Upcycle Studios, Orestad; sustainable housing development, Lendager, NREP

Upcycle Housing Development

-Working example of how waste can be used in construction

-Lower carbon impact on contruction and running costs

-Comparable construction costs

Re-think. Reduce. Reuse. Recycle. Most of all re-think. Carlsberg Chair Flemming Besenbacher speaking at C40, Copenhagen. I visited a sustainable housing development made with upcycled materials at a 70% lower impact and 50% better energy running costs. 

While there are challenges in scaling and waste supply chain infrastructure, the developer + architects (NREP, Lendager) argued there were no insurmountable barriers to scaling this to cities world wide. 

The design and liveability is wonderful. The capital costs while c. 5% higher should come down in future projects.

The ethos behind this was similar to what my friend, Hana Loftus (of HAT Projects)  relayed to me about the Rural Studio project in Alabama, US and her time there.

The Rural Studio are fairly individual projects, made on very limited budgets. They won’t scale like Lendager’s hope to. But the principles and ethos those builder-architects go on to make, do last. 

They are examples of happening now, and happening for a while. 

Links

Hat Projects: https://www.hatprojects.com/projects/

Rural Studios: http://ruralstudio.org/

Article on part of the project: https://arcspace.com/feature/upcycle-studios/

And https://www.dezeen.com/2019/04/16/upcycle-studios-townhouses-lendager-group-copenhagen-recycled-materials/

And link to Lendager https://lendager.com/

And NREP https://nrep.com/

Goldman Sachs: climate change, Cities resilience

The ThinkTank part of Goldman Sachs writes a piece on climate change with a focus in cities.

Cities because as I’ve blogged before that the majority of people now live in cities. They are also a big source of our carbon impact.

They summarise:

Although the timing, scope and magnitude of the consequences of global warming remain uncertain, the potential risks are significant. Attention has focused on the need to reduce greenhouse gas emissions, and far more work will be needed here. Even as this work progresses, however, there will also be a need for adaptation efforts that can help the world withstand the potential effects of climate change.

Climate change could reshape the earth. Negative outcomes that could make adaptation critical in coming years include higher temperatures, more intense storms, melting glaciers, rising sea levels, shifting agricultural patterns, pressure on food and water and new threats to human health.

Cities will be on the frontlines of climate adaptation. Although the need for adaptation is likely to be widespread, we focus here on cities. Because they are home to more than half the world’s population and generate roughly eighty percent of global GDP, cities will find themselves at the epicenter of this challenge. Rapid urbanization in some developing countries will also likely sharpen the focus on cities.

Urban adaptation could drive one of the largest infrastructure build-outs in history. Greater resilience will likely require extensive urban planning, with investments in coastal protections, climate-resilient construction, more robust infrastructure, upgraded water and waste-management systems, energy resilience and stronger communications and transportation systems. Despite the uncertainty around the timing and scale of the impact, it may be prudent for some cities to start investing in adaptation now and to do so in ways that allow for maximum flexibility in the future – without committing to any one specific climate projection.

Given the scale of the task, urban adaptation will likely need to draw on innovative sources of financing. Even the most economically prosperous cities will likely need to look beyond tax revenues to other sources of funding, including central-government funds, public-private partnerships, institutional investors, insurance and, in developing economies, international financial institutions. “Soft” infrastructure, such as laws, regulations and markets that support financing, will matter too.

Adaptation may raise questions of fairness. Urban adaptation may raise questions of fairness – such as which cities can support adaptation and which cannot, or where limited resources should be directed within cities. This is likely to be true even in the most prosperous cities; the fact that many of the problems could prove to be local and specific could exacerbate this dynamic.

Available at GS here.

My interactive sustainability show here, Thinking Bigly.

Leadership / WeWork

Leadership at WeWork

-A reflection on WeWork

-On what it means to lead

-The problems of charismatic leaders

-The value of the S-1

[Update, ofc, the CEO has resigned now]

Much is being written on WeWork and the debate around its valuation as it has tried to list on Public markets. Scrutiny of the business, governance and the like. A friend mentioned in passing the other day how the regulation behind the S-1 filing document was one of the most-value adding pieces of financial regulation law of history. This episode seems to back this up, as the transparency that the S-1 filing has brought has cast a scrutiny  that may have been lacking before.

The law is the 1933 Securities Act - “An act to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.”

There’s plenty of analysis of the business model and valuation. I’m interested in an assessment of the CEO as a person from what we can tell.

There has been analysis about its CEO and his “self-dealing” taking his trademark on “We” and selling it back to the company. Plus the side ventures WeWork has invested in, which closely align with the CEO’s personal interests, but seem further away from WeWork’s core business.

Namely a private school, a surfing/wave pool business, a natural food and an energy drink business. Plus WeWork has bought a private jet at $60m.

As a fundamental investor looking at company fundamentals and management - what it means to be a leader is an important question for me - although I know not for everyone.

When I’ve asked people, especially employees, what they look for - they tell me  they look to their leaders to reach out beyond themselves and beyond their own self-interest to a “wider purpose” to some purpose higher than themselves.

I sense this “purpose” led work - attractive to the younger generations - is becoming ever more important.

It’s one of the problems in the sense of “fairness” for executive pay.

When we see a CEO whose actions seem to have such self-interest to go along with the typical self-belief - typically needed - I don’t think people especially employees are inspired by that.

To me, that goes to the heart of the challenge with WeWork (and previously with the former Uber CEO) - it’s a challenge of leadership.

I know a multi-millionaire biotech CEOs who still travel economy as this means there is more money left to pursue the mission - save people’s lives.

So When Wework says this of its mission:

“When we started WeWork in 2010, we wanted to build more than beautiful, shared office spaces. We wanted to build a community. A place you join as an individual, 'me', but where you become part of a greater 'we'. A place where we’re redefining success measured by personal fulfillment, not just the bottom line. Community is our catalyst.”

And

“Create a world where people work to make a life, not just a living.”

I’m unsurprised that some have found jarring the CEO’s interconnection with what many view as his personal interests.

I am surprised neither the board nor a good friend/adviser has taken him aside and offered him other advice (or in the case of the investments sanctioned them).  

This twitter story by an early WeWork employee (number 17)  is also telling about how she wasn’t given options/stock. https://twitter.com/tristajaye/status/1162471350851817472?lang=en

Update: WeWork CEO has now gone. He’s still a billionaire though. 

Under-investment in Green Tech

-Humanity is under invested in green tech

-Plenty of investment in “content”

I’ve written before on how my sense is that we are under-invested in environmental technology. 

I was looking at investment in content from Apple and Netflix and it really hit home.

US Military R&D Only

$78bn

US Govt Green Tech

$3bn

UK Govt Green Tech

$0.8bn*

AstraZeneca Pharma R&D

$6bn

Apple, new TV content

$6bn

Netflix, new TV content

$15bn

*UK has this week promised another £1bn

Shell R&D spend = $1bn

Apple is spending $6bn this year in content for movies and tv.

Netflix is on track for $15bn spend (source FT, end).

Back, in 2015 this blog (see end) calculated it would take 34,739 hours to watch the whole Netflix catalogue.

And in 2018, Netflix added 1,500 of original content.

Assuming you could spare 2 hours a day, every day of your life to watch Netflix.

It would take around 49 years to watch the entire catalogue currently. And every year, at current rates. it would take you 2 extra years to watch.

So Netflix already has more content than a human can reasonably possibly watch in a life time and is spending $15bn more this year. Humanity will spend a few dollars a month to binge watch on TV box sets, but we’re not doing the same on pollution.

Meanwhile The US government can only spend $3bn on green tech funding, and Shell spends about $1bn on energy R&D.

Apple coming from nowhere is spending 6x more on content than Shell is spending on energy R&D.

OK. I understand that you can spend or only should R&D on project which are worthwhile but given the scale of the challenge in environmental challenges, and the huge returns to society / companies from solving some of our big climate challenges (eg fertiliser, energy, steel, aluminium, flying, mobility, etc. to name some).

This does seem a bit of a mismatch partly due to the returns to society and the externality cost being much harder to monetise appropriately, I guess.

No obvious answers from me - the known policy responses seem to be politically hard - although innovation investment seems clear to me.

https://automatedinsights.com/blog/netflix-statistics-how-many-hours-does-catalog-hold/

FT on content spend: https://www.ft.com/content/4f7f4326-c2bf-11e9-a8e9-296ca66511c9

Incentive Pay, CII update

Strong emphasis on time vesting awards:

CII overhauled its policy on executive compensation, urging public companies to dial back the complexity of pay plans for top executives and set longer periods for measuring performance for incentive pay. The new policy cautions against the pitfalls of performance-vesting awards and encourages companies to explore adopting simpler plans comprised of salary and restricted shares that vest over five years or more. The policy also recommends that companies consider barring the CEO and CFO from selling stock awarded to them until after they depart, to ensure management prioritizes the company’s long-term success. Although performance vesting share plans can work well for some companies, recent studies suggest they may not provide a strong enough connection to long-term company performance on a broad level, and use goals and metrics that can be numerous, overlapping, flexible and hard to understand.

CII notes:

For some companies, emphasis on restricted stock with extended, time-based vesting requirements—for example, those that might begin to vest after five years and fully vest over 10 (including beyond employment termination)—may provide an appropriate balance of risk and reward, while providing particularly strong alignment between shareholders and executives.Extended vesting periods reduce attention to short-term distractions and outcomes. As full-value awards, restricted stock ensures that executives feel positive and negative long-term performance equally, just as shareholders do. Restricted stock is more comprehensible and easier to value than performance-based equity, providing clarity not only to award recipients, but also to compensation committee members and shareholders trying to evaluate appropriateness and rigor of pay plans.

This is in line with work I’ve mentioned previously that Alex Edmans and Tom Gosling have done via the Purposeful Company.

ESG-linked pay, PRI session

I was at an investment conference debating extra-financial linked (Environment Social Governance) pay.

A blog summary is at the PRI:

”….The case for ESG-linked pay

We heard some strong arguments for why ESG factors should be incorporated into pay. Firstly, executive remuneration is a matter of concern for investors when the levels of pay don’t correlate with corporate performance or value generated in the long-term. This is not uncommon, given that incentive plans don’t often work as intended. Secondly, there is evidence to suggest that ESG factors result in positive financial returns and hence portfolio performance. Given that the market doesn’t account for these factors adequately (Alex Edmans work) it would be sub-optimal not to consider them in incentive plans to help deliver long-term sustainable performance….”

In the overall debate, I’ve referenced the Purposeful Company work several times.

This argues (amongst other matters) for a large amount of long dated restricted stock plus incentives around material intangibles (strategy and extra-financial) - this is broadly the position I argued.

Of recent note:

The PwC study looking at EPS / Sharebuy backs and incentive pay.

A Caroline Flammer study suggesting CSR linked pay leads to increase in firm value, long term orientation and social, environmental initiatives and Green innovations.

This study examines the integration of corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. We construct a novel database of CSR contracting and document that CSR contracting has become more prevalent over time. We further find that the adoption of CSR contracting leads to i) an increase in long-term orientation; ii) an increase in firm value; iii) an increase in social and environmental initiatives; iv) a reduction in emissions; and v) an increase in green innovations. These findings are consistent with our theoretical arguments predicting that CSR contracting helps direct management’s attention to stakeholders that are less salient but financially material to the firm in the long run, thereby enhancing corporate governance.

SSRN link for Flammer

Purposeful Company: Exec Pay Report

BEIS / PWC report.

PRI blog here.

Shell CEO defending its climate policy alignment

“I had an ambition to be a synchronised swimmer…”  Adam Matthews (Church of England) challenges Shell CEO Ben van Beurden on how ambition translates into reality and “mean what we say”.  

Shell CEO (pictured) explains the full life cycle measure of Net Carbon Footprint (includes use of product [carbon scope 3] and Shell’s ambition. Need to be 50% less in Shell’s portfolio by 2050 to hit climate ambitions (Paris alignment).

This is derived from a fairly technical view - you can find Shell’s explanation here.

A few elements of Shell’s plan:

-Links targets to remuneration

-public commitments to net carbon target 

-annual review of progress 

-TCFD alignment 

-review of lobby practices 

One can argue with Shell’s position but I do think it’s worth taking the time to understand where it is coming from.

Bending the demand side has been considered hard for companies to do - but they are also uniquely placed to influence government policy and consumer behaviour.

It is worth getting your head around “scope 3” carbon emissions.

There are many factors in play. The one which is high in my mind is the need for more innovation not less. You can see from above chart that arguable government spending here is under invested and similar arguments could be made for the private sector.

Short blog on there here.

Death of Value Investing

This paper (2019) from Prof. Lev and Srivastava:

“The business press claims that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge since 2007. The reasons for this putative sudden demise of value investing elude investors and academics, making it a challenge to assess the likelihood of the return of value investing to its days of glory. Based on extensive data analysis we show that the strategy has, in fact, been unprofitable for almost 30 years, barring a brief resurrection following dotcom bust. We identify two major reasons for the demise of value: (1) accounting deficiencies causing systematic misidentification of value, and particularly of glamour (growth) stocks, and (2) fundamental economic developments which slowed down significantly the reshuffling of value and glamour stocks which drove the erstwhile gains from the value strategy. We end up by speculating on the likelihood of the resurgence of value investing, which seems low.”

This is the same Lev who wrote the Death of Accounting and that argues that accounting metrics are not very relevant any more.

That concept is a key component of the idea that intangible capital is now one of the most important types of capital which you can see in the Westlake & Haskel book. Capitalism without Capital.

However even with (some) adjusting for intangibles Lev can not fully explain the “value trap”. Lev then explains this be reference to the economic fundamentals that value companies in the last decade might need to recover. They suggest value companies have not been able to invest to recover profitability as measured by eg Return on Equity or Assets (graph above)

The authors then speculate that these might be structural changes which might make it hard for these companies to recover.

Critics may suggest that this is primarily a critique of price/book or book price and that “value” or the “value factor” as practised by quant investors today is not a reflection of price to book.

The debate on “value factor” and “value” continues amongst investors.

Link to Lev paper here.