginning we set out with a whiteboard on saying how could we build better tools. To enable individuals to collectivize their climate actions and just identifying that we as individuals. But so many of us when we face climate change. We just get left hanging at the top of the emotional feedback loop. It was just like fuck like this is terrible. The icebergs are melting the fires are coming. World is still run by fossil fuels and emissions I’ve never been higher I’m one person. What can I do within that so that to us you know seemed like a problem that was looking for better solutions and we ended up interviewing one ah none people in and around our network trying to figure out where their climate actions anxiety took them. But actions it took them to take it where they got blocked and investing was this place again and again that we found they ran into.
James McWalter
That’s such an interesting process and I went through something very similar and I’ve talked to a lot of climate founders on on the podcast who’ve also done similar where you nearly start with a whiteboard and like a print out of the emissions in the economy and then you start trying to draw the lines between these different areas and then also trying to work with you know a certain amount of. Founder fifth and so yeah I guess kind of digging into that process like was this over you know, long weekend or was this kind of just ah, a constant kind of iteration over the series of months
Zach Stein
It was a long process. We formally kicked off on jan one of 2020 and we didn’t know what we were building until June like the beginning of June of none for sure so we started by reading. We probably read like None books in the first quarter. And really just getting deep and then we really kicked off into interview mode and we went through the whole thing of like we started off by building all the like a paper prototype that was like really like beautiful and like trying to illustrate our none idea and the None person we interviewed was like hey there’s this book called the mom test.
James McWalter
Yes, yes, very important book I.
Zach Stein
Have you heard of it. Yes, and so we’re like no we we haven’t done. He’s like you need to read it and so we’ve read it and we’re like oh my God we should have been doing this all along and so we just strapped everything and went right into just mom testing as hard as we could.
James McWalter
Yeah, and and for for the listeners. Um, if you’re looking to build anything that ah has any sort of consumer mass adoption and honestly even from Enterprise as we have the consumerization of Enterprise it becomes ever important if I read that you know it it really really helps you ask better questions. Ah, both of.
Zach Stein
Yeah, yeah.
James McWalter
Potential users. But then also of yourselves in terms of how you try to develop products to solve protect our problems.
Zach Stein
Yeah I think if you’re just at a point whether it’s a new product or a new feature or whatever that is on a product if you’re asking the quiet yourself the question should we build this then Mom testing is as as far as I’ve seen the best way of answering that question without actually building a thing.
James McWalter
I Yeah absolutely and you know I haven’t talked as much about this my own startup but when we were whiteboarding my cofounder and I like going to lots of different options. We were literally just there was a particular cohort of people we wanted to service and we would just ask them questions about the biggest problem they have that no one’s Solving. We just like write those down. And then thematically just the the problem we ended up focusing on came out and I think that just like that’s another way. It’s like I want to solve a problem in a particular cohort of people that have a climate impact or in our case, it was developers of clean energy and so on. But yeah, did they have like. Obviously we need to do all these other things and it’s like well it’s actually blocking it and so then you can kind of start building products around those blockers and those problems.
Zach Stein
Exactly you know for you. It was developers and for us it was individuals who had climbing anxiety So we we each kind of had that focus but then was able to use you know, kind of limit or or you know have our curiosity just take over from there.
James McWalter
And you know people with climate anxiety. That’s also a pretty large demographic group right? A lot of different slices and so as you kind of explored right? exactly. But as you kind of explored that. How do you start? this kind of segment. You know what that early customer cohort you wanted to go after might look like so.
Zach Stein
Fair.
Zach Stein
Yeah, it became clear to us that the hardest people to win over. But also the most important were going to be people who knew a lot and were focusing to some degree on climate change in their lives. They were the most important because. They were often the ones who felt the greatest pain where especially as an individual the level of cognitive dissonance that they they feel for say I work on climate change in my everyday life and then I like I get into that Suv and like drive home that it just it causes pain it causes identity suffering. There and so these type of people are trying to align every part of their personal lives to salt and climate change. So a really good fit there. The reason that they’re the hardest to sell to is that they’ve been burned greenwashing we stepping into the space of sustainable investing. We are stepping into a space that has been.
James McWalter
Right.
Zach Stein
Maybe the most greenwashed of kind of all spaces with it climate and so we fundamentally especially to this group that knows so well and has been exposed to that green washing we are stepping into a place that I like to say we are guilty until proven innocent in coming in for Them. So. Yeah, it’s people who work in the climate Space. So We very much are kind of writing the code tales on the rise of climate tech itself. Also this is obviously like nonprofits and academics as well. But then we also found a pretty strong traction with a group of cohort that we call ecotechies and this is.
Zach Stein
More engineering focused and folks who generally tend to work in tech. It might maybe would want to go work at climate company but like are making 300 k from Facebook or meta or whatever it’s called now drive a tesla ride a mountain bike on the weekend I think we probably all could picture this person. Um, and so them as well.
Zach Stein
Um, and for them they also are going to kind of demand that same level of rigor that this is the type of people who really likes to understand how the world works and once they’re only going to align with something when they can really see that someone has really done the homework in a way that is logical and makes sense to them and and is transparent.
James McWalter
That’s that’s super clear and I think it is ah really essential to get that. Well-defined customer cohort to kind of go after right because you can’t service everybody and so as you kind of zoomed in on that. Um, and one of the nice things about that cohort is I’m already thinking of places where those. Human beings like congregate online like they’re in the forums of places like my climateurney and so on so you know from a distribution and getting in front of people point of view. Um, it’s actually like a pretty nice kind of cohort to kind of go after but you still have to kind of win that trust and you do that through building an Mvp that yeah really starts to solve a problem that. As they see it and so what was that kind of initial Mvp iteration like.
Zach Stein
Yeah, so for us and this came through our mom testing it became really clear that. Yeah, we could not build something and this was also a failure. We interviewed founders who had kind of taken a crap at like a green investment app and stuff like that and a lot of the where we diagnosed. Where they fell short was they did not fully appreciate that the number None reason that people are investing is to meet their financial goals. They’re not investing with to drive impact that is a secondary. Um so primarily and and for so many of us the way that we’ve been taught that is smart to invest. Is what vanguard taught us is to invest passively with as much of the market as you can diversify it as possible with as low fees as possible and so we said okay we can’t break that mold because that would be a double bank shot. We’d have to say you know hey invest in this new way that is different that you are taught and you’ve never heard of us it. It should. This is how we’re going to drive impact that’s going to be too hard so we said all right? Can we build portfolios that kind of meet that none threshold but then secondarily have a very clear theory of change in regards to climate and so that went through a lot of iteration. We had to get registered with the se. And be able to launch as a robo advisor and do that and and then went through like lots of experimentation of how are we actually telling the story of how these portfolios are put together in a way that is concise and makes sense to people and kind of the first test that we had before we raised our pre-seed round. Was would did did it work was our hypothesis correct and how we built these portfolios that individuals would not treat it like climate charity which they often did with other platforms where they’d roll over like or they’d like invest 3 grand or something you know it was like.
Zach Stein
Money that you’re like okay I can lose this It’s not money of saying this is my retirement account and or would they move their full iris over toser roll over at old four None k and what we found luckily our our hypothesis was was correct. That our average account size was like closer to $50000 so people were moving over those larger chunks of money for them. Those full accounts consolidating with us and that kind of gave us the gumption of saying all right we have we’re on something here to go and raise ah a pre preceded in February of 2021.
James McWalter
Yeah, that’s that’s going to be exciting and going from you know ideation right? before covid I guess if it was None all the way through you know within year and a year and a half kind of getting to that level is in a very tough time for for everybody is is actually phenomenal and.
Zach Stein
Thanks Sam.
James McWalter
Going Well going through those steps with the scc and so On. Um I Think that’s also something that people who are coming in to try to ah build something in Climate. There’s often already existing rules of the road to navigate and you know some of them are literally legal like you need to do it Otherwise you literally legally can’t do it. Um, and so I guess how did you find that process. You know it’s something that scares away a lot of you know founders from tackling certain problems because of those kind of regulatory Burdens. And yeah I Guess what was the experience like.
Zach Stein
Yeah I think about this a lot and I imagined you do too that if we as humans had perfect like for knowledge of how hard something was going to be before you did it like we would just do so many fewer things. Yeah.
Zach Stein
Um, so it was a grant to get through that process and rightfully it should I think that this is you know what are the areas in terms of financial regulation that is really important and that you should It should be strict and hard to get through and say yes, the scc. Um, you’ve now passed the requirements that you need to pass in order to legally offer investment advice and manage other people’s money so that certainly was a challenge and also making sure that we found the right people around us to help make sure that the portfolios that we’re building even though they’re. Based on passive investing principles and we had our long back testing kind of showing like hey you could get a similar risk of reward as you would for a generic us-based Index portfolio here getting the right people around to say like yeah like that this this is checking the boxes. This is kind of meeting a fiduciary. Responsibility with this strategy with that That was really important for us to have as well.
James McWalter
And I guess then you know it comes to the the the hard question here. It’s how do we assess a climate positiveive company right? And how do we make sure that we’re balancing portfolios that have that kind of positive climate effect. Guess how do you kind of think through that because even recently there was I know there’s a you know you know Musk Twitter storm about ratings for some of the large oil gas majors getting particular kind of esu ratings that that seemed from the outside to look like overly advantageous to them. So yeah.
James McWalter
How do you think about that and ah, how to measure the actual climate climate impact of these different companies. Please.
Zach Stein
Yeah, so I have a lot of thoughts on this and I’ll try I’ll try to be concise. So this came through our testing as well. We experienced this as individuals but that esg was not actually meeting the the user needs I had that I had as ad as a user of the product. Um, for me, especially wanting impact investing fundamentally what I wanted was two things I wanted a tangible theory of change that I can understand and made sense to me of how my money was going to be driving change in the world. How making this switch from the vanguard index fund to this. Actually going to change anything in the real world and then to an emotional experience of being connected to something higher than myself and I think that for a lot of b to c companies is especially turn the offset space and something like that like that is the Holy Grail that every b to c climate company is going after it’s almost I don’t like to use this word like a religious. Type like of of what religion was you know has historically held of like that connection of I’m a part of something larger than myself I think especially when it comes to climate change that dichotomy of I’m one person who is born into a world run by Fossil Fuels and on a one track to a world of catastrophic warming to the how are we? How am I a part of something bigger that is something that’s really powerful esg as a framework I believe and we argue is in the process of a classic unbundling and so when we look at other products that have. Become kind of the first in their space that were really popular like other users started saying hey I bet we could use it for that. So like we’ve seen the unbundling of of excel. For example, when spreadsheets came about people are like oh this is so great for computation that I can do manually the intended use case. Then other people were like I could store my sales contacts with this not the intended use case you have the unbundling of excel which leads to companies like salesforce so we argue you know there’s the embundling of Craigslist the unbundling of email leading to companies like slack etc. We think that we’re in the middle of the unbundling. Of Esg Where Esg as a framework was created by institutional investors to be used as a tool to build balanced portfolios by institutional investors and they weren’t trying to create impact or drive value what they were trying to do is say huh. There is other factors. That we should be making sure we’re diversified around outside of like credit score and sector and pe ratio. So. It’s literally thinking about it on that level of how are we making sure if there’s you know some piece of environmental legislation hits that we are not facing too much portfolio risk to that.
Zach Stein
The innovation of esg was to quantify all of this for the None time prior to that like that type of rating or that type of system had just been exclusionary filters. So it’s much more basic but you then are these exactly and so.
31:54.38
James McWalter
You like? yeah like get rid of the sin stocks basically Tobacco firearms, etc.
Zach Stein
Then with esg you then have these new users who are like I really want to have value space investing or I really want to have impact investing again. This is a personal theory I think a lot of that especially on the the political left was in response to the election of Donald Trump of there was kind of this looking for ways of say how am I pushing back? How am I that. Kind of doubling down on my sense of identity within that. Which until now we’ve kind of led to this point of the unbundling of esg all right, very long-winded way to talk about How do we build our portfolios as you can guess we don’t use esg esg looks at a company ah at like how it operates at its business. What it doesn’t look at is what does the company make because that is the number None thing that drives its impact. The thing that it makes money from and so we look at the stock market. We kind of bucket companies into 3 categories. The none category are companies whose core business is fundamentally antithetical with solving climate change.
Zach Stein
And these barring some miracle technological breakthrough. This is obviously oil and gas but petrochemical companies dirty utilities airlines right now. Airline manufacturers cement steel. There’s hope for some of these industries but technologically now for a lot of them. They’re still not there. So we divest we do not invest in these companies. We do not believe it makes sense to own Exxon Mobile to vote on them and we can happy to dive into exactly there in a sec so that’s bucket number None and step one that we take we cut those companies out bucket number 2 are companies that are building solutions to climate change. That’s how they make money tesla is a very famous example kind of why we think it’s absurd and this was a lot of the pushback by Elon Muskkin the Twitter storm you talked about so we look at what are the best independent plans to solving climate change those who are in the climate space have probably heard of them groups like project drawdown the international energy agency Rewiring america and we say which publicly traded companies are building those that aren’t generating more revenue from products or services that are dependent upon the fossil fuel industry that kind of fall into that first bucket. So we just use revenue. We don’t use pledges or anything like that. So an example of a company that does not make it into that category in spite of it making a climate solution is general electric. They didn’t make it last year they are the None largest manufacturer of wind turbines in the world but they generate more revenue from their natural gas turbine and jet engine business. Therefore we do not hold them then the none category is everyone else and these are the companies whose core businesses can exist in a decarbonized world in a 0 carbon world. They just aren’t there today and that that means to us as shareholders this is where we should be engaging. And trying to pressure them to get there as quickly as possible. The example I like to use is Coca-cola there’s no reason why coke can’t sell me a beverage using the secret recipe in a zero carbon future. It’s just doing so powered with 100% renewable energy delivered on 100% electrified fleet and they’re protecting instead of abusing their natural resources. That to us is where we should be engaging as shareholders because right now there’s so much in the climate activist space. It’s trying to go to exxonmobil who like has a line out the door of customers waiting to buy its product and say like hey you should become a solar company and they’re like why would we do that.
Zach Stein
Instead we should be going to the line and being like hey there’s a ah better cheaper way to get what you’re going after.
James McWalter
I love I love I love it telling this. So I think I think the um, the pushback on the issue is really wellm made and it’s the nature of large enterprises. It’s the nature of finance generally. You love a number right? because if you have a number you could start doing things you can index against it. You can say is it going up or down and so ishi was like this attempt or is this attempt to kind of orientate the industry around a number. Um and all of the kind of considerations that go into that number were new to a definition. On the basis of a ton of compromise right? because you know an msci or sandp comes up with their esg indices they are doing that with a ton of conversation with the people who are getting hit badly by the esg indices. Um or potentially it could be hit badly and so. There’s just a user level of compromise because even as divestment occurs even after the blackrock letter a few years ago that’s had like this massive effect on on these things in general, you’re not going to see just like the mass divestment across all of these firms. All of a sudden because it would actually have like a you know, very very large effect. In in the stock market in a way that you know most financial professionals are way more conservative than allowing that to happen and so this all makes a kind of ton of sense to me. It was interesting when you mentioned kind of going into the revenue lines of a company like Ge and figuring out the exact yeah revenue line on a you know let’s say a climate positive versus a climate negative. Basis and the kind of things you’re talking about like typically large investment firms will have you know a none analysts like figuring these kind of things out and so how do you? you know I guess how do you kind of scale that research to figure out exactly what’s happening. Um, yeah, are you just kind of living in ten Ks and ten queues or exactly how do you kind of approach. It.
Zach Stein
Yeah, it’s we do only publicly available information. We think that this is again a problem with esg is that it is fundamentally opaque. You’re saying this is ethical. It matches your ethics. Sorry we can’t tell you how we came up with this and we’re not going to be able to show you in the future. What decisions we’re going to make with it. Um, that again, it just it kind of fails. The none test of trust building and it fails what you’re trying to build so for us transparency is absolutely key which means we all use publicly available information. So yes, it is 10 k’s. We look at investor reports and try to dig where we can and there’s companies which you can go on our website and you can look at our full list of all the climate solution companies that we evaluated in 2021 it was 352 companies. We identified as building or potentially building a climate solution. None made it through our filters so you could not only see every single company that made it through but also the ones that didn’t and why they didn’t what they failed of our criteria. We try to make it really really clear and one of the categories is lack sufficient information for it. If we cannot see the exact revenue breakdown between these product lines then we just don’t hold it in there. Um, because it means our clients also could not double check and repeat it for us.
James McWalter
That that’s very interesting. So so we have these kind of None companies just so I have a kind of sense of scale relative to something like the sandpfivehundred would those one hundred and sixty nine from a market cap basis would that be None of the sbfivehundred or like yeah fifteen twenty percent just to kind of get a sense of like how far we have to go to start having companies that have such a clear climate positive. Ah you know impact.
Zach Stein
Yeah let me I actually have members for this if you just give me a sec let me look this up so in the way that we build it about. In terms of the market capitalization. This is not going to be the best way of doing it but about 50% of our climate solutions collection is large gap about 30% is midcap and about 20% of Smallcap. So there are certainly companies in there who are large gap in there. You know Tesla is kind of the going to be the most.
James McWalter
So it’s about 80 so if you think about this and pick 500 is large cap and you have 169 so you know fifty to eighty companies in the sb 500 might fit into that criteria. Okay.
Zach Stein
Aggressive and leading example.
Zach Stein
It’s probably a little bit lower but I would need to go in and kind of look and double check.
James McWalter
Ah, under said. Okay, but I think it’s a good level setting for for me as I kind of think through again the the amount of ramp that’s needed to start pushing all these companies into it right? because even let’s say it is 50 companies that’s 10% of the s and b 500 um there’s a huge amount of.
James McWalter
Gap there that needs to be made up for and to do that and your theory of change is leveraging you know a large movement of capital from the existing place to this new place where it’s focusing on that 10% and kind of expanding those and then also those companies will perform better because of ah you know the ability to kind of. Their valuation is going up and so on and so I guess as you kind of think through like what are like the best levers to to do that. So is it getting yeah hundreds of companies to sign up from a benefits point of view with. Consumers would would you guys or are there other Levers. You’re thinking about.
Zach Stein
Yeah, so when we get to kind of our high level vision. We are trying to build the company at the intersection of climate and investing right now we see it as a fundamentally open category and we think that they’re really people are looking for a place that they can trust and again as we talked about earlier. It’s a really high bar. You have to meet for that and we take on that challenge willingly because we’re so focused it enables us to move really quickly and move into other spaces really quickly so we launched in this in 2021 in September we launched our green four one k program. Which allowed us to come on as investment advisors for mission-driven companies. So like if you guys if and when you guys launch a 401 k if you didn’t work with a carbon collective. You went with like a guide lie and or ah you know, empower or human interest it would force you to invest in Fossil Fuel companies you and all of your members. That is just contrary to your mission that doesn’t make any sense it it. It deflates the value of the perk as a founder of what you’d give to your employees and so we actually found oh. We could actually come on and be the investment advisor where we take on the liability and responsibility away from the record keeper the guideline of building those portfolios. And we can make it a win-win-win for everyone so that is going that that program is going really well and scaling really nicely and kind of from a business standpoint. It’s like what you talked about earlier of you know going to mccj on the slack channel and stuff like that like that’s a collection of people people who come to work at a company like yours or something like that. That’s an. Another self-selecting group of people that we then get to go talk to and hopefully help help them navigate. What is this challenging space and build. Trust.
James McWalter
And we are we are setting up our for one k in the next two weeks so I will I will honestly take you open that I offer because even though a couple of us it is something that I was literally like just looking at guideline it’s None clicks and we be done. Um, and I think that defaults are kind of what you’re battling against right. But I think over time as you actually become the default I think then then you will start to see that kind of real hockey sick kind of growth and at scale.
Zach Stein
I Think so too. Yeah, we definitely should talk. We have a great deal right now with forever savings. So let’s talk a fine about that. Um, yeah I think so this is something That’s really interesting that came out of our mon testing was there was a cohort of people who are just.
James McWalter
Yeah, absolutely.
Zach Stein
Ah, off when we ask these type of questions and you probably see this person. You could think of them too where they would say why should I do anything about climate change when it’s all the corporations in government’s faults I’m one person I was born into this world like get off my back stop guilting me and to some degree that person is totally correct. Like they you are just None person. You are born into this world. But what it misses of saying it’s all just corporations or governments and they should fix it is it fails to ask the question of well what should how do you How do corporations and governments change and what’s on I keep coming back to and it’s something I wrestle a lot with is. Like the status quo only changes and this is like the status quo of guide log be the default option like the status quo only changes when enough individuals or companies. Whatever it is decide to change it like I don’t know of a different theory of change.
Zach Stein
Than that of like how to change the world.
James McWalter
And well so that but then you also have the the combination of ah often technology that makes things a bit more obvious right? and so it kind of goes back to sa of transparency and I think there are so many areas of the economy that has just like relied on the opaque nature of their processes. Because nobody really cared like like a classic kind of non-climate example is the idea of sweatshops and so until mid 90 s there wasn’t really any sort of like general awareness of what is occurring at you know a South East asian sweatshop and then that changed and while that problem is not kind of away. You know it is at least something that consumers started to kind of think through things like ethical fashion and and and these kind of elements and I think that a lot of what happened was it was just actually easier to communicate in the 90 s people all of a sudden could send an email or. Communicate much more rapidly and eventually we had you know ubiquitous video to show conditions and I think what we’re starting to see is as information is more readily available as you know, even small cap companies that wouldn’t typically have a ton of research analysts on it even their data is more easily extractable. You start to have the but benefit of. Places like carbon collective to like make sense of that data expose it and you know drive change that way.
Zach Stein
I think so and I think to kind of use the sweats up shop analogy a little bit further should kind of stand on the shoulders of the work of activists before where you know those activists came in. You know they were to say this is wrong. You know Nike you should change I remember that with you know, there’s. Very focused on Nike at that time and that kind of gave room for a company like everlane to come about and saying there is this this awareness and this push but there’s not necessarily a place to go for it and so I think you know when I look at a company like carbon collective. I see like the group the work of the groups like three fifty dot org and Bill Mckibben and the divestment movement of that being some of the shoulders that we’re standing on of kind of popularizing and educating that we cannot solve climate change without changing how we invest and I think that’s really key.
James McWalter
And I guess you slightly touched upon it. But I’d love to kind of get you know if if you had any kind of numbers around like what the ah roi is right? because if the primary Decision-ma process that you kind of alluded to at the very beginning as you’re kind of thinking through this you know people to trust their fifty K plus. Retirement account in the hands a car collective. They want to see yeah a reasonable return for that in a way that at a minimum I guess tracks with the vanguards of betterments and so on Um, but but you are also from what you said like having to expose. To Larger. Let’s say small cap risk than then maybe more so than a typical kind of Vanguard or betterment. Um, so yeah, so I Guess how do you you know, think about the kind of different ah Roi and the the kind of risk adjusted investment profile of a karma collective account.
Zach Stein
Absolutely we think about it a lot so our core portfolios which is kind of what I described at the beginning with those 3 buckets that divest reinvest and engage the rest. Um, that is the that that’s what makes up our core and that’s where you get a similar level of risk in return when we do our back testing. Can go to our website. You could see our None ar back test. We update it quarterly. We show all kind of like the relevant metrics. We I think we do a pretty good job of explaining what it means to people who don’t know what things like beta or standard deviation are like is higher lower is like higher better or worse like we’d tell you? um.
James McWalter
It Red Red red is bad. Green is good. These kind of things. Yeah.
Zach Stein
Ah, basically um, so we try to make that really transparent we get this question a lot and I think I but take this opportunity to kind of step back and even a little bit larger because you brought it the divestment movement and this kind of goes into the theory of change where I think that that that the divestment movement. Promise land for when you start seeing things to really change is not just when people like you and me are saying I don’t want to be in fossil fuels because it’s wrong but people like you and me are saying I don’t want to be in fossil fuels because it’s wrong and it’s stupid financially and starting to spread those narratives when you. I think are fairly educated educated on economical things. So efficient market hypothesis is you know a theory that stocks are priced based upon publicly available information and there’s a lot of debate upon it in economic circles. But you know you can make the guess that it’s largely true. Maybe outside of some insider trading one people make the argument for efficient market hypothesis and this is often an argument against divestment. They’re just like de efficient market hypothesis. The prices itself. You’re not going to change anything what they don’t take into consideration is that there’s publicly available data is. What are the underlying narratives that we have about certain industries that are just pervasive. There are the undercurrents that you don’t see and there is an underlying narrative and you touched us on this by talking about wall street that fossil fuels are fundamentally a necessary evil in a balanced portfolio that if you want returns. That’s your primary goal. You have to include them. And there was a none narrative that sustainable investing is just for green hippies like me who want to wear our values and are willing to take worse returns for doing that and both of those narratives have proven false. So if you had divested from the sandpfivehundred from one thousand eighty nine to the present you would have made more money. Ah, 0 is born looking forward when we look at should you hold Fossil Fuels like should you be long on fossil fuels or climate solutions just the macroeconomic trends but you know without any legislation at all like 50% of the oil that is used in America is on our roadways. And most of that is in individual cars and trucks like you and I own. We just have a better technology here. It’s like the horse and buggy to a car. It does the same thing as a fossil fuel power car but it does it faster it is safer it is roomier you don’t have to go to a gas station. It costs a none as much to maintain you could drive it for a million miles and in None ars it’ll be cheaper to buy up front like that’s the middle of a technological transformation and that’s a lot of market share for oil. That’s just gonna go away and it’s not.
Zach Stein
There’s not room. There’s not other industries where that’s going to be made up or kind of tapped out in plastic. You know, maybe the growth of airlines and the broader growth of the economy but like maybe blue hydrogen. Maybe if green hydrogen doesn’t get there first. So when we kind of look at the long-term trends of like. Should you be invested sustainably. We try to make it very clear of any time that you deviate from the market you’re gonna have deviating returns in the near term you’re in a half months or you’re higherre gonna have months where you’re lower. That’s the way we you know we let’s not beat around that theres bit and that’s happened with our carbon collective portfolios. When we we are focused on long-term investing on on kind of the decades level approach that to us. It just makes a lot more sense to not hold the industries who are fundamentally being outcompeted and instead hold those that are replacing them well and then just you know hold the rest as well.
James McWalter
Yet’s super interesting and as I looked so you have your index which is on your website and actually a previous guest. The Ceo of beam global is on the index I’m sure he’d be a Duncan Denis um would be delighted. Yeah no I’d absolutely a happy take.
Zach Stein
Um, yeah, make the intro. Let’s get there for 1 k.
James McWalter
Yes, yeah, absolutely. Um, but I think one of the one of the powerful things about it as well. Like if I think about the ah the kind of startup ecosystem and the private company side of things you know we we had this kind of very exciting and I would say a pretty volatile issuance of Sps and so on and I’m sure there’s quite a few specs as like. Quickly glance at the index on there. But what I think is like really powerful about having an index like that and and creating this connection between those companies four one k and the overall kind of long-term market returns that actually also gives very nice comps to. Later stage climate companies and then that I’ll filter down to earlier stage climate companies that there is like a very very clear path and for those who kind of yeah this is before my time but I’ve talked to folks who were involved in the you know the none kind of renewable startup world just over a decade ago. Clean tech 1.0 and they really struggled to get to a clearer exit path whereas this is like you know you’re getting all the way into a 4 1 k like the more eventual boring quote unquote it becomes the more exciting it is for earlier stage investors because it’s like okay that’s that’s true. Scale.
Zach Stein
I Think that’s a really interesting perspective I actually haven’t really considered before yeah in the point that you bring up of what is the difference between Clean Tech 1.0 and you know climate Tech 2.0 of what we’re in now is it’s the end markets. Is that especially in so many of those areas like electric cars or like renewable energy. It’s not based upon altruism of what’s driving the end Market. It’s based upon financials and so all the kind of the whole ecosystem there of like what you’re building. For example. Um, like it just makes a ton of sense like if climate change wasn’t a problem your business would still be a venture business and like that’s that’s a really big difference Mine I don’t know but yours definitely would be.
James McWalter
Bre.
01:14:50.22
James McWalter
No absolutely And and I mean even yours because like we do want clean air right? like so there are also these other externalities that we are trying to reduce. Um hopefully and thankfully and we talked a little bit but before we jump to the call and I believe you have a a newborn and it.
James McWalter
So It’s very difficult to start a company build a company, get it to scale while also you know managing these other yeah, very very important like restrictions on our time and so I guess how you find Found. Kind of balancing those things particularly because you’ve already previously founded a company and I’m sure it was slightly different experience with that first company.
Zach Stein
Yeah, we talked about this a little bit on the beginning of the call at kind of seeing kind of the culture of founders who are like yeah I work seven days a week and like maybe it’s because I’m an introvert at heart or something like that. But I need so much creativity for the work. That I do. It’s like I don’t think you could write poetry 80 hours a week like if you’re kind of in that format. Yeah, exactly like it wouldn’t be very good could just get continually worse unless it’s like you’re like the monkey trying to write Shakespeare so that.
James McWalter
This poetry sweatshop.
Zach Stein
To me. It’s something that’s kind of going as and as a baseline of having really clear rules for myself of when am I unplugging when am I turning it off when am I not checking emails I Very deliberately do not have email alerts on my phone for that reason. So it’s been kind of just a continuation of that of having a newborn his name’s caleb.
James McWalter
It very good. Yeah, it’s good. It’s good that the scottish name right? Yeah, okay.
Zach Stein
Really cute. Thanks um, yeah, biblical. Originally he was one of the the spies sent by moses to go look into the land of Israel and see’m jewish and see come back and say like. You know god said we should go here like should we go here if so how at the other 10 of out of the None spies told like these lies that like it was either like incredibly good like unrealisticically but or unrealistically bad and C Caleb is one of the 2 that told the truth of saying that like. Is is going to be hard, but it’s going to be doable and especially in starting you know, working on a climate tech company and being in this space I think that was part of the reason for naming a child that I think that’s kind of the ethos that so much so many of us have to hold of it’s going to be hard. And it is really hard and it is really scary and we also have to hold that it’s doable and so yeah, my life has become very narrowed since having him in a really nice way in some ways my first priority or my first priority is him frankly, my second priority is carbon collective and my third priority is. Taking care of my wife so she can you know, be there to press feed and do things like that that I can’t do um and everything else is very far beneath that now I haven’t exercised in like twenty days
James McWalter
I and and I think that is yeah as long as people understand the tradeoffs they’re making I think I think it all. It’s all fine and and some people would have their priority stack different depending on on their kind of life situation. Um, it’s funny you you know this idea of like the the poetry search shop. There’s this like old tale of James Joyce the the famous irish author and he’s like supposedly working away in his you know, writer’s room shouting and and you know the person he was with at the time was like downstairs hearing all this and he comes down after like a full day and she’s like oh James like you know. Was today gone and he’s like I wrote None words and she’s like oh my god like that’s that’s really good because she knows how difficult it is for him to kind of produce anything at all and he’s like I don’t know what order to put them in you know and so I think like that like in similar to the metaphor of you know.
James McWalter
Raising a child for a startup founder I think that’s also a bit of a metaphor for trying to figure these things out. Um, but Zack this has been absolutely brilliant before we finish off is there anything I should have asked you about but did not.
Zach Stein
I don’t think so I um, yeah, this has been a lovely chat and you know I think if you are listening to this as a fellow founder in the climate space come check us out for 401 k’s or if you’re an investor in climate you’re None can you have a 4 one k it. Also shouldn’t force you to invest in Fossil Fuels we help you out. We aren you know were work with partners that integrate every payroll provider. We build a series of portfolios offer unlimited education where real people we’re quite helpful frankly and you’re really not going to pay much more than you would otherwise. So tos. It’s a big, no brainer.
James McWalter
I yeah absolutely and I’m not even joking like just because it’s a bug I guess but I’m literally figuring out the 401 k right now and we’ll we’ll well have a chat about this. Thank you Zach.
Zach Stein
Okay, like Jabs thanks so much for having me.
Title: Solving Climate Change with 401Ks – E102
Great to chat with Zach Stein, Cofounder of Carbon Collective! Carbon Collective is the first online investment advisor 100% focused on climate change! We discussed the importance of a well-defined customer cohort, how to assess a climate positive company, the intersection of climate and investing and more!
https://carbotnic.com/carboncollective
Download Podcast Here: https://plinkhq.com/i/1518148418
Remember, If you want to support the podcast please rate and review 5 stars on Apple, Thanks so much!
James
The unedited podcast transcript is below
James McWalter
Hello today we are speaking with Zach Stein co-founder of carbon collective welcome to podcast, brilliant to start could you tells a little bit about carbon collective.
Zach Stein
James so glad to be here. Carbon collective is an online investment platform that enables individuals and businesses through their 401Ks to invest in portfolios that are built around solving climate change right now sustainable investing as what wall street sells. It is just a less bad version of the world today. We know what we need to do our greatest issue within sustainability which is solving climate change and we cannot do that with fundamentally scaling sustainable investing but in a way that is aligned with that end goal. So that’s what we do.
James McWalter
And what drove the initial decision to start Carmen collective. Yeah.
Zach Stein
So this is the second company that my cofounder and I have started. We’ve known each other since we were four years old first company was also in sustainability but in a very different space and at 2020 right at the beginning we set out with a whiteboard on saying how could we build better tools. To enable individuals to collectivize their climate actions and just identifying that we as individuals. But so many of us when we face climate change. We just get left hanging at the top of the emotional feedback loop. It was just like fuck like this is terrible. The icebergs are melting the fires are coming. World is still run by fossil fuels and emissions I’ve never been higher I’m one person. What can I do within that so that to us you know seemed like a problem that was looking for better solutions and we ended up interviewing one ah none people in and around our network trying to figure out where their climate actions anxiety took them. But actions it took them to take it where they got blocked and investing was this place again and again that we found they ran into.
James McWalter
That’s such an interesting process and I went through something very similar and I’ve talked to a lot of climate founders on on the podcast who’ve also done similar where you nearly start with a whiteboard and like a print out of the emissions in the economy and then you start trying to draw the lines between these different areas and then also trying to work with you know a certain amount of. Founder fifth and so yeah I guess kind of digging into that process like was this over you know, long weekend or was this kind of just ah, a constant kind of iteration over the series of months
Zach Stein
It was a long process. We formally kicked off on jan one of 2020 and we didn’t know what we were building until June like the beginning of June of none for sure so we started by reading. We probably read like None books in the first quarter. And really just getting deep and then we really kicked off into interview mode and we went through the whole thing of like we started off by building all the like a paper prototype that was like really like beautiful and like trying to illustrate our none idea and the None person we interviewed was like hey there’s this book called the mom test.
James McWalter
Yes, yes, very important book I.
Zach Stein
Have you heard of it. Yes, and so we’re like no we we haven’t done. He’s like you need to read it and so we’ve read it and we’re like oh my God we should have been doing this all along and so we just strapped everything and went right into just mom testing as hard as we could.
James McWalter
Yeah, and and for for the listeners. Um, if you’re looking to build anything that ah has any sort of consumer mass adoption and honestly even from Enterprise as we have the consumerization of Enterprise it becomes ever important if I read that you know it it really really helps you ask better questions. Ah, both of.
Zach Stein
Yeah, yeah.
James McWalter
Potential users. But then also of yourselves in terms of how you try to develop products to solve protect our problems.
Zach Stein
Yeah I think if you’re just at a point whether it’s a new product or a new feature or whatever that is on a product if you’re asking the quiet yourself the question should we build this then Mom testing is as as far as I’ve seen the best way of answering that question without actually building a thing.
James McWalter
I Yeah absolutely and you know I haven’t talked as much about this my own startup but when we were whiteboarding my cofounder and I like going to lots of different options. We were literally just there was a particular cohort of people we wanted to service and we would just ask them questions about the biggest problem they have that no one’s Solving. We just like write those down. And then thematically just the the problem we ended up focusing on came out and I think that just like that’s another way. It’s like I want to solve a problem in a particular cohort of people that have a climate impact or in our case, it was developers of clean energy and so on. But yeah, did they have like. Obviously we need to do all these other things and it’s like well it’s actually blocking it and so then you can kind of start building products around those blockers and those problems.
Zach Stein
Exactly you know for you. It was developers and for us it was individuals who had climbing anxiety So we we each kind of had that focus but then was able to use you know, kind of limit or or you know have our curiosity just take over from there.
James McWalter
And you know people with climate anxiety. That’s also a pretty large demographic group right? A lot of different slices and so as you kind of explored right? exactly. But as you kind of explored that. How do you start? this kind of segment. You know what that early customer cohort you wanted to go after might look like so.
Zach Stein
Fair.
Zach Stein
Yeah, it became clear to us that the hardest people to win over. But also the most important were going to be people who knew a lot and were focusing to some degree on climate change in their lives. They were the most important because. They were often the ones who felt the greatest pain where especially as an individual the level of cognitive dissonance that they they feel for say I work on climate change in my everyday life and then I like I get into that Suv and like drive home that it just it causes pain it causes identity suffering. There and so these type of people are trying to align every part of their personal lives to salt and climate change. So a really good fit there. The reason that they’re the hardest to sell to is that they’ve been burned greenwashing we stepping into the space of sustainable investing. We are stepping into a space that has been.
James McWalter
Right.
Zach Stein
Maybe the most greenwashed of kind of all spaces with it climate and so we fundamentally especially to this group that knows so well and has been exposed to that green washing we are stepping into a place that I like to say we are guilty until proven innocent in coming in for Them. So. Yeah, it’s people who work in the climate Space. So We very much are kind of writing the code tales on the rise of climate tech itself. Also this is obviously like nonprofits and academics as well. But then we also found a pretty strong traction with a group of cohort that we call ecotechies and this is.
Zach Stein
More engineering focused and folks who generally tend to work in tech. It might maybe would want to go work at climate company but like are making 300 k from Facebook or meta or whatever it’s called now drive a tesla ride a mountain bike on the weekend I think we probably all could picture this person. Um, and so them as well.
Zach Stein
Um, and for them they also are going to kind of demand that same level of rigor that this is the type of people who really likes to understand how the world works and once they’re only going to align with something when they can really see that someone has really done the homework in a way that is logical and makes sense to them and and is transparent.
James McWalter
That’s that’s super clear and I think it is ah really essential to get that. Well-defined customer cohort to kind of go after right because you can’t service everybody and so as you kind of zoomed in on that. Um, and one of the nice things about that cohort is I’m already thinking of places where those. Human beings like congregate online like they’re in the forums of places like my climateurney and so on so you know from a distribution and getting in front of people point of view. Um, it’s actually like a pretty nice kind of cohort to kind of go after but you still have to kind of win that trust and you do that through building an Mvp that yeah really starts to solve a problem that. As they see it and so what was that kind of initial Mvp iteration like.
Zach Stein
Yeah, so for us and this came through our mom testing it became really clear that. Yeah, we could not build something and this was also a failure. We interviewed founders who had kind of taken a crap at like a green investment app and stuff like that and a lot of the where we diagnosed. Where they fell short was they did not fully appreciate that the number None reason that people are investing is to meet their financial goals. They’re not investing with to drive impact that is a secondary. Um so primarily and and for so many of us the way that we’ve been taught that is smart to invest. Is what vanguard taught us is to invest passively with as much of the market as you can diversify it as possible with as low fees as possible and so we said okay we can’t break that mold because that would be a double bank shot. We’d have to say you know hey invest in this new way that is different that you are taught and you’ve never heard of us it. It should. This is how we’re going to drive impact that’s going to be too hard so we said all right? Can we build portfolios that kind of meet that none threshold but then secondarily have a very clear theory of change in regards to climate and so that went through a lot of iteration. We had to get registered with the se. And be able to launch as a robo advisor and do that and and then went through like lots of experimentation of how are we actually telling the story of how these portfolios are put together in a way that is concise and makes sense to people and kind of the first test that we had before we raised our pre-seed round. Was would did did it work was our hypothesis correct and how we built these portfolios that individuals would not treat it like climate charity which they often did with other platforms where they’d roll over like or they’d like invest 3 grand or something you know it was like.
Zach Stein
Money that you’re like okay I can lose this It’s not money of saying this is my retirement account and or would they move their full iris over toser roll over at old four None k and what we found luckily our our hypothesis was was correct. That our average account size was like closer to $50000 so people were moving over those larger chunks of money for them. Those full accounts consolidating with us and that kind of gave us the gumption of saying all right we have we’re on something here to go and raise ah a pre preceded in February of 2021.
James McWalter
Yeah, that’s that’s going to be exciting and going from you know ideation right? before covid I guess if it was None all the way through you know within year and a year and a half kind of getting to that level is in a very tough time for for everybody is is actually phenomenal and.
Zach Stein
Thanks Sam.
James McWalter
Going Well going through those steps with the scc and so On. Um I Think that’s also something that people who are coming in to try to ah build something in Climate. There’s often already existing rules of the road to navigate and you know some of them are literally legal like you need to do it Otherwise you literally legally can’t do it. Um, and so I guess how did you find that process. You know it’s something that scares away a lot of you know founders from tackling certain problems because of those kind of regulatory Burdens. And yeah I Guess what was the experience like.
Zach Stein
Yeah I think about this a lot and I imagined you do too that if we as humans had perfect like for knowledge of how hard something was going to be before you did it like we would just do so many fewer things. Yeah.
Zach Stein
Um, so it was a grant to get through that process and rightfully it should I think that this is you know what are the areas in terms of financial regulation that is really important and that you should It should be strict and hard to get through and say yes, the scc. Um, you’ve now passed the requirements that you need to pass in order to legally offer investment advice and manage other people’s money so that certainly was a challenge and also making sure that we found the right people around us to help make sure that the portfolios that we’re building even though they’re. Based on passive investing principles and we had our long back testing kind of showing like hey you could get a similar risk of reward as you would for a generic us-based Index portfolio here getting the right people around to say like yeah like that this this is checking the boxes. This is kind of meeting a fiduciary. Responsibility with this strategy with that That was really important for us to have as well.
James McWalter
And I guess then you know it comes to the the the hard question here. It’s how do we assess a climate positiveive company right? And how do we make sure that we’re balancing portfolios that have that kind of positive climate effect. Guess how do you kind of think through that because even recently there was I know there’s a you know you know Musk Twitter storm about ratings for some of the large oil gas majors getting particular kind of esu ratings that that seemed from the outside to look like overly advantageous to them. So yeah.
James McWalter
How do you think about that and ah, how to measure the actual climate climate impact of these different companies. Please.
Zach Stein
Yeah, so I have a lot of thoughts on this and I’ll try I’ll try to be concise. So this came through our testing as well. We experienced this as individuals but that esg was not actually meeting the the user needs I had that I had as ad as a user of the product. Um, for me, especially wanting impact investing fundamentally what I wanted was two things I wanted a tangible theory of change that I can understand and made sense to me of how my money was going to be driving change in the world. How making this switch from the vanguard index fund to this. Actually going to change anything in the real world and then to an emotional experience of being connected to something higher than myself and I think that for a lot of b to c companies is especially turn the offset space and something like that like that is the Holy Grail that every b to c climate company is going after it’s almost I don’t like to use this word like a religious. Type like of of what religion was you know has historically held of like that connection of I’m a part of something larger than myself I think especially when it comes to climate change that dichotomy of I’m one person who is born into a world run by Fossil Fuels and on a one track to a world of catastrophic warming to the how are we? How am I a part of something bigger that is something that’s really powerful esg as a framework I believe and we argue is in the process of a classic unbundling and so when we look at other products that have. Become kind of the first in their space that were really popular like other users started saying hey I bet we could use it for that. So like we’ve seen the unbundling of of excel. For example, when spreadsheets came about people are like oh this is so great for computation that I can do manually the intended use case. Then other people were like I could store my sales contacts with this not the intended use case you have the unbundling of excel which leads to companies like salesforce so we argue you know there’s the embundling of Craigslist the unbundling of email leading to companies like slack etc. We think that we’re in the middle of the unbundling. Of Esg Where Esg as a framework was created by institutional investors to be used as a tool to build balanced portfolios by institutional investors and they weren’t trying to create impact or drive value what they were trying to do is say huh. There is other factors. That we should be making sure we’re diversified around outside of like credit score and sector and pe ratio. So. It’s literally thinking about it on that level of how are we making sure if there’s you know some piece of environmental legislation hits that we are not facing too much portfolio risk to that.
Zach Stein
The innovation of esg was to quantify all of this for the None time prior to that like that type of rating or that type of system had just been exclusionary filters. So it’s much more basic but you then are these exactly and so.
31:54.38
James McWalter
You like? yeah like get rid of the sin stocks basically Tobacco firearms, etc.
Zach Stein
Then with esg you then have these new users who are like I really want to have value space investing or I really want to have impact investing again. This is a personal theory I think a lot of that especially on the the political left was in response to the election of Donald Trump of there was kind of this looking for ways of say how am I pushing back? How am I that. Kind of doubling down on my sense of identity within that. Which until now we’ve kind of led to this point of the unbundling of esg all right, very long-winded way to talk about How do we build our portfolios as you can guess we don’t use esg esg looks at a company ah at like how it operates at its business. What it doesn’t look at is what does the company make because that is the number None thing that drives its impact. The thing that it makes money from and so we look at the stock market. We kind of bucket companies into 3 categories. The none category are companies whose core business is fundamentally antithetical with solving climate change.
Zach Stein
And these barring some miracle technological breakthrough. This is obviously oil and gas but petrochemical companies dirty utilities airlines right now. Airline manufacturers cement steel. There’s hope for some of these industries but technologically now for a lot of them. They’re still not there. So we divest we do not invest in these companies. We do not believe it makes sense to own Exxon Mobile to vote on them and we can happy to dive into exactly there in a sec so that’s bucket number None and step one that we take we cut those companies out bucket number 2 are companies that are building solutions to climate change. That’s how they make money tesla is a very famous example kind of why we think it’s absurd and this was a lot of the pushback by Elon Muskkin the Twitter storm you talked about so we look at what are the best independent plans to solving climate change those who are in the climate space have probably heard of them groups like project drawdown the international energy agency Rewiring america and we say which publicly traded companies are building those that aren’t generating more revenue from products or services that are dependent upon the fossil fuel industry that kind of fall into that first bucket. So we just use revenue. We don’t use pledges or anything like that. So an example of a company that does not make it into that category in spite of it making a climate solution is general electric. They didn’t make it last year they are the None largest manufacturer of wind turbines in the world but they generate more revenue from their natural gas turbine and jet engine business. Therefore we do not hold them then the none category is everyone else and these are the companies whose core businesses can exist in a decarbonized world in a 0 carbon world. They just aren’t there today and that that means to us as shareholders this is where we should be engaging. And trying to pressure them to get there as quickly as possible. The example I like to use is Coca-cola there’s no reason why coke can’t sell me a beverage using the secret recipe in a zero carbon future. It’s just doing so powered with 100% renewable energy delivered on 100% electrified fleet and they’re protecting instead of abusing their natural resources. That to us is where we should be engaging as shareholders because right now there’s so much in the climate activist space. It’s trying to go to exxonmobil who like has a line out the door of customers waiting to buy its product and say like hey you should become a solar company and they’re like why would we do that.
Zach Stein
Instead we should be going to the line and being like hey there’s a ah better cheaper way to get what you’re going after.
James McWalter
I love I love I love it telling this. So I think I think the um, the pushback on the issue is really wellm made and it’s the nature of large enterprises. It’s the nature of finance generally. You love a number right? because if you have a number you could start doing things you can index against it. You can say is it going up or down and so ishi was like this attempt or is this attempt to kind of orientate the industry around a number. Um and all of the kind of considerations that go into that number were new to a definition. On the basis of a ton of compromise right? because you know an msci or sandp comes up with their esg indices they are doing that with a ton of conversation with the people who are getting hit badly by the esg indices. Um or potentially it could be hit badly and so. There’s just a user level of compromise because even as divestment occurs even after the blackrock letter a few years ago that’s had like this massive effect on on these things in general, you’re not going to see just like the mass divestment across all of these firms. All of a sudden because it would actually have like a you know, very very large effect. In in the stock market in a way that you know most financial professionals are way more conservative than allowing that to happen and so this all makes a kind of ton of sense to me. It was interesting when you mentioned kind of going into the revenue lines of a company like Ge and figuring out the exact yeah revenue line on a you know let’s say a climate positive versus a climate negative. Basis and the kind of things you’re talking about like typically large investment firms will have you know a none analysts like figuring these kind of things out and so how do you? you know I guess how do you kind of scale that research to figure out exactly what’s happening. Um, yeah, are you just kind of living in ten Ks and ten queues or exactly how do you kind of approach. It.
Zach Stein
Yeah, it’s we do only publicly available information. We think that this is again a problem with esg is that it is fundamentally opaque. You’re saying this is ethical. It matches your ethics. Sorry we can’t tell you how we came up with this and we’re not going to be able to show you in the future. What decisions we’re going to make with it. Um, that again, it just it kind of fails. The none test of trust building and it fails what you’re trying to build so for us transparency is absolutely key which means we all use publicly available information. So yes, it is 10 k’s. We look at investor reports and try to dig where we can and there’s companies which you can go on our website and you can look at our full list of all the climate solution companies that we evaluated in 2021 it was 352 companies. We identified as building or potentially building a climate solution. None made it through our filters so you could not only see every single company that made it through but also the ones that didn’t and why they didn’t what they failed of our criteria. We try to make it really really clear and one of the categories is lack sufficient information for it. If we cannot see the exact revenue breakdown between these product lines then we just don’t hold it in there. Um, because it means our clients also could not double check and repeat it for us.
James McWalter
That that’s very interesting. So so we have these kind of None companies just so I have a kind of sense of scale relative to something like the sandpfivehundred would those one hundred and sixty nine from a market cap basis would that be None of the sbfivehundred or like yeah fifteen twenty percent just to kind of get a sense of like how far we have to go to start having companies that have such a clear climate positive. Ah you know impact.
Zach Stein
Yeah let me I actually have members for this if you just give me a sec let me look this up so in the way that we build it about. In terms of the market capitalization. This is not going to be the best way of doing it but about 50% of our climate solutions collection is large gap about 30% is midcap and about 20% of Smallcap. So there are certainly companies in there who are large gap in there. You know Tesla is kind of the going to be the most.
James McWalter
So it’s about 80 so if you think about this and pick 500 is large cap and you have 169 so you know fifty to eighty companies in the sb 500 might fit into that criteria. Okay.
Zach Stein
Aggressive and leading example.
Zach Stein
It’s probably a little bit lower but I would need to go in and kind of look and double check.
James McWalter
Ah, under said. Okay, but I think it’s a good level setting for for me as I kind of think through again the the amount of ramp that’s needed to start pushing all these companies into it right? because even let’s say it is 50 companies that’s 10% of the s and b 500 um there’s a huge amount of.
James McWalter
Gap there that needs to be made up for and to do that and your theory of change is leveraging you know a large movement of capital from the existing place to this new place where it’s focusing on that 10% and kind of expanding those and then also those companies will perform better because of ah you know the ability to kind of. Their valuation is going up and so on and so I guess as you kind of think through like what are like the best levers to to do that. So is it getting yeah hundreds of companies to sign up from a benefits point of view with. Consumers would would you guys or are there other Levers. You’re thinking about.
Zach Stein
Yeah, so when we get to kind of our high level vision. We are trying to build the company at the intersection of climate and investing right now we see it as a fundamentally open category and we think that they’re really people are looking for a place that they can trust and again as we talked about earlier. It’s a really high bar. You have to meet for that and we take on that challenge willingly because we’re so focused it enables us to move really quickly and move into other spaces really quickly so we launched in this in 2021 in September we launched our green four one k program. Which allowed us to come on as investment advisors for mission-driven companies. So like if you guys if and when you guys launch a 401 k if you didn’t work with a carbon collective. You went with like a guide lie and or ah you know, empower or human interest it would force you to invest in Fossil Fuel companies you and all of your members. That is just contrary to your mission that doesn’t make any sense it it. It deflates the value of the perk as a founder of what you’d give to your employees and so we actually found oh. We could actually come on and be the investment advisor where we take on the liability and responsibility away from the record keeper the guideline of building those portfolios. And we can make it a win-win-win for everyone so that is going that that program is going really well and scaling really nicely and kind of from a business standpoint. It’s like what you talked about earlier of you know going to mccj on the slack channel and stuff like that like that’s a collection of people people who come to work at a company like yours or something like that. That’s an. Another self-selecting group of people that we then get to go talk to and hopefully help help them navigate. What is this challenging space and build. Trust.
James McWalter
And we are we are setting up our for one k in the next two weeks so I will I will honestly take you open that I offer because even though a couple of us it is something that I was literally like just looking at guideline it’s None clicks and we be done. Um, and I think that defaults are kind of what you’re battling against right. But I think over time as you actually become the default I think then then you will start to see that kind of real hockey sick kind of growth and at scale.
Zach Stein
I Think so too. Yeah, we definitely should talk. We have a great deal right now with forever savings. So let’s talk a fine about that. Um, yeah I think so this is something That’s really interesting that came out of our mon testing was there was a cohort of people who are just.
James McWalter
Yeah, absolutely.
Zach Stein
Ah, off when we ask these type of questions and you probably see this person. You could think of them too where they would say why should I do anything about climate change when it’s all the corporations in government’s faults I’m one person I was born into this world like get off my back stop guilting me and to some degree that person is totally correct. Like they you are just None person. You are born into this world. But what it misses of saying it’s all just corporations or governments and they should fix it is it fails to ask the question of well what should how do you How do corporations and governments change and what’s on I keep coming back to and it’s something I wrestle a lot with is. Like the status quo only changes and this is like the status quo of guide log be the default option like the status quo only changes when enough individuals or companies. Whatever it is decide to change it like I don’t know of a different theory of change.
Zach Stein
Than that of like how to change the world.
James McWalter
And well so that but then you also have the the combination of ah often technology that makes things a bit more obvious right? and so it kind of goes back to sa of transparency and I think there are so many areas of the economy that has just like relied on the opaque nature of their processes. Because nobody really cared like like a classic kind of non-climate example is the idea of sweatshops and so until mid 90 s there wasn’t really any sort of like general awareness of what is occurring at you know a South East asian sweatshop and then that changed and while that problem is not kind of away. You know it is at least something that consumers started to kind of think through things like ethical fashion and and and these kind of elements and I think that a lot of what happened was it was just actually easier to communicate in the 90 s people all of a sudden could send an email or. Communicate much more rapidly and eventually we had you know ubiquitous video to show conditions and I think what we’re starting to see is as information is more readily available as you know, even small cap companies that wouldn’t typically have a ton of research analysts on it even their data is more easily extractable. You start to have the but benefit of. Places like carbon collective to like make sense of that data expose it and you know drive change that way.
Zach Stein
I think so and I think to kind of use the sweats up shop analogy a little bit further should kind of stand on the shoulders of the work of activists before where you know those activists came in. You know they were to say this is wrong. You know Nike you should change I remember that with you know, there’s. Very focused on Nike at that time and that kind of gave room for a company like everlane to come about and saying there is this this awareness and this push but there’s not necessarily a place to go for it and so I think you know when I look at a company like carbon collective. I see like the group the work of the groups like three fifty dot org and Bill Mckibben and the divestment movement of that being some of the shoulders that we’re standing on of kind of popularizing and educating that we cannot solve climate change without changing how we invest and I think that’s really key.
James McWalter
And I guess you slightly touched upon it. But I’d love to kind of get you know if if you had any kind of numbers around like what the ah roi is right? because if the primary Decision-ma process that you kind of alluded to at the very beginning as you’re kind of thinking through this you know people to trust their fifty K plus. Retirement account in the hands a car collective. They want to see yeah a reasonable return for that in a way that at a minimum I guess tracks with the vanguards of betterments and so on Um, but but you are also from what you said like having to expose. To Larger. Let’s say small cap risk than then maybe more so than a typical kind of Vanguard or betterment. Um, so yeah, so I Guess how do you you know, think about the kind of different ah Roi and the the kind of risk adjusted investment profile of a karma collective account.
Zach Stein
Absolutely we think about it a lot so our core portfolios which is kind of what I described at the beginning with those 3 buckets that divest reinvest and engage the rest. Um, that is the that that’s what makes up our core and that’s where you get a similar level of risk in return when we do our back testing. Can go to our website. You could see our None ar back test. We update it quarterly. We show all kind of like the relevant metrics. We I think we do a pretty good job of explaining what it means to people who don’t know what things like beta or standard deviation are like is higher lower is like higher better or worse like we’d tell you? um.
James McWalter
It Red Red red is bad. Green is good. These kind of things. Yeah.
Zach Stein
Ah, basically um, so we try to make that really transparent we get this question a lot and I think I but take this opportunity to kind of step back and even a little bit larger because you brought it the divestment movement and this kind of goes into the theory of change where I think that that that the divestment movement. Promise land for when you start seeing things to really change is not just when people like you and me are saying I don’t want to be in fossil fuels because it’s wrong but people like you and me are saying I don’t want to be in fossil fuels because it’s wrong and it’s stupid financially and starting to spread those narratives when you. I think are fairly educated educated on economical things. So efficient market hypothesis is you know a theory that stocks are priced based upon publicly available information and there’s a lot of debate upon it in economic circles. But you know you can make the guess that it’s largely true. Maybe outside of some insider trading one people make the argument for efficient market hypothesis and this is often an argument against divestment. They’re just like de efficient market hypothesis. The prices itself. You’re not going to change anything what they don’t take into consideration is that there’s publicly available data is. What are the underlying narratives that we have about certain industries that are just pervasive. There are the undercurrents that you don’t see and there is an underlying narrative and you touched us on this by talking about wall street that fossil fuels are fundamentally a necessary evil in a balanced portfolio that if you want returns. That’s your primary goal. You have to include them. And there was a none narrative that sustainable investing is just for green hippies like me who want to wear our values and are willing to take worse returns for doing that and both of those narratives have proven false. So if you had divested from the sandpfivehundred from one thousand eighty nine to the present you would have made more money. Ah, 0 is born looking forward when we look at should you hold Fossil Fuels like should you be long on fossil fuels or climate solutions just the macroeconomic trends but you know without any legislation at all like 50% of the oil that is used in America is on our roadways. And most of that is in individual cars and trucks like you and I own. We just have a better technology here. It’s like the horse and buggy to a car. It does the same thing as a fossil fuel power car but it does it faster it is safer it is roomier you don’t have to go to a gas station. It costs a none as much to maintain you could drive it for a million miles and in None ars it’ll be cheaper to buy up front like that’s the middle of a technological transformation and that’s a lot of market share for oil. That’s just gonna go away and it’s not.
Zach Stein
There’s not room. There’s not other industries where that’s going to be made up or kind of tapped out in plastic. You know, maybe the growth of airlines and the broader growth of the economy but like maybe blue hydrogen. Maybe if green hydrogen doesn’t get there first. So when we kind of look at the long-term trends of like. Should you be invested sustainably. We try to make it very clear of any time that you deviate from the market you’re gonna have deviating returns in the near term you’re in a half months or you’re higherre gonna have months where you’re lower. That’s the way we you know we let’s not beat around that theres bit and that’s happened with our carbon collective portfolios. When we we are focused on long-term investing on on kind of the decades level approach that to us. It just makes a lot more sense to not hold the industries who are fundamentally being outcompeted and instead hold those that are replacing them well and then just you know hold the rest as well.
James McWalter
Yet’s super interesting and as I looked so you have your index which is on your website and actually a previous guest. The Ceo of beam global is on the index I’m sure he’d be a Duncan Denis um would be delighted. Yeah no I’d absolutely a happy take.
Zach Stein
Um, yeah, make the intro. Let’s get there for 1 k.
James McWalter
Yes, yeah, absolutely. Um, but I think one of the one of the powerful things about it as well. Like if I think about the ah the kind of startup ecosystem and the private company side of things you know we we had this kind of very exciting and I would say a pretty volatile issuance of Sps and so on and I’m sure there’s quite a few specs as like. Quickly glance at the index on there. But what I think is like really powerful about having an index like that and and creating this connection between those companies four one k and the overall kind of long-term market returns that actually also gives very nice comps to. Later stage climate companies and then that I’ll filter down to earlier stage climate companies that there is like a very very clear path and for those who kind of yeah this is before my time but I’ve talked to folks who were involved in the you know the none kind of renewable startup world just over a decade ago. Clean tech 1.0 and they really struggled to get to a clearer exit path whereas this is like you know you’re getting all the way into a 4 1 k like the more eventual boring quote unquote it becomes the more exciting it is for earlier stage investors because it’s like okay that’s that’s true. Scale.
Zach Stein
I Think that’s a really interesting perspective I actually haven’t really considered before yeah in the point that you bring up of what is the difference between Clean Tech 1.0 and you know climate Tech 2.0 of what we’re in now is it’s the end markets. Is that especially in so many of those areas like electric cars or like renewable energy. It’s not based upon altruism of what’s driving the end Market. It’s based upon financials and so all the kind of the whole ecosystem there of like what you’re building. For example. Um, like it just makes a ton of sense like if climate change wasn’t a problem your business would still be a venture business and like that’s that’s a really big difference Mine I don’t know but yours definitely would be.
James McWalter
Bre.
01:14:50.22
James McWalter
No absolutely And and I mean even yours because like we do want clean air right? like so there are also these other externalities that we are trying to reduce. Um hopefully and thankfully and we talked a little bit but before we jump to the call and I believe you have a a newborn and it.
James McWalter
So It’s very difficult to start a company build a company, get it to scale while also you know managing these other yeah, very very important like restrictions on our time and so I guess how you find Found. Kind of balancing those things particularly because you’ve already previously founded a company and I’m sure it was slightly different experience with that first company.
Zach Stein
Yeah, we talked about this a little bit on the beginning of the call at kind of seeing kind of the culture of founders who are like yeah I work seven days a week and like maybe it’s because I’m an introvert at heart or something like that. But I need so much creativity for the work. That I do. It’s like I don’t think you could write poetry 80 hours a week like if you’re kind of in that format. Yeah, exactly like it wouldn’t be very good could just get continually worse unless it’s like you’re like the monkey trying to write Shakespeare so that.
James McWalter
This poetry sweatshop.
Zach Stein
To me. It’s something that’s kind of going as and as a baseline of having really clear rules for myself of when am I unplugging when am I turning it off when am I not checking emails I Very deliberately do not have email alerts on my phone for that reason. So it’s been kind of just a continuation of that of having a newborn his name’s caleb.
James McWalter
It very good. Yeah, it’s good. It’s good that the scottish name right? Yeah, okay.
Zach Stein
Really cute. Thanks um, yeah, biblical. Originally he was one of the the spies sent by moses to go look into the land of Israel and see’m jewish and see come back and say like. You know god said we should go here like should we go here if so how at the other 10 of out of the None spies told like these lies that like it was either like incredibly good like unrealisticically but or unrealistically bad and C Caleb is one of the 2 that told the truth of saying that like. Is is going to be hard, but it’s going to be doable and especially in starting you know, working on a climate tech company and being in this space I think that was part of the reason for naming a child that I think that’s kind of the ethos that so much so many of us have to hold of it’s going to be hard. And it is really hard and it is really scary and we also have to hold that it’s doable and so yeah, my life has become very narrowed since having him in a really nice way in some ways my first priority or my first priority is him frankly, my second priority is carbon collective and my third priority is. Taking care of my wife so she can you know, be there to press feed and do things like that that I can’t do um and everything else is very far beneath that now I haven’t exercised in like twenty days
James McWalter
I and and I think that is yeah as long as people understand the tradeoffs they’re making I think I think it all. It’s all fine and and some people would have their priority stack different depending on on their kind of life situation. Um, it’s funny you you know this idea of like the the poetry search shop. There’s this like old tale of James Joyce the the famous irish author and he’s like supposedly working away in his you know, writer’s room shouting and and you know the person he was with at the time was like downstairs hearing all this and he comes down after like a full day and she’s like oh James like you know. Was today gone and he’s like I wrote None words and she’s like oh my god like that’s that’s really good because she knows how difficult it is for him to kind of produce anything at all and he’s like I don’t know what order to put them in you know and so I think like that like in similar to the metaphor of you know.
James McWalter
Raising a child for a startup founder I think that’s also a bit of a metaphor for trying to figure these things out. Um, but Zack this has been absolutely brilliant before we finish off is there anything I should have asked you about but did not.
Zach Stein
I don’t think so I um, yeah, this has been a lovely chat and you know I think if you are listening to this as a fellow founder in the climate space come check us out for 401 k’s or if you’re an investor in climate you’re None can you have a 4 one k it. Also shouldn’t force you to invest in Fossil Fuels we help you out. We aren you know were work with partners that integrate every payroll provider. We build a series of portfolios offer unlimited education where real people we’re quite helpful frankly and you’re really not going to pay much more than you would otherwise. So tos. It’s a big, no brainer.
James McWalter
I yeah absolutely and I’m not even joking like just because it’s a bug I guess but I’m literally figuring out the 401 k right now and we’ll we’ll well have a chat about this. Thank you Zach.
Zach Stein
Okay, like Jabs thanks so much for having me.