Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: New York State’s retirement fund to divest from fossil-fuel companies (and other miscreants), Bitcoin as strategy, bubble fun with SPACs and food, not seeing the wood for the trees, and wealth taxes.
Divesting other people’s money
A key characteristic of today’s corporatism — stakeholder capitalism, “socially responsible” investing (SRI), and all the rest of it — is a somewhat high-handed attitude toward other people’s money, whether it’s shareholders, taxpayers, savers, or pensioners.
It seems that New York State’s pension fund (“the Common Retirement Fund”) is going to take a similar approach:
The New York Times has the details:
New York State’s pension fund, one of the world’s largest and most influential investors, will drop many of its fossil fuel stocks in the next five years and sell its shares in other companies that contribute to global warming by 2040, the state comptroller said on Wednesday.
With $226 billion in assets, New York’s fund holds sway over other retirement funds and its decision to divest from fossil fuels could accelerate a broader shift in global markets away from oil and gas companies, energy experts and climate activists said.
The announcement comes months after the fund moved to sell its stock in 22 coal companies. New York City, San Francisco, Washington and several smaller cities have also committed to fossil fuel divestment plans, but New York State’s commitment to such a sweeping step is more significant, especially given the state’s centrality to the global financial markets.
The state comptroller, Thomas P. DiNapoli, had long resisted a sell-off, saying that his primary concern was to safeguard the taxpayer-guaranteed retirement savings of 1.1 million state and municipal workers who rely on the pension fund.
But on Wednesday, Mr. DiNapoli signaled that the main goal was to set up the fund for long-term economic success in a world moving away from fossil fuels. “New York State’s pension fund is at the leading edge of investors addressing climate risk, because investing for the low-carbon future is essential to protect the fund’s long-term value,” he said in a statement.
DiNapoli had been right to resist, and it’s a shame that he changed his mind (even if this decision “only” affects, as I assume, the fund’s actively managed portfolios). His earlier understanding was correct. His job is to safeguard those taxpayer-guaranteed retirement savings. And that (basically) is it. That means the fund’s criteria for investment ought to be focused on generating as high a return as possible for its beneficiaries so far as it’s compatible with the law, basic prudential standards and, of course, funding needs.
That appears to have changed:
[DiNapoli] said the fund could drop stocks that do not meet its new standards requiring them to show “future ability to provide investment returns in light of the global consensus on climate change….
New York’s fund, the New York State Common Retirement Fund, has historically invested about $12 billion in fossil fuels. Now it is committing to sell its investments in any oil, gas, oil-services and pipeline companies that do not have clear plans to abandon the fossil fuel business. Few companies have disclosed such plans.
Looked at that way, unless DiNapoli believes that the fossil-fuel sector is going to be put out of business all over the planet (spoiler: it’s not, for a very long while) there is good reason to think that there were will be times in which the shares in such companies will be priced sufficiently cheaply to represent an attractive buy, something that will be all the more likely if their prices have been knocked down by the unwillingness of politically motivated investors to hold them.
There’s also an idea from Warren Buffett’s 1989 letter to Berkshire Hathaway shareholders worth recalling:
If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.
That said, I still think we’re quite some while from fossil-fuel companies being at the cigar butt stage.
Equally there will be times when “investing for the low-carbon future” will generate a good financial return. And there will be times when it does not.
Put another way, DiNapoli’s decision is too broadly drawn to be defensible on investment grounds. That only leaves a political explanation. That’s even more the case when it comes to his commitment that the fund should “sell its shares in other companies that contribute to global warming by 2040,” a commitment that could, if the logic of the climate warriors is to be followed to where it currently leads, end up eliminating a large percentage of almost any conceivable stock index in the years to come.
And if his rationale is political rather than economic, that raises the question whether funds of this nature should be drafted into a political cause. The answer ought to be no, but we live in an era when SRI and stakeholder capitalism have made a mockery of traditional notions of what fiduciary duty should be. And so drafted such funds will be.
Worse still, DiNapoli does not seem content with merely putting his own house in (as he sees it) order. He’s going to use the power that those billions give his fund to “influence” the behavior of other companies (my emphasis added):
The fund is also pledging to push other companies it invests in to reduce the amount of planet-warming greenhouse gases that they and their suppliers emit. The fund will sell its stakes in the firms if they have not eliminated such emissions by 2040, according to the announcement. The plan could free up billions of dollars for potential investment in renewable energy and carbon-neutral industries, analysts said.
When a fund is investing in a fiduciary capacity it is meant to encourage its portfolio companies to generate improved return. It is difficult to believe that that is the aim here. Reading the Times’s report, it was also hard not to wonder whether one effect of “freeing up” billions of dollars to invest “in renewable energy and carbon-neutral industries” might be to increase the price of investing in such industries, while at the same time depressing the price of the shares of those companies being divested. Yes, yes, the fund might be encouraging some welcome new technology, but its climate-change policy could easily lead it to buying high and selling low. That’s exactly the opposite of the way that funds are meant to be managed. Oh well.
There is some comfort, I suppose, to found in the fact that the state’s fund has been relatively well run. According to a 2018 Pew survey, New York was one of only seven states that had managed to reach the level of 90 percent funding, making it, I suppose, one of the healthier horses in the glue factory. That is something that cannot be said of New York City’s pension funds, which is ahead of the state when it comes to moving ahead with its fossil fuel divestment plans, but considerably behind when it comes to its ability to meet its pension and other post-employment obligations.
But the relatively decent position of the state fund is only some comfort. Leaving aside the fiduciary issue of whether asset managers should be playing politics with other people’s money, there is also the, well, political question. In a democracy, the question of what to do about climate change and for that matter the decision to anathematize entire sectors of the economy ought to be matters for voters not moneymen.
Around the Web
Almost Daily Grant’s:
Doubling down on digital ducats. Business intelligence software provider MicroStrategy, Inc. (MSTR on the Nasdaq) announced yesterday that it will issue $400 million worth of convertible senior notes with an eye-catching use of proceeds: Open market bitcoin purchases.
“Our investment in bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders,” CEO Michael Saylor explained in the press release. The company announced in August that it bought $250 million worth of the world’s most prominent cryptocurrency, then snapped up an additional $175 million worth of BTC a month later.
MSTR shareholders have certainly enjoyed the company’s strategy pivot, as the stock has enjoyed a gangbusters 150% rally since August, leaving the stock at 20-year highs and conjuring memories of even crazier price action during the Y2K era: From mid-May 1999 to mid-March 2000, MSTR shares rose a cool 3,000%, before collapsing 95% over the next two months to erase nearly all those gains . . .
Duly availing themselves of Mr. Market’s current generosity, the MicroStrategy C-suite has hit the bid en masse. Since the end of October, corporate insiders have sold 220,000 shares on the open market, generating some $55 million in (fiat currency) proceeds.
When bubbles merge.
SPACs (Special Purchase Acquisition Companies, or “blank check” companies) have, in various forms, been a symbol of stock market bubbles since the South Sea Bubble, and here they are, back on the scene again. Throw in a green bubble and the journey to electric vehicle SPACs is a short one, but it doesn’t stop there.
The Financial Times:
A blank-cheque company founded by telecoms billionaire Xavier Niel and two other prominent French businessmen jumped on its first day of trading after raising €300m in the largest public offering on the Paris market this year.
2MX Organic aims to acquire companies involved in the fast-growing sectors of organic food and sustainable consumer goods.
The successful listing shows that the booming investor appetite for [SPACs] is no longer limited to the US, and that European entrepreneurs are getting into the game.
The trio behind 2MX Organic also includes Centerview investment banker Matthieu Pigasse and retail entrepreneur Moez-Alexandre Zouari, who has built his fortune as the franchise partner of supermarket chain Casino.
They told the Financial Times that their goal was to “build a European champion in organic food” and aimed to do their first acquisition next year. Like other Spacs, they raised cash from investors on the basis that managers will buy a company or return the money after a certain date if they are unable to complete a purchase within two years.
Shares in 2MX Organic rose about 30 per cent at opening before trimming back gains to trade 6 per cent higher by midday in Paris on Wednesday.
At first glance, big corporations appear to be protecting great swaths of U.S. forests in the fight against climate change.
JPMorgan Chase & Co. has paid almost $1 million to preserve forestland in eastern Pennsylvania.
Forty miles away, Walt Disney Co. has spent hundreds of thousands to keep the city of Bethlehem, Pa., from aggressively harvesting a forest that surrounds its reservoirs.
Across the state line in New York, investment giant BlackRock Inc. has paid thousands to the city of Albany to refrain from cutting trees around its reservoirs.
JPMorgan, Disney, and BlackRock tout these projects as an important mechanism for slashing their own large carbon footprints. By funding the preservation of carbon-absorbing forests, the companies say, they’re offsetting the carbon-producing impact of their global operations. But in all of those cases, the land was never threatened; the trees were already part of well-preserved forests . . .
It would take a heart of stone not to laugh.
Wealth taxes remain a bad idea that won’t go away:
The Daily Telegraph (my emphasis added):
Wealth taxes don’t work. France should have put that question to bed in 2018, when Emmanuel Macron was forced to repeal one particularly destructive annual levy on wealth after it resulted in tens of thousands of people fleeing the country. But in the great debate over how to pay the costs of lockdown, it seems we are gearing up to repeat the same mistakes all over again.
Argentina – a country well versed in financial crises – has introduced a one-off levy on those with assets worth more than £1.8 million to help fix a fiscal hole left by Covid. Legislation put forward in California for a new tax on net worth failed to pass this year, but voters in San Francisco have brought in a local levy targeting Silicon Valley CEOs. In the UK, the idea of a one-off or annual percentage tax on the value of an individual’s assets is gaining currency on the Left, even Labour “moderates”, who are keen on proposals that undermine private property and expand the state. But more worrying is the number of establishment economists warming to the idea when they should know better…
Taxing wealth is a fundamental break in the social contract between taxpayers and government: people pay their taxes to help fund services on the understanding that their income and property ultimately belong to them, not the state. A wealth tax turns that on its head: it all belongs to the state, which can call it in whenever it sees fit. It has dangerous implications, not just for our economy, but for what it means to be an individual in a free society.
To sign up for the Capital Note, follow this link.