One ESG Pioneer's Pet-Peeve... And Did Allbirds Push the ESG Envelope Too Far?

By Herb Greenberg

Tuesday, November 9, 2021
A A

One of the hottest trends in investing today is 'ESG,' which stands for environmental, social, and governance...

As my Empire Financial Daily co-author Berna Barshay has written numerous times, public companies are tripping over themselves to show that they're best-in-class ESG investments.

The goal, of course, is to position themselves as must-buys for investment funds that have an ESG mandate or want to hop on the ESG bandwagon... from public pension funds to seemingly any and every mutual fund and exchange-traded fund ("ETF") on the planet.

Never mind that there is no standard for what really constitutes ESG.

And never mind that this is a really a case of what's old being new again...

Just ask Jerry Dodson...

Jerry will go down as one of the true pioneers in the predecessor of ESG, when it was known merely as "socially conscious" investing.

He founded the San Francisco-based Parnassus Fund in 1984 with around $350,000, and by the end of 1990 was struggling so much he was about to shut the doors.

Back then, investing in companies with an eye on social responsibility was considered kind of kooky, and in some ways as a way not to make money.

I first met Jerry when I was a columnist at the San Francisco Chronicle back in the late 1980s.

I'd interview him every now and then, mostly talking about stocks...

Such as the time in 1996 when he had become a rabble-rouser about what he felt was the mismanagement at Apple (AAPL). At the time the stock had crashed, and reflecting a few subsequent stock splits, was trading around an adjusted $0.25 a share. As I quoted him saying at the time...

There's a lot of value in Apple. It has tremendous name recognition, and in my opinion the best technology in terms of use. And in many respects, it's got a good corporate culture.

But with all of those advantages, they still can't execute. They can't forecast costs properly, and their costs of manufacturing are too high.

With all of their advantages, they should have executed much better. It's just disgraceful.

He added:

We can't go after the CEO, but we can throw out the board.

Well... as it turns out, the old management was booted, and within a year Steve Jobs returned. The rest, as they say, is history.

As for Jerry, after almost crashing, Parnassus prospered, managing well over $60 billion by the time he sold his stake earlier this year to AMG Group.

Given everything that has happened with ESG investing, I thought it would be fun to track him down in retirement to see what he's thinking now.

I was especially eager to hear his take on the investing world finally coming around to his way of thinking. He was never one to mince words, and he still isn't...

It's good in the sense more people aware of it. That's the good part. The negative part is people using it as window dressing... as a marketing ploy.

Still, on balance he sees more positives than negatives, but Jerry is also dubious about so-called "greenwashing," which is when companies aren't as environmentally friendly as they claim to be.

One company that will never be accused of greenwashing is Allbirds (BIRD), one of last week's hot initial public offerings ('IPOs')...

But in my opinion, the company – best known for its sustainable sneakers – could be accused of pushing the ESG envelope a bit too far in its IPO filings with the Securities and Exchange Commission... to the point of claiming that its IPO wasn't really an initial public offering...

Instead, starting with its original IPO filings last summer, Allbirds referred to its IPO as a "sustainable public equity offering," proclaiming...

We are... excited to complete the first ever Sustainable Public Equity Offering, or SPO.

Wait... what?

That's absurd to the point of being laughable, and I tweeted as much... suggesting that by calling itself an SPO, Allbirds was making a blatant attempt to get investors to look there (at the novel nature of an SPO)... instead of here (the remarkably unimpressive growth for a direct-to-consumer company during the pandemic, while its losses were growing).

As one investor tweeted back at me:

"Caring about ESG issues" is like tacking .com onto your business name in 2000.

That was in late August.

Two weeks later, in an amended filing, the company added this broad disclosure – in italics – to the SPO section (emphasis added):

A Sustainable Public Equity Offering, or SPO, is a new and untested framework which was not developed solely by disinterested third parties but rather was developed with input from Allbirds and other partners. An SPO is not defined in any federal or state statute or regulation and is not a specific equity offering type under federal or state securities laws. The SPO framework has not been approved by regulators.

Our initial public offering will be the first ever SPO. Accordingly, there is no basis for investors to, or track record by which investors can, assess the impact of the SPO on our operations, financial condition, and the market price of our Class A common stock. The SPO may entail additional costs as compared to non-SPO transactions.

The implication of the highlighted sentences was that there was pushback somewhere to the company trying to position its IPO as something other than an IPO.

And then, in yet another amended filing two weeks later (drumroll)...

All mention of a Sustainable Public Equity Offering disappeared. But in an apparent effort not to lose the SPO acronym, it was replaced by something the company was calling the Sustainability Principles and Objectives Framework. From the filing (emphasis added)...

We hope to help pioneer a framework for companies going public where they share with the market their performance against a set of environmental, social, and governance, or ESG, criteria, which we call the Sustainability Principles and Objectives Framework, or the SPO Framework.

We believe that investors, equity transaction partners, and other stakeholders will benefit from knowing that companies have been assessed by one or more independent third parties as having satisfied objective, clearly defined ESG criteria.

We believe that companies sharing these ESG criteria will help investors to identify, as they enter the public equity markets, companies that prioritize ESG initiatives and are committed to meeting high ESG standards across their business.

While Allbirds has said from its earliest filings that it hoped to "pioneer" some kind of "framework" for other "sustainable" companies going public, this was the first and last time that the above italicized statement was included in pre-IPO filings.

But wait, our story doesn't stop there...

A mere two weeks later, the filing was amended yet again. Not only was the above disclosure gone, but this time also gone was any mention that Allbirds was hoping to "pioneer a framework" for other companies. Now, it's all about what Allbirds intends to do for Allbirds.

In other words, by the time it went public – based on its filings – Allbirds was just another IPO, albeit one that flew high right out of the cage. Its ESG ties certainly didn't hurt.

But now? Now it'll have to prove to investors that its wings can continue to flap fast enough to keep its stock from falling. For any newly public company, regardless of its story, that's always the tricky part.

In the mailbag, readers write in talking cannabis and home warranties...

As always, feel free to reach out via e-mail by clicking here. And if you're on Twitter, feel free to follow me there at @herbgreenberg. My DMs are open. I look forward to hearing from you.

"Herb, I have several concerns about investing in cannabis. I've seen articles in the WSJ on each of these concerns, but I've seen very little regarding any of these concerns from the analysts promoting cannabis as a good investment:

"There has been an enormous underground market for cannabis for years that remains in place. Legalization seems to be increasing underground traffic as well to escape taxation. This will continue to provide competition to the legal market with unfair advantages escaping regulation and taxation.

"CBD and THC are being promoted to solve virtually every problem including depression and anxiety but there seems to be little hard evidence to support many if not most claims.

"In know CBD comes without the high experienced with THC, but much of the allure regarding cannabis is the high one experiences from it. Cannabis is addictive and like most drugs makes one feel better with improved mood on the way up but experience the opposite on the way down. Cannabis also is confirmed to effect memory loss and IQ scores with regular use, particularly when under the influence.

"I'm underwater on Whitney's recommendation to get in a few months back. I got in fairly heavily because I respect his opinions, however I'm wondering if the above concerns which I've had all along regarding cannabis, isn't a large part of the apprehension we're seeing in the investment performance of the sector. It seems like its being overhyped to a large extent.

"Curious to hear your thoughts regarding these concerns?" – Mike B

Herb comment: Hi Mike, thanks for writing in. The thing to remember about Whitney is that he is a long-term-oriented value investor, and cannabis today is as speculative as it was in August when he mentioned his bullishness.

In his writeup, he talked about what he believed was the industry's "immense" potential, especially if there is a so-called "long squeeze" on even just a whiff of positive news.

Knowing Whitney as I do... he wasn't talking overnight, over a few weeks, or even a few months.

As it so happens, late last week, news broke of a Republican-led bill to legalize pot. On that alone, using the AdvisorShares Pure Cannabis Fund (MSOS) as a proxy, pot stocks were up 20%... overnight.

Whether that will lead to something sustainable – or whether the stocks can hold these gains – is anybody's guess. But it shows how quickly these can move, and as I wrote in my essay... the value of patience.

This is certain: There is no shortage of opinions on the cannabis stocks – positive and negative. If you continue to hold them and haven't already, I would strongly encourage you to read Todd Harrison's newsletter, especially his latest. Few know the space better.

"Don't appreciate your use of realtor's coercing clients to pay for a home warranty. It is simply an insurance policy if anything goes wrong in a year the buyer is less likely to come back and sue the seller."

Herb comment: Hi Robin, you're right. I should have used the word "convincing" rather than coercing. However, there were times I felt coerced.

Over the past four decades, I've bought and sold 10 homes. I've received and given warranties... and I've used them several times. Each time, based on the quality of the service, I swore I'd never do it again.

That said, I agree that if it gives peace of mind, it can't hurt... but in normal times it is an extra cost... especially to the seller. And it's unclear whether warranties make or break sales. In a hot market, obviously they don't.

Regards,

Herb Greenberg
November 9, 2021

Whitney Tilson

Get Empire Financial Daily delivered straight to your inbox.

About Berna

Berna Barshay is editor of Empire Financial Daily and a contributing editor to the Empire Stock Investor and Empire Investment Report newsletters.

She graduated cum laude from Princeton University and earned her MBA from Harvard Business School in 1997.

Following her graduation, Barshay spent 20 years on Wall Street. She began her career in equity derivatives at Goldman Sachs and later worked as a buy-side equity analyst at Sanford Bernstein, where she covered global consumer cyclicals and conglomerates.

Later, Barshay spent five years working as a portfolio manager of the Ingleside Select Fund, a long/short fund with a focus on value and event-driven stocks. She later was a portfolio manager at Swiss Re, where she managed the Consumer long/short book on the equity proprietary trading desk.

She has additional experience as a buy-side analyst at several long/short hedge funds – including Sky Zone Capital, Metropolitan Capital, Buckingham Capital, and LaGrange Capital – where she primarily covered consumer and technology, media, and Internet stocks in the U.S. and Europe, with some additional work in financials and energy.

Barshay is a fashion enthusiast, a pop culture addict, obsessive indoor cycler, and prolific social media user. She currently lives in New York with her husband, daughter, and three dogs.