MAOI ARROYO
Rebuffing Buffet
Warren Buffet is the last person to whom I ever thought I’d retort “Okay, boomer” to. After all, he’s the kindly grandpa of capitalism who pledged to donate 85% (about $37.4 billion) of his wealth to charity. However, he’s also the gentleman who has adamantly opposed two proposals for annual reports on climate change and diversity initiatives , despite the push of some of his top investors. These include BlackRock Inc (BLK.N) , the world’s biggest asset manager; the California Public Employees’ Retirement System, which is the largest U.S. public pension fund; and Federated Hermes Inc (FHI.N) , an investment manager with $625 billion under management. He recently spoke to the Financial Times about “why corporations cannot be moral arbiters” saying “If they asked [the fund investors], ‘Do you want the board of directors and the managers of your companies to spend time and energy on environmental, social, and governance issues or do you want them to spend all of their time and energy on increasing the value of your shares?’ I’m rather sure that an overwhelming number of them would choose the latter.”
Mr. Buffet comes from a generation whose model is to take resources, make money, and then eventually “give back” to society. Instead of “giving back” later, why not invest in businesses that don’t “take away” in the first place? This is merely solidifying his investment philosophy of backing undervalued assets for the long term.
Let’s break it down.
An asset is considered under-valued when the price it’s selling for is below its actual value. In a truly efficient market, the price and value would be the same amount. It’s in inefficient markets where one can find assets to buy low and sell high. Developing countries and emerging markets are where we see these types of inefficiency. It’s also where the additional effects of job creation and modernizing agriculture or mariculture would help achieve the United Nation’s sustainable development goals. Every finance geek is out to make money, but why not use that cash to pull double duty? Why not make money more: more meaningful, more aligned with your values?
The new focus on environmental, social, and governance efforts or investing in the sustainable development goals doesn’t change the fact that you need to have a business case for each initiative. It reflects four particularly important things:
1) Our growing understanding of the dangerous imbalances in society and nature that are threatening our way of life and our prosperity. These carry enormous costs and are risks that must be assessed and mitigated as part of any investment thesis. The 2021 World Economic Forum global risk report shows that multiple global industries are dependent on the environment, with 32% of the risks from climate change, and over 60% from taking more than the planet can provide. With the continuing COVID-19 pandemic, the 1.89 billion people living in extreme poverty (36% of the world’s population) and 5 billion people declined access to justice and equity become a risk to our own families. When so many people have to choose between safety and starvation, the pandemic should bring us to the much overdue realization that a better life for them means safety for our loved ones.
2) The burgeoning opportunities that are the flip side of these risks. Low-income people around the world are already paying for services and are in fact over-paying. The average slum dweller in Manila pays much higher for their water than someone from London, and 4200% more for vended water vs piped water. Investing in companies that find a way to provide products and services in a more efficient and effective way, without exploiting people, would be able to capitalize on this market.
3) The significant data that shows a patience premium for long-term principled investing. The August 2020 World Bank report shows that the International Finance Corporation has generated higher returns than the S&P 500 by 15%. SK Innovations in Korea has proven that you can drive profit with a purpose, for every $1 in profit they create $0.53 in social value.
4) The largest inter-generational transfer of wealth from old men to women and millennials is underway, and both these groups are more concerned with how their money is invested.
We are all facing a future where firms and funds must also have a social license to operate and where stakeholder capitalism will be the norm in the great reset post-pandemic. A black and white approach that pits return on investment against social impact is not only artificial and outdated, but also possibly dangerous.
The old adage that one cannot serve two masters does not apply to innovative structures like blended finance and impact investing.
Like Warren Buffet, I too manage an American fund — though a much smaller one than Berkshire Hathaway. Ignite Impact is the first Philippine-focused fund. Our first priority is still a return to our shareholders. That’s why we invest in companies that have an inherently impactful business model — companies that literally profit because they have a purpose. These companies work hand-in-hand with existing foundations and non-government organizations. Our portfolio companies don’t have to choose between impact and profit because these partners help with a large part of community development work. Such synergies have also been key to Berkshire’s portfolio.
The times, Mr. Buffet, are changing. I will always admire your solid acumen that outperformed the market by over 3,000 percent from 1979 to 2008. But the current under performance of Berkshire Hathaway post-financial crisis might just be telling you something.
