Week 25: Mission Driven Investing, Avoiding Headwinds and Considering the Stakeholders

Impact investing has gone through a revolution of sorts over the past few years. For decades, communities have voiced continuous concern that shareholders are myopically focused on short term profits at the expense of society as a whole. ESG (environmental, social, governance) investing was considered to be more of a marketing strategy or a charitable endeavor instead of a high quality investment strategy. Today the message is abundantly clear. ESG is no longer a marketing campaign or a feel good story, it’s an investment necessity. The proof of this shift is in the numbers:

ESG Risks = Intangible Risks

The triumph of intangible value helps explains why valuations today are elevated when compared to historical norms. Less is said about intangible risks. Today any company not strategically focused on ESG is at significant risk of being boycotted, canceled, or displaced entirely. In other words, if you’re a CEO of a major public company, you can’t afford to not be a leader in impact investing for your shareholders and stakeholders. It’s not surprising that the world’s most successful companies today have both a high degree of technical expertise and strong social rights leadership, like in the LGBTQ community. You can see the list of the top 100 LGBTQ companies here: https://lgbtq100.com/.

What happened with Exxon?

Exxon was the largest company in the US from 2004 until 2011 when it was dethroned by Apple. Exxon hit a peak market cap of $510B in 2007 and has been on a steady downward slope for over a decade to a current market cap of $270B.

Exxon Mobil’s mission statement is to be the world’s premier petroleum and petrochemical company. You would think it would be an easy win for Exxon to change their mission to something more palatable and broadly acceptable like, “powering the world”.

Last month, a tiny activist hedge fund named Engine No. 1 successfully replaced three of Exxon’s board members in an attempt to force the company to invest aggressively in the future of clean energy, which is not something the company is currently focused on. In fact, Exxon has been betting that oil consumption will continue to increase in the coming years. This large activist victory by a small fund is virtually unheard of. Engine No. 1 was successful because they were aligned with the prevailing political tailwinds – adoption of renewable energy and climate change.

Engine No. 1 was able to persuade large passive fund managers like Blackrock and Vanguard, to vote in favor of climate-friendly policy. The longer Exxon waits to get into clean energy, the harder it will be for them to gain access to capital or continued support from investors.

One more thing about clean energy…

Wyoming currently derives 90% of its electricity from fossil fuels. The U.S. Department of Energy is investing up to $2B to help build a next-generation nuclear reactor in the state to replace a coal powered plant. “Once operating, the Natrium plant is estimated to produce nearly 3 million megawatt hours of carbon-free power each year and avoid almost 2 million metric tons of carbon. It will also avoid other pollutants that lead to smog and acid rain to improve the overall air quality in the region.”

It’s clear there is great opportunity for investors to participate in the next generation of clean and renewable energy. It’s less clear that any single leader will emerge as different regions and use cases will adopt an optimal solution whether it’s solar, wind, geothermal, hydropower, biomass, and so. There are many ways to participate in the clean energy revolution.

Health Care Impact Opportunities

In the US, health-related spending accounts for 17-18% of GDP, much higher than other developed countries. Healthcare is an amazingly complex system with many conflicting forces. The list of considerations feels endless: preventative care, elder care, obesity epidemic, oncology, rare diseases, new drug development, regulation, safety standards, insurance, medicare, medicaid, and so.

Gene therapy resulting in a permanent cure is one of the most exciting areas of biotech R&D today. mRNA technology used by Pfizer and Moderna for their COVID vaccines is a type of gene therapy. Moderna’s mRNA vaccine pipeline includes possible upcoming vaccinations for Zika and for HIV, among others. Gene therapies in development today are aiming to cure numerous rare diseases, inherited blindness, hemophilia (inherited blood clotting disorder), certain cancers, and many other. Rapid DNA sequencing technologies provided by companies like Illumina will help us continue to explore the “dark matter” of the genome, which will likely unlock further gene therapy opportunities.

Given the direct impact on health and therefore quality of life, nearly all gene therapy investments can be considered impact investments.

The NCAA’s financial inequality problem

On Monday, The Supreme Court ruled 9-0 against the NCAA and in favor of more equitable student athlete compensation. NCAA athletic directors currently earn $1m+/year and top NCAA coaches make $11m/yr while even the best student athletes receive mostly education related compensation like free tuition, room and board. While this was not part of the ruling, starting on July 1 student athletes in six states will be allowed to monetize their Name, Image and Likeness (NIL).

Another blow against the NCAA is the Overtime Elite League which pays $100,000 salaries and provides coaching support to young up-and-coming talent. Overtime Elite bypasses cable networks and streams directly to Instagram, Twitter, Facebook, Youtube and Snapchat. Kevin Durant, Jeff Bezos, Andreessen Horowitz, and former NBA commissioner David Stern are investors in Overtime. In a world with massive amounts of venture capital, and easy access to state of the art technology, it’s cheaper and easier than ever to start a new business. Inequitable structures, like the NCAA, are asking for more disruption.

Weekly Articles by Osbon Capital Management:

"*" indicates required fields