Green Investing May Be a Bubble, Jeremy Grantham Says, But He’s Doubling Down

(Bloomberg) -- Jeremy Grantham got rich steering clients away from bubbles in late-1980s Japan, in turn-of-the-century tech stocks and in U.S. housing before the 2008 financial crisis. Now, the 83-year-old co-founder of Boston investment company GMO admits he may be benefiting from another bubble — in green investing.

This time, the value investor known for pessimism sounds downright sunny. He says the plan he laid out years ago to pour nearly his entire $1-billion-plus fortune into the climate-change fight is working. He’s making lots of money, while recruiting other superwealthy people to pursue similar strategies that mix philanthropy and investing.

For Grantham, the capital flowing into green investing over the past couple of years reflects his warnings for more than a decade: Floods, fires and extreme weather have made warming undeniable, creating momentum for carbon taxes and other climate-friendly policies that will transform the world’s economy.

“This is going on as far as the eye can see. It’s an unfair advantage for green investing,” Grantham said. “There may be a bubble that will affect this for a year or two, but it will come back bigger and better than other groups because of this tailwind. This is going to be the most important investment theme for the rest of your life.”

Read More: Grantham Says Fed Is Erring on Highest Inflation Since 1990At the COP26 climate summit in Glasgow, Scotland, this month, more than 450 firms managing $130 trillion — about 40% of the world's financial assets — pledged to reach net-zero carbon emissions by midcentury, and to set interim goals for 2030. To exploit this green boom, Grantham is making risky bets. Venture capital and other private investments now compose more than three-quarters of the $1.4 billion in assets he manages across a foundation, a charitable trust and his personal holdings.

Half the portfolio is slated for green venture investments, including $74 million deployed by Grantham and his team in 34 startups that they designate “neglected climate opportunities.” For these, he said, “we only pick ideas that seem extremely important, ideas that have the potential to change the world.”

Grantham says his venture-capital portfolio has returned 19% annually over the past decade, including a 102% jump in 2020, a “watershed” year. The spectacular gains were powered by QuantumScape Corp., the maker of a new type of battery, which went public via a special purpose acquisition company last year.

Capricorn Investment Group, founded by EBay Inc. billionaire Jeff Skoll, recommended QuantumScape to Grantham in 2013, when he was relatively new to green investing. “We took a very deep breath,” Grantham said. The $12.5-million stake was his largest single investment.

Most of Grantham’s early climate investments were “completely disastrous,” he said, but QuantumScape more than made up. At one point in late 2020, a frenzy for green SPACs pushed the value of Grantham’s QuantumScape shares to more than $630 million, a 50-fold return. As an early investor, Grantham couldn’t sell until May — by which point the share price had dropped to around $25 from more than $130. Grantham still got about 10 times his initial investment.

Read More: Elon Musk Tops $500 Billion List of Green Billionaires

Grantham doesn’t reject traditional philanthropy: Since 2001, he and his wife, Hannelore, have donated about $400 million to environmental causes and he’s promised to give away 98% of his fortune, which was primarily earned from GMO, or Grantham, Mayo, Van Otterloo & Co.

To run his grant-making and investing, Grantham has hired a team of 10, led by foundation president and Chief Investment Officer Ramsay Ravenel and including specialists on climate-related topics. Recent investments include companies working in agriculture, which is a big emitter of carbon and methane that Grantham worries will have trouble producing enough food as climate change intensifies.

Greenlight Biosciences, Grantham’s second-largest direct investment, makes RNA molecules designed to be an environmentally friendly alternative to pesticides. In August, the firm said it’s going public via a SPAC. Other investments include Kula Bio, which makes a fertilizer, and Regrow, which develops carbon monitoring technology for soils.

Another concern for Grantham is the green economy’s surging demand for rare metals needed in batteries and other technologies. His investments there include Lilac Solutions, a startup that aims to find new lithium sources.

Investments in such startups advance the fight against climate change while also, Grantham said, providing the chance for stunning returns. “We expect to have many failures, but when we win, we expect it to be a very big win,” he said.

Grantham’s enthusiasm for startups has influenced his philanthropy. Half of a new $44 million grant program on carbon capture will go for university research on ways of pulling the gas from the atmosphere. To be eligible, technologies must be feasible as businesses soon. If the research pans out, Grantham is prepared to invest in those startups. 

Grantham says his “No. 1 job description” is to persuade other rich people to join him. “This is so much more important than building a new building for some business school,” he said.

Richard Lawrence, founder and chairman of Overlook Investments, said Grantham “educated me on climate change slowly over the course of several years.” Grantham would recommend books and bring up particular issues, like agricultural methane emissions, well before Lawrence heard activists discussing them. Among their joint philanthropic projects is Carbon Mapper, a nonprofit that uses satellites to track emissions.

Grantham connects with fellow billionaires through nonprofits like Prime Coalition, which encourages foundations to invest in climate startups, and CREO Syndicate, which encourages the world’s richest families to explore green investing.

Shopify Inc. co-founder Tobias Lutke’s family office, Thistledown, is among the CREO members who have invested alongside Grantham. Lutke, 41, has a net worth of $14 billion, according to the Bloomberg Billionaires Index.

“There are a lot of people who started investing in climate this year,” said Kavita Surana, a professor at University of Maryland’s Center for Global Sustainability. But “we need more investment in research, and into getting research out of the lab and into the world.”

While some areas, like electric vehicles, have no trouble attracting money, she said, less popular, capital-intensive ideas “need people and investors that are able to take on quite a big risk.” 

Despite past successes as an investing prophet, Grantham has also been wrong — or at least too early — with some calls. He’s been warning that the U.S. stock market is overvalued for the last couple of years,  a period when equity values keep soaring.

Grantham’s green investments could also falter, putting at risk the fortune he’s spent a lifetime building. But, given the dangers of climate change, he argues that’s a chance he and other superwealthy people should be willing to take.

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