March Madness – A Climate Investing Playbook for University Endowments

Chris Ito

Chris Ito

CEO, FFI Holdings
Overly Passionate Ohio State Buckeye

Some sports fans would say that March is the best time of the year. College conference basketball tournaments, and then the NCAA men’s and women’s tournaments. So how, you ask, is March Madness related to climate change? Well, let’s see if we can find some analogies that might resonate with endowment investment teams and trustees who are supporting their teams and filling out their brackets.

The Bubble

Win your conference

The first objective of every college basketball program in America is to get an invitation to the NCAA Basketball Tournament on Selection Sunday. If you win your conference, you get an automatic bid. If you don’t, then you can still get in as an “at large” team if you are selected by the NCAA Tournament Selection Committee. Teams that are under consideration are termed “on the bubble”, meaning that winning (or losing) games down the stretch will be the difference in whether they make or don’t make “The Big Dance”. Bubbles are also applicable to financial markets. Sometimes company share prices become inflated due to investor over-exuberance or speculative frenzy. Inevitably, these bubbles burst, leading to a decline in those overinflated share prices, sometimes dramatically.

Clean energy has experienced bubbles in the past, but with the continued maturing and scaling of proven technologies such as wind and solar, we can expect bubbles to appear with less frequency and severity. That said, investment sectors centered around emerging technologies such as hydrogen and carbon capture can expect periods of exuberance and decline as markets assess the ability of these technologies to scale into real climate solutions. Asset owners, particularly endowments, can take a long-term time horizon and absorb the additional volatility that may be associated with clean energy investing. Bottom line, keep your cool and don’t panic.

Don't panic

Cinderellas and Bracket Busters

It seems like every year, we see relatively obscure teams reach the second week of the tournament, known as the Sweet Sixteen. The media refers to these teams as Cinderellas or Bracket Busters as they are typically from “mid-major” conferences. These Cinderellas are great stories and it is rare that underdogs advance to the Final Four, but last year the Florida Atlantic Owls proved that it can be done.

Cinderellas are great stories

Twenty-five years ago, solar power, wind power, and EVs were like energy transition Cinderella stories in terms of their small share in the overall energy and transportation sectors. Few experts believed that these technologies would ever become a significant energy component. Today, those technologies have shed their Cinderella status, as they are becoming cheaper, faster, and better than the fossil fuel incumbents. Some asset owners might believe that the transition is still decades away, and that “business as usual” will continue far into the future as fossil fuel interests tout hydrocarbons as necessary to energy security and reliability. Yet the market forces and policy changes driving the adoption of clean energy and EVs suggest that the transformation of our energy and transport systems is inevitable and already underway. Without much warning, the clock can strike midnight. Asset owners should prepare themselves and not to be caught off guard when fossil fuels turn into pumpkins.

Game Plan

In the NCAA tournament, players make plays. There is a saying: “It’s not the X’s and the O’s, but the Jimmys and the Joes (or the Caitlins and the Camerons) that make the difference.” The adage often holds true – players win games. But that said, a good game plan matters, and every coach tries to create game plans that allow teams to play to their strengths and cover up their weaknesses. For example, if your team doesn’t guard the 3 well, don’t double the post, and don’t go under screens, go over. If you have good three-point shooters, run plays that free them in clutch moments. Outside of good guard play, there is no one style that consistently wins in the tournament. But good coaches put their players in the best position to win.

Free them in clutch moments

Investment teams need to do some version of this as well. Their players (either internal investment teams or external asset managers) are responsible for executing, but it is important that the game plan puts them in the best position to succeed and accomplish their institutional goals. There is no one style of investing that works to integrate climate considerations. If you are an impact-oriented investor, your focus and game plan is going to be different than an investor who is solely focused on managing the risks and taking advantage of return opportunities presented by the energy transition. Asset owners can develop custom game plans to achieve success.

Score and Defend in Transition

Teams that can win in transition may prosper in the tournament. Scoring in the half court is difficult, and while some teams are efficient in running set plays, most successful tournament teams get some easy buckets in transition while also preventing fast break points and transition 3s. Teams that can get out and run, and teams that can defend in transition, can generate an edge. Positioning for the energy transition is the cornerstone to any investor game plan when integrating climate change considerations. There is a defensive component (manage risk) and an offensive component (identify sources of alpha). The energy transition will be a mega-trend, one that investors must understand to position their portfolios accordingly. 

One Shining Moment

You know the song One Shining Moment. This phrase and the mosaic played by CBS Sports after the final game encapsulates the pinnacle of success in the tournament. In the context of climate-conscious investing, it could symbolize the achievement of a significant milestone, such as committing to net zero principles, or funding a groundbreaking sustainability project, or showcasing the highlights and successes of a decarbonization strategy. For Ohio State fans like me, it’s been way too long since our last title (1960). The optimist in me says that within my lifetime the Buckeyes will win the NCAA tournament. And then, finally, that One Shining Moment, will be Our Shining Moment.

One shining moment

Buzzer beaters

Enjoy the Buzzer Beaters and let the Madness Begin!