Woke “capitalism” will destroy capital.

@robert2013

Good post. Couldn’t get to the WSJ article, but the rest are readable through 12ft ladder.

I agree with your premise that ESG approach to running companies will be their death. Go woke, go broke type thing. I have worked for and worked along many private organisations that put way more focus on keeping up with the “current thing”, rather than concentrating on their core business. We have seen evidence of this in multinationals, be it Gillette, Anheuser Bush, Nike or Disney. People do have a tendency to vote with their wallets, and some of the investment funds have pretty thick wallets, and, as stated in one of the articles, will invest even if the company is not publicly traded.

Woodside’s core business is extraction and sale of hydrocarbons. How are they possibly hope to be Net Zero by 2050 if their sole purpose is to extract stuff from underground or from under the sea and transport it to the point of sale/transportation/refinement. All of this requires energy, ad hydrocarbons, especially oil, are the most calorie-dense fuels, meaning they generate more power per unit of input. Two of the quoted solutions are:

The obvious answer is carbon capture and storage – putting the carbon generated in production back underground or under the ocean floor – but Burns says that is too expensive to do today, and the market still too small.

To make it more viable, Woodside can either find a cheaper way (which is hard) or try to create a bigger market, potentially buying back carbon from its LNG customers in Japan and Korea and importing it to its sites in northern Australia. It’s still early days.

So, the answer is “creating new markets that are not so expensive” to save the planet from a deadly gas that is present in earth’s atmosphere at around 400ppm (or 0.04%). Yes, the deadly gas that comprises 4 one-hundredth of one percent and is solely responsible for creating oxygen as a result of photosynthesis by plants. Guess, better invest in Brawndo.

I also liked the bit about Woodside’s proposed hydrogen plant in Oklahoma. Investment in Australia aside, this plant is

still subject to a final investment decision and could cost close to $1 billion. The plant could produce 60 tonnes a day – a fraction of Woodside’s gas operations – and the company already has the access to land, power and water to make it happen.

What it doesn’t have are customers; it has locked in buyers for less than half the output.

“Customers want it but at a diesel-equivalent price,” 

So investment in unproven expensive technologies that are yet to have customers is the way forward to increase company’s profitability? Along with denial of biology, thermodynamics, physics and other uncouth sciences. Sign me up!

Barron’s article also has a few zingers. It recommends oil companies to invest in short-term on-shore shale deposits rather than deepwater projects, because shale basins can produce oil more quickly. Anyone familiar with shale oil will immediately recall stories of boom-and-bust dependent on global price of oil. The global price of oil is, incidentally, controlled by OPEC. OPEC’s two largest oil producers are Saudis and Russia. Any production cuts by those two have an immediate effect on oil price (that benefits shale) but it reduces overall global output (supply), raising competition (demand) between consumers, thus finding equilibrium at a higher price. Economics 101.

As a result, Russia’s April oil and gas revenue to double, Reuters calculations show Who could’ve thunk it! And remember that cap of $60 per barrel? Yeah, nah. This makes the following statement from Barrons laughable

Oil companies, however, are dependent on market prices they can’t control. Only Saudi Aramco, as the leading producer in OPEC, has any power to influence the price of oil, though even that is debatable.

On subject of the oil companies should look to tobacco companies. I see one huge difference here: tobacco companies are producing a legal product that is consumed by choice. Similar to alcohol, McDonalds, Lay chips, etc. Phillip Morris did a good thing by diversifying to IQOS, as it distinguished them as “front-runners” of the shift away from combustible tobacco use, and towards heated tobacco use, which is being positioned as a safer alternative. However, PMI are still selling the same product, tobacco, with the same addictive substance, nicotine, that is consumed in a very similar manner, plus it requires something else for consumption – an IQOS device. Regular cigarettes required a cigarette, a match, and a set of lips. IQOS require a device, battery operated / charged, to consume an IQOS cigarette. One cannot smoke an IQOS cigarette, as it has a different composition and does not naturally burn, unlike old-school tobacco. The devices tend to break, as everything that has electronics built into it. The devices can be improved upon, to produce a cooler / customisable / better device. Design of IQOS cigarettes can be changed (which has happened at least once from what I know), which makes old IQOS cigarettes obsolete, as these cannot be consumed in new devices. This is Apple on steroids nicotine.

Oil companies, however, are in the business of producing hydrocarbons that are essential to sustaining life on this planet in the way we are accustomed to. Plastics, fuels, fertilisers, you name it. It is not a product to be weaned off, it is a vice or a habit. Tobacco companies need to separate themselves from the rest of the field, because they have been demonised so much. Purdue (opioids) or other pharmaceuticals, arguably, caused as much harm to the population as tobacco/alcohol, but that’s different. So, oil companies’ revenues, share price, etc. are stable and will continue to provide returns, unless a major accident, like BP in the Gulf of Mexico, happens.

Now onto my last point of this diatribe. It is opinion, not facts, just the way I see and understand this world. Call it a theory.

The definition of “investment” has been changing over the last 100 years or so. Similar to the definition of “vaccine” between 2020 and 2023 by the CDC, but I digress. Investment used to mean a thing (stock, land, house for rent) that would provide a return. P/E ratios of 7 and all that. US Government Bonds!

Then things changed. Slow and steady became out of fashion. Watch Wolf of Wall Street for an example, or Wal Street. So, investment became synonymous with capital gains. Roulette table mentality, pick that 10-bagger, pink sheets, options, futures, stuff that was reserved for professionals.

Then even capital gains weren’t good enough, because of front-running by the trade houses. Derivatives took over, low interest rates made that possible, along with full digitalisation of all banking commercial transactions. I just read somewhere that more than 60% of US dollars, cash issued, is sitting outside of the US. Digits are preferrable to stacks, because the amounts used are staggering, even if you are a mid-level dealer in vices.

Then digital coins and NFTs came along (these last ones seem to have died). Backed by full faith and credit in nothing, a thought of “fighting the system” and “sticking it to the man”. To eat, those digital assets still needed to be converted out of the digital wallets into cash, but that’s not important, because if you HODL Doge long enough for it to go to the moon, catapulted there by St. Elon, you would certainly make it in life. Maybe even get a cool car in your Metaverse (that, too, appears dead, at least for now).

And then, of course, there are those who invest in new furniture, new clothes or a dining experience. Definition of “investment” has changed drastically.

But if the leaps from buying a thing for returns, to buying a thing for capital gains, to buying an option or a future of a thing made some sense to the great unwashed, who constituted a vast majority of investors, the leap to a derivative, let alone digital coins, was a bit too far. But the great unwashed still have money to invest, so how to get them to part with their money, when return on investment (P/E ratio) is in the gutter, capital gains rarely outperform the inflation rate (unless you are in bed with the “insider”), options and futures are 99% controlled by the algorithm, and digital coins are controlled by whales?

Elegant solution is ESG.

Environmental, social, and governance (ESG) investing is used to screen investments based on corporate policies and to encourage companies to act responsibly.

Many brokerage firms offer investment products that employ ESG principles.

ESG investing can help portfolios avoid holding companies engaged in risky or unethical practices.

I am young enough to still remember the ringer some of the companies were put through when a journalist discovered a connection of a business with illegal enterprise – blood diamonds, sweat shops utilising child labour – but these types of businesses are either gone (unlikely) or so well protected / shielded from similar revelations that it is impossible to out them, even in social media. Investment in companied dealing in illegal, therefore, was generally frowned upon.

So this ESG thing got created. The businesses were divided into progressive, immoral, and everything on the scale from P to I. Based on the ESG, which is a perception-based pseudo-science” that is based on sustainability principles.

Sustainability is a social goal for people to co-exist on Earth over a long time. (wiki)

There are 17 such principles, from memory, I will not delve into those, but they are not exactly measurable. But there are frameworks and systems and tools and outcomes. So scientific-like, and transferable into ESG score of some sort. Some companies, like Disney or Gillette, have tried to be leaders in this space. Some have been “forced” to the the ESG line, like big oil and tobacco.

Leaders in the ESG initiatives tend to be companies that depend on consumption by choice, this includes tobacco and alcohol. So they try to position themselves as “progressive”, which results in trans advertising Bud Light (the most consumed beer in US) or black Mermaid. And backlash by the consumer, who can see through bullshit, and vote with its wallet, because progressive values still do not penetrate as deep as social media likes to portray. Also, this individual action remains mostly anonymous, as it is easy to pick up a carton of Coors Light instead of Bud Light.

Individual investments, however, tend to not matter in a greater scheme of things, as a lot of individual investors are represented by pooled money, rather than trading in individual accounts. Think of Super funds, retirement finds, etc. Individual investors cede control of their money to investment fund managers.

Investment fund managers, thus, are having discussions with various entities representing available cash based on a number of factors, including ESG. In the world of sustainability, more expensive outcomes can and often are “better for the planet”. Loss of income or profitability provides a better social outcome and, therefore, better. So, a company with a high ESG score and lower returns can be a better investment because funds, investment fund managers and companies will gain points on social media, in the investment prospects and financial handouts, because they deliver a higher score than competitors. The score in % of return, or $ per share, but if a pension fund manager selected an investment fund with a better ESG portfolio, they are the professionals.

Negligent AND ideologically captured. It’s their legal obligation to be as profitable as possible.

Your statement above is perfectly in line with investment fund’s and their managers’ actions. They do deliver a more profitable outcome, because of the advertised rate of returns based on empirical adjustments. Again, as seen in Wolf of the Wall Street, the job of an investment fund manager is to keep the money in circulation, earning fees on trading.

Oil companies (and arms manufacturing companies, incidentally) are seen as immoral. Sure, they provide great returns, but they are not “sexy”. Hell, MB, when they first started their investment offering, pushed this line of service. Sure, “the love of money is the root of all kinds of evil” but apparently some money is more ethical than the other. In line with the evolution of the definition of “investment”, investment is now based on feeling rather than a result measured in dollars or percent.

Side benefit, of course, is the opportunity for the savvy investment fund managers to invest their own money into these “immoral” enterprises. Or for savvy bankers to assist these “immoral” companies to take themselves private. After which the savvy investment fund managers will be free to invest in these “immoral” companies without the scrutiny of the stock market oversight.

FMD, this was long. I apologise.