Jay Haynes: 0:00

Welcome back to How would you beat where we discuss how you can use jobs to be done innovation methods to beat your competition and accelerate your growth. Remember to subscribe and like this podcast. In this episode, we'll look at E S, G, which refers to environmental, social and governance for companies. This has been in the news lately, because BlackRock, the largest asset manager in the world has adopted ESG principles in its investing. And there has been some backlash by opponents who, in summary, argue that investors should exclusively focus on shareholders. So the question is, is investing USG? Sorry, ESG principles, a good idea, or a bad idea? And Ken jobs to be done to help us answer this question. So there's some big questions with ESG. Can including it in your investing criteria generate better returns? Or is ESG just a cost at the expense of shareholders? And another related question is ESG, a red herring or just greenwashing? So, Jared, let's start with the fundamentals. What is ESG? Sure,

Jared Ranere: 1:06

so ESG stands for environmental, social, and governance. So when it comes to investment, the questions become, you know, how does this company handle environmental impact environmental issues? How does it handle social issues? So what is its position towards the way it deals with employees, the way it deals with its suppliers, the way it deals with people in the community where it operates? And then the governance would be, you know, how does it handle executive pay? What does it do to measure its impact on the environment and on society? And how does it generally maintain responsibility and accountability for the way it operates beyond the shareholder value? It delivers?

Jay Haynes: 2:00

Yeah, that's great. I think it's a good way to summarize, I think, is that there's lots of stakeholders around any company. And, of course, famously, the example in economics is externalities. So you know, a company produces a product, it creates a lot of waste, or pollution, and the company doesn't have to pay for that pollution, or that waste, but some community does, because it ends up in their backyard. And so the company really benefits from that it creates equity value, because obviously, cleaning up the pollution would cost money. So they're their shareholders benefits, while the community around them or wherever they operate, or wherever they pollute doesn't. And of course, you know, this is the big problem with climate change and carbon. There hasn't been a cleanup effort yet. And yet, we, you know, we're obviously putting out a lot of carbon. So the, the, the way to think about I think, is that it's all of these stakeholders. And I would also say, what's, what's just extraordinary, is how important and how big companies are today, for the world. Since 1980, there has been $100 trillion in equity value created by just public companies. So companies really are I mean, of course, you know, famously, the large companies like Apple, Google, Facebook, Microsoft, etc, Amazon, are actually bigger than countries. Literally, they're, they're, they're bigger than some companies. GDP, and certainly their market caps are bigger than a lot of companies and more cash. Yeah, they're just, they're just these unbelievable machines of capital creation. So we have to, we have to think about how companies interact with stakeholders. So the argument against it is that companies should just exclusively focus on creating equity value, and they should just do what they're doing and focus on shareholders, you know, exclusively, and none of these other ESG principles. So let's use Joss Whedon to kind of figure out why is that a good argument or not?

Jared Ranere: 4:19

Yeah, and one thing I would point out there is that there's often people think about ESG as the ethical thing to do, or implying a certain morality, and to be to comply with set of ethical principles, or morality implies a value system. And so you're imposing the probably the operating executives value system, on the shareholders. Right? And so you're saying to so you're saying like, in spite of what whether or not this is going to be good for you as a shareholder? I'm going to do it because I think it's the morally correct thing to do and aligns with my value system of reducing environmental impact etc. Right. And and that's, I think this is where jtbd can shed a lot of light, right? Because I think that that once you say like, oh, it's an ethical thing, as opposed to a market driven thing, it takes your eye off the ball, right, you start to have this argument about values, as opposed to whether or not ESG principles can actually help you make a better investment that produces a better return. So good.

Jay Haynes: 5:26

Yeah, no, I think that's great. And I think, remember, bringing in people's needs is fundamental. And we can map this out which jobs you don't helps us with, into functional emotional and consumption needs. So and there are lots of stakeholders that accompany interacts with beyond just its customers, and its, its shareholders. So if you look at the needs of the customers, and the shareholders, but also the employees, and also the local communities they operate in, and also just the global community of everybody, you know, if you're breathing air on planet Earth, you probably care about what the error is like. So you can look at each of those stakeholders through this lens to say, what are their functional, emotional and consumption needs? And is that something that we should help focus on in order to then create value for those stakeholders, but also to create value for our shareholders, they're not, they're not two separate things, they can come together very tightly. And if they don't remember this in conflict, they don't have to be in conflict. And I, if I remember correctly, I've thought about this a lot over the years, I think was a few years ago, a shareholder, who is, you know, clearly opposed to a bunch of apples work. And I think he was complaining specifically at the annual meeting about their work for disabled people, like adding features that for disabled people, which is, you know, obviously, relative the size of apple and the number of customers is not a, you know, huge market. And Tim Cook's answer was, this is just the right thing to do. You know, if you don't, if you don't like us, if you're a shareholder, you don't like that we're enabling, you know, blind people, deaf people and handicapped people to really be able to use our products, then sell your shares, right, you know, right. And, obviously, apples had a big enough position that he can just, you know, he could tell shareholders to leave if they don't like him. But what I thought is interesting about that is, there is also an emotional benefit to Apple's customers that does go beyond the functional job, if you have a family member or friend, who needs those accessibility features, that's very functional for your family member, your loved one your friend, whoever it is, but it's also very emotional for you. Because if that's your child, or your relative, your sibling, or a friend, having them really be able to get their jobs done, makes you emotionally connected to Apple in a way that's very powerful. And that builds, you know, customer retention and customer loyalty, which is literally a metric that directly drive shareholder value. So, you know, we focus a lot on the functional job, but there are these emotional elements, and that can extend through everything a company is doing, and its communities.

Jared Ranere: 8:31

I think that's super interesting. And just to take a step back, you know, we talked about three types of jobs to be done, right, there's the functional job, which is the key goal you want to achieve. Then there's the emotional job, which is how you want to feel while executing the functional job. And then there are consumption jobs, which is what you have to do to use the product. So in the case of an iPhone, you have to unbox it, you know, create an account and iCloud set it up, there's a bunch of tasks you have to do, just to use the product. And so what you're saying, which I think is very interesting, is that if we consider that all three of those jobs come together to create an excellent customer experience, that one of the emotional jobs you have when trying to get most functional jobs done is is feeling good about the solution that you use feeling like it aligns with your value system, it's not harming your friends and family in any way, right. Like to make it pretty real. Like I can think of a good example to top my head by Matt but I like this this iPhone example, right, which is, you know, your your friend, or family member has a disability and they can't use the product because Apple is not looking out for them that will make you feel worse. And it'll it'll hurt your customer experience, which then will make you potentially less likely to buy it in a competitive environment where there are other solutions that can get the functional job done equally well. So it's a competitive advantage in some ways to satisfy these emotional jobs and create a better customer experience even if it Just even though Tim Cook says is the right thing to do, and it feels only moral and ethically driven, and about Tim's value system, you know, as always a friend of mine. Even if you don't share his value system, you can see the business logic behind it.

Jay Haynes: 10:16

Yeah. And there, it would be, it would be hard to measure the ROI on that, but maybe not it's potentially measurable like what What were people's you know, views of apple and their loyalty to Apple as a result of, you know, these features, you could, you could take a stab at trying to measure that. And so he his response to that shareholder could have been this is creating shareholder value, you just don't because you don't understand it. And let me introduce you to jobs, you don't explain why this is important. And, and it is creating shareholder value. And that's what I think the jobs we've done can help bridge this gap between ESG. And the functional market you're going after is it really can create shareholder value. Now, that's an extreme case where it's really emotional. But on the functional side as well, just looking at something like energy. Let's take a really basic example, like the energy markets, or the market for oil, for example. And a lot of the controversy around ESG is companies not wanting to invest in oil companies. This literally goes back to the beginning of jobs theory. And Theodore Levitt, who, interestingly wrote about oil companies. This is in the 1960s. And he was trying to figure out how industries missed huge opportunities. And what seems like a very dated analysis, he was looking at how the movie companies missed the opportunity for television, which seems insane today. And then how the railroad companies miss the opportunity for cars and planes. And his third big example was, how did the oil companies miss the opportunity for natural gas? So of course, the answer to all of those are no one wants a railroad car or plan, they want to get to a destination on time, no one wants a movie or a television, they want to be entertained, and no one wants oil or natural gas, they want energy. So the one of the reasons to look at the market through this lens, if you're an investor is to say what is the likely growth in oil, and what is likely growth in alternative renewable energies, regardless of your moral position on either and regardless, if you think oil companies should pay for the externalities for the carbon they're producing, right? Even even just factoring those out, you just look at the economics. And the growth is obviously going to come in, in renewables. And I think you see this in the electrification of everything. And Tesla, we've talked about before, one of the great things about Tesla, what it shows is, normally there was this trade off between, you know, doing something that was more like driving a Prius, for, which I did for a long time, you know, is it, it obviously was not a very powerful car didn't go very fast, you know, didn't handle very well, it was this tiny, little odd looking thing, but you know, it was obviously sending out less carbon. So then you get to the Tesla, the Tesla is literally faster on every dimension, it's like, it's just a better car or all around regardless of whether it has gas or electric. And my favorite examples, that is it to try and prove how fast the Tesla, I think it was the s how fast it really was, they raised a Lamborghini. But then they realized that we didn't even demonstrate how ridiculously fast it really was. So they attached a U haul to the Tesla and it still beat the Lamborghini. While you know, having six passengers in the back and all your family stuff and your u haul. It's bdn Lamborghini. So those are those are such good examples where the growth isn't it's not a trade off, it is grinding more equity value by considering all the stakeholders and looking at the job to be done. Is the future going to be about oil. I mean, we're not going to transition off it you know, overnight, unfortunately. But clearly, if you're betting on innovation, like betting on oil is just might not be a good investment at all.

Jared Ranere: 14:24

There's a there's a company in Cambridge, Massachusetts called Commonwealth fusion systems, they raised a $1.8 billion Series B. And I find it hard to believe that investors are willing to put $1.8 billion up because it you know aligns with their value system. There's a commercial opportunity there you know, and energy is perhaps the biggest market ever, right? You know, it's oil and natural gas or electricity created from solar and water and wind put those together. They They're enormous market trillions of dollars.

Jay Haynes: 15:02

And Saudi Aramco is the largest company in the world, I believe,

Jared Ranere: 15:06

right. And so if you if you have a path to disrupting that market, it's, it's a huge commercial opportunity, no matter no matter where you would no matter what your value system is. And so I think one of the things we can talk about is there are jobs to be done, that happened to be tangentially related to environment in the ESG. parlance, right, so like, the energy market is tangentially related, because some energy causes damage to the environment. But whether or not if fusion is cheaper energy, that you can get faster and from smaller, it's more profitable get like, what if they cracked fusion, it's gonna be much easier to generate than it is to like, create these complicated drilling systems that find, you know, oil in deep underwater wells, or they try to extract it from sand, right fusion, just a better product for generating energy, regardless of its environmental impact. So So I think that's one category. I think there's another category, which is really interesting, which, you know, Blackrock mentions, in this story, from Axios, that they think that taking the long view on what's happening in the environment will produce better returns. So what what does that mean, the jobs to be done in terms, you know, we often talk about the job doesn't change, the customer needs don't change, but what does change is which needs are unmet, and the degree to which they are unmet. We live in a dynamic world, right? The world changes, new solutions come out, and the environment itself can change over time. And I don't mean just the climate, but I mean, the the the world, the situations we live in, right? The environments around Yes. And that change can cause certain needs to be more or less met. And if you put blinders on against that, you can miss huge opportunities, right? If you say, Well, you know, it seems that you know, preventing your house from sinking when it's on the coast, is getting harder, whether or not that's because of climate change, and you believe in the value system, or political position of climate change should not matter. As an investor, it's getting harder to get that job done, and preventing your house from sink. So you should figure out the investment opportunity and the solutions that are going to help people avoid that problem.

Jay Haynes: 17:27

Yeah, I think that's right. And the problem with with the politics of it is people try and draw this binary line, you're on this side or that side. And that's not what business is about. That's not where anything's about unless you're just being purely ideological. But because business is about probabilities. And it is about the probability of first and foremost creating value for some customer who is the customer that you're targeting? And as you say, their customers have unmet needs. So what target segment are you going after, which unmet needs or you're targeting, and then factoring in everything that goes around that, to be able to say, we've increased our probability of success or or decreased it? And I think you're right, that ESG even the social and the governance side of it, like how do you treat your employees? How do you engage with your, your other stakeholders, the communities that you operate in all these incredibly important factors in business success, and business resiliency, which I think is another element of this is how do you maintain yourself as a resilient business because companies are going off to Fortune 500 at a faster rate than ever before. So and the s&p 500. So you know, you got to be not only do you have to be resilient, you have to grow. So factoring in all of these things, is incredibly important in increasing your probability of success and accelerating your growth and creating equity value. So this is why we, of course, focus on creating equity value, if you're a company and you're not creating equity value, you know, unless you're like a local small business, and you're, you're, you own a business and you're generating cash for your family, that's great. But if you're, you know, if you're even a medium sized business, and you've got employees and shareholders, you do have to create equity value, do you have to be growing? Otherwise, you know, either you get beaten by your competition, you know, your investors want to sell or, you know, the dramatic scenarios where you go bankrupt, right? So you do have to be creating equity value, but it's not a separate thing. Then all of the elements that go into ESG. And that's what I think we understand, you know, especially when you're a large, the largest investor and asset manager like BlackRock, you're talking about very, very broad trends in markets that you have to stay on top of because you you're operating at the market level, you know, Blackrock so big, I mean to differentiate, you know, then the s&p 500 is extremely hard at that size. So it's hard to do at any size, but it's certainly as you get larger. And I think they're, they're doing something that I, I really recommend to any executive or entrepreneur is thinking about the long term. Because that is where Joshua is really powerful. The, as you said, Jared, the customer's job is not going to change. Now. There's one, there is a case where things could there could be new jobs that people have to execute, and that's regulations. And so again, if you're assessing probability of being an investor, and looking at what might happen with regulations, you know, who can predict right, we have crazy politics. And you know, things get changed all the time, the Supreme Court just reversed, you know, some EPA ruling. So that's crazy. But is it more likelihood that the world is going to see more regulations about things like climate change? The answer is yes, I'm sitting here in California, again, this state is on fire overnight, we have this massive fire, you know, just east of our capital here, explode again, it's literally looks like a nuclear bomb went off. It doubled in size, creating massive amounts of smoke again, we, you know, I've been living through this for the past few years like that, that doesn't seem like it's going away anytime soon. So are we just going to sit here and do nothing? Are we going to respond to that with some? It's like, it's, again, probabilities, probabilities that the politicians do something about this is extremely high. Right? Because people who like

Jared Ranere: 21:36

climate change, or just call it frequent fires right away? It's a problem.

Jay Haynes: 21:40

It's a problem. Yeah, that's right. So I think they're looking at this long term, which is very smart, because the jobs are there they stay and the new jobs that will have to get executed or compliance. And but by the way, this is what happened in 2008, right after the financial crisis, we had gotten rid of all the regulations, we basically repealed Glass Steagall and said, Okay, you AIG, you can go create this, like fake insurance company with no assets that's totally unregulated. And then you can help contribute to, you know, the collapse of our entire global economy. And then out of that Dodd Frank was enacted to say, wait, that was a really dumb idea. We need some regulatory, you know, boundaries on these financial markets. So that that happens, the response to those types of collapse, and changes are okay, we need to play the game differently. We need a different set of rules, because it didn't work. I mean, it literally brought the entire financial system to collapse, which nobody wants. Right. So that is the long term game. And I love the Warren Buffett, quote, when asked, why don't more people don't why more people don't imitate his investing style. And he said, because no one wants to make money slowly. I love that. Because you should do things oddly slower. I mean, everybody wants to develop the next thing and ship the next feature and get out as fast as possible, obviously. But the slow element is that if you really are focused on your customers job, and and your stakeholders, jobs, all these other stakeholders that are your employees, you know, your investors, your board, your communities you operate in, even the politicians that you have to interact with, that those those all of those stakeholders have jobs, they're trying to get them done, you know, that are independent of any solution and paying attention to them. You know, certainly when you're as large as BlackRock, but even if you're a medium sized, you know, company, these types of things can have a big impact on your business if you don't pay attention to them and make yourself more resilient as a result.

Jared Ranere: 23:54

Yeah, so I think we've got there are a few categories of opportunities that are related to the ESG discussion. So we've got jobs that are fundamentally ESG environmentally based, like the energy market, innovation in the energy market, great, huge commercial opportunities. We've got emotional jobs, that if you, you know, appeal to certain social stakeholders, and satisfy emotional jobs, you can improve your customer experience and generate growth. We've got compliance jobs, which because the government is creating new regulations cause a job to become to come about. And that relates to governance because you may then have to report to the government or your stakeholders about how you're doing against that compliance, which creates opportunities for new technology platforms, and we're seeing large investments in this space right now. Because there's gonna be a new job to be done that's going to be very hard to get done. We're seeing the environment can change causing unmet needs and existing job abs. And so we need new solutions. And there are new opportunities there. And I think the last one you just pointed out, which is, you know, think of your, the social and ESG as how you treat your customers and do you deliver value to them or not. And that's kind of jobs you done one on one, right? If you deliver customer value, you can win. And I think of, you know, this is a fictional? Well, it's actually based on a true story, but the Wolf of Wall Street, the movie based on the stock trader, where he was abusing his customers, right, like he was getting them into bad deals, where they lost money. And he made a lot of money very fast, but then imploded. And if you follow jobs to be done principles of creating customer value, doing well by your customers, and having a revenue model that aligns with them getting the job done better, and as they do well, you make money. And if they don't do well, you don't make money that can prevent situations like that. And it's, you know, The Wolf of Wall Street is an exaggeration, almost, it's almost hyperbolic how crazy that is. But you can see this happen in much larger companies. I think Facebook is an interesting example. Right? The the connecting you with your social, your weak social ties better is a job to be done that makes sense, addicting you to their app, so that advertisers get more of your attention can be in conflict with better connecting you to your social ties. So the revenue model and the job are in conflict. Now that doesn't cause them to upload overnight, like giving getting their getting clients into bad trade deals like The Wolf of Wall Street does. But we're seeing the cracks in the armor over time. And I think that's related to the slowness you're talking about, right? If you're not taking care of delivering value to customers, the s in ESG, right? The stakeholders are your customers in the social aspect that can come back to get you sooner or later.

Jay Haynes: 26:56

Yep, yeah, cuz there, everybody's competing, and there are competitors. And if you're not aware of who's gonna get the job done better in your market? You know, that's a huge problem. And frankly, that's what you see with the oil companies. You know, they're they do a lot of greenwashing. Well, there's no doubt about that. But you know, have they really taken the step to say, we've got a plan to not sell oil anymore? Now, that seems insane. But that is the I guess we'll call it the insane question. That that is, it's the most important question, like, Can you envision a future where you're not selling your current product? Because this happens in every single market? If, you know, obviously, we use Apple all the time for this example, but 50% of the revenue was the iPod, it is now zero, because instead of keeping with the iPod, and kind of like the Sony Walkman, right, Sony, he was like, we have the Walkman. And we're gonna sell cassette tapes. And then they, you know, they tried to make like disc version of it, it just didn't, didn't go well. And then they just lost out. Like, they didn't even create an mp3 player that had any success, right? So they just like, who I haven't bought a Sony Music device for forever, I actually still have some headphones I love they've been making the same same headphones forever. But literally, Sony was a brand that I was a teenager, and in my 20s I must to Sony was the Apple brand of the day for audio. Right? My

Jared Ranere: 28:26

The only time I hear about them related to music that was in publishing. Yeah, I mean, it's just

Jay Haynes: 28:31

digital lost the market, because they were focused on their product, not the customer's job, there was enormous opportunity for innovation, obviously, you know, and so you really have to envision a future where your product or your current product doesn't exist. And obviously, in some markets, that's going to be a long time from now software, you know, pretty stable market, because software is, you know, very, very valuable. And but even in that case, even in software's case, you have to think about it like, will there be a way that the software does this for my users, rather than having my users do it. And back to music? That's a great example used to have software that you would find songs and buy them on your computer, or you'd sync them up to your iPod, and then you have to download them. Now that's gone. Now the software does that for you automatically. You just, you know, click on a song and listen, start listening to playlists, right?

Jared Ranere: 29:25

Right. It's interesting to think about, if there are protests against your product, what does that mean? unmet needs, you're not satisfying and you're in the need for you to innovate right? Now, not every protester is right about everything. It could be, maybe you are doing the right thing. You just need to communicate it differently. That would be great. But it's worth taking a minute to say like, Okay, if they are right, what what unmet needs, aren't we solving that somebody else might better with a different product? And that exercise can be worth a lot?

Jay Haynes: 29:57

Yes. It It's generally a indication that there are externalities, something's happening with your product that people don't like, that isn't your customer value, it isn't your delivery of customer value. And, and and remember, as well, a lot of these, if you look at the businesses and what they're fundamentally doing, they are also in extremely cost competitive businesses. So energy is a great example, energy is a pure commodity, that that is just a unit of energy, a kilowatt is a kilowatt is a kilowatt, and electron is electron, right. So when you're competing in those markets, you also have to watch what's happening to the cost curves, because people will always pay to get a job done faster and more accurately, but they would be happily pay for lower cost solution that does the same thing. And that is such a good example of where the oil companies are just not fully understanding the impact of where the cost curve that alternatives and renewable energy are on is going to just keep them from sustaining their business. And it's already happened, right? You know, it's just cheaper now to build solar than it is to build, you know, a new coal fired power plant. Now, you know, solar has drawbacks, and there's all sorts of other issues, obviously, but, but you have to pay attention to that, because it's the speed and accuracy of getting the job done combined with the cost to your customers get the job done, and no one wants to pay more for energy. It's a tax on everybody. So you want lower taxes, right? And in so as soon as those lower priced solutions come into your market, you're likely to lose share quickly.

Jared Ranere: 31:54

Yeah, it's kind of interesting. As we're talking, I'm thinking that, you know, if you're, if you're criticizing companies that are including ESG, as criteria in their investment strategy, you really run the risk of your own value system getting in the way of opportunity, right? Oh, no, I don't want to invest in that. Because it's green, and I come from oil country. Right. Okay. Preserve your products, you know, that worked out really well, for Blackberry. And Kodak, let's see how it works out for you in the long term. Like, you know, and it's a high stakes, I get that it's oil is not going away tomorrow. So if you're in that business, you know, make the sales you can but think about how you're going to survive in the long term.

Jay Haynes: 32:42

Yeah, it really is this long term perspective, obviously, you know, we work with CEOs and executives who have this long term perspective, we're not helping, you know, day traders, if you want to trade on the market going up and down and play that casino game, you know, have at it. But the it's really that's the difference between trading and investing, investing is figuring out what is the current value of the company giving its growth rate and its future cash flows, owners earnings, as Buffett calls them, and you have to discount that back today. So the huge driver in that valuation analysis, if you're investing over the long term, is that growth rate? And which is a function of whether or not you'll continue to create value? So if you said, Will, Will everybody drive an internal combustion engine car forever? The answer is no. I mean, California is already going to regulate them out of existence. It's clearly there. Electric cars are already just better there.

Jared Ranere: 33:48

Even if they didn't regulate them. I wouldn't buy one as my next car. Yeah, it's just faster, quieter, faster, more comfortable. Nice. Yeah.

Jay Haynes: 33:55

Yeah. I mean, I like to go fast. The Tesla is very fast. Yeah, it's fun. So yeah, I think that you know, the writing is on the wall, because it's getting the job the functional job better, regardless of the ESG principles, right? It's just getting the core functional job done better. So if you're taking that, that long term investment strategy, in Outlook, and you know, we talked about this all the time, in any of these valuation and investment spreadsheets, you can type in a different growth number. And you look like a genius, right? Whether you're buying a company, you're planning a roadmap, investing in a public stock, you can anybody can take a spreadsheet now and create that valuation model and say, Look, I'm gonna change the growth rate from 7% to 15. And I'm a genius, right? Well, okay, how do you change that growth rate? And what's the likelihood that that growth rate continues? Because that is the discounted present value of all those cash flows that creates the valuation. So you need to know what that growth rate is going to be. And if you're not looking at the customer's job, and all the competition to get that job done, then you're likely going to have an inaccurate assessment of that growth rate, which lowers your probability of success. So that's where you know, jobs to be done can really give you a lens into ESG and markets and stakeholders. And is the company that you're investing in or buying or running? Is it really likely going to sustain its value and grow?

Jared Ranere: 35:24

Right? Right. It's a great place to end.

Jay Haynes: 35:28

Yeah, great. Well, thanks for listening. Remember to subscribe and like to this podcast. And if you want to learn more about jobs in innovation methods, visit us@thrv.com