ESG is good business (but don't call it ESG)
How to lose and make money in the climate era
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This isn’t complicated.
Alongside books, teenagers’ periods, and the statue of David, the notion of even considering “ESG” parameters in an investment fund has become one of 2023’s political footballs. Florida’s built a whole stupid political machine fighting it, the Senate passed an even stupider bill banning it, cueing up Green Joe’s first veto.
That’s not to say ESG is perfect.
In fact, it’s become pretty difficult to pin down exactly what the hell ESG is. That’s in part because ESG is a bunch of great ideas smashed together in one acronym. Drilling down, each those ideas — to more comprehensively and aggressively consider environmental, social, and governance standards, all vitally important and overdue — doesn’t really have a standardized, measurable anything. Which means formalizing them through ratings and the like is asking for trouble.
It’s problematic! Does a complete lack of standards but need to burnish reputations among retail investors set the stage for massive greenwashing? Of course!
Friends, many things can be true at once. Capitalism can make civilizations prosperous, drive innovation, and fund the arts. Capitalism also has a track record of being horrifically exploitative of ecosystems and people and self-regulation more or less does not work.
This is all to say: I am fully cognizant that a corporation’s traditional purpose is to create value for shareholders.
But that is exactly why considering even just the “E” in ESG isn’t putting “politics over profits”. It’s the opposite.
Since the beginning of time, two things have been true:
Bacteria are 10 steps ahead of us
We have been able to boil investing down to core very simple principles: capital conservation (protect what you’ve got) and capital appreciation (try to get more).
The mechanisms to execute those have become myriad, byzantine, and often automated, but the principles remain, because they are so easily understood.
Take a look around. Assess risk. Assess opportunities. Make your moves, try to keep them balanced out. Don’t be an ignoramus, don’t be greedy.
Now forget ESG, the label, all of it. Just consider the “don’t be an ignoramus” part.
As Morgan Housel described it, “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.”
In 2023 and beyond, an era when things are — shall we say — unpredictable, “screwing up” includes ignoring the real-world climate impacts already flooding our doorstep, and the millions of good people trying to build and participate in a capitalist system that isn’t, you know, monstrously extractive.
Pretending the “E” is anything but a new prism to assess risk so is dumb.
Ignoring that it may also be the most lucrative opportunity of all-time is even dumber.
1. Your fund, investments, and company should anticipate regulatory changes that are, yes, taking forever, but are probably inevitable
Regulation is a fickle mistress, often decades too late and sometimes — I know — overused.
But any well-run company should be able to put their finger to the wind and say “Yes, the times, they are a changing”, and methodically change their business practices to at least align with the general principles of future regulations.
And THAT is so when regulators do eventually, inevitably knock on their office door (I’m kidding, there’s no more offices), those same companies can smirk, knowing the hard work is already done. This is a result that typically makes shareholders very, very happy.
My children and I actually call this “doing a favor to your future self”, and whether we’re talking about — just once — depositing our Crocs in the shoe bin at the end of the night, or producing toothpaste without fucking forever chemicals, your future self will always be appreciative.
2. Your fund, investments, and company should anticipate consumer trends, especially among the youths
In case you missed it, the youths are all about saving the planet. “The planet”, you smirk again, “will be fine.” And you’re correct! Geology. So cool.
But think of it instead like “Saving the planet as they know it”, and then consider that these young people will live on our rock far longer than you or me, and you may finally understand why they reluctantly, and then forcefully rallied behind Green Joe. But also why they are now absolutely furious about the Willow Project, why second-hand clothing and furniture shops have exploded in popularity, why they keep suing fossil fuel companies wherever they can, and more.
Now, if you’re more of a “soft pants” person, “furious” may not seem like a consumer trend to you, but if I’m a company, and I’m looking around at successive generations demanding companies, goods, and services with a conscience, I would try to adjust accordingly by becoming one of those.
And then, assuming I could remember my password, I’d buy a bunch of TikTok ads to support my efforts. If Nutter Butter can do it, we can too.
Maybe, sure, no one could have predicted a Nutter Butter resurgence, but making it a company policy to make things the youths need, and out of materials that used to be a part of something else, assembled by nice people who enjoy a living wage and can take a day off when their own youths are sick is really a smart way to reliably stay in everyone’s good graces, and maybe even become something they make one of those dance videos about.
3. Your fund, investments, and company should seek access to new markets
I say this all of the time and still people shrug and it’s strange because “We have to electrify every automobile and building on the planet” doesn’t seem like small potatoes to me?
Nor the downstream markets of these?
Hello? Building a gazillion e-bikes? Building a bazillion EV chargers? Maintaining chargers? Software to manage chargers? Repairing water pipes? Wastewater monitoring? Zero carbon sneakers? Building storm gardens? Telehealth? EV manufacturing? Building four million new electrified homes? Sustainably harvested cardigans? Geothermal anywhere? Equitable, healthy urban design? Solar over reservoirs? Solar over farmland? Battery recycling, eventually? Pumped hydro? Heat pumps? Food waste? Induction stoves? Composting services? Have you seen all of the EV and battery money gushing into red states? Do you understand where that money is coming from? What about advertising and marketing and legal and financing and HR for all of these? Tap, tap, is this thing on?
Do people at your company not wear sneakers? Wouldn’t they like a nice pair made from sustainably-harvested tree bark, that could then be recycled into, I don’t know, pencils? Please don’t tell me you still make them wear the loafers. No more loafers.
Look, I ran the numbers on these new markets and the revenues totaled up to “All of the money.” Can I interest you in all of the money?
4. Your fund, investments, and company should reduce costs
This doesn’t even have to be that complicated.
You can buy clean energy from almost anywhere, virtually at least, and Energy Star appliances have been around since Home Alone 2: Lost in New York.
Other things that reduce costs and improve profits: stop wasting all that energy by using smart appliances, stop wasting food (there are plenty of startups that will pickup your company’s extra food or food waste to redistribute or compost), stop wasting paper and packaging materials (look at Walmart’s Zero Waste program).
Another idea! Healthier employees. Those are fun, even when we’re all working remotely, which can also save businesses money, and save transportation emissions too. This is great.
Lastly, insulation might not be sexy to you, but you wouldn’t believe how excited well-stuffed drywall and double-paned windows get me.
5. Your fund, investments, and company should protect your assets and investments against real-world climate impacts
Millions of historically marginalized people in “sacrifice zones” around the world have been suffering through not-fun climate impacts for decades, from water and air pollution to heat, drought, and flooding.
The IRA, which seems to be completely reinvigorating American industry and causing quite the kerfuffle across the pond, is an imperfect tradeoff of oodles of future profits in exchange for keeping those same sacrifice zones around for just a while longer, which really sucks.
The thing about many of those sacrifice zones is they’re either where fossil fuel infrastructure is and/or where climate impacts are most likely to come to life, affect, harm, or kill people, but also absolutely trash whatever’s within striking distance, like homes or businesses your bank loans to, or insurers, or whatever. It’s not great.
It’s also not super fair to people who’ve lived in those places for generations. Home is home, and it’s terrible to have to leave, but while many folks now know they’re being poisoned, others aren’t, and find themselves “underwater” on mortgages and insurance policies that simply won’t come due when the big one comes. We have to ask hard questions, and money talks.
Which is to say, continuing to support that infrastructure in any conceivable way is a big fat F+ in Managing Risk 101.
On the other hand, helping to fund or provide goods and services around four million new electrified homes in pedestrian-friendly urban areas and suburbs that should become urban areas, in places where climate adaptation is more manageable, is a nice way to make a buck.
And here’s where this all comes together.
The longer your company continues to invest in, loan to, subsidize, get energy from, or require products made from fossil fuel infrastructure, the more likely climate impacts will continue to grow, and the more your investments are at threat from, say, melting or drowning or both, to say nothing of the people who live and work there.
The longer it takes companies to adapt to upcoming regulatory changes — even literally just disclosure rules — the more likely climate impacts become.
The longer “trends” like sustainable manufacturing, EV’s, clean power, heat pumps and more take to become as common as Swiffers, the more likely climate impacts become.
ON THE OTHER HAND: Choosing to see these exposures not just as massive risks, but as opportunities to directly reduce the risks, for yourself and everyone else, can make your fund, your investments, and your company, a boat load of cash.
Ignore the performative bullshit, ignore the grifters. You are smarter than this. You know that market risks have always been real-world risks, reputational risks, and political risks, standing on each others’ shoulders in a trench coat, no matter what label we give them.
I’ve got a poster in my office that says “Work Hard and Be Nice to People”. It’s easier said than done, but it’s not difficult to understand.
Do the right thing with your money, which also happens to be the least risky thing, and maybe even the most profitable — ever.
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