Founder’s Edition, by Joseph Neu
Takeaways from a fireside chat with ValueAct founder Jeffrey Ubben.
Based on a head’s up from a top Wall Street activist defense adviser, I went to an event earlier this month hosted by Refinitiv and Reuters Breakingviews that featured a fireside chat with ValueAct co-founder Jeffrey Ubben. Mr. Ubben has stopped trying to increase his net worth and is now focused on making the world a better place (at least according to his worldview). One of the vehicles for him to do this is the ValueAct Spring Fund launched in 2018, which invests in companies aiming to address environmental and social problems.
- Inspired by Silent Spring. According to Ubben, the Spring Fund name was inspired by the Rachel Carson environmental science book published in 1962.
- What makes the fund unique. It’s run by one of the leading activist investors at a firm with $16 billion under management that’s famous for, among other thing, forcing its way onto the board of Microsoft, proving mega-caps were not off limits. “It takes a profit maximizer to know a profit maximizer,” Mr. Ubben said. Bringing an activist mindset to an environmental and social investment mandate has appeal, and Mr. Ubben has raised $1 billion in capital so far.
Here are some key insights from Mr. Ubben:
- Larry Fink’s letter ups the ante substantially. BlackRock Chairman and CEO Larry Fink’s latest annual letter to CEOs ups the ante on sustainability, calling for “a fundamental reshaping of finance.”
- Building on multi-stakeholder and corporate purpose mandates. Climate risk as investment risk and putting sustainability at the center of investment mandates may be the most powerful driver of the multi-stakeholder, corporate purpose mandate that Mr. Fink helped usher into modern thinking in his earlier letter.
- Sustainability is a way to get the long term back. The constituency to support sustainability includes at least two-thirds of CEOs who see it as a way to win back a long-term view from shareholders—give me more than a quarter to reallocate capital to save the world before showing returns on that investment. There are probably one-third of those that are really driven to save the world.
- Profit maximization over decades. To make the case for profit-driven investment in sustainability, investors need to understand that the time frames must extend 30 to 40 years. Decisions made based on current values, versus terminal values, will lead to investments that will destroy capital over the next generation. They are not conducive to long-term profits.
- Change the investor base. Thus, companies that want to embrace sustainability and long-term profitability in their corporate purpose need to move toward investors who share that purpose.
- This is the window to move. Not only is more research convincing more people to believe in climate risk and the need for action, but the cost of capital in the current lower-for-longer interest rate environment is conducive to making new investments and reallocating capital. As Mr. Ubben notes, we have moved from the traditional situation of being short financing to being short human, social and environmental capital.
- The effort is capital intensive. Ultimately, the transition to sustainability will be capital intensive. Such a capital-intensive effort will require the capital structures of existing large companies. For this reason, Mr. Ubben is not a fan of villanization.
- Big Oil capital budgets needed. One of his investments is in Nikola Motor, for example, which is developing hydrogen fuel cells for long-haul trucking. To move to this future, there needs to be substantial capital invested in refueling platforms and distribution. “We will need the capital budgets of a Shell or a BP to do this over the next 30 to 40 years,” he said.
- Shifting value propositions. While shifting to long-term value propositions is one necessity for the fundamental reshaping of capitalist economies, another is a change in perception of value and unit economics. As an example, Mr. Ubben said that if biodiesel becomes mainstream, it would make sense for McDonald’s to pay customers to order french fries to generate more used frying oil to convert into fuel.
- Utilities need pristine governance. The grid is the most important asset in the energy economy, including a clean energy one. So it’s imperative that utilities embrace a multi-stakeholder model and adopt the best possible governance. If customers have no choice but to be utility customers, then the economy must rely on regulators and government to sustain their ESG viability. This drives Mr. Ubben’s activist investment in Hawaiian Electric Industries and his calls for a management shake-up. He favors performance-based ratemaking for utilities, encouraging them to become asset light and deploy micro grids.
Ultimately, it’s impossible to know if green activist investors like Mr. Ubben are motivated mostly by a philanthropic desire to fix a system they helped create and make capitalism work for society, or are using the increasing embrace of ESG to profit from green activism. It’s probably a bit of each. Regardless, finance professionals at multinationals have no choice but to pay attention and take action.