The ESG Spot #3

Issues 1, 2.

The topics discussed this past Friday varied from subsidies to ESG investment by pension funds to consumer behaviour, so you might be quit entertained reading the summary below.

Bad Software Developers are Killing People

  • It’s not a new concept and I totally don’t lay claim on it, but it’s still quite entertaining. It goes like this: an average human life consists of 2.5 billion seconds. Imagine a company with 300k employees, each using a certain piece of software, which runs quite slow (due to poorly optimized algorithms) leading to the loss of 5 minutes’ productivity a day simply because a person is looking at the screen doing nothing.

  • My calculations show that the developer of this software “kills” one person every month, i.e. collectively removes one person’s lifetime out of the lives of 300 000 people.

  • So if you’ve been looking for an S/ESG reason to hire good developers – here’s a fancy case for you.

  • It’s important to understand that only the waste of time with no alternative use counts as killing people; a person sitting in the airport waiting for a delayed flight can still use his/her laptop for productive activities.

For Many Investors ESG is About Managing Poor Compliance

  • I did mention it before, and seemingly the audience is agreeing with the following statement: “While there’s weak evidence that good corporate governance is a driver for superior returns, sharp declines in share prices in many cases have been caused by poor corporate governance.”

  • Good governance is not free, and the most immediate effect of a compliance-conscious Board is that the CEO is tasked with a conflicting goal of growing revenues in a “sustainable” way, which mostly means “be as aggressive as you need to be, cut any corners, but don’t get caught and we will never ever stand behind you in case you fail”.

  • At the same time, many investors are under the mounting pressure from their own investors to look and act “good” and ensure the companies they put the money in don’t leave the world a worse off place in the long run. During the call there was an argument that the pension funds the speaker is working with are less interested in ESG credentials, but rather in the long-term performance. This can be explained by the obvious fact that human lives are getting longer each decade, and the people with the money to invest are the same people who put their health first, further extending their expected life span. So the alternative to ESG for them is medical care + high returns of their pension portfolio or fund.

  • Russia in the view of the majority of the speakers is the market where ESG concerns are negligible, and people are mostly chasing returns. It can be explained by the simple fact that if we take 40 years as the expected investment duration over the life of a person before they start drawing down on the funds to support their lifestyle or existence, Russia provides a poor example of long-term planning. Any savings made prior to 1980 were eaten by the inflation of early 1990; savings in 1940 would’ve gone to the WWII effort, and savings in 1900 would’ve been confiscated by the Bolsheviks in 1918. So Russia so far is not the best place for long-term financial planning, let along ESG.

ESG Analytics Market

  • I was surprised to learn that the ESG ratings/analytics/etc market is a whopping $2.7B number. It’s also incredible that the companies chasing the ESG alpha are buying not just one, but (on average) 4 reports for a total of ~$350k annually.

  • Needless to say, the reports are not in tune when it comes to ranking different variables and the data they collect, so matching data is a full-time job on top of the cost of the reports. One wonders what qualifications the analysts should hold to correctly sift through the conflicting opinions of different agencies.

  • It would be interesting to see whether the ESG-focused funds (assessing the direct contribution of the reports to the outcomes of using them) actually earn the alpha (i.e. above-market returns) in excess of the money they spend on obtaining and analyzing these reports.

“Brown” Bitcoins

  • A few days ago we had a long conversation with a group of recycling specialists discussing energy generation from burning non-recyclable non-organic waste. An argument was made that the “brown” energy generated this way is “toxic” for (i.e. not favoured by) the companies trying to flash their “green” credentials.

  • I made a case that while this is noble on many levels, there are less picky energy consumers, among which a group of Bitcoin miners stands out. If my guess is correct, no one can tell whether a certain particular Bitcoin has been mined with “green” energy or “brown” energy, so there’s at least one segment of energy users who wouldn’t know or care where their energy comes from – as long as it’s cheap enough to justify mining.

  • It kind of sounds funny that Tesla, positioning itself as a “green” company, has bought $1.5B in Bitcoin. Something doesn’t feel “green” here.

  • PS. For the sake of consistency, my friend Evgeniya Klochkova and I collectively and came up with the concept of “brown Bitcoins” independent of any existing publications on the topic.

SDG vs ESG

  • There’s been a substantial scepticism about whether the UN SDG (Sustainable Development Goals) are a good guide or replacement for ESG investment principles.

  • Most participants agreed that this is not the case, as SDG goals are not immediately actionable and their KPIs are widely open to interpretation. With ESG parameters (200-300 in many models) many boxes have to be ticked and measured, any company attempting to seriously tackle on more than 4 SDG goals at once is bound to cut corners on all of them.

  • Rainbow (the SDG kind, not the LGBT kind) washing, unfortunately, is a thing, and companies are motivated to look as SDG-friendly as possible.

Conclusion

  • I believe now is the right time to change the format of the series and focus not on the “discovery”, i.e. “ESG for dummies”, but rather focus on specific corporate actions and the commercial reasons behind these actions.

  • So for the next issue I’ll be looking for such actions and discussing them with the audience. Hope it’s going to more interesting than some random stories and thoughts.