You Didn’t Build That, Part 2


Values-Alignment and Value Creation Are NOT the Same Thing

As we have written hereherehereherehere, etc. and as we discuss in these two podcasts, there is, to put it bluntly, no direct transmission mechanism between an investor’s decision to buy or sell shares in the public market (or to delegate that activity to an asset manager) and corporate behavior. To argue otherwise is to defy both logic and the structure (much less the intention) of the public markets.

This is so important that I’ll say it again: deciding what to own in public securities is a values-alignment exercise, not a value-creation exercise. Yes, it is an important way to express a personal (or collective) orienting philosophy relative to participation in the mechanisms of capitalism. And, yes, it is an important thread in the much larger re-weaving of the capital markets. But if the collective decision to sell shares of a company perceived to be villainous had any direct effect on that company’s operations, then Phillip Morris would have stopped selling cigarettes long before they changed their name to Altria.

(Speaking of Altria, if that name change isn’t the most cynical rebranding exercise in history, I don’t know what is. Even the company admitted as much in a contemporary NY Times article: “The company has taken this action to reduce the drag on the company’s reputation that association with the world’s most famous cigarette maker has caused.” Stop selling cancer sticks? Nope. Invest the profits in our nation’s rickety health care system? Nope. Maybe donate some money to lung cancer research? Nope. Stop doing anything related to the activity that was causing the reputational risk? Riiiiiight. Same company, same products, different business cards. Sweet.)

And yet… and yet…

The siren song of collective action seduces. If enough people act in concert, surely the world we want will emerge like a butterfly from the chrysalis of a dystopian stock market. Surely the solutions we need, the future we desire, is just a few harmonized sell orders away? There is something about the process and promise of screening a portfolio of publicly-traded securities that leads to magical thinking. The satisfaction of identifying that company you hate and stripping it from your portfolio is altering, empowering. And the idea that if you and all your friends sell that evil company at the same time, the company will… change.

And I get it. Change through concerted action seems plausible, perhaps even possible. Even if it isn’t possible, it is profoundly tribal. And, from what I’ve seen over the nearly 30 years I’ve been orbiting the SRI/ESG/Impact world, that is the rub: the feeling of tribal connectedness in a financial services ecosystem that at times seems engineered to depersonalize and transactionalize the activity that defines it. All one need do is spend a day at SRI in the Rockies to get a sense of “the movement”, the tribalism that sits in the liminal space between rational arguments for incorporating ESG factors into investment decisions and emotional calls for action.

But let’s be honest with ourselves: the scope of the mass alignment required to steer corporate behavior defies comprehension. US public equity market capitalization is around $20 trillion. Global public market capitalization is just north of $70 trillion. To put that in perspective, US GDP – the largest economy in the world – is around $12 trillion.

So if we took every single penny generated by our economy and used it to buy shares of public companies, it would take more than six years to buy, well, pretty much everything.

Except that doesn’t include all of the private companies on which, presumably, we’d want to impose the same ESG best practices. Oh, wait. That also ignores all of the real estate, which is the largest global industrial contributor to climate change. Or agricultural land, which is also a huge opportunity. And don’t forget public timber property. And we wouldn’t be able to eat for that six-year, dedicated, buying spree because we wouldn’t have any money. Etc.


All of which returns us to that most important conclusion: it isn’t what you own that matters. Rather, it is what you dowith what you own. To repeat myself, buying or selling securities in the public markets has no direct impact on corporate behavior. But filing shareholder resolutions, engaging with management, boycotting products, and signing petitions does. Big time. Companies don’t like being publicly shamed, and the list of really interesting initiatives that have been pursued by businesses in the public-shaming-crosshairs is long – too long for a blog like this.

But even in the face of concerted action, sometimes the business simply can’t change. Call me naïve, but I believe that Exxon, if it had been able, would have responded more “responsibly” after they fouled one of the most beautiful coastlines in the world. But they couldn’t. Their entire business is based on petroleum sales, and a rational person presumes that when you drive boats full of the stuff around the world, there are going to be accidents. The fact that almost every SRI/ESG fund in the world immediately sold their shares after Captain Hazelwood tried to play slalom through the icebergs floating in the Valdez Narrows, had precisely zero effect on company activity. Zero.

For those of my readers who are too young to remember that particularly horrifying environmental disaster, let me suggest a current example: Peabody Energy, the world’s largest public coal company. Peabody’s stock has been taken out behind the woodshed and shot, sold by just about everyone who owned it, and the company is likely to nosedive into bankruptcy as they explore their debt-induced crush depth. In the face of this value destruction, one would be forgiven for thinking that the company might… I don’t know… stop selling coal? Right?

Yet Peabody continues to ship more coal than any other company in North America, and will continue to do so even if they do declare bankruptcy. Why? Because shipping more coal than any other company in North America is their business. Is it rational to think that a company will commit stock market Seppuku just because a group of self-defined “progressive” investors decide to sell their holdings? To provide an answer for those readers who have not yet connected the dots: “no”.

(note: Peabody slid, somewhat ignominiously, into Chapter 11 between the time this blog was drafted and when it was posted. The essential point, however, remains intact. Peabody continues to sell coal despite public markets price discovery telling them that doing so is no longer a long-term viable business.)

It is useful to remind ourselves that as climate-change investors were busy selling Peabody, the exact same number of people were looking at the company, the hardening science around climate change, the changing regulatory environment, headline risk, etc. and concluding the opposite: that they wanted to OWN shares. And this is how markets work: buyers and sellers acting together to determine the value of a company… not to determine how that company should operate.

With Peabody, as with many other businesses, it is almost as if the evisceration of the company’s market value (cue hideous chart) has had no effect whatsoever on the operations of the company.

Which is, of course, the point.


A Depressing Coda

Curious to learn who exactly was buying shares, I did a bit of research. Among shareholders:

  • Morgan Stanley, the Wall Street firm that has spent more money than anyone else to convince investors that it is an impact investing firm.
  • BlackRock, also working damn hard to present itself as a sustainable investing firm.
  • State Street Corporation, which claims to embed ESG criteria in its investment discipline.
  • Gallagher Fiduciary Advisors, who published these two pieces just last year.
  • The Russell Company, which regularly produces White Papers on Mission Related and Sustainable Investing.
  • Coatue Capital, a technology hedge fund that pours a slice of net profits into an environmental-focused foundation that is a major supporter of Woods Hole Oceanographic Institute. (why is a tech fund buying shares in a coal company anyway??)

And that is just six from the ten largest holders. You can’t make this up.

Institutional-scale cognitive dissonance, anyone?