Tuesdays with Travis is a collection of monthly interviews with our data science lead, Travis Korte, that explores the complexities of expressing values through data.
Companies pollute in a variety of ways and with varying degrees of harm. How can investors identify the greatest offenders and clean up their portfolio?
We tackle that question in this month’s Tuesdays with Travis, exploring what it means to have a pollution-conscious portfolio and discussing the consequences of aiming for “zero waste.”
When we talk about pollution at Ethic, we’re considering ways that companies introduce harmful substances into the environment. A lot of us are familiar with pollution in terms of smoke stacks on factories, oil spills, or hazardous waste. And while those are certainly components of pollution, our Pollution Cause is quite a bit broader than that.
We split pollution into three general areas: air pollution, water pollution, and land-based pollution. Air pollution tends to be familiar among clients, including things like carbon emissions, chlorofluorocarbons (CFCs), particulates, and volatile organic compounds (VOCs). In water, we’re looking at things like accidental spills and contaminants, as well as business activities like fracking, which can contaminate groundwater. On land, pollution can take the form of packaging waste, waste from agriculture, or things like unrecycled outputs of the manufacturing process. There are subsets of subsets within each of those three areas, but that outlines our general approach. I think it’s also worth mentioning that pollution is often framed as a harm to humans, but there are countless other consequences for ecosystems and other species.
Definitely. We’re not explicitly grading them, but we’re taking this kind of thing into account in the sense that the most harmful sources of pollution will be flagged in the most portfolios. Some of the pollutants most harmful to humans are nitrogen oxides and sulfur oxides, which are often outputs of burning coal. There have been longitudinal studies that suggest that exposure to these particular air pollutants are linked with substantial decreases in performance on verbal and math tests. In other words, air pollution is negatively affecting people’s brain functions to such an extent that you can measure how many points on a standardized test score someone lost compared to people in the next town over who weren’t exposed.
Other kinds of pollution are more subtle. Packaging waste, for example, is a relatively lower priority for many of our clients because the harms tend to be less direct. If your waste is toxic, there’s an immediate danger. If your waste is just waste — you didn’t recycle and you put it in a landfill — we still want to reduce that pollution, but it’s less acute in its harms.
Some screens are on the basis of business activities. The fossil fuel industry, for example, is so strongly tied to air pollution that we’ll sometimes want to be so strict on pollution that we flag companies just for their involvement, whether that be exploration, distribution or supporting services. In the same way, we’ll often flag unsustainable palm oil manufacturers just on account of their core business activities, because it’s one of the most carbon-intensive industries.
In most cases, though, it’s not black and white, and we’re looking at the volumes of waste, volumes of air pollution emitted, or revenues associated with polluting behaviors in order to pick out the worst performers. If you think about it, every company has waste outputs, so we’re trying to identify those worst offenders. Otherwise, you wouldn’t be left with companies to invest in.
Yeah, exactly. So if the client has a number of different sustainability priorities and pollution is relatively low, maybe we’d only flag the top 1 or 2 percent of waste producers by volume. If pollution is their number one issue, we’d look at a much bigger set of pollution-related behaviors. There’s also an interesting characteristic of a lot of pollution metrics in that the worst polluters are so much worse than the average offenders. The distribution is so skewed that the very few companies in the top percentiles are responsible for the majority of all pollution outputs, so you can clean up a lot of pollution from your portfolio relatively easily.
We can absolutely blame them. You could make the same argument with Nike: could we blame Nike in the 1980s and 1990s for using sweatshops to meet the world’s demand for sneakers? Of course we could — we wanted sneakers but we also wanted Nike to make them in a way that didn’t violate our standards of fair labor. Part of the point of sustainable investing is to create an incentive that aligns what companies do with a broader view of what people want. Surely there are things we can do to reduce the demand for products produced in pollution-intensive ways — as long as we’re mindful about not decreasing access — but we also want to put pressure on companies that supply the most pollution.
First thing I’d point to is tobacco. Secondhand smoke is air pollution. It makes sense if you stop and think about it, but people don’t necessarily lump the tobacco industry in with pollution in part because the direct harms to smokers are more visible than the indirect harms. Second, think about war; military vehicles are huge greenhouse gas emitters, as are the military’s manufacturing supply chains. Recent academic efforts to measure the U.S. military’s greenhouse gas footprint estimated that its fuel usage alone accounts for 25 million metric tons of carbon dioxide per day, which is about as much as the entire economy of Portugal emits in a day. Figures like that make it clear that war is a pollution issue too.
Zero waste shouldn’t be an end in itself. To see why, it helps to realize that one way of reducing waste to zero would be reducing the population to zero. Since we’re not comic book supervillains, we don’t think this is a good approach. But as a result, we have to acknowledge that it doesn’t make sense just to try to minimize waste on its own, at the expense of everything else; we have to weigh the costs of waste against lots of other costs that don’t necessarily all line up. There are always trade-offs.
To take this one step further, we don’t even think reducing everyone’s individual pollution outputs should be our goal. In countries with a lot of extreme poverty, increasing volumes of plastic waste might be a marker of increasing household consumption, which is one way of measuring economic development. It also might be a marker of better access to essential medicines that get distributed in plastic containers. We may want to reduce plastic waste overall, globally, but it’s hard to make that demand equally strictly for everyone, since we also want impoverished people in these countries to reap more of the individual benefits plastics bring. So instead of advocating for “zero waste,” we think it makes more sense to work on reducing the negative impacts of waste—that way we don’t just end up substituting the harms of waste with the harms of poverty.
Travis Korte is the Data Science Lead at Ethic. Previously, Travis organized civic-minded technologists at Hack for LA and advised a wide range of clients on data science, data policy, and quantitative methods. You can follow him on Twitter at @traviskorte.
Melissa Mittelman creates content at Ethic and is an alumna of Bloomberg News, where she covered private equity & deals. Melissa previously worked at Deutsche Bank, providing institutional, cross-asset sales coverage for ultra-high-net-worth investors.
Jay Lipman, a co-founder of Ethic, is driven by the need to address climate and environmental risks with the resources to which we each have unique access. He has been ranked among the Forbes 30 Under 30: Social Entrepreneurs. Born in the UK, he now lives in San Francisco. Previously, he managed the capital of ultra-high-net-worth investors in Deutsche Bank's cross-asset capital markets structuring and sales team.