Category Archives: Finance

Value(s) by Mark Carney: Chapter 15 Investing for Value(s): Key Takeaways / Analysis / Citations

Chapter 15 Investing for Value(s)

Key Takeaways

The short-summary is:

It’s the transition, stupid!

More detail:

Capitalism must solve the climate crisis, obviously, according to Carney. In this chapter, Carney is making a push to show how ESG ought to be used which aligns with his Glasgow COP26 work. This chapter is very much advocacy as he is the special envoy to the UN on climate finance.  

The Rise and Rise of ESG

Carney lays out the trajectory for ESG. Just as GAAP (in the wake of crash of 1929) and as IFRS (following the 2008 credit crisis) imposed new standards in accounting, we now see increased pressure for companies to set out their sustainable development goals. Carney identifies a key challenge however, that there is a wide variety in methodologies in environmental, social and governance (ESG) and subjectivity is more prominent then in absolutes typical in accounting. Noting of course that accounting, too is subject to managerial influence. Hence, to shore up standardization, Carney is working on Glasgow COP26 ie. re-assert global standards for ESG. Glasgow COP26 is the next global conference, Paris 2015 was the last major conference. For Carney, the providers of capital such as pensions, banks and insurers will increasingly need more transparency, stipulate their investment horizons and clarify where they sit on the continuum of maximizing value for shareholders versus doing the same for stakeholders (who as stakeholders provide a positive feedback loop back to increased shareholder value in many instances anyway, according to Carney). 

The Rise of ESG Historically:

It started with SRI (Socially Responsible Investing) in the 1960s. SRI screened for tobacco companies and apartheid in South Africa. ESG has broadened considerations: 

Environmental Impacts

  •         Climate change and Greenhouse Gas emissions
  •         Air and water pollution
  •         Biodiversity
  •         Deforestation
  •         Water scarcity
  •         Waste management
  •         Energy efficiency

Social Contributions

  •         Customer satisfaction
  •         Labour standards
  •         Data protection and privacy
  •         Human rights
  •         Gender and diversity
  •         Community Relations
  •         Employee engagement

Governance and Management

  •         Board composition
  •         Whistleblower schemes
  •         Audit committee structure
  •         Political contributions
  •         Bribery and corruption
  •         Executive compensation
  •         Lobbying
Hortense Bioy

The Surge of Interest in Separating the Good Motives from Bad Execution

Modern ESG involves analyzing and investing in purpose-driven companies. In short, ESG is about having credible strategies while avoiding those that are part of the problem (gambling, firearms, deforestation, tobacco, fossil fuels) and supporting “bad” industries that are solution-oriented. Sustainably managed assets totaled $30 trillion at the start of 2018 and is now already at $100 trillion in 2021 according to Morningstar’s Hortense Bioy in August 2020. In addition, the UN’s Principal for Responsible Invest (PRI) have now been more widely supported which mandated ejecting member who don’t follow ESG principles.

How ESG can Guide Stakeholder Value Creation

a massive amount of ink in this chapter is dedicated to the technical deployment of a more rigorous version of ESG. The details are as follows:

  • Carney insists on looking at finance first impact investing, that is to say, “seeking to do well by doing good” (Value(s), 421) using ESG criteria to identify common factors that assist risk management and value creation BUT ALSO delivering superior financial returns;
  • ‘Do well by doing good’ is about positive social or environmental benefits AND accretive financial returns;
  • With mandatory pensions, you can’t ‘vote with your feet’ but beneficiaries on socially responsible resolutions are possible;
  • As the CFA (charter financial analyst exams) trains you to identify a client’s risk appetite, it should also train you to prioritize non-financial appetites ie. ESG; Again, think John Kay, who says that the purpose of living is not to breath anymore then the purpose of business is to make a profit. Breathing and profits are necessary but not the purpose…;
  • Carney supports attempts to evaluate wooly environmental and social outcomes as rigorously as financial returns;

As such, Carney points to the Impact Management Project’s approach as detailed here

·(From the Impact Investing Institute)

·         Carney advocates a broad alignment between stakeholders and shareholders which occurs when purpose and competitive advantage of a company both depend on achieving a specific social or environmental value which Carney calls “Shared Value”;

Trade-Off versus Divine Coincidence

Some will trade a degree of financial returns to gain greater social returns while other seek divine coincidence which is what Carney is more interested in exploring in this chapter. Divine coincidence is a central bank / new Keynesian terms that suggests there is zero-tradeoff between stabilization of inflation and the stabilization of the welfare output gap. Divine coincidence approach of environmental outcomes and accretive returns that increase together. But what Carney is referring to regarding divine coincidence is more likely that doing well on ESG just so happens to mean doing well in terms of financial performance for factors obvious as well as less tangible (hard to draw causal links given complexity). Said another way, Carney’s thesis is that stakeholder values have a feedback loop that fuels the maximization of shareholder values.  Carney wants explicitly calculated, reported and tracked social and environmental goods to be embedded in financial reporting…and its finally starting to happen through various international bodies: TCFD, FSB, Glasgow COP26, IFRS…..

Why ESG is so Lucrative or At Least Will Be…

Carney’s big persuasion push in this chapter is that purpose-driven companies tend to score on ESG metrics and also tend to outperform those that do not score well on ESG. Why? Possible explanations have to consider:

  • Superior management = superior ESG adherence = superior financial returns. Some ESG factors are more helpful financially than other ESG factors, the ones that are short-term could be overweighted and thus deliver shareholder value sooner, for example Wal-Mart has a logistics competency at its core and their carbon footprint is reduced which would align with divine coincidence;
  • Some ESG factors are more long-term. Some ESG factors are indirect contributors of competitiveness such as brand, social license which improve a company’s ability to attract and retain talent. For example, opposite to Wal-Mart, a company that protects endangered species but receives no direct reward might receive more or better job applicants as is the case with Patagonia for example;
  • The prospect of strong cashflows could explain why a ESG company trade at a premium in the case of Wal-Mart (controlling for other factors which is difficult empirically) and on social license in the case of Tesla (i.e investors and institutions bias towards cashflow metrics, managing what they can measure as Peter Drucker famously points out but social media darlings and rocket launches play into an aspiration mix that communicates both “it’s the transition, stupid!” and stock momentum)
  • Carney admits that ESG performance will not automatically translate into higher cash flows and that society’s values should not be determined exclusively by whether the stock market gives a company credit for helping achieve those ESG goals.
  • Somethings…money can’t buy but companies have massive impacts such as species loss or inequality according to Carney. The value in those cannot be captured by the firm and thus not translated into the price of the company.
  • As Albert Einstein said “not everything that counts can be counted, and not everything that can be counted counts.” Carney notes that there is are a lot of different methodologies to decide what should count, and determine what society believes should be counted…..

Performance….Further Arguments for ESG

  • Sustainable investment strategies (divine coincidence) outperform traditional strategies, according to Carney. He points to a study by Causeway Capital’s Mozaffar Khan, George Serafeim of Harvard and Aason Yoon of Northwestern University which shows that activities that enforce better and material social and environmental value get you ‘Alpha’ ie outperformance relative to the market median of 3 to 6 percent annually.
  • Again, Carney references Divine Coincidence here. The researchers found that this may be a function of the positive ESG sentiment such as public sentiment momentum (ie. Tesla is the top example).
  • Public sentiment influences the value of corporate sustainability activities therefore the price paid for corporate sustainability and the investment returns of portfolios that consider ESG data is boosted by those sentiments.
  • Again, Carney acknowledges that ESG does not equal Alpha automatically. The formulaic application of ESG ratings or kitemarks are not enough. Also, that as more firms use ESG… “if ESG mainstreams, then overall market performance, risk-adjusted returns, should improve, but relative performance will not.” (Value(s), 427)
  • Broad societal improvements to workforce diversity and inclusion across the board won’t differentiate specific companies that have helped make it happen, except during the transition to a more equal and inclusive society. “These shifts will create ‘social alpha’ , or what people would colloquially refer to as progress.” (Value(s), 427).

Fiduciary Duty

Carney is making an appeal here to the idea that CFA (chartered financial analysts turned portfolio managers) should really include calculations and inputs on ESG. Investors must weight ESG factors to fulfil their fiduciary duty to those whom the money is being managed. To do that investors need:

1) clear objectives of an investment…ie. that we knew the value that our capital is bringing in terms of ESG.

2) understanding the divine coincidence between stakeholder and shareholder value….i.e what’s good for the abstract other will have intangible benefits for the investor and the client.

Carney argues that investors must consider maximizing their client’s welfare not simply financial results…Recent polls show that owners of capital care more than simply about profit and want ESG to be a factor to some degree. 50% of those surveyed by FCDO (Foreign, Commonwealth & Development Office) were interested in sustainable investment today or in the future….33% were willing to accept LOWER returns if they knew their investment made a difference to something they cared about. In pensions, OTPP (Ontario Teacher’s Pension Plan) and UK cancer researches want to exclude things like children in cages, tobacco companies even if these firms are very profitable

Carney proposes changing the definition of what constitutes fiduciary duty.

Also notes the success of Make My Money Matter in the UK which aims to get individual investors to express their views.


Effective in June, 2021, 1,500 firms with a market cap of $17 trillion are now reporting against TCFD (Task Force on Climate-related Financial Disclosure from the Financial Stability Board of the G20) which was launched only 3 years ago. How do we get this to be accretive is being researched and more people are moving into ESG roles to support that analysis.

The Investing Ecosystem for Stakeholder Value Creation

Carney is basically saying, we need climate disclosure. This investment ecosystem is rapidly developing, evolving and confusing according to Carney. Here are the main actors to explain what the information they need is:

  • Companies that receive investments and put it to work on green initiatives or social projects get a weighting;
  • Investors that provide that capital to those companies to support these activities, they can pursue investment strategies that are traditional or ones that systematically do take into account ESG facotrs;
  • Stakeholders including employees, suppliers, customers and communities are wanting more transparency;
  • Governments and regulators that oversee the system, set the rules and address the systemic consequences of actions that companies and investors take. It is a superior solution IF the consequences are independent of any single human actor’s will; if the consequences and punishment are autonomous and objective then those punished will not seek to punish the regulator themselves. This is particularly applicable to good parenting, autonomous punishment works much better.

Problems with Disclosure

Obviously, investors have different weighting on each ESG factor because they may care about different factors differently to others, I might like fire arms for example. Reducing exposure to tail risks and improving returns are part of solution, but companies may shift away from social license and resilience to systematic shocks as memories fade (think about how SARS memories faded in the run-up to Covid). We just don’t know when the next pandemic, climate Minsky-moment or decline in social license (catastrophic global war perhaps) will or might happen.

Carney is betting that the stakeholders are going to push investors over time as these ideas that Carney is espousing are mainstreamed.

Trying to understand if he’s late to the party: this has been tried. Companies don’t do this. Impact accounting and ESG needs to be more transparent in their investment goals. 

ESG seems to be a differentiator…but there will be push-back.

Information and Disclosure:

  • IASB and FASB and securities regulators will likely oversee disclosures.
  • There is the IAS39 for valuation of financial instruments and the IAS9 for expected losses on loans.
  • But sustainability reporting has the following:
  • GRI (Global Reporting Initiative),
  • SASB (Sustainability Accounting Standards Board),
  • And as mentioned prior, the TCFD ( the Task Force on Climate-Related Disclosures…is another group pushing for ESG disclosures as mandatory.
  • Social media to scientific analysis informs the view of public expectations…in the case of social media I hope not considering social media is not representative of public opinion.
  • There are competing interests per topic and opinion will vary over time but those opinions all should matter, according to Carney.

There has been a major attempt to consolidate by the big four (Deloitte, PwC, EY and KPMG) to develop a corporate reporting framework that has agreed standards with the GRI, SASB and TCFD metrics. The metrics are as follows:

1)      Core metrics: 22 well-established metrics and reporting requirements, there are quantitative and obtained with some effort and time;

2)      Expanded metrics: 34 metrics which are less well established which convey a wider supply chain scope. These metrics are more advanced ways of communicating sustainable value creation.

Impact Management Project (IMP): is building a framework on:  What is already reflected in financial accounts (IASB);

§  Information material for enterprise value creation (SASB);

§  Information for sustainable development (GRI);

Integrated Reporting: developed in 2013 to explain the value creation incrementally of human, intellectual, manufacturer, social and natural capital.

The European Union has been leading on non-financial through something imaginatively called “Non-Financial Reporting Directive” (NFRD)

There are three major approaches to using ESG by investors

  • 1.      Ratings based Approach
  • 2.      Fundamental value where raw ESG data is analyzed in an integrated assessment;
  • Or
  • 3.      Impact assessments

[1] Ratings Based Approach

in this approach the investor outsources the assessments to ESG data providers how have their own methodologies for objective and subjective data and then create a comprehensive indices.

  • There is a lot of self-reporting and surveys can be gamed;
  • Ratings system data may vary and therefore data vendors will have wildly different scores;
  • The correlation between 6 different ESG rating companies was only 0.46 in other words only about half the time did they get close to the same rating;
  • The more profitable a firm the lower the ESG discrepancy so there is hope that energy and time can avoid inaccurate ESG reporting;
  • Governance metrics were the weakest at 0.19. In other words only about 1/5 of the time did the 6 different rating firms score similarly;
  • Disagreement are increasing in 2019. Berg, Koelbel and Rigobon showed that there are three primary drivers of difference in reporting: 1) measurement (what metrics are being used), 2) differences in scope (what attributes are being used), 3) weighting (the level of materiality the ratings vendor ascribes to a given attribute).
  • Different ESG outcomes mean ultimately different values.
  • Carney argues the rating approach is simply too subjective. It is not straightforward to value the outcomes that a given investor values. Improvements will come but ultimately, this is subjective.
  • Carney reiterates that sustained practice of a virtuous goal of value creation is essential.

[2] Fundamental Sustainable Value

in this approach, rather then ratings based approaches, investors have access to the raw tools. The data is usually publicly available data (social media, NGOs, company website, company filings) and then disseminated systematically. Examples are:

  • HIS Markit;
  • Refinitiv;
  • Bloomberg. 

The end user determines the materiality. This approach is akin to fundamental analysis in the Equity Research field in which the expert is providing a final investment decision by analyzing company performance, building a financial model that provides a homebrewed answer to the company’s intrinsic value…..and then trading accordingly.

As part of fundamental sustainable value, there is a growing emphasis on Shared-Value. Shared-Value reinforces:

  • (1) creating innovative products that solve a social need,
  • (2) enhancing productivity in supply and value chains,
  • (3) investing to improve the industry cluster where the business is based… 

Carney is supportive of this approach because of the complex changes and having someone at the wheel. However, companies are the leaders at conveying their ESG strategy and this is still going to lead to a lack of standardization. Carney admits that there is a significant risk that this is about branding over substance….

[3] Impact, Monetization and Value

This approach looks at the financial AND social contributions. They seek to measure social impact. This approach uses:

  • IFC Operating Principles,
  • Impact Management Project Dimensions of Impact,
  • And Global Impact Investing Network’s GIIN’s IRIS+ metrics,
  • 1/3 of FTSE100 companies already do this IMV….

Impact monetization puts prices on the impacts. The calculations are sometimes easy like: how many solar panels sold minus production costs? While it’s social impact includes solar arrays installed in a house and the array is known to replace CO2 emissions by $17 therefore the monetary impact of this solar panel company is X. But some investors might place a higher value on CO2 creation averted or that the value factor of CO2 will rise which is a value judgement in and of itself. For example, Canada uses it’s carbon price path of $170CAD per ton….

The Serafiem/Cohen Impact Measurement Model asks that you compare the total environmental cost of 1,800 company. You could find 2 chemical companies with sales of $12B each but one created environmental damage of $17B and the other only $4B.

  • These are the same problems with having to calculate the value of and the actual Amazon. There are some many factors that aren’t measured.
  • Calculating the impact value of moving from fossil fuels to renewable power generation requires looking at the different estimates of the diminishing marginal utility of impact….
  • Ranges and sensitivity analysis are useful here but Carney warns that false precision could set in.
  • The danger in Impact, Monetization Analysis is that the analysts will become disconnected from the raw data and develop a sense of false precision that cannot be validated since it is subjectively derived.
  • Aggregating the nuance, it will basically create an obsession with that one number much like a stock price itself.

Securing Climate Impact

  • The Transition to Net Zero…Carney believes that the evidence points to a need to shift toward green solutions in order to prevent exceeding the 2 degrees Celcius consensus from the Paris agreement which will unleash a feedback loop that is irrevocable.
  • Since climate transition is an imperative of climate physics and chemistry, it’s obvious that this demand for change is going to go mainstream, therefore jump on the wagon. Engineers and politicians see it.
  • Companies are increasingly being as whether they are doing their part or whether they will be crushed and become “climate roadkill” (Value(s), 449).
  • 25 countries already of a Net Zero plan….Carney believes that harnessing finance is critical to make this happen. Every financial decision- should take climate change into account in that decision-making.

There are ways to evaluate the providers of capital:

  • What percentage of companies we invest in have a net-zero transition plan in mind?
  • What percentage of the portfolio is net-zero aligned?
  • What percentage deviation from the target is a given company?
  • What degree of the portfolio is actually warming: how much emissions is this particular company generating? GPIF, AXA and Allianz volunteer this information

Carney works at Brookfields to try to create net-zero as an asset class….

Social Purposes of Investing:

William Blake “Know your values rather than be enslaved by those of another.” Carney concludes that we ought to measure if the impact is achieved! Carney does not believe that investor should able to put companies into ethical blind pools of ESG collateral….. Creating value for all means measuring that value. That is what this chapter has been about.  

Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG

Analysis Part 3 Chapter 15

Ø  Theory (8/10) versus practice (6/10). In theory, something works but in practice, operationally, that something might not work. Executives are interested in the next 2 to 5 years. As Tetlock showed in his master work Superforecasting, our predictions get very hazy past 5 years. Therefore, executives and others will continue to ignore climate physics in the short-run and point to correlative speculation when weather events are more and more extreme. It’s sad but true. Shareholders are wolves too! Carney does not address the counter-arguments sufficiently here.

Ø attempted to create a systematic ESG metric that is more than a value add but is mainstream, but then they pivoted to supply chain risk because of the greenwashing effect. Self reporting is one problem, there is the tacit consent challenge. The classic criticism of anyone who supports climate change initiatives is that their intentions are conspiratorial and self-interested at a proportion nearing 100%. I don’t think Mark Carney is looking to enrich himself because climate change is not in fact a serious threat, he may enrich himself somewhat because he is creating value by raising climate finance into the mainstream and it is the right thing to do.

Ø  Carney says the investing ecosystem is rapidly evolving, but what is the massive sample size data on that? I’m not talking about a survey which is about as reliable as polling data about Donald Trump. “Yes of course I care about the environment!” Yes, this topic is trending because it aligns capital with solutions to climate change, but the financial sector still has a streak of strategic gambling and as such there will be a strong counter-argument / hedge against ESG as not that accretive after-all. Hard to predict the future but Carney is making an aspiration case, this is how it WILL play out which he’s betting will have a self-fulfilling impact. But as I have argued, I don’t think most people will be reading Value(s) in the way he entirely wants. It’s too lengthy, too academic and should be distilled further to connect with the audience, hence I have provided these summaries….

Ø  Carney thinks the Edmonton Oilers have the greatest player in the world and that cognitive error matters because there is no I in team. You could read into Carney’s enthusiasm that he a) loves the Oilers which is fine, b) places to much emphasis on heroes and individual leaders…it takes a village to achieve great things!

Ø  Carney may be violating his principal that the four most dangerous words in the English language (actually five words) “this time it is different” in this chapter. With ESG, he’s saying “this time it is different”. Social license has been around and doesn’t figure that prominently in the MBA programs of the world, dude. I support the aspiration but measurement is going to be your Achilles heel as well as what motivates financiers who are an exclusive group regardless of some democratization of stock trading in recent years. Few bankers will agree with John Kay that breathing is to living as profit is to business…for bankers the only thing that matters is money right now. They discount the value of money in the future for this reason.

Ø  If Carney had more experience in the private sector, then he’d be aware that every detail that is public-facing is designed to present the firm in the best possible light….managerial accounting shows that A/R (account receivable) and A/P (account payable) accounting can and may be manipulated if there is shareholder pressure or the executives are playing to analysts.

Ø  It’s interesting that Carney believes ratings vendors will never get rid of subjectivity. It’s self-evidently true but what if the ratings firms were rated as well. And that the consequences of their poor ratings were made clearer to the end users….or is the rating process too far removed from the company’s themselves while the employees are loyal to their firm and thus consulting firms ought to march in there to provide this oversight?

Ø  If Wealthsimple has an ESG ETF, then let’s see what GoodInvesting has to say about it. Tim Nash’s views.

Ø  Carney has shown it is the crisis that triggers re-evaluations and gets political and social change. Therefore, climate events are a series of relatively small crises which are correlated to Greenhouse gas emissions but there are counter-narratives that dispute the causal link of the increases in the hurricane season in part to absolve polluting sectors of the economy (most of the product components). Known as “De nile” from Al Gore’s An Inconvenient Truth.

Ø  Machievelli says that presenting to the public that you are lovable is better, but it is also essential that you be ruthless and feared. Does sustainable impact investing draw both actual supporters of the environment/human stability as well as self-interested posers? Yes. The ruthless and feared VW executives figured they could game the system.

Ø  G7 Finance Minister summit in June 2021 was unprecedented as they came together to commit to a 15% corporate tax minimum in all those jurisdictions UK, Canada, France, UK, Germany, Italy, EU, Japan. But of course, where there is a will, there is a consulting firm that will help these corporations maximize their after-tax profit (PwC, Deloitte, KPMG, EY).

Ø  Carney is advocating more people skill up for ESG. There were Masters degrees in environmental science (a decade ago while I was at LSE) that basically created an army of advocates without any significant job and cashflow opportunities over the last decade. Just as those who studied Middle-Eastern politics in the wake of the Iraq war, those who studied environmentalism found that their skill is still not really respected that much on its own. You need to be well-rounded, have strong fundamental understanding of things like accounting, finance, marketing, sales: basically an MBA.

Ø  Carney enters the political frame by stating that what society believes should be valued is X. He makes not systematic effort to evaluate what society wants himself. Hence, he needs to consider how citizens engage their own options and preferences.

Ø  Carney doesn’t necessarily call out who the polluters are…he doesn’t put pen to paper to say that fossil fuel companies are the problem and could be part of the solution. And what to do about Alberta’s transition? Carney doesn’t talk about a way to help Albertans who have driven the Canadian economy forward in terms of GDP should be compensated…and or supported in retaining economic development locally against the back drop of the Rookie Mountains. Think about how Britain settled the slavery questions in 1834 by compensating the owners of slaves? Then think about how the US settled the slavery question between 1861 – 65? Oil is like slavery in some ways as I argued a decade ago.

“When Abraham Lincoln wanted to curb slavery, he was battling the entrenched interests of the Southern US states. Slavery was a moral wrong, but slavery was also central to the Southern US economy. ” – Professor Nerdster

Ø  Carney as well as other advocates struggle with the fact that profit motives are the metric for success for companies, therefore the creation of value and that the capture of that value in the form of money is THE primary driver. Whether it is the only driver is another matter. But I think a critic can be forgiven for thinking that it is naïve to think that this generation of C-suite decision-makers are mostly pre-occupied with the long-term impacts of the company at which they have climbed the ‘greasy hole’ to the top of.

Ø  Just because you can find a poll that shows ESG factors are valued by consumers of large asset managers, doesn’t mean you aren’t leading the horse to water. The question is will we all drink the kool-aid? Also there is a wide spectrum of preferences. To assume that they all care about profits and or all care about ESG, why would that happen? And even if there was a major climate catastrophy, it is not clear that polluters would stop polluting considering that the damage has now been done, they would argue that the feedback loop of hyper temperature increases that Carney warns about is probably wrong and they would continue to burn energy to build things they were building just before said catastrophe just as post-Covid, we’re returning to offices because there are rents on that commercial real-estate and C-suite wants to get more value.

Ø  IF THE INVESTOR SEES the consequence of their preferences then they will be shaped for the better. If Quebec felt the consequences of shutting down the oil sands directly then their behaviour would change. If the consequences of your behaviours are imposed by an autonomous system it is much better than if the consequences are imposed by other people (Ottawa, bureaucrats, etc); in that latter case, it will fell like a game: As per How to talk so little kids will listen. 

Citations Worth Noting for Part 3: Chapter 15

Ø  Tidal Wave of ESG, from David Beatty at Rotman.

Ø  Hortense Bioy, ‘Sustainable Fund Flows Hit Record in Q2’, Morningstar, 4 August 2020.

Ø  Hortense Bioy, ‘Do Sustainable Funds Beat their Rivals?’, Morningstar (June 2020).

Ø  Michael E Porter, Goerge Serafeim and Mark Kramer, ‘Where ESG Fails’, Institutional Investor, 16 October 2019.

Ø  Robert G Eccles and Svetlana Klimenko, ‘The Investor Revolution’, Harvard Business Review (May – June 2019), ‘The True Faces of Sustainable Investing: Busting Myths Around ESG Investors’, Morningstar (April 2019).

Ø  UK Department for International Development, ‘Investing in a Better World: result of UK survey on Financing the SDGs’ (September 2019).

Ø  Sarah Boseley, ‘Revealed: cancer scientists’ pensions invested in tobacco’, Guardian, 30 May 2016.

Ø  Oliver Hart and Luigi Zingales, ‘Companies Should Maximize Shareholder Welfare Not Market value’, Journal of Law, Finance, and Accounting 2(2) (2017).

Ø  ‘Dynamic Materiality: Measuring What Matters’, Truvalue Labs (January 2020).

Ø  Dane Christensen, George Serafeim and Anwhere Sikochi.

Ø  PwC, ‘Purpose and Impact in Sustainability Reporting’ (November 2019).

Ø  ‘Fiduciary Duty in the 21st: Final Report’, United Nations Environmental Programme Finance Initiative (2019).

Ø  Florian Berg, Julian F. Kolbel and Roberto Rigobon, ‘Aggregated Confusion: The Divergence of ESG Ratings’, MIT Sloan School of Management Working Paper 5822-19 (May 2020).Ø

Value(s) by Mark Carney: Chapter 14: Values in Companies: Key Takeaways / Analysis / Citations

Chapter 14: Values in Companies

Key Takeaways

Carney starts out with the history of companies as a concept and what asks what is the purpose companies? It is not simply to make a profit, but rather to create value which is only partly quantified in the form of profit. For Carney, purpose requires balancing dynamism, fairness(?), solidarity (with employees and community), sustainability (across generations) and responsibility.

As John Kay put it…“Profit is no more the purpose of business than breathing is the purpose of living.” And so you need to make a profit to operate just as you need to breath. But it is not the purpose of business. Who owns the company? Shareholders do not own the companies to which they hold stock

Wedgwood as the Model of a Modern Major Capitalist:

  • What is the company for? Carney suggests it’s more than profits. Josiah Wedgwood is the example of a capitalist that made life better for customers by democratizing.
  • He was born as the industrial revolution was taking off.
  • He tracked 5,000 changes in experimentation to understand how to make the perfect pottery.
  • He was an abolitionist icon.
  • He built a town with amenities to support his growing factory.
  • He was an ardent economic nationalist, admits Ricardian Carney.

Five things that change us in a crisis;

1)      Triggers a revaluation of what we value…

2)      Triggers a shift in what we value…

3)      Triggers an improvement in reporting…

4) Triggers cause resilience…

5) Triggers embed responsibility…

1st for Carney, a crisis triggers a reevaluation of what we value. In prior chapters, showed that the crisis was caused partly by:

·         the underpricing in risk and the lack of supervising and off-loading responsibility to the wisdom of the market in Chapter 7’s breakdown of the Financial Crisis;

·         the years of undervaluing resilience, with states failing to protect citizens despite ample warnings in Chapter 9’s breakdown during Covid;

·         the tragedy of the commons where we aren’t pricing pollution as the producers problem (externality)

2nd for Carney, a crisis changes our appraisal of value and values. Who benefits from these shifts? Shareholder, stakeholders are disrupted through change….

The Covid crisis caused:

·         a reappraisal of value and values

·         a reset by companies

·         a social resets by countries

·         accelerated move to e-commerce,

·         accelerated shift to e-learning

·         accelerated shift to e-health

·         a reorientation of supply chains from ‘just-in-time’ to ‘just-in-case’

·         greater consumer caution

·         widespread financial restructuring (sees a stretched)

3rd for Carney, crises are a catalyst for new reporting of systematic risk.

·         1929 Wall Street Crash (crazy speculation by everyday people using loan money) + Roosevelt’s New Deal = creation of the Securities and Exchange Commission to protect the investors and  efficient markets. The SEC then also triggered the creation in 1936 of GAAP (generally accepted accounting principles) which became the global standard to ensure financial data could be reliably counted on.

·         2008 Financial Crisis = reporting for OTC derivatives, reduce the influence of shadown banking, new rules for securitization, accounting standards such as IFRS 9 was developed. IRFS includes what the expected losses are which provides more clarity.

·         The Climate Crisis, Carney is (hoping?) to bring about TCFD for consistent, standardized disclosures on climate-related financial risk.

4th for Carney, crises increased resilience, they make us tougher. Global banks have a buffer 10x the size prior. Trading has been reduced 1/2 , interbank leading is declined 1/3rd and cloistering of divisions within banks, with deep separation aims to prevent a systematic collapse.

Again, Carney argues the Climate Crisis has a valid target of net-zero. ¾ of the world’s coal reserves…

5th for Carney, embedding responsibility. Having purpose, Carney suggests might have prevented the financial crisis. In the aftermath, regulations, rules and compensation provide the teeth for a better future.

The Firm A Series of Contracts versus Purpose-Driven Companies at the Heart of an Ecosystem:

Carney goes through the history of company formation. The coordination of employees, investors, suppliers, buyers. He notes that corporations are indeed people both legally and in reality. For Carney, the company is not the sum of a bunch of contracts, however.

Shareholder & Purpose:

East India Company (the 1st publicly traded company in the UK) was incorporated with the purpose of protecting a monopoly on in Asia. The concept of the shareholder was buy shares of a company with the agreement that that capital would be used to advance the purpose of the firm, a larger goal. But during the industrial revolution, in 1844, the UK government passed a law that allowed incorporate without an express purpose and it made registration much easier. By the 19th century the focus on public purpose shifted to private purpose.

Shareholder Primacy:

Ford Motor Company challenged the idea further when in 1916, there was a $112 million surplus on their balance sheet. Shareholders wanted a dividend by Henry Ford wanted to direct those profits into creating more innovation and to democratize cars for more people. The Michigan Supreme Court sided with shareholders but the amount doled out was much smaller through managerial discretion. This case Dodge v. Ford is central to the idea that shareholders own the company they have shares in. The UK Companies Act in 2006 and the Delaware Supreme Court in 2015 re-asserted that the purpose of ‘directors must make stockholder welfare their sole end.’ So, in the UK and the US, it is to maximize shareholder value. But there is disagreement, Wachtell, Lipton, Rosen & Ktaz LLP says shareholder primacy is not exactly what is going on….

Carney shows through legal examples in Canada and France that shareholder aren’t even owners of the company and thus the maxim of maximizing shareholder value is flawed. It is ture that shareholders do get paid after everyone else: creditors, bond holders, employees, suppliers and governments via taxation both in the UK and the US. But employees cannot diversify their risk to a company as Martin Wolf has argued so shareholders may not really be taking the most risk, aren’t really owners and certainly a poor shareholder who put their life-savings in is taking more risk than Warren Buffett in the owning of a given share of any company. Shareholders do not have much downsize risk either. So, for Carney shareholder primacy is flawed.

The Agency Problem:

The separation of ownership of shareholders and control via the management which have their own self-interest (perks, pet projects, empire building) mixed in with meeting shareholder interests, triggered the Milton Friedman doctrine that:

a)    an executive is an employee of the owners of the business;

b)    the executive is responsible for maximizing shareholder value;

c)    shareholders (probably want) profits therefore that is the value in question;

d)    as long as the firm conforms to rules of society in terms of customs and law, they are good.

Carney sees Friedman’s ideas as useful but deeply flawed. Shareholder primacy is problematic and the proof is that Friedman gives himself an out in two ways:

1)    saying that money making should conform with customers and laws of their day. As Carney has shown, values are subject to their time therefore, Friedman has an out when there is disembodiment between the market and shareholders. Friedman claims any charity to employees is merely window-dressing. But Carney has shown in this book that there are times where there is deep corrosion in financial markets.

2)    saying that shareholders have primacy is flaws because shareholders merely have a ownership of the shares in a limited legal way. there is strain in how the wealthy treat the poor and how pay  

Companies have Command and Control Dynamics so Models of an Economic is a Matter of Degrees:

For Coase in The Nature of the Firm, the firm is defined by costs difference of providing goods and services through the market. Transactions in the market hold the costs of gathering information, bargaining, and enforcement. These transactions bear costs that the firm save but the expense is the span of control, complexity and diseconomies of scale. The activities performed more efficiently in a Command and Control system within the firm with the rest completed through the market.

Stakeholder Value:

Carney argues that instead of Shareholder Value there ought to be Stakeholder Value, which also happens to be the latest trend in business school literature. Profit is essential but it is not the only thing. Many CEOs reject the notion that there is a single purpose to a firm. For Carney, a successful firm must deliver a balance of competing interests amongst stakeholders (which Carney neglects to define), but this is analogue to the individual who pursues the good life. Competitive advantage, for Carney includes, having an attractive purpose as Chapter 15 will show.

Other Thoughts from Chapter 14:

·         For a better tomorrow, we need companies that are motivated by profit and empowered through purpose;

·         Profit and purpose are both necessary and re-enforce each other;

·         Firms should embed purpose is what they do;

·         Corporate purpose reduces risks, inspires employees, provides guidance in uncertainty and attracts and drives innovation;

·         Non-financial metrics should matter even if they are notoriously hard to measure;

·         The challenge falls with turning a purpose into practice (actions, outputs);

·         Maximizing shareholder value (short-term) is not the sole aim of corporations, full stop;

·         Environmental, Social and Governance (ESG) can contribute to profits and also purpose;

·         The make up of boards and their focus on purpose is critical;

·         Board-level reforms need to include purpose-oriented reform;

·         Patagonia, Unilever have institutionalized purpose;

·         B Corp certification reward companies that meet social and environmental metrics;

·         Danone is a company that embraces a entreprise a mission designation;

·         Executive level compensation needs to be connected to ESG factors and needs to be re-configured to align incentives that are longer term;

·         Companies need to consider future generations;

·         Companies should be engaged in improving communities;

·         Reporting is Key: two-way flow of information between stakeholders, shareholders and companies;

·         Good and bad ideas need to be tested and then good ideas scaled, and bad thrown away;

·         There is more and more evidence that suggest that companies that perform well on ESG also tend to have better financial performance, 63% report a positive co-variation, increased ESG leads to increased financial performance, Chapter 15 will address the counter-arguments.  

·         Employees who know their employers purpose also have better financial performance;

·         Patagonia give 1% of its revenue and they get 9000 applicants per post;

Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG

Analysis Part 3 Chapter 14

Ø  Chapter’s message in a nutshell: You get more with honey then you do with vinegar, be nice and have better outcomes in good and bad times.

Ø  The Covid crisis has accelerated a shift, but for how long? What is the reasonable band-width for which human’s recalibrate? Carney seems to be have a view that change is more permanent than might myself.

Ø  “During thee [Covid] crisis, we have acted as interdependent communities not independent individuals, with the values of economic dynamism and efficiency, joined by those of solidarity, fairness, responsibility and compassion.” (386, Value(s). This is not quite what is happening or happened or has it? How does Carney know from publications, statistical research or the people he hangs out with. People aren’t, pre-determined. There is speculation and sales in his statement that  

Ø  If Carney is so certain of the benefits of a crisis, then logically should triggering a crisis not be an aim of effecting change? From 9/11 to detonating a nuclear weapon in the Antarctic, causing a crisis is perhaps a logically implication of his breakdown of how the financial crisis has progressed finance forward. Carney seems to imply that all the Dodd-Frank legislation was a major success, whatever has been implemented deserves a thumbs up, however the process of providing new safe-guards was very contentious and as Obama points out in my blog post, it wasn’t always that great.

Ø  An inverted view might be that the financial crisis brough on regulations that are a mixed bag of efficacy and punishment. Instead of weeding out the incompetent, regulations have cause a retrenchment of those most passionate about finance which has the effect of

Ø  Perhaps this will be addressed in Chapter 15, but how do you really objectively measure ESG performance, if the measures are game-able, they will be gamed, just a fun fact of human nature. Humans are cunning. Get used to it.

Ø  Carney took the Patagonia “9,000” applications example in two funny ways. 1) that Patagonia didn’t plant this story as a PR stunt, 2) that Patagonia has those high number of applicants because of their purpose (single causation is flawed thinking or perhaps Carney is simply trying to persuade).

Ø  Senator Elizabeth Warren’s 2018 proposed Accountable Capitalism Act requires directors in firms making more than $1 billion to ‘consider’ stakeholders, not simply shareholders, when making choices.

Citations Worth Noting for Part 3: Chapter 14:

v  Andrea Sella, ‘Wedgwood’s Pyrometer’ Chemistry World, 19 December 2012.

v  Derek Lidow, ‘How Steve Jobs Scores on Wedgwood Innovation Scale’, Forbes, 3 June 2019.

v  US Securities and Exchange Commission, ‘What We Do’, 10 June 2013.

v  John Kay, ‘Shareholders Think They Own the Company – They Are Wrong’, Financial Times, 11 November 2015.

v  Martin Wolf, ‘Shareholders Alone Should Not Decide on AstraZeneca’, Financial Times, 9 May 2014.

v  Lynn A Stout, ‘The Shareholder Value Myth’, Cornell Law Faculty Publications, Paper 771 (2013).

v  John Kay, The Truth About markets: Their Genius, their Limits,  their Follies (London: Penguin, 2003).



v  Bank of England, HM Treasury and Financial Conduct Authority ‘Fiar and Effective Markets Review: Final Report’ (June 2015).

v  Nell Derick Debevoise, ‘Why Patagonia Gets 9,000 Applications for an Opportunity to Join their Team’, Fortune, 25 February 2020.

v  ‘The Business Case for Purpose’, Harvard Business Review Analytic Services Report (2015).v  Marc Andreesen, ‘It’s Time to Build’, Andreessen Horowitz, 18 April 2020,