Socially Responsible Investing

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Recently, I read a fairly long article in the November 2015 Atlantic by James Fallows about Al Gore's investment ideas and practices. Gore now devotes much of his time to Generation Investment Management, a socially responsible investment firm that has seen spectacular results:

The most sweeping way to describe this undertaking is as a demonstration of a new version of capitalism, one that will shift the incentives of financial and business operations to reduce the environmental, social, political, and long-term economic damage being caused by unsustainable commercial excesses. What this means in practical terms is that Gore and his Generation colleagues have done the theoretically impossible: Over the past decade, they have made more money, in the Darwinian competition of international finance, by applying an environmentally conscious model of “sustainable” investing than have most fund managers who were guided by a straight-ahead pursuit of profit at any environmental or social price. 

...according to Mercer ["a prominent London-based analytical firm"], the average return for Generation’s global-equity fund, in which nearly all its assets are invested, was 12.1 percent a year, or more than 500 basis points above the MSCI index’s growth rate. Of the more than 200 global-equity managers in the survey, Generation’s 10-year average ranked as No. 2. In addition to being nearly the highest-returning fund, Generation’s global-equity fund was among the least volatile.

Moreover, beyond this evidence of real-world success, Fallows references some convincing academic research that strongly supports the notion that businesses should embrace ESG policies, meaning that they should account for environmental, social and governance effects of what they do. Sometimes, as Fallows notes, these businesses embrace the so-called "triple bottom line" (pictured above).*

A 2014 study (subsequently updated) by economists at Oxford, collaborating with the investment firm Arabesque, surveyed nearly 200 academic studies, books, industry reports, and newspaper articles about ESG. Fallows summarizes some of their findings:

The Oxford-Arabesque report found overwhelming evidence that “it is in the best economic interest for corporate managers and investors to incorporate sustainability considerations into decision-making processes.” According to the study, the advantages include more stable (and less volatile) revenues, significantly lower cost of capital, higher profits, and better share-price performance.

Fallows also mentions some prominent bankers and investors who now criticize firms and investors who focus too narrowly on short-term profit statements rather than long-term issues like sustainability. For example, Fallows mentions a series of speeches by Andrew Haldane (one example here), the Bank of England's chief economist, and a March 2014 open letter to other CEOs by Laurence Fink, Chair and CEO of BlackRock. This is from Fink's letter:

...the companies we invest in should similarly be focused on achieving sustainable returns over the longer term. Good corporate governance is critical to that goal. That is why, two years ago, I wrote to the CEOs of the companies in which BlackRock held significant investments on behalf of our clients urging them to engage with us on issues of corporate governance. While important work remains to be done, good progress has been made on company-shareholder engagement. I write today re-iterating our call for engagement with a particular focus on companies’ strategies to drive longer term growth.

As Fallows describes it, BlackRock is the world's largest asset management firm, managing about $5 Trillion. Fink told Fallows that he favors SRI in order to change business behavior:

“I truly believe we need to have inclusive capitalism, progressive capitalism”—a system that can be “stronger, more resilient, more equitable, and better able to deliver the sustainable growth the world needs.” Fink said that countless pressures, from hyper-fast automated trading to the frenzied tone of cable-news coverage, were steering managers toward destructively shortsighted behavior. “We decided that we needed to be a countervailing voice, to say that as your largest shareholder, we’re going to raise expectations about how you behave.”

Perhaps investor demands for sustainable profits will encourage a market shift towards more socially responsible practices all-around?


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*Here's a link to one of my favorite businesses that overtly emphasizes the triple bottom line in its operations.


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"Free" Enterprise

The University of Louisville recently announced it had received millions of dollars of contributions from Papa John's head John Schnatter and the Koch Brothers to fund a "free enterprise center" in the Business School on campus. Apparently, the contract gives the donors somewhat unusual leverage over the personnel hired by their funds and the content of new academic programming.

English Professor Martin Kich of Wright State discussed the gift and voiced a major criticism that is often associated with the terms. First, however, he quotes a University official:

“’The [UofL Economics] department is in the process of hiring a new full-time faculty member but is struggling to get enough funding, faculty and class offerings to keep pace with student demand,’ said university spokesman Mark Hebert. 

“Hebert said the department focuses on applied microeconomics, which includes statistics and econometrics instruction needed for health, industrial organization, labor and environmental studies. ‘The department would like to expand all of these areas if funding and faculty were to become available,’ he said.” 

What this spokesperson is actually saying is that the ideological slant of the department is up for auction. Since it is very clear that the Koch gifts are not going to fund “labor and environmental studies,” in the absence of competing gifts from progressive donors, one can only conclude the Koch views on labor and environmental issues will dominate, if not go completely unchallenged.

Personally, I find it interesting that the Koch brothers and Schnatter could end up funding free market critics of the practices that help make them rich. While the Koch brothers are famous for their libertarian and anti-government policy positions, they frequently use their corporate lobbying clout to win lucrative government contracts -- mostly involving the Department of Defense. Roughly 80% of their DoD contracts do not involve competitive bids. Their timber and cattle ranching interests take advantage of cheap government leasing rights that are famously priced well below market rates. Their oil and related energy businesses seek to benefit from government seizure of private land under eminent domain. Though the Koch brothers have apparently argued against them in DC, their corporations have apparently accepted $1 billion for ethanol subsidies.

Schnatter too fairly directly benefits from government subsidies. After all, Papa John's Pizza is a food business and agricultural subsidies of pork, grain and dairy products help him keep costs artificially low. That means he personally profits from tremendous government spending that has very little to do with the free market.

One of my earliest blog posts from December 2003 quoted a letter from over 100 economists arguing that "government subsidies of irrigation, logging, livestock grazing and mining prop up activities that could not survive in efficient market conditions." The result is often subsidized environmental destruction. Government leasing needs to be priced at market rates, preferably involving full environmental costs.

Ann Hagedorn in the Winter 2015 issue of The American Prospect emphasized the economic costs of government outsourcing of security functions to private business:

Blackwater went into the annals of government contracting as one of the great disgraces of privatization. A staff report prepared for the Oversight Committee found that Blackwater billed the government $1,222 per day per guard, “equivalent to $445,000 per year; over six times more than the cost of an equivalent U.S. soldier.” Reeling from scandals, Blackwater later reorganized and changed its name to Xe, and then again to Academi, which is now part of a holding company called Constellis.

Hagedon's article appears as part of a special report, "What the Free Market Can't Do." See this and this, for example.

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The Costs of Privatization

For all those people who believe the private sector is always superior to government, keep this information in mind (from the Project on Government Oversight):

POGO’s review of DoD [Department of Defense] service contracting budget and spending data found that contractor employees cost 2.94 times more than an average DoD civilian employee performing the same job. In fact, although the number of employees in both workforces is relatively balanced, spending on the workforces is not: DoD service contracts cost $253.8 billion and DoD’s civilian workforce cost $72 billion (base) or $108 (base plus overhead) in FY 2010.

Just in this area alone, privatization of the military creates about $150 billion in annual additional spending -- or corporate payoffs, if that's how you want to think of it. And this is merely the civilian force.

Some reports suggest another $30 to $60 billion annually "lost to waste and fraud by military contractors." And then there's the issue of soldier versus private contractor pay -- for doing the same job:

Incredibly, while base pay for an American soldier hovers somewhere around $19,000 per year, contractors are reportedly pulling in between $150,000 - $250,000 per year.

This is all somewhat disheartening in the context of ongoing budget debates in the  U.S.


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Could Google Rig an Election?

Research psychologist Robert Epstein, a former editor of Psychology Today, has coauthored a study with Dr. Ronald E.  Robertson of the American Institute for Behavioral Research and Technology, on this question called “Democracy at Risk.” It is slated for presentation at this year’s meeting of the Association for Psychological Science:

In a double-blind, controlled experiment, web pages and search engine results from an actual election were presented to three groups of eligible voters. In two of the groups, rankings favored one candidate or the other. Preferences shifted dramatically toward favored candidates, with 75% of subjects showing no awareness of the manipulation. In a second experiment, voter preferences again shifted in the predicted direction, and the proportion of people who were unaware of the manipulation was increased by slightly altering the rankings to mask the favoritism. In a third experiment, a more aggressive mask was used to hide the manipulation, and no subjects appeared to be aware of it, even though voter preferences still shifted in the predicted directions. We conclude (1) that the outcomes of real elections—especially tight races—could conceivably be determined by the strategic manipulation of search engine rankings and (2) that the manipulation could be accomplished without people being aware of it.

Based on his reading of the work, Evan Leatherwood (Associate Director for Communications at Fordham University’s Schwartz Center for Media, Public Policy, & Education) concluded in the May 6, 2013 edition of The Nation: "insiders at a dominant search engine (at the moment, Google) could, if they chose, covertly pick members of Congress and even the president. What’s more, says Epstein, it is perfectly legal for a search engine to behave this way."

Michael Fischer, a professor of computer science at Yale, agrees that there is cause for concern. “To the extent that somebody wants to build a politically biased search engine, they are certainly capable of doing that,” Fischer says. “We don’t have any way of knowing what biases, if any, the search engines we currently use have, and this is a concern not just for elections, but for all areas of our democracy.”

Much of the rest of the article discusses the First Amendment implications of regulating search engines. Leatherwood favors a public and transparent search engine that does not take advertising dollars.


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Out of Print

As I noted about a year ago, advertisers have spent the past decade or so abandoning print media in favor of the internet. The data from 2012 suggest the trend is worsening -- mostly to the benefit of Google:

A new study from Statista has revealed that Google (GOOG) is making more advertising revenue than the entire U.S. print media combined. The Internet giant has raked in slightly more than $20 billion in ad revenue in the first six months of 2012, while the U.S. print media industry has generated just less than $20 billion as a whole.

“Google, a company founded just 14 years ago, makes more money from advertising than an industry that has been around for more than a hundred years,” Statista notes.

Here's what the trend looks like in a graph:

Back in 2000, I believe my household subscribed to at least 10 different magazines. However, No Depression folded nearly five years ago. The American Prospect was a biweekly, became a monthly (published 10 times per year), and is now a (thick) bimonthly. Most other magazines we receive have dropped the total number of issues published per year or reduced their content. Utne Reader jacked up subscription prices to a level that made each bimonthly issue cost about $6. We dropped it.


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I read it in a magazine...

The internet has helped foster many changes in modern life, but not all of them are desirable.

In a December 2011 review of The Fall of the House of Forbes: The Inside Story of the Collapse of a Media Empire by Stewart Pinkerton, Jamie Malanowski identifies some harsh numbers for the publishing industry:

Facing dramatically declining advertising revenue (in the year 2000, Forbes had more than 6,000 pages of advertising—this was during the high-on-your-own-supply years of the dot.com bubble)—and was charging about $75,000 per page; in 2010, it had 1,640 pages of advertising, and was charging between $23,000 and $25,000 per page. The numbers from magazine to magazine no doubt differ, but throughout the industry the basic story is surely the same. Revenue declined, and the Internet, with all its power to deliver information quickly and cheaply, and all its nifty gadgets, pushed magazines into yesterday.

By my calculations, Malanowski is identifying a revenue drop from $450 million in 2000 to $41 million in 2010 -- and those figures assume the highest charges were always collected in the more recent year.

So Forbes, at least, lost over 90% of its advertising revenues during the decade, before accounting for inflation.

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Automakers and climate change

American automobile manufacturers are typically not viewed as "green" businesses. The manufacture of their central product requires tremendous expenditure of natural resources. The ordinary operation of autos likewise necessitates substantial consumption of petroleum -- and production of pollution.

Nonetheless, Ford and Chrysler last week joined General Motors in the U.S. Climate Action Partnership, which has called for the federal government to enact legislation that includes mandatory reductions of greenhouse gas emissions. The group represents real economic clout:

The expansion of the coalition will bring the total revenues of USCAP companies to over $1.9 trillion, with a total workforce of more than 2.3 million and operations in all 50 states and around the world. The members have a combined market capitalization of more than $1.9 trillion.

Other members include Alcoa, ConocoPhillips, Dow Chemical, Johnson & Johnson, PepsiCo and Shell.

USCAP's "A Call for Action" centered primarily on adoption of a mandatory market-based "cap and trade" system, which has the support of some Senate Republicans -- and Joe Lieberman.


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Missing word of the day

Stephen Colbert is on vacation this week, so his viewers are missing the "word of the day." I'm missing two.

Let me explain.

Have you seen this short video? Here's a shorter version for comparison.

Watch those and compare them to the official transcript from last November 8:

And in terms of the election, no question Iraq had something to do with it. And it's tough in a time of war when people see carnage on their television screens.

Hmmm. There seems to be a word missing.

Check this out too -- it might explain the missing word.


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