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Business Unusual

Sustainable finance - what it means for the planet and your investments

3 February 2021 7:15 PM

It may sound obvious but for the longest times sustainability was not a major factor when deciding to invest

In any other week talking about sustainable finance as a novel idea would seem odd, but given the run on companies like GameStop might remind you that little will get in the way of making a quick buck even with ideals about fighting back against hedge funds that profit when businesses fail.

Companies were created to share business risk with investors. In time they used shares to raise capital to expand and grow. For the longest time their focus was justifiably looking after the shareholders in order to look after their business. That focus has often been criticised as coming at the cost of the staff of the company and even the customers. In recent years the worst kind of shareholders were framed as private equity companies and hedge funds that would use the assets of the company to secure other assets financed via debt which would give the investors an even better return while saddling the company with job of sustaining the company and servicing the debt

It is not useful to use companies that don’t actually make anything to effectively use companies that do to make a quick profit. It still happens and it is considered fair business.

For those that think these investors are like vultures, they may have a point, but nature needs vultures to get rid of the animals that are about to die and this is what they do.

By looking for and then preying on weak businesses it should leave more customers for the good businesses and open a space for new business.

But as we move from one form of economy that was dominated by certain sectors to a different economy with a new dominant sector we are likely to feel a bit sad for the once powerful brands that shrink and fall.

GameStop

Back in the 80s as personal computers and software were on the rise the computer shop became a new addition to shopping malls, GameStop at one point was one of the largest in the world and looked like it would be around forever, but as games have evolved so too has their principle means for distribution. Downloads became the way to buy games and I can say that before 2016 I would not consider buying a game, firstly because new games are expensive and the cost and time to download it was prohibitive. I would buy games second hand from a physical store on a disc for PC or console, however in the last 5 years I have not bought any physical games, not because new games are cheap, but that I can find almost any old game to buy online at a very reasonable price and with uncapped fibre even a slow connection would allow be to download a game overnight and play it the next day.

This was a shift everywhere and it affected GameStops sales. For some there is a straight line to draw about a business in decline that is destined to die especially during a pandemic, but others know that new things generally don’t kill the previous incumbent it just readjusts their prominence. The sale of new consoles released in 2020 and the need to spend so much more time at home looked like a good reason that GameStop had not reached game over.

For some investors the fundamentals justified a share price greater than the price in late 2020 and was even better given how some very big firms had chosen to short so much of the stock.

Having some believe a company will live and others believing it will decline is how a market is supposed to operate. Over time the performance and incentives will declare one or other side correct or both will remain in a kind of stalemate.

That changed in mid January when online inventors and advisers with names like Player896 and RoaringKitty began seeing the share price climb, at the same time the many other small time investors who were looking at what they could buy to get a quick return began to take notice. As the share price rose, doubling in a week by 21 Jan only to double again by the 25th of Jan. Now it was not just those tracking investment forums like Reddit’s Wall street Bets and YouTube, it got noticed on social media and traditional media too.

Now the chance of a run on the stocks was looking very likely especially as short sellers expecting the share to rise further opted to cut their losses which means buying shares, lots of them.

In three weeks the share had risen from $20 to $483

Rather than being a celebration, it had created a very dangerous position for the investors, the brokerages, the company and even the market itself.

The full story is still to be seen but for the few investors like RoaringKitty that at one point was up $33 million he has since lost $13 million as he and other investors wonder if the run is over or not. For many the run ended on the 28th and it may include major damage for the likes of Robinhood, the hedge funds that shorted the stock and credibility of the market about being a fair place to make money. For the many most likely young and small investors they may have taken on debt to buy the share that has now dropped back to $90 (3 Feb 2021) . Sell now and you lose your initial investment, hold on and the share price could go lower still. What are they supposed to do?

This is a good time to revisit the idea of sustainable finance

It is not a new idea and grew out of the idea that companies needed to consider more than profits. The triple bottom line which focussed on profits, staff and the environment became a buzzword in the last five to ten years even if the application was not that impressive.

But as companies automate they realise that the people they do employ become more critical and that trying to turn a profit in a world in turmoil is much harder that just battling competition.

The World Economic Forum has moved to make it more of a focus in the last few years. BlackRock CEO Larry Fink’s letter to CEO’s has focused on investing in sustainable projects and not those that have driven the rise in CO2 emissions.

UBS has released their latest report during the recent virtual Davos gathering and not ten trends that are likely to make sustainable finance a key investment trend this decade.

It does not only look to see who will be the winners, it looks at the sectors that with the right support will thrive.

Some of the trends can be seen in the GameStop spike with investors able to organise and coordinate their investing for impact. They also see data transparency becoming better allowing more investors to see what is happening in the market, a sector and a specific company.

The focus on companies and sectors that will look to counter the impact climate change and the pressure to shift away from companies that still depend on it will not only be one to sustain your capital, it may be critical to sustain the planet.




3 February 2021 7:15 PM

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