Green Alpha Advisors & The ‘Next Economics’

Garvin Jabusch is talking fast again. This usually happens when he is talking about the two topics he cares about most deeply: excavating ancient artifacts around the western United States and upending the S&P 500. The former is what consumed Jabusch’s youth. The latter is what he’s doing through Green Alpha Advisors, the radical impact investing firm he co-founded with Jeremy Deems in 2007.

“Capitalism is supposed to be dollars chasing the best ideas that can create the most wealth,” Jabusch insists, sitting at a table in his Boulder, Colorado office. “Not dollars investing in the old ideas because that’s what we’ve been told to do. And smart money is starting to realize that.”

By “old ideas” Jabusch means blindly investing in a nearly century-old stock index, or investing in fossil fuels or any other sort of industry not forward-thinking enough to see a potentially inevitable economic, environmental, and social collapse.

“It is starting to resonate with people and they are starting to get that they don’t have to have an investment that correlates with the S&P 500,” Jabusch, 49, says. “In fact, on the contrary, why would you want your investments to correlate with the cause of all of that risk? Bear in mind, the S&P 500 has 59 fossil fuel companies in it. It has companies that make pesticides and herbicides and degrade farmland and that make internal combustion engines and that make nuclear. The S&P 500, outside of a handful of companies like Apple and Google, typify the risks that are threatening the global economy right now.”

FROM AN ‘INCUMBENT ECONOMY’ TO A ‘NEXT ECONOMY’

This message is, indeed, starting to resonate with people. Once a meager $2 million fund comprised of the backing of mainly good-natured risk-taking friends and family — not to mention Deems’ own 401k — Green Alpha Advisors has become a $75 million enterprise, with the vast majority of that growth occurring in the past three years. Instead of using the S&P 500 as a starting point and using screens to narrow the list, Jabusch and Deems threw out the often sure-bet index and created their own — from scratch.

Traditionally, those looking to make an impact with their capital look at a set of companies, impose their own criteria to screen out those not aligned with their personal values, and invest in the shorter list. Jabusch and Green Alpha Advisors do it differently. They start with a list of “risks” or threats to our world and find companies working to alleviate those risks. Instead of a traditional, “incumbent” economy, Jabusch calls it investing in the “Next Economy.”

“If you’re starting with a list of companies that basically embodies the present economy,” he explains, “whatever portfolio you end up with is going to be some representation of that economy — in other words, the present economy that has given rise to all of these big risks that now have the power to undermine the global economy over time and, honestly, civilization.”

Don’t like the way things are done? Create a new way of investing. That’s what Jabusch and his team did. They call it the Next Economy Investment Model, focusing on five broad industries, including renewable energy, recycling, and resources management. They’ve also created their own stock index, called the Green Alpha Next Economy Index. Within their GANEX-molded portfolio you won’t find any companies involved in fossil fuels. You will find major companies like Tesla, Garmin, and Salesforce.

“When we started, we got nothing but derision. ‘That’s crazy. Go hug a tree, you guys,'” Jabusch recalls. “And we’re like, ‘No, it’s not about that. It’s about innovation and productivity gains.’ ‘OK, come back and tell us how you’re doing in a few years.’ We got a lot of that.”

Now it’s a few years later, and Jabusch has growth to report. But to fully understand the radical approach to money management, it’s essential to understand Jabusch’s approach to life.

‘THE BLACK SHEEP OF INVESTING’

Often referring to Green Alpha Advisors as “the black sheep of investing,” Jabusch’s life could be said to have been steeped in atypical situations from birth. Born in Salt Lake City in the 1960s yet not raised as a member of the Mormon Church pretty much immediately established Jabusch in “black sheep-hood.” He and his friends grew up doing a lot of skiing, whitewater rafting, hiking — all the outdoors opportunities Utah’s national forests and parks and Bureau of Land Management land have to offer. “We were kind of the black sheep in the Salt Lake Valley back then,” Jabusch says.

As an undergraduate at the University of Utah, where Jabusch’s father was a professor, not much changed. Jabusch majored in anthropology, often participating in archaeological digs around the state during the school year. In the summer he guided whitewater rafting trips for Western River Expeditions. He started running sections of the Colorado River outside of Moab, Utah and eventually worked his way up to leading three-week trips through the entirety of the Grand Canyon. A lifetime dream trip for many whitewater enthusiasts, Jabusch was running the Grand five to eight times a summer. Listening to him talk about it now, it’s tough to tell if he was more excited about the whitewater or the naturalist hikes that groups often took, with him as river guide, to look at the geological wonders of the canyon.

After a brief full-time stint as a rafting guide, Jabusch returned to the University of Utah to pursue a Ph.D. in anthropology. As a doctoral candidate, he traveled to Jordan, Switzerland, and Egypt for more digs. Before eventually dropping out from the program, Jabusch was part of a $14 million cultural resource mitigation project along the proposed route of the Kern River Pipeline, stretching 1,700 miles from the Green River Basin in southwest Wyoming to the San Joaquin Basin near Bakersfield, California. As part of the Antiquities Act, Jabusch and his team excavated hundreds of cultural sites along the pipeline’s path.

AN EARLY LIFE OF ARCHAEOLOGY 

The Kern pipeline project was an important turning point for Jabusch. For the first time in his life, he suffered from the “so what” problem, and was no longer satisfied being outside digging in the dirt. “We spent $14 million and dug hundreds of sites and what we really learned was a lot of detail about how people lived,” he recalls. “It was interesting and important but our main conclusion was, yeah, the paleo natives in Utah were hunting and gathering. So what?”

Jabusch was still fascinated by how far native tribes carried certain tools before making new ones. But he was also having trouble reconciling that work as a career. “You’ve got your cooler and your dog and tent and it’s all good,” he says with a sudden accent, similar to someone you’d see dragging a surfboard down a Ventura County beach. “But pretty soon you’re 26 and you’ve been doing it for a few years and you’re like, what happens when I’m 46, you know?”

Ever the deep thinker, he saw the value in learning from previous generations and cultures.

“It is interesting because we do learn about the past and subsequently about ourselves,” Jabusch says. “And we learn a little bit about human nature, which could in turn inform how we behave going forward, should we as a civilization decide to apply those lessons. And that brings us into the theory of Next Economics. What matters most? What are the real systemic risks that cause civilizations to collapse, and how do we manage the economy so as to avoid those risks?”

FROM THE AMERICAN DESERTS TO MORGAN STANLEY’S BOARDROOM 

Jabusch decided to look for something that held more meaning, that felt less like he was a grown adult spending all of his time at summer camp. And what he looked for was almost a polar opposite experience. It was an MBA.

Jabusch left the archaeological dig sites of the U.S. West for case studies and group projects at the Thunderbird School of Global Management. An MBA and master’s in international finance later and Jabusch was a bona fide investment manager at Morgan Stanley.

“I just felt like it was a transition to something that could earn a better living than digging holes in the ground, and in some ways, reflect my internal drive to grow up a little bit,” he reflects. “Whether or not, in retrospect, that becomes true, we’ll see.”

“Still an open question,” Jeremy Deems jests from behind his computer across the room.

STRAYING FROM THE S&P 500

While at Morgan Stanley, Jabusch was instrumental in the acquisitions of rapidly burgeoning companies overseas that eventually led to the establishment of both Morgan Stanley U.K. and Morgan Stanley España. During an deal for a potential e-trade competitor to the Bank of Montreal, which Jabusch says resulted in a massive loss, he met Deems, who at the time was the chief financial officer at Forward Management, the $6 billion investment fund run by Gordon Getty, son of oil tycoon J. Paul Getty. Recently acquired by Salient Partners, Forward Management had a co-fund with the Sierra Club. Soon, Jabusch and Deems were co-managing the Sierra Club Stock Fund in San Francisco.

That is when Jabusch was engrained in the S&P 500 and Negative Screening. Jabusch and Deems took the S&P 500, weeded out companies the Sierra Club would be opposed to — which was about 80% — and were left with a list of about 100 names to manage the fund from. “That was good, but Jeremy and I both perceived that it wasn’t really advancing the theory and methodology of how sustainability-focused investments should be done,” Jabusch says.

“Grabbing the archetype model of that economy and hacking away at it a little bit is good as far as it goes, but it’s insufficient,” he continues, his word-speed rising again. “What we really need to do, we realized, if we want to model what a truly and indefinitely sustainable economy can look like, is figure out all of the big problems that the incumbent economy is causing. Figure out what technologies and innovations can address them and just start investing in those.”

TURNING MODERN PORTFOLIO THEORY UPSIDE-DOWN

Instead of starting with a list of stocks and ending with a slightly different list of stocks, Jabusch and Deems wanted to start with a list of the world’s most pressing risks, then end with a list of stocks. They wanted to cherry-pick companies providing alternatives to chemical runoff from herbicides that were degrading farmland and causing a massive dead zone in the Gulf. They wanted to scour for ventures focused on solar and other alternatives to fossil fuels. Except this was 2007. Solar wasn’t a proven viable alternative yet. And they were still under the umbrella of the Sierra Club, which they couldn’t radically change — even if John Muir was likely applauding from his grave.

Throwing Modern Portfolio Theory out the window and starting fresh probably sounded awesome to the bleeding heart liberals Jabusch dug in the dirt with. For the trained MBA keen on bottom-line shareholder improvements, it likely sounded totally crazy.

“When we told others what we wanted to do, we heard, ‘No, you need to have 8% exposed to oil and 2% exposed to coal. That’s how it’s done. That’s what Portfolio Theory says,'” Jabusch recalls. “And we’re like, ‘No, we want to skip that and go with what sustainability looks like.’ And then they say, ‘No, no, no. There are plenty of green funds that screen out a couple of those bad guys, just do that.'”

BUILDING A ‘RESPECTABLE TRACK RECORD’

Jabusch and Deems left and founded Green Alpha Advisors in 2007. They spent the first year and a half building the Green Alpha Next Economy Index. “We designed it to be the S&P 500 of the future. Here’s what the economy will be, as opposed to here’s what the economy is,” Jabusch says. On December 30, 2008, they invested the first $2 million to start the clock ticking on a 2009 track record report.

“If you’re going to convince anyone to buy your products in financial services, you have to have a respectable track record,” Jabusch notes. “We knew that it was going to be really hard to sell those portfolios in any kind of a serious institution or to anyone outside of friends and family or very similarly ideologically minded people. So in other words, almost impossible to sell in a mainstream channel without a lot of track record and a lot of objective evidence that it works.”

So Green Alpha Advisors has set out to prove a track record. And they think that’s precisely what might keep them from the circling vultures of big banks opening impact wings. “Goldman can start all of the portfolios it wants this year, but we’re still going to have eight years of track record on them,” Jabusch boasts.

USING CAPITAL TO SUSTAIN THE WORLD

But for Jabusch, ever the lover of the wild and outdoors, it comes down to more than making successful investments. It’s about sustaining the planet. “It’s now become easy to begin de-risking the economy if we just make enough investments, which is a big part of why we do what we do,” he explains. “We want to be a conduit of capital in solutions.”

Focusing on energy, agriculture, and transportation, Jabusch and Green Alpha Advisors certainly aren’t shy about those they support — and those they don’t.

“Should you just stay the course and do what you hear on CNBC every day and invest in the S&P 500 because you’ll never beat it and that’s where the lowest fees are? Every time your 401k drops a buck into the S&P 500, Exxon Mobil gets a 2.12% allocation of that,” Jabusch explains. “And it just keeps them growing and fat and happy, even though their technology and approach to providing energy to the world is ecologically bankrupt long-term.”

That, Jabusch says, is precisely how to measure the success of Green Alpha Advisors over the next five or so years.

“I think if we’re right about Next Economics, what you’ll see is over longer cycles, our portfolios outperforming traditional benchmarks,” Jabusch says. “And we’ll prove that the underlying companies are gaining market share. If you don’t see us outperforming, that will mean the legacy economy is still dominant and we’re in for a lot of big systemic existential trouble in the long run.”