Earlier this year, Brian Norgard, a Silicon Valley tech executive, tweeted “there are 7.8 billion versions of reality.” An interesting thought at the time. As 2020 progressed, however, the impacts of this thought on how differently humans form beliefs has been disastrously highlighted. Despite consensus in the health care community, 75 million infections, and 1.7 million deaths, millions of people across the globe view COVID as an over blown hoax that is no more dangerous than the common flu. How does this happen? Why do humans, given the same set of information, come to drastically different realities? Psychiatrists attribute this phenomenon to humans relying on biased thought processes. People can be rational and logical, but our wishes, hopes, fears and motivations make us disproportionately more likely to accept or believe something as true if it is in line with what we want to believe. So, the next time you are thinking “how the h*** does my crazy cousin believe something so nuts?!” Rephrase it as “why does my cousin want to believe this?” By following this exercise on the current pandemic you can see that the desire to believe that COVID is a hoax seems to ultimately lie in our desires of economic wellbeing and personal freedom. How we collectively have struggled to come together, and suppress these personal desires in our response to the virus has strengthened my belief that we, as investors, will need to do more in the future.
The same desires that drive many to believe that COVID is a hoax are even more pronounced for many of the challenges we will face over the coming decades. Take climate change – what I believe to be the biggest threat to our planet and its inhabitants – as an example. Sen. James Inhofe (R-OK), the former chairman of the Senate Committee on Environment and Public works, has claimed that “man-made global warming is the greatest hoax ever perpetrated on the American people.” He even brought a snowball onto the senate floor to put our irrational fears of the planet warming at ease. How nuts is this guy?! Sorry, I mean, why does he want to believe this? Lowering our greenhouse gas emissions will be expensive, have negative interim economic consequences and would likely result in many Americans having to retrain in other fields. These realities are not the ones you want to hear representing the fourth largest oil producing state in the nation.
Unfortunately, Inhofe is not alone in his biased cognitive processes. Somewhere between 97% and 99.94% of scientists believe that humans are to blame for the 2° Fahrenheit increase in average global temperatures since 1880. However, only 63% of Americans believe that humans are responsible. The origins of this false “reality” for 37% of Americans is not so innocent, like one could argue for COVID. Oil producers like Exxon and Texaco are believed to have known about the effects of climate change on the planet as far back as 1979, according to memos uncovered by Greenpeace USA. Yet, the same report shows that in the decades since, oil producers have worked against scientists to create uncertainty about humans' role in climate change. Between 1990 and 2015, just five publicly traded oil producers spent over $3.6 billion on advertisements aimed at changing the public's perception of the fossil fuel industry and climate change. Additionally, political contributions from fossil fuel interests outspend renewables 13 to 1, with over $1.4 billion spent by fossil fuel lobbyist over the last decade.
The same inability to recognize, or worse, ability to hide, business practices that cause harm are not specific to fossil fuels. Guns, missiles, bombs, explosives, landmines, and cigarettes kill. Alcohol, gambling, and pornography advertising worsens addictions that ruin lives. Old growth timber farming, mining, and palm oil production devastate local communities and wildlife. Complicit to all of this are investors, who believe - through biased cognitive processes - that their passive form of ownership in corporations removes their responsibility to its actions. Our ownership, and hard-earned savings, collectively, provides companies with the financing needed to grow and enter new fields, finance operations and invest in research and development. By taking responsibility for our capital, we can not only remove ourselves from being complicit in harmful business practices - like denying climate change - but use it to make the world better. Our philosophy for achieving this is through the three pillars of ethical investing: engage, avoid, seek.
Most investors abide by profit seeking narrative, that management's singular focus should be to maximize shareholder value or simply to make their investors rich. A company managed in this way can invariably achieve this goal, in the short run, at the expense of other stakeholders – employees, suppliers, customers, their community, and the environment. We need to change this narrative; our capital can both earn competitive returns and be used to make the world better. This starts with informing management that businesses need to be managed for all stakeholders in a sustainable way that does not hurt our planet or its inhabitants. As shareholders, we are given certain rights that give us the ability to enact change within a company, such as voting on decisions and influencing company management, that aid in this discussion.
Corporations whose business practice simply cannot conform to our values should be divested from. These includes companies who produce fossil fuels, weapons, tobacco, pornography, and alcohol. Many responsible investors believe in still investing in these sectors but limiting the investment to industry leaders, in terms of their impacts. We would rather avoid the industry all together, as what does the “most responsible” tobacco company really mean? That they kill - 6 million people die every year from deaths linked to tobacco usage - their addicted customers more humanely than their competitors?
Investing responsibly, in well run, sustainable, and ethical companies is not altruistic. We are seeking to generate positive, above market returns through our investments. Evidence, gathered over the last thirty years by academics and practitioners alike, has shown that there is no tradeoff between investing ethically and earning competitive returns. In fact, more research points to investment outperformance by responsible investors than underperformance. As fiduciaries we are legally obligated to act in the best interests of you, the client, and cannot make decisions that benefit others - most importantly ourselves, but also the environment and other social causes - at the expense of returns. Our vision is to continue to do all the things that evidence shows improves returns – tax loss harvesting, tilting of portfolios to companies that exhibit characteristics that have been shown to outperform over time, keeping fees low, intentionally rebalancing, tax efficient asset locating, and overweighting of companies that we believe offer asymmetric risk and return characteristics – but adding an additional layer of value to our clients by making their capital also work for the environment and others, as well.
Our market commentary from last quarter continues to be our market views, which are to remain relatively conservative, and continue to be overweight international developed markets, emerging markets, value, and small capitalization companies. While these sectors have substantially outperformed, we believe that they still offer attractive risk and return characteristics for the coming quarters. An update on our overweighting’s, and underweighting’s, and how they performed in fourth quarter:
As always, please reach out with any questions, grammatical errors, or just to talk.
Happy New Year,