Trust and Consequences

The daughter of a friend of mine called me about a Dutch Fraud Film festival. Would I have any examples of fraud to apply for the Fraud Film Festival Prize? The winner would receive funding to produce a documentary. I replied. “Wow. There is no shortage of examples”. Leonard Blankfein’s (Goldman Sachs CEO) Senate Hearings testimony came to mind.

If you look at this clip, it is quite amazing to see how Blankfein defends Goldman’s actions in a very circular reasoning that gets the viewer so confused that one loses the script. The basic question that Senator Levin asked was quite simple. “Is there not a conflict when you sell something to someone and then are determined to bet against that security and don’t disclose that to your client?”

Blankfein’s answer is stunning.

“Whoever is careless with the truth in small matters cannot be trusted with important matters.”
Albert Einstein
I look forward to greeting you at TBLI CONFERENCE EUROPE 2015 in Zurich November 19-20 and introducing you to people of integrity and trust.

TBLI Testimonial

“TBLI is not just a great place to increase one’s understanding about sustainable investing it is also an excellent place to meet and network; some of the contacts I have made at TBLI have turned into successful and lucrative business partnerships.”

Rufo Quintavalle-Poet, Investor and Director at Agro-Ecological Investment Management

Guest Blog: Rufo Quintavalle

Tracking errors are themselves an error

An article earlier this year in Institutional Investor pointed to low carbon indexes as an alternative to fossil fuel divestment for investors who are concerned about climate change. Citing the example of the Swedish pension fund, AP4, and the French pension fund, FRR, who both use this investment strategy the article describes these funds as “low-carbon equity indexes that closely track blue-chip benchmarks while excluding most carbon-exposed companies in those benchmarks.” Which, translated into terms that people outside of the financial sector can understand, means “a way to say you are doing something about climate change while not actually doing it”.
It is probably already too late to stop global warming of 2?C, although that remains the official goal that negotiators at the COP21 will be working towards. But what is certain is that if there is to be any hope at all of avoiding catastrophic climate change then the world economy will have to fundamentally alter. In such a context any strategy that proposes closely tracking “blue-chip benchmarks” is woefully inadequate since the “blue-chip benchmarks” simply reflect the reality of the world economy as it is and not as it should be.
Proponents of low carbon indexes would say that by excluding the most polluting companies they can contribute to an incremental change towards a low carbon future – companies will be pressurized to improve their performance in order to make it onto the index and a virtuous circle will be set in place. But in the same way that you cannot have your cake and eat it you cannot have an investment strategy that purports to address climate change while only accepting a tiny tracking error relative to the broader economy. The broader economy is itself part of the problem and if we do want to address climate change then what is needed is as large a tracking error as possible. Otherwise we will end up with low carbon indexes that by their own internal logic are obliged to invest in companies such as Royal Dutch Shell (the fourth largest holding of MSCI’s European Low Carbon Leaders Index) and Exxon Mobil (the third largest holding of the equivalent global fund).
The inadequacy of low carbon indexes to address climate change is, to be fair, not an indictment of institutions like AP4 and FRR who are, compared to their peers, among the more progressive of institutional investors. Rather it is an indictment of our financial system as a whole which, as it is structured will never be able to address climate change or indeed any other problem that is time-sensitive and requires systemic change. And ultimately this failure boils down to a philosphical failure regarding moral agency and the true nature of investment. If the goal of investing is simply to mimic the behavior of the broader financial market then the money managers and the people devising the indexes are doing a good job (although one suspects it is the kind of job that could be done just as easily by a computer). But if we are to understand investment as something that does not simply follow the markets but rather seeks to actively create value for society then our financial system is conspicuously failing.
So what to do in a context where the system as a whole is inadequate to serve society? And in which every single one of us is complicit in this problem the minute we take out an insurance policy or start paying into a pension plan? To those with no disposable income at all the most obvious course of action is to lobby your pension fund and your insurer to adopt a genuinely proactive policy on climate change and divest from fossil fuels. For those who do have disposable income to invest and are interested in using their investment dollars to combat climate change then you could consider investing this money outside the stock markets via angel investing, crowdfunding, private equity and other asset classes that your banker will do his or her best not to tell you about. The rewards here are far greater both financially but also in terms of accelerating the transition to a clean, green economy. And finally, since it is all too easy to point the finger at others we ought to examine our own collective responsibility in creating a state of affairs where “investment” has reduced itself to the buying and selling of shares in publicly listed multinationals who never needed our money in the first place.
Bernie Madoff was able to thrive as long as he did because there was a stream of people who liked the idea of a steady “no-risk” annual return of 10%. But ultimately if you are getting returns without risk that means someone else is picking up the bill. In the case of Madoff it was the new subscribers who were picking up the bill for the old ones. In the case of the broader financial system (of which low carbon indexes are merely a symptom) it is the planet as a whole which is picking up the bill for our obsession with “low-risk” listed equities and our refusal to rock the boat.

 

Empty Gestures

I am a huge fan of the tv show Curb Your Enthusiasm. The star and writer, Larry David, is brilliant in his ability to be brutally honest, awkward,  and totally embarrassing with his social dysfunctionality. However, the show makes you laugh, which is essential, these days.  If you never watched it, start today. Every time I am watching a television interview or listening to a podcast interview about something that I find important, I think of Larry David.

Most people being interviewed always say “that is a very good question” even if the question is stupid, useless, empty or just a dead end. What drives me crazy is the standard  one-two punch in responding to the interviewer. First “that is a very good question” then you hear “You know. It is very interesting…”, even if nothing is interesting, which they often prove with their answer. I often think that media advisors or other “experts” on not being authentic, train people with these two repetitive statements. Larry David’s does a brilliant parody on these empty comments.

Let’s  have a real dialogue where people say what they really think and challenge the interviewer in a polite, educational, and engaging way. Empty gestures don’t cut it and just dumbs us down. The stakes are too high and we need to be inspirational, thought provoking and laugh.

A genuine leader is not a searcher for consensus but a molder of consensus.

Martin Luther King, Jr.

Come to TBLI EUROPE 2015, Nov. 19-20 in Zurich. You will  be inspired and have your thoughts challenged, and have a great time.

Guest Post Jochen Wermuth

The first Dow Jones Industrial Index only had steam engine rail companies in it, there were only horses on the roads and horse-whip-makers were great investments. Just a few years later there were no more horses on the road, no rail company in the Dow Jones – a new industrial revolution based on the combustion engine wiped out the old economy companies, with many losers and winners like the Rockefellers and JP Morgans at the time. A similar new industrial revolution is under way now with similarly large risks and opportunities.
With solar power being offered at $4cent/kWh in Austin Texas, a price with which oil could only compete at $7/barrel, the fossil fuel economy is dead. There will be huge changes in the world economy with many losers (the old oil, gas, coal companies and their related industries ) and many winners, the new Rockefellers. We  can stand at the spearhead of this new industrial revolution, allowing us to earn outstanding profits and at the same time generating a sustainable future for our planet.
On the risk side, there will have to be write-offs of $21 trillion in oil, gas and coal reserves by listed companies, as they will no longer be profitable to burn because greater energy efficiency and competition from renewables will drive down long-term fossil fuel prices. This is huge and compares to $15 trillion write-offs in the mortgage bubble.
On the opportunity side, emerging markets still consume 4x as much energy as we do say in Germany or in the EU. Thus bringing state-of-art products there we can make a lot of money and have a huge impact. With solar and wind-power now costing less than power from the grid there are also ample business opportunities across the world. Few have realized this, just as few realized for a long time that smoking was bad for your health…
Great background reading in this regard is the book “My indecent proposal to the German Chancellor” which tells the great success story of a farmer’s boy becoming the owner-manager of a multibillion dollar company in the renewable energy space and sets out the plan for Germany to become 100% renewable powered by 2020. A model for a successful business leader in the new industrial revolution, winning against all odds, and a model for any country in the world (in particular those with more sun) to follow.
As missing this opportunity may not only cost each of us money but could destroy life on our plante, my wife Sasha and I have shared with many of you a hard-copy of the book already. Given continued interest we have gotten the author to make the book available electronically and free of charge for TBLI Blog readers in return for my father having edited and translated it to English.
To download your complimentary copy of the Book in different “eBook” formats for almost any common reading device like Kindle, Tablets ( IOS Android ) or Smartphones, please visit There is also a pdf version for PC-, Mac and Linux Users available. If everything else fails, you can also find an adobe flash based ePaper Version that you can read online with any flash enabled Browser. If you have Problems downloading or opening your copy, please contact helmut.zengerling@wermutham.com.
Please have a look and enjoy!

Jochen Wermuth
Founding Partner and CIO
Wermuth Asset Management GmbH
www.wermutham.com
jwermuth@wermutham.com

Donald Trump, Success and TBLI Hero

Alain de Botin gave a very good Ted Talk about success, particularly how it impacts Americans. Having grown up in Brooklyn, New York I always struggled with the incessant pressure to win and compete. It never motivated me, but always demotivated me. Alain’s description about how people are viewed as winners and losers, in America, was brilliant.  His talk, made in July 2009, resonated with me because of my own personal experiences and the current US Presidential election.

Donald Trump campaigning and his success in the polls is a joy,(entertainment) and depressing. Trump has offered no concrete solutions, insulted many, has been against most progressive initiatives that help many and he is very  proud of the fact that he fights very hard to pay as little taxes as possible. His tv show The Apprentice, which I really disliked, taught nothing of value. The focus was quick fix, short term, zero sum game, ego, winners and LOSERS, and no added value at all to the contestant or society. Trump is about  “success”. It is about the ribbon cutting, ego, cash, and no fulfilment and WINNERS and LOSERS. Unfortunately, we all become the losers with winners like that.

Try not to become a man of success, but rather try to become a man of value.

Albert Einstein

Come to TBLI CONFERENCE EUROPE 2015, November 19-20, in Zurich and meet the thought leaders of value.

TBLI Hero

I have known George Curuby for quite a long time. He was one of the few people who came from Japan for our inaugural launch of TBLI CONFERENCE in Rotterdam, in 1998. A quiet man who doesn’t push himself forward when everyone wants to be in the ribbon cutting photo. George never seeks to claim credit for great accomplishments or to pump up his ego. He just gets on with the work at hand. Theodore Roosevelt speech The Man in the Arena describes George.

George has always been extremely supportive of TBLI and our efforts. TBLI CONFERENCE ASIA 2011 was held in Tokyo. Due to the nuclear disaster at Fukushima, most sponsors and guests pulled out.  This created a huge problem for TBLI. George was the only one who came forward and helped TBLI making the Conference a success. His support for our work has continued to this day.

I was impressed with a recent revelation. He left Japan to move back to the USA to take care of his mother, as primary care giver.  I will never forget his kindness, generosity or authenticity, and neither should you.

He is a true mensch. Thank you George.

TBLI in the Press

Thanks to Family Office Magazine for publishing this article in their South East Asia Edition.

 

 

The New Toxic Asset

I was listening to the Planet Money podcast about how Wall Street is exacerbating the drought in California. It seems that investing large sums of money to speed up depleting the aquifer is a wise strategy for investors and farmers. Price of pistachio nuts is sky high and 1 pistachio nut needs 1 gallon of water, so farmers need to go deeper to pump up water, which needs more money. Wall Street to the rescue. Wonder if the fund managers are telling their asset owner investors that this agriculture investment is “impact investing”. This idea shows how the perversion of bonuses, no proper water pricing, and short term incentives makes good financial sense but very bad environmental sense. Check out the podcast.

Don’t reward bad behavior. It is one of the first rules of parenting. During the financial cataclysm of 2008, we said it differently. When we bailed out banks that had created their own misfortune, we called it a ‘moral hazard,’ because the bailout absolved the bank’s bad acts and created an incentive for it to make the same bad loans again.

Eliot Spitzer

Early Bird Discount TBLI CONFERENCE EUROPE Nov. 19-20 ends today

Guest Blog

Amit Sharma Co-Founder, Empowerment Capital

I find several phenomena in and around the “impact” sector to be a bit perplexing, given its stated objective for seeking social returns alongside financial/economic returns. As financial purists or ‘socially neutral’ investors may look to receive strong returns–or at least commensurate with deployed risk–when it comes to social enterprise investing, sometimes behaviors and expectations compared to traditional investing efforts seem set aside or changed in the following ways:
Time horizon: there are numerous examples in high tech, social media and initiatives in the information and big data economy where companies have openly expressed no view to near term profitability, and yet institutional investors flock to such deals with the patience that the firm is working toward strong market share, sector dominance or to achieve total proof of concept. One look no further than amazon– the world’s largest cloud-service provider taking years to achieve profitability (arguably continuing to innovate in ways that sacrifice near term profitability). Mainstream investors seem to find such investments attractive despite no real near term returns…but social enterprise ventures seem to be held to a higher standard–where investors demand attractive exits in the short term and positive cash flows in 18-36 months that will justify injections of capital.
Low vs high tech: some of the most innovative new ventures boast high tech solutions to meet consumer demand, requiring relatively large capital and R&D investments. Yet, often we look to impact-oriented activities to employ low-tech solutions to solve pressing development challenges, forcing such companies to cut on needed investments that would otherwise be more costly but ultimately could lead to greater efficiencies in delivering on our social objectives at scale. While multiples may be more attractive in sectors like gaming–whereby mainstream investors often incentivize beta testing, market exploration and high tech innovation–social enterprise may equally see attractive economics if they too were able to make larger capital expenditures that would benefit investors over time AND help achieve greater impact.
Risk-return calculation: Financial returns are a mere representation or proxy for other forms of value to investors: increased personal security, greater life and work flexibility, the facilitation of desired lifestyle, and/or the feeling of success that comes with positive economic investments. But all such returns need to be measured against risk–be it deployed financial capital, leveraged assets or relationships, or foregone opportunity costs given competing priorities. It seems to me, that if we ultimately seek greater welfare for ourselves and our communities, social enterprise investments may bring returns that are indeed commensurate with or exceed our deployed risk.
Growing impact may require a broader look out our fundamental investment objectives, and a reconciling of the standards we hold to mainstream vs social enterprise.