Positive Investment Screening for Employment

Prompted by a colleague and friend who responded to this post of mine on divestment yesterday, I’m responding with my thoughts on his really important concern: What about the people employed in the sectors targeted for divestment?  This is actually a pretty straight-forward screening criteria that I’ve yet to hear of anyone employing. 

One way to make sure you’re not contributing to growing unemployment with your divestment strategy is reinvesting in industries with high employment.  For those of you who know about multipliers, you can derive them yourself, otherwise, there are those of you who may use IMPLAN who have employment multipliers at your fingertips and will likely have updated data coming your way soon.  Since that data is proprietary, another way to evaluate good sectors to invest in with employment in mind is by looking at sectors that are profitable and have high labor shares.  BEA and BLS data are useful for our purposes here. 

Below is a graph with the industries that are the highest Value Added, with Labor Compensation above 60%. These are on the left side of the graph, ending with Legal Services. These are good targets for future investment.  I also included some of the industries that I previously suggested people might want to reconsider investing in. These are all on the right side of the graph starting with Support Services for Mining. You’ll see that this group has both lower value added and labor shares, so shifting these out of your portfolio will be trading up in terms of aggregate labor income and output.

 

 

For your swapping strategy, I suggest considering investing in companies in those sectors to the left with similar financial profiles of the companies you’re trading out. 

This is a macro-level, pretty abstract approach to the problem of creative destruction (or intentional destruction).  There are some serious structural issues when a whole industry is being dismantled. There’s no magic, invisible hand that makes sure everyone who lost a job will get a perfectly substitutable job in a new sector, automatically, even if they are abundant. If you are really thinking about skill-set transfer of workers from the old energy sector to the new one, alternative energy funds and companies are a good option to consider. I’ll have another post soon that’s more in depth about prospects of the alternative energy sector but in the meantime here are two very good alternative energy mutual funds (Green Century Balanced Fund and Trillium Sustainable Opportunities), a few companies (SunPower Corp, Advanced Energy Industries Inc and SunEdison Inc) and some exchange traded funds (Market Vectors Global Alternative Energy ETF and ALTEX). All have solid returns and growth potential as well.  These sectors are more capital and resource intensive then the ones in the graph above, but if your concern is more about workers likely finding work in another part of the same sector, then this kind of swap might make sense to you.

If this is still too abstract and you’re concerned about the actual communities themselves, you might want to consider diversifying your portfolio and using a share of the freed liquidity from the divested stocks, to go partly into higher yield investments and partly into impact investment or philanthropy, targeted at these communities directly. These decisions would be based on your financial return preferences and risk profile, as well as how granular your concerns are about displacement.   

There are real displacement concerns regarding the coal and gold mining communities and local economies that are supported by these industries with very effective short-term divestment campaigns.  I recently responded to a research query regarding this exact question vis-à-vis the coal sector and found some interesting philanthropy options I discuss here.  

There are large roles to play in these transitions by communities, non-profits, local and federal government, large and small development institutions and the philanthropic sector as well. How you want to play a role in it as an investor is an individual decision. Arms-length divestors might simply do some basic swapping out of divestments with SRI and sustainable mutual fund shares and call it a day.  Here’s USSIF’s list of options for that strategy and here’s MSCI’s resource for more industry-level benchmarking for ESG screened investments. The more granular you go, the more likely you’ll benefit from working with a financial advisor who’s well versed in SRI, including impacting investing.  Good luck and God’s speed. I still think making your portfolio do no evil is easier than quitting bread and pasta, as far as New Year’s resolutions go. 

Thanks, Karim, for the prompt and even though I’m going to pretend like I discovered it, we should name this screen for jobs the Youssef Employment Screen. I’m taking other name suggestions.

Sponsoring a Just Transition

 Many banks are being targeted by shareholder activists for their investments in unsustainable sectors. See more on these campaigns here.  One bank, with a lending portfolio heavy in coal in the Appalachian region, with obvious material concerns regarding their strategic business model for lending, has also expressed concern that their lending currently supports viable industries and jobs and if they stopped lending, those too would disappear. I sought to determine if that was a valid assessment and to explore other potential economic investments in Appalachian coal country.   

 

What I found actually surprised me. There was tremendous ground-work for an economic industrial transition happening in these communities. Communities in coal country had taken lessons from those in the southern Appalachian country in North Carolina who had weathered the transition away from a booming Tobacco industry by building up local sustainable agriculture and cottage industries around it. More on the success of those initiatives here.  Some front runners for philanthropic and potentially even future impact investment would be enterprises coming out of the Mountain Association for Community Economic Development and local organization and cooperatives/enterprises in Central Appalachia supporting what they call a Just Transition model.  While many of the enterprises are cooperatives and the development corporations are currently non-profits, private lending can certainly be paired with government funding by way of Community Development Block Grant funding, to scale-up these endeavors significantly.  It’s easy to envision a bank partnering with communities in the development of even larger Community Development Corporations in this region which could mobilize a significant amount of new economic activity.
  

Most large industrial transitions will require policy and governmental facilitation.  In the Just Transition model, federal and/or state government funds would be set aside to address the needs of those affected by industry displacements.  The funds would be designated for direct assistance, worker training and/or investment in new industries or small-scale farming or enterprise loans. These kinds of funding vehicles have been proposed for Tobacco farmers in Appalachia, (in McCain’s 1997 Universal Tobacco Settlement Act and with the Tobacco Community Revitalization Trust Fund); for the Native communities in the Southwest, from pollution tax revenue from Southern California Edison; and in legislation proposed in Massachusetts, (H.2935).  

The Department of Energy has been rapidly scaling up funding for alternative energy programs and lending capacity and the Obama Administration has advanced a number of programs directed at creating jobs and supporting the creation of new business. These communities, in collaboration with private investors, could rapidly advance their mutual goals by taking advantage of these opportunities.  My suggestion for banks in these areas is to hire some policy people familiar with government requests for proposal and to pair up with good local community leaders and make it happen. 

With serious commitment from traditional lenders in regions that are preparing for economic industrial transitions, alongside governmental targeted programs and sufficient community momentum, these transitions could be not only effective at minimizing the damage of change, but could revitalize entire regions and transform communities.