Category Archives: ESG

23/4/21: There are no ‘social’ winners amidst this pandemic

 

No one is left unscarred by the #covid19 pandemic when it comes to public approval trends for the major social stakeholders in Ireland: 

Source: Core Research. 

Broadly-speaking, the above is expected, although Core Research report contains one glaring omission: it does not survey public attitudes to media/press. Worse, the three improving stakeholder groups are also the three least impacted: own employer, citizens and large companies. Meanwhile, approval of the government is still nosediving. 

Covid pandemic is certainly testing Irish (and other countries') key institutional frameworks. The fallout from these tests is going to be long-lasting and deep. We went into the pandemic with huge deficits of trust in key institutions of our societies. And we are becoming more polarized and less enthusiastic in our support for these institutions since then.

6/4/21: Edelman Trust Barometer: the Age of Cognitive Dissonance?

Some shocking, genuinely shocking data from the Edelman Global Trust Barometer for 2021. Let's take a look. 

Start with this: 

Welcome to the world where sociopaths like Jeff Bezos are both trusted to be competent and perceived to be ethical. 

Meanwhile, at least w are catching up with what is happening in the tech sector:

And with the Social Media...


But we can't be human without some serious cognitive dissonance... Healthcare is now the second most trusted sector of business in America. Yep, the same private healthcare that had to rely on public / State / Federal money and logistics to distribute vaccines. The same private healthcare that could not organize vaccinations. The same private healthcare that, effectively, bankrupted and overcharged millions of Americans for emergency treatments during the pandemic. 

Back to Social Media:

I am not quite sure what people 'trust' in terms of information delivered via 'search engines', exactly. A search engine provides access to information, but it does not provide  or produce information. So drop this daft category from the analysis and what you have? Traditional Media is barely above the water, when it comes to trust. Owned Media and Social Media are below the waterline. If you control for the partisanship divide in the U.S. political landscape, most likely the vast majority of those trusting Traditional Media are... well, Democrats. The vast majority of those who distrust Social Media are... well, Democrats. Converse holds for the Republicans. One way or the other, massive shares of American population do not have trust in anything relating to quality control or verifiability of information sources.

This year's barometer is a scary reading. In most basic terms, NGOs and Business are the only two sets of institutions that are perceived ethical. Business' perception in this area is dangerously close to being marginal. Perceived incompetency of the Government is vastly greater than perceived competency of Business.  Media is virtually the exact mirror reflection of business. We trust no one in terms of information we receive. And we love those who are making money by not caring for us - American Healthcare. We lap up anything our employers communicate, but we believe they are telling us bullshit when it comes to their social and environmental sustainability efforts or to the risks of us being displaced by them with AI and technology. 

Is there much 'social fabric' left that hasn't been torn up, yet?.. 

14/12/19: Governance and Government Debt


What I am reading this week: a new paper via EFMA, titled "Governance and Government Debt" by João Imaginário and Maria João Guedes, available here: https://efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2019-Azores/papers/EFMA2019_0184_fullpaper.pdf.

The paper looks at "the relationship between Worldwide Governance Indicators [a proxy for governance quality] and Government Debt in 164 countries for the period between 2002 and 2015." Using fixed effects (FE) and generalized method of moments (GMM) models the authors show that "governance quality is negatively and statistically related with government debt. For Low Income countries was found evidence that better governance environment is associated with lower public debt levels."

More specifically, "for a set of 164 countries on a period between 2002 and 2015, ... estimation results for FE model suggest that Control of Corruption (CC) and Voice and Accountability (VA) indexes are negative and statistically significant on influencing government debt. In part, this result confirms our Hypothesis 1 that better governance quality is associated with lower levels of public
debt." But the study also shows that these 'global' effects are predominantly driven by the presence of low income countries in the full sample. The authors find that "the link between good governance quality and government debt reduction is more evident for Low Income countries."

As a caveat, the authors do find that overall higher score in the World Governance Indicators Index (as opposed to specific sub scores) has a negative and statistically significant impact on the levels of government debt, so that overall higher measure of governance quality is associated with lower government debt for the High Income economies. The magnitude of this effect was reasonably large, as well.

9/9/2018: Corporate Power, Charity, and Social & Policy Impacts


In an important discussion, titled "Tax-exempt lobbying: Corporate philanthropy as a tool for political influence", Marianne Bertrand, Matilde Bombardini, Raymond Fisman, and Francesco Trebbi (02 September 2018, https://voxeu.org/article/corporate-philanthropy-tool-political-influence) argue that as "special interests use donations to influence the political process", "...philanthropic efforts in the US are targeted, at least in part, to influence legislators. Districts with influential politicians receive more donations, as do non-profits with politicians on their boards. This is problematic because, unlike PAC contributions and lobbying, influence by charity is hard for the public to observe." The resulting conclusion by the authors is that the case of corporate-charity interlinks "amounts to a taxpayer subsidy of corporations expressing their political voice". In other words, concentration of market power causes concentration push in lobbying and, thus, potentially forces policy formation to more closely reflect the interests of the corporate donors at the expense of the taxpayers and ordinary voters.

This is a very important issue in any analysis of the functioning of our democratic processes. But it also raises another 'adjoining' issue, not covered in the paper: American corporations are increasingly relying on other channels to alter social (and related policy) outcomes today. This channel is the companies increasing financial and other commitments to Corporate Social Responsibility and Social Impact (or even broader ESG) targeting. Whilst benign in its core values and ethos, the channel can be open to potential abuse by corporate powers. In addition, like charity status channel, the CSR and SI/ESG channel also avails of public funding link ups to corporate balance sheets (via tax incentives, subsidies, co-financing of projects, etc). The question worth asking, therefore, is the following one: To what extent do modern SI/ESG and CSR strategies of major corporations align with their lobbying objectives? In other words, do corporates use SI/ESG/CSR strategies to promote self-interest beyond purely societal interest?

Surprisingly, very little research in the Social Impact or ESG analysis has been devoted to the potential for corporations to 'game the system' in their favour.

25/4/18: Tesla: Lessons in Severe and Paired Risks and Uncertainties


Tesla, the darling of environmentally-sensible professors around the academia and financially ignorant herd-following investors around the U.S. urban-suburban enclaves of Tech Roundabouts, Silicon Valleys and Alleys, and Social Media Cul-de-Sacs, has been a master of cash raisings, cash burnings, and target settings. To see this, read this cold-blooded analysis of Tesla's financials: https://www.forbes.com/sites/jimcollins/2018/04/25/a-brief-history-of-tesla-19-billion-raised-and-9-billion-of-negative-cash-flow/2/#3364211daf3d.

Tesla, however, isn't that great at building quality cars in sustainable and risk-resilient ways. To see that, consider this:

  1. Tesla can't procure new parts that would be consistent with quality controls norms used in traditional automotive industry: https://www.thecarconnection.com/news/1116291_tesla-turns-to-local-machine-shops-to-fix-parts-before-theyre-installed-on-new-cars.
  2. Tesla's SCM systems are so bad, it is storing faulty components at its factory. As if lean SCM strategies have some how bypassed the 21st century Silicon Valley: http://www.thedrive.com/news/20114/defective-tesla-parts-are-stacked-outside-of-california-machine-shop-report-shows.
  3. It's luxury vehicles line is littered with recalls relating to major faults: https://www.wired.com/story/tesla-model-s-steering-bolt-recall/. Which makes one pause and think: if Tesla can't secure quality design and execution at premium price points, what will you get for $45,000 Model 3?
  4. Tesla burns through billions of cash year on year, and yet it cannot deliver on volume & quality mix for its 'make-or-break' Model 3: http://www.thetruthaboutcars.com/2018/04/hitting-ramp-tesla-built-nearly-21-percent-first-quarter-model-3s-last-week/.
  5. Tesla's push toward automation is an experiment within an experiment, and, as such, it is a nesting of one tail risk uncertainty within another tail risk uncertainty. We don't have many examples of such, but here is one: https://arstechnica.com/cars/2018/04/experts-say-tesla-has-repeated-car-industry-mistakes-from-the-1980s/ and it did not end too well. The reason why? Because uncertainty is hard to deal with on its own. When two sources of uncertainty correlate positively in terms of their adverse impact, likelihood, velocity of evolution and proximity, you have a powerful conventional explosive wrapped around a tightly packed enriched uranium core. The end result can be fugly.
  6. Build quality is poor: https://cleantechnica.com/2018/02/03/munro-compares-tesla-model-3-build-quality-kia-90s/.  So poor, Tesla is running "reworking" and "remanufacturing" poor quality cars facilities, including a set-aside factory next to its main production facilities, which takes in faulty vehicles rolled off the main production lines: https://www.bloomberg.com/view/articles/2018-03-22/elon-musk-is-a-modern-henry-ford-that-s-bad.
  7. Meanwhile, and this is really a black eye for Tesla-promoting arm-chair tenured environmentalists, there is a pesky issue with Tesla's predatory workforce practices, ranging from allegations of discrimination https://www.sfgate.com/business/article/Tesla-Racial-Bias-Suit-Tests-the-Rights-of-12827883.php, to problems with unfair pay practices https://www.technologyreview.com/the-download/610186/tesla-says-it-has-a-plan-to-improve-working-conditions/, and unions busting: http://inthesetimes.com/working/entry/21065/tesla-workers-elon-musk-factory-fremont-united-auto-workers.  To be ahead of the curve here, consider Tesla an Uber-light governance minefield. The State of California, for one, is looking into some of that already: https://gizmodo.com/california-is-investigating-tesla-following-a-damning-r-1825368102.
  8. Adding insult to the injury outlined in (7) above, Tesla seems to be institutionally unable to cope with change. In 2017, Musk attempted to address working conditions issues by providing new targets for fixing these: https://techcrunch.com/2017/02/24/elon-musk-addresses-working-condition-claims-in-tesla-staff-wide-email/. The attempt was largely an exercise in ignoring the problems, stating they don't exist, and then promising to fix them. A year later, problems are still there and no fixes have been delivered: https://www.buzzfeed.com/carolineodonovan/tesla-fremont-factory-injuries?utm_term=.qa8EzdgEw#.dto7Dnp7A. Then again, if Tesla can't deliver on core production targets, why would anyone expect it to act differently on non-core governance issues?
Here's the problem, summed up in a tight quote:


Now, personally, I admire Musk's entrepreneurial spirit and ability. But I do not own Tesla stock and do not intend to buy its cars. Because when on strips out all the hype surrounding this company, it's 'disruption' model borrows heavily from governance paradigms set up by another Silicon Valley 'disruption darling' - Uber, its financial model borrows heavily from the dot.com era pioneers, and its management model is more proximate to the 20th century Detroit than to the 21st century Germany.

If you hold Tesla stock, you need to decide whether all of the 8 points above can be addressed successfully, alongside the problems of production targets ramp up, new models launches and other core manufacturing bottlenecks, within an uncertain time frame that avoids triggering severe financial distress? If your answer is 'yes' I would love to hear from you how that can be possible for a company that never in its history delivered on a major target set on time. If your answer is 'no', you should consider timing your exit.