By Lauren Foster Nili Gilbert has always loved solving hard...

By Lauren Foster Nili Gilbert has always loved solving hard problems. As a young girl, she spenthours poring over the mind-bending book, The Lady or the Tiger? And Other Logic Puzzles.Years later, while working as a quantitative investor, it was modeling human behaviorthat turned out to be a particularly difficult puzzle. Today, as vice chairwoman ofCarbon Direct, a firm that invests in climate technology and supports companies inmeeting their decarbonization commitments, she is tackling one of the hardest problems ofall: climate change. Gilbert's journey from portfolio manager to decarbonization champion took root incollege when she had the opportunity to design her own course of study. She focused onthe interplay between social and cultural progress over time, and economics and markets.After starting her career in international development at Synergos, Gilbert discoveredthe world of quantitative investing. She went on to co-found Matarin Capital Management,a hedge fund and equity asset manager for institutional investors, where she spent thenext decade. These days, Gilbert spends much of her time thinking about the intersection ofclimate and capital, and how to reduce greenhouse-gas emissions and remove carbon dioxidefrom the atmosphere. Barron's recently spoke with her about why carbon removal is part ofthe solution to getting the planet to net-zero emissions by 2050. An edited version ofour conversation follows. Barron's : We're in the midst of a global energy crisis where there is renewed focuson carbon-intensive fossil fuels. How should investors be thinking about carbon removalin the current climate? Nili Gilbert: The energy crisis has caused countries around the world to focus moreintensely on short-term needs for fossil energy, as well as long-term clean energytransitions. Our energy transition will remain difficult and complicated. The more thatwe overshoot the pathways we have ahead for decarbonization, the more CO(2) will need tobe removed. And the need for removal already greatly outpaces what we're doing today. For investors, the opportunities for carbon management have risen in recent weeks.We need to increase our investments, both in managing carbon emitted by traditionalenergy and, even more importantly, in accelerating the investments that we're making inclean fuels, like hydrogen. What prompted you to focus on carbon removal? As I learned more about the climate challenge, as a quant, the numbers really spoketo me. We are emitting about 50 gigatons of carbon a year. When you think about removals,we have to work on first reducing the emissions that we're still putting into theatmosphere. We need to get our emissions down to net zero. The emissions we're puttingout annually are the flow. If we look at the stock, the amount of CO(2) already in theatmosphere is 1.6 trillion tons, so it's 40 times the flow. We need to do a huge amount of work both on reducing the flow and getting our handsaround the stock. When we talk about getting to net zero, we're never going to be able toreduce those 50 gigatons of emissions we're putting into the atmosphere all the way downto zero. When we talk about net zero, it's the work of reducing emissions as much aspossible, and then focusing on the need to remove. Why is net-zero emissions the goal? It's not so much that net zero is the driving logic. It's that limiting globalwarming to 1.5 degrees Celsius [2.7 Fahrenheit] is the driving logic. And in order to dothat, we have to get global emissions down to zero by 2050. We won't be able to get itdown to zero just by reducing; we're also going to have to remove, and that's why we say"net." How do carbon credits fit in? We know that we're going to have to remove a significant amount of emissions inorder to achieve a 1.5-degree goal. So for me, all of this starts with the emissionsthemselves. But in order to get capital into those removals, especially at the scale thatwe need, we need to create a financial market for greater efficiency. So, that's whatcarbon credits represent. For carbon credits to be able to serve their role, there needsto be a focus on high-quality removals that are financing high-quality credits. And thatis what we focus on in our work at Carbon Direct. How do we remove carbon from the atmosphere? We have nature-based solutions. Nature itself acts as a carbon sink: healthyforests, sustainable agriculture, the blue-carbon economy -- our seas and oceans. It's still not getting us all the way up to the 10 gigatons that we need to remove.Thus, another big part of what we need to focus on is advancing the practice arounddurable engineered removal, which is also permanent removal. Some say there is a moral hazard in focusing on carbon removal versus loweringemissions. The moral-hazard conversation can't stop us from doing everything we need to do tocombat climate change. In order to soften concerns around moral hazard, it will behelpful to be clearer about standards for high quality and how we account for removals.We must make sure that removals are additional, and that we're applying high-qualityaccounting standards in how we measure the carbon impact. How is Carbon Direct investing? We are investing in and working on both sides of the equation, focusing onreductions and removals. When you think about investing in removals, the equation can bechallenging for investors because we don't have a price on carbon. In order for carbonmanagement to really scale, we need to see that the revenue for doing the work iscommensurate with the cost. This is what makes certain carbon capture -- which we'reinvesting in via the cement industry -- more economically ready to scale right now thanpure removals. What is the opportunity in cement? As impact investors focused on the carbon theme, we want to go to where theemissions are. That's what brings us to the cement space. Cement production accounts forabout three billion tons of CO(2) per year. But there are more than 30 cement producersaround the world that have made net-zero commitments. We see opportunity to invest in thetechnologies that will help to advance the solutions they need to be able to achievethose ambitions. Multiple parts of the production process are emitting carbon. The kiln is a keylocus, accounting for more than half of the total emissions. One of the investments wehave made is in the Leilac Group, which focuses on eliminating emissions in the design ofthe kiln. Leilac is owned by Calix [ticker: CXL.Australia], which has been developingthis technology and approach for over a decade. It has now reached a commercial proofpoint with HeidelbergCement (HEI.Germany) that's going into commercial pilot. There areabout 2,000 cement plants around the world. How can investors participate? I've mentioned Calix and HeidelbergCement, one of the world's largest cementproducers by far. It has made a net-zero by 2050 commitment, and is investing intechnologies to be able to decarbonize its product. It has also pledged to develop theworld's first net-zero cement plant by 2030. Were you encouraged by what you heard at the United Nations Climate ChangeConference, or COP26? I sit in the leadership group of the Glasgow Financial Alliance for Net Zero, orGFANZ, and I chair the advisory panel of technical experts that advises GFANZ and itsstandards. It was so exciting to be at COP26 when GFANZ announced that over 450 financialfirms, including asset owners, asset managers, banks, and insurance companies, had madenet-zero commitments. These institutions represent $130 trillion in assets. Securing commitments is one thing. Deploying the capital is another. Exactly. I'm excited about the hard work of figuring out the strategies and how bestto deploy that capital to achieve our net-zero ambition. We don't have any choice becauseof the systemic risk that climate change presents to all of our investments across allasset classes. The Swiss Re Institute estimates an 18% hit to global gross domestic product if westay on our current path, and so this ties fundamentally to fiduciary duty. We also don'thave a choice because of the planetary risks. There's a lot of talk about decarbonizing investment portfolios. But does this haveany effect on the ground, in the real world? This is where we need to be active owners and true stewards of our portfolios, andunderstand what the decarbonization pathways are for companies in the real economy. Then,we must support those companies down this path as owners. What is the role of the asset-management industry in reshaping the economy? Asset management has a design opportunity ahead of it, thinking creatively about howto design new products across asset classes to support clients in getting theirportfolios to net zero. As the CEO of an asset-management institution, one can't justflip a switch to get to a net-zero target. You're going to have to advocate with theclients to support them in changing how they're investing in the products they'reselecting. You need your clients to get their portfolios to net zero to get the firm tonet zero. It's innovation in offerings, and communication and education for the market tobe able to support net-zero selection. Thanks, Nili. Write to Lauren Foster at [email protected] (END) Dow Jones Newswires March 11, 2022 04:29 ET (09:29 GMT)Copyright(c) 2022 Dow Jones & Company, Inc.