Investment portfolios with a green focus: An interview with Zach Stein of Carbon Collective
A Q&A on Carbon Collective's green digital investing platform
I was excited to do an email Q&A with Zach Stein, one of the co-founders of Carbon Collective, a digital investing platform for individuals that offers environmentally-friendly investing choices. Carbon Collective is very early-stage, but is gaining traction. I personally don’t have fully-formed views on divestment and green asset allocation as an effective climate strategy (a subject for another day!), but appreciated hearing Zach’s perspectives on the topic. We also spoke about Zach’s varied startup experiences, his company’s fee structure, his future product roadmap, and where else he sees opportunities for climate enterprises in the future. Without further ado, here’s the Q&A:
Zach, thanks for doing a Q&A with me! Can you tell me a little about your entrepreneurship journey?
My entrepreneurial journey has always had a through line in sustainability and it began very humbly, literally in the dirt. I helped found what briefly became the Bay Area’s largest worm composting company.
In 2016, I joined with my oldest friend from childhood to work on a different problem within sustainability, helping a dirty industry get cleaner. We had developed some promising tech that could allow the many fish and shrimp farmers around the world to deploy real time sensing into their ponds for the first time, allowing them to add inputs far more precisely, waste less $ and reduce their water pollution. We raised a significant seed round to commercialize the tech and came to the hard conclusion at the end of 2019 that we were not going to be able to succeed on a venture timeline.
So in 2020, my cofounder and I set out to build better ways for individuals who are worried about climate change to come together and magnify our impact. The result has been Carbon Collective.
What’s the business thesis behind Carbon Collective?
We believe that with each fire season, record setting temperature and hurricane, and 1,000 year flood, the #1 question of the 2020’s will end up being: “What should I do about climate change?”
Right now there aren’t great answers, particularly around your money. When it comes to investing, there aren’t good options that both feel like a smart ethical and financial decision. Green funds are smart ethically, investing your money in solar/wind companies building climate solutions, but they are very expensive and lack diversity. We find that people treat them like “climate charity” and will put just a few % of their investments in them.
The other options are ESG funds and portfolios. These tend to be smarter investments because they’re broadly diversified with lower (but not super low) fees. But they’re just “less bad” from an ethical perspective. We’ve found in over 120 interviews that ESG is just not a good fit for retail investors. Not only do they often include a ton of fossil fuel companies (4.76% of Betterment’s Climate-Impact portfolio was flagged by fossilfreefunds.org), but we found that retail investors who include ethics in their decision-making increasingly want transparency and clear, quantifiable impact from their brands. By its very nature, ESG does the opposite. It’s built on proprietary data sets with a subtractive, rather than additive process (cut out: the tobacco companies, rather than: include the solar companies).
We don’t think you should have to choose. Our portfolios give you the best of robo-advisor investing: broad diversification and very low fees, while being 100% focused on climate.
At a high level, we built an index fund for the world as if it had already decarbonized. The energy sector’s allocation just goes to renewable energy. Utilities just to green utilities. Materials to batteries, water efficiency, etc. And industrials to fuel cells, landfill methane capture, etc.
Then broadly invest you across the rest of the stock market because it’s already low-carbon and doesn’t depend on fossil fuels for its core business (we make a few more changes).
We also think climate-focused is a smarter investment strategy and we’re excited to see how our portfolios perform over the next 5-10 years.
What traction have you seen so far in terms of user growth?
We launched our climate-focused robo-advisor in November, 2020 with the goal of testing the hypothesis that if you made a climate-focused portfolio inexpensive and broadly diversified that people would adopt it as their core investing strategy. In other words, we wanted to avoid the climate-charity trap of green funds.
We’re quite happy with the results thus far. Our average account size is $43,000 and we have over $3m on the platform. Many people are moving large accounts and this has all been through word of mouth.
We are (successfully!) wrapping up our pre-seed raise in early March and we are now going to be moving to fully focus on growth.
What fees does Carbon Collective charge, and how do the fees compare to other digital investing options? How do you counter the “race-to-the-bottom” for digital investing fees these days when designing a business model?
We don’t believe you should pay more to invest with your values. We charge $25/year plus a 0.20% management fee. Because we don’t use expensive ESG/green funds, our average fund fee is just 0.10%.
All in all, it’s about the same as you would pay for a generic Wealthfront or Betterment account (and considerably less than their “Climate-impact” account).
We don’t see a significant race to the bottom in the robo-advisor space at this point. That 0.25% management fee seems to be where the industry has settled on the right price to charge for online investment advising, and we wanted to meet it.
It seems as though a focus of Carbon Collective is avoiding investing in carbon-intensive equities. There’s been some skepticism around fossil fuel divestment and investment allocations having a real impact on climate issues. How do you see it being an effective climate mitigation strategy?
We’ve thought and written extensively on this topic. If this was the case then why would any CEO or corporate board care about their share price? Narrative really matters in the stock market. For decades the narrative has been that fossil fuels are an important part of a diversified portfolio, but that’s just not true.
When investors are bearish on a company, it can make it harder for them to raise additional capital. When investors are bullish on a company, it sets them up to grow faster. One of our portfolio companies, Plug Power, was able to use its high stock price to raise an additional $1B to build out its green hydrogen infrastructure. That’s the cheapest capital out there!
This is why we take a divest and reinvest approach, divesting from the sectors that largely depend on fossil fuels and then reinvesting that share in the companies building climate solutions within those sectors.
What’s on the product roadmap for Carbon Collective going forward?
In the long term, we want to create the largest pool of impact-investing shares in the world to push our portfolio companies to transition to zero-carbon faster.
The first hose to fill that pool is our robo-advisor. The next are climate-friendly 401k’s. We’re super excited about the opportunities in DAFs and eventually we want to launch our own series of ETFs.
Outside of personal investing, what areas within the intersection of fintech and climate change do you feel present promising opportunities for potential founders?
On the macro level, there’s a huge need in project finance. How can we creatively find high-risk capital willing to finance full scale pilot projects of really promising tech?
On the micro level, there’s a huge need for innovation to make personal decarbonization a financial no-brainer for everyone. We’re excited to build solutions in this space too, but the problem is absolutely massive and critically important to solve.