Episode 4 Transcript: Draining the Fossil Fuel Pool
The complete transcript for episode 4.
MOLLY WOOD:
Hi, and welcome back to Everybody in the Pool, the business podcast for the climate economy. I'm your host … Molly Wood.
[transition music]
MOLLY WOOD:
This week, we're talking about something you probably didn't think was quite so interesting: your 401k. Stay with me here. I’m telling you … the boring topics are the big ones! For example … let’s have a little news update for a minute …
You remember a couple of weeks ago when we talked about home insurance becoming a way bigger part of the conversation, right?
Well, on the Friday night before the Memorial Day holiday, the big insurer State Farm announced it would no longer write any new homeowner policies in most of the state of California … citing climate change.
And right *after that … Allstate announced the same thing.
Both companies had asked the state for big premium increases … up to 40 percent in Allstate’s case … to cover the cost of wildfires … and rebuilding homes and businesses in such an expensive state.
More on this in a future episode … but when you start imagining where you’re going to live … in a future where actuarial tables might dictate where you can live … based on their risk tables? Let’s just say I’m looking around my house in the Oakland hills all of a sudden and thinking … is this thing dead weight?
It’s a big deal. That’s one of the things I find so interesting about the business side of the climate crisis … you never know what levers … are going to lead to real change.
Which … leads me to this week’s topic.
401ks.
It turns out that the average 401k invests in about 30 different mutual funds … and each of those funds is invested in thousands of companies. This just shows up to you in your benefits portal or whatever … as a basket of options … and target-date funds … that you probably don’t think about very much.
But the companies in those funds … are responsible for a lot of carbon emissions. First of all … lots of them are just fossil fuel companies … Exxon … Enron … Shell … et cetera.
Also … the nonprofit Transition Pathway Initiative studies the corporate and financial world’s clean energy progress … it says a third of the companies in the S&P 500 index have no emissions reduction targets at all … and of the companies that do have targets … more than half … aren’t on track to meet them.
So, how can you make sure that your 401k isn't contributing to the climate crisis?
Well … not surprisingly … there are several companies … mostly startups … trying to create … some better options. Here’s one of them.
ALEX WRIGHT-GLADSTEIN:
Hi. My name is Alex Wright-Gladstein and I'm building a company called Sphere, which is making it easy for every company to offer climate-friendly investment options to their employees and their 401ks.
MOLLY WOOD:
Alex has a super interesting origin story that I want to get to in a minute … but first … here’s just one reason why the 401k conversation … much like the insurance conversation … has quite recently gotten a whole lot more interesting … and a whole lot more political.
ALEX WRIGHT-GLADSTEIN:
There's, there's 10 trillion invested right now in just US-based 401k plans and similar 403b plans for nonprofits. And that means, given that about 10% of the economy right now is made up of fossil fuel companies, that means there's about a trillion dollars invested directly in fossil fuel companies just from 401ks and 403bs. That's a lot of money that we have the power to move if we start to make other options available to people.
ALEX WRIGHT-GLADSTEIN:
It's hard to know exactly, but it seems like maybe about a third of the market cap of US fossil fuel companies comes directly from retirement plans. A third. So that's significant. And I think the reason it's so high is, it might be because so many other sources of capital have been pulling their funding, the endowments of colleges.
There's been a huge divestment movement where Harvard and Middlebury and tons of, tons of universities have pulled their endowments from the fossil fuel industry. A lot of family foundations and family offices. Even the, the Rockefeller. The descendants who their family wealth comes from, Standard Oil, the company that got broken up into Exxon, Chevron, et cetera, they have decided to stop investing in the fossil fuel industry.
ALEX WRIGHT-GLADSTEIN:
And so it turns out retirement plans are one of the last sources of capital for this industry. And so it's very significant. And it's actually no surprise that as a result there's been a huge focus on trying to prevent climate-friendly investing from making its way into the retirement industry. It's become an extremely politicized area just within the past year, which has been a wild experience starting this company.
You know, little old us at Sphere, just trying to get climate-friendly options in retirement plans all of a sudden is at the epicenter of this political debate, I guess we could call it. It really just feels like this political agenda that has been set by the fossil fuel lobby that has risen all the way to the highest offices in our country, where the very first veto that the Biden presidency has had to do. Biden's first veto was on the topic of just letting people have the option to do climate-friendly investing in their 401ks.
MOLLY WOOD:
Yeah. I have to be honest, I have wondered a lot, I've been writing a lot about this kind of ESG culture war, and I have wondered how much of that is quite specifically a fossil fuel disinformation campaign. Of course, that's gonna be hard to prove, like it'll be in the Washington Post in 20 years that it was really deliberate. But it does sort of feel like a quite coordinated disinformation effort because it feels like that kind of came out of nowhere.
ALEX WRIGHT-GLADSTEIN:
Yes, absolutely. And, uh, when you see the numbers and realize what a significant portion of the money that's invested in these companies comes from retirement plans directly, you realize, of course they would be scared of people having any option to do otherwise.
MOLLY WOOD:
Just … keep that in mind the next time you hear about a state like Texas or Florida or Indiana telling its pension funds they can’t engage in so-called woke investing … maybe check the campaign finance disclosures … for a sudden influx … of fossil fuel money.
Just so happens by the way … insurance companies in Texas have started pushing back against regulations that restrict them from environmental considerations in their business and underwriting … for all of the reasons I mentioned above.
So 401ks are powerful … not boring … and surprisingly political … just for starters.
Now … let’s go back to how Alex ended up in this field … in the first place.
MOLLY WOOD:
Alex, you were one of, you were one of the earliest founders I met actually in my venture career, and it's been super fun to watch us grow, us grow together. This is what's happening here. Um, tell me a little bit more about Sphere. How are you doing this? And, and actually let's even go to the origin story.
MOLLY WOOD:
What made you do this because you founded a company before that's very different from this one.
ALEX WRIGHT-GLADSTEIN:
Yeah, I've really, I've cared a lot about turning around global warming for a long time, and I thought early on if I could be a serial entrepreneur helping get technologies out of labs that could have an impact on climate, that could be worthwhile. So I started my first company, which is called Ayar Labs.
ALEX WRIGHT-GLADSTEIN:
Spinning a technology out of MIT that makes data centers and supercomputers more energy efficient by using light to move data between chips. We started that company in 2015, and in 2017 we started offering a 401K plan to our employees, and I asked for a climate-friendly investment option in the lineup, thinking it was a simple request.
And long story short, it took over three years and a lot of persistence to get a single climate-friendly offering to our employees, which meant for over three years we were forcing all of our employees to invest in Exxon and Chevron, which really just didn't sit well with me and it started me down this rabbit hole of trying to figure out why is it so hard to do climate-friendly investing in a 401k?
ALEX WRIGHT-GLADSTEIN:
There are plenty of climate-friendly investment options that exist in the world. Why is it so hard to get those options in 401ks, especially when there's so much data showing that investing in a climate-friendly way can actually result in, in really good financial returns, it can be just a good financial decision.
So why are we boxing out people from being able to make those decisions in 401ks? And I ended up learning, there are a lot of reasons. It's hard. None of them are insurmountable. It was just clear there weren't enough people trying to make it as easy as possible, and that is why I decided to start Sphere as my second company.
MOLLY WOOD:
Fascinating. So go back a little bit. Have you been intentional, you say almost that it was your intention to be a serial entrepreneur like you were like, I wanna start as many businesses as I'm starting a business right now and I'm dying. And you were out here like, I'm gonna start as many businesses as I can. Just gonna keep on rolling.
ALEX WRIGHT-GLADSTEIN:
I think there's probably a screw loose in my head that, yes, that was my intention. I, uh, back in college I was trying to figure out what do I wanna do in climate? And I did internships and all kinds of things. I even in high school, I did internships at the Scripps Institute of Oceanography. Thinking science was a really important way to, to, to address this.
ALEX WRIGHT-GLADSTEIN:
Uh, realized lab work wasn't really for me. Did an internship in DC, did an internship, did, did internships all over the place. Ended up doing an internship at a VC firm, uh, called Lux Capital. Uh, and at the time it was a pretty new VC firm, very much focused on nanotech and the founders had this LP who was just a really important mentor to all of them.
They would talk about him all the time. This guy Larry Bach and. He was just a legend to them because he had gone around to labs across the country looking for the smartest people in nanotech and convincing them to spin out their technologies. And he had founded 20 different companies. 14 of them had gone public.
ALEX WRIGHT-GLADSTEIN:
And when I heard that story, I just realized, oh, a serial entrepreneur can be a job description and that sounds amazing and I wanna do that, but for climate, so yes, I did decide I want to be a serial entrepreneur and I, it's a highly unusual career choice, but one that I just love so much because it keeps every day super interesting, even though yes, being an entrepreneur is also a crazy emotional rollercoaster. So, uh, hence my having a screw loose, probably to willingly choose this.
MOLLY WOOD:
I mean, it's awesome. I will say it's awesome. So the goal then is to try to create and be present at the. I, what do you Ima like the first year, when I say the first year, I almost mean that metaphorically like an infant. You know, like when you have a newborn baby, you're like, I just gotta get this little effort to year one and then probably it's gonna stay alive, you know, like.
So is, is that the kind of, I'm gonna come back to the actual businesses in a minute, but I'm just curious about this path. It's like there's a certain sort of upfront commitment to building and then you can sort of step back and let a team take over.
ALEX WRIGHT-GLADSTEIN:
To me, what I'm always asking myself is, do I, am I the best person? Do I need to be here to make this company successful? And as long as the answer is yes, then I'm with the company wholeheartedly and not even thinking about doing anything else but. In growing a company, it's, it's kind of this continuous process of hiring people who are smarter than yourself in each different role.
ALEX WRIGHT-GLADSTEIN:
You start out wearing every hat and then you keep finding people who know more than you at each specific job description and, uh, with my first company, Ayar Labs, it's a semiconductor company and I had no semiconductor experience. Uh, I learned a huge amount from my co-founders and from mentors in the semiconductor industry, and I got to a place where I could hold my own in any room, uh, on with semiconductor experts.
But being able to bring in a CEO who had decades of experience in the industry and connections in the industry, that was what I was trying to get the company to, was get the company to a place where we can attract a really top tier CEO who not only brings in all that valuable experience, but also who understands and is a hundred percent bought in to our vision for the company. And that was really the most important thing and the hardest thing to find because a lot of leaders or mentors, advisors, to me and to my co-founders at Ayar Labs would oftentimes end up advising us to mimic what other companies had done.
ALEX WRIGHT-GLADSTEIN:
Other photonics companies, other optics companies. Oh, you could, you could make this type of product and really just copycat what already exists. And we kept saying, wait, but no, what we have is this really transformative technology that's going to transform the whole semiconductor industry. And we're not gonna do that if we're just plugging into an existing product type that other people are already making.
MOLLY WOOD:
Ayar Labs … by the way … just raised a little over 150 million dollars … because its semiconductor technology is all about low-latency, super fast computing with great power management … aka faster and more efficient computing that is just the kind of thing this new AI revolution needs … so yes … I will hopefully be inviting the new CEO they found … Charlie Wish Bard … onto the show.
In the meantime … Alex had turned over her first baby … and was thinking about where to go next.
ALEX WRIGHT-GLADSTEIN:
It really felt like we were running out of time. I realized, oh my gosh, we have seven years left before we hit one and a half degrees Celsius of warming. It's a really scary place to be. How can I have the biggest possible impact in those seven years and. Ended up realizing that FinTech was the area, uh, which was very surprising to me because I thought I'd be spinning out another deep tech.
ALEX WRIGHT-GLADSTEIN:
I thought I'd be a deep tech co-founder over and over again, and I ended up realizing, actually, I think I can have a much bigger impact founding Sphere than doing anything else.
MOLLY WOOD:
Alex, you were one of, you were one of the earliest founders I met actually in my venture career, and it's been super fun to watch us grow, us grow together. This is what's happening here. Um, tell me a little bit more about Sphere. How are you doing this? And, and actually let's even go to the origin story.
ALEX WRIGHT-GLADSTEIN:
What made you do this because you founded a company before that's very different from this one.
ALEX WRIGHT-GLADSTEIN:
Yeah, I've really, I've cared a lot about turning around global warming for a long time, and I thought early on if I could be a serial entrepreneur helping get technologies out of labs that could have an impact on climate, that could be worthwhile. So I started my first company, which is called Ayar Labs.
ALEX WRIGHT-GLADSTEIN:
Spinning a technology out of MIT that makes data centers and supercomputers more energy efficient by using light to move data between chips. We started that company in 2015, and in 2017 we started offering a 401K plan to our employees, and I asked for a climate-friendly investment option in the lineup, thinking it was a simple request.
And long story short, it took over three years and a lot of persistence to get a single climate-friendly offering to our employees, which meant for over three years we were forcing all of our employees to invest in Exxon and Chevron, which really just didn't sit well with me and it started me down this rabbit hole of trying to figure out why is it so hard to do climate-friendly investing in a 401k?
ALEX WRIGHT-GLADSTEIN:
There are plenty of climate-friendly investment options that exist in the world. Why is it so hard to get those options in 401ks, especially when there's so much data showing that investing in a climate-friendly way can actually result in, in really good financial returns, it can be just a good financial decision.
So why are we boxing out people from being able to make those decisions in 401ks? And I ended up learning, there are a lot of reasons. It's hard. None of them are insurmountable. It was just clear there weren't enough people trying to make it as easy as possible, and that is why I decided to start Sphere as my second company.
MOLLY WOOD:
Fascinating. So go back a little bit. Have you been intentional, you say almost that it was your intention to be a serial entrepreneur like you were like, I wanna start as many businesses as I'm starting a business right now and I'm dying. And you were out here like, I'm gonna start as many businesses as I can. Just gonna keep on rolling.
ALEX WRIGHT-GLADSTEIN:
I think there's probably a screw loose in my head that, yes, that was my intention. I, uh, back in college I was trying to figure out what do I wanna do in climate? And I did internships and all kinds of things. I even in high school, I did internships at the Scripps Institute of Oceanography. Thinking science was a really important way to, to, to address this.
ALEX WRIGHT-GLADSTEIN:
Uh, realized lab work wasn't really for me. Did an internship in DC, did an internship, did, did internships all over the place. Ended up doing an internship at a VC firm, uh, called Lux Capital. Uh, and at the time it was a pretty new VC firm, very much focused on nanotech and the founders had this LP who was just a really important mentor to all of them.
They would talk about him all the time. This guy Larry Bach and. He was just a legend to them because he had gone around to labs across the country looking for the smartest people in nanotech and convincing them to spin out their technologies. And he had founded 20 different companies. 14 of them had gone public.
ALEX WRIGHT-GLADSTEIN:
And when I heard that story, I just realized, oh, a serial entrepreneur can be a job description and that sounds amazing and I wanna do that, but for climate, so yes, I did decide I want to be a serial entrepreneur and I, it's a highly unusual career choice, but one that I just love so much because it keeps every day super interesting, even though yes, being an entrepreneur is also a crazy emotional rollercoaster. So, uh, hence my having a screw loose, probably to willingly choose this.
MOLLY WOOD:
I mean, it's awesome. I will say it's awesome. So the goal then is to try to create and be present at the. I, what do you Ima like the first year, when I say the first year, I almost mean that metaphorically like an infant. You know, like when you have a newborn baby, you're like, I just gotta get this little effort to year one and then probably it's gonna stay alive, you know, like.
So is, is that the kind of, I'm gonna come back to the actual businesses in a minute, but I'm just curious about this path. It's like there's a certain sort of upfront commitment to building and then you can sort of step back and let a team take over.
ALEX WRIGHT-GLADSTEIN:
To me, what I'm always asking myself is, do I, am I the best person? Do I need to be here to make this company successful? And as long as the answer is yes, then I'm with the company wholeheartedly and not even thinking about doing anything else but. In growing a company, it's, it's kind of this continuous process of hiring people who are smarter than yourself in each different role.
ALEX WRIGHT-GLADSTEIN:
You start out wearing every hat and then you keep finding people who know more than you at each specific job description and, uh, with my first company, Ayar Labs, it's a semiconductor company and I had no semiconductor experience. Uh, I learned a huge amount from my co-founders and from mentors in the semiconductor industry, and I got to a place where I could hold my own in any room, uh, on with semiconductor experts.
But being able to bring in a CEO who had decades of experience in the industry and connections in the industry, that was what I was trying to get the company to, was get the company to a place where we can attract a really top tier CEO who not only brings in all that valuable experience, but also who understands and is a hundred percent bought in to our vision for the company. And that was really the most important thing and the hardest thing to find because a lot of leaders or mentors, advisors, to me and to my co-founders at Ayar Labs would oftentimes end up advising us to mimic what other companies had done.
ALEX WRIGHT-GLADSTEIN:
Other photonics companies, other optics companies. Oh, you could, you could make this type of product and really just copycat what already exists. And we kept saying, wait, but no, what we have is this really transformative technology that's going to transform the whole semiconductor industry. And we're not gonna do that if we're just plugging into an existing product type that other people are already making.
MOLLY WOOD:
Ayar Labs … by the way … just raised a little over 150 million dollars … because its semiconductor technology is all about low-latency, super fast computing with great power management … aka faster and more efficient computing that is just the kind of thing this new AI revolution needs … so yes … I will hopefully be inviting the new CEO they found … Charlie Wish Bard … onto the show.
In the meantime … Alex had turned over her first baby … and was thinking about where to go next.
ALEX WRIGHT-GLADSTEIN:
It really felt like we were running out of time. I realized, oh my gosh, we have seven years left before we hit one and a half degrees Celsius of warming. It's a really scary place to be. How can I have the biggest possible impact in those seven years and. Ended up realizing that FinTech was the area, uh, which was very surprising to me because I thought I'd be spinning out another deep tech.
ALEX WRIGHT-GLADSTEIN:
I thought I'd be a deep tech co-founder over and over again, and I ended up realizing, actually, I think I can have a much bigger impact founding Sphere than doing anything else.
MOLLY WOOD:
Tell me about the process of arriving then at FinTech as a hugely impactful solution. Like what were the data points that you encountered? Because there's a, there's a big, I, I would argue almost purity test type conversation happening in the climate sort of startup and investment landscape, right?
Where there, there are among certain cohorts, the idea. there's the, the firmly held idea that deep tech, hard tech, major transformative innovations are the only way forward. And I'm curious, given that specific background, what were the data points that that sold you on 401ks? I mean, clearly your own experience, but what else happened?
ALEX WRIGHT-GLADSTEIN:
Yeah. It was really a journey and it wasn't just my own experience. I kind of thought of my own experience as this. Annoying side project where I couldn't stop thinking about it. I was like, oh, this stupid 401k thing. We still haven't figured it out. I have to spend more time on it. And that was kind of the place it occupied in my mind.
ALEX WRIGHT-GLADSTEIN:
And after bringing in Charlie as CEO and having a little more, you know, getting him up to speed and then starting to have a little more time to get re-engaged in the climate conversation. I really was trying to ignore the 401k thing and trying to dive deep on meeting inventors who had incredible technologies that might need help getting them out of labs and.
ALEX WRIGHT-GLADSTEIN:
I thought that was what I would be doing, but this 401k thing just kept nagging at me, is really what it came down to. I couldn't stop thinking about it, and I think the reason that I kept trying to ignore it was because I knew for myself that I didn't wanna be invested in the fossil fuel industry. I wanted nothing to do with 'em.
I knew, uh, what an outsized impact they have in the politics of our country and in preventing progress when it comes to the policies that scientists and policy makers already know. can lead to solutions. It's really this obstructionist lobbying that this extremely well-funded industry is doing that's preventing us from moving forward.
ALEX WRIGHT-GLADSTEIN:
And I didn't wanna be personally investing in that industry, but I couldn't think of a reason that it made sense to give that option to not invest in this industry. I couldn't think of. What impact that would have on a big scale. I thought, okay, if I get everyone to stop investing in the fossil fuel industry, great, but so what? How does that solve climate change?
And I was thinking about it in terms of dollars and cents. I think it's probably a limitation where I come from a pretty math, science tilted brain mindset, and I was trying to figure out and you know, I even, I majored in economics and so I was trying to figure out what is the elasticity of demand for fossil fuel stocks and how much money do you have to take out of fossil fuel stocks to have an impact on their price?
ALEX WRIGHT-GLADSTEIN:
And if you do have an impact on their price, what does that actually translate into in terms of impact on climate change? Does it make it harder for fossil fuel companies to raise capital to do more exploration for fossil fuel reserves? And I couldn't see that mattering, given that we already know that there are enough known fossil fuel reserves to screw the planet over multiple times.
ALEX WRIGHT-GLADSTEIN:
It just didn't seem relevant to make it a little harder for these companies to do more. Of that work and that's, I, I kind of kept leaving it at that and thinking, okay, I personally don't wanna invest in them, but I don't see it as a big world-changing company or idea to make climate-friendly investments available to everyone.
ALEX WRIGHT-GLADSTEIN:
But then one day I thought about it a little bit differently and I think it was because I was thinking about the anti-apartheid movement and a lot of people who were proactive in the anti-apartheid movement really, um, say that some of its success is due to the divestment movement and. and I, I started diving into that more and, and trying to figure out how did divesting end up having an impact on apartheid?
ALEX WRIGHT-GLADSTEIN:
And I realized that. The, the folks who were involved in that don't try to make an argument for how it impacted the stocks of the companies. Really, it was a tactic, an organizing tactic, and a tactic for really spreading the word on this problem that really shone a light on the issue. And so that was what got me thinking about, okay, not investing in fossil fuels isn't so much about trying to impact the share prices.
ALEX WRIGHT-GLADSTEIN:
So much as just making a statement and shining a spotlight on the issue and saying proudly, loudly that the status quo is not okay and something needs to change. And getting more press coverage because of that. Because money really talks in a way that just people talking doesn't as much. And that was what started getting me to realize maybe this is something I should pay more attention to.
MOLLY WOOD:
No, it's, uh, you know, it's, um, we're here to talk to you and also I will tell you like very similar journey from journalism, which is not a money-oriented career to nonprofit journalism, to thinking, to covering business and technology and innovation and realizing that like capitalism is a big part of our problem, but also this.
MOLLY WOOD:
The greatest incentive system that humans have ever created.
ALEX WRIGHT-GLADSTEIN:
Yes.
MOLLY WOOD:
You can make a really big impact there. And so I think it's fascinating that you went from, from invention to not just the power of money, but the power of movement. And so now you're like a rabble-rousing organizer in the FinTech space.
ALEX WRIGHT-GLADSTEIN:
Yes.
MOLLY WOOD:
Like how big a departure is this from the path that you thought you were on?
ALEX WRIGHT-GLADSTEIN:
It is such a massive departure. What am I doing? I don't know the first thing about social movement building, I know chips and photonics. Um, but, uh, but yeah, it, it's been really inspirational to meet the people in this movement because it turns out I wasn't alone. There were people who long before me have been working to make climate-friendly investments available, ranging from.
ALEX WRIGHT-GLADSTEIN:
401k advisors. There are some that have been focusing on green and socially, just 401ks for a decade. And there also are employees at the biggest tech companies at Microsoft, at Apple, at Google, who've been asking for climate-friendly options in their retirement plans for years.
Going back to 2016, getting thousands of signatures on petitions, getting hundreds of emails sent to HR, asking for a single climate-friendly investment option in their plan lineups. And so it was exciting to see that this is actually a social movement that already exists, but a lot of people haven't heard of it. And that is an area where I think we can help.
MOLLY WOOD:
After the break … more details on how this type of investing works … and how even a pretty green company … can be hiding a lot of sins … in its retirement plans.
AD BREAK
MOLLY WOOD:
Welcome back to Everybody in the Pool … here’s the second part of my conversation with Alex Wright-Gladstein … founder of Sphere …
MOLLY WOOD:
Right. Um, okay. So then talk to me about, so the, the money part is significant. The other thing that you have done a good job of highlighting and will con and continue to do is, is the extent to which this makes up sort of a hidden carbon emission companies.
MOLLY WOOD:
The plans that they offered. Tell me more about this, because it is mind-blowing.
ALEX WRIGHT-GLADSTEIN:
Yeah, so sustainability teams at companies spend a lot of time trying to reduce the emissions of those companies. And there's something called the Greenhouse Gas Protocol, which is the gold standard guideline on how companies should measure emissions, and that's where this idea of a Scope one and Scope two and Scope three emissions come from.
ALEX WRIGHT-GLADSTEIN:
If your listeners have heard of that. Scope one is, the direct emissions from the facilities or the fleet of trucks, perhaps of, of a company. Scope two is the emissions from the electricity that's produced for those facilities. And then scope three is everything else. And it's really made up of the emissions from suppliers who are manufacturing components that go into the products as well as from customers who are using, you know, the emissions created when they use products.
ALEX WRIGHT-GLADSTEIN:
Now when sustainability teams are working on reducing all those scope one, two, and three emissions, they are not paying attention to 401ks. And the reason is that the greenhouse gas protocol has not included the financial supply chain in its definition of the supply chain until now. And so the emissions impact of bank accounts where companies hold their cash, for example, or the emissions impact of their 401ks or pension funds, none of that has been included until now.
ALEX WRIGHT-GLADSTEIN:
The greenhouse gas protocol is going through its first update since it was first written in 2011, and the new revision is expected to include the finance, the finance emissions, that financial supply chain emissions, including 401ks and pension funds.
And that is gonna be a big deal because Mercer came out with a study in September that looked at the emissions of 401ks from S&P 500 companies. So the biggest 500 companies in our economy. It took a sample of just 38 of them, and on average within that sample of 38, the emissions from their 401ks are 33 times higher than their direct emissions.
MOLLY WOOD:
Wow.
ALEX WRIGHT-GLADSTEIN:
So it's a massive set of hidden emissions.
MOLLY WOOD:
No one is tracking right now, let alone reporting, but that they will start tracking and reporting about two years from now when the greenhouse Gas protocol update goes into place. And we are building a platform called the Atmosphere that makes it easy for companies to understand the emissions from their 401ks, and more importantly, how to reduce those emissions because a lot of sustainability teams.
ALEX WRIGHT-GLADSTEIN:
Don't know the first thing about how one goes about changing a 401k. And so this tool really equips them with the knowledge they need to be able to go to their benefits team, their HR team, and really give a roadmap to here's how we would like to engage on a conversation on improving our 401k emissions, while also maintaining our fiduciary duty as a company to our employees, which is a very important aspect of any 401k.
MOLLY WOOD:
Right. And then in addition to that tool, which is being developed now, you also offer a mutual fund and we're not offering a 401k plan or service. There are a lot of, uh, 401k advisors and record keepers there. There are a lot of different players in the 401k industry basically. And, um, Within the platform and advising community, there are actually a lot of good ones that already exist that can help employers get climate-friendly options, but.
It's oftentimes really hard to change what platform a company is using or what advisor they're using. It's sometimes there's an RFP process. It could take a year, maybe even multiple years to do those changes. And there are important tax implications and, uh, liability. There's, it's, it's a big deal to change.
MOLLY WOOD:
To sort of clarify that those platforms and advisors are like Fidelity, Vanguard. Those are the types of names that you would hear in this conversation. Like who administers your 401k plan for your business?
ALEX WRIGHT-GLADSTEIN:
That's right. There are kind of two main categories. One is the record-keeping platform, and that's the Fidelity or Vanguard, sometimes ADP. There are a bunch of them out there. And then there are the advisors, which are typically a different entity than the platform to avoid a conflict of interest. And the advisor is just like a personal financial advisor, except they specialize in advising companies on 401k investment fund lineups.
ALEX WRIGHT-GLADSTEIN:
It turns out there are companies in both of those categories that you could hire to give you a green 401k. So that exists. There are actually more companies getting added to that world, um, in just in the past couple years, which is really exciting. Uh, but it can be really hard as an employer to switch providers. And so what we offer is a mutual fund that is really designed to meet employers where they are so they don't have to switch record-keeping platforms.
They don't have to switch 401k advisors. They can go to their existing providers and say, Hey, we'd like to add this one extra option to our fund lineup, and that's a much easier ask lighter lift. That's something that can be done in a, in a couple of months as opposed to a year or two time frame. And we work with a lot of existing record keepers and advisors to add our fund to their platforms.
MOLLY WOOD:
And tell me more about the fund. Is it like a target date fund? Is it a basket? What's in there?
ALEX WRIGHT-GLADSTEIN:
Yeah, so our first product, and I'll start by saying none of this is investing advice that you should talk to an advisor before making investment decisions. Our product, the first one we launched is called the Sphere 500 Climate Fund, and it's really the first fund that has been created both to check all the boxes that a 401k fiduciary looks for in a, in a fund that would be added to a 401k.
And also check the boxes of what someone who just cares about climate change wants. So when it comes to the fiduciary and checking those boxes, it has low fees, it's seven basis points. It's a passive index fund, so it has 99% correlation to the S&P 500 index. So it is well diversified. Across industries, just like the S&P 500 index is, uh, when it comes to the check boxes that someone who cares about climate change is looking for.
Really, for us, it's two things. One is don't invest in fossil fuel comfort companies or the lead contributors to deforestation. So we have some screens that we apply. After those screens, after taking the top 500 US companies like the S&P 500 does. We do those screens. We're left right now with about 415 companies. For those companies, we vote our shares for climate action because we all have a power to create change at the biggest companies in our economy through our. Shareholder votes.
A lot of people don't even realize they have that power, but it's hugely influential. A lot of existing fund managers in 401ks don't offer that power to the people. In 401ks, the people investing in 401ks, they vote on our behalf, but we think it's important to vote for climate action. We think it's in the long-term financial best interest of investors to prepare companies for climate change.
And so, that is really a big differentiator between how we manage our fund and how, uh, the existing fund managers that are typically offered in 401ks manage their funds is that we vote for climate action.
MOLLY WOOD:
So then the other kind of natural question for a serial entrepreneur is like, what does this look like as a business? How does it become, you know, how do you make money from that mutual fund and then the future atmosphere product?
ALEX WRIGHT-GLADSTEIN:
So on the mutual fund, we charge a management fee like any mutual fund manager would, and so we're charging that seven basis point fee. We'll be launching additional funds that are similar to this one. This one is known as the large cap category.
It's the largest companies in the US economy. We'll be launching similar funds, but in each category that's typically offered in a 401k. So midcap, small cap international bonds, and target date funds. Climate-friendly versions of all of those, and we'll be charging fees on all of those. For the Atmosphere platform, it's an enterprise SaaS tool, so we are selling an annual subscription to sustainability teams at companies who want to understand how to improve their 401ks.
That's the short-term revenue model. In the longer term, we are licensing it to carbon accounting companies that. Aren't experts in 401ks so that when the greenhouse gas protocol update gets finalized and they start having to support their customers in improving their 401ks, they can have that information, that modeling, uh, that tool at their fingertips. They can incorporate it via API to their own tools and pay a licensing fee to us for that.
MOLLY WOOD:
So you're really positioning or will be well positioned as what will effectively be a compliance tool, which I think is just sort of increasingly a big underappreciated category of climate tools as regulations spread around the globe.
ALEX WRIGHT-GLADSTEIN:
That's right, and there's a lot of uncertainty right now as to whether the SEC will require companies to report their emissions. They've put out a proposed rule of what that might look like, and they've really stalled on finalizing that rule. But it turns out that.
Well, a lot of people, I think, weren't paying attention. The EU passed a rule saying that companies that do business in the EU will have to start reporting their emissions, and that will actually apply to over 3000 US companies. And so really, regardless of what the SEC does, companies more and more will have to start reporting their emissions to stay in compliance. So you're absolutely right. It's a compliance tool just to report it. And then we also are helping improve, you know, reduce those emissions as well.
MOLLY WOOD:
Which I love. Never point out a problem without offering a solution. Big fan of that approach. Um, and then the other question I guess is, and maybe this will come into play in future products, is that, um, there is a little bit of. I wouldn't say it's a spirited debate, but there's a little bit of debate about the efficacy of divestment versus sort of staying in the pool, if you will, and voting your shares at a brown company.
And I wonder how you're thinking about that as you approach sort of future investments, especially given the fact that like post Russian invasion of Ukraine, everybody couldn't be happier about energy stocks. God help us.
ALEX WRIGHT-GLADSTEIN:
Yes. Uh, so. The data does show that despite the fact that energy stocks have spiked in value over the past two years, over the long term, it has been an industry in decline. When you just look at the S&P 500 index over the past 10 years compared to the S&P X energy index, which. In financial lingo, energy is code for fossil fuels.
Every energy company is a fossil fuel company. So if you just look at the S&P 500, excluding those fossil fuel companies, the returns over the past 10 years have been lower. If you're investing in fossil fuels and higher, if you're not.
MOLLY WOOD:
Mm-hmm.
ALEX WRIGHT-GLADSTEIN:
Also the S&P puts out data on volatility and the volatility of each sector in the S&P 500 and the energy sector has been the most volatile over the past 10 years. So of course it will have periods of outperformance, but for longer-term investors who are saving for retirement and not, you know, day traders trying to make a quick buck, it actually can be a better financial decision to avoid this sector that. Is in a, in a longer-term decline.
Uh, but back to your first question about, uh, engagement investing in these companies to then engage in terms of voting shares and try to create change versus divesting and what has a bigger impact. Our thought on that is that as fiduciaries with a financial product that is geared towards people saving for retirement, it is just not financially responsible to tell people to invest in fossil fuel companies, which we see as a sector that's in decline and not a good investment choice. To try to create change at those companies.
ALEX WRIGHT-GLADSTEIN:
Leave that to the engine number ones. Leave that to the activist hedge funds and good luck to them. I hope they're successful, but we shouldn't be gambling the money of people saving for retirement to create that type of change. We are looking to create change at the rest of the economy.
So if. We invest in, and this is actually not hypothetical. We do invest in banks and we invest in a lot of the biggest banks in the financial sector. A lot of those banks finance, fossil fuel development projects, and we had a big discussion within our company, do we. Invest in those banks. They're not fossil fuel companies, but they're financing fossil fuel projects.
ALEX WRIGHT-GLADSTEIN:
And that's pretty bad. And we made the decision to stay invested in those companies because we can vote our shares to encourage them to stop financing those projects. And we actually did, just over the past few months, we participated in shareholder votes at four major banks saying that we want them to stop financing fossil fuel projects.
Now imagine if everyone invested in their 401k, had been able to vote that way. Imagine if BlackRock, Fidelity, Vanguard had voted those shares the way that I'm sure they're investors. Oh, 82% of them would've wanted those shares voted. It would've had a massive impact, and those banks might be stopping that, that fossil fuel financing activity.
So that is just a massive lever for impact that we have in offering that choice for the first time to 401k investors to vote those shares. So we, we absolutely care a lot about the power of shareholder advocacy. We don't think it should be at the expense of returns, and so that's why we avoid the most risky industries, and then we vote our shares and the rest.
MOLLY WOOD:
I love it. Where else can people find you?
ALEX WRIGHT-GLADSTEIN:
Our website is our sphere.org. That's O U R S P H E R E.org. And we're also on Twitter at our sphere org and on LinkedIn. And, uh, my personal Twitter handle is Galax, G A one E X, and I'm on LinkedIn as well. You can follow me there.
MOLLY WOOD:
Alex Wright-Gladstein is the founder of Sphere, a company offering a carbon-friendly 401k fund called the Sphere 500.
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