Gaming the Market

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Kids’ screen time may be a hotly debated topic among parents and daytime talk show hosts in the US. But in China, the government has gotten involved, as it tends to do with most things, and is quite literally laying down the law in homes. Regulators have ordered online gaming companies to restrict play time for children to a maximum of three hours a week. The state-owned media dubbed online gaming "a spiritual opium,” which if you know anything about the history of China, is a pretty layered and harsh take.

This aggressive policy comes amid a broader government crackdown in the country on various industries, including e-commerce, gambling, fintech, and for-profit education. Perhaps foreseeing more rules, on Monday the owner of TikTok said the app would limit Chinese users younger than 14 to 40 minutes a day between 6 am and 10 pm These bans are affecting shareholders in Chinese companies around the world – the KraneShares CSI China Internet ETF is down 40% this year – and officials are reportedly trying to stem the flow by reassuring Wall Street executives.

It’s also looking like it won’t end there. The growing scrutiny of online gaming here at home in the US is prompting the creation of a new category of negative screening for socially responsible investors. Investors use negative screens to exclude industries they don’t approve of from their portfolios, like tobacco or fossil fuels. According to the head of screening research at MSCI, some have been asking for ways to avoid games with addictive qualities, gratuitous violence, and the “loot box” feature that has been compared to gambling. A screen to exclude video game companies that produce explicit content already exists.

Could investors turn on companies that don't consider their impact on the young consumers they target? So far we have not seen much action from investors on this but we will keep an eye on it.

Don’t put all your eggs in the same basket

Nearly half of investors (49%) between ages 18 to 34 who received coronavirus stimulus checks invested some of it, according to a recent survey. Their most popular choices were buying individual stocks (15%) and cryptocurrency (11%).

This isn’t surprising, and we promise we’re not clutching our pearls. We get it. Investing in a company or digital coin you believe is on the rise is exciting. Young investors can usually afford to be a little bold, and apps like Robinhood and Coinbase have made it easy for them to participate. We also know there is a lot of excitement from young investors in ESG and sustainability-focused investing, with 64% of young investors saying they make investment decisions based on societal problems that are important to them. But finding real, long-term success with stock picking or crypto trading is very, very hard, even for experienced investors. It’s so notoriously difficult that famed investor Warren Buffett placed a million-dollar bet that elite hedge funds couldn’t beat a basic S&P 500 index fund over a decade. And he won.

The bottom line? Don’t put all your hard-earned eggs in the same basket. All investors, including values-aligned investors, need to ensure their portfolios aren’t concentrated in just a few stocks but spread out in a variety of different assets.

Diversification is one of the core tenets of investing. The first step is identifying what your goals are and how much risk you can tolerate. Next comes asset allocation. You can talk to a financial advisor, review suggested allocation models like the ones from AAII, or use asset allocation calculators online to find out the ideal blend for your portfolio.

ETFs and mutual funds make it easier to diversify since they can hold a mix of stocks, sectors, or asset classes, but beware of overlapping. Target date funds also simplify this process since they are adjusted automatically to more carefully manage risk as your retirement nears.

As a sustainable investor, diversifying your portfolio may require a little extra effort since you run the risk of being overexposed to certain sectors, industries, or regions. To avoid too much exposure to one sector, investing in a number of issues you care about can help diversify your portfolio while making an impact. If you are looking for other companies and areas to consider, remember that 38% of the 8,550 companies in the MSCI All Country World Index are aligned with the 17 UN Sustainable Development Goals (SDGs).

Investing in China: Buyer beware

As can be seen above, investing in China can be complicated. It’s a country with a long history of keeping things behind the scenes—a problem for ESG investors who value transparency. Without transparency, corporate disclosures can be like a highly-curated social media feed: it’s easy to share only what you want people to see. Though the number of Chinese companies proactively reporting ESG data has increased, whatever is released tends to be more qualitative than quantitative. As a result, very few Chinese companies share enough data to pass an ESG screen.

The lack of data sharing is not necessarily a lack of interest in sustainability. The number of Chinese impact investors is steadily growing, particularly among younger heirs to family fortunes. But China’s homegrown companies must navigate a complex web of government regulations designed to keep only the highlights in the public view. A recent regulatory crackdown further restricted what companies can share, and the latest revelations from China could have shockwaves in markets around the world.

With challenges on so many fronts — human rights, carbon emissions, worker rights, and corruption, just to name a few — many ESG investors are naturally very wary of China-based companies and have few options that meet all of their values-aligned screens. A good reminder that no matter the circumstance or your excitement for an issue, demanding clear data at the outset is key for all ESG investing decisions.

Are green clouds in our future?

When soccer star Cristiano Ronaldo shares a new post on Instagram, it takes 24 megawatt-hours (MWh) of energy to enable all his followers to view it, double the electricity the average US home uses in a year. This estimate was made back in January 2020 when the Portuguese player, the app’s most popular user, had 188 million followers. He now has 343 million.

The sending, receiving, and storage of online data, used in everyday applications like email, social media, online shopping, and streaming, guzzles electricity. Technology’s “clouds” are on the ground and housed in enormous concrete buildings with computers stacked high in windowless rooms. These are data centers, and the electricity they use is mostly created through the burning of fossil fuels, which makes the internet “dirty” in a way most of us never realize. Data has a carbon footprint.

Globally data centers account for about 1% of electricity consumption per year at 200 terawatt-hours (TWh) and less than 1% of carbon emissions. If this doesn’t seem like much, remember it’s more than the electricity used annually than whole countries, like Thailand or Sweden. Consumption is also expected to keep growing as more people in the world come online and we get more data-hungry. Besides electricity, these buildings also need water for cooling and backup diesel generators, and they produce e-waste.

So what’s next? Do the powers that be force Ronaldo off social media? Not quite. Companies under pressure from customers, investors, and regulators to be more sustainable have been working to make data centers “green” by using and generating renewable energy, deploying more efficient hardware, and developing smarter cooling solutions (see: the hyperscale shift).

Last week CNBC called green data centers “the next big trend in ESG investing,” citing a report from investment bank Barclays that called them the modern equivalent of public utilities and listed a few ways investors can get involved. A real estate approach includes buying shares in major operators that have made progress in “greenification,” like Equinix and Digital Realty Trust. You can also zero in on makers of the right hardware. For example, Barclays says Nvidia makes chips for all but one of the top 10 most energy-efficient computers. Microsoft is called the “theme leader” with its long-term sustainability targets.

Before you go -

Can potty-training save the planet? Cow waste is a major greenhouse gas emitter, but scientists have successfully trained baby cows to use a “MooLoo” that keeps the bad stuff from getting into the atmosphere.