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No more fossil fuel for Harvard 🎓

It’s a fiduciary responsibility

This is edition 369 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

The world’s largest academic endowment is officially washing its hands off fossil fuel investments. But there’s one thing in particular from its announcement that caught our eye.

Subscriptions are all the rage now, even Volvo is doing it.

And to play their part in “saving the environment”, tech giants are now pledging to be “water positive”. But it’s easier said than done. 

Does fiduciary duty and ESG investing go hand in hand?

Last week, Harvard University decided that it needed to get into the thick of ESG (environmental, social, and governance) action. The US$42 billion academic endowment fund—the world’s largest—won’t be investing in companies in the fossil fuel industry anymore.

It didn’t happen overnight and took years (a decade, actually) of activism from students, faculty, and alumni to make this happen. And while it’s all part of a sea change that’s happening across the investment management industry, one part of the letter from Harvard’s President stood out to me.

“Given the need to decarbonize the economy and our responsibility as fiduciaries to make long-term investment decisions that support our teaching and research mission, we do not believe such investments are prudent,” Harvard President Larry Bacow said in a letter Thursday.

The use of the term fiduciary. 

Because that’s one question that has increasingly popped up when fund managers employ the lens of socially responsible investing (SRI) to their investment decisions—does ESG investing mean that companies are operating within their fiduciary duties?

In its simplest form, fiduciary duty means that the asset manager has to act in the best interests of its clients. And if we put it bluntly, it means whether the investments are made in companies or assets that make money for the client; not just as per the whims and fancies of the asset manager. 

While ESG may be an enticing proposition to get with the times, if the interest of the client (making money) dictates that there’s one company with not-so-great ESG credentials, but with strong financials, and the potential to deliver scorching returns, then ESG considerations should be parked to the side. Probably.

Questions about this fiduciary responsibility are even more relevant today, with energy companies’ valuations bouncing back, the Asian coal price benchmark at its highest since 2008, and ESG funds beginning to underperform against the regular stock market indices. If asset managers have divested away from these markets, are they actually fulfilling their fiduciary responsibility then?

A short-termist’s view would be to invest in those companies that are poised at the start of certain business cycles. For example—and this is just hypothetical—shipping. Pent-up, post-pandemic demand along with a host of other factors are leading to super-normal profits for the shipping industry. And that’s a tailwind for the stock prices of these shipping companies. 

But, let’s take a long-term view that the shipping industry contributes majorly to carbon emissions and global warming. Again, hypothetically (it’s responsible for 2.2% of all global greenhouse gas emissions). 

What’s the fiduciary responsibility here? Capitalise on the short-term profit potential or focus on the longer-term interest of the planet?

The answer may be more nuanced and not quite black and white. In fact, it might depend on the ‘type’ of asset manager.

...short-term market trends should not be a major consideration for many fiduciaries, particularly pension fund trustees, says Steven Feit, lawyer at the Center for International Environmental Law, who has studied the divestment movement extensively.

“Pension funds are explicitly not supposed to get caught up in what’s happening week-to-week or month-to-month,” he says. “They’re supposed to be making sure they’re not exposing themselves to any uncompensated correlated risk.

“And that is exactly the kind of risk that fossil fuel investments pose. This industry has a shelf life – it hasn’t been the worst-performing sector of the past decade by accident.”

And endowment funds are kind of like pension funds. Their investment horizon is really long term. 

But stock price performance can still sow the seeds of doubt. 

Take, for example, the California Public Employees’ Retirement System (CalPERS) that exited tobacco stocks in 2000. In 2016, it revisited the decision when tobacco stocks started creating shareholder wealth. And then finally in 2021, it decided that it had indeed done the right thing by divesting from tobacco companies. 

Even today, the question of fiduciary responsibility still hangs like a cloud over pension fund managers. 

For now, “pension funds in Europe have a legal duty to invest in the long-term best interest of beneficiaries,” said Matti Leppala, secretary general of Brussels-based Pensions Europe. “So that’s the legal obligation. Whether going as far as possible to deliver on ESG goals would be in contradiction with that fiduciary goal is very difficult to say.”

This also means that even though there has been a rush of money towards ESG-linked investments, more clarity on whether it is really a fiduciary duty could lead to more cash flowing into the theme.

I said earlier that it could be argued that the fiduciary angle for ESG really depends on the ‘type’ of asset manager. So, what about companies like mutual funds or hedge funds that are definitely more focussed on quarterly and annual performance metrics? 

While it’s not specifically about ESG, here’s some excerpts from a note by Marcellus Investment Managers from 2019. On the ethics of investing in certain kinds of companies—even monopolies. 

A senior fund manager outside India for whom we manage money has ethical issues with us investing in a cigarette manufacturer. A legendary business strategy guru in the UK has raised an even broader issue regarding the ethics of investing in monopoly-like companies. His point is that the era where business & ethics were seen as being divorced from each other has come to an end.


...our job as fund managers is to be stewards of our clients’ monies. We first need to protect the corpus we are given and then we need to grow the corpus without putting the monies as [at] risk. We believe that this job can be best done by investing in companies who meet three criteria: their books are not cooked, they sell essential products and they do so behind the shelter of monopolistic barriers to entry.


The Government, not we, has to make a call on whether these products pose a danger to public health. If these addictive products are being sold legally then we believe it is appropriate for us to invest in such stocks.

For now, it’s all subjective.

15% of Volvo’s UK retail customers are… its subscribers

We’ve written in past editions about how automobile makers are bundling in access to specific features in the cars they sell as “subscriptions”.

With cars increasingly not just run but also differentiated with software, carmakers find it cheaper to build physical features into all the car models they sell instead of creating and managing an inventory of different models. It’s easier and more profitable for them to use software to lock, price, and unlock specific features on a customer-by-customer basis.

But why stop at selling access to features as a subscription, if you can sell the entire car itself as a subscription? 

In just one year, Volvo UK has shifted 15% of its retail customer base to subscriptions.

The level of demand has resulted in the service now claiming almost 15% of all Volvo retail sales, equivalent to 7% of the brand’s total UK new car sales. This is comfortably beyond the initial 5% total targeted for the service at the end of its first year.


Care by Volvo offers two types of subscription package, both designed to be a convenient and uncomplicated alternative to traditional car ownership. Care by Volvo Fixed provides cars on a three-year term, with no deposit or sign-up fee. Care by Volvo Flexible is based on an open-ended, three-month rolling contract, following an initial risk-free 30-day trial period; after that time, the customer can change their car or end their subscription with three months’ notice.

The shift to subscriptions is only the second half of the story though. The first half is the willingness of customers to shift to online buying. After all, if you’re walking into a car showroom to sign up for a subscription, then you’re… leasing.

The enthusiastic customer response reinforces Volvo’s belief that the uptake of online sales will accelerate. The company anticipates that the majority of its retail sales in the UK will be transacted online – both for retailer-assisted and direct sales – by 2025. Globally, Volvo expects all its sales to be conducted online by 2030.

As this trend plays out globally, car dealerships will bear the brunt of it.

For nearly a century, the American car dealership has retained its iconic appearance even as technology transformed every corner of the business landscape. In towns across the country, local business titans lured customers to glass-walled showrooms and large asphalt lots, where buyers bargained for the best price. That model is showing its age.

The way people buy and sell cars is changing. More of it is happening online as buyers get comfortable with completing transactions remotely. It is a shift that started before the pandemic but accelerated over the last 18 months as Covid-19 spurred people to do more of their shopping from home and demand for cars unexpectedly surged.

The auto dealership, as a result, could soon look like other parts of the business world upended by e-commerce. National chains, instead of local small businesses, will set prices and give salespeople less room to haggle. Dealers will hold fewer cars on the lot and operate more like service-and-delivery centers, using their dealerships as hubs where customers can pick up vehicles ordered online and get them serviced.

You might be tempted to think that India will take a while to adopt these trends. Don’t. 

The combination of venture capital-funded copycat models along with fast-evolving consumer behaviour models for transacting online (if people can buy a home online, why not a car?) often leads to significant trends rippling across country borders fast. 

In fact, Hyundai, Maruti Suzuki, and a few other carmakers already have subscription options in India. But, according to Shashank Srivastava, executive director (marketing and sales), Maruti Suzuki India, conversions are still low and only 1-2% of these enquiries turn into actual subscriptions. 

So, if you could buy your next car as a subscription service instead of outright (even if funded by loans), why wouldn’t you? 

A flood of data that will cause a drought

Silicon Valley is making a new kind of pledge to save the environment. The “water pledge” is now a yardstick that companies like Google and Facebook are set to measure themselves by. Both companies made an announcement at the end of August that they would be “water positive” by 2030. Which means that they’re going to put more water back into the local environment than they suck out.

One of the biggest uses of water, for tech giants, is to keep their data centres cool—a goal that’s getting tougher as the need for data increases globally. The pandemic might have temporarily cleared the air of tail-pipe emissions, but a spike in work-from-home (WFH), gaming, delivery app usage, 5G rollout etc., has put a huge strain on water resources.

“The typical data center uses about 3-5 million gallons of water per day—the same amount of water as a city of 30,000-50,000 people,” Venkatesh Uddameri, professor and director of the Water Resources Center at Texas Tech University told NBC News earlier this year. Much of it is used to chill the giant servers, machine learning systems, and other hardware the companies run around the clock.

Water shortages across the globe are only getting worse. Now imagine putting a thirsty, water-guzzling data centre in a depleted water shed; you’ve got an epic environmental disaster on your hands. That’s why Google’s taking steps to reuse wastewater to cool its data centres. Facebook, on its part, is also building solar power plants to power its operations, which, according to the company, saved “1.4 billion cubic meters of water”.

The US is not the only country that’s going to have to deal with water-guzzling data centres. According to a report by JLL, a global real estate services company, India’s data centre capacity is going to double, from 491 MW to 1008 MW by 2023. That’s two years away. 

“Global investors and data center players have increased their commitment during the last six months, announcing joint ventures with operators to setup sites. Investment commitments to the tune of $3 billion highlight the growth potential, with the data center industry expected to double its capacity and cross the 1GW mark by 2023," said Samantak Das, Chief Economist and Head of Research & REIS (India), JLL.

Mumbai which currently accounts for 45% of the total capacity is expected to further add 267 MW between now and 2023. Various states have also been providing incentives for data center industry as they want to join the next leg of technological change, Das said.

India’s climate is likely going to demand even more water to keep data centres cool. Let’s just juxtapose that with what India’s water shortage situation already looks like.

Source: World Resources Institute

The data centre sprawl will have to contend with these maps, before they put roots down and dig deep for water.

Unofficial Sources: Why India is quietly building the world’s largest e-commerce platform

Open Network for Digital Commerce, or ONDC, is the Indian government’s alternative to the American “laissez-faire, completely market-driven model”. It aims to be seller-first and consumer-focussed and to shift power away from the e-commerce giants. But many stakeholders bring many problems and if not solved, the network might end up creating many more.

Le meme: 

Listen to the latest episode of our podcast here:

That’s it for today.

Don’t forget to write in with your thoughts and observations on the reshaping of businesses, societies, and economies. We will be back tomorrow.

Stay safe,
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