The Green New Deal

Momentum has been gaining over the past several years over Environmental, Social and Governance (ESG) investing considerations.  Initially reserved for ‘sin’ stocks (tobacco, alcohol and gambling), this movement has evolved to encompass a wide array of ethically questionable, albeit legal, activities including guns and ammunition, farming practices and corporate benefits to name a few.  Notably with the release of the release of the United Nations’ Global Warming of 1.5°C report on October 8, 2018, a renewed emphasis has been heard from some parts of the community, particularly as related to environmental issues.

I first touched on the issue of moral investing last June in concert with the border issues and Paul Tudor Jones’ initiation of the JUST ETF.  Other than a cursory acknowledgement, only one purchase (and no divestments) were performed with ESG in mind. The sole activity being the purchase of Amalgamated Bank (AMAL).  Further deconstruction questioned whether the JUST approach was only a ‘Greenwash’.

Over on the other side of the pond, there has been more angst and soul-searching, my guess as to the cause – a greater formalization of constructive movement towards some of the goals, such as Germany’s coal phase out.  To this end, one of the better posts explaining investing issues and alternatives surrounding ESG is Mindy’s as she performs her due diligence. With the dizzying array of options available, especially when ala carte choices are included, no wonder her “… brain tends to fog over when thinking about investments.

Then again, there’s always the well-reasoned do-nothing approach proposed by Ditch the Cave.  His reasoning follows a similar vein to that of Pitchfork Economics in that the basis of ownership is an event providing no direct benefit to the corporation.  While this is true, I would further add that any ownership stake that most of us could amass would be so minuscule as to be less than a rounding error on the corporate books.

Another school of thought – and more the focus of this piece – comes from DIY Investor (UK) who is currently repositioning his portfolio, in theory, to one less damaging to the climate.  At the very least, it provides comfort that his efforts are doing a small part in contributing to the betterment of society. I have minimal or no debate with his conclusions as we’re dealing with probabilities rather than certainties.  My quibble is with a portion of his analysis – primarily due to the emotional level of the debate on these issues. In my opinion, to present a case inclusive of incorrect – or incomplete – data provides an opportunity for detractors to seize upon and raise questions concerning the legitimacy of the remaining thesis.

Perhaps I was mistaken for a ‘detractor’ when we engaged last week as my comment of:

I applaud your research and investing convictions.  However some conclusions you arrive at may be somewhat flawed.

1) The ‘Green New Deal’ has climate change as only one element. It is too broad an endeavor to gain much traction. A better play would’ve been to select one or two of the contained issues to focus on.

2) The PG&E bankruptcy filing had ‘probable’ equipment malfunction as a cause of the deadly forest fire. Climate change was not listed as a factor, although I would suspect it was a contributor. The article referenced was an editorial (opinion) – not necessarily a factual piece.

3) To take asset managers to task is misguided, I believe. Their growth is largely due to the rise in passive investing (ETFs). Although they are listed as ‘registered owners’ it is on behalf of ‘beneficial owners’, i.e., the vast majority of individual investors with ETFs in their portfolio

The response provided was:

Thanks for your observations Charlie. I may be misguided but I would err on the side of caution with fossil fuel investments. You may have read about the decision by the worlds largest sovereign wealth fund to divest out of 134 of its oil exploration holdings.  The writing is clearly on the wall for everyone to see (or ignore).

So let’s break apart my objections.

  1. The Green New Deal can best be described as aspirational at best and is highly unlikely to be passed in any manner close to its’ current form. The essence of the resolution is to re-engage in the Paris Accord, ensure existing laws (particularly Labor and EPA) are strengthened or adhered to, strengthen laws pertaining to collective bargaining and improve the economy with a focus on infrastructure.  The one piece with any short term chance of passing is infrastructure as it melds with Trump’s economic priorities. Regardless, it remains too lacking in focus to be a viable basis for investment decisions.
  2. The PG&E filing was based on California law that holds a company liable for claims even when fault is not proven (one of the reasons I rarely invest in California).  It appears the direct cause was ‘equipment malfunction’ predicating the filing. His claim that the filing was due to global warming may be partially true but is based on an op-ed (opinion) piece in the LA Times.
  3. His quest against asset managers is akin to tilting at windmills for two reasons.  The majority of ETFs are rules based and merely a reflection of the base rule or index.  If the index is MSCI managed the determination would need to be made by MSCI – not the asset manager.  If the index was based on the S&P 500, the questionable company would need to be removed from the S&P before it would be reflected in the underlying index.  A more jermain reason is that asset managers based in the US (like Blackrock, Vanguard, Fidelity, et.al.) are required to adhere to a higher, government mandated, standard as related to shareholder engagement activities (activism).  To do otherwise would jeopardize their business model.

If engagement were to be considered, who would be the target?  Would it be a broad-brush approach or be laser focused? I mentioned MSCI earlier.  Would they get a pass as they create and manage indexes addressing both investing styles?  Or would their inclusion of questionable companies in some indexes place a target squarely on their backs?  I alluded to this type of inequity in my final sentence to DIY, “The quandary I encounter in my research are undefined secondary impacts. One example being solar. A by-product of manufacturing is silicon tetra-chloride. Therefore, is solar really green?”  The answer is a resounding yes, but, maybe ….

To make the implication that I’m a non-believer reinforces my contention that DIY Investor (UK) has a tendency to mold a conclusion based on opinions rather than facts.  The reality is that I have been looking at this type of strategy since at least 2015. One doesn’t have to look any further than the comment stream of one of Roadmap2Retire’s oldies but goodies on the renewable topic.  Today, the investing landscape in this space remains as muddled as ever and additional elements, perhaps brought into the spotlight by the Green New Deal, are being included. My concern is that this broadness will be result in its failure.  Call me a pragmatist, but current iterations include everything but the kitchen sink. You may also call me overly cautious, but not a naysayer.

The one investment on my watchlist that appears to meet much of the criteria is Brookfield Renewable Partners (BEP) with my core issues being valuation, debt and the K-1.  Therefore, on my watchlist it remains.

The one certainty continues to be each and every investor has their own core sets of values and beliefs – meaning that arriving at a consensus approach is unlikely at this time. I do have to applaud the energy and research being applied by newer investors coupled with their desire to invest in a manner matching their ideals.  For that is what will ultimately result in the world being a better place.

With that, I’ll get down off my soapbox and let you all have your turn 🙂

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My 3Rs – Revitalize

In the first two posts of this series, I highlighted my thought process in basically the recent past and present.  Today will attempt to bring the investment landscape of the future into focus.  I will be the first to admit that I have a jaded view of the present – i.e., not being aligned with the economic views espoused by the current administration.  The upcoming midterms have the ability to shuffle the deck even further.  The assumption set I used (which easily could be argued with) is:

  • The current administration will continue to be embattled by prior missteps – primarily in vetting – (resulting continuing indictments and guilty pleas)
  • This could be further hampered by loss of one – or both – chambers of Congress
  • I (currently) anticipate no major activity regarding impeachment, 25th amendment or resignation

Basically a recipe for gridlock – which will put the brakes on some of Trump’s more polarizing policies.  Without a Democratic landslide, I don’t see a major rollback but also don’t see further continuation on a partisan path.  Therefore my view is a continuation of trade tensions (notably Canada and China), rising deficits and interest rates resulting in a slowdown in the US economy.  While the economy is currently growing, the metrics I am watching are debt levels (student loan and state government), the inability of rising wages to keep pace with inflation and savings rate.  Though the concerns are endless, a greater domestic focus tends to mitigate much of the risk but bring me to one conclusion: Regular Americans’ disposable income may be in shorter supply next year.

With this theory outlined, it’s time to fit the remaining pieces into my puzzle of a portfolio which allows for roughly 1/3rd allocation to conservative speculation.  Frankly, my outlook is a bet that the US economy has been front-loaded into the midterm elections.  The downside if incorrect is that I’ve added some slower growth positions.  If correct I’ve generated a little alpha.

Tariff Myself

In the spirit of the times, I completed the move of my Johnson & Johnson (JNJ) and Church & Dwight (CHD) positions to M1 Finance.  I plan to add Colgate (CL) as a new position in the near future.  With M1 being a no-fee broker, my intention is to add new funds whenever I purchase toothpaste, mouthwash or deodorant throughout 2019 with the aim for these companies to attain about 2%, 3% and 1% of the portfolio respectively.

Corporate Actions

I intend to ride the M&A wave in addition to selected spinoffs.  I rarely participate in IPOs but do make an exception from time to time.  I continue to add to my banks that have completed two-step conversions.  This month has seen activity in this area as follows:

  • added to GBNK and sold IBTX locking in a total gain of 46.4% (16.3% annual return).  Assuming their merger with GBNK completes I’ll be assigned more shares of IBTX than I previously had.
  • added to SHPG as they received another approval in their merger.
  • Initiated a post-IPO position (from the 30 day over-allotment period) in Amalgamated Bank (AMAL).  This due to their intention to initiate a dividend next quarter.

Averaging Down

Yes, there are times when I’m underwater on some investments, most of these being holdings of less than 1%.  It would be a fair assessment that something was amiss in my initial analysis as several of these are foreign caught in the cross hairs of the strong US dollar.  One reason I tend to scale in to investments is to take advantage of opportunities to average down when my  original premise remains intact.  These tend to be intermittent purchases.

There, in three parts, is my strategy going into 2019.  As my dividend goals for 2018 are close to being met, I am now starting the realignment process so I’ll be hitting the new year with a running start.

I’d love to hear your thoughts the processes you use!