Happy (?) Earth Day

Well, the Earth isn’t particularly happy, and we aren’t so happy about what is happening to the Earth, so perhaps we should rephrase that to be Wishing You a Day of Concerned Observance for the Earth.

Today it seemed appropriate to come back to a recurring theme at RIS, that being the idea of the commons. We have been stuck with this notion that caring for the planet comes at the cost of truly free commerce. Underpinning that notion seems to be the sense that taking from the planet comes at no cost other than the expense of obtaining the license to exploit and the costs of the materials and processes to execute on that taking.

What we all need to recognize is that everything comes at a cost. Even if you subscribe to the notion that humans are the supreme beings on this planet, or even that only certain humans are supreme, that cost is socialized among us. If a factory belches GhGs or heavy metals into the air, we all share in that one atmosphere and the consequent health effects. If an oil well dumps millions of barrels of oil into the ocean, coastal communities and fisheries pay the price. If the water supply is polluted or overused, it is the citizens of Flint, Michigan or Charleston, West Virginia who get poisoned or the farmers of Nebraska or California who can’t grow productive crops. The consequences to access to clean water, breathable air, farmable land, fishable waters, safe and healthy food, clean beaches, and sharable wildernesses are shared by all.

In a free and fair market, people are compensated for taking risk, providing labor or sharing resources. But, the reality is people are not adequately compensated individually or collectively for the use of our commons. Our shared environment within our communities, our countries, and across our planet is being exploited with little concern for what it actually costs. Put aside for the moment you care about oily birds and homeless polar bears. If the market actually priced what it costs just human society for the uncompensated taking of our natural environmental resources in terms of health, welfare and prosperity, it would be far too expensive to sustain.

As long as it is cheap or free to take oil, coal, natural gas, minerals and water from our public lands, or to fill our public waters and public air with garbage and pollutants, this problem will never be rectified. The cost of doing business and the cost of capital need to take into account all of the costs for our people and our planet. What is the price for the use of our commons? Will they pay it? If not, they should lose their licenses to operate. Other businesses will take their places that serve the same needs but better consider the interests of all stakeholders. That is how a truly free market works. 

Quarterly catch-up

A few additions have been posted to the Library of note. First is an article entitled “Got the Message” on systems-level thinking on markets and sustainability. The short version is that we believe it is more capital-efficient to address the root causes of climate change than to discount the capital destruction caused by it. The free market is capable of pricing climate change risk if it is permitted to do so. Failing to recognize the true cost of capital by ignoring the system in which it exists is short-sighted and destined for ruin.

Next up, a fresh look at the investability of emerging markets through an ESG lens in “ESG and EM”. The transparency of emerging markets has improved significantly, making it easier for fundamental managers to examine environmental, social and governance criteria with the same intensity as in developed markets. Some of this improvement is a credit to the governments and home markets that are driven to attract stable, long-term investment capital from the developed world, and some is thanks to data providers and investment firms working harder to capture and catalog the same material information available to developed market investors.

Lastly, a copy of HR 109 of the 116th Congress, aka the Green New Deal, and an accompanying article, “Small Steps & Giant Leaps” where we make the market case for the Deal. The GND is a statement of direction and purpose to pull the country back from the brink in societal and environmental terms, but is not in itself legislation destined for law. If it never finds its way out of the starting gate, it is still an effective roadmap for communities and markets to mitigate risk and create the next several decades of economic opportunity while improving health and wealth for all. And, the greed motive is entirely in line with the objectives of the Green New Deal. There is a great deal of money to be made by investors that recognize the decadal opportunities it describes.

Standing cheek to cheek

Somehow, even with the dramatic uptick in adoption of sustainable investment practices, the idea of investing in a conscious and purposeful way is still taboo. In the process of working to gain more mainstream acceptance of ESG-focused practices asset managers shifted away from the idea of aligning portfolios to individual or institutional values or missions and rather emphasized an investment-first, or in many cases investment-only approach to ESG. I have even sat through manager presentations where it was stated not just definitively but assertively that what was being shown was strictly about investing and without concern for issue avoidance or positive change for anything other than economic reasons.

What got forgotten is what motivates investors, again both individual and institutional, to want to invest in this way in the first place. Continue reading “Standing cheek to cheek”

NCA4 — Too much to ignore

It is of no small consequence that an administration predisposed to discounting climate science and dismantling environmental guardrails did not do more to bury the fourth National Climate Assessment. Aside from dropping it over a holiday weekend, not much has stood in the way of its wide release, and it has its own dedicated .gov URL. The science speaks for itself, the number of agencies participating in and validating the science underscores the conclusions, and plenty has been and will be written about the top-line takeaways in case earth, wind and fire have not been sufficient to make the point for the last several years.

Continue reading “NCA4 — Too much to ignore”

Start now and give all year

Today is Giving Tuesday. Numerous worthwhile charities are raising their hands and asking for our attention and our dollars in pursuit of their missions. The difficulty with a one-day campaign is that, while it may bring in new dollars from existing donor relationships, there is a low probability of establishing durable relationships with new donors. Whether the connection is spiritual or practical, driven by a single crisis or by a lifelong pursuit, connecting givers with worthy recipients is a process. Not only does a donor, whether organization or individual, need to find that alignment of purpose, that donor also needs to go through some degree of due diligence to see whether the receiving organization is a good steward of donated capital and creating meaningful and measurable impact with it over time.

Let today not just be a flash in the pan, but let it be the start of an ongoing process for kind and caring individuals, families, and institutions to discover and build long term relationships with impactful organizations creating positive change in the world. As part of that, donors should also consider solutions that help create a platform for purposeful giving that could last months, years or even generations. Consider donor advised funds (DAFs), private foundations, community trusts, and other solutions that make it possible to institutionalize giving, make larger financial commitments that can be disbursed systematically, and provide partners and resources to help identify and evaluate potential recipients.

Posers vs. Prophets

Photograph: Getty Images, Accompanies Article on CityWire USA website

With the possible exception of Amazon, trying to be all things to all people is less and less a winning strategy. Consumers increasingly pick products and services on more narrowly defined, and more personal, criteria. Companies are responding by picking more narrowly defined customer groups to serve. What this demonstrates is an alignment of social or environmental purpose with good business strategy. Customers and companies get into a virtuous and self-reinforcing cycle of positive change and deeper market penetration as companies respond to customers’ ESG expectations and customers respond to companies that proactively work to reflect their interests.

This article discusses distinguishing between the posers and the prophets using an ESG lens. (In)authenticity is a powerful factor in determining depth of commitment and quality of execution that has profound consequences for both financial and ESG performance. It is posted to CityWire USA’s website here, or can be downloaded as a PDF here.

Small batch capitalism

I have been doing a lot of work on how to relate what and how we consume everything else around us with how we consume financial services. The great divide has been rooted in equal parts in a lack of understanding that the same rules could apply, and in a belief, misguided I will assert, that the sole objective of investing should be financial return.

Maybe this is a byproduct of well-intentioned but heavy-handed regulation, and maybe some of it is the cowardice of investment professionals and fiduciaries who do not want to take a single step outside of the lines inside which they are protected when delivering  mediocre or even inferior results. “Here is food. It is nutritious and diversified and portioned according to the US recommended daily allowances. I understand it doesn’t taste good, but my responsibility wasn’t to make sure you enjoyed it. It was to make sure you don’t die of starvation.” We don’t consume anything else where the bare minimum is also the maximum expectation.

There is no reason, even in a well regulated environment, that consumer behaviors that apply elsewhere shouldn’t apply to investing. A movement back to the way we used to make and consume, local and artisanal, is afoot. We want to see the supply chain. We want to know where things came from, that those things were sustainably and responsibly obtained, that they are healthful and mindful, and that they support our local communities. That small-batch mentality, from arts and crafts to food to beer to clothing, has taken hold particularly with Millennial consumers. A local, sustainable, community-oriented focus is available in investment products as well. Read my latest article in CityWire USA pro buyer magazine on how investing small helps to foster sustainability and serve consumer demands while still delivering on core investment mandates.

Necessary narrative

Thistle in the Colorado Rockies

Everything that exists has a story. It might not be an interesting story, but there is a narrative for what was before, what is, and what will be. It might have been the case in the early days of SRI that the investment case was built too much around storytelling and not enough around economic fundamentals. We have now overcorrected in an attempt to be included and inclusive, and lost the motivational hook for why individuals and institutions commit to this type of investing over “traditional” options. This is not philanthropy, but there is a lot to learn from charities about how to motivate people to allocate capital with a purpose. This article in CityWire found in our Library touches on the goals beyond total return that inspire investors of all stripes to make their portfolios reflect their values and behaviors in the rest of their lives.

Is Israeli divestiture an ESG prerequisite?

I am apparently very fond of standing on the third rail, and not because of any particular affinity for public transit. Many of the big ideas in ESG and impact investing are based on almost universally-accepted principles for sustainable business, from access to nutrition and healthcare to clean waterways and shrinking carbon footprints. I attempted in this month’s CityWire pro buyer magazine to look into what happens when some of those universal principles cross into grey areas where stakeholders do not agree, in some cases at all. South African apartheid divestiture was a signature moment in socially responsible investing and one that reaped profound social returns. My question was what are managers doing with the BDS (Boycott, Divestiture, Sanctions) movement in the Israeli occupied territories since BDS is drawing from the South African apartheid playbook but is far more polarizing? What is attributed as good or bad is very different depending on the perspective of the stakeholder. Are managers even looking at BDS, and if so how does it integrate with a sustainable investment process designed to appeal to as broad a universe of investors as possible? You can find the article here or in the Library.

Inevitable

Can’t say this is surprising. From a policy point of view Scott Pruitt is antithetical to everything for which a good environmental steward stands. But, cabinet appointments are the province of the President with the advice and consent of Congress. We are getting the environmental policies for which the people voted. That is how it works. Pruitt took governance to new lows though, befitting regimes we (used to) laugh at in less developed parts of the world.

Nothing is won here though except a glimmer of hope that, even if we vehemently disagree with their policies, civil servants act with honor and honesty in service of their country. However, environmental vigilance is still critical on the part of all stakeholders even with Pruitt’s departure from the EPA. He is gone but the people who put him in that position, and will replace him, are still in power.

Embattled EPA Chief Scott Pruitt resigns (Washington Post)

Scott Pruitt, Trump’s EPA Chief, Resigns Under Cloud of Ethics Scandals (NY Times)

Embattled Scott Pruitt Resigns as EPA Administrator (Wall St. Journal)