BP Results + BEIS Restructure

BP (BP.) produced some great financial results yesterday and the share price rose 8% on the day and is still rising. Other oil companies rose in unison. What I particularly liked as a holder was the improvement in Return on Capital which is forecast to grow to 18% in 2025 and 2030. This is after many years of quite mundane returns when I judge such a metric to be a key factor in any investment decision.

With increasing share buy-backs and dividend increases you can see why shareholders are happy. Their view might also have been affected by the following comment from the company CEO: “It’s clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon – all three together, what’s known as the energy trilemma. To tackle that, action is needed to accelerate the transition. And – at the same time – action is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it’s needed today”.

He is in effect saying that BP will continue to invest in oil/gas production while also investing in “transition growth engines” which includes “bioenergy, convenience and EV charging, hydrogen and renewables and power”. Production of oil/gas will be around 25% lower than BP’s production in 2019, excluding production from Rosneft, compared to the company’s previous expectation of a reduction of around 40%. BP correspondingly now aims for a fall of 20% to 30% in emissions from the carbon in its oil and gas production in 2030 compared to a 2019 baseline, lower than the previous aim of 35-40%.

It is good to see that reality has crept into their plans and forecasts. But the company’s results are clearly very dependent on the price of energy whose cost has shot sharply because of the war in Ukraine, There is a worldwide energy shortage and investors should keep a close eye on trends in that market if they hold companies such as BP and Shell.

There was an amusing post on Twitter by Philip O’Sullivan pointing out that the Annual Report of Shell in 1944 was all of 8 pages long – see first page above. Last year it was 359 pages!

That would be a good example for Shell and other companies to follow when annual reports are now way to long and voluminous in most cases. This is partly down to increased regulation and expanded accounting standards driven by increases in bureaucracy emanating from the Government BEIS Department  (“The Department for Business, Energy and Industrial Strategy”). For many years this used to be called the Department of Trade and Industry (the DTI) before politicians decided it was a good idea to rebrand it.

Now the Government has decided to split it up into three new Departments to be called “the Department for Science, Innovation and Technology, the Department for Energy Security and Net Zero, and the Department for Business and Trade”. What the benefit of this restructuring will be is not at all obvious and the name “Department for Energy Security and Net Zero” is a particular oxymoron as aiming for Net Zero is not going to improve energy security.

The downside is likely to be another year of musical chairs for civil servants in these departments when one of the issues is lack of continuity of expertise in specialist areas of government such as company law and stock market regulation.

Shuffling responsibilities does not help.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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UKSA Position Paper on Dematerialisation

UKSA has published a “Position Paper on Dematerialisation” – see https://www.uksa.org.uk/sites/default/files/2022-12/UKSA-position-on-dematerialisation-published-2022-12-24.pdf

It covers how the existing nominee and Crest systems operate which is an exceedingly complex topic, and what they would like to see if all shareholdings are dematerialised into the Crest system (and paper share certificates scrapped) as they must be soon.

I have been writing on this subject for over ten years for both UKSA and ShareSoc and the UKSA Paper provides a good explanation of the existing system. The ShareSoc campaign on the issue is described here: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

As one of the few remaining sponsored Crest members I am very keen to retain my rights that this provides such as being on the share register as a “Member” giving undisputed voting rights and clear communication rights.

But even this is proving problematic at present because companies and their registrars are now forcing payment of dividends via bank transfer rather than cheques. But if I buy a new shareholding they don’t know my bank details which creates a delay while they send me a form to register the details. Indeed the same difficulty arises with the few certificated holdings I have.

I am happy to give up receiving dividend cheques because my local bank is closing in May much to my disgust, but this is a system problem that needs resolving.

In the meantime the Digitisation Taskforce created last July needs to get a move on and come up with some recommended solutions before those of us on share registers all die of old age.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Baronsmead VCT AGMs and VCT Prospects

Today (1/2/2023) I attended the two Baronsmead VCT AGMs (BMD and BVT) via a Zoom webinar, partly because of the train strikes today but partly because I did not expect any momentous events or questions to take place, and so it turned out. But they did get a number of shareholders attending in person despite the train strikes.

However despite me registering for the event some weeks ago I did not receive a zoom invite and had to chase that up just before the meeting.

Just looking at BVT results, their total return last year was -19.20% which was very similar to my overall portfolio return. They achieved a similar return on both quoted and unquoted holdings which is probably not surprising because the valuations of quoted companies will have been used as benchmarks for the latter (they claim to be the only “hybrid” VCTs with a mix of quoted and unquoted holdings). Both BVT and BMD run very similar portfolios). The result was much better in the previous year at a total return of 29.3%.

There were 6p in dividends paid last year which equates to a yield of 7.1% (tax free remember).

There were a number of good realisations last year including listed company Ideagen which I also held directly. That achieved a return on initial investment by the VCT of 13 times.  

But the Chairperson of BVT, Sarah Fromson, warned that returns are likely to be more volatile in future due to the change in VCT investment rules in 2015. They are having to invest in more immature businesses in essence.

Voting took place on a poll but on-line attendees could not vote so you had to submit your votes in advance which I did. For example, I voted against the remuneration report as did 1.37 million shareholders because pay in the Baronsmead VCTs seems to be going up substantially.

There were few questions from the audience. One issue that was raised was the fees paid by investee companies for directors nominated by the VCT or Gresham House which seemed to be increasing – now over £1million possibly. It was suggested that having nominated directors on boards assisted with control of the companies.   

Is it a good time to invest in VCTs? I think the jury is still out on that. We have not yet seen the result of the changes to the VCT investment rules and it is unclear whether the investment in more early stage companies will be successful. The valuation of such companies still seems high to me but it may be some years before we see whether the valuations are justified.

However VCTs are still raising funds so they must see opportunities to invest them. There may be a high demand by investors due to the high tax reliefs and good dividend yields but they need to be aware of possible changes to the taxation of VCTs due to the “sunset” clause in the legislation which was mentioned briefly in the BVT AGM.

There may be problems revising the legislation because, as reported in the FT today, the Government has a problem in that it has committed to revoking EU imposed legislation in the UK but has just added another 1,000 pieces of such legislation that have been discovered that will need reviewing. That means the total is now 3,700 laws and regulations to be considered and amended or discarded. That surely shows how bureaucratic we have become of late because of our former membership of the EU and there are so many obscure laws that even identifying them has proved to be a problem!

But the good news is that if they have not been reviewed by the end of 2023 then they are likely to be automatically dropped because of the   Retained EU Law (Revocation and Reform) Bill 2022 which is in the House of Lords at the moment. What that might mean for VCT legislation is not clear.

The AIC held a seminar on VCTs recently and you can see a report on it here:  https://www.theaic.co.uk/aic/news/press-releases/vct-managers-still-seeing-strong-investor-appetite

As I already have substantial VCT holdings I have not been adding to them recently as the returns achieved I do not consider that good (mainly due to high management costs including the hated performance fees) and I would prefer to see how these issues play out. The Government may have made statements supporting VCTs but we need definite commitments and no threats to remove the high tax reliefs on VCTs which is the only thing that makes them good investments.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Future Disclosure Framework, Revolution Beauty Case and Performance of Slater Growth Fund

Having concluded that the existing KIDs are not fit for purpose, with which I totally agree, the FCA are consulting on the “Future Disclosure Framework” for investments, i.e. what investors should be told before they splash their money out. You might think this would be a relatively simply matter to define but it is not – or at least the FCA wishes to make it complex as usual.

You can read their consultation document which they recently published here: https://www.fca.org.uk/publication/discussion/dp22-6.pdf

I have submitted a response which you can also read here: https://www.roliscon.com/Future-Disclosure-Consultation-Response.pdf

One particular point to note is that they fall into the common trap of suggesting the riskiness of an investment can be simply measured by the volatility of the share price. This is nonsense. Warren Buffett has said that stocks are more volatile than cash or bonds, but they’re safer to own in the long run, and he is quite right. The riskiness of an investment is a function of many other factors than price volatility. Major risks are the trustworthiness of the investment manager – the case of Revolution Beauty is discussed below as an example of what investors would have liked to know before they purchased the shares.

Revolution Beauty

The shares in Revolution Beauty (REVB) were suspended in September 2022 after the auditors raised concerns. On Friday (13/1/2023) all the bad news was revealed.

One of the issues is that larger than normal sales were booked to three distributors in the last month of the financial year. Payment for these orders was delayed. Two of the distributors returned some of the stock at a later date. This is a classic example of “channel stuffing” to improve a company’s financial reports. This is a very well known method of improving a company’s financial figures and is a fraud on investors. It’s a clear example of orders being booked in the expectation that they would never be delivered but reversed out in the next financial period.

There were also personal loans from two of the directors to the distributors or their affiliates and also loans made to some of the non-exec directors and senior managers which were not disclosed to the board.

We wait to see what action is taken against the directors who orchestrated this conspiracy but I suspect it won’t be as severe as I would like to see.

Slater Growth Fund

I have been monitoring the performance reports of other investors last year to see who did worse than me. Another recent example reported is that of the Slater Growth Fund run by Mark Slater. He is usually a sound manager – performance of +23% in the last five years well ahead of the relevant index and that includes a negative 25.5% last year. Last year was definitely not a good year for “growth” funds and my portfolio was certainly focussed on growth companies at the start of 2022. Similar problems were faced by the Fundsmith Equity Fund and the CFP SDL Buffettology Fund.

But as an individual investor I could quickly exit some of my holdings when I saw the way the wind was blowing while fund managers would have had more difficulty in moving rapidly as a few large sales would have depressed the share prices of companies they were selling. The other issue is that open-ended fund managers may have to sell holdings to meet redemption requests when investors want to withdraw their money which many did as gloom spread through markets. This is why I prefer closed-end investment trusts to open-ended funds – the former managers can make their own decisions about whether it is a good time to sell or hold on.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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PRIIPs Consultation Response, Market Close and BHP Legal Case

With the market winding down I have had the time to write a response to HM Treasury’s public consultation on the PRIIPs regulations. They include the requirement for KIDs (Key Information Documents) which I now completely ignore because there are better sources of the required information on funds and trusts.

My consultation response is present here: https://www.roliscon.com/PRIIPS-Consultation-Response.pdf . I agreed with most of the recommendations.

There is a complementary consultation on the “Future Disclosure Framework” from the FCA which I may or may not get around to over the holiday period.

The UK stock market has just closed for Christmas. If there was a “Santa Claus” rally it was barely perceptible in my portfolio. There was a minor hiccup after the announcement that there will be a court hearing next April to determine whether BHP Group should face a trial over the damn burst in Brazil many years ago.

There are 400,000 Brazilian claimants and it will be the largest group litigation in English civil court history if the case proceeds. BHP said: “BHP fully refutes the claims made by the English plaintiffs and will continue to defend itself in the case, which we believe is unnecessary as it duplicates issues already covered by the existing and ongoing work of the Renova Foundation — under the supervision of the Brazilian courts — or are objects of legal proceedings in progress in Brazil”. Looks like a beanfeast for lawyers that will run for years.

As a holder of BHP shares I doubt BHP will have a problem with this lawsuit so I will continue to hold until more information comes to light.

I will probably give a full analysis of my stock market portfolio later in the New Year as I do a calendar year analysis and it takes me some time to do a full analysis.

I look forward to the New Year with my usual perennial optimism and I hope my readers have a good Xmas.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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The Death of KIDs

HM Treasury have announced plans to revoke the PRIIPs regulations which will likely mean the death of KIDs (Key Information Documents).

KIDs are imposed and regulated under the PRIIPs regulation as devised by the EU for packaged investment products such as funds and trusts. KIDs give basic financial information, risk indicators and likely future performance based on past performance. Those who purchase investment trusts for example will be asked to confirm they have read the KID before purchasing a holding. But in reality KIDs are grossly misleading for many investment trusts.  This is because their estimate of future returns are based on short-term historic data. This has caused many fund managers of investment trusts to suggest that they should be ignored and investors should look at the other data that the companies publish to get a better view of likely future returns. This writer certainly ignores the KIDs for the investment trusts I hold and I doubt most retail investors took much notice of them.

KIDs were a typical example of complex financial regulations that were misconceived by EU bureaucrats while imposing substantial costs on investment trusts which they no doubt passed on to investors.

The Treasury have issued a public consultation on what might replace KIDs – see https://www.gov.uk/government/consultations/priips-and-uk-retail-disclosure . It explains exactly why KIDs need scrapping.

I may respond in some detail to the consultation as I might have time over Xmas to do so.

In the meantime I am still waiting for the usual Santa rally in share prices. Perhaps I am just being impatient and Santa Claus may arrive in the last few days before Christmas. I hope so but the market has already gone quiet with prices stabilising. I guess folks might be too busy attending parties and doing Xmas shopping to spend time on share trading.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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More News on Globo Case

Globo was a company subject to a large fraud back in 2015 which caused the company to collapse and investors lost everything. Shareholders might have thought that any legal proceedings were dead but not so. The FCA have published a note on how they have been progressing the case which is here: https://www.fca.org.uk/news/press-releases/fca-progresses-market-abuse-claim-against-globo-plc-chiefs

In summary despite the Greek courts rejecting extradition requests to face criminal charges against the former CEO and CFO, the FCA is now progressing a civil case and the High Court has rejected an application to strike out the proceedings.

As a former shareholder in Globo it is good to hear that the case is still being pursued although I did not lose money on my shareholding having decided that there were too many unexplained and unaccountable problems being reported and therefore selling before it went bust. But many other shareholders were not so lucky.

After 7 years it would be good to have some conclusion on this example of how fraud can fool auditors such that the reported accounts were a complete fiction.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The Economy, Politics and Financial Fraud

With not a lot happening in my stock market portfolio today, I have some time to comment on wider issues. With the USA Federal Reserve raising interest rates and the Bank of England doing likewise, there is clearly a commitment to tackle inflation aggressively. This will undoubtedly put a damper on the economy in due course and lead to a recession in the UK as has been widely forecast anyway.

Is raising interest rates wise at this time? I think it is because the era of cheap money (i.e. when it was possible to borrow money at less than the rate of inflation) should never have been permitted.

We still have very low unemployment rates from a historic perspective while the Government is still handing out money in the form of energy support cash which it has to borrow to fund. The Government also remains committed to the “triple-lock” on state pensions to protect the elderly such as me which I find simply unjustifiable when the rest of the population have no such protection from a rising cost of living.  

The concept of a “balanced budget” where taxation matches Government expenditure has been forgotten and the excuse of keeping the economy afloat in the face of the Covid epidemic has been used to justify excessive spending.

Meanwhile the cost of asylum seekers and illegal immigrants is enormous with as many as 1 million illegal immigrants in the UK. Nearly £1.3 billion per year is now being spent housing asylum seekers, with costs likely increasing as dinghy arrivals rocketed over the summer

The rise in small boat crossings in the English Channel is driving the migration figures with at least 40,000 arriving that way in the current year and claiming asylum. A large proportion are young men from Albania who are economic migrants. See this BBC analysis for the data: https://www.bbc.co.uk/news/explainers-53734793

The Government seems incapable of stopping this “invasion” as the Home Secretary recently called it despite the UK having historically a strong navy. In reality the UK navy has spent billions of pounds on large aircraft carriers (£7.6 billion for two) which are white elephants in modern warfare while it has insufficient border patrol vessels or is unable to use them effectively.

Other parts of the UK economy are in a parlous state with the transport network being horribly congested while as much as £45 billion is being spent on Phase 1 of HS2 alone – another expensive white elephant. At the same time terrorist organisations aiming to achieve their objectives by undemocratic means such as “Just Stop Oil” are allowed to disrupt the transport network and divert police operations at enormous cost.

The NHS is at breaking point with costs rising but simply having enough staff, hospital beds and ambulances seems to be incapable of being provided.

The level of fraud and crime in general is rising and it’s worth reading the recent report of the Parliament Justice Committee on fraud in the UK. Here are some brief extracts:

“Justice response inadequate to meet scale of fraud epidemic. Prioritising traditional forms of crime has left the justice system ill-equipped to deal with continuing rise in fraud, the Justice Committee has found.  

The Committee finds that the level of focus from policing is inadequate to deal with the scale, complexity and evolving nature of fraud. Only 2% of police funding is dedicated to combatting fraud despite it accounting for 40% of reported crime. Lines of accountability are confused with responsibility split between local and national forces. Action Fraud has proven itself unfit for purpose and while a replacement reporting system is expected in 2024, victims should not have to wait this long to see improvements in the service they receive.  

In addition to a lack of investigation of fraud crimes, there is also a lack of prosecution. The ONS estimates that there are an estimated 4.6 million fraud offences each year, but in the year ending September 2021 just 7,609 defendants were prosecuted for fraud and forgery as the principal offence by the CPS.  

Chair of the Justice Committee, Sir Bob Neill MP said:

Fraud currently accounts for 40% of crime and the figure is growing. People are losing their life savings and suffering lasting emotional and psychological harm. But the level of concern from law enforcement falls short of what is required.

We need the criminal justice system to have the resources and focus to be able to adapt to new technologies and emerging trends. The current sense of inertia cannot continue, we need meaningful action now.”

There is currently an epidemic of fraud in England and Wales. The number of cases has grown steadily over the past decade and accelerated rapidly to unprecedented levels during the pandemic. This trend has shown no sign of abating as the country returns to normal life. Around 875,000 cases are reported each year, however the Office for National Statistics has estimated that the real number could be as high as 4.6 million. 40% of recorded crime is now fraud and is calculated to cost society £4.7 billion a year”.   

It’s altogether a quite depressing picture of the UK economy, and of our legal and democratic systems that seem unable to respond to these problems in any reasonable timescale. Meanwhile UK politicians seem happy to focus on trivia such as woke issues.

Even the weather has turned bleak and life is thoroughly downbeat.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Platform Transfers and Judicial Reviews

I have written about the unreasonable delays in doing a platform transfer of a SIPP previously and on the slow and inadequate response to a complaint to the Financial Ombudsman – see here: https://roliscon.blog/2022/09/02/useless-financial-ombudsman-and-fca-plus-defective-insolvency-regime/

The platform transfer took over 5 months and my complaint to the Ombudsman was commenced in May 2021. I accepted £350 for the delays from one provider and have now received a derisory offer of £50 from the receiving platform as part of a “Final Decision” by the Ombudsman, which I have rejected.

My only options now are to either pursue a Judicial Review of the Ombudsman decision or pursue a direct legal claim. Neither are really very practical. On the grounds of expense and my time involvement for a relatively minor claim it would not be sensible to take either option.

The whole point of a Financial Ombudsman is that it should enable claims to be pursued for failures in financial institutions without going to the expense of a full legal claim. It’s falling down on the job in essence. It also apparently considers a transfer time of over 5 months to be not unreasonable despite the fact that there were clearly avoidable delays and inefficiency in the process by both sending and receiving platforms. The FCA really does need to take up this issue of long platform transfers which are simply anti-competitive. They need to follow Alexander’s example with the Gordian Knot and take a sword to slice through the complexity.

Incidentally a recent publication on Judicial Reviews may be of interest. A Judicial Review is a legal process that enables you to challenge decisions by central or local Government bodies or where the law may have been applied incorrectly by tribunals or other courts. It has been widely used of late by environmental lobbyists to challenge planning decisions but it can also be helpful on other issues. For example an application for a judicial review was made in the Northern Rock nationalisation case.

But they are not always easy cases to pursue because they are not judged on moral principles but simply on the legal technicalities. Cases can be thrown out before they are even heard by judges if they are not handled correctly and do not meet certain criteria. For example cases need to be raised as soon as possible after the issue comes to the attention of litigants or at least within 3 months.

A recent publication by the Courts and Judicial Tribunal entitled “Administrative Court Judicial Review Guide” is exceedingly helpful in explaining what is required and the process that must be followed – see link below. It even explains how “litigants in person” are supported if you do not wish to pay for professional legal representation yourself. And it covers the issue of costs which must be taken into account which litigants may need to pay (and the defendants costs if you lose the case).

Costs can vary wildly. For example this writer has been involved in two judicial reviews. The first was a challenge to the suspension of a hearing in a magistrate’s court on an alleged motoring offence when a key prosecution witness failed to turn up. This cost me less than £2,000 in court fees and my own solicitor’s fees. The case was referred back to the magistrate’s court when the witness again failed to appear so the case was abandoned.

The other was the challenge to the Government’s nationalisation of Northern Rock where legal costs of both sides were several million pounds. The court refused to overturn the decision in parliament by Labour MPs to force nil compensation to shareholders.

One can apply for a “cost cap” to stop the defendants running up enormous bills which Government bodies and Councils can otherwise easily do. And note that if a claim is over an environmental issue then the Arhaus Convention can be invoked to limit costs further. See the Guide in Section 25 for more details.

Although it is possible to pursue a judicial review without legal representation I would recommend that people contemplating a judicial review do take some advice from solicitors familiar with the process. It is particularly worth noting this statement in the Guide: “In judicial review proceedings, the Court’s function is to determine whether the decision or conduct challenged was a lawful exercise of a public function, not to assess the merits of the decision or conduct under challenge. It is therefore seldom necessary or appropriate to consider any evidence going beyond what was before the decision-maker and evidence about the process by which the decision was taken – let alone any expert evidence”.

In summary judicial reviews can be a useful tool for those challenging decisions of a public body but you need to adhere to the rules laid down by the courts including the timescales. The Guide is very helpful in that regard.

Administrative Court Judicial Review Guide 2022: https://tinyurl.com/2sfw4d7p

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Woke Inc and the Corruption of Capitalism

I have been reading the book Woke, Inc. by Vivek Ramaswamy. It’s not a very good book in my opinion so I will not do a detailed review but it does highlight how corporate profits are being diverted to social causes, good and bad, in the USA. It enables directors of public companies to espouse their favourite causes and signal their virtues while shareholders pay the cost of this munificence.

This largesse is also spreading to the UK. Recently Shell UK announced that “British Cycling has signed a long-term partnership that will bring wide-ranging support and investment from Shell UK as a new Official Partner. The agreement starts this month and runs to the end of 2030. This new partnership will see a shared commitment to; supporting Great Britain’s cyclists and para-cyclists through the sharing of world-class innovation and expertise; accelerating British Cycling’s path to net zero…..”. David Bunch, Shell UK Country Chair, said:  “The partnership reflects the shared ambitions of Shell UK and British Cycling to get to net zero in the UK as well as encouraging low and zero-carbon forms of transport such as cycling and electric vehicles”.

Some cyclists promptly accused the company of “greenwashing”, i.e. offsetting their oil/gas pollution by pretending that their profits are going to good causes. But as a shareholder in Shell I object to them redirecting their profits which should go to shareholders to other purposes. Particularly when the clear objective seems to be to reduce consumption of the company’s products.

But companies are now also interfering in politics. So Paypal has been closing the accounts of people and organisations that hold dissident political views. They even closed the account of a UK group that campaigns for free speech. They closed the account without warning, and companies such as Facebook and Twitter have been censoring users who espouse unpopular political views.  

The author of the aforementioned book has even launched two ETFs that explicitly aim to pressure companies to drop efforts to diversify their workforces and their focus on climate change according to an article in the FT. That’s contrary to the stance of many institutional investors such as Blackrock. Ramaswamy says: “In reality, companies like Blackrock, and in particular their leaders, are using social causes as a way of assuming their place in a moral pantheon. And in the process, they’re quietly dropping hints to consumers to take the bait and make purchasing decisions on the basis of moral quality rather than product attributes alone…. Woke consumerism is born when woke companies prey on the insecurities and vulnerabilities of their customers…..”.

Ramaswamy argues that capitalism is being corrupted and companies are abusing their public trust.

Businesses have now gone far beyond the promotion of the interests of stakeholders as well as shareholders (reference Section 172 of the Companies Act). Racing cyclists (the main focus of British Cycling) are hardly a stakeholder in Shell.

Yes they are “greenwashing” and they should not be wasting my money on such trivia.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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