December 2, 2023

Healthy Choice

Healthy Choice The Only Solution

This Investor Is Fighting Climate Change By Nudging Portfolios to Net-Zero Carbon

Nili Gilbert has always loved solving hard problems. As a young girl, she spent hours poring over the mind-bending book The Lady or the Tiger? And Other Logic Puzzles. Years later, while working as a quantitative investor, it was modeling human behavior that turned out to be a particularly difficult puzzle. Today, as vice chairwoman of Carbon Direct, a firm that invests in climate technology and supports companies in meeting their decarbonization commitments, she is tackling one of the hardest problems of all: climate change.

Gilbert’s journey from portfolio manager to decarbonization champion took root in college when she had the opportunity to design her own course of study. She focused on the interplay between social and cultural progress over time, and economics and markets. After starting her career in international development at Synergos, Gilbert discovered the world of quantitative investing. She went on to co-found Matarin Capital Management, a hedge fund and equity asset manager for institutional investors, where she spent the next decade.

These days, Gilbert spends much of her time thinking about the intersection of climate and capital, and how to reduce greenhouse-gas emissions and remove carbon dioxide from the atmosphere. Barron’s recently spoke with her about why carbon removal is part of the solution to getting the planet to net-zero emissions by 2050. An edited version of our conversation follows.

Barron’s: We’re in the midst of a global energy crisis where there is renewed focus on carbon-intensive fossil fuels. How should investors be thinking about carbon removal in the current climate?

Nili Gilbert: The energy crisis has caused countries around the world to focus more intensely on short-term needs for fossil energy, as well as long-term clean energy transitions. Our energy transition will remain difficult and complicated. The more that we overshoot the pathways we have ahead for decarbonization, the more CO2 will need to be removed. And the need for removal already greatly outpaces what we’re doing today.

For investors, the opportunities for carbon management have risen in recent weeks. We need to increase our investments, both in managing carbon emitted by traditional energy and, even more importantly, in accelerating the investments that we’re making in clean fuels, like hydrogen.

What prompted you to focus on carbon removal?

As I learned more about the climate challenge, as a quant, the numbers really spoke to me. We are emitting about 50 gigatons of carbon a year. When you think about removals, we have to work on first reducing the emissions that we’re still putting into the atmosphere. We need to get our emissions down to net zero. The emissions we’re putting out annually are the flow. If we look at the stock, the amount of CO2 already in the atmosphere is 1.6 trillion tons, so it’s 40 times the flow.

We need to do a huge amount of work both on reducing the flow and getting our hands around the stock. When we talk about getting to net zero, we’re never going to be able to reduce those 50 gigatons of emissions we’re putting into the atmosphere all the way down to zero. When we talk about net zero, it’s the work of reducing emissions as much as possible, and then focusing on the need to remove.

Why is net-zero emissions the goal?

It’s not so much that net zero is the driving logic. It’s that limiting global warming to 1.5 degrees Celsius [2.7 Fahrenheit] is the driving logic. And in order to do that, we have to get global emissions down to zero by 2050. We won’t be able to get it down to zero just by reducing; we’re also going to have to remove, and that’s why we say “net.”

How do carbon credits fit in?

We know that we’re going to have to remove a significant amount of emissions in order to achieve a 1.5-degree goal. So for me, all of this starts with the emissions themselves. But in order to get capital into those removals, especially at the scale that we need, we need to create a financial market for greater efficiency. So, that’s what carbon credits represent. For carbon credits to be able to serve their role, there needs to be a focus on high-quality removals that are financing high-quality credits. And that is what we focus on in our work at Carbon Direct.

How do we remove carbon from the atmosphere?

We have nature-based solutions. Nature itself acts as a carbon sink: healthy forests, sustainable agriculture, the blue-carbon economy—our seas and oceans.

It’s still not getting us all the way up to the 10 gigatons that we need to remove. Thus, another big part of what we need to focus on is advancing the practice around durable engineered removal, which is also permanent removal.

Some say there is a moral hazard in focusing on carbon removal versus lowering emissions.

The moral-hazard conversation can’t stop us from doing everything we need to do to combat climate change. In order to soften concerns around moral hazard, it will be helpful to be clearer about standards for high quality and how we account for removals. We must make sure that removals are additional, and that we’re applying high-quality accounting standards in how we measure the carbon impact.

How is Carbon Direct investing?

We are investing in and working on both sides of the equation, focusing on reductions and removals. When you think about investing in removals, the equation can be challenging for investors because we don’t have a price on carbon. In order for carbon management to really scale, we need to see that the revenue for doing the work is commensurate with the cost. This is what makes certain carbon capture—which we’re investing in via the cement industry—more economically ready to scale right now than pure removals.

What is the opportunity in cement?

As impact investors focused on the carbon theme, we want to go to where the emissions are. That’s what brings us to the cement space. Cement production accounts for about three billion tons of CO2 per year. But there are more than 30 cement producers around the world that have made net-zero commitments. We see opportunity to invest in the technologies that will help to advance the solutions they need to be able to achieve those ambitions.

Multiple parts of the production process are emitting carbon. The kiln is a key locus, accounting for more than half of the total emissions. One of the investments we have made is in the Leilac Group, which focuses on eliminating emissions in the design of the kiln. Leilac is owned by


[ticker: CXL.Australia], which has been developing this technology and approach for over a decade. It has now reached a commercial proof point with


(HEI.Germany) that’s going into commercial pilot. There are about 2,000 cement plants around the world.

How can investors participate?

I’ve mentioned Calix and HeidelbergCement, one of the world’s largest cement producers by far. It has made a net-zero by 2050 commitment, and is investing in technologies to be able to decarbonize its product. It has also pledged to develop the world’s first net-zero cement plant by 2030.

Were you encouraged by what you heard at the United Nations Climate Change Conference, or COP26?

I sit in the leadership group of the Glasgow Financial Alliance for Net Zero, or GFANZ, and I chair the advisory panel of technical experts that advises GFANZ and its standards. It was so exciting to be at COP26 when GFANZ announced that over 450 financial firms, including asset owners, asset managers, banks, and insurance companies, had made net-zero commitments. These institutions represent $130 trillion in assets.

Securing commitments is one thing. Deploying the capital is another.

Exactly. I’m excited about the hard work of figuring out the strategies and how best to deploy that capital to achieve our net-zero ambition. We don’t have any choice because of the systemic risk that climate change presents to all of our investments across all asset classes.

The Swiss Re Institute estimates an 18% hit to global gross domestic product if we stay on our current path, and so this ties fundamentally to fiduciary duty. We also don’t have a choice because of the planetary risks.

There’s a lot of talk about decarbonizing investment portfolios. But does this have any effect on the ground, in the real world?

This is where we need to be active owners and true stewards of our portfolios, and understand what the decarbonization pathways are for companies in the real economy. Then, we must support those companies down this path as owners.

What is the role of the asset-management industry in reshaping the economy?

Asset management has a design opportunity ahead of it, thinking creatively about how to design new products across asset classes to support clients in getting their portfolios to net zero. As the CEO of an asset-management institution, one can’t just flip a switch to get to a net-zero target. You’re going to have to advocate with the clients to support them in changing how they’re investing in the products they’re selecting. You need your clients to get their portfolios to net zero to get the firm to net zero. It’s innovation in offerings, and communication and education for the market to be able to support net-zero selection.

Thanks, Nili.

Write to Lauren Foster at [email protected]