True Crime: Climate Edition

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You may have seen “COP26” in the news — and no, it’s not a new true-crime docuseries (although the bland title does keep things mysterious).

Since 1995, the annual United Nations “Conference of the Parties” brings countries together to make commitments to address climate change — most recently, the 2015 Paris Climate Accords, which came out of COP21. As COP26 kicks off in Glasgow on Halloween, two mysteries need to be solved: how quickly we can fully transition away from coal and other polluting energy sources, and who will be paying for that transition in less-wealthy countries.

This will be the first COP since the Paris Agreement was signed to require countries to actually change their plans based on the progress they claim to have made over the past few years. Announcements of real steps that go beyond the Paris Agreement will signal an even stronger commitment to the structural changes and innovation funding needed to limit the rise in temperatures to 1.5 degrees Celsius. Add in the increasingly dire climate change warnings from scientists, the one-year COVID chaos delay, and the growing tensions between the US and China (and the latter’s reluctance to phase out coal), and you can see why the conference is a “make or break” moment.

Solving the mystery of transition will come down to the regulations and targets proposed in the refreshed country plans, and how much they are likely to reshape carbon-emitting industries. In addition, real change will require new innovations and discoveries to ensure a path to a carbon-free future and a regulatory environment that enables these new innovations to flourish. The second mystery — who foots the bill, which experts project is about $100 billion beyond what has already been committed — is still TBD. Aid from other governments will cover some, but climate-focused investors will also have a chance to step in and close the case.

Microsoft joins the reuse, reduce, repair party

Whether it’s a cracked phone screen, a failing laptop battery, or a silent headphone speaker, we all know the signs of gadgets reaching the end of their lifespan. Next is usually an expensive visit to an authorized service provider or buying a replacement. Either way, we’re forced to go back to large manufacturers to solve the problem and open our wallets.

Big Tech’s monopoly on repairs has been at the heart of a consumer rights debate in recent years. Think about it: do you really own a product if you can’t open it up and fix it with genuine spare parts, a manual, and diagnostic information, or pick an independent, third-party service to do it? Not to mention all the potential inventors we’ll lose out on if we end the age-old tradition of tinkering.

The barriers to repairs have also created a serious environmental issue. Electronics discarded in 2019 weighed a combined 53.6 million metric tons (Mt), which is equal to 350 cruise ships the size of the Queen Mary 2. Global e-waste, which leaches toxic substances like mercury into the environment, is expected to reach 74.7 Mt by 2030 — and our recycling efforts aren’t keeping up. Replacing rather than repairing also drives up emissions from production, puts billions of dollars worth of precious metals (gold, copper, nickel, etc.) in landfills each year, and eliminates circular market opportunities where the devices are modified and then reused for other purposes.

These concerns have sparked the “right to repair” movement, which aims to increase access to and ease of repairs. It’s been gaining steam with President Biden in July calling for new regulations and mentioning American farmers who can’t repair their own equipment (yup, really). A bill is currently in Congress, and nonprofits and sustainable investors are pushing corporations to make big changes. So far they’ve largely resisted, citing consumer safety, copyright, the threat of hackers, and quality of repairs. Critics point out that the “right to repair” also threatens their business models.

But the movement saw a massive win just last week. Microsoft bowed to shareholder pressure and became the first major tech company to agree to make parts and repair documents available outside of its authorized service provider network. Some companies like Patagonia, Dell, Lenovo, and Fairphone have already made their repair manuals available online. iFixit, a community of DIY repair experts, provides repairability scores for different products, and the 2017 Greenpeace Guide to Greener Electronics is also worth a look.

Sharing the wealth — literally

What would happen if the Roy family put some of their shares into a trust controlled by the employees of Waystar RoyCo? This is a highly unlikely plotline for season 3 of Succession, but some real-life businesses see employee ownership as a response to the Big Quit.

In addition to much higher retention rates, employee-owned businesses have, on average, higher salaries, better performance, faster growth, and a decreased risk of going out of business. Proponents say it’s the natural result of a model where your employer’s success directly benefits you, rather than just the higher-ups. No wonder the more than 6,000 businesses owned in whole or in part by the people they employ— including familiar names like Publix, Costco, and King Arthur Flour — are mainstays on “best places to work” lists. Ownership can also help to close racial and gender wealth gaps.

The most direct form of employee ownership is a worker cooperative, where employees are the sole owners of the business. They share profits based on hours worked and govern the business themselves. Butter mogul Land O’Lakes, for instance, is owned by an agricultural cooperative of member-farmers, though most co-ops are on the scale of neighborhood grocery stores.

However, the most common form of employee ownership in the US is an Employee Stock Ownership Plan (ESOP). With an ESOP, a percentage of the company’s shares are placed in a trust and then gifted to employees as “stock options,” often based on how long they’ve been working at the business. Costco’s employees own a percentage of the company through an ESOP, giving them a seat at the table for decisions about everything from COVID safety precautions to potential product markets. The more than 200,000 current and former employees of Publix Supermarkets own 80% of the Florida-based chain through an ESOP, making it the largest employee-owned company in the US. And, Chobani employees are set to own about 10% of the company when it goes public later this year, thanks to a policy that CEO Hamdi Ulukaya instituted for all employees starting in 2016.

ESOPs have a lot of tax advantages, and some city and state governments are offering support to companies who want to make the transition — which can involve buying back shares from current investors to place in a trust. For family-owned businesses (with the likely exception of Waystar RoyCo), ESOPs can also be a big part of succession planning.

With great (financial) power, comes great ...

We’re back with a brand new edition of “That Doesn’t Mean What You Think It Means.” Last week we covered impact investing – what it is, what it isn’t, and how it’s different from other concepts like philanthropy and corporate social responsibility (CSR). This week we turn our attention to socially responsible investing or SRI, a popular umbrella term for techniques to invest with your conscience and “do no evil.”

The oldest method to practice SRI is avoiding companies and industries whose products, assets, or operations cause harm to society or the planet, even if it means giving up opportunities for financial gains. This is known as negative or exclusionary screening and some sectors commonly filtered out this way are tobacco, gambling, and fossil fuels. You can also perform positive or best-in-class screening by backing the companies that perform better than others in different areas that matter to you, like employee safety, pollution, or gender equality.

SRI uses ESG factors (environmental, social, and governance) for screening, but it’s not quite the same as ESG integration as it relies largely on screening out negative elements and can look different for different people depending on their preferences and values. Therefore it can be highly subjective. For instance, an investor may avoid a gaming company with excellent ESG scores because they see the gaming industry as detrimental to young people while other SRI investors would not screen out gaming industry stocks.

Impact investing, on the other hand, is a proactive approach that invests in companies or funds that explicitly pursue a social and financial return. One way to pick an impact investment out from others is to look for transparency, measurement, and intentionality.

Examples of some SRI funds include the SPDR SSGA Gender Diversity ETF (SHE), iShares MSCI ACWI Low Carbon Target ETF (CRBN), ClearBridge Large Cap Growth ESG ETF (LRGE), and Vanguard ESG US Stock ETF (ESGV).

As you can see, the various kinds of sustainable investing are closely linked and some overlap is possible, but there are differences reflecting the goals of the investors in question. We like to think of it as a continuum of tools investors can use to invest with the impact they would like to make. We hope that clarifying these definitions helps you find the right tool for you in the values-aligned investing toolbox.

Before you go -

Newly minted Nobel laureates who caught our eye this year as they had an impact on issues covered in FWIW: an economist who challenged conventional wisdom on minimum wage and the first climate scientists to be awarded the Physics prize.