Blackrock CEO supports ESG and Long-Term in 2018 Letter

January 17, 2018 Ben Yeoh

Larry Finks 2018 Letter to CEOs is titled “Sense of Purpose” he writes:

“We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”

My personal view is that reflects close to a consensus view amongst thoughtful long-term investors and those interested or practicing a sustainable or integrated ESG part of their investment process.

However, I do not believe that this is the predominant line of investment practice in the assessment management world. I have no direct data on this, it’s culled from experience and anecdote. The reasons are multi-factorial compounded by incentive structures, short-term pressures and job career risk. A lot of what it means to be human is not initially geared for long-term sustainable thinking. Perhaps this will be humanity’s

downfall.

Under: A new model for corporate governance, Fink suggests: “ In managing our index funds, however, BlackRock cannot express its disapproval by selling the company’s securities as long as that company remains in the relevant index. As a result, our responsibility to engage and vote is more important than ever. “

“…The time has come for a new model of shareholder engagement … companies have been too focused on quarterly results; similarly, shareholder engagement has been too focused on annual meetings and proxy votes. If engagement is to be meaningful and productive – if we collectively are going to focus on benefitting shareholders instead of wasting time and money in proxy fights – then engagement needs to be a year-round conversation about improving long-term value.

“….: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.

Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world?”

FT’s Authers comments: “CEOs who think this is politically correct claptrap (there must be plenty) can of course ignore him. They can be safe in the knowledge BlackRock is not going to sell, whatever happens”

(Truly active) managers oft scoff at passive managers ability to engage. 40 ppl engaging 4,000+ companies, is not 10 ppl engaging with 50 cos.

Passive managers remain skeptical of how many active portfolio managers are effectively engaging.

But as Dimson et al. Active Ownership academic study implies +ve stewardship is good for multiple stakeholders: employees, company, shareholders environment…

Long-term stewardship should be a win-win for All.

But as my earlier post on actual effectiveness and mainstreaming sustainability, where we can see Blackrock itself only voted in favour of Climate Change proposals for the first time in 2017 and then on very few (2%) of climate proposals, one could argue we still have some way to go.

There are also reasonable arguments that can be made suggesting that this is so far rhetoric which might not be supported by the current voting record. Although others would note it is complicated and that much good engagement can happen regardless of vote.

Link to climate proposals post

Link to BlackRock CEO 2018 Letter

Link to Active Ownership paper here: H/T Xi Li, Elroy Dimson and Oğuzhan Karakaş https://www.thendobetter.com/investing/2017/10/16/active-ownership-academic-study

If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude or investor Ray Dalio on on Principles.

Cross fertilise. Read about the autistic mind here.

Facebook changing its newsfeed, less advertising

January 13, 2018 Ben Yeoh

Facebook are changing its newsfeed. Less advertising, more connections with friends.

This is big news giving the share of advertising FB now has and is growing.

It is responding to sustained and increased criticism. One of the latest from early investor Roger McNamee. This is notable due to his relationships with many of the senior FB team, his knowledge and understanding of social media platforms and his early insights into how social media was being “weaponised” / manipulated / abused by special interest groups.

Link to McNamee article here in Washington Monthly

“A consulting firm was revealed to be scraping data about people interested in the Black Lives Matter protest movement and selling it to police departments. Only after that news came out did Facebook announce that it would cut off the company’s access to the information. That got my attention. Here was a bad actor violating Facebook’s terms of service, doing a lot of harm, and then being slapped on the wrist. Facebook wasn’t paying attention until after the damage was done. I made a note to myself to learn more.

Meanwhile, the flood of anti-Clinton memes continued all spring. I still didn’t understand what was driving it, except that the memes were viral to a degree that didn’t seem to be organic. And, as it turned out, something equally strange was happening across the Atlantic.

When citizens of the United Kingdom voted to leave the European Union in June 2016, most observers were stunned. The polls had predicted a victory for the “Remain” campaign. And common sense made it hard to believe that Britons would do something so obviously contrary to their self-interest. But neither common sense nor the polling data fully accounted for a crucial factor: the new power of social platforms to amplify negative messages”

Read about my questions to a dying man, on how to live a life well lived.

Or, a thought about the narrative of Bitcoin.

Is ESG sustainable investing going global?

January 13, 2018 Ben Yeoh

Is ESG investing going global? Is sustainability / ESG truly mainstreaming? A Bloomberg article (ref i) argues 2017 is the year ESG went global. There are some surface data supporting that. Ex, the amount of money flowing into “ESG” funds (ref ii), but other facts suggest we have ways to go. The article suggests 4 asset managers (AUM > $10,000,000,000,000 yes, that’s $10 trillion, est $1tn+ in equities) finally voting for a climate related proposal is positive.

Personal View: the counter is that it has taken until 2017 for 4 of the most significant asset managers in the world to vote for the FIRST TIME for such a proposal, + the voting record is behind the median industry view (which some argue is below where it should be).

I’m discouraged that these votes are so little + so late. That might sum up where we may be on climate (cf. Vaclav Smil on climate, ref iii).

If ESG is mainstreaming, then that doesn’t square with the lack of mainstream reporting of the largest RI/ESG investment conference (UN PRI). No mention in FT, WSJ or others. Very very few “mainstream” portfolio managers attending. Hmmm.

I often put myself in an optimistic camp. But, we have to be true. I remain uncertain if sustainability has gone mainstream. Links and more in comments.

Finally, investor surveys (ref iv) show 27% investors ignore ESG, 35% are unsystematic, thus only 35% systematically incorporate ESG. I’m unsure it counts as mainstream. I question what type of ESG participants define. One of the assets mngrs above states “Actingon material environmental, social and governance (ESG) opportunities or risks in our investments.” So it would self-define itself as integrate ESG. Some would argue its record on voting is not aligned to this. Other might want to know its engagement record.

Ref i - https://newsletters.briefs.bloomberg.com/document/wjZIuqmna7F.0H-sfcWRmg--_9ez2hhvxnqgzbspk5q/year-ahead

H/T Gregory Elders, photo source via Bloomberg which sources Ceres

Ref ii https://www.ussif.org/files/publications/sif_trends_14.f.es.pdf

US SIF suggests $1tn to $4tn from 2012 to 2014 for US-dom funds with ESG tilt.

Ref iii https://www.thendobetter.com/investing/2017/7/19/vaclav-smil-energy-expert-awesome

Ref iv https://www.thendobetter.com/investing/2017/10/26/esg-survey-cfa-amel-zadeh

Note: Personal view. No organizational endorsement.

Valuable presents. High return. Easy to do.

December 23, 2017 Ben Yeoh

High return on investment presents. Last minute Christmas gifts. Economists argue that buying presents is a value loss as recipients do not value the gifts at the same value as bought.

These economists suggest cash is the best gift as economic value is not destroyed. Tim Harford in the FT (Link here, behind paywall) in 2016 looked at Joel Waldfogel’s notorious research paper, The Deadweight Loss of Christmas, Waldfogel showed that gifts typically destroy value, in the sense that the giver had to pay more to buy the gift than the recipient would ever have been willing to spend on it.

Richard Thaler Might disagree (post here) arguing rational “hominem economist” is fantasy. Cash gifts are frowned open.

I have several gift ideas which have a high RoI. These gifts utilise the equation:

Time + Unique + You = Priceless a gift of time and attention and thought.

Poetry/Writing: Write them a poem. Write them out your favourite poem. Record a video or audio of you reading a poem (or short story) to your loved one.

Even for the young child who has everything, they won't have a video of you reading their favourite book.

Write a letter about a time together or why they are important to you.

Recipes: Collect recipes from friends and write them in a book. A short story about their importance is a welcome touch.

If you take the time to create/make/cook some thing, this has “positive value” both economically and socially. There are many items in the read/eat/drink category that most people enjoy.

Cook some thing, make a cake; confit a duck leg (recipe here, keeps for 6 months); order some green coffee beans, roast them yourself for a coffee lover, present them with roasted beans (worth over 10x the green bean value plus 30 minutes or so roasting time, I’ve done it in a pan similar to this). You can brew your own gin, ginger ale, make lemonade.

You can make simple jewelry, with a little more time you could learn to knit or something to actually make a garment, though I appreciate that is probably above what can be easily achieved.

You can make them a mix tape / CD / on line mix -- with personal commentary. The mix tape was a teenage rite of love in decades past.

Busy parents might appreciate a "voucher" for baby sitting time offered by the gifter. We value experiences more than objects when it comes to happiness.

One final note, for those who mostly have what they want. A charitable donation to the receivers’ favourite charities - most countries, you gain some tax back, could also be a positive return.

Read about my questions to a dying man, on how to live a life well lived.

Or, a thought about the narrative of Bitcoin.

Face-to-Face is better.

December 20, 2017 Ben Yeoh

A look at a paper exploring face-to-face communication.

"Has technology made face-to-face communication redundant? We investigate using a natural experiment in an organisation where a worker must communicate complex electronic information to a colleague. Productivity is higher when the teammates are (exogenously) in the same room and, inside the room, when their desks are closer together. We establish face-to-face communication as the main mechanism, and rule out alternative channels such as higher effort by co-located workers. The effect is stronger for urgent and complex tasks, for homogeneous workers, and for high pressure conditions. We highlight the opportunity costs of face-to-face communication and their dependence on organisational slack."

Writes Diego Battiston, Jordi Blanes i Vidal, Tom Kirchmaier in their paper: Is Distance Dead? Face-to-Face Communication and Productivity in Teams link to paper here

“We exploit a natural experiment to provide evidence on the relation between distance, communication and productivity in a large public sector organisation: the branch in charge of answering 999 calls and allocating officers to incidents in the Greater Manchester Police. An incoming call is answered by a call handler, who describes the incident in the internal computer system. When the handler officially creates the incident, its details are available to the radio operator responsible for the neighbourhood where the incident occurred. The radio operator then allocates a police officer on the basis of incident characteristics and officer availability. The main measure of performance available to the organisation is the time that it takes for the operator to allocate an officer. Unfortunately, delays often result from the radio operator’s need to gather additional information. One way in which she can do this is by communicating with the call handler electronically or in person.”

“We find that allocation time is 2% faster when handler and operator work inthe same room. An important consequence of this faster response is that it decreases the likelihood that the operator misses the country-wide target for a maximum allocation time- a metric by which police forces are evaluated by the UK Home Office. We also show that proximity within the room is important - the effect of co-location is 4% when handler and operator are sitting very close together.”

“We provide two additional sets of results. Firstly, we establish that being able to communicate face-to-face has a higher effect for: (a) more urgent and information intensive incidents, (b) in conditions of higher operator workload, (c) when the teammates are more homogeneous (in terms of age and gender), and (d) when the teammates have worked together more often in the past. Secondly, we highlight and compute the opportunity costs of face-to-face communication.”

“This paper provides, we believe, the first detailed causal evidence on the relation between proximity, communication and productivity inside organisations. Of course,the study involves a particular setting and production technology. As such, the implications are stronger for high pressure environments such as the healthcare professionals assessing and treating patients in emergency rooms, or the frontline staff and their supervisors in air traffic control, the military, and other time-critical settings. More generally, we also believe that the insights on the contingent value of face-to-face communication have broader applicability.”

This paper looks at this from the point of view of worker productivity. But, it makes me wonder how many other social type interactions benefit from face-to-face interactions over electronic or social media.

Perhaps there is more to Nassim Taleb’s love of parties (though not artsy fartsy ones) than only the benefits of focused randomness.

If you'd like to feel inspired by commencement addresses and life lessons try: Ursula K Le Guin on literature as an operating manual for life; Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting.

There's a discussion on what makes a life well lived, by a fun theorist.

Cross fertilise. On investing try a thought on stock valuations. Or Ray Dalio on populism and risk. You can also click on the Carbon tag below.

A lesson from autism here. And a post on the seductive story of Bitcoin

Lost Einsteins. Cost of Inequality.

December 4, 2017 Ben Yeoh

This paper makes for sobering reading on the cost of inequality for lost inventions in the US.

Full paper here. Summary paper here. NYT article here.

“We characterize the factors that determine who becomes an inventor in America by using de-identified data on 1.2 million inventors from patent records linked to tax records. We establish three sets of results. First, children from high-income (top 1%) families are ten times as likely to become inventors as those from below-median income families. There are similarly large gaps by race and gender. Differences in innate ability, as measured by test scores in early childhood, explain relatively little of these gaps. Second, exposure to innovation during childhood has significant causal effects on children’s propensities to become inventors. Growing up in a neighborhood or family with a high innovation rate in a specific technology class leads to a higher probability of patenting in exactly the same technology class. These exposure effects are gender-specific: girls are more likely to become inventors in a particular technology class if they grow up in an area with more female inventors in that technology class. Third, the financial returns to inventions are extremely skewed and highly correlated with their scientific impact,as measured by citations. Consistent with the importance of exposure effects and contrary to standard models of career selection, women and disadvantaged youth are as under-represented among high-impact inventors as they are among inventors as a whole.”

From the NYT:

“Much of human progress depends on innovation. It depends on people coming up with a breakthrough idea to improve life. Think about penicillin or cancer treatments, electricity or the silicon chip.

For this reason, societies have a big interest in making sure that as many people as possible have the opportunity to become scientists, inventors and entrepreneurs. It’s not only a matter of fairness. Denying opportunities to talented people can end up hurting everyone….

…

The project’s latest paper, out Sunday, looks at who becomes an inventor — and who doesn’t. The results are disturbing. They have left me stewing over how many breakthrough innovations we have missed because of extreme inequality. …

I encourage you to take a moment to absorb the size of these gaps. Women, African-Americans, Latinos, Southerners, and low- and middle-income children are far less likely to grow up to become patent holders and inventors. Our society appears to be missing out on most potential inventors from these groups. And these groups together make up most of the American population….

...The groups also span the political left and right — a reminder that Americans of different tribes have a common interest in attacking inequality….

Cross fertilise. On investing try a thought on stock valuations. Or Ray Dalio on populism and risk. You can also click on the Carbon tag below.

A lesson from autism here.

Bitcoin. A mystery narrative of seductive freedom.

November 30, 2017 Ben Yeoh

Bitcoin has a seductive story. All great investment manias have a compelling narrative behind them, all with a fistful of truth. An early one being tulip bulbs. I still argue Bitcoin is NOT an investment, but a speculation in a maybe-currency. It also is waste of energy (in my view). Bitcoin mining energy, which consumes the same as a medium sized country like Ireland, could be used more productively given the pollution cost emitted.

Still, the mania has further to run, in my view, as although many random people I meet talk about it, there are still many people to be seduced.

Jeffrey Robinson, the author of BitCon, writes that bitcoin is "a digital-something pretending to be a currency; that same digital-something pretending to be a commodity; a political movement that reeks of a delusional cult; and a technology — a unique peer-to-peer transfer system — that happens to be brilliant."

Block chain technology is great. Bitcoin itself, not so much.

But, back to the story…. My early career was as a stock broker - the sell-side - and as all good sell-siders know, selling investments is about selling a story, selling a narrative… indeed politics and much of life today is about the story… “facts” and data are only a small (or even non-existent) part of the debate. Don’t let a fact get in the way of a good story (fakenews).

An early story of being seduce by investment manias involves Isaac Newton of gravity, physics and maths fame. He supposedly said (though my guess this is made up):

“I can calculate the movement of stars, but not the madness of men.”

(Nassim Taleb would agree. Stars and comets and that type of physics are systems we can calculate. Complex systems like markets are beyond us, mix in fat tails and by their nature, black swans, will always be beyond our imagination).

Newton was an early winner then victim of the South Sea China Bubble. See picture above. He made a nice profit, but then went back in and lost it all. Some traders (eg supposedly Soros) can identify bubbles early and exit before the crash, but it’s a rare skill / luck.

So… the bitcoin story… it starts with a legendary mysterious inventor (pen name Satoshi Makamoto), who is unknown, unidentified and has walked away from billions to serve a larger purpose….this purposes inspires those such as this FT reader:

...The internet as we know it would not exist without the government. Crypto makes governments obsolete. Cryptocurrency combines value and governance into one package that obviates the need for nation-states. And it doesn't have to just be used for money; it can be used to decentralize anything that we currently produce or exchange in a centralized way. That is what is exciting here. Not making a bunch of money, or the massive transfer of wealth from the old guard to a bunch of risk taking nerds. The latter is exciting to me because who doesn't like money, but it's much more deeply exciting because our current governments (all of them), while mostly better than what we had before, are a truly awful human system. They tax humanity to make war with each other….

It’s also used by criminals (or any who don’t want to be traced), those who might consider gold a store of value, those who only have access to very unstable currencies.

It appeals to a certain kind of libertarian thinker, it appeals to those who are disillusioned with government (and that’s a lot of people)... and there’s the nub:

It appeals to those who love a good story. And that’s all of us. Economists would do well to remember that.

Cross fertilise. On investing try a thought on stock valuations. Or Ray Dalio on populism and risk. You can also click on the Carbon tag below.

A lesson from autism here.

Wolverhampton

November 30, 2017 Ben Yeoh

Oh when the wolves (Oh when the wolves) go marching in (Go marching in) Oh when the Wolves go marching in I want to be in that number When the Wolves go marching in....

This was my first time to Wolverhampton and the "Black Country".

Two possible origins of the term Black Country.

(1) the exposed coal seams that run through the country (2) the smokey black fog that was prevalent in the 1800s.

I also learnt the gold and black colours of Wolverhampton Wanderers FC originate from the city's motto 'Out of darkness cometh light', with gold and black representing light and dark respectively.

Many Wolverhampton workers are feeling happy at the moment as they sit top of their football league table (Championship).

And we know happy employees, satisfied employees (better #ESG) make better companies (!) and better stock returns. See Alex Edmans paper.

Listened to the West Midlands Pension Fund AGM and spoke about ESG, stewardship and #responsible #investment.

A topical question was asked on engage / divest conundrums. When a shareholder divests they may no longer influence the board/management. If coal [insert controversial item] assets are divested to a less responsible owner - is the problem solved or made worse?

The discussion revolved around needing both engage and divest prongs at work. Neither alone is as effective together. Discuss.

There is no simple answer, but universal owners such as index funds have a duty to engage; and active managers gain more returns if they do successfully engage - this paper would suggest.

If one puts the active ownership paper together with the work on the outperformance of Global Equity managers described here, one can start to build a defense of Active Management; where John Kay would argue Active Managers should compete on style and philosophyin any case.