A Company’s environmental practices will more profoundly impact cost of capital and investor returns.
Significant momentum behind investors voting with their wallets. Millenials have and will continue to lead this trend.
It’s ok if you don’t know who Larry Fink is. Most don’t. He is the 67 year old white self-made billionaire CEO of BlackRock, a company that controls over $7 trillion of investments; only the US and China have annual GDP higher than that.
Each year he writes an open letter to CEOs’ -- a presumptuous act in nature -- but hey, here we are talking about it. In very short, his letter this year says:
- Climate change is real and it’s a defining factor in companies’ long term prospects.
- Climate change is causing a fundamental reshaping of finance, AND
- There will be a significant reallocation of capital as a result.
“Reallocation of Capital” is finance jargon meaning investors are beginning to prioritize environmental responsibility and sustainability over profitability. The responsibility of business is a question economists, business leaders and society have extensively debated during the last century, with the seemingly dominant capitalist position memorialized by Milton Friedman as:
“There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits."
Fink overtly states as example that Blackrock will be “exiting investments that present a high sustainability-related risk, such as thermal coal producers.” Jeez; sucks to be a coal producer I guess. In all seriousness though, you could be a profitable coal producer generating electric power for many homes and Teslas, and now business just got tougher and more expensive (will be harder to raise capital in theory).
This isn’t just Fink. Also, this month, Tom Steyer emphasized in the democratic debates that fighting climate would be his number one priority as President. And Satya Nadella the CEO of Microsoft committed to eliminate Microsoft’s carbon emissions and invest $1 billion in climate initiatives. Microsoft actually cited the Xbox as one of its largest carbon footprints. Who would’ve thought?
These are not entirely new concepts to finance. The Dow Jones began publishing in 1999 global sustainability indexes based on their environmental, social and governance practices (known as ESG criteria). Mr. Fink’s company Blackrock offers ETFs, for example, that are based on these ESG indexes and can even exclude businesses involving alcohol, tobacco, gambling, firearms and adult entertainment.
We are in the midst of a paradigm shift in thinking: acknowledging that real-economic value can and will be derived from social impact. And we should go ahead and thank the millenials, led by Greta Thunberg 17 year old Swedish environmental activist and 2019 Time Person of the Year, for driving us here hard and fast.
Personally, I have not historically advocated an investment approach that is “environmentally conscious”. Not because I’m opposed to it, but more because I subscribed to the Milton Freidman and Adam Smith school of thought. And it just didn’t seem that practical: Do I boycott a company that uses styrofoam packaging? I’m now amenable to an ESG investment approach, because I think doing something is better than nothing and I believe there will be financial rewards. A good excuse to buy a Tesla as well.
My point in all of this? We all think about the environment and debate climate change and global warming, etc… The difference NOW, is we are going to see a monumental shift in how capital is allocated. Or said another way the millennial generation is going to be much more serious voting with their wallets; and savvy investors recognize this.
Questions relating to this column can be directed to Sean Hathaway, Investment Advisor and Manager; (971) 409-4180; or visit: www.HathawayFinancial.com