ESG Investing – How to Handle AI and Robotics?

Some big news came out yesterday that should make Americans feel horribly embarrassed. You see, someone who is a self-made billionaire said something so incredibly staggering that every single water cooler discussion should have been dominated by this revelation. The fact that Americans can go on about their lives without even discussing what was said is a testament to the apathetic culture we live in. That’s right, we’re talking about what Mark Cuban said at the recent SXSW Conference. Ok, so the guy stars on the reality show Shark Tank and may be compelled to say some pretty off-the-wall things, but what this self-made billionaire and owner of the Dallas Mavericks said is as follows:

I am telling you, the world’s first trillionaires are going to come from somebody who masters AI and all its derivatives and applies it in ways we never thought of.

A trillion is 1,000 piles of $1 billion! That means that Bill Gates who is the richest man in the world has only managed to accumulate about 85 of these piles. He would need to come up with 915 more piles to be a “trillionaire”. Right now, investments in artificial intelligence (AI) being made could end up making someone a trillionaire. When we read that as retail investors, we want a piece of that action.

The truth is besides the extremely profitable (so far) picks-and-shovels play on AI hardware like Nvidia (NASDAQ:NVDA), we’re going to have a tough time finding stocks that exist today which give us pure play exposure to artificial intelligence. Here’s what NVDA has been doing lately along with some of our very own hand-drawn, artisenal annotations:

That’s not what we’re here to talk about today though. Today we’re here to talk about the effect that environmental, social, and governance (ESG) will have on companies that invest heavily in artificial intelligence and robotics which stand to displace up to 80% of all jobs if you believe the hype. Before we go any further, we want to be clear what we’re talking about when we say “ESG investing”. Here’s a good breakdown by Oppenheimer funds on the terminology:

If you’re not familiar with ESG investing, here’s what it is in a nut shell. You see this thing called capitalism makes everybody greedy and it’s actually what has brainwashed people into believing that they should hand over 30% of all their waking hours to a corporation in exchange for a salary that chains them to a desk every day and somehow that’s called “being successful”. The people that do manage to accumulate wealth this way then see how the rest of the people in the world are getting steamrolled by capitalism and they feel guilty about it. They then say things like “I want to invest in companies that do good” which is admirable and (we might add) quite trendy lately. A company called MSCI (NYSE:MSCI) is a market leader in ESG investing and here’s what their investment methodology is based on:

We made it a specific point to highlight in yellow, one of the themes which is “human capital”. That’s where this conversation is leading.

Investors aren’t just paying attention to ESG because it makes them feel all warm and fuzzy inside. They’re paying attention because the growth in ESG investments have been on a tear over the past 10 years:

That sort of growth trajectory is kind of like the growth we see in venture capital funding for artificial intelligence. At some point, these two worlds will collide. AI and robotics are going to start displacing hundreds of thousands of jobs (they kind of already are), and it’s hard to see how ESG can avoid addressing this under the “human capital” theme. There are really three approaches ESG can take to this fundamental change they are facing:

  • Ignore it entirely NOT LIKELY
  • Penalize companies who adopt technologies that displace large working populations (like Foxcon) NOT LIKELY
  • Penalize companies who do not provide assistance for workers losing their jobs to AI and robotics and reward those that do LIKELY
  • Reward companies that still employ large numbers of humans LIKELY

At some point there will probably be companies that own 100s of “lights out” factories, companies that have all their needs such as recruiting and accounting handled by AI, companies that largely consist of a handful of steering committee members who make long-term strategic decisions like which technology vendors to use. If you were evaluating such a company for “human capital development”, would you still give them an ongoing penalty once they trained all their laid off workers? Would you penalize them for hiring robots instead of humans?

Now is when people will say that the answer to this problem is largely whether or not a “universal basic income” scheme exists. As investors though, what if that trillionaire that Mark Cuban was talking about was the guy who owned the majority of shares in that fictional “lights out” robot factory we mentioned earlier? Would you avoid investing in that company at the early stages because they had a low ESG score? Then, sit idly by while the company creates trillions of dollars in wealth for investors just so you can feel good about yourself? That’s doubtful.

How ESG investing or “impact investing” or any of these feel-good investing methodologies chooses to handle robotics and AI becomes increasingly important as we start to see more and more jobs displaced by automation. It’s important that industry leaders like MSCI ESG come out soon with a stance so that investors know how they can expect these investment vehicles to behave with the coming onslaught of automation. If anything, we can hope for some sort of “automation score” that we can then use ourselves to create portfolios of companies on Motif Investing that are heavily investing in automation. If we’re going to lose our posh jobs in the finance world to robots and AI, you can be darn sure we’re going to enjoy some of those rewards in terms of increased performance of our investments.

In a coming article, we’re going to dissect what the pundit complex is saying about investing in AI and what that really means. If some entrepreneur is planting the seeds to become the world’s first trillionaire, we may not be able to get a piece of that right away but we’ll figure out who it is over time. Those with wealth to invest will benefit from the coming boom in robotics and artificial intelligence, and finding out where to invest is what we’re all about here at Nanalyze.


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