Money Life Market Call: Bill Davis on ESG investing

This interview has been lightly edited for clarity.

 

Chuck Jaffe: Welcome to the Money Life Market Call, where we talk with experienced money managers about their job, what they look for that determines their buys and sells, what they see happening broadly on the market, and how they’re putting it all together. Joining me today is Bill Davis, portfolio manager at Stance Capital. The last time he was here we talked about the Stance Equity ESG Large-Cap Core ETF, ticker STNC. The fund has been rebranded and today operates as the Hennessy Stance ESG fund. If you want to learn more about the firm and the fund – and it’s really important when we talk about ESG investing that you understand the principles behind it – go to stancecap.com. 

Bill Davis, it’s great to have you back on Money Life.

Bill Davis: Chuck, great to be here.

CJ: Now, as I said, we need to know the ESG principles that go behind it, but we also need to know methodology because buys, sells and holds are worthless till we have all that information. So lay it out for us. What is the basic investment style, and what’s the ESG style that you lay over it?

BD: First of all, our investment style is to identify companies within the S&P 500. So we’re focused on U.S. large caps that are statistically likely to outperform on a total return and an alpha basis over the upcoming three months. We’re using AI and machine learning—we always have been—in order to identify the companies from a fundamental standpoint that we like.

Bill Davis
Image courtesy of Bill Davis

You mentioned ESG; I think it’s the most misunderstood thing in investing these days, but the idea behind what we’re doing is simply looking for companies who relative to their industry group peers are doing a better job of mitigating some off-balance-sheet risks. So what’s an example of that? 

If we were talking about a company that used a lot of water as an example, and all of a sudden there’s a scarcity of water in areas where they’re actually drawing a lot of water, or let’s say they are creating a lot of wastewater that’s creating pollution in rivers and things like that, those things represent risks to performance. So the way we look at ESG is, we wanna be avoiding companies creating unnecessary risk for investors.

It’s kind of that simple, Chuck. All we do is merge names we like from a fundamental standpoint with names we like from a sort of off-balance-sheet, material-risk factor standpoint, and in order to invest in a company we need to hold the view that they are good in both regards.

CJ: ESG has been taking a bit of a beating in the media largely because the term is, on the one hand, meaningful, and on the other hand lacks meaning and specificity. Sometimes I talk to an ESG manager and they say ‘These are our values’ and their values might be ethical, moral, religious, what have you. Other times it’s ‘No, we’re just applying what we think is good governance technique,’ and do good while we do good by investing in you. How much does that confusion make you worry that somebody who wants to be an ESG investor is maybe looking in the wrong places or not getting what they want in any ESG fund? I mean, I’m sure you want a certain type of ESG investor to come to you and there’s another type where you go, ‘Yeah, we’re not your fund,’ right?

BD: Yeah, I think that’s important. As you say, there are no rules in this, nobody can define exactly what it is. I mean, look, all it really was intended to be, was just data. And people could use it however they wanted to use it. I think where it got a little confusing is that there are different degrees of authenticity. There are ESG funds that own coal stocks, there are ESG funds that are full of energy, you know, conventional fossil fuel companies.

And that’s all fine, right? It’s all in the eye of the beholder. So ultimately I think it’s up to an investor to take the time to understand how the portfolio manager is thinking about these things and whether that aligns with their own worldview. I will tell you this though, Chuck, I think most ESG investors are in it to get aligned with some set of values that they currently hold. In our particular case, we’re in it in order to manage risk and to have a smoother ride for investors over a long period of time.

And we think that ESG done properly, for people who care to use it, is essentially a free option for investors. In other words, the companies we think are good from an ESG standpoint, we don’t have any sort of an expectation that [ESG] is going to, in and of itself, generate alpha for us. I think that the other things that we do in portfolio construction, fundamental analysis and risk optimization, that’s where we generate performance. The ESG is really just to get investors companies that they’re comfortable investing in.

CJ: In other words, the ESG side never overrides the investment side. You’re not buying something based on the fact that it passed an ESG screen. And at the same time, if the fundamentals are all there, you’re just making sure that you only look at those companies that have the right kinds of influences. And it’s an interesting side of things in a world with the kind of politics we’ve got right now, where I’m frequently asking money managers ‘Are you worried that politics would be a wild card?’ Well, I would imagine that with most ESG companies, you eliminate a lot of those. Whether you can drill or not drill, doesn’t affect you if your environmental screens are gonna eliminate big oil, right?

BD: That’s right. I would also say that media has a real role in this because when there’s a lot of click-bait nature to things I’ve read. I’ve been on some podcasts and done some interviews recently where people have said, ‘Oh, we hear that there’s massive exodus from the ESG space to the point of $2.8 billion in 2023.’ Well, what they don’t tell you is that $2.1 billion of that was a BlackRock fund that basically changed its mandate. And so in fact, the exodus from ESG is about the same as the exodus from equities in general during 2023, when a lot of money simply moved to the sidelines or moved into treasuries or money market funds. So yeah, the signal-to-noise ratio is very important to understand in this space. But at the end of the day, what we’re trying to do is simply invest in companies that are less likely to blow up on clients.

CJ: So let’s talk about a company or two that’s a good exemplar for the methodology, and maybe a company where the ESG research helps you make sure that, yeah, it’s not gonna blow up for crossing the line. In other words, maybe it’s the one that passes the screen, but it’s in one of those places where you’re like, ‘Yeah, you could see maybe this might be an industry that doesn’t always pass the screen.’

BD: A good example of that is industrials. If you take industrials as a sector, it can be dirty. A lot of ESG investors might avoid sectors that are a little dirtier. But the reality is, everything in the industrials and their various sub-sectors … it’s one of these catchall sectors that includes everything from airlines to cruise ships.

The reality is, these things aren’t going away as a result of the world decarbonizing. It’s just that there’s going to be winners and losers in all of these sectors. We happen to like industrials. By the way, we also happen to like health care. And we think that if you look at the macro environment right now, we just came out of a year—almost a year and a half—that has been pretty much dominated by the Magnificent Seven, which is very much big tech and comm services companies. It’s basically the seven largest, highest weighted companies in the S&P 500.

We think that trade is getting pretty tired, notwithstanding Nvidia’s beating their earnings or their estimates the other day. I think that right now we’re in a scenario where the spread between the equal weight S&P and the market cap weighted S&P – which is what most people are familiar with – the S&P 500, is the highest it’s been in over 20 years. And we think generally speaking, that is potentially scary and it’s unsustainable. And so one of the things that we see returning is greater breadth to the market, which necessarily means that companies in the bottom two thirds of the S&P 500, not just the top 10, but all of the S&P 500 are poised to actually outperform. And so if you look at sectors like healthcare and industrials, there’s a lot of companies that fit into that doing very, very different things.

A couple of names we like, Elevance Health as an example, a healthcare company, it’s up about 6% this year. That was through a couple of days ago. Another is Aon, which is essentially in the insurance sub-sector or subsegment of financials. That’s another name, both of those names we own in our portfolio and we like them a lot. And those are just kind of maybe a little bit off the beaten track from where a lot of other investors are looking.

CJ: What makes you sell? Presumably, while you wouldn’t expect somebody who’s got good ESG scores to suddenly change things dramatically, it could be that, but it’s more likely to be that the fundamentals have changed, right?

BD: That’s absolutely right. There have been occasions—the greatest example of all is probably Wells Fargo, which goes back a handful of years. Wells Fargo was in everybody’s ESG portfolio until it turned out that they were running a big fraud machine. Everybody jumped out of there, and a lot of people still haven’t gone back. But that’s pretty rare. Companies that tend to be good at governance tend to stay good at governance. But for, you know, the rare exception.

What does happen a lot is that all of a sudden, the fundamental picture changes. Something changes on the fundamental side. Again, since we need to hold both views simultaneously, if they don’t pass the fundamental screen, then they’re just not eligible to stay in the portfolio. So we rebalance quarterly and everything gets a fresh look every quarter.

CJ: Well, now we’re going to get your quick and dirty take on some stocks my audience is particularly interested in.

 

To listen to the full interview, please visit Money Life with Chuck Jaffe.

Introducing the NEW Equities News: Transforming the world by investing in what matters most

Equities News has long been recognized as a trusted financial news platform. As our world shifts and evolves, and we grow more globally connected and informed, it’s essential not only to stay abreast of these movements but to look ahead and help shape a healthier and more equitable world for all of us.  I’m delighted to share that we’re embarking on a transformative journey that transcends traditional financial news and information. We’re expanding our vision and mission  to create a community centered around investing with impact and purpose.

A New Mission: Let’s invest in things we actually believe in.

Our goal is simple yet profound: to empower individuals like you to invest in what truly matters, for our families, our workplaces and our communities. We’re shifting our focus toward a mission-oriented approach, where investing isn’t just about financial returns—it’s about making a positive difference in people’s lives and  the world we live in. Whether it’s impact investing, sustainability initiatives, or any other topic within the private and public markets that drive meaningful change, Equities News is committed to shining a spotlight on investments that align with our collective values, and the people making real-life impact in their communities and companies.

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An opportunity for women in the clean-energy transition

Graphic for "Opportunities for Women in the Clean Energy Transition"

Article by Maria Lettini, CEO of US SIF

As we celebrate Women’s History Month, it is again a time of reflection. We delight in the pockets of progress over the years but reiterate that there is certainly no room for complacency. The World Bank estimated that there are still almost 2.4 billion women who are without equal economic opportunity and more than 178 countries that still maintain legal barriers to prevent the full economic participation of women.[1]

Closer to my home, in the United States, numbers feel more optimistic. American women contribute more than $7 trillion to US gross domestic product each year.[2] In addition, they control $10 trillion in assets, a number that is expected to grow to $30 trillion – an amount roughly equivalent to U.S. gross domestic product – over the next decade.[3] And, by 2028, estimates suggest women will be responsible for 75% of discretionary spending.[4]

When it comes to climate change, women are still disproportionately affected; however, given their growing economic importance, women have a really significant role to play in the rapid and just transition to a low carbon economy. At COP28, the nexus of gender and climate change was a clear focus. Vice President Harris reinforced the US government’s commitments to the Women in the Sustainable Economy (WISE) Initiative which, through public-private partnerships, gives women around the world access to capital and financing that supports climate resilience and women’s leadership on climate issues.[5]

To meet net zero by 2050, the U.S. must transition swiftly. It’s an incredible challenge that requires the alignment of energy demand and production, diverse infrastructure components, supply chains across sectors, capital formation, public opinion, and more. Women’s influence is increasingly converging to the center as women become empowered to contribute to and benefit from the transition. At the US Sustainable Investment Forum (SIF), our research finds that climate is a top criterion for both institutional investors and money managers, and that diversity, equity and inclusion (DEI) issues are among our members’ top five investment themes and engagement priorities. This important climate-DEI intersection creates a potential wealth of opportunities for investors.

Many of these opportunities may be found in projects funded through the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA), which work in tandem to incentivize private capital to move the equitable transition forward, accelerating the development and deployment of clean energy technology. Goldman Sachs research estimates that the IRA’s impact could encourage $11 trillion of total infrastructure investment by 2050,[6] and BlueGreen Alliance research estimates that more than nine million jobs will be created over the next decade, across technologies, as the U.S. builds more resilient infrastructure, including grids, buildings and transport, with a focus on conserving and maintaining access to clean air, water, soil and more.[7]  These industries and impacts have the potential to benefit women, as well as communities that have been disproportionally affected by climate change and the transition away from fossil fuels.

Incentivization of new projects is expected to stimulate necessary capital expenditures. For example, the IRA made it possible for governments, non-profits and other entities to take advantage of clean energy tax credits. This could translate into further public financing benefits for local communities. Historically, municipal bonds have comprised about 70% of state and local infrastructure financing, and state and local municipal bond sales are expected to reach about $400 billion in 2024.[8] Grants, tax credits and other incentives and financing have the potential to transform communities and industries as our climate and energy resilience emerges.

Women are essential to the transformation, resilience and impact our world requires. Yet, there is still work to be done in the global job market. We know that increased representation of women in government, and a higher share of women in corporate leadership roles, lead to more stringent climate policies and lower carbon emissions.[9] In addition, workforce and leadership diversity has been found to foster innovation and creative solutions,[10] and lead to superior investment returns.[11] As a result, diversity in the workplace can help address existential climate challenges and deliver the market returns we need to finance the climate transition.

So, what’s the problem?

While women hold more C-suite positions than they have in the past, they remain under-represented in leadership and decision-making positions across sectors and industries,[12] and in government.[13] This is true globally, and it is also front-and-center in the United States. Last year, the U.S. workforce participation rate for women in their prime working years reached an all-time high.[14] However, there are notable gender gaps in various industries. For example:

The Energy Sector – While women comprise almost 50% of the U.S. workforce, just 25% of workers in the energy sector and 32% of those in the renewable energy sector are female. In addition, women are under-represented on the boards of the world’s 200 largest utilities, holding 25 seats representing 16% of board members.[15] In contrast, women hold 32% of board positions in S&P 500 companies.[16] Even in the dynamic area of start-ups, only about 11% of energy sector founders are women, compared with 20% across all sectors.[17]

The Financial Industry – In North America, women hold about one-fifth of senior finance services leadership roles, according to Deloitte, and that figure may fall as the number of women who are in position to be tapped for the next generation of leadership is expected to decline in coming years.[18] A bright spot is found in private equity and venture capital. PE and VC firms with women co-owners are more likely to engage in and allocate a greater proportion of their portfolios to impact investments.[19] It’s notable that just 34% of women in private equity firms hold investing positions.[20]

The clean energy transition is gaining momentum, and gender equity is a critical aspect of its progress. Women are both disproportionately affected by negative aspects of climate change, and key contributors to positive change through their leadership in government and business. While women are recognized changemakers, gender equality has yet to be realized. We are at an exciting juncture of history where woman can be empowered to make a difference across all levels of the transition value chain. Governments, businesses, and investors can have a significant effect on climate and gender, while supporting strong economic growth and pursuing attractive market returns.

We will explore this topic in more detail at the upcoming US SIF Forum 2024 from June 24-26 in Chicago, IL. Early bird pricing is available until Mar. 15, 2024.

Maria Lettini is the Chief Executive Officer of US SIF: The Sustainable Investment Forum. She joined US SIF in May of 2023 and is an innovative leader within the fields of sustainability and finance.  She is recognized for building meaningful partnerships across the capital markets value chain to address some of the world’s most critical, and financially material, environmental and social challenges.

This article is republished with permission from GreenMoney.


Footnotes:

[1] https://www.worldbank.org/en/news/press-release/2022/03/01/nearly-2-4-billion-women-globally-don-t-have-same-economic-rights-as-men

[2] https://www.americanprogress.org/article/a-day-in-the-u-s-economy-without-women/

[3] https://www.weforum.org/agenda/2023/05/unlocking-trillion-dollar-female-economy/

[4] https://www.nielsen.com/insights/2020/wise-up-to-women/

[5] https://www.whitehouse.gov/briefing-room/statements-releases/2023/11/16/fact-sheet-vice-president-harris-launches-women-in-the-sustainable-economy-initiative-totaling-over-900-million-in-commitments/

[6] https://www.goldmansachs.com/intelligence/pages/the-us-is-poised-for-an-energy-revolution.html#

[7] https://www.bluegreenalliance.org/site/9-million-good-jobs-from-climate-action-the-inflation-reduction-act/

[8] https://www.smartcitiesdive.com/news/2024-municipal-bonds-outlook-crucial-financing-tool-cities/704313/

[9] https://www.oliverwymanforum.com/climate-sustainability/2023/jan/applying-a-gender-lens-to-climate-investing.html

[10] https://online.uncp.edu/degrees/business/mba/general/diversity-and-inclusion-good-for-business/#

[11] https://www.mckinsey.com/featured-insights/diversity-and-inclusion/diversity-wins-how-inclusion-matters

[12] https://www.mckinsey.com/featured-insights/diversity-and-inclusion/women-in-the-workplace

[13] https://www.unwomen.org/en/what-we-do/leadership-and-political-participation/facts-and-figures

[14] https://www.brookings.edu/articles/prime-age-women-labor-market-recovery/#:~:text

[15]  https://www.americanprogress.org/article/uplifting-women-in-the-clean-energy-economy/

[16] https://www.prnewswire.com/news-releases/us-corporate-boards-are-more-diverse-than-ever-but-the-pace-of-growth-is-slowing-301984556.html

[17] https://www.iea.org/commentaries/gender-diversity-in-energy-what-we-know-and-what-we-dont-know

[18] https://www2.deloitte.com/us/en/insights/industry/financial-services/women-leaders-financial-services.html

[19] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4425799

[20] https://www.axios.com/2022/11/01/private-equity-women-investing-jobs

Making diversity in venture-capital funding a priority

DEI: diversity in business

SB 54 — a bill signed into law by California Governor Gavin Newsom in October 2023 — makes the state a pioneer in requiring venture-capital firms to report on the diversity of the founding members of businesses they invest in.

Legal mandates tend to push businesses toward transparency, and SB 54 is set to encourage precisely that. The bill compels VC firms to create internal systems for tracking diversity metrics, a practice many firms might not have embraced voluntarily.

While 74% of VC firms have established organizational diversity, equity, and inclusion targets, and 68% have portfolio DEI targets, there’s still a notable diversity gap. McKinsey found that just 1% of VC funding goes to Black founders, 1.5% to Latino founders, 1.9% to women founders, and only 0.1% to teams founded by Black or Latina women.

As an ardent supporter of inclusivity within the industry, I believe SB 54 isn’t just a legal mandate but has the potential to be a catalyst for change, unlocking unprecedented funding opportunities in venture capital for women-led and other underrepresented founder startups.

Yinka Faleti

 

A precedent that could spread

California often sets industry standards across various verticals and SB 54 will likely have a ripple effect beyond the state. With its progressive policies, New York could follow suit. There’s also the possibility of a progressive federal administration leading to nationwide changes. The impact of SB 54, even on firms outside California, showcases the state’s influence and the potential for a nationwide shift toward greater transparency.

As for the results of SB 54, immediate changes might not be evident now. However, the law could gradually alter the venture capital diversity landscape. Some firms may initially drag their heels, but as the law’s March 1, 2025, implementation deadline approaches, I anticipate a surge in compliance measures, transforming funding opportunities and venture capital for underrepresented founder startups.

As for the practicalities of the bill, integration of diversity reporting into existing processes is key. This might be a smoother transition for larger firms with established diversity reporting structures.

However, some smaller firms are exempt from certain kinds of federal reporting if they have less than a certain threshold of assets under management. So, for those firms, this may be something new, requiring a bigger muscle movement to achieve this level of reporting.

Beneath the surface, a deep interrogation of internal processes is critical for business leaders. Firms will achieve success by closely examining their internal processes and identifying areas for improvement.

This isn’t merely about setting venture-capital diversity goals. It’s about understanding the biases within the selection processes for portfolio companies. Uncovering and rectifying these biases is critical to venture capital diversity success in response to SB 54.

The profitability paradox

Ironically, the venture-capital industry could naturally boost profits by embracing diversity. Venture-capital demographic statistics support this claim, indicating that diverse teams consistently outperform their monolithic counterparts, offering better returns.

For example, firms with ethnically and culturally diverse teams are 36% more likely to outperform companies with less diverse teams in profitability. They also tend to have 2.5 times higher cash flow per employee, as well as 19% higher innovation revenues and 9% higher EBIT margins.

As we navigate this transformative era marked by SB 54, my hope is that venture-capital firms don’t just see this as a need for compliance but rather as an opportunity for profound change. Beyond the legal mandate, proactive measures and a critical examination of internal processes will pave the way for a more inclusive and profitable venture-capital landscape.

SB 54 might have originated in California, but its echoes will undoubtedly reverberate across state lines, shaping a more equitable and diverse future in venture capital.

 

E-bike incentives are a costly way to cut carbon emissions, but they also promote health

Christopher R. CherryUniversity of TennesseeJohn MacArthurPortland State University; and Luke JonesValdosta State University

E-bikes have captured widespread attention across the U.S., and for good reason. They are the most energy-efficient way to move from place to place, providing exercise in the process, and offer enough assistance while pedaling uphill or into headwinds to make them usable for many types of riders.

Greenhouse gas emissions from e-bikes are much lower than those from either gasoline-powered or electric cars. Some cities and states are encouraging the use of e-bikes by providing purchase incentives, often drawing on public funds dedicated to curbing climate change.

Currently, over 100 cities and states have or plan to launch e-bike incentive programs, most funded by energy or environment initiatives. However, there has been little research on the effectiveness of these types of programs, how to design them or how to define goals.

We study transportation from many angles, including innovationsustainability and economics. Our new study, published in the journal Transportation Research Part D, investigates the effectiveness of several types of e-bike purchase incentives and the investment required to induce additional e-bike purchases.

We found that incentives do spur extra e-bike purchases, but at a relatively high cost compared with narrowly defined climate benefits. We find that a public agency using a point-of-purchase discount would have to distribute about $4,000 in incentives to generate one additional e-bike purchase. This is because over 80% of people who buy an e-bike would likely have bought one even without the discount.

For perspective, it takes about $30,000 worth of incentives to induce an electric car purchase. California initiated a $10 million statewide program in 2023 that offers voucher incentives to low-income residents for purchasing electric bikes.

Read more: Are EVs the bread maker of today?

 

Nonetheless, e-bikes provide many other benefits. They make mobility easier and more affordable for many people, including older adults and people with disabilities. They bolster the case for investing in bike paths and infrastructure, which produce economic, safety and mobility benefits for cities. And they boost health by promoting exercise. In our view, cities and states should assess e-bike incentive investments based on this broad range of benefits, rather than focusing solely on a narrow environmental objective.

Not just a climate tool

Clean technology incentives tend to be focused on a specific outcome – usually, reducing greenhouse gas emissions. This works well for most energy-related upgrades, such as replacing old air conditioners, improving home insulation and generating electricity from wind and solar power. Consumers want the services that these devices deliver – cool air, comfortable conditions indoors and electricity that’s available and affordable. The new devices simply deliver those familiar goods more sustainably.

E-bike incentives are different. They invite people to adopt a new technology that can fundamentally change recipients’ travel patterns. In fact, while replacing car trips with e-bike trips can provide substantial climate benefits, those benefits may be smaller than other benefits that are less widely measured. Focusing narrowly on reducing greenhouse gas emissions by replacing car trips means providing incentives to people who drive the most, or who drive the biggest gas guzzlers.

But what about carless households, transit riders or bicyclists? For them, e-bikes can make it much easier to travel in most North American cities. That increased mobility could provide greater access to jobs, shopping or other important services, such as health care.

Is investing in e-bike incentives worth it?

Transportation is the largest source of U.S. greenhouse gas emissions. Electrifying as much of it as possible is an important strategy for slowing climate change. However, e-bike incentives – and, indeed, electric car incentives – are pretty expensive ways to reduce emissions.

The importance of e-bike incentives is that e-bikes are good at replacing car trips and make daily trips easier for people who rely on other options. These advantages provide two main classes of benefits from increasing ownership of e-bikes.

The first set of benefits comes from substituting car-based trips with e-bike trips. Transportation researchers think about a swap like this in terms of vehicle miles traveled.

If I used to drive to work but now ride an e-bike, many benefits will be proportional to the number of miles that I now cover by bike rather than by car. They include reduced traffic congestion, lower fuel and parking costs, increased physical activity and improved health, cleaner air and reduced greenhouse gas emissions. In North America, about 60% of e-bike trips replace car trips.

A second class of benefits comes from improvements in mobility. These effects are more complex to measure. For many people in U.S. cities who don’t own cars, the basic options for getting around are walking, public transit, ride-hailing services like Uber and Lyft, or riding a conventional bicycle. In almost all cases, e-bikes would get them to their destinations faster.

Carless households tend to have lower income and lack mobility options. E-bike incentives can make travel more affordable and give people better access to jobs, health care, child care, shopping and other destinations. Such benefits likely far exceed any nominal greenhouse gas accounting from these transportation users.

E-bike purchase incentives are an investment in the broad benefits that e-bikes can provide. We believe they should be measured against the collective goals of the agency providing the incentives, whether its mission is transportation, equitable mobility, public health, economic development or environmental protection.

The University of California system offers e-bike discounts on eligible brands.

Putting more people on two wheels

Once there’s agreement that e-bikes are worth supporting for many reasons, the challenge is how to induce more e-bike use and realize those benefits.

Point-of-purchase discounts or vouchers are the most popular strategy, because they mimic other clean energy incentives, such as those for high-efficiency appliances or electric cars. Our study found that they are also the most efficient way to influence consumer behavior compared with other purchase incentives, such as rebates.

Other strategies could be more effective but need further research. For example, e-bike lending libraries let people test-ride e-bikes without ownership. And employers can provide e-bikes to employees to help encourage more sustainable and affordable ways to get to work.

Partnering with community organizations or local mobility-oriented programs could be an effective way to get e-bikes into the hands of people who need them and couldn’t afford them otherwise. And giving e-bike owners more reason to use them, such as payments for biking to work, could increase e-bike use and subsequent benefits.

E-bike purchase incentives may be an expensive climate solution, but they also offer other important benefits. Carefully designed incentive programs could help many urban and suburban residents access a faster, healthier and cleaner way to get where they need to go.

Christopher R. Cherry, Professor of Civil and Environmental Engineering, University of TennesseeJohn MacArthur, Sustainable Transportation Program Manager, Transportation Research and Education Center, Portland State University, and Luke Jones, Professor of Economics, Valdosta State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Millennials and Gen Z drive demand for more ESG investment choices

Millennials and Gen Z drive demand for ESG investments

Environmental, social and governance principles continue to gain interest from corporations, governments, fund managers and, more importantly, younger investors. According to a Pew Research Center survey, both Millennials and Generation Z are more active online and offline in regards to social and environmental issues compared to their older peers.

Changes in the way asset and fund managers are constructing investment opportunities have now taken a different turn, enabling more financial professionals to seek ESG-focused investment vehicles that are in line with younger generations’ social activism goals.

During the last several years, there has been a strong sense of encouragement among investors, both old and new, to build more socially conscious portfolios. This collaboration enables companies and government institutions to gain access to the necessary financial resources to build more robust and innovative ESG-focused policies.

As the financial landscape continues to change, and more investors are seeking to introduce ESG assets into their long-term investment strategy, an important question on everyone’s mind remains what challenges and opportunities does ESG investing pose in capital markets, and how can investors navigate these circumstances more effectively.

The hidden assumptions of ESG investing

When we begin to take a few steps back and look at the bigger picture of how investment choices can make a more favorable impact on the future of the planet, environment and people, there are a few hit-and-miss questions that remain unanswered.

One of them, and perhaps the biggest question fund managers and seasoned shareholders are wondering about, is how companies will adapt to the changing market landscape to address specific issues younger investors care about.

Some may argue for the fact that not all investors share a homogenous viewpoint considering ESG-focused products, leaving little to change in the greater scheme of things. Others share that some fund managers will be required to adapt and change in accordance with market pressure and more young people stepping onto the market in the coming years.

In a similar vein, some wonder what power fund managers have to help change the direction of companies, and how they’re using their voting power to make a change for the better. Would fund managers be able to address both investor and corporate needs simultaneously, while also considering the future potential of investment returns on products that merely address conscious investment causes?

Millennials and Gen Z drive demand for more ESG investment options
Photo by RDNE Stock project

The disparity is perhaps more clear once we begin to break down the various intricacies that stand between the investor, fund manager, and corporate entities.

While one side, investors, may understand some environmental and social issues, as they witness them firsthand, a board of directors of a company that has some ESG policies may be more abstract due to the individuality of each person and their viewpoint of these principles.

What’s more, not many investors are completely willing to lose on their long-term returns, even if younger generations might have a longer time horizon compared to older generations. Although some investors might be willing to give ESG investments a shot, fund managers might be in a more precarious position having to make these efforts become a reality.

As you begin to factor in one thing after the other, the equation becomes increasingly complex and much harder to solve in terms of the long-term value of ESG products.

On one hand, there’s some significance in terms of ESG products, and perhaps those shareholders interested in these sorts of investments. On the other hand, there could be minimal change that occurs over the long-term horizon, leaving investors to sit with continuous losses without seeing any real change or improvements taking place.

The reality would be that fund managers, along with seasoned investors and company directors, would need to consider how to create a balance. What are their overarching goals? Would this perhaps be a combination of things or rather one set of core values that they would carry throughout the coming years?

There is still much that needs to be resolved in terms of environmental, social, and corporate governance investing. It will take more than just a handful of funds and investment products to provide possible solutions. Read more: ‘People who really know what ESG data is, know it isn’t political.’

The bottom line

Investing with the planet, the environment and society in mind can become seemingly ambiguous over the long term, but there is a possibility for change and adoption of principles that can clearly carry out the core values of young investors.

However, as one begins to weigh these against traditional assets and funds, there’s still a lot of room for improvement, both financially and logically. A better understanding of how fund managers can direct their influence and present actual changes for companies to later develop key ESG principles would require immense resources. Yet, the opportunity isn’t completely lost.

Compared to older generations, there’s a clear disparity between what Millennials and Gen Z value and what they want in their portfolios. The generational lines are steadily changing, and perhaps in favor of the planet and social inequality.

It’s only a matter of time, and perhaps the necessary supervision of fund managers and seasoned shareholders can lead to actionable change and help direct coming-of-age investors towards a future of sustainable growth and equitable opportunities in the stock market.

Social media’s ‘algorithmic control’ over users ought to be better regulated

Social media's 'algorithmic control' ought to be reined in

Mariana Mazzucato  and Ilan Strauss

Deploying algorithms to maximize user engagement is how Big Tech firms maximize shareholder value, with short-term profits often overriding longer-term business objectives. Now that AI is poised to supercharge the platform economy, new rules and governance structures are urgently needed to safeguard the public.

LONDON – In a new lawsuit in the United States against Meta, 41 states and the District of Columbia argue that two of the company’s social-media products – Instagram and Facebook – are not just addictive but detrimental to children’s well-being. Meta is accused of engaging in a “scheme to exploit young users for profit,” including by showing harmful content that keeps them glued to their screens.

According to one recent poll, 17-year-olds in the U.S. spend 5.8 hours per day on social media. How did it come to this? The answer, in a word, is “engagement.” Deploying algorithms to maximize user engagement is how Big Tech maximizes shareholder value, with short-term profits often overriding longer-term business objectives, not to mention societal health.

As the data scientist Greg Linden puts it, algorithms built on “bad metrics” foster “bad incentives” and enable “bad actors.” Although Facebook started as a basic service that connected friends and acquaintances online, its design gradually evolved not to meet user needs and preferences, but to keep them on the platform and away from others. In pursuit of this objective, the company regularly disregarded explicit consumer preferences regarding the kind of content users wanted to see, their privacy and data sharing.

Putting immediate profits first means funneling users toward “clicks,” even though this approach generally favors inferior, sensational material, rather than fairly rewarding participants from across a broader ecosystem of content creators, users, and advertisers. We call these profits “algorithmic attention rents,” because they are generated by passive ownership (like a landlord) rather than from entrepreneurial production to meet consumers’ needs.

Mapping rents in today’s economy requires understanding how dominant platforms exploit their algorithmic control over users. When an algorithm degrades the quality of the content it promotes, it is exploiting users’ trust and the dominant position that network effects reinforce. That is why Facebook, Twitter, and Instagram can get away with cramming their feeds with ads and “recommended” addictive content.

As the tech writer Cory Doctorow has colorfully put it, platform “enshittification comes out of the barrel of an algorithm” (which may, in turn, rely on illegal data collection and sharing practices).

The Meta suit is ultimately about its algorithmic practices that are carefully constructed to maximize user “engagement” – keeping users on the platform for longer and provoking more comments, likes, and reposts. Often, a good way to do this is to display harmful and borderline illegal content, and to transform time on the platform into a compulsive activity, with features like “infinite scroll” and nonstop notifications and alerts (many of the same techniques are used, to great effect, by the gambling industry).

Now that advances in artificial intelligence already supercharge algorithmic recommendations, making them even more addictive, there is an urgent need for new governance structures oriented toward the “common good” (rather than a narrowly conceived notion of “shareholder value”) and symbiotic partnerships between business, government, and civil society. Fortunately, it is well within policymakers’ power to shape these markets for the better. Read more: Corporate purpose vs. corporate profits.

https://www.youtube.com/watch?v=cWe2CZ7pbSY&list=PLf_FnoTsoAgG8NM0O1JWugvrz07zes59Z&index=3

5 ways to shape social media for the better

First, rather than relying only on competition and antitrust law, policymakers should adopt technological tools to ensure that platforms cannot unfairly lock in users and developers. One way to prevent anti-competitive “walled gardens” is by mandating data portability and interoperability across digital services, so that users can move more seamlessly between platforms, depending on where their needs and preferences are best met.

Second, corporate governance reform is essential, since maximization of shareholder value is what pushed platforms to exploit their users algorithmically in the first place. Given the well-known social costs associated with this business model – optimizing for clicks often means amplifying scams, misinformation, and politically polarizing material – governance reform requires algorithmic reform. A first step toward establishing a healthier baseline is to require platforms to disclose (in the annual 10-K reports filed to the US Securities and Exchange Commission) what their algorithms optimize for, along with how their users are monetized. In a world where tech executives descend on Davos every year to talk about “purpose,” proper disclosures will pressure them to do what they say, as well as help policymakers, regulators, and investors distinguish between earned profits and unearned rents.

Third, users should be given greater influence over the algorithmic prioritization of information shown to them. Otherwise, the harms from ignoring user preferences will continue to grow as algorithms create their own feedback loops, pushing manipulative clickbait on users and then wrongly inferring that they prefer it.

Fourth, the industry standard of “A/B testing” should give way to more comprehensive long-term impact evaluations. Faulty data science drives algorithmic short-termism. For example, A/B testing may show that displaying more ads in a feed will have a positive short-term impact on profits without overly harming user retention; but this ignores the impact on acquiring new users, not to mention most other potentially harmful long-term effects.

Good data science shows that optimizing recommender systems for long-term, delayed rewards (such as customer satisfaction, retention, and new-user adoption) is the best way for a company to drive long-term growth and profitability – assuming it can stop focusing primarily on the next quarterly-earnings report. In 2020, a team within Meta determined that fewer intrusive notifications would be better for both app usage and user satisfaction over a longer period of time (one year). Long-term effects differed sharply from short-term effects.

Fifth, public AI should be deployed to evaluate the quality of algorithmic outputs, particularly advertising. Given the considerable harms arising from platforms lowering the standard of acceptable ads, the United Kingdom’s advertising watchdog will now use AI tools to scrutinize ads and identify those making “dodgy claims.” Other authorities should follow suit. Equally important, AI evaluators should be a feature of platforms’ openness to external auditing of algorithmic outputs.

Safeguarding the health of Big Tech users

Creating a digital environment that rewards value creation from innovation, and punishes value extraction from rents (especially in core digital markets), is the fundamental economic challenge of our time. Safeguarding the health of Big Tech’s users and the entire ecosystem means ensuring that algorithms are not beholden to shareholders’ immediate profit concerns. If business leaders are serious about stakeholder value, they should accept the need to create value in a fundamentally different way – drawing on the five principles above.

Meta’s forthcoming trial cannot undo past mistakes. But as we prepare for the next generation of AI products, we must establish proper algorithmic oversight. AI-powered algorithms will influence not just what we consume, but how we produce and create; not just what we choose, but what we think. We must not get this wrong.

Mariana Mazzucato, professor in the Economics of Innovation and Public Value at University College London, is founding director of the UCL Institute for Innovation and Public Purpose, chair of the World Health Organization’s Council on the Economics of Health For All, and a co-chair of the Global Commission on the Economics of Water. She is the author of The Value of Everything: Making and Taking in the Global Economy (Penguin Books, 2019), Mission Economy: A Moonshot Guide to Changing Capitalism (Penguin Books, 2022), and, most recently, The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments and Warps Our Economies (Penguin Press, 2023). A tenth anniversary edition of her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths was published by Penguin in September.

Ilan Strauss, a visiting associate professor at the University of Johannesburg in South Africa, is a senior research associate at the UCL Institute for Innovation and Public Purpose, where he leads the digital economy research team.

This post originally appeared on Project Syndicate.

 

Stocks are on a roll, but if you look under the surface you’ll find reason for caution

U.S. stocks are holding steady so far in February, but there are important shifts happening underneath the surface you should know about.

As I write, the S&P 500 has surged about 15% since November 1. That’s roughly two years’ worth of average gains squeezed into three months. Markets got too hot, and I think we’re due for a pullback.

Looking at how stocks tend to perform throughout the year has always been part of my analysis. This “seasonality” helped us make a lot of money last year. Now, it’s telling us to be a little cautious.

Going back to 1950, February has historically been the second-worst month for stocks. Along with September, it’s the only month in which stocks have averaged a loss. So it would be perfectly normal to see markets pull back here. Read more: Buying and holding stocks isn’t a fashionable strategy, but it is working.

The second thing giving me pause is something my friend J.C. Parets of All Star Charts brought to my attention during my trip to New York. While the S&P 500 continues to flirt with new highs, the list of individual stocks hitting all-time highs peaked seven weeks ago. This behavior typically precedes a broader market drop.

Stocks could still be in for a rough February if history is any key.

Let’s remember the S&P 500 was up 12 of the last 13 weeks. It hit record highs last week. Again, it’s totally normal—even healthy—for stocks to take a breather here.

What I’m doing: continuing to own only great businesses profiting from disruptive megatrends inside my flagship newsletter, Disruption Investor. We’re long-term investors and don’t try to trade every 10% market move.

Elon Musk wants to put a chip in your brain. You in?

Musk is best known for building battery-powered cars (Tesla) and 400-foot rocket ships to get us to Mars (SpaceX). But his startup, Neuralink, might end up helping mankind the most.

Neuralink is building a special chip that will allow us to control computers with our minds. The big news is the first human recently received a Neuralink brain implant. If you’re anything like me, you’re thinking, “Hell no is anything going in my brain.”

But Neuralink wasn’t built so you could skip intros on Netflix by blinking at the TV. Its goal is to help paralyzed people walk and blind people to see.

Here’s how it works. The neurons in your brain “fire” in similar ways when you think about moving your legs, whether you physically move them or not. Same for speech. When you think a word, your brain lights up as if you actually said that word out loud.

Neuralink built a chip about the size of a quarter that slides in just under the skull. It can “read” your mind and then speak for you or move a limb, for example.

Separately, a group of Swiss doctors already achieved this. They put a chip in a paralyzed guy’s brain, and now he can walk by simply thinking about moving his legs. Read that sentence again and tell me you’re not a techno-optimist.

Neuralink isn’t the latest must-have gadget. It’s an experimental new technology that will help people who can’t yet be helped. And if it works, watch how fast attitudes change.

Not long ago, people viewed organ transplants as some Frankenstein experiment. As for putting something in your body, 3 million Americans have a pacemaker in their chest.

But don’t expect to read a positive news story about Neuralink anytime soon with Musk running the show. Funny how media coverage of Musk suddenly nosedived when he started pushing back against political correctness. The attacks really ramped up when Musk bought Twitter and blew the whistle on censorship.

Forget all that. Neuralink is curing the uncurable. Future’s bright.

Today’s dose of optimism

Former U.S. presidential candidate John Kerry made some interesting comments at The World Economic Forum in Davos recently: “2023 … was literally the most disruptive, climate-disrupted, most climate consequential, negative year in human history.”

Someone send him this chart, which shows climate-related deaths collapsing to near zero:

Source: Humanprogress.org

Major narrative violation for the climate doomers. Technology and capitalism, which are often blamed for ruining our climate, are the driving forces behind this one-way trend.

Mother Nature continues to hand out heat waves, cold snaps, hurricanes, and flash floods. In fact, according to the National Oceanic and Atmospheric Administration, 2023 was the hottest year on record. But technological innovation is the reason Mother Nature no longer claims hundreds of thousands of lives each year.

Extreme heat … we invented air conditioning. Extreme cold … we created indoor heating and insulation. Deadly floods … we devised dams, canals, and expert drainage systems. Hurricanes, earthquakes, and tsunamis … we contrived early warning systems for evacuations. Droughts … we pioneered new farming methods that allow us to grow crops year-round. Dirty energy like coal burning our lungs … we masterminded “capture” tools that enable us to remove 95%+ of the deadly toxins.

Technology—not politicians or penance—will solve climate change.

Stocks are near record highs, but prudence dictates taking profits in 2024

I recently sat down with one of my heroes, Matt Ridley. His book, “The Rational Optimist: How Prosperity Evolves,” changed my life. It helped me see what was right with the world instead of getting bogged down in the constant doom and gloom.

Matt and I are optimistic because of the entrepreneurs who continue to innovate and improve our lives. Everything great was built by someone. And thanks to the stock market, we can piggyback on their successes by investing in their companies.

While 2024 is setting up to be another great year, I’ve learned to expect the unexpected. Everyone and their mother thought stocks were going to fall in 2023. We took the other side of that bet and made a lot of money. The S&P 500 jumped 24%, and our Disruption Investor portfolio finished the year up 50%—more than double the return of the S&P.

Now, it’s time for some prudence.

With the S&P 500 near an all-time high, I see a lot of people getting very bullish. Speaking from experience, that makes me nervous. Our research suggests 2024 could be rockier than last year. The biggest “known” risk is the U.S. presidential election.

This will be the most extraordinary U.S. election ever, and not in a good way. Prepare to be depressed by the rhetoric, especially heading into November. This will likely weigh on the national psyche. Investors will go “risk-off.” I wouldn’t be surprised if stocks sell off heading into November’s political “Super Bowl.”

Stocks in an election year

For perspective, stocks typically go up in election years. Since 1928, U.S. stocks were positive 90% of the time—gaining 11%, on average. Our research suggests this time could be different. This is a great time to get rid of any stocks you’re unsure of. Read more: Look under the surface and you’ll find reasons to be cautious on stocks.

Imagine something crazy happens, like one of the presidential candidates dies or inflation jumps back to 10% … and stocks plunge. Own businesses you wouldn’t be afraid to buy in these highly unlikely scenarios: Stocks you’re happy holding regardless of what happens.

But while the going is good, it may be time to sell that stock you only “kinda, sorta” like.

We’re preparing for potential volatility by continuing to own only great businesses profiting from disruptive megatrends. These are great disruptors that will sail through stormy seas. They don’t care about volatility. They get after it and stay after it. My advice: Focus on great businesses; take profits on everything else.

 

2 ways to build wealth through real estate equity investing

What is the best way to tap into real estate equity investing? While you can go out and buy property yourself, self-directed investors now enjoy a number of less hands-on channels for accessing the real estate asset class.

Two main categories: real estate private equity and public REITs. Let’s take a closer look at how these types of real estate investing behave and why investors may gravitate to one or the other. First, some terminology.

REITs are companies that own, operate or finance income-producing real estate. They offer investors a way to invest in portfolios of real estate assets through the purchase of publicly traded shares. REITs must meet specific regulatory requirements, including distributing the majority of their taxable income to shareholders as dividends.

Private-market real estate refers to direct investments in property assets, typically made through private equity real estate firms or funds. These investments are not listed on public exchanges and are accessible only to accredited or high-net-worth investors. Private-equity real estate means participating in the equity portion of private real estate transactions, where total return potential may be higher (as opposed to debt/credit).

Alcove Garner Apartments, Garner, N.C. Yankee Capital Partners photo

Advantage of private-market real estate

The private nature of these investments allows for a more hands-on approach, potentially leading to higher returns due to the active management of the assets. Critically, private-market real estate is illiquid. Read more: How green real estate investing can generate superior returns.

Assets that are exchanged via private markets (usually via auction platforms or facilitated by private brokerages) are subject to market inefficiencies, such as imperfect information and high barriers to entry. Inefficient markets mean opportunities to capture returns in ways that investors can’t via public markets, which are liquid and react quickly to changing conditions. 

  • Direct ownership: Investors in private-market real estate often have a more tangible connection to their investments, as they own a share of the actual properties. This direct ownership can lead to a sense of control over the investment, as decisions about property management, tenant selection, and renovations are made by the asset managers who are directly accountable to the investors. This may be a critical advantage for socially responsible-minded investors.
  • Potential for higher returns: The active management and value-add strategies employed can lead to significant appreciation and higher overall returns. For example, a private real estate fund might acquire an underperforming commercial property, implement improvements to increase its value, and subsequently sell it at a profit or refinance it to return capital to investors. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), private market real estate has delivered an average annual return of approximately 8.4% over the past 20 years, outperforming many other investment classes.
  • Tax benefits: Private real estate investments can offer tax advantages, such as depreciation and the potential for 1031 exchanges, which can defer capital gains taxes. These benefits can significantly enhance the after-tax return on investment, making private real estate a potentially more tax-efficient option compared to other investment types.
  • Lower volatility: Private-market real estate is generally less susceptible to market fluctuations, providing a more stable investment option. Since these assets are not traded on public markets, their values are not subject to the daily price swings seen in publicly traded securities, which can be driven by factors unrelated to the underlying property’s performance.

Enhancing portfolio diversification

Private-market real estate (an “alternative asset”) can also play a crucial role in portfolio diversification. By investing in physical properties across various geographic locations and sectors, such as residential, commercial, industrial, and retail, investors can spread risk and potentially reduce the correlation with traditional financial markets.

For instance, during the 2008 financial crisis, while public equities experienced significant volatility, many private real estate investments provided a cushion due to their stable cash flows and intrinsic value.

Public REITs behave differently from private-market real estate in one key respect: they are traded as securities. So, while a public REIT will offer some diversification from stocks and bonds, it may be subject to some of the same sentiment-driven swings as other publicly traded assets (namely stocks).

Because private real estate equity is untraded, it may offer more “de-correlation” from stock market returns. Many analyses of past data prove this out. A recent study from PGIM, looking at the years 2000-2022, shows that private real estate equity was significantly negatively correlated versus performance of large cap stocks over this period. Public REITs, meanwhile, bore a 54% correlation. 

Advantages of REITs

  • Liquidity: Shares of publicly traded REITs can be bought and sold on the stock market, offering investors the flexibility to quickly adjust their positions. This liquidity is particularly appealing for investors who may need to access their capital on short notice or who prefer the ability to easily rebalance their portfolios.
  • Diversification: REITs often hold a diverse array of properties, providing investors with exposure to various sectors within the real estate market. For instance, a single REIT might invest in a mix of office buildings, shopping centers, and apartment complexes across different geographic regions, spreading risk and reducing the impact of any single property’s underperformance.
  • Dividend income: REITs are known for providing consistent dividend payouts, which can be an attractive feature for income-focused investors. The dividend yields of REITs are often higher than those of other equities, making them a popular choice for those seeking regular income streams. In fact, historical data from the FTSE Nareit Equity REITs Index shows that REITs have consistently offered dividend yields of 4% or higher, which is particularly compelling in low-interest-rate environments.

Control and transparency

REITs are highly accessible and offer built-in diversification. The downside: a lack of transparency versus more direct ownership of real estate. This may be significant for investors who want to understand the impact of their investment.

By investing in private-market real estate via platform like EquityMultiple, for example, an investor can get to know the real estate firm behind the investment (the “sponsor”), the neighborhood and the potential impact on the community, tenants and the local built environment. 

Some public REITs may also offer the opportunity to confront the housing affordability crisis. However, investors in such REITs would still have relatively little visibility into day-to-day operations and the specific properties that make up the fund.