Blog

Here’s the February edition of Pegasus.

In this issue, we include a very unique piece on the art and architecture of moral capitalism and another on the Yijing.

I would be most interested in your thoughts and feedback.

Our colleague, Professor Hashim Kamali, Founder and Director of the International Institute of Advanced Islamic Studies in Kuala Lumpur, has sent me an essay on the values in Islam which provide grounds for our promoting sustainable development.  Prof. Kamali is included in the 2022 list of the world’s 500 most influential Muslims.

From its inception, the Caux Round Table presumed that an ethic of responsibility in business and finance would resonate with many wisdom traditions and so could appeal to global communities for support of its aspirations.  Prof. Kamali’s essay is, to me, further proof of this profound and reassuring proposition.

You may read his essay here.

In 1999, two journalists wrote a book titled Dow 36,000.  At the time, the Dow Jones Industrial Average was a measure of the price performance of the New York Stock Exchange.  At the time, the Dow was at 8,800.  In 1994, it had been 3,400.  Two years later, the Dow was still rising and Federal Reserve Chairman Alan Greenspan worried in public about “irrational exuberance.”

Many thought: “Not in my lifetime!”

As I write this, the Dow is at 35,112.

The Dow closed higher than 36,000 for the first time on November 2, 2021.

Does this mean that capitalism really works as promised – creating the wealth of nations?  What happened?

Time and low interest rates.

Time makes it possible for compounding returns to take effect.  Here is a compound interest chart:

The higher the return and the longer the time the investment is left also to grow, the more dramatic the total return.

Secondly, low interest rates.  For various reasons, governments have put trillions of dollars in both the U.S. and the global economies since the late 1990s.  More money, lower interest rates.

Then, earnings on stocks (dividends and buybacks) and expectations of continued entity profitability outpace what can be earned in interest by investing in debt instruments.  So, rational investors put their money in stocks and keep it there.  The Dow just keeps on rising, day in and day out.

Now, importantly, wealth makes for differences in marginal utility of an additional dollar and in the consequences of risk.  Wealthy people have a lower marginal utility for each dollar they own and so can tolerate risk better.  They can put money away for the long-term in more risky investments and so earn the higher returns that go with higher risk and, thus, get more in compounding returns on their equity investments.

Poor people need to be more prudent and not take long-term risks.  They also don’t have much money to use for investments after their consumption expenditures.  They are systemically limited in being able to benefit from long-term stock investments.

A particular stock is more risky in the short and medium-term that if held for years and years. Risk-averse investors should stay away from long-term bets on equity ownership.

Secondly, the liquidity provided by governments and central banks tends to flow to the wealthy. They, in turn, have more income than they consume, so they are systemically more able to save and to keep their savings untouched.

Thirdly, the rise of huge investment funds have lowered risks for stock ownership.  The big funds diversify risk by investing in many, many companies.  Thus, they have provided a safer haven for money invested in equities, which pay more than bonds and other debt contracts.  This has attracted money into equity investments.

These economic realities have kept financial markets growing and growing for 25 years.  Here is a chart on the Dow’s performance:

 

I saw in a recent Harvard Business Review mention of an article in the Academy of Management Journal noting that “Hedge funds see high levels of CSR activity as a signal that a firm is wasteful and ripe for cost-cutting.” The researchers found that in a sample of 16,000 firms, the higher a firm’s CSR score, the more likely it would be targeted by an activist hedge fund.

For firms targeted, on average, 25% reduce CSR spending after the attack on their business model by some owners.

The article concluded that firms with CSR commitments need to find investors with similar values – the love of something other than ready money.

Larry Fink of BlackRock recently released his 2022 letter to CEO’s.

It is immodest of me, but truthful nevertheless, to point out that Mr. Fink’s understanding of capitalism is nicely tracking the work of the Caux Round Table’s founders some 36 years ago.

For example, Fink wrote:

At the foundation of capitalism is the process of constant reinvention – how companies must continually evolve as the world around them changes or risk being replaced by new competitors.  The pandemic has turbocharged an evolution in the operating environment for virtually every company.  It’s changing how people work and how consumers buy.  It’s creating new businesses and destroying others.  Most notably, it’s dramatically accelerating how technology is reshaping life and business.  Innovative companies looking to adapt to this environment have easier access to capital to realize their visions than ever before. 

…

I believe in capitalism’s ability to help individuals achieve better futures, to drive innovation, to build resilient economies and to solve some of our most intractable challenges.

Then, he gets specific about how capitalism makes the world better – brings inventions to scale for mass consumption:

Engineers and scientists are working around the clock on how to decarbonize cement, steel and plastics; shipping, trucking and aviation; agriculture, energy and construction.  I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime.

…

The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable for all consumers.

So, how is all the money Larry Fink is talking about going to find the right technologies to get our world to zero net carbon emissions?

Well, we have been commenting on that process as the secret sauce of capitalism – reaching out to tech types and risking funds in the development of new technologies to commercialize.

Another such opportunity is a battery capable of powering passenger aircraft in flight.  From The Independent:

Researchers have achieved a world-leading energy density with a next-generation battery design, paving the way for long-distance electric planes.

The lithium-air battery, developed at the Japanese National Institute for Materials Science (NIMS), had an energy density of over 500Wh/kg.  By comparison, lithium-ion batteries found in Tesla vehicles have an energy density of 260Wh/kg.

The new battery can also be charged and discharged at normal operating temperatures, making them practical for use in technologies ranging from drones, to household appliances.

According to the researchers, the battery “shows the highest energy densities and best life cycle performance ever achieved” and marks a major step forward in realizing the potential of this energy storage.

“Lithium-air batteries have the potential to be the ultimate rechargeable batteries: they are lightweight and high capacity, with theoretical energy densities several times that of currently available lithium ion batteries,” according to a release posted by NIMS.

Energy density has been the biggest obstacle towards the advancement of electric planes, with 500Wh/kg viewed as an important benchmark for achieving both long-haul and high-capacity flights.

The batteries work by combining oxygen in the air with the lithium present in the anode, which comes with safety issues that the latest research was able to overcome.

Until now, electric planes have been small and incapable of carrying large numbers of passengers over long distances, with efforts typically focusing on short-distance, private aircraft.

This week, Rolls-Royce’s Spirit of Innovation electric plane was confirmed to be the world’s fastest battery-powered vehicle after achieving speeds of over 600kph (380mph).

Achieving such feats on a larger scale would not only reduce pollution from fuel-burning engines, but also eliminate noise pollution that forces airports to be located in areas with low population densities.

I once heard a biologist say why don’t we make our own photosynthesis machine – no need to rely on plants to store solar energy?  Well, an item in SciTechDaily reports on just such innovation:

A research team has developed a new artificial photosynthesis device component with remarkable stability and longevity as it selectively converts sunlight and carbon dioxide into two promising sources of renewable fuels – ethylene and hydrogen.

The researchers’ findings, which they recently reported in the journal Nature Energy, reveal how the device degrades with use, then demonstrate how to mitigate it.

“By understanding how materials and devices transform under operation, we can design approaches that are more durable and thus reduce waste,” said senior author Francesca Toma, a staff scientist in the Liquid Sunlight Alliance (LiSA) Berkeley Lab’s Chemical Sciences Division.

For the current study, Toma and her team designed a model solar fuels device known as a photoelectrochemical (PEC) cell made of copper(I) oxide or cuprous oxide (Cu₂O), a promising artificial photosynthesis material.

Cuprous oxide has long puzzled scientists, because the material’s strength – its high reactivity to light – is also its weakness, as light causes the material to break down within just a few minutes of exposure.  But despite its instability, cuprous oxide is one of the best candidate materials for artificial photosynthesis because it is relatively affordable and has suitable characteristics for absorbing visible light.

To better understand how to optimize the working conditions for this promising material, Toma and her team took a closer look at cuprous oxide’s crystal structure before and after use.

Electron microscopy experiments at the Molecular Foundry confirmed that cuprous oxide quickly oxidizes or corrodes within minutes of exposure to light and water.  In artificial photosynthesis research, researchers have typically used water as the electrolyte in the reduction of carbon dioxide into renewable chemicals or fuels, such as ethylene and hydrogen – but water contains hydroxide ions, which leads to instability.

But another experiment, this time using a technique called ambient pressure X-ray photoelectron spectroscopy (APXPS) at the Advanced Light Source, revealed an unexpected clue: cuprous oxide corrodes even faster in water containing hydroxide ions, which are negatively charged ions comprised of an oxygen atom bound to a hydrogen atom.

“We knew it was unstable – but we were surprised to learn just how unstable it really is,” said Toma.  “When we began this study, we wondered, maybe the key to a better solar fuels device isn’t in the material by itself but in the overall environment of the reaction, including the electrolye.”

To validate their simulations, the researchers designed a physical model of a Z-scheme artificial photosynthesis device at Toma’s LiSA lab at Berkeley Lab.  To their delight, the device produced ethylene and hydrogen with unprecedented selectivity – and for more than 24 hours. “This is a thrilling result,” said Toma.

The Wall Street Journal recently ran a commentary which included some observations from George Gilder on the foundation of capitalism on intangible factors – knowledge and the communitarian process of getting goods and services into the hands of others.

I include some excerpts of the commentary here.

I recall a college class where the noted scholar of identity, Erik Erikson, asked, with a note of despairing resignation, why we humans divide ourselves into what he called “pseudo-species.” By this term, he referred to lineages, clans, tribes, ethnicities, peoples, nation states, in-groups of all sorts – all the identity collectives we invent for ourselves.

In answer, I suppose, there is the Old Testament story of the Tower of Babel, where our being divided into rival groups was a punishment for our hubris in seeking to rival God, who alone should organize the cosmos.

But in the U.S., the month of February is dedicated to crossing barriers of race, given our history of slavery, Jim Crow segregation and racist disaggregating and disalignment, one with another. February is Black History Month, an opportunity to learn about the isolating history of some Americans.

A notable response to the harsh experience of African Americans was written by Dr. Mary McLeod Bethune as her last will and testament.  She, thereby, left us all the gift of pointing to our moral sense as a good way (Dao) of living.

The Caux Round Table Principles for moral capitalism and moral government rely on the very principles of moral thinking which Dr. Bethune recommended.

You may read her last will and testament here.

Much attention is currently being directed towards companies finding a “purpose” more meaningful than the making of profits, towards running companies to accomplish good ends for the environment, society and in governance (ESG) and finding a net positive balance in the totality of their impacts.

Our metric of a moral capitalism looks in that direction, as well.  Given that the Caux Round Table Principles for Business were conceived and debated by practical senior business executives, such principles seek a balance of idealism and realism.

I noticed, with some interest, a recent C-Suite Outlook survey by the Conference Board on CEO outlook for 2022.  Those responding believe that the issues having the greatest impact on their businesses are: 1) Covid related disruptions; 2) rising inflation; 3) labor shortages; 4) supply chain disruptions; and 5) changes in consumer behavior.

Ah, the tyranny of the mundane when it reigns over our hopes and dreams.

I was reminded of two lines in Robert Frost’s elegant poem on aspirations:

But I was going to say when Truth broke in
With all her matter-of-fact about the ice-storm

Frost then goes on to leave truth and dream a bit:

It’s when I’m weary of considerations,
And life is too much like a pathless wood
Where your face burns and tickles with the cobwebs
Broken across it, and one eye is weeping
From a twig’s having lashed across it open.
I’d like to get away from earth awhile
And then come back to it and begin over.
May no fate willfully misunderstand me
And half grant what I wish and snatch me away
Not to return. Earth’s the right place for love:
I don’t know where it’s likely to go better.
I’d like to go by climbing a birch tree,
And climb black branches up a snow-white trunk
Toward heaven, till the tree could bear no more,
But dipped its top and set me down again.
That would be good both going and coming back.
One could do worse than be a swinger of birches.

Yesterday, I sent around a comment on spending money on just what to remediate carbon emissions.  Today, there is a report that Bill Gates and others have spent $80 million on a technology for carbon capture.

According to Bloomberg, a Massachusetts-based startup that captures carbon dioxide directly from the air has raised $80 million from investors, including Bill Gates-led Breakthrough Energy Ventures:

Verdox has a different approach that it claims to be more efficient and therefore cheaper.  The Massachusetts Institute of Technology spinoff has developed a special type of plastic that can selectively pull out CO₂ from a mix of gas—in air or exhaust—when charged with electricity. Once trapped, a change in voltage releases the CO₂.  The startup said its material could cut the total energy used in direct air capture by 70% or more.  The startup will have to rely on low-carbon electricity to power the process.

Most other carbon capture processes use huge amounts of energy per ton of carbon captured for sequestration.

An early version of the material, developed at MIT, worked well at capturing CO₂, but it also ended up capturing oxygen.  Air is composed of 21% oxygen and only 0.04% CO₂.  But in the past year, Verdox has landed on a material that it says is 5,000 times more attractive to CO₂ than oxygen.

It will take years before Verdox can capture millions of tons of CO₂ annually, but it eventually aims to do so at $50 per ton or less.  That would be an attractive price, given carbon permits in the European Union’s Emissions Trading System have traded this year around 80 euros ($90) a ton.

A recent issue of Newsweek featured an essay by Charles, the Prince of Wales, on the need for a global mobilization of will to remove the risk of harmful global warming from our planet.  Again, and with respect for Prince Charles’ goodwill and concern, I am struck by divergence of the high aspirations and passionate concern of climate activists from the specifics of just what to do.  Will and high ideals cannot take the place in solving problems provided by 1) biology, physics and chemistry and 2) the means and mechanics of praxis – changing real conditions with real processes.

To some extent, Prince Charles agrees with me.  His Sustainable Markets Initiative has authored the Terra Carta Roadmap for Nature which contains nearly 100 specific steps for remediation of climate change.  He writes, “Together we are working to drive trillions of dollars in support of transition across ten of the most emitting and polluting industries, including industry, agriculture, transportation, health systems and fashion.”

My question is: if markets fail to do this, how can good intentions and money get the job done?

To support my skepticism, let me note the three avenues suggested by Prince Charles to work around market failure.  First is to have industries set out “what it will take to make this transition and have strategies in place to speed up the process.”  But what if no one wants to pay for the new technology or buy the new products?  What if nobody sells the machines and processes which would reduce emissions or pollutants?  Will just giving away money produce inventions of the right machines and processes?  Who wants to give away money and not get some good in return?

Secondly, Prince Charles says private investors must finance transition efforts. As charity?  At what level of risk?  To whom should the money go?

Thirdly, the Prince says CEOs and institutional investors need clear market signals from governments – to give them confidence to invest in the long-term. Governments?  The government will buy me an electric car and pay for a charging station in the garage of my condo? Fine, but I am not going to stay awake for it.

Then, in the same issue, Newsweek runs a story about nuclear energy.  After years and years of idealist protest against nuclear power, now suddenly, when people realize that wind and solar will never provide enough electricity to power our civilization and that burning natural gas, as we do, contributes to CO2 emission, some kind of nuclear power is suddenly in vogue.

This article reveals how we can deal – actually and in fact – with global warming, one step at a time, starting with research, then building a pilot, then have innovators (2.5% of the people) buy and test out the pilot, followed by early adapters (13.5%), then early majority consumers (34%), then late majority users (3/4%) and finally, the laggards getting on board (16%).