Seeking Alpha

Investing And The Environment - A Long-Term View

by: Martin Lowy
Martin Lowy
Long only, value, contrarian, portfolio strategy

Although the planet is billions of years old and humans have walked it for over a hundred thousand years, the environment was little utilized until about 1750.

Utilizing the environment brought great progress and made human lives much better. But it did come at cost to the resources that were used.

Humans now have to consider how best to preserve the environment, both for future generations of humans and for other species.

Investors have a role to play in these decisions because the companies that we support have lower costs of capital than the ones we do not support.

Thus each investor needs to have a personal policy regarding to what extent, if any, environmental factors will influence our decisions.

The environment—what some refer to as “free goods”—has been here for a few billion years. There has been life on earth for, they tell me, more than a billion years. Humans have been around a couple hundred thousand years. Through all those years, species came and went, ice ages came and went, environmental catastrophes came and went.

Yet until about 1750—only 270 years ago—no one actually utilized much of the bounty available in the environment. Humans learned to slash and burn and to kill animals and fish for food, but those were small changes from the ways that other animals had found their food. Humans learned to use metals and fire for cooking, fighting and foraging, and stone to build aqueducts, as well as wood and wind to sail the seas and bricks and straw to build their homes. But with so few humans, the use of—and therefore the impact on—the overall environment was minimal.

Then came the Industrial Revolution. Suddenly there was progress. Human life, notoriously “nasty, brutish and short”, became more pleasant, somewhat less brutish, and definitely longer—gradually. Life in the 21 st century would have been totally beyond the imagination of people living in 1750—or even 1800, 1850 or 1900. And even those of us who can remember 1950 find the achievements and improvements since then amazing.

Robert J. Gordon’s great book The Rise and Fall of American Growth details the achievements and how they used the environment to make life better. One of the interesting tradeoffs that Gordon talks about was the streetcar that put urban horses out of work. Electricity used environmental resources. But the streets no longer were littered with horse manure and health improved. Think also about replacing the cooking fires of a typical African town—the sky is filled with soot at dinnertime—with natural gas stoves.

But as the streetcar example illustrates, making life better did and does involve learning to use the environment. Each step on the path of progress takes advantage of some natural resource. And some such resources are sustainable and some are not. Some are necessary for life and some are not. Some that may be exhausted may be replaced by others. Few will mourn the exhaustion of coal deposits or oil, for example. Thanks to science, the energy that they have provided will be replaced by energy from better sources.*

Environmental issues have crept up on us

But the fact is that damage to the environment has crept up on us. Although there had been aspects of ecological study for a hundred years or more before that, the modern science of ecology was born only around 1950. And it came into general consciousness only gradually after that.

Therefore, although young people tend to think ecological issues have been around “forever”—actually they are of fairly recent origin in the public arena. And ecological thought has made remarkable progress, considering its recent origin.

The U.S. has had environmental legislation beginning in the 1960s, Europe has had stronger legislation, beginning at about the same time. And the Paris Accord of 2016 was a great step forward. It recognized that only international cooperation could make real progress because the environment covers the entire globe; it recognized that less developed nations had to be given a chance to develop; and it recognized that becoming better stewards of the environment was a human necessity.

Science will be the key

Unfortunately, much of that accomplishment is on hold due to President Trump. In my view, his lack of care about the environment will be the single thing for which he will be most reviled by history. But he, too, will pass. And the U.S. will again join the nations of the world in the search for ways to protect the environment while continuing the great process of human improvement that we have pursued for as long as our Republic has existed.

That young people are impatient with this process is understandable. We, the human species, must continue to make progress toward preserving the important non-renewable parts of the environment. That means we have to seek consensus on what is most important and direct our efforts in those directions. Most importantly, those efforts must include the same sort of ingenuity that got us to where we are today—both the good and the bad. Science can, should, and will provide many of the solutions to how to conserve the environment while continuing to make life better for humans. If you are alert to it, you can see signs of this scientific progress every day. Practically every day the price of renewable energy comes down. Practically every day, some new means of reducing emissions of greenhouse gases is invented for some aspect of production.

These scientific efforts have to be supported far better than they are today—both with public money and with laws and regulations that give private enterprise greater incentives to do the job. Maybe the U.S. should have an environmental science agency comparable to the National Institutes of Health. The National Environmental Science Institute would be a great addition to our governmental effort, at relatively little cost. The issue of protecting the environment is not a war to be won or lost. It is and will be an ongoing task that will have successes and failures but must move forward.

What goals should the world community set for what dates? I do not know. The goals will not be as important as the achievements that will come from providing incentives to all the great scientists in the world. We also need an international framework within which cooperation among scientists from all over is encouraged. I have seen the benefits of such cooperation and collaboration in the field of cancer research. But I am told the beneficial effects to be expected are supported not only by empirical observation but also by modern game theory.

How extreme should governmental action be?

Will better science mean that extreme governmental measures will not be needed? I do not know. But extreme measures probably are not politically possible at this time. And I believe that, like most issues, our environmental issues likely are best approached with moderation and a large dollop of humility.

Yes, you are correct to point out that I have not discussed humans’ impact on other species. To what extent should that be a priority in setting the environmental agenda? That is another political issue that only international cooperation can solve. At least, all species benefit from clean water and clean air and less drastic climate shifts.

Companies, the environment, and investment decisions

In the meantime, while we wait for renewed international progress, nations and companies are taking steps on their own. Several European nations have environmental goals of their own, the Business Roundtable in the U.S. has indicated that environmental protection can be a legitimate part of a company’s long-term plan for growth and income, there are mutual funds that consider environmental contributions as part of their investment decision-making process, and some companies are making environmental issues and goals explicit parts of their business plans.

Investors therefore are faced with ecological decisions regarding their portfolios. For example, will they take a company’s carbon footprint into account in deciding whether to invest? Should they invest in environmentally friendly mutual funds? Should they invest in companies that make or install renewable energy systems? Should they invest in coal? Oil? Shale? All these are meaningful questions.

As I say in my new book Capitalism for Democrats, capitalism is built on a faith in the billions of little decisions that people make every day to determine what gets offered, what gets sold and at what prices. Informed consumers, not elites, run the show. Similarly, there are billions of investment decisions made every day. They, too, run the show.

Each investor should have a personal policy

I have never bought a tobacco stock or a coal company stock. That has been my choice, and it may have dented my returns (or made them better, I do not know and do not care). Now that both investors and the companies that we may invest in are more ecologically conscious, to what extent will we, individually, consider those factors? I am not advocating any particular point of view. But I am advocating that each of us, as an individual investor, should think about the subject and should adopt a personal policy, even if that personal policy is that “the environment does not matter in my investment decision-making. My investment portfolio is to make profits, not to change the world.”

Do I have a personal policy? Not yet. I think I am going to come out in a middle ground, where I will tend to want to invest—all other things being equal—in companies that seem to be doing good vis-à-vis the environment and to shy away from companies in polluting businesses that seem not to care at all. I have no power on my own. But all of us collectively—individual investors—have enormous power. That is one of the great things about capitalism.

* What is my background in the study of the environment? It is scant. Little science education. Just read things. In the 1980s-90s I was a trustee of The Nature Conservancy chapter on Long Island and active in protecting the environment there. My wife and I were founders of what became the Montauk Mountain Preserve, a sixteen acre tract that supports one globally endangered species and two locally endangered species of plants. If you are in Montauk, you can take a walk in our preserve. It has quite a view!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.