August 30, 2023

Mark Neuman – Constrained Capital and ESG Orphans

34 minutes

BIO: Mark Neuman is the CIO and founder of Constraint Capital. He is a CFA charterholder and creator of the ESG orphans index.

STORY: Mark talks about constrained capital, ESG orphans, and his work around it.

LEARNING: We can’t get to the future of energy without present energy. To win the renewable energy fight, we must put facts above feelings.

“We can’t get to the future of energy without present energy.”Mark Neuman

Guest profile

Mark Neuman is the CIO and founder of Constraint Capital. He is a CFA charter holder and creator of the ESG orphans index. He’s a 30-year Wall Street veteran and former global equity derivatives trader with Merrill Lynch, Susquehanna, Jones Trading, and Bay Crest partners. He’s a former event-driven hedge fund partner. In his recent investment project, he spent 1,000 hours of deep dive into all things ESG over the past six years. His goal is to deliver truth in ESG to protect and help investors make informed decisions with measurable results when understanding risk and reward.

In today’s episode, Mark talks about constrained capital, ESG orphans, and the work he is doing around it.

Constraints on capital

According to Mark, constraints on capital is a pattern that exists in the market based on policy, investment themes, and philosophies. Most recently, ESG (Environmental, Social, Governance) has been the most prominent example of constraints on capital. Constraints on capital cause misallocation and malinvestment. In general, they are starving specific industries and flooding others.

For example, in ESG, constraints were heavily implemented on fossil fuels, nuclear energy, weapons, alcohol, tobacco, and gambling. Basically, ESG said those were bad. On the other side, they chose certain winners that were apparently good in ESG, leading to the misallocation of capital because, though these winners are considered great, they still have a considerable carbon footprint.

Ultimately, the constraints push capital to one place and starve capital to another. The ESG orphans are the six sectors, fossil fuel, nuclear energy, weapons, alcohol, tobacco, and gambling, that were routinely excluded. As they’re being cut off from capital, the value of their stocks falls.

Looming reversal flows for ESG orphans

In the last decade up through 2021, the Info-Tech space in the S&P 500 grew from 18% weighting to 36%. On the other hand, the energy sector shrunk from about 10% to 2.5% and became so cheap within the same decade. Mark indicates that we’ll see a reversion over a more extended period. As ESG gets called out, we’ll see reversal flows that will return to those excluded names.

Put facts above feelings

Mark insists he’s not anti-ESG; he’s simply anti the ESG bubble as an investor and a CFA charterholder. He says there’s significant value in many of these companies that have been discarded. We simply need a different energy plan. While Mark agrees we need to find a replacement for fossil energy, he believes that we can’t get to the future of energy without present energy.

Therefore, it makes no sense to starve Exxon Mobil, for example, instead of leaning on it to lead the renewable energy change. Mark thinks people putting feelings above facts on some level is a troubling aspect of ESG.

Mark has been doing a lot of ESG consulting, working with companies to help them understand the risks. If certain companies have been classified by ESG as medium risk or low risk, Mark wants to kick the tires and turn it over. He’s helping companies do their own due diligence and dig into what their ESG analysis really means. Mark’s passion is ensuring people understand risk and reward and are not misled by ESG, saying, “Everybody wins, nobody loses, it’s costless, and we’re all benefiting.” That sounds too good to be true for him.

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