Educational Alpha: A Deep Dive into Private Equity, Climate Investment, and the Realities of Capitalism with Brett Christophers

Episode: S2: Conversation with Brett Christophers, Professor, Department of Human Geography, Uppsala University
Release Date: November 20, 2024

Introduction

In this compelling episode of Educational Alpha, host Bill Kelly engages in a thought-provoking conversation with Brett Christophers, a Professor of Human Geography at Uppsala University. Their discussion traverses the intricate intersections of private equity, climate investment, and the broader implications of capitalism in addressing global challenges. Christophers draws from his extensive research and two influential books—Our Lives and Their Portfolios: Why Asset Managers Own the World and The Price Is Wrong: Why Capitalism Won't Save the Planet—to dissect the efficacy of private capital in driving sustainable change.

Brett Christophers’ Background

Brett Christophers introduces himself as a Human Geography professor whose academic freedom allows him to explore diverse topics. With a decade-long stint in management consulting before returning to academia, Christophers brings a unique blend of practical and theoretical insights. He states:

“Over the last 10 years or so, I've been focused predominantly on questions related to the modern financial system and particularly questions related to institutional investment.”
(03:27)

Critique of Private Equity in Real Assets

Overview of the Private Equity (PE) Model in Real Assets

Christophers critically examines how asset managers have extended the private equity model to real assets like housing and infrastructure since the 1990s. He explains:

“Asset managers who carry out private investment increasingly diversified away from their traditional asset classes... and began to invest a lot more in various types of real assets.”
(06:11)

This shift involves applying the fixed-term, profit-driven PE model to assets that significantly impact daily life, such as housing and healthcare facilities.

Issues with Time Horizon and Profit Motive

A central critique revolves around the mismatch between the long-term nature of assets like housing and infrastructure and the short-term focus of PE funds. Christophers highlights:

“Why would you route that money via fund vehicles that are very, very often short termist in nature?”
(08:48)

He points out that public pension funds, which have long-term liabilities, invest in these assets to match maturity but find the short-term PE model incongruent. This results in asset managers aiming to exit investments within five to seven years, potentially destabilizing essential services and infrastructure.

"The Price Is Wrong: Why Capitalism Won't Save the Planet"

Thesis of the Book

In discussing his latest work, Christophers presents a critical analysis of capitalism's role in addressing climate change. He posits that relying on private capital to drive decarbonization is fundamentally flawed due to inherent profitability constraints. He articulates:

“The basic argument... is that... profitability characteristics of that business are somewhat problematic... represent pretty significant hurdles to investment in solar and wind on the scale and at the pace that we require for rapid decarbonization.”
(14:08)

Profitability Challenges in Renewable Energy Investments

Christophers elaborates on the financial realities of renewable energy projects, emphasizing that declining costs in technologies like solar and wind do not necessarily translate to profitable investments. He states:

“Solar and wind deployment... turns out that the profitability characteristics of that business are somewhat problematic, are not particularly attractive...”
(16:34)

The competitive nature of these markets often erodes potential profits, making it challenging to attract the necessary capital for large-scale and rapid energy transitions.

The Role of Private vs. Public Sector in Decarbonization

De-risking Private Capital through Public Investment

Christophers advocates for substantial public sector involvement to de-risk investments and attract private capital effectively. He suggests:

“If rich country governments could pull together a proportion of GDP... and direct it towards where it is most needed.”
(25:41)

This approach mirrors models like the Inflation Reduction Act’s tax credits, which aim to make renewable investments more attractive by mitigating financial risks.

Policy Gaps and Recommendations

Highlighting structural inconsistencies, Christophers critiques the reliance on short-term PE models for long-term public assets. He emphasizes the necessity for policymakers to create frameworks that align investment vehicles with the extended time horizons required for sustainable projects.

“If this thing shouldn't happen, it should be regulated out of existence rather than relying on the actors themselves to make those decisions.”
(12:55)

The Urgency of Climate Action and Potential Solutions

Discussing the slow pace of decarbonization despite technological advancements, Christophers underscores the dire need for a paradigm shift in investment strategies. He warns against overreliance on unproven technological fixes to compensate for inadequate investment scales.

“We will be relying on one or more technological fixes, saving the day... but I don't think any policymaker would come forward and say explicitly that's what we're banking on.”
(25:41)

Individual vs. Corporate Responsibility in Climate Action

Christophers addresses the intertwined responsibilities of individuals and corporations in combating climate change. He challenges the dichotomy that places the onus solely on fossil fuel companies, arguing for a collective approach where both sectors must adapt their behaviors to drive meaningful progress.

“There is a certain hypocrisy, contradiction of those who say fossil fuel companies are the real source of evil... while we're not willing to change our ways ourselves.”
(35:22)

Future Work and Conclusion

Looking ahead, Christophers hints at his upcoming research focus on the global housing crisis, poised to delve deeper into another realm where investment models critically impact societal well-being.

“Something housing crisis related will be what I'm going to be working on next.”
(35:36)

In closing, the conversation underscores the complex interplay between private capital, public policy, and global sustainability goals. Christophers and Kelly illuminate the pressing need for reformed investment models and robust public sector initiatives to ensure that climate action is both effective and equitable.

“Our goal is not to solve for anything, but hopefully if we enlighten people about some of the challenges... we've done our job.”
(37:03)

Notable Quotes:

• “Is it a good thing that asset managers have got increasingly involved in buying and owning these types of assets...?”
  (06:11)

• “If this thing shouldn't happen, it should be regulated out of existence rather than relying on the actors themselves to make those decisions.”
  (12:55)

• “We will be relying on one or more technological fixes, saving the day... but I don't think any policymaker would come forward and say explicitly that's what we're banking on.”
  (25:41)

• “There is a certain hypocrisy, contradiction of those who say fossil fuel companies are the real source of evil... while we're not willing to change our ways ourselves.”
  (35:22)

This episode offers a critical lens on the efficacy of private equity in steering the planet towards sustainability and highlights the imperative for systemic changes in investment and policy frameworks.