The Middle Way
How we, as the most powerful species on our planet, approach environmental challenges is now front and center in the summer of 2021.
Dear Clients,
I hope your summer is progressing well. For the past couple of weeks Hannah and I have been staying in southwestern Massachusetts, in the Berkshires, where we purchased some land earlier this year, and one of the most biologically diverse places on our continent. Our intention is to do restoration and conservation work with this land, and preserve it forever. Each morning I work via video conference on New Capital business with our terrific staff, and in the afternoon I put on safety glasses, gloves, and chaps, pick up the chainsaw, and do some clearing work on our first project, “Basecamp B.”
I had to start first with Basecamp B because Basecamp A is tied up by regulatory authorities, who are currently refusing to issue a permit for a small culvert at “Basecamp A”, where a marsh already drains through an existing large culvert into a creek. While I won’t go needlessly into details, suffice it to say that the environmental laws in Massachusetts are far, far stricter than in Texas, where they are often non-existent. Buddhist philosophy expresses that the middle way is often the right way, conducting your life away from the extremes. Unfortunately, neither state where I practice land conservation practices the middle way. In Texas, my neighbors are permitted to poison coyotes with cyanide paid for by the federal government, to dam waterways without permits, and to use herbicides indiscriminately. In Massachusetts, you must obtain a permit to grind a tree stump if it exists in an area deemed by the state to be a wetland, and obtaining that permit may require multiple regulatory submittals, retention of engineers and attorneys, and must be approved at the local and state level.
How we, as the most powerful species on our planet, approach environmental concerns is now front and center in the summer of 2021, when much of the world is now waking up to the fact that human combustion of fossil fuels is yielding dismal consequences in many places. Hannah and I arrived in Massachusetts on July 4, which was a beautiful day, but immediately record amounts of rain began falling on New England, and did not really stop until July 21. The road I paid to put into service at Basecamp B has washed out in several places. In other parts of the country, most notably the Western US, heat and drought are resulting in wildfires, crop damage, and animal, bird, insect, and human deaths. In Western Europe, catastrophic floods, the worst in 1000 years, inundated small towns and caused massive loss of life and property.
Climate change is not cheap. This week, Pacific Gas & Electric announced that it will spend $20 billion to bury California power lines which have caused numerous fires when they have blown down onto drought-stricken landscapes. PG&E’s new CEO, Patricia Poppe explained that what was previously believed to be too expensive to accomplish is now believed to be too expensive not to accomplish: "It's too expensive not to do it. Lives are on the line.”
Whether you have long accepted the fact of climate change, recently come to accept it with the realities occurring across the world, or have not yet accepted it, change is coming fast. New Capital has long invested clients who care about environmental issues in sustainable (now called ESG) portfolios (we are not alone, as the next graph shows), and we are continuing to evaluate methods to help align your portfolio with efforts to solve these massive problems.
Several weeks ago, as I first wrote about in my June 6 letter, a small investment firm named Engine Number 1 captured three seats on ExxonMobil’s board of directors, where it intends to argue for changes that will bring the energy behemoth into congruence with the future for the benefit of its shareholders. Astonishingly, the entire energy industry now accounts for only 2% of the aggregate value of the S&P 500. The market has far more effectively discounted the value of energy stocks and their futures than all divestment efforts combined.
Engine Number 1 is now following up on its winning ExxonMobil board effort with an announcement that, at least in my view, holds enormous implications for the future of ESG investments: a low-cost index fund similar to the investment funds that New Capital currently uses for your portfolios, with one huge difference: while the investment approach is passive, Engine Number 1, unlike all other index fund purveyors, intends to be an active shareholder with companies held by its index fund.
I have long argued to our business partners at DFA, Vanguard, BlackRock, Fidelity, and others that when we place our clients’ money with them we are effectively giving them our clients’ proxy vote in the thousands of companies in which their index funds hold shares, and that we expect they will use those proxies judiciously and actively to advocate for allocation of capital to future-oriented growth projects, appropriate executive pay, fair hiring and employment policies, beneficial community involvement, and yes, environmental policies that respect our planet. Often, I have been concerned that our business partners may not always be up to the task of representing your shares across these various needs.
Engine Number 1 aims to address this deficiency in the index fund world with its new fund, the Engine Number 1 Transform 500 ETF. The fund, which began trading a few weeks ago under the ticker symbol VOTE, is based on the Morningstar U.S. Select Large Index, and charges only 5 basis points, less than many similar funds from much larger fund companies like Vanguard, and far less than divestment-oriented active managers such as Calvert.
Engine Number 1’s concept is that if it can attract investor interest and money to its fund, then it will be positioned to use its shareholder proxy to advocate for change at, theoretically, any of the companies held in its new fund.
I am studying and watching VOTE to see how it is constituted, how it performs, whether it attracts funds, and how Engine Number 1 uses it. If it does well, I would expect Engine Number 1 to follow up by launching additional funds: international, small company, etc.
But my primary wish is that the fund companies in which I am already very significantly invested - DFA, BlackRock, and Vanguard especially - will follow suit and expand their governance activities so that they too advocate and take action in the way that Engine Number 1, a tiny competitor with a fraction of the resources of these larger companies, has done with ExxonMobil and may now do with other companies as well.
New Capital Management is now responsible for approximately $400 million in assets and growing under its management. Your trust gives me a strong voice with our business partners, who themselves potentially have extraordinarily strong voices represented by the shares and votes they control - shares and votes that are each day voluntarily granted by New Capital’s investments with them. My hope is that, as the world moves to address critical problems and needs, they will now use their full voices in new ways. Should they decide to do so, and take the Middle Way, they can be among the most powerful locomotives over the hills that we must now climb.
Leonard Golub, CFA
Fiduciary Financial Advisor