SRI and ESG Simplified

For some odd reason it occurred to me the other day that the movements in the title of this post have spanned a significant portion of my life and most of my career in the financial services business as a Registered Investment Advisor. 

The common acronym for socially responsible investing is SRI and the concept has been around for awhile.  SRI utilizes a screening process that excludes investments in industries or specific companies engaged in business or activities that an individual may consider undesirable.  Varying by individual investor, SRI popularly excluded companies engaged in the manufacturing or sale of alcohol, tobacco, firearms, gambling and the like.  

The movement has its roots in faith-based investing and the anti war movement during the Vietnam conflict.  In 1971 it led to the first ethical mutual fund - Pax Fund (renamed Impax Funds in 2022).  By the time I joined the fray in 1980 popular divestment campaigns in opposition to South African apartheid raised the profile of SRI and its potential for drawing attention to social change.  The movement achieved broader recognition with the adoption of the Domini Social Index in 1990 - recognizing the US Social Investment Forum and the growth of assets in this sector.

In 2004 the acronym ESG was coined. Named for a new emerging movement known as Environmental, Social and Governance; it introduced specific environmental, social and governance factors into traditional financial analysis to better assess a company's risks, opportunities and long term sustainability.  Financial considerations have continued to remain the primary focus of ESG.  In its nascent years ESG was a niche or boutique movement - a small frog in an enormous investment pond.  Notably, SRI didn't go away; as a matter of fact it persists to this day.   

By 2010, driven by global climate crises and events along with growing corporate support driven by evidence that sustainability improved returns; ESG entered the mainstream. 

ESG initiatives have boosted profitability by means of reducing waste and improving operating efficiencies.  They also enhance brand imaging which improves market position and attracts customers and talent. Stock prices benefit from enhanced stability as a consequence of managing risks associated with everything from labor issues, to brand loyalty to long term climate-smart resourcefulness.

For sure there are mixed results among specific industry sectors including emerging vs. mature markets; and there is not universal success in every single company. Nevertheless, there is strong evidence that ESG may provide a strategic advantage leading to long-term value creation over short-term gains.

click on image to enlarge

While the terms SRI and ESG are frequently used interchangeably there are nuanced differences.  SRI is values-driven (who you won't invest-in); while ESG is data-driven (evaluation of risks and opportunities).  

Why is this important?  When evaluating the application of the former vs. the latter in the drafting of an investment policy consider a very common misconception about the ownership of common stock.  Aside from an IPO (initial public offering) your purchase of a stock does not 'support' the company.  Nor does your divestment of a stock 'undermine' the company.  This is because it is not a transaction between you and the company; it is a transaction between you and the previous stock owner.

If you don't care to own shares of an armaments manufacturer because it is cross-ways with your value system that is perfectly OK.  The company will pay dividends to whomever owns the shares on the record date and it cares little for whom that person or entity happens to be unless you are amassing so much stock that you are approaching majority ownership. This is why companies are generally mum in response to divestment campaigns.  They're a welcome distraction from other, more potent, forms of activism such as a product boycotts.  A scenario altogether better managed by means of the latter vs. the former. 

Don't take my work for it, speak with your trusted financial advisor about how this may, or may not, impact you.

Cheers!  

*More background on the chart here:  https://www.bloomberg.com/professional/insights/sustainable-finance/are-esg-scores-relevant-for-portfolio-returns/

Chart Of The Day

New data reveals that the American dream of home ownership is on life support for first-time home buyers.

With mortgage rates hovering near 7% and a median-price home near $422,000 Americans need to make six figures to participate in the housing market nowadays. 

To put this in perspective, in 2004 the number of first-time home buyers totaled 3.2 million according to the National Association of Realtors.  By 2024 this number had plunged to only 1.14 million.

Complete story here at Fortune.   

Pump And Dump

On the evening of January 17 president-elect Trump and his family started selling a block chain crypto meme token featuring an image of him lifted from the July assassination attempt.  

Disclosed mere days before his second inauguration this venture is the latest in a long line of hustles to monetize his followers and enrich his family.  It is yet another sign that the Trumps will take every opportunity in his second term to push the edge of the self-dealing envelope. 
The Trump meme coin is his latest and likely most successful yet.  

You're likely wondering why the President is laughing all the way to the bank.

photo credit - Al Jazeera

That's because if you borrowed against your 401K, mortgaged your home, cashed-in all your frumpy, dumpy, boring stocks, bonds and mutual funds and purchased as many Trump meme coins as you could get your hands-on there's a possibility you made a killing.  As well, there is a possibility your got your ass kicked.  Further evidence that PT Barnum was prescient.  

Only moments following the president-elect posting on his social media account that his family had issued a crypto currency named $Trump a trade was placed.  In the amount of $1,096,109, from a crypto wallet with a unique identification code beginning with 6QSc2Cx, someone acquired a boatload of the Trump tokens - 5,971,750 to be exact - at the opening price of 18 cents apiece.  This launched a run up in the price of $Trump that would swell to $75 a token.

With a balance of only 25 tokens remaining this anonymous trader pocketed as much a $109 million according to an analysis performed for The New York Times.

The front-end profits for the unidentified early traders, including possibly some from China, was at the expense of the much larger number of schmucks late to the game who lost more than $2 billion following the crash of the token's price. 

While trading in the meme coin space is relatively new - what is described in the preceding paragraph is as old as the hills.  In the vernacular of the stock-trading world this is known as Pump and Dump - with early traders pumping-up the price and them dumping their positions as less sophisticated individuals get in late to the game.  Illegal in a regulated market this scam is all to common in the unregulated crypto world. 

It is one thing for the Trump family to profit from crypto trading; it is also worth noting that the President holds executive sway over the relevant federal regulatory world.  Rolling-back victim protections and enforcement is one thing; leaving the fox to guard the hen house is altogether another.  

Coincidentally, only ten days ago The Lever reported that the Trump administration issued a blanket ethics waiver to venture capitalist David Sacks, now the president's special advisor for artificial intelligence and crypto, clearing him to work on regulatory issues directly related to his financial holdings.  The waiver comes a month after President Trump fired the Senate-confirmed director of the Office of Government Ethics - the independent agency responsible for enforcing federal ethics laws. 

'I am granting you a waiver...of any conflict of interest regarding particular matters of general applicability concerning the digital asset industry' - reads the March 5 memo from White House Counsel David Warrington.

The creation of a financial instrument facilitating the transfer of money to the president's family in connection with his office interests me.  The Trump meme coin is ideally suited as a mechanism for, hypothetically-speaking, special interests or a foreign government to influence the President and his family.  

The fact that his office's regulatory actions may now shield or insulate him from both scrutiny and consequences interests me even more.

How about you?

Wallet Economics

 

A couple of days ago, Waffle House announced a 50 cent surcharge on each and every egg slung at one of my favorite breakfast joints.

Meanwhile, I grabbed one of three remaining cartons and paid $7.99 for a dozen large brown eggs. 

 

 

That, folks, is what is known as market economics. 

 

There is absolutely nothing a president can do to make your eggs 99 cents a dozen, again…..

Render Unto Caesar

You need not look any further than the family bible on your bookshelf to learn that taxes have been around for thousands of years.  Our country was income tax-free for most of our early history; mostly as a consequence of the absence of a federal government to establish such a tax.

Nevertheless, the early colonists were subject to real estate and head taxes imposed by their British overlords.  Additionally, the Sugar Act (1764) levied duties on imported goods such as textiles, wine, coffee and sugar.  The Currency Act  (1764) caused a precipitous decline in the value of colonial paper currency and the Quartering Act (1765) required colonists to billet and supply British troops in response to the costs of defending the empire following the French and Indian War.  

As school children we learned about the infamous Tea Tax that led to the Boston Tea Party.  It was the cumulative resentment over taxation without representation that was the largest contributing factor leading up to the revolution and break with British rule.

Following the Revolutionary War the Constitution gave Congress the authority to impose taxes and other levies on the general public.  The federal government was funded largely by excise taxes and tariffs imposed on specific goods or services such as alcohol and tobacco and other imported goods.

For a brief period during the Civil War an income tax was levied as a supplement to funding the war effort while almost every commodity possible was subject to an excise tax. Congress repealed this income tax in 1872.

Time passed, and with the rise of the Progressive Movement eventually led to the establishment of the 16th Amendment to the Constitution authorizing Congress to impose a federal income tax. Effective in 1913 rates started at 1% and with a large personal exemption the tax initially applied to only 1% of the population.  In a few short years the new income tax was a principle contributor to funding the costs of the first World War.

Yet I digress.  That's more of an intro than I initially bargained-for; perhaps one day we can take a deeper dive into our country's history of taxation.

Inasmuch as another Trump Trade War begins today between our friendly neighbors to the north and south - Canada and Mexico - the tax subject of the moment is tariffs.  A 25% tariff on imports from our two largest trading partners goes into effect today. 

China is subject to a smaller 10% tariff.

What is a tariff?  A tariff is a tax on imported goods. In his first term the President frequently reminded us that; China is paying us billions of dollar in tariffs.  Despite what the President says this tax on imports is almost always paid by the importer (a domestic company) and never by the exporting country.  

If the US imposes a tariff on a Chinese appliance the duty is paid to the US Customs and Border Protection Service at the border by the broker representing a US importer - take your pick of any Big Box store who retails appliances

China pays nothing; just like the US government pays no tax to France when exporting Kentucky bourbon whiskey.  The French importer pays the relevant duty; ironically a legacy of the unpleasantness of Trump trade wars during his first term of office.

Are you with me so far?

The importer remits the tariff to the relevant nation's customs service but who ultimately pays it depends.  If possible the business will pass the cost on to consumers.  In the instance of the Kentucky bourbon a French consumer is basically stuck with the increase in price as there is no other global competitor for Kentucky bourbon.

In the instance of the Chinese appliance the price may rise rapidly.  But there many other countries (here and abroad) that will sell a lower cost appliance.  In some instances the tax is absorbed by shareholders in the form of reduced profits or by workers in the form of lower wages.   If it is a domestic firm nobody pays a tariff.  Nevertheless, the tax on imports won't go to zero immediately; the government will collect some revenue until markets adjust.

Tariffs have been around for as long as there has been trade between nation states and what is a reliable constant is that initial higher prices will reduce consumption.  Over longer periods of time reduced competition can result in domestic companies becoming inefficient.  In the absence of competition this can lead to higher prices; not just for goods subject to tariffs but those of domestic origin too.  I've blogged about this before, an unintended consequence is not only will the price of Chinese appliances rise, but so will the price of domestically-manufactured appliances.  

What we learned from Trump's first term in office is that with the imposition of tariffs US prices will rise and demand will fall.  Chinese exports to the US will fall and will likely be replaced by imports from competing nations.

Today, the latest chapter to the story is that new tariffs will result in a windfall in federal revenue.

Nope. 

In the context of $4.4 trillion of federal revenues import taxes are insignificant; the equivalent of loose change in the federal sofa cushions.  Furthermore, this revenue is fleeting and unreliable. Importers will naturally find suppliers not subject to tariffs.  For all that, higher prices imposed on consumers are likely to persist.

Again, the Law of Unintended Consequences suggests that a large decline in Chinese exports to the US will drive down the value of the Chinese currency; offsetting  some of the rise in price.  Consequently, a reduction in sales can result in a reduction of purchases of our Treasury securities by China.  Which may push interest rates up.

The bottom line is that the interplay of tariffs on trade can be complex stuff and can result in unintended outcomes.  Thanks for staying with me; It's early in the game for the second coming of Donald Trump so I'm staying out of trouble and not making any predictions.  

The least complex takeaway is that China won't be paying us billions of dollars in tariffs anymore than we are paying France to import Kentucky whisky.  If you believe anybody that tells you otherwise I gotta bridge I want to sell to you.  

To the extent tariffs are the new sanctions regime to negotiate for better terms on an unrelated matter we'll just have to see how that plays-out.

Stay tuned and have a terrifically taxed weekend....

The Grift

Last Friday evening president-elect Trump and his family started selling a block chain crypto meme token featuring an image of him lifted from the July assassination attempt.  

Added to a long line of steaks, burgers, foot long wieners, chocolate, water, ice, beer, vitamins, wine, vodka, board games, video games, more than a half-dozen books, hats, mugs, key chains, travel booking, energy drinks, office furniture, women and menswear, flags, bar ware, life size cardboard cutouts, watches, perfumes, colognes, sneakers, bibles, digital trading cards and unsigned guitars. 

The Trump meme coin is his latest merch push and really raises the bar.

Disclosed mere days before his second inauguration this venture is the latest in a long line of hustles to monetize his followers and enrich his family.  It is yet another sign that the Trumps will take every opportunity in his second term to push the edge of the self-dealing envelope.

The $Trump token is being sold thru CIC Digital LLC an affiliate of the Trump Organization pitching the slogan: Join the Trump community!  This is history in the making!

Accompanied by multiple disclaimers disavowing anything to do with any political campaign, political office or government agency the website says that the Trump meme tokens are for entertainment purposes only, are not intended to be seen as an investment opportunity, investment contract, or security of any type. They are expected to function as an expression of support for and engagement with the ideals and beliefs embodied by the symbol $TRUMP.  In a pitch promoting the meme token, Trump told his supporters to; Have Fun!

Eric Trump had this to say; I am extremely proud of what we continue to accomplish in crypto.  $Trump is currently the hottest digital meme on earth.  This is just the beginning.

Trump tokens are not currency, they are not backed by anything tangible, they have no intrinsic value.  Unlike Bitcoin and Ethereum Tesla won't accept them for the purchase of a vehicle and cartels and crime syndicates won't take them in trade either.  Commonly, these coin tokens have been created as a joke inspired by internet memes and animal cartoons.  Next to worthless, they're  traded as a hobby.  In this instance, 80% of the coin tokens are controlled by the Trump organization while 20% have been offered for sale to the public.  You tell me who is The House and who is The Mark?

Attracted by the lure of easy wealth by means of a  pyramid scheme,  Trump business opportunity, trading of these meme coins on cryptocurrency markets began on Saturday immediately driving up the value of Trump tokens.  

Not surprisingly, the creation of a financial instrument facilitating the transfer money to the president's family in connection with his office has ethics lawyers pulling their hair out.  

It's also caught the attention of the crypto world with some in the crypto industry criticizing the token.  Nick Tomaino, crypto venture capitalist and former executive at Coinbase, wrote on social media; Trump owning 80% and timing launch hours before inauguration is predatory and many will likely get hurt by it.

Just between you and me I think the Trump meme coin could also be a mechanism for special interests and foreign governments to engage in influence peddling with the in-coming president.  But I digress.  

I'd be willing to bet that a few of you reading this post would tell me to my face I'm full of beans and simply meddling in another wildly successful Trump business enterprise.  I disagree about the matter of meddling as I happen to place a high value on free will.  A fool and his money are soon parted after all.

A challenge to my detractors:  If you embrace the veracity of this opportunity you might consider mortgaging your home or cashing-in all your frumpy, dumpy, boring stocks, bonds and mutual funds and purchase as many Trump meme coins as you can get your hands-on.  

What's that you say?  

You want to sit it out?

I thought so.