The Capital Note

Legislation by Regulation — The Accountants Are Moving In (Shareholders Left Out)

(sutlafk/Getty Images)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Sustainability by fiat, Milton, Nikola and Paradise Lost, the IMF’s net-zero fantasy, renters in trouble, and two tales of discontinuing catalogues: Sears and Ikea.

“Sustainability” > Democracy (and Shareholder Rights)

One of the characteristic techniques of those attempting to force a sustainability agenda upon the nation’s companies is the use of regulation rather than legislation, a ruse which largely avoids such inconveniences as votes in the legislature, democratic scrutiny, and all that. So say what you will about Britain’s decision (I’ll say that it’s idiotic) to mandate that companies should, within the next five years, report the financial impacts of climate change on their businesses (which company will be brave enough to say none whatsoever?), it is at least a decision that is being taken by a democratically elected government.

The same cannot be said about the way in which some central banks — most recently the Fed — are busy adding climate change to their list of responsibilities. To return again to this topic, they shouldn’t do so both as a matter of principle (that whole democratic consent thing) and as a matter of common sense. The argument that central banks are obliged to take on this role as a result of their responsibilities to guard against systemic financial risk is, as economist John Cochrane argued in the course of a recent talk (which I have linked to before and will link to again), a distinctly dubious claim:

Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather.

Interestingly and awkwardly, an HSBC survey of 2,000 investors found that just 10 percent viewed climate risk disclosures to be a relevant source of information.

But the power of that 10 percent should not be underestimated. Cochrane (who, incidentally, makes his debut in our latest Supply & Demand column today) understands all too clearly why so much emphasis is being put on disclosure. It operates as part of what he has described as a “regime essentially of shame, boycott, divest, and sanction.” Its purpose? To unleash activists and “socially responsible” investors on companies that don’t appear to be taking climate change seriously enough, and, for that matter, on those that lend to them.

Banks are not known for their heroism, after all.

Bloomberg Green:

The Swedish bank that brought the first green bond to the world over a decade ago is now forcing corporate clients to prove they’re clean enough to stay on its books.

SEB AB Chief Executive Officer Johan Torgeby, who spent years as a corporate banker pitching green bonds to issuers back when “no one” wanted them, says the bank will work with clients to improve their sustainability credentials. But if they don’t step up, he says SEB will sever ties.

“You have very many long-term relationships,” Torgeby said by phone. “Today, you view those relationships in a different light than you might have done 10 years ago.” Though it’s not “an easy thing…you have to decide if you want to disengage completely.”

SEB’s line in the sand comes as a growing number of banks review their loan books to purge their portfolios of polluters. And though the Swedish bank has gone further than most, growing pressure from investors and regulators suggests more lenders may follow.

At the same time, European authorities are working on new reporting requirements that force firms to disclose risk measured in terms of environmental, social and governance goals. That will make it easier for banks to assess how clean their clients are.

The author of that piece is right. Many more lenders will follow. Quite how SEB’s shareholders will benefit from this decision is, of course, a mystery, but in the coming age of stakeholder capitalism that’s going to matter less and less. It’s worth adding that there is also something somewhat distasteful about a private company acting as a social enforcer, purely on the say so of its managers, but these are the times we live in.

What’s even worse is when private companies with, effectively, a regulatory role step into the fray. Enter the accountants. In, The Future of ESG Is … Accounting?, a recent article for the Harvard Business Review , Richard Barker, Robert G. Eccles, and George Serafeim highlight the fact that “there are still no universally adopted standards for how companies can measure and report on their sustainability performance.” That’s true — and it is something that has helped enrich many of the “consultants” who have flourished in the ecosystem that sustainability has spawned.

But this, note Messrs. Barker, Eccles and Serafeim, “might be about to change, thanks to a quiet revolution in the accounting community”:

That revolution is being led by the IFRS Foundation, the body that oversees the work of the International Accounting Standards Board (IASB) in setting financial reporting requirements for most companies in the world, across more than 140 jurisdictions. (In the U.S., these requirements are set by the Financial Accounting Standards Board, or FASB). This past September, the IFRS Foundation proposed the creation of a parallel Sustainability Standards Board (SSB).

The IFRs Foundation is well-placed to make this proposal. That’s because of its expertise in the standard-setting process, its legitimacy in the corporate and investor community, and its support from regulators all over the world. If its proposal is adopted, investors and other stakeholders will suddenly have a much clearer view of any company’s sustainability performance—just as they do its financial performance. Most companies already issue sustainability reports, of course, but these are divorced from their financial reports, making it difficult to see the relationship between financial performance and sustainability performance. The SSB would make it possible for the ideal of integrated reporting to be realized. And the FASB would be able to build on this work in the United States.

But what begins as a worthwhile initiative to try to find some agreement — for those who care about such matters — over the definition of sustainability is already well on the way to mutating into an obligation on the part of companies to issue reports in compliance with these definitions. It won’t be too long before opting out of such reporting will not be an option:

 Investors are making the case for sustainability reporting for IFRS and also at the SEC.

Those investors who care that is.

Other investors will rightly suspect that forcing managers to focus on such issues will take their attention away from the bottom line, a problem that will become even more pressing if “the ideal” of “integrated reporting” (a subject for another day) is realized.

Problem? What I am saying? Shareholder return is so 1980s, so Milton Friedman, so passé.

Around the Web

Nikola’s Milton: Paradise Lost?

The Financial Times looks into the past of Trevor Milton, Nikola’s (former) executive chairman:

Nikola’s backers, including its chairman and former GM executive Steve Girsky, insist that “an army” of advisers conducted due diligence on the company before it went public. Now it is the turn of the US Department of Justice and the Securities and Exchange Commission, to pore over Nikola after they launched separate investigations into the allegations swirling around the company.

The repercussions are being widely felt. The incident has raised further doubts over the extent of due diligence being carried out on companies aiming to go public via so-called special purpose acquisition companies, rather than the more rigorous route of an initial public offering. “Nikola could have done with a little more disclosure,” says one banker who has worked on multiple Spac deals. “Someone missed the buck on that one.”

Mr Milton’s exuberance was a “yellow flag” for some investors, says one who did put money into Nikola before the listing . . .

The IMF’s net-zero fairy tale.

Rupert Darwall in Real Clear Energy:

With Britain, France, the European Union, and now America (soon to be under Joe Biden’s leadership) piling onto the net-zero bandwagon, you’d think that some objectivity about the economic costs and consequences about such absolutist carbon-emission policies would be in order. Traditionally, the International Monetary Fund (IMF) could be relied upon as a source of sound economic advice. No longer. Under its previous managing director, Christine Lagarde, and now its current one, Kristalina Georgieva, the IMF has traded economic integrity for green wokery – thus giving governments license to push radical green policies in the false belief that there are few or no downsides.

Covid-19 has put what might be called green millenarianism on steroids. In July, Georgieva told an interviewer that the pandemic presents a once-in-a-lifetime opportunity to be part of a transformation necessary for human survival: “you don’t like the pandemic, you’re not going to like the climate disaster.” A characteristic of climate millenarianism is over-hyping of the potential damage of climate change while at the same time claiming that avoiding this damage will cost next to nothing. Thus in its most recent World Economic Outlook, the IMF implies that potentially catastrophic climate change can be avoided with a green fiscal stimulus amounting to 1 percent of GDP and carbon taxes of between $10 to $40 a ton in 2030 . . .

Interestingly, Georgieva is a member of the World Economic Forum’s (Davos) Board of Trustees, and thus presumably sympathetic to the WEF’s “Great Reset,” a project I have discussed here and here.

Running out of runway.

The Washington Post:

Millions of Americans who lost their jobs during the pandemic have fallen thousands of dollars behind on rent and utility bills, a warning sign that people are running out of money for basic needs.

Nearly 12 million renters will owe an average of $5,850 in back rent and utilities by January, Moody’s Analytics warns. Last month 9 million renters said they were behind on rent, according to a Census Bureau survey.

Random Walk


[T]he roots of the Sears catalog are as old as the company. In 1888, Richard Sears first used a printed mailer to advertise watches and jewelry. Under the banner “The R.W. Sears Watch Co.” Sears promised his customers that, “we warrant every American watch sold by us, with fair usage, an accurate time keeper for six years – during which time, under our written guarantee we are compelled to keep it in perfect order free of charge.”

The time was right for mail order merchandise. Fueled by the Homestead Act of 1862, America’s westward expansion followed the growth of the railroads. The postal system aided the mail order business by permitting the classification of mail order publications as aids in the dissemination of knowledge entitling these catalogs the postage rate of one cent per pound. The advent of Rural Free Delivery in 1896 also made distribution of the catalog economical.

All this set the stage for the Sears, Roebuck and Co. catalog. A master at slogans and catchy phrases, Richard Sears illustrated the cover of his 1894 catalog declaring it the “Book of Bargains: A Money Saver for Everyone,” and the “Cheapest Supply House on Earth…” This catalog expanded from watches and jewelry, offering merchandise such as sewing machines, sporting goods, musical instruments, saddles, firearms, buggies, bicycles, baby carriages, and men’s and children’s clothing. The 1895 catalog added eyeglasses, including a self-test for “old sight, near sight and astigmatism.” At this time Sears wrote nearly every line appearing in the catalogs drawing upon his personal experience using language and expressions that appealed to his target customers.

In 1896 Richard Sears added a spring and fall catalog and enlarged the size. He also extended an open invitation for all customers to visit the company’s Chicago headquarters. For the first time the company charged for the catalog. Sears tried to mitigate the 25-cent fee by promising to apply the fee to any orders over 10 dollars. Specialty catalogs now appeared covering such items as bicycles, books, clothing, groceries, pianos and organs, and sewing machines. Sears sold the earliest entertainment centers in the form of magic lanterns. These were either a single slide type, or a version called the chromatrope, which showed a succession of slides giving the viewers a motion picture feel.

Sears added a color section in 1897, advertising shoes in black, red and brown. New products included cloth bound books as cheap alternatives to hardbound books, and the Edison Graphophone Talking Machine. Incorporating a new trend, Sears added a “club order program” encouraging customers to combine their orders with friends or neighbors to share in discounts. A Builders Hardware and Material Section appeared; selling everything a customer needed to construct a building. Noting that all men are not equal in size and shape, Sears targeted the extra stout and extra large customer with men’s laundered shirts specifically made for them.

In 1898, he added more specialty catalogs including ones for photographic goods, talking machines, and mixed paints. In the general catalog a color section showed different buggies in red, green, brown, and black with gold or silver trim. He placed the Graphophone in an office setting, and the optigraph moving picture machine appeared. Reflecting current events, the lantern slide collection included shows on the Klondike gold fields, the destruction of the Maine and the Cuban war . . .

To get a hands on feel, the 1905 catalog featured full color and texture wallpaper samples, and a swatch of material used in men’s suits. Following this trend, the next year [Sears] added paint samples, and in 1908, the last year Richard Sears was associated with the company, he offered both wallpaper and paint color sample books to customers.


Reflecting modern trends in retailing, the company decided to stop producing the general catalog in 1993.


Ikea is to stop producing its iconic catalogue, once the most-printed book in the world ahead of the Bible and Koran.

The flat-pack furniture retailer on Monday said its current catalogue — released in August — would be its last as more and more shoppers move online and fewer read a pamphlet first released in 1951 by Ikea’s founder, Ingvar Kamprad . . .

At its peak in 2015, Ikea produced more than 200m copies of the catalogue featuring a full array of its products from Billy bookcases to Ektorp sofas. The glossy brochure became a staple of family homes and student flats around the world.

The first catalogue was produced by Kamprad in his home region of southern Sweden, Smaaland, and distributed in 285,000 copies as part of his mail-order business, seven years before the first Ikea store opened. It gradually expanded around the world and the current 2021 catalogue ran to 40m copies . . .

 — A.S.

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