What is sustainable investing and is it profitable?

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This guest post is brought to you by Zach Stein, co-founder of Carbon Collective, a sustainable investing platform that provides low-fee, diversified portfolios built for solving climate change.

Zach Stein, Carbon Collective

I've been working in the sustainable startup space since graduating college in 2011. I began humbly, helping found the Bay Area's largest worm composting farm. Yes, I literally sold shit for a living. I moved into aquaponics/hydroponics, raised ~$4m to build a novel sensing system to reduce waste in shrimp and fish farms, and since the beginning of 2020 have been fully focused on climate change.

Sustainable investing: what is it, will it make you money, and how can you get started?

Estimated reading time: 4 minutes

TL,DR: 

Fight climate change in a way that works for you.

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What do you define as sustainable or ethical investing?


We focus on sustainable investing because broad ethical investing is really hard. Why? We live in a deeply unequal, overly exploitative society. ESG (Environmental, Social, Governance) investing has been the financial world's best attempt at creating a way to invest ethically. And it's not great. Basically, analysts from different firms assign scores to publicly traded companies on these three categories. They then average them together to give each company a meta score. With these scores, they'll build a portfolio of companies above a certain threshold. The problem - these scores are totally subjective. The analysis firms don't agree with each other. And they combine all metrics together, meaning some really bad companies still make the cut, including many fossil fuel companies. So to us, ESG = less bad, but not good.



We took a simpler, far more understandable approach, focusing on a single metric: carbon footprint. The carbon footprint data for publicly traded companies is quite strong. We love this free tool: https://fossilfreefunds.org/. We use carbon footprint plus a few other tweaks to build portfolios that we believe are as sustainable as you can get while preserving diversity and low fees.

Many people see sustainability as a trade-off with wealth building. What do you say to that?


The tradeoff is a myth at this point. From 2010 - 2019, renewable energy stocks have soundly outperformed fossil fuel stocks in the US, UK, France, and Germany. Since the Covid-19 stock market crash back in March, 2020, the difference has been even more extreme. From 01/01/20 - 10/01/20, the energy sector returned: -49.45%. The clean energy sector: 82.60%. Historical returns are no guarantee of future ones, but a strategy divesting from fossil fuel and reinvesting in companies solving climate change would have performed well looking back over the past 5 years.



If we look even further back, say to 1927, a portfolio divested from fossil fuels still would have performed about the same as the S&P 500. Since then, the S&P 500 delivered an average return of 11.53% annually. The S&P 500 with fossil fuels removed would have returned 11.48%  per year.



The one place where it has been historically true has been fund fees. You generally have to pay more to invest in a mutual fund or ETF that has an ethical/sustainable goal. The fund managers have to put more work in and they want to get compensated for it. The #1 solar ETF, TAN, has an expense ratio of 0.71%. That's *really* high.



We don't think you should have to pay more. Our portfolio largely use low-fee sector index funds. The average fund fees you'll pay is 0.09%, which is about the same as you would pay for a Betterment or Wealthfront account's generic portfolio.

Our goal was to create a portfolio that tracked the market that was truly climate friendly. Looking backwards, we seem to have hit our goal. Looking forwards, it depends on your assumptions about which industries will grow and which decline.

Here's the results of a backtested simulation we did of our 80% stock, 20% bond Carbon Collective Portfolio vs. the overall stock & bond market (represented by Vanguard index funds).

Do you think that investing solely using Carbon Collective has any limitations?

Not from a financial perspective. It's where we personally keep 100% of our investments. We built Carbon Collective because we could not find a way to invest that was climate-aligned but still felt safe for our full retirement accounts.

If you are going to invest in the stock market, I can confidently say we have created far and away the best way we have seen to invest sustainably while still being a careful, smart investor.

But that's a big "If." We live in an unequal, unjust world. For some investing in the stock market period feels like too much participation in that. It's a personal choice. We believe that your investment is needed to help push the companies building climate solutions forward. We also believe that right now, it's not a smart investment to invest only in those companies, which is why we invest more broadly in the low-carbon sectors of the economy, as well.

Our portfolios will always be a work in progress. We update them annually to incorporate new data about companies and their carbon footprints. As more meet our inclusion threshold for the Climate Index, we'll include them and your money will get put to work supporting them.

Tell us more about why your platform is unique.

I can say it better over video.

There are three options out there today for sustainable investing:

  1. ESG. Includes fossil fuel companies, very unclear how they make decisions on which companies to include/exclude. They're just less bad.
  2. Climate-focused funds. REDWX (from Aspiration), ETHO, CHGX. These don't include fossil fuel companies (although REDWX had Berkshire Hathaway), but they don't include companies with impact, building climate solutions. It's just less bad than ESG. Plus they're really expensive with fees all close to 0.50%.
  3. Green funds. TAN, ICLN, WIND. These are filled with awesome companies building our zero-carbon future but they lack diversity. You're not going to invest your whole IRA in just solar.

We use carbon footprint as our guiding metric. There are 11 sectors of the stock market. 85% of the CO2e from publicly traded companies comes from just four of them: energy, utilities, materials, and industrials. These sectors only represent 19% of the total value of the stock market. They are also the sectors that are actively dependent on fossil fuels for their core business. So we remove and replace them with the collection of over 112 companies building climate solutions. Then invest directly in the rest of the low-carbon parts of the stock market using low-fee sector ETFs.

This video is really helpful on how we build portfolios:

There are so many companies that claim to provide sustainable investments — why should we trust yours?

Transparency. One of our greatest personal frustrations with the sustainable/ethical investing space is that so many companies end up saying some equivalent of "this is great, just trust us." How they make decisions to include and exclude is really unclear. That's hard from an ethical perspective, but also a financial one. How do I know what criteria you'll be using to make these decisions in the future? Greenwashing is super real and it's unfortunately common in the sustainable investment space. You can find exactly what's in our portfolios and the logic behind our decision-making on our website.

We believe that investing with the total stock market in low-fee index funds is the smartest way for average investors like you and me to invest over the long term. So we wanted to build a way to invest like that but for the world as if it had already transitioned off of fossil fuels. And we believe we've built the best way for doing that.

One question we do get a lot is something like: "This is great! But you're new. What happens if Carbon Collective doesn't make it as a company?" This is such a good question and a very reasonable concern. The worst case scenario is this: you have a mild hassle to electronically transfer your account somewhere else. Your shares are your shares. We guarantee that we will help you transfer them somewhere else.

And who actually holds your stocks and bonds? We work with an online software brokerage called Altruist. They're you're portal to access your account, withdraw, and deposit funds, get tax docs, etc. They work with one of the largest custodians in the country (the company that holds your stocks/bonds) called Apex. Should we not make it, we have our transfer guarantee. We'll work with you to electronically transfer your account to a different custodian (like Schwab, Fidelity, Robinhood, etc.).


Other than Carbon Collective, what are some of your favorite tools and resources for fighting climate change?

We really like Saul Griffith's Rewiring America. It's a clear guide on what we need to do to fight climate change which basically involved electrifying everything.

What is one thing you wish more people understood about the movement for a more sustainable future?

Be forgiving. We all have a part to play and it's not the exact same part. I had a great conversation with a professor in the UK the other day. He's trying to find the right way to use his skills to fight climate change. He was looking at different places he could help individuals make change and it came out that he actually works with a number of fossil fuel companies on projects. He admitted that he does a lot of things that I wouldn't approve of. He drives, eats plenty of meat, and will take grant money from these companies.

I observed in myself my urge to judge him. To tell him he's wrong and hypocritical for doing all of those things. But I didn't voice it because I don't think that's how change happens. No, I told him that his part to play is actually within these companies. It's on us on the outside, who can take a more strident view to shift the conversation, the Overton Window, of what is socially expected. It's on people like him to be on the inside. Someone who knows all of the details of where a company is today, a trusted source that can say, "we're getting all this pressure, let me show you our path to change."

We need both sides. Always look for allies to bring into our movement.

Any advice for people who are new to the fight against climate change or aren't sure what their place is?

Focus on what you can control first and lead by example. Show others in your life how living in a manner that is increasingly climate-aligned also just means you're living a better life. Electric cars are just better. Solar is cheaper energy. Getting natural gas out of your home improves air quality + safety. Investing in a climate friendly manner historically has and very well could have better returns.

Fight climate change in a way that works for you.

💌 Thinking about sustainability can be overwhelming after a busy workday, so we're here to help. Join over 3,000 other busy people and subscribe to Changeletter, a bite-sized action plan that'll take you 3 minutes or less to read every week.
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"The info is always timely, actionable, and never stale." - Aishwarya Borkar, Change.org
"Making social change always felt so overwhelming until I started reading this newsletter." - Meghan Mehta, Google