Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from Intercontinental Exchange on Markets leadership and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE at ICE's exchanges and clearing houses around the world. Now, welcome, Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
September in New York City, the summer sojourns are over, people are back to work, and the world descends on Gotham, no doubt burning a lot of fossil fuel, hopefully with offsets to attend the series of events and gatherings that dot the calendar around the United Nations General Assembly. These include the Clinton Global Initiative, Climate Week, NYSE, and right here at the New York Stock Exchange, the 2023 ICE Climate and Capital Conference. This year's event, hosted by ICE, is centered on three interconnected themes, adaptation, innovation, and regulation. Some folks in the space prone to acronizing everything, of course, especially if it fits thematically, refer to this as AIR or air.
So pithy or not, here's the truth. Over the next decade, industry professionals will face increasing exposure to both known and emerging risks, including physical and climate risk, biodiversity loss, large scale human migration, and changing regulatory frameworks, but progress moves a pace, and along with the risks, advances in environmental technologies and new ideas for improving the effectiveness of government policies are likely to shift the landscape still further.
That's why last year, my colleague, Elizabeth King, whose president of ICE Sustainable Finance, our company's chief regulatory officer as well, launched the first ICE Climate and Capital Conference. It proved so successful that we're making it an annual thing centered around this big season in New York, providing attendees with practical tools to navigate climate-related challenges and opportunities.
As you might expect, attendees will find a series of panels, fireside chats, and interactive discussions with industry leaders coming away with actionable strategies for both mitigating risk and also fostering innovation to reduce emissions and build resilience for the world's most vulnerable communities.
Among the marquee speakers, David Craig, the co-chair and the task force on nature-related financial disclosures, is going to give an opening keynote address on Wednesday, September 20th, and also Jeff Ubben, founder and managing partner of Inclusive Capital Partners, will give the opening address on innovation in the space. Jeff's talk will be followed by sessions on energy transition market liftoff and the role of private capital, another one on how do carbon credits fit into the climate finance toolkit, and still one more on building planet positive portfolios among a slew of other sessions.
In a minute, to help preview the 2023 ICE Climate and Capital Conference, we're going to dive deep into innovation and other topics with the aforementioned Mr. Ubben, one of the planet's leading activist and investors and thinkers on the intersection of climate and capital. Our conversation with Jeff Ubben on his storied career, his investing philosophy, using his dollars for action and activism, and where our lonely planet might be heading in the future, it's all coming up right after this.
Speaker 3:
Connecting the opportunity is just part of the hustle.
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Opportunity is using data to create a competitive advantage.
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It's raising capital to help companies change the world.
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It's making complicated financial concepts seem simple.
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Opportunity is making the dream of home ownership a reality.
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Writing new rules and redefining the game.
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Driving the world forward to a greener energy future.
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Opportunity is setting a goal-
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... and charting a course to get there.
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Sometimes the only thing standing between you and opportunity is someone who can make the connection
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At ICE, we connect people to opportunity.
Josh King:
Our guest today, Jeff Ubben, is the founder, managing partner, and portfolio manager of Inclusive Capital Partners. Since 2000 and before his retirement, he was the founder, CEO, Chief Investment Officer, and Portfolio Manager of ValueAct Capital, which is where he first came onto my radar when I was head of communications at Willis Group Holdings. That was NYSE ticker symbol WSH back then when ValueAct took a sizable position in the company and a seat on its board. Today, Jeff sits on the board of ExxonMobil, that's ticker symbol XOM, Enviva, and Vistry Group [Editorial note: Mr. Ubben is no longer on Fertiglobe, but had joined the board of Vistry Group] in addition to his board seats on not-for-profits including Duke University and the World Wildlife Fund. Jeff, welcome Inside the ICE House.
Jeff Ubben:
Thanks for having me, Josh.
Josh King:
Innovation, a broad topic. Can you give us a preview of what you'll tell the Climate and Capital attendees on Wednesday?
Jeff Ubben:
The way I went to climate with inclusive, and so the idea was to marry my value investing with capital allocation expertise around climate, and so our focus has been maybe quite different than many investors has been to go into these legacy businesses and work with their expertise. They have the incumbency, they have the customer, they have the project management skills, they understand the chemistry, and to decarbonize those businesses while they provide an essential good or service, whether it's oil and gas, ammonia, biomass, whatever it may be.
When you think about the climate challenge in the food challenge, it's a super capital intensive problem. Renewables are about as capital intensive a form of energy as you're ever going to see, and renewables has benefited from 20 years of subsidies and it went down a cost curve, but it's still challenged to generate the returns even today. It just shows you how capital intensive this is. My opinion was the big balance sheets in some cases that are canceled by the ESG folks, these big balance sheets are the balance sheets that we need to commercialize many of the new technologies or the transition technologies.
That's really, I think, where we're quite different and we're going to be at your conference with OCI, which is a number ... I think they probably have the biggest export ammonia infrastructure in the world across all of their holdings, including Fertiglobe, which they own 50% of. The idea is ammonia is the most CO2 intensive process, use natural gas to make ammonia, but it throws off 70% CO2. So it's a really easy process to grab the CO2, which is not so diluted like it is in the atmosphere, and to do something with it, put it back in the ground. In many cases that business model is challenged until you get a subsidy like we have now in the United States.
You can also use different forms of hydrogen that are less carbon intensive as an input so you don't do the steam-methane reforming process, and that to me, I'll finish here quickly, but there's, there's a valley of death in the energy transition where you have new technologies or capital intensive technologies that haven't gone down the cost curve that are very hard to fund without a big balance sheet, and that's the OCI and the Exxons of the world. I think that we need to be at the table to basically keep energy affordable, but also do the transition and reduce carbon along the way.
Josh King:
Jeff, talking about a valley of death perhaps or a field of ice, as I mentioned in the intro, you may not remember this, but the first time I met you was at a Willis Group board meeting in Dublin back in 2013, sharing with the board the results of Willis' resilience expedition to the South Pole, which was led by this then 19-year-old named Parker Liautaud of Yale to both set a record for an unassisted walk from the coast to South Pole and then to study the effects of climate change on the polar ice cap. Taking a 30,000-foot view as an environmentalist, things felt somewhat dire way back then 10 years ago. How do you think we are now 10 years on?
Jeff Ubben:
Oh, man, Josh, I'm worried, I'm worried. I'm worried about we're way behind atmospheric CO2 where we need to be by 2030. We're way behind. We don't have the honest conversations across private markets, politicians, and NGOs. We need to level with the public that this is going to cost a lot of money. Your energy prices are going to be higher. If we're going to really do this, we probably need to have a carbon price of some sort to make the product reflect the externalities of the price, reflect the externalities of the product, which food prices are going to go up because we're trying to get off plastic packaging, we're trying to provide more natural preservatives and products, things that are bio-based rather than fossil fuel based.
We avoid that conversation. The politicians don't want to do it. They saw the yellow vest come out in France and the NGOs do us a disservice. They tell us that the renewables are cheaper and just buy an EV, essentially. If you really look at that, renewables actually, because they're so intermittent, really stress the grid and they have historically raised electricity prices. We're not having this honest conversation. How do we do the transition where we keep products affordable, we keep them accessible, but we do it with less harm? We should be doing carbon capture at scale as quickly as possible, but we even had the NGOs fighting that because somehow it extends the life of fossil fuels. We just need to get going faster and this is what worries me.
Josh King:
Affordable, accessible, and with less harm. Jeff, just to give our listeners a sense of how you came to this worldview, just want to step back a little bit into your past. You grew up in the Chicago area where your dad ran Lincoln Capital Management. You spent your summers analyzing financial statements before heading off to Duke. What influence did your upbringing or your parents play in steering the type of financier that you, Jeff, would eventually become?
Jeff Ubben:
I grew up in the business. I'm a contrarian, so I guess the rebel in me decided to be a value investor because my dad was a growth investor. I remember the first time I called a company when I was 18. I was like, "Why would anybody buy your product prepaid legal services?" The CEO took my head off and said, "Don't presume that you know my customer at all." It quickly gave me an appreciation for how humbling this job is going to be and how much you have to learn constantly on a learning curve.
That's one of the reasons I moved from traditional financial metric activism where you just try to get the margins up like we did at Willis to address these other imperatives, climate, social inequities. The learning curve in energy has been spectacular for five years for me, and the role I can play as a shareholder director in something that's bigger than just maximizing profit is really why I'm doing this and why I love it, but it's really, really hard.
We just got to tell people this is really, really hard. This is not easy like Al Gore tells you, and you're not going to fix the problem by buying an ESG fund and buying an EV. We have this knack when we're threatened to tell the public, "Just go buy something. Just go buy an EV and everything's going to be good." This is much harder than that.
Josh King:
Learning how to do the hard work, even your learning curve over the last five years was informed maybe by your learning curve over the past 30 years. After you got out of Duke, you went to Kellogg and then you're at Fidelity running the value fund, having moments like following Peter Lynch into the men's room to make your pitch for owning a certain stock. I just want to hear a little bit, remind ourselves of Peter's voice talking about his philosophy a couple of years ago.
Peter Lynch:
Companies are dynamic. Behind every stock, there's a company. These are not lottery tickets. So you're trying to find the companies within the S&P 500 that are doing better. They're going from crappy to semi-crappy to good. That might take a couple of years or they're going to grow for a long time and you're trying to avoid the companies that are going south. That's how you beat them or you find some companies outside the S&P 500 that are great companies. CarMax was not in the S&P 500. They went up 200 fold. So a lot of companies enter and a lot of their great performances before they go in.
Josh King:
Paint a picture of the Fidelity zeitgeist at the time when you were there with Peter.
Jeff Ubben:
Basically, it was call three companies a day or else you were a failure, track on a monthly basis those companies, call them all the time. You're learning something every time you talk to a company, something new about the industry, the competitors or the franchise value of the company, how it's dealing with ups and downs, and to be completely company-facing. We didn't really spend much time at all with Wall Street. It does come down to people. You have to really have a relationship with the management team. You just can't view companies as ticker stock prices that are ... Recently, what's happened in the stock market is I think stock prices have traits rather than real cashflow behind them. It's a momentum play, it's an AI play, it's an interest rate play, and you've got a lot of computer stock and computers trying to find datasets that are contemporary to trade stocks on a daily basis.
I'm a little bit saddened by that because back in the '80s and '90s, it really was about the company and what was unique about that company that was in cashflows and in the growth profile of the company. Since I've been in the business, Josh, we've gone from in 1985 years holding period by the mid '90s to two to three years, and today it's five months. That is a big problem when we're trying to address these really long-term issues like food and energy security, and food and energy transitions.
Josh King:
When you had moved on from Fidelity and you were at ValueAct, management teams and boards have always harbored fear of activists. As the longtime comms guy like Kristen, you always girded for the day when the CFO or the GC would call me and say, "There's an activist in our stock calling up outside advisors," and so forth, but you always had this reputation for being a more constructive, one of them said a nicer activist. How did playing nice play into your approach when you got into the boardroom?
Jeff Ubben:
First of all, I don't like lawyers. Second, it's much easier to make change if you can get the management team to realize that your idea is their idea. So the huffing and puffing outside the door, that happens because people, the activists really are short-term guys and they don't want to take business risks. They want to grab some transaction value and the hedge fund community, which really is paid oftentimes on one year of performance, has shortened up the time horizon of activism a lot.
It really is a neighborhood I wasn't interested in staying in because I actually think that that created a lot of the problems that we have today around demanding that oil and gas companies be share repurchase machines. That doesn't make any sense to me. These guys have tons of free cash in their business in a mature industry called hydrocarbons that should be repurposed for lower energy solutions, low carbon solutions, and why would you buy stock back in the hydrocarbon industry that's going to go away over the next 40 years or 50 years? It doesn't make any sense to me.
So that's a self-liquidating strategy, but it's really hard to take on these short-term investors and not give them their cash today, and that's the challenge I took on. I'm not sure it's going to work. Honestly. The markets have decided they don't like balance sheet intensive businesses, they don't like capital intensive businesses, and this is a capital intensive problem. So somehow we need to get lower cost of capital available to these capital intensive industries so they can do the build out.
By the way, without investing, you don't generate cashflow growth, but it just comes in three or four or five years in some cases. That's that value of death, and even the public markets struggle with that, which is why you need a big balance sheet with a lot of free cash from a mature business like fertilizers or oil and gas to repurpose. That's really what I'm trying to do.
I don't see it resulting in multiple increases at these companies, even though OCI is public. They're going to put a billion one into a greenfield blue ammonia plant in Beaumont, Texas, and because of the IRA and because of the carbon price in Europe where they can sell the fertilizer, they're going to generate a $350 million return on a 1.1 billion investment and the public markets has valued at a zero. It's actually a negative because they're putting the capital out before the cashflow comes in. I have not seen a public market value attributed to this opportunity, and it's only two years away. That just shows you how short term the markets are and how hard it is to get the capital to do this stuff.
Josh King:
If there's anyone who's shown they have figured out how to make an impact, it's Jeff Ubben. I want to take one example. For example, Microsoft, its share price, if you look at it from 2011 to the present, is a hockey stick over the past 12 years compared to the flat line that it was for many years before that. Did you think that the way you worked with big shareholders at Microsoft when you own just 1% of that stock reflected somewhat in where the stock sits today?
Jeff Ubben:
It was pretty simple. It was a strategy diseconomy. The former CEO was attaching because he was a monopolist. He was attaching the productivity suite to this Windows monopoly, and you just had to disconnect the productivity suite so it could flourish in an open environment from the Windows operating system. Satya did that immediately. Azure was a hockey stick in the deal. We didn't really know what it was. Of course, like any stupid value investor, I water my weeds and pick my roses. I sold it, I don't know what, 90 bucks and now it's 350, but that software was actually cheap during the first 10 years of ValueAct.
There was a commodity boom, actually, in the early mid 2000s that created its own momentum investor across hedge funds when China was basically building out China, but over time, because of shortened time horizons, the asset light business model, which is Microsoft's, has been more and more and more and more rewarded to the point where it starts, in my opinion, to cause a misallocation of capital in the sense that your ESG funds, which are huge right now, some of these Blackstone funds are quite big, and you look at their holdings and it's big tech. If ESG had any integrity and really, really cared about the issue of energy transition, it would be the opposite.
It's all about find companies that have low emissions endemic to their business as if investing in that company means you're doing something about climate. That confuses me a lot. Their core business at Microsoft is to build data centers, which is really energy intensive. That being said, it's less energy intensive than most businesses because it's a lot of software. So to have that be the number one fund in ESG funds is, in my opinion, it's a failure of ES .
Josh King:
Somewhere during the pandemic, there's this big article that quoted you saying, "Finance is done." This was at the time that you were retiring from ValueAct and starting up Inclusive Capital Partners. The quote that you had at the time was or the mission was to positively leverage capitalism and governance in pursuit of a healthy planet and wellbeing of its inhabitants. I'm curious, what were the real life events in your life around the way you work and invest? You'd been grinding it out for such a long time, and then suddenly you and your wife find yourselves to be empty nesters. She has passions that she's interested in. How did that affect your thinking about starting Inclusive Capital?
Jeff Ubben:
Yeah, sure. You're at my dinner table with me. What I was trying to say there was this idea of maximizing profit, near term profit, which is really what public market investors love and they reward at higher and higher prices is not what we need. It's the opposite of what we need. So we need to redefine the role of markets to solve these imperatives, which is a healthy planet, clean air, a less polarized society, fair wages, all of that.
The big picture, actually, is capital for 10, 15 years was basically free. Interest rates were so low. So you could buy your competitor with really cheap debt. The abundant resource typically doesn't generate the high return, the constraints. If you invest well into the constraints where there's resource constraint, that's really, and you do that well, that's where you generate the high return. When you look at where the constraints are, it's natural capital and it's social capital. So the big opportunity for excess returns over the next 10 or 20 years is around these issues, not trying to repurpose capital over and over again. I don't really know if that is going to work or if that makes sense, but that's how I think about it.
Josh King:
We had Pete Stavros from KKR in the show about a year ago.
Jeff Ubben:
I know Pete.
Josh King:
He was at the time the co-head of America's private equity platform. He's now got a huge new job now at KKR, but here's part of what he told me. I just want to take a quick listen.
Is the commitment needed to launch an ownership program help rebuild trust between company and employee that's been worn down over generations?
Pete Stavros:
Yeah, and by the way, according to Gallup, who's the leader in employee engagement surveys and really invented this as a discipline, every company has about 15% to 20% of employees that they characterize as actively disengaged, so literally trying to sabotage the employer, which is something really to think about. Yes, I think ownership is that first step. It's a sign of trust. We trust you enough to bring you into the ownership. We're going to be sharing a lot of information, financial information with you, and then the second thing is it's a sign of respect. We respect you enough, you matter enough to be brought into the ownership.
Josh King:
Is Pete's approach a good way to run a business?
Jeff Ubben:
We work with Pete. The problem with manufacturing businesses in this country as we start to build out big new ammonia plants and other major projects around gassification and really cool stuff to decarbonize energy is that we haven't built anything and populated a manufacturing workforce in this country really in 20 years. It doesn't surprise me that you're seeing these big semiconductor projects get pushed two or three years from where they were targeted to start. We ship all of that to China in a profit maximizing exercise.
So we're working with Pete on manufacturing workforces to try to get them to think like owners, to prosper when the company prospers, but it's also defensive like, how do you populate a new plant with people? They're not out there. They're really hard to find. It's the manufacturing economy is ready to go in America, but we need workers. We need the ability to build stuff. We need governments in state and local to allow things to be permitted on a accelerated basis. The nimbyism has to step back and realize there's a greater good.
The guy who really got me going in this direction besides my wife who's a conservationist, and I was going to be having dinner with her and she had no interest in talking about Microsoft, but she was interested in how we're going to help make a healthier planet. So E. O. Wilson was my other ... He's like the Peter Lynch late in life for me. I tracked him down just like I tracked Peter down. E. O.'s book, Half Earth, talks about this is our ultimate higher purpose to leave the planet in a better place than we have it today because it's good for us.
So that higher purpose, I don't think it's really kicked in. I think CEOs get it. That's why they like working with me on the board because I own the stock, but I'm thinking long-term and they need help talking to their investors. I think CEOs get it. I think the investor class is the problem and their time horizons are just too short. The private equity guys and the venture capital guys that have, let's say, longer time horizons, they're not interested in balance sheet businesses, they're just not. They need the cashflow or they want to be asset light so they can get the profitability as quickly as possible. The venture capital world is not constructed to raise billions and billions and billions of dollars.
Josh King:
E. O. Wilson, making a healthier planet. After the break, we're going to get into a lot of that and more with Jeff Ubben, founding, managing partner, and the portfolio manager of Inclusive Capital Partners as we get ready for ICE's second annual Climate and Capital Conference happening this Wednesday at the New York Stock Exchange where Jeff is going to be the keynote speaker on the topic of innovation. That's all coming up right after this.
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Josh King:
Welcome back. Before the break, Jeff Ubben, founder, managing partner, and portfolio manager of Inclusive Capital Partners and I were talking about his career arc and his thoughts for the upcoming ICE Climate and Capital Conference unfolding in two days time here at the iconic New York Stock Exchange. Now, I want to dive deeper a little into the subjects that are sure to be on the minds of many of those attendees.
So Jeff, talking about Climate and Capital, you made a ton of news two and a half years ago or so when you and Michael Angelakis of Comcast joined the board of ExxonMobil. That's NYSE ticker symbol XOM. What have you seen changed at the company since March of 2021? It was reported that you spent about $49 million to buy an additional 458,000 shares of the company to increase your stake to about 175 million. What's the bull case for the stock? What are you seeing inside the boardroom?
Jeff Ubben:
It's a really well-run company. You would not have known that during the COVID sell off of oil price when the activists got involved around the proxy, but the company was doing heavy investing bottom and it really hurt them from a financial performance perspective, but Darren, the CEO, who had been on the job now for five or six years was positioning the company to do quite well and he trusted the assets quite well. He didn't cut the dividend. He's really gone to three business units before there were many silos and many business units. So he's got the cashflow in an amazing place.
The thesis around oil and gas at a high level is the pro-cyclical supply response from the industry is not going to happen because the industry is truly viewed as a sunset industry and it's very difficult for companies to go to investors with a bunch of capex to do 20, 30 year investments and new wells, and that creates, in an industry that's still growing from a demand perspective, tremendous predictability to the cashflow. It's not an up and down industry anymore. It's actually very predictable.
At the core, you have to trust that demand doesn't go negative. When you do the math on the seven billion people that don't live in the United States, Canada, Europe or Japan, when you do the math on that, there's a billion of us that are shrinking our footprint, but there's seven billion people that are consuming three barrels per capita versus the Western world at 15. If they're allowed to develop like we develop, you have just a growth profile that is just impossible to stop. As much as we would like fossil fuels to go down, they're not going to go down for a while.
The climate first approach we're taking toward the rest of the world is another form of colonization if you ask me. So we should help them do the energy demand that's going to accrue to a middle class emerging India, let's say. We should help them do it as clean as possible, but they're going to be pulling hydrocarbons. They just will. So once you get comfortable with the cashflow, and it's not up and down cashflow, but it's a predictable cashflow, I've got tons of cashflow to work with in a mature business to redeploy.
The company wants to do this. Carbon abatement is a reinvestment opportunity they don't really have in hydrocarbons. They want to reinvest. That's where the EBITDA, the cashflow comes from in the future. We want a carbon price. We want a carbon economy. We want returns attached to decarbonization investing, and it's slowly happening. The IRA was helpful.
So when you look at our announcement, we're buying Denbury rate in the Gulf Coast region. It's a CO2 pipeline. It's a thousand miles. We can use that pipeline in the aquifers around it that we've done the geology on to the point where we could probably sequester a hundred million tons of carbon a year along that Gulf Coast corridor.
That's a lot of carbon removed, this post-combustion carbon, but that's a lot of carbon removed. Just one two million ton per year carbon capture project with CF Industries, a fertilizer company down the Gulf Coast, just that one project alone removes more CO2 than all the EVs we sold in this country last year, all of them, because the grid is not green, the grid is gray. So as we put these EVs out of the grid without making the grid more green, it doesn't generate a lot of CO2 reduction.
By the way, we had to make that car and maybe you didn't need to buy a new car for another few years, and so maybe you should have driven your existing car longer. By the way, the subsidies that go into EVs are tremendous. Now, we finally do have some subsidies around carbon capture, for instance. So now we got to go down the cost curve just like we did with renewables.
Josh King:
We seem to often stop this conversation around talking about EVs and cars and it's going to be a long time before every car in the road becomes electric, but even longer before long haul trucks are powered by hydrogen, let alone getting bunker fuels out of the boilers of container ships plying the oceans, how do you edge Exxon closer to decarbonizing and layering in things like green hydrogen technology on top of their legacy of extracting and refining fossil fuels?
Jeff Ubben:
Green hydrogen is so expensive and it's so land intensive that the way I see keeping energy affordable is to use the existing infrastructure as long as possible, put the carbon back in the ground as much as we can, a 45Q tax subsidy of $85 a ton. If it was $100 a ton or $120 a ton, would open up a lot more carbon capture projects, That allows us to decarbonize while we meet the energy demand, albeit mature energy demand. Then you can start to layer in these really expensive new technologies like green hydrogen, but if you try to shock the system and just move a whole hog into what is a three or four times cost infrastructure, a whole new infrastructure, you'll inflate energy prices terribly.
Also, you start to do green on green. We're cutting down trees to create the land to put these huge solar fields on, so you have all these unintended consequences if you move too fast. I just wish we would have a real conversation about moving too fast or canceling an industry and its role in decarbonization, which is what tends to happen sometimes with hydrocarbon companies.
Josh King:
Instead of canceling an industry, maybe perhaps explaining some of the differences between the ValueAct Jeff Ubben, and the Inclusive Capital Jeff Ubben. You alluded to this in the first half of our conversation, but you said something in an interview that you did with Kellogg Professor Robert Korajczyk that Kristen sent. You alluded to this earlier, but you said, "Now with my new hat on, instead of replacing CEOs, I have to fire existing shareholders." So for an average listener who listens to Jeff Ubben on this podcast, how does Exxon go about firing its shareholders that it shouldn't want in its portfolio?
Jeff Ubben:
That was a click baity comment, but you need to appeal to these investors with the opportunity that's long-term in nature to grow a mature business in a exciting and, frankly, higher quality way. If you look at Exxon in the model for carbon capture, we basically do a 50-year off take. Carbon emitter pays us annually to store the carbon in the ground, and that's a very different profile than the old oil and gas business that went up and down in cycles. It's a high multiple business, and if we're doing $2 billion in carbon capture revenues by 2030 to 2035, that should drive our multiple.
Right now, the multiple on these legacy businesses is somewhere between five and 10 times earnings in a 25 PE market. So I see it as a new value creator. I see it as multiple on a business that's growing its cashflow while it's addressing these climate issues, but the challenge, Josh, is to get somebody to pay for that $2 billion revenue stream stream in 2030 to get them to pay for that today, and I haven't quite made that happen.
Josh King:
You'll make it happen.
Jeff Ubben:
It requires constant conversation. It requires us to be more public about our plans. It requires a high integrity conversation about how hard this stuff is, how important this work is, and to get people out of big tech into these industries that we really need to reward if we're going to create the capital flows we need.
Josh King:
Jeff, you mentioned fertilizers earlier, and another way in which our paths crossed even metaphorically across decades is via Monsanto, which was acquired by Bayer in 2018. 20 years ago as I was leaving the White House, I joined the government affairs team at Monsanto, then trading under the NYSE ticker symbol MON. I didn't stay more than a year. I was a young guy, a little unsure of where its roundup ready crops were headed, but you joined Bayer in February of this year with I think an investment of about 500 million Euros and you called for a new CEO. You got one in Bill Anderson. What's the report card on how he's doing?
Jeff Ubben:
Our thesis is that Monsanto is one of the great climate adaptation franchises out there. We are going to be land challenged to feed. I'm more worried about famine than I am about anything else, and it relates to supply chain and droughts and floods, which is all linked to climate, of course, but famine will kill people first. So the ability to use their technologies and seed their library of seeds and traits and genetic editing is coming down the pipeline pretty darn fast, makes it a keystone species if we're going to be able to feed 8 billion people and do it with less harm and in some cases create a carbon sink that isn't there right now.
So when you think about things like dry rice farm seed, the way you irrigate a rice patty is spewing methane and it needs a lot of water, those are big problems that we need to solve and dry rice farm seed solves it, and India should be adapting dry rice farm seeds and mass, but there's no policy in place to make the water cost something. So India, the farmers aren't ... This is the problem we have until we get incentive systems in place, policy, whether it's a carrot or a stick. It's really hard to compete with that dirty technology, but it's coming because we're going to run out of water and we need to address methane.
Short stature corn is actually in the market right now. They've got a seed that grows the corn much stocky. It's a bigger stock and it's short so it doesn't get knocked over by the winds. It stores a lot more carbon in the soil, but you can plant 15% to 20% more of it because the density goes up as the size of the plant goes down, and you get as much corn out of the same field times 15%. This is going to be really important as their arable land is shrinking.
Josh King:
I was going to ask you about short stock corn because it came up in a conversation I had a couple of weeks ago with Russ Benham, the chairman of the Commodity Futures Trading Commission, and he's so focused on helping farmers hedge against corn prices, but if the corn can grow lower and thicker and be resistant to the high winds across the Midwest, farmers are going to be able to grow a lot more corn in the nation's bread basket.
Jeff Ubben:
Yes, there's tons of loss. It's called lodging. There's tons of loss to winds in the Midwest because the corn is growing too high. Exactly right.
Josh King:
I should disclose here. I think that you're an investor in ICE. You've met with our founder and CEO, Jeff Sprecher, and our CFO, Warren Gardner, among others. What's your view on what environmental markets generally, and ICE in particular, can do more broadly to help us tackle some of the challenges of the energy transition?
Jeff Ubben:
your energy franchise is really what we love about your company, but we do also really respect the way you go after datasets and then use those datasets to lower the cost to transact. You're going at mortgages now with the Black Knight acquisition, but the energy franchise is really, really, in our opinion, misprice the volatility in energy because we're under investing in energy even as the demand for energy is growing. The volatility in energy is going to remain quite high, and your business, the exchange and the data that comes off your exchanges is perfectly positioned and the clearinghouses attached is perfectly positioned to benefit from that.
You also have an environmental, you do 98% of the EU carbon trading. You do 95%, probably a plus, of the RINs and the low carbon fuel standard credits in California in the wrecks here in this country, and really move these industries along, these low carbon industries along. We're going to need hedging mechanisms. We're going to need off takes. We're going to need people that can come in with long-term money in finance. So you're really well positioned, I think, to be the environmental trading shop and that thing can grow 15% a year for many, many years to come.
Josh King:
I was talking to the folks at BlackRock and certainly keeping my eye on news of Larry Fink almost taking ESG out of his lexicon because as he, in his own words, it's been weaponized. You've said, and I'm going to quote you, "The ESG thing is happening away from me." Maybe changing the agenda of boards but not generating real change, do you agree with Fink that it's time to retire that term?
Jeff Ubben:
Larry's a great guy, Larry, really, he was on the Nature Conservancy board. He really cares about this stuff. He profit maximized by turning ESG from an input into an investment process to an investment product, and the investment product didn't have any integrity. It owns big tech, for instance. Like I said earlier, it replicates the index to as much as he possibly can, but he packaged it as something else.
There's a word called slacktivism out there. It's a new word in this idea that if you retweet a climate post or if you buy an ESG fund and tell your friends about it, you're actually doing something. Well, actually, you're not. He set himself up, I think, in that way, but I feel for him because he's in business, he's got to turn ideas into profit, and this was an idea that seemed okay, a bit opportunistic on this part, but we live in a polarized world and it was polarized.
So ESG is really confusing. It got out of the box wrong. So ultimately, ESG is, are you a responsible producer? That's what ESG is. Are you responsibility? Do you care about the climate? Do you care about the environment? Do you care about your workers? Do you care about your customers?
All this other stuff is what is the real capital going into these transitions, and that's for some reason has actually been devalued by the ESG folks because they would rather run away from that than run to it. So I do think we should retire ESG. It's hard though. There's an ESG industrial complex and these guys, these service providers that are in their own way opportunists have hijacked it and they're going to run with it and they're not going to give it up very easily.
Josh King:
Well, maybe this is a message you can bring to New York on Wednesday at the Climate and Capital Conference among in your remarks. One panel is going to dig into the topic of fixed income and venture capital, and for some of our partners and clients who are focused on investing in climate solutions, venture capital may be an asset class full of opportunity. Do you see the same opportunity?
Jeff Ubben:
I think venture capital as it relates to these capital intensive industries needs Exxon. I think the venture capitalists are going to come up with cool direct air capture technologies, a certain solvent or a sorbent that we can really use, but it is going to sit in a lab in a prototype forever, unless the big balance sheet comes in and deploys it. That high risk capital to commercialize, to go from prototype to commercialization, that's a very high risk, high reward capital, and that's what's missing in the market.
The infrastructure funds need an offtake, and so this is where we've got to bring the incumbents to the table. I think the innovators, the failure rate's going to be incredibly high because there's only so many investments. People like Exxon can make that stand up to diligence and make sense to commercialize. There's a role for the legacy and the startups to work together rather than to have them sit in their silos and not get it done.
Josh King:
Just as a connection to what you're seeing coming out of governments around the world but the US in particular, are there specific sectors that you're keeping an eye on that have the potential to see a lot of growth on the back of regulatory pressure in addition to some of the things that we've mentioned before, sectors offering, as you've talked about, solutions in climate capture, carbon trading, perhaps alternative energy solutions, even data providers?
Jeff Ubben:
We need a carbon tax dividend plan in the United States. We have a number of investments in companies that are bio-based companies taking out fossil fuel products. When you're a smaller company trying to invest in a lactic acid facility to move to a bio-based plastic or bio-based polymer for medical products, it's really hard, especially as times get tough, to compete, and the big companies squeeze you or they go back to the fossil fuel product because they're trying to make their own numbers.
So we need that explicit price in fossil fuel based products, and that I think will cause a compliance market globally. We're at 20% compliance. If the United States put themselves into the carbon regime, it would be 60%. That would create a compliance market where you match high quality demand with high quality supply in carbon reduction, and that would switch on a high integrity, nature-based solution economy, which right now is low integrity because you've got low quality supply, voluntary supply seeking low quality demand, the cheapest offset possible.
So what would change the world is if the US were to do a carbon policy or a carbon tax dividend plan. It would change the world. It would switch on the biggest carbon sink as we know it, which is nature, which we can't switch on with the existing system of voluntary credits that cost three to five or seven bucks. That allows emitters to emit.
So that is the big idea. We got to get the big oil companies to go to Washington and say they want this. We've got to get politicians to be less fearful that they won't get elected if they raise the price of energy on their constituencies because it's in the general good.
Josh King:
Yet we lose people like Mitt Romney because so tired of being in a hundred person men's club.
Jeff Ubben:
Yeah, exactly. Right. I heard his speech as he left. Yeah, he doesn't want to be that guy.
Josh King:
Jeff, you're on the board of the World Wildlife Fund. A couple of days ago, the WWF put out a statement after the Department of the Interior canceled its oil and gas leases in the Arctic National Wildlife Refuge. Steve McLean, who's the managing director of the WWF's Arctic program said, I'm going to quote him here., "The refuge supports an extraordinary abundance of wildlife from caribou to muskox to denning polar bears, and is the home to indigenous communities whose ancient traditions are deeply rooted in the land and sea." So beyond the carbon tax dividend plan, are things like what the Biden administration, the Department of Interior is doing, does that move the needle or is a lot more needed?
Jeff Ubben:
The IRA A was really, really helpful. It's, in its own way, a massive fiscal stimulus because it's not capped. So you're going to get, I think you get 700 or 800 billion, not 390 billion of federal funds flowing into projects. It's going to happen a little slower than we would like because of permitting and just the ability to build stuff in this country, but it's going to do that. Then on top of that, there's probably one and a half trillion of private money that comes in on top. That is a big deal. That's a big deal.
Again, it's picking winners, Josh. It's like green gets this subsidy, blue gets that subsidy, EVs gets this subsidy. It's picking winners, and you always worry about that when you have heavy-handed government policy. Really, what we need to do is we're doing 40 to 50 billion tons into the atmosphere every year globally, and this is where China and others have to play, but we need to get that to 20 through things like carbon capture and greening the grid, and then we can tax that 20 at 100 bucks and we reduce the drag on the GDP from what would be 10% to 2% or 3%. We're just going to have to acknowledge that there's a 2% or 3% GDP investment to do this higher purpose.
That's why I say that we need ... Anti-fossil fuel is an etiology. We need to decarbonize now any way we can. So let's just get going and get that global emissions down to the point where we can tax it and not bust the global economy. Then once you have carbon at 100 bucks plus, things like green hydrogen and so forth become much more affordable.
Josh King:
Lastly, Jeff, coming back to where I began at the beginning of our conversation, this week also coincides with the United Nations General Assembly. You're on the board of the Redford Center. Here's something that Robert Redford said five years ago at a speech at the UN. I want to compare that to where we stand today.
Robert Redford:
I'm here today as an environmental advocate, but also a father, grandfather, and a concerned citizen, one of billions around the world who are urging you to take action now on climate change. I'm an actor. I'm sorry about that. I'm an actor by trade, but I'm an activist by nature, somebody who has always believed that we must find the balance between what we develop for our survival and what we preserve for survival. Your mission is as simple as it is daunting, to save the world before it's too late.
Josh King:
Jeff, I'll put this to you. Is it too late to save the world?
Jeff Ubben:
The world's going to be fine. Can we save humanity? We're going to kill ourselves off. The planet repopulates with plants and fish incredibly well. So it's really a threat to humanity. Last night, we showed Path of the Panther. The Redford Center showed Path of the Panther and a screening at my wife's vegan restaurant. It was so incredible to see how important storytelling is because that movie alone created a legislative response that killed a toll road that was approved to run right through the Everglades.
Once you put a road in and the cost of land goes from $2,000 an acre for the farmer to 20,000 acres for the developer, once that road goes in, it's done. It's over, and just through one movie ... You have to all watch this, Path of the Panther. It's really well done. Through one movie, we stopped that. There's a piece of saving ourselves that is very local. We all talk about system change, and we're so important we're going to change the world with our power at the Cop 28 or whatever it is, but at the local level. If you just eat food local, live local, stop roads from being built local, support the the farmer that is protecting the land, it's almost like we have to start there or else we've got nothing. So I'm going hyperlocal.
Josh King:
Preserve at all costs the Path of the Panther. We'll all watch it. Thanks so much, Jeff, for joining us on the ICE House.
Jeff Ubben:
You bet. Thanks, Josh.
Josh King:
That's our conversation for this week. Our guest was Jeff Ubben, founder, managing partner, and the portfolio manager of Inclusive Capital Partners. If you like what you heard, please rate us on iTunes so other folks know where to find us, and if you've got a comment or a question you'd like one of our experts to tackle on a future show or hearing guests like Jeff Ubben, email us at [email protected] or tweet at us, @ICEHousePodcast. Our show is produced by Pete Ash with engineering and editing from Ken Abel and Ian Wolff. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length and clarity.
