A few years ago, I wrote a note about whether companies should focus on the common good (climate change, feeding the world, etc). I got a lot of feedback on that take on social responsibility and my thinking hasn’t changed. Energy transition companies, by definition, have a sense of corporate social responsibility that is baked into a decision to invest. So in this sector, expect that social conscience to be front and center of the prospectus. However, is it really good or just a marketing strategy? I am a surfer and golfer. I love outside. I want a clean world as much as the next tree hugger, but my data-driven mind has discovered that chasing “good” destroys shareholder value…and this is all that really matters.
The False Confidence of Snap Judgments
I started my previous article by quoting from Pink Floyd’s Wish You Were Here. I did this for a couple of reasons—one, I really love the album, and two, it’s a great example of returns exceeding expectations. What I mean by this is that critics were not fans of this album when it dropped. The record-buying (those plastic discs you used to put on turntables or hard-drive-sized bricks you put in the dashboard of the car) public politely disagreed, and this turned it into the band’s best-selling album. More copies than Another Brick in the Wall. Look it up.
What does this have to do with sustainability, investing, and energy? Simple—the experts thought the album was a loser. People who liked records bought them anyway, making the band a fortune despite the snap judgment of the critics. So, how will history judge the power players in the energy transition space? More importantly, will investors pony up enough for history to fall on the side of renewables?
Shareholder vs. Stakeholder—What’s the Priority?
It’s popular these days to talk about stakeholders instead of shareholders because we are all circled up, holding hands and singing Kumbaya. Stakeholders are all the entities a company affects writ large—investors, employees, customers, suppliers—everybody with skin in the game. Let’s add another shareholder since we’re discussing energy: the environment.
While I appreciate more than most that energy companies have an outsize impact on the environment and don’t exist in a vacuum, I’m old school enough that I still believe that investors are the driving force of any business. In other words, if the shareholders ain’t happy, then nobody’s happy..and the data proves thus out time and time again. And unhappy shareholders aren’t shy about sharing their displeasure with the board or the bottom line—so in reality, they are the ones who move the markets.
But stakeholder capitalism is the flavor of the month, so let’s start there. Is it really a company’s responsibility to consider the needs of the stakeholders ahead of the shareholders? Or does social responsibility create long-term value at the expense of current investors? Before I go any further down this particular rabbit hole, let me stipulate for the record that I am a conscious capitalist. I’m a fan of companies that do well while doing good. Costco is a great example of this sort of ethos—they provide the consumer with quality products at low prices, pay above-market salaries with great benefits, and contribute generously to charities. It’s a win-win, so I’m willing to sit in line to get gas at Costco. The Motley Fool has a great article about conscious capitalism, but I’m skeptical of citing Trader Joe’s and Starbucks as good examples.
Is Conscious Capitalism a Winning Strategy?
Whole Foods is a cautionary tale of conscious capitalism. Their laser focus on customer service became the driving force behind a stock freefall, and there stood Jeff Bezos with a great big organic net and delivery van (2017).
Did Whole Foods founder John Mackey fulfill his duties to his shareholders?
No, but early investors in Whole Foods understood Mackey’s focus on the stakeholder. They bought into that vision of providing organic, high-quality products and at least a nod to buying local. I was living in Austin and met Mackey during his book tour to promote this new strategy and vision. It sounded F#cking Fantastic! If you’ve ever been in a Whole Foods, it’s obvious early on that this is not exactly a price-conscious consumer business—somebody who pays eight bucks for a pound of grapes is clearly okay with the social ethos of the company. Unfortunately, Mackey didn’t have a crystal ball to see 2008 coming, and Whole Foods started a downward spiral that ultimately put Amazon in the organic food business. Mackey led Whole Foods until he retired in September 2022—his leadership decisions cost him the company, but he was still there implementing his vision.
Why Does This Matter Now?
I like this analogy because the Whole Foods model is somewhat similar to energy but on a smaller scale. Mackey sought to make fresh food more accessible and, in doing so, help people (admittedly the less price-conscious) evolve their eating habits into something healthier for themselves and the planet. His focus was social responsibility.
See where I’m going here? He focused on the company’s overall impact more than the bottom line, and his investors were okay with that—the stock’s plummet was not so much shareholder skepticism as WalMart entering the organic sector of the grocery industry.
Let’s face it—if Wally World sells a gallon of Horizon organic milk for $5 and it’s $7 at Whole Foods, that’s a no-brainer. The recession sent a lot of Range Rovers to the big box parking lots—and they keep coming back.
The Gospel of Milton Friedman Begs to Disagree
Milton Friedman had this incendiary piece in the New York Times way back in 1970. It’s so old that when I first Googled it, I got an archived microfiche version. It’s better now. If you’re wondering, Friedman was a Nobel economist who was a leader in the theory of monetary economics and capitalism at the University of Chicago. And the article was so divisive that Forbes was still writing about it forty years later.
Friedman opined, and I agree with this to an extent, that businesses are effectively stealing from their shareholders when they fiddle around with stakeholders. He stopped short of saying it was outright criminal behavior, but he did put the concept in terms of the CEO appointing himself in charge of the world when he (or she) chose to deploy company assets to the social good at the expense of investors and employees. Private enterprise, in other words, allows individuals to be responsible for their own actions. The CEO who makes a killing can give all the money he wants to his pet projects but should return as much as possible to his shareholders so they can make their own decisions about their money.
Renewables Operate on a Different Scale…
Right this minute, it’s hard to argue against investing in renewables (OH…AND exporting more GAS from the US but I digress). The war in Ukraine has highlighted the imperative for Europe to get serious about energy sources that aren’t Russia; the spike in prices is clearly unsustainable for the EU. If there’s one thing I’m absolutely certain of, there’s nothing like skyrocketing energy prices to get investors’ attention. If an economy like Germany’s can be brought to its knees, that’s serious stuff.
Energy has historically been a tough sell to investors. It’s easy to get the idea of Amazon or KitchenAid—they have a tangible product. Most investors are okay with things like microchips and marketing ideas. But selling clean energy has always been an uphill climb for several reasons, not the least of which is that the barrier to entry is so high. Petroleum, relatively speaking, is easy now that it has a 100 years of history behind it. You drill the wells, find and refine the crude, and voila—barrels and barrels of black gold. Gas is a little more complicated, but the technologies for both are streamlined and (relatively) simple, NOW. Legacy oil and gas companies are still hanging in there in the Fortune 30—Exxon, Chevron, Marathon, Phillips, and Valero have roughly a $700 billion market cap.
Green energy, on the other hand, is unbelievably complex. Well not really, but it is new and there is a technological and know-how learning curve. Geographically it can be easier since you get wind and sun almost anywhere. But the infrastructure is challenging (offshore wind farms) and requires a tremendous amount of capital to build out. Also, because it’s hard to grasp how seaweed will change the world and why in hell the saltwater extraction plant costs a gazillion dollars, investors have decided to put their money into the big four instead of startups.
But the Capital Is Rolling In
Cleantech companies are doing pretty well in terms of raising cash. Globally, they raised $165 billion in equity financing in 2021. What astonishes me is that this all happened in the middle of both rising commodity prices and the supply chain nightmare. Wind, hydrogen, and solar projects brought in the lion’s share of the capital at $68.5 billion, but the transport sector—batteries and EVs—were a seriously close second, just a billion short. It’s almost like we’re discussing real money.
By the way, Pitchbook has taken notice of the boom in climate tech, predicting the market will hit $1.4 trillion-with-a-T by 2028.
Investors in climate tech understand and accept the concept of conscious capitalism. Traditional risk is a relatively short-term concept. But in the energy transition sector—especially with startups—you’re literally looking at decades before likely seeing any appreciable returns. Society today overall belies that this climate stuff is real. They believe that changes are critical for the planet to survive. Maybe this is true, maybe it is not. My concern is that the economy is more forgiving of the stakeholder/social responsibility mindset than it was when Friedman wrote his thesis in 1970. However, he is right. Can you prove me wrong?
What’s helping with this new-found social responsibility trend is that non-energy companies are publicly committing to implementing fairly aggressive clean energy and sustainability strategies. And this is destroying shareholder value.
Software behemoth Salesforce is leading the charge. They have a goal of net-zero carbon emissions years earlier than their 2050 target date. They have been working on the overall efficiency of their hardware, facilities, and infrastructure for years and are shooting for total global renewable energy. They’ve already purchased wind power from farms in West Virginia. But what happened a few weeks ago? Activist investor Elliott Management just took a big stake in the company. Why is Salesforce spending all of this time on social projects vs. increasing shareholder value? Again, time will either prove me an idiot or I am really onto something.
This reminds me of one of my favorite movie characters from Bull Durham, Crash Davis when trying to disciple the young pitcher “Nuke” LaLoosh: “Your shower shoes have fungus on them. You’ll never make it to the bigs with fungus on your shower shoes. Think classy and you’ll be classy. If you win 20 in the show, you can let the fungus grow back on your shower shoes and the press will think you’re colorful. Until you win 20 in the show, however, it means you’re a slob.” In other words, maybe founder and Co-CEO Marc Benioff has taken his eyes off of the fundamentals. In early January, Salesforce announced it was laying off 10% of its workforce and and reducing its office space in certain markets. Marc has won 20 in the show, but investors don’t care about then, they care about now.
I’m open to comments on my thinking—nothing here is written in stone. Finally, I’m going to quote the Beatles and Bob Dylan—Good morning, sunshine; the answer is blowing in the wind.
There’s money to be made in renewables, but it better make sense economically… What say you?