Blain’s Morning Porridge – May 21 2020: ESG – Now it Matters!

Blain’s Morning Porridge – May 21th 2020: ESG – Now It Matters!

“Even the bad guys get to be heroes once in a while…”

New Morning Porridge Lite-Bite Video: The European Recovery Fund..

If I could understand why anodyne Fed minutes prompted global stock rallies… then I would happily explain why… but I can’t, so I won’t. What did interest me was news that Volvo’s recently reopened US car plant closed again yesterday – they can’t get parts they need to keep producing. What does that hint about global supply chain problems?

ESG – A concept that has some merit? 

Every week I try and write at least one “thoughtful” Porridge focused on how markets are evolving. I also try to touch on alternatives – since they pay me! Real assets and private markets where prices are negotiated on a bilateral basis, rather than being set by Central Banks desperately trying to avoid an absolute market meltdown – are much more interesting than crazy indices.

This morning I’d like to thoroughly bore you about ESG – Environment, Social and Governance Investment – and why, this time it’s no longer just a trendy investment fashion, but actually matters.

Regular readers will know I’ve been brutally sceptical about ESG in the past.  It’s been far too easy for fund managers of the middling sort to use ESG as an ill-considered blanket excuse not to invest.  It’s also unbalanced – too many folk focus only on the E issue: if its green it must be good and its dug out the ground it must be bad. And that’s a bad thing… the over-emphasis on E skews the effectiveness of the whole ESG debate.

I would argue effective corporate governance and a strong social conscious are even more important than being “green” – especially at this stage in a global recovery. If you want to stall recovery – then an easy way to do so would be to stymie any investment with even a hint of “Not-Green” about it..

We have to ensure all aspects of ESG are considered holistically. That’s not going to be easy: while Coronavirus stopped the business world, it feels like the globe has been busy cleaning itself.  The air feels better.  The skies are clearer.  Even the birds and bees sound happier – but that might be all the new planting we did in March.

Perhaps there is something in this environmental green mumbo jumbo after all?

I was out for our daily yomp with She-who-is-now-Mrs-Blain last night, and she remarked just how much greener the world feels, before coming up a startling new theory: “Maybe Greta Thunberg cooked up the virus?” I am sure it will be headline fact in some American rag by the end of the day.

A quick digression: If E becomes a blanket ban on anything Greta and her ilk perceive as bad, like mining, then we are going to end up even more stuffed than the virus did to us. 

Your clothes and food might come from agricultural sources, but I would reckon most of the stuff you use today will have been “dug out the ground”. If you jump on your bike, are sitting at a PC or thinking about cooking breakfast – then you will be using goods made out of minerals that were most certainly mined. If you actually want to cook those delicious eggs and bacon this morning, then switch on the hob. Here in the UK, its unlikely there will have been any coal involved in making the electricity – but it will probably have involved gas and renewable power sources. 

My point today is that ESG has to become pragmatic and balanced. You can’t build wind and solar farms without steel, and you can’t make steel without Metallurgical coal. We won’t be able to use out wonderful electric cars, unless we burn gas to make electricity. Get over it Greta.

But, its equally critical ESG also reflects Social and Governance aspects. These are the areas where investment practices have utterly failed in recent years.

Let me illustrate: how many fund managers reading this work for firms that were invested in Boeing?

You were happy enough to invest in Boeing because the price of the stock soared ever higher. But did you stop to consider why? With hindsight, we can now see Boeing failed on every aspect of ESG – and I didn’t hear anyone complaining at the time.

While Boeing’s stock price rose, no one asked the right governance questions about the wisdom of the firm allocating profits to short-term stock buy-backs that justified higher (obscene) executive bonuses. No one questioned its lack of green vision: why that money was not being invested in developing a new fuel efficient short-haul regional jet built from lightweight composites to replace the B-737. And who spoke up as the plane maker paid $9 an hour for programming, lied in its training manuals about new flight systems, and tried to blame pilots after 346 people were killed?

Boeing is a 100% ESG Fail. Yet, two weeks ago, Boeing was able to raise $25 bln from the corporate bond market – despite all the more hazard that goes with that. Who is going to hold Boeing to account?

Readers might thing I am on something of a crusade against Boeing. I am not. They just happen to easiest to explain example of what went wrong with Corporate Business and why ESG – till now – has been little more than a fad. Thousands of other listed companies failed as badly.

I have nothing against Tesla cars – I am quite tempted to buy one. But, Elon Musk utterly fails every S&G test I can come up with. That’s been great news for him – collecting a $750 bln stock option bonus, and dragging happy stockholders in his wake.. but in my mind he’s a bad person creating a bad (and massively overvalued) company in my rough and ready ESG playbook.

In contrast, I would score the oil majors highly on ESG. They are spending on green solutions, seeing their long-term future survival as viable and profitable companies depends on securing their niche at the forefront of clean energy provision. That ticks the boxes better..

In the future, if funds want to demonstrate their ESG credentials – and brag about their ethical investment strategies – I’ll look forward to more fund questions about how much CEOs are paid compared to the office cleaner, about green product development goals and future strategies to mitigate social equality and welfare, and how closely their board balances society and the business.

And – the next time someone tells me they can’t invest in a mining project – and I have two on the go: gas and met coal – because it’s too difficult because of ESG.. then I shall … be very unimpressed.

That said, the E in ESG is critically important. Over the last few months every waking moment feels like it has been consumed by the Coronavirus – but I get the sense we’re moving on. Over the past few weeks, clients have started talking about renewables and the environment again.

Perhaps it’s been the collapse in oil prices, or perhaps it’s the sense the times they are changing, but renewables are definitely back in fashion. But, I’m also hearing pragmatism from the E-side – a realisation that we’re still going to be using fossil fuels in 50 years, but it’s likely to be gas rather than coal or diesel.

One thing we might have learnt from the Coronavirus is a sense of the real – that nothing works quite like you hope it might. That’s likely to spur investment into a broader range of investments. For instance, renewables it’s not just Solar and Wind. These are great, but they are not entirely reliable or predictable. A blocking high over mid-winter means dark skies and zero wind – meaning we have to burn coal again!

In contrast Tidal power is 100% reliable – but today it costs about 10 times as much to produce as less reliable renewables. If we were to spend modest sums of money on developing tidal power – experimenting with more efficient and easily maintained systems – then that cost will quickly fall to 5 times the cost of wind. At 3 times more costly – as production scale costs kick in – tide actually becomes more efficient than other renewables – because it is utterly reliable.

The tide comes in and out every 6 hours 40 minutes.  The UK is blessed with some of the best tides on the planet sweeping round out coasts – powering the UK 24/7! If the precision aerospace engineers of Rolls Royce and their suppliers need new markets, then might I direct them in this area?

If you want a great site to learn more about the costs and opportunities across renewable energy – then you can’t do better than Thunder Said Energy and the brilliant Rob West. Please go check them out, and tell them Bill sent you! I don’t get anything for it – but its genuinely great research.

Five Things to Read this Morning

Bberg – UK Property Could Slump 12% on Pandemic Impact, Aviva Warns

Bberg – World’s Best Restaurant Noma Reopens as a Cheeseburger Joint(when to flights to Denmark start??)

FT – Biggest US Shopping Complex shows threat to mortgage backed bonds

WSJ – Nearly Half of Adults Live in US Households That Lost Income Since Lockdowns Started

Grauniad – Bank of England paves way for negative interest rates

(There might not be a porridge tomorrow – possible conference call might get in way..)

Finally, if you are looking for a good read on the not-the-train-home tonight, try The Property Chronical Summer Special!

Out of time, and back to the day job..

Bill Blain

Shard Capital