Roblog

An interesting paper by Samuel M. Hartzmark and Kelly Shue outlining a counter-intuitive aspect of ESG investing.

The ESG consensus is that you should invest in companies that do good, and not invest in companies that do bad. If you do that, you’ll make it harder to do business for companies doing bad things (by raising the cost of capital for them). That’s then a good incentive for those companies to behave better (and therefore access more, cheaper investment).

But Hartzmark and Shue argue that this is counterproductive. If you invest in an already-good business, there’s much less scope for them to improve in absolute terms. And if you don’t invest in bad businesses, you make it hard for them to make big investments (which means they won’t create new technologies to reduce emissions), and you put pressure on them to make money in the short term in order to survive (which means they’ll do bad things like mine more coal or produce more diesel engines).

ESG investing effectively makes bad companies worse, without making good companies better – because it lacks a mechanism for rewarding companies for absolute reductions in impact. #

ESG investing on Wall Street is dominated by the assessments of MSCI, which produces the ratings that large institutional investors and funds like Blackrock use to judge their investments.

The problem with these ratings is that they’re in some strange sense reversed from how one might intuitively imagine them. They don’t measure how positive the impact of a business is on the world; they measure how negative the impact of the world might be on the business. For example:

“McDonald’s Corp., one of the world’s largest beef purchasers, generated more greenhouse gas emissions in 2019 than Portugal or Hungary, because of the company’s supply chain. McDonald’s produced 54 million tons of emissions that year, an increase of about 7% in four years. Yet on April 23, MSCI gave McDonald’s a ratings upgrade, citing the company’s environmental practices. MSCI did this after dropping carbon emissions from any consideration in the calculation of McDonald’s rating. Why? Because MSCI determined that climate change neither poses a risk nor offers ‘opportunities’ to the company’s bottom line.

“MSCI then recalculated McDonald’s environmental score to give it credit for mitigating ‘risks associated with packaging material and waste’ relative to its peers. That included McDonald’s installation of recycling bins at an unspecified number of locations in France and the U.K. – countries where the company faces potential sanctions or regulations if it doesn’t recycle. In this assessment, as in all others, MSCI was looking only at whether environmental issues had the potential to harm the company. Any mitigation of risks to the planet was incidental.”

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A quirky “and in other news” story on the BBC:

“A man who uses his 72-year-old toaster every day said he was embracing the spirit of the wartime generation.

“Jimmy James, from Stanwick, in Northamptonshire, said the toaster was manufactured in December 1949 and given to his parents as a wedding present.

“The 69-year-old said it only needed repairing once every six or seven years.”

But it makes a good point about the durability and repairability of modern products:

“He said the age of Mr James’ toaster was actually a benefit: ‘Newer ones aren’t always repairable. Manufacturers don’t want us to be able to mend it. They want people to buy a new one.’

“Mr May said there was ‘a growing pile of waste across the planet,’ with environment pollution and plastics joined by ‘mountains of white goods’.

“‘We have been caught up in a race to the bottom with a belief that cheapest is best,’ he said.”

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A remarkable find from Bill McKibben:

“Last week, I noticed a comment in passing: forty percent of the world’s shipping, one commenter insisted, consists of just sending fossil fuels around the world to be burned.

“That can’t be right, I thought – what about all the other things we have to ship. There’s grain, and lumber, and iron ore, and cars, and a zillion containers loaded with tennis rackets and dog toys and 70-inch TVs. But no – a little research makes clear that in fact if you add up all the tonnage, something very close to forty percent of all the shipping on earth is just devoted to getting oil and coal and gas (and now some wood pellets) back and forth across the ocean.”

The optimistic conclusion is fairly straightforward:

“If and when we make the transition to solar power and wind power, we will not just stop pouring carbon into the atmosphere, and not just save money – we will also reduce the number of ships sailing back and forth by almost half.”

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One of the downsides of ESG investment, in the short term at least, is that it creates an opportunity for the unscrupulous. (I’ve written about this before.)

The logic is fairly simple: if a bunch of investors choose not to invest in “sinful” stocks, those stocks will be underpriced; if a bunch of investors choose not to lend money to “sinful” businesses, then the cost of raising capital for those businesses will be higher, meaning higher returns for those who lend to them. Big institutional investors have mostly moved towards ESG principles, which means that – if you’re a sociopath – you can get higher returns by consciously choosing to invest in those sinful stocks. While they’re still around, at least.

Sadly, private equity (not known for its strong ethical foundation) seems to have got the memo:

“Private equity firms are lining up to take on the dirty – and highly profitable – assets being divested by publicly traded commodity producers as the world grapples to decarbonize.

“In the latest example, private equity accounted for most of the 30 so-called western candidates that signed non-disclosure agreements in the sale of Vale SA’s Mozambique coal business, according to Luciano Siani Pires, head of strategy and business transformation at Rio de Janeiro-based Vale.

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“‘The ensuing combination of high commodity prices and low acquisition costs for unwelcome assets may provide these firms the bonanza of a lifetime,’ Siani said.”

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A beautiful short film by Dana Frankoff:

“Voice Above Water is the story of a 90-year-old Balinese fisherman who can no longer fish because of the amount of plastic pollution in the ocean, instead he collects trash in hopes of being able to fish again. The story is a glimpse into how one human is using his resources to make a difference and a reminder that if we all play our part we can accomplish something much greater than ourselves.”

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Nuclear fusion is extraordinarily powerful:

“…we discovered that fusion powered the stars only about a hundred years ago, when the British physicist Arthur Eddington put together two pieces of knowledge into what was seen at the time as a wild surmise. The facts he combined were that the sun is made up mostly of hydrogen, with some helium, and that E=mc².

“Eddington noticed that four hydrogen atoms weigh a tiny bit more than one helium atom. If four hydrogen nuclei somehow fuse together, in a series of steps, and form helium, then a little bit of mass must be “lost” in the process. And if one takes seriously that most famous of equations, then that little bit of mass becomes a lot of energy – as much energy as that amount of mass multiplied by the speed of light, squared. To give a sense of this ratio: If you converted a baseball into pure energy, you could power New York City for about two weeks. Maybe that process – hydrogen crashing into hydrogen and forming helium, giving off an extraordinary amount of energy in the process – was how the sun and all the stars burned so bright and so long. Eddington, in a paper laying out this theory, closed with an unusual take on the story of Daedalus and his son Icarus. Eddington argued in defense of Icarus, saying it was better to fly too high, and in doing so see where a scientific idea begins to fail, than it was to be cautious and not try to fly high at all.”

It’s also remarkably safe, and generates no problematic waste – unlike nuclear fission. But it’s always just around the corner, and has never really progressed towards commercial viability. But there are still scientists working on it, still progress is being made, and this New Yorker article looks at one particular team’s efforts to solve the (many) remaining problems. #

Beautiful, useful, and thought-provoking: what more can you ask for from a building? #

Duncan Austin argues that voluntary, market-led attempts to fix climate change (such as corporate social responsibility initiatives, environmental social and governance-led investing, campaigns to change consumer behaviour, etc.) have failed.

His analysis is an interesting systems-thinking one. He argues that these attempts represent the “fix that fails” systems archetype, whereby initial attempts to fix a problem trigger delayed secondary effects that make the problem worse. Eventually, the “fail loop” overtakes the “fix loop”, and the system collapses.

It’s a dense post, but it has some great thinking in it. The idea of the “fix that fails”, the complementary “unmentionable foot” to the market’s “invisible hand”, and the notion of “externality-denying capitalism” are all useful additions to the collective language on sustainability. #

Emma Pattee introduces a brilliantly simple but powerful metaphor for thinking about your individual impact on climate change: your “climate shadow”. More useful than just thinking about your climate footprint, your climate shadow takes into account the secondary impacts of what you do, who you vote for and what you lobby for, and forces us to consider ways of making a far bigger impact than just by changing our own individual behaviours:

“The problem with the carbon footprint is that… our footprints don’t paint an accurate picture of our true individual impact on the climate crisis. And by encouraging eco-minded people to use their carbon footprints as a ‘guide’ to fight climate change, we risk them spending all of their energy on low-impact individual actions that are easy to quantify, like recycling or turning off lights, instead of putting that energy toward broader, more meaningful work, like lobbying local politicians or speaking up at work about wasteful practices.”

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Interesting video documenting a grassroots effort to hold back desertification in northern Africa by planting spiral gardens. #

Matthew C. Klein argues persuasively that to be in favour of economic growth isn’t to be anti-environment, but that to be against it is to be anti-humanity:

“That’s because there is no way to lift living standards for the vast majority of people – including the large number of poor and working-class people in rich countries who would happily enjoy better food, larger homes, a wider array of gadgets, and more opportunities for travel, if provided with the necessary spending power – if humanity as a whole must consume far less. Vastly increasing global production and consumption of goods and services is the only solution to global poverty, and it’s the only acceptable way to reduce inequality.”

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Outrageous:

“On 4 February the German energy giant RWE announced it was suing the government of the Netherlands. The crime? Proposing to phase out coal from the country’s electricity mix. The company, which is Europe’s biggest emitter of carbon, is demanding €1.4bn in ‘compensation’ from the country for loss of potential earnings, because the Dutch government has banned the burning of coal for electricity from 2030.

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“RWE is suing under the Energy Charter Treaty (ECT), a little-known international agreement signed without much public debate in 1994. The treaty binds more than 50 countries, and allows foreign investors in the energy sector to sue governments for decisions that might negatively impact their profits – including climate policies. Governments can be forced to pay huge sums in compensation if they lose an ECT case.”

Withdrawal from the treaty is tricky but possible; OpenDemocracy urge people to sign the petition started by the Transnational Institute and Corporate Europe Observatory. #

iFixit have been nobly banging the drum for repairable electronics for years. That debate has often been framed as one of consumer control and what “ownership” really means when it comes to our devices.

But with their Repair Jobs Revolution, they’ve shifted the focus to the wider societal benefits. Sending electronic waste to landfill doesn’t just waste the components and energy used to create it, and damage the planet; it also takes almost no effort to process and creates no value. Repairing and reusing, on the other hand, creates local jobs that produce genuine value. Good for the planet, good for the local economy. #

Olof Hoverfält tracked every item of clothing he wore for three years. The data gathering enabled him to make extraordinary insights into the costs – both to his wallet and to the environment – of what he wore. His writeup is both a joyously nerdy statistical deep-dive and a series of genuinely useful insights, and it demonstrates just how carefully we must work to adjust our gut feelings about sustainability closer to reality. #