Business

➚ BUY: Love. Americans are expected to spend $26 billion on Valentine’s Day, an 8% jump from 2022, according to the National Retail Federation. Blame higher prices on everything from roses (up 12% since 2020) to Moët (bubbly is up 9% from last year) to breakfast-in-bed eggs (don’t get us started.)

➘ SELL: LUV. Southwest Airlines stock is still trading below its pre-December meltdown value and the company is now a bipartisan villain in Washington. In a hearing last week, senators called the holiday chaos an “unmitigated disaster” and an “epic screw-up.” There’s also a federal investigation, and the company’s famous customer loyalty has taken a hit.

The number of planes bought by Air India from Boeing and Airbus in the largest deal in commercial aviation history. There was a 47% increase in Indian air passengers last year, with more than 123 million people flying domestically, according to the nation’s aviation regulator.

The backlash to the ESG backlash is here

THE NEWS

In the culture wars over sustainable investing, we’ve arrived at the backlash to the backlash.

Last year, Republican-controlled legislatures began passing laws blacklisting state investment funds from doing business with money managers that pushed what they deemed to be liberal agendas, like boycotting gun manufacturers and mining companies. BlackRock, run by Larry Fink, an outspoken supporter of so-called ESG principles, has taken the brunt of the pressure, with at least 10 states pulling their money from his firm or threatening to.

“If Larry or his friends on Wall Street want to change the world — run for office,” Florida’s chief financial officer said in December, when he announced the state would pull $2 billion out of BlackRock, which he accused of running a “social-engineering project” with clients’ cash. A chorus of state governors, treasurers, and attorneys-general joined in, and the American Legislative Exchange Council, a test kitchen for conservative legislatures, outlined model bills that statehouses could propose.

In recent months, though, several campaigns have failed even in conservative strongholds, and studies have calculated the financial cost to these ideological stances. They include:

• Indiana’s budget office found that a bill forcing state pension funds to divest from “woke” money managers would cost $6.7 billion over the next decade in sub-market returns, forcing retirees to increase their paycheck contributions.
• Executives in charge of one of Kentucky’s retirement funds sent a letter last week to the state’s treasurer, arguing that a recent law requiring them to pull money from BlackRock and 10 other firms deemed hostile to the energy industry would violate their duty to get the highest returns for pensioners. BlackRock manages one-third of the fund’s international stock holdings, according to Ed Owens III, CEO of the $10.8 billion County Employees Retirement System.
• A 2021 Texas investment blacklist cost municipalities an additional $303 million to $532 million in bond interest, according to a study by University of Pennsylvania’s Daniel Garrett and Federal Reserve researcher Ivan Ivanov. JPMorgan, Citigroup, and other big banks left the state after the law was passed, leaving less competition for the underwriting deals and pushing interest rates about 40 basis points higher in the eight months that followed, they found.
• The board of the American Legislative Exchange Council ended up rejecting a proposed model bill that would have required states to stop doing business with companies considered to be boycotting fossil fuels.
• North Dakota last week voted down, 90-3, a Texas-style bill that would have required the state treasurer to prepare a blacklist of financial firms that have committed to reducing carbon emissions. but would have stopped short of banning state investment funds from doing business with them.

LIZ’S VIEW

Owning the libs turns out to be expensive.

Whether politicians decide the political value of these stances more than compensates for the lost profits is another question. So too is whether voters, who are also taxpayers and pensioners, will punish them for it.

And as my colleague Bradley wrote in the fall on a different investing conundrum, that of Catholic funds, there are trade-offs all across the moral spectrum between principles and profits. But the fact remains that limiting choice in money managers will lead to less choice, worse returns, and higher costs.

And the political gains have already been wrung from the fight. BlackRock is beating a hasty retreat from the front lines of ESG, touting its investments in fossil fuels and rolling out technology that will let investors cast their own ballots in corporate elections instead of outsourcing their votes to the firm. The move would blunt criticism that BlackRock is using its $8.6 trillion in assets to push a progressive agenda.

ROOM FOR DISAGREEMENT

Yesterday brought one sign that the political juice may not have been wrung from this sacrificial stone. Politico reported that Vivek Ramaswamy, the “anti-woke” investor and corporate crusader, is planning to run for president in 2024. The 37-year-old grabbed headlines last year for campaigns urging companies such as Disney and Chevron to keep politics out of the boardroom and simply focus on making money.

THE VIEW FROM BISMARCK, N.D.

The North Dakota bill, which was aimed at kicking out banks that had signed on to global emissions-reduction targets, failed when, upon closer examination, it turned out it would hamstring local banks’ ability to lend, its sponsor, Rep. Bernie Satrom, told me this week.

“That’s the danger in some of this. Everything is black and white until you look closely,” he said. “You can’t stand on principle and then freeze to death.”

Carriers once closely guarded the details of just how profitable their frequent-flier programs were. But during the pandemic, they pledged those loyalty programs as collateral for new loans, forcing them to open the books.

So now we know: Airlines make more money from credit cards than from flying planes.

United’s rewards card program with JPMorgan Chase is valued today at $22 billion. But United’s market capitalization is $16 billion, meaning investors are assigning negative value to the part of its business that flies airplanes. The same goes for American and Delta.

So why don’t companies sell these crown jewels or spin them off?

Aside from the fact that doing so would leave behind less-profitable businesses, it would risk the secret sauce of these programs: the opaque value of the perks to both sides. Customers think they’re getting a $10,000 upgrade to first class, while the airlines know that ticket is unlikely to sell for anything near that much. That trick requires close ties between the airlines and their rewards programs and means that, for now, both are stuck in a strange, sum-of-the-parts netherworld.

That’s less true for foreign carriers, which rely less on their rewards programs. For one thing, they often operate with heavier government subsidies, so their flights are more profitable, and they serve consumers who are less comfortable with plastic.

Joey Zwillinger is the co-CEO of Allbirds.

When Allbirds went public in 2021, it tried something new — a “sustainable public offering” that would guarantee the company met certain environmental standards. The SEC, which tends to be touchy about securities laws, nixed the name, though the company has continued to tout its environmentally friendly cred.

This is an excerpt of a new 10-minute text interview format we’ve recently launched. You can read the rest of my conversation with Zwillinger here. He talks about Allbirds’ stock price (grim) and the vibes in downtown San Francisco (also grim), but why he’s hopeful about both.

Party’s over, and it’s time to clean up. Fintech giant FIS took a $17.6 billion writedown on payments processor Worldpay, which the company is planning to spin off to shareholders four years after buying it for $43 billion. The M&A exuberance of pre-pandemic times — more than $4 trillion in global deals were struck in 2019 — has turned into headaches and tough decisions today.

• Academic Kazuo Ueda was nominated to be Bank of Japan’s next governor. His predecessor, Haruhiko Kuroda, was a latecomer to the free-money-is-over party in December, loosening the BOJ’s stranglehold over the country’s bond market. While Ueda is expected to continue that shift, Bank of America economists don’t expect major policy changes until mid-2024.
• In the U.S., the White House is expected to name Lael Brainard as its top economic adviser. Brainard, a Fed official since 2014, was a close advisor to Chair Jay Powell, and her replacement will be coming on board at a delicate time for the Fed’s fight against inflation.
• The IRS is answering 89% of taxpayer phone calls so far this tax season, up from 13% in 2022 and 11% in 2021, The Washington Post reports. It’s the first tangible sign of the $80 billion in Inflation Reduction Act funding working its way through the agency.

Mattress company Purple, whose shares are down 90% in two years, is trying to fend off a private-equity firm seeking control of its board. The company’s tactic is to issue new shares that will let investors concentrate their votes to keep incumbent directors in the seats. It’s calling them Proportional Representation Preferred Linked Stock, or PRPLS.

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— Liz and Bradley