We haven’t posted a Quick Hits in awhile, but the following events caught my eye all at once:
The U.S Federal Trade Commission is “ordering nine large retailers, wholesalers, and consumer good suppliers to provide detailed information that will help the FTC shed light on the causes behind ongoing supply chain disruptions and how these disruptions are causing serious and ongoing hardships for consumers and harming competition in the U.S. economy… Walmart Inc., Amazon.com, Inc., Kroger Co., C&S Wholesale Grocers, Inc., Associated Wholesale Grocers, Inc., McLane Co, Inc. Procter & Gamble Co., Tyson Foods, Inc., and Kraft Heinz Co. … will have 45 days from the date they received the order to respond.”
Our view: Putting aside the question about whether this is governmental meddling in the market economy, there is the concern that this kind of pressure may push retailers to relax their supplier ESG standards in order to fill shelves. This could test retailer resolve on supplier ESG and the government’s own understanding of supply chain realities.
One of my observations about ESG economics is that conversations weigh heavily toward share price and tend to quietly ignore revenue. Operating revenue/profits and cash flow are separate from stock price. Although theoretically, capital markets value shares based on an assessment of future revenue/profits and current asset value (e.g., plants, property, equipment and intangibles), stock prices fluctuate wildly for other (sometimes irrational) reasons. What am I rambling about? If you haven’t heard about UK home appliance manufacturer Dyson’s row with one of their Malaysian suppliers (ATA), read about that here. My point is that revenue lost specifically due to alleged ESG failures is at the center of ATA’s financial implosion, not some generalized ESG risk management concept or irrational investor reaction.
Our view: ESG is not simply a risk management exercise. Sprinkling ESG fairy dust on stock just to appease investors doesn’t work either. How a company implements ESG programs directly impacts operating revenue, which can then create momentum (good or bad) with other customers and investors. I explore this concept in depth in the soon-to-be released update of my book.
One of the books on my reading list is The Key Man, a true story about the founder and CEO of a well known private equity firm who used private equity’s search for ESG nirvana to defraud investors, the World Bank, the Bill and Melinda Gates Foundation, McKinsey and even the Harvard Business School. The pointy end of the stick in this tale is that too many people zealously bought the hype without conducting due diligence. The firm ended up being a Ponzi scheme – and apparently not a particularly sophisticated one at that.
Our view: Theranos, anyone? Where there is money, there is fraud. ESG is attracting record-setting amounts of capital so fraud should be expected. Don’t bypass due diligence because of FOMO. Trust but verify – always.