The investors who will have to wait a long time before feeling good about buying Lyft

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While Lyft was preparing to go public this week in an IPO valuing the rideshare company above $20 billion, Facebook was preparing for something else: a lawsuit from the federal government over discriminatory housing ads.

That probably wasn’t in the minds of investors back in 2012 when the social network was the Silicon Valley start-up going public that would change the world for the better, and improve lives.

It certainly wasn’t the message being broadcast by founder and CEO Mark Zuckerberg, who wrote in a letter with the Facebook S-1 IPO filing that the company, was not just one more company, but “was built to accomplish a social mission — to make the world more open and connected. … and improve the quality and efficiency of their lives.”

A lot has changed in the way the world views Facebook, but not in the way these companies message their public market debut. Lyft’s IPO filing included the now typical founders’ letter talking about the company’s larger-than-business mission. And it stated it pretty simply: “Improve people’s lives with the world’s best transportation.”

Sound familiar?

The Lyft IPO should be a reminder that Silicon Valley’s change-the-world moments come with unpredictable consequences. But the investor dollars keep flowing. The Lyft IPO price was raised higher than expected, and some market enthusiasts think the deal will lead to a new surge of stock market interest. Lyft shares traded as high as $87 on Friday after an IPO price of $72, but closed up with a more modest (for an IPO) gain of 8.7 percent, at $78.29, and market valuation above $22 billion.

“This is a lightning start for Lyft’s stock as investors are salivating [over] owning a piece of the $1 trillion ride sharing market,” Wedbush managing director Dan Ives said in a statement to CNBC.

There’s one investor class, though, that should be sitting this deal out — investors who buy into the idea that social issues matter in their decision-making and to the bottom line.

Data show that more than 1 in 4 new investing dollars go to companies that investors deem to be socially responsible. In 2018 alone, $12 trillion of professionally managed assets were in socially responsible accounts, a 38 percent increase since 2016, representing 26 percent of the $46.6 trillion in total U.S. assets under professional management, according to the US Sustainable Investment Forum.

The concept of ESG (environmental, social, governance) investing is particularly attractive to younger investors, many from the millennial generation. On all these counts, Lyft deserves — if not a failing grade — at best an “incomplete” today.

Its IPO filing stated that, “At Lyft, we work every day to address these challenges by improving transportation, with the goal of improving people’s lives socially, economically and environmentally.”

According to ESG experts, the company has a lot of work to do, starting with climate and business goals of carbon neutrality and electrified transit.

“In the case of Lyft and Uber and Didi [China’s largest rideshare company], they need to translate those aspirations and early stage commitments into systemic work to make sure they are part of solutions rather than worsening problems,” said Sue Reid, vice president of climate and energy at Ceres, which works with 161 institutional investor with $25 trillion on all on climate risk and sustainability. “It could go in either direction.”

Lyft says it was “founded on the belief that technology will enable us to dramatically reduce carbon emissions from the transportation system.”

In April 2018, the company began making all Lyft rides carbon-neutral, but not by changes made to its core business model — it is one of the world’s largest voluntary purchasers of carbon offsets.

This week, New York City moved closer to instituting a congestion pricing plan in Manhattan, in part blaming Uber and Lyft for the increased traffic. They are convenient scapegoats, and not immune from criticism.

“They definitely have made things worse,” said Harry Campbell, founder of The Rideshare Guy blog and author of The Rideshare Guide. “They have to be putting more miles on the road by the simple math of going to get a passenger. … we’re starting to see that too much of a good thing can be bad, but they are not the sole cause of congestion.”

Lyft has made some notable changes: It offers electric scooters and bikeshares, and in February, it announced a Green Mode that will allow riders to choose hybrid or electric vehicles. Its rental program for drivers also added electric vehicles as an option. Reid said the efforts are too early to earn approval as being significant. “It would not be responsible to say they are a sustainability company today,” she said.

Nicole Moore, one of the driver-organizers behind a strike in Los Angeles this week, said that both Uber and Lyft need to do more to incentivize drivers to use electric vehicles. “They are onboarding more and more drivers which causes more and more congestion, which causes more and more carbon.” What is most needed is more financial support to buy emissions-free cars. “Right now, their model is built on us buying and maintaining cars,” Moore said.

More from Impact Investing:
Why Bill Gates, Jeff Bezos are big clean energy backers
Warren Buffett on investing in an era of climate change
A primer for the socially responsible investor

Campbell said electric vehicles are smart for markets like California, where electricity is cheaper than gas, and he recommends the Chevy Bolt as one of the best options for rideshare drivers. But Uber and Lyft do need to work more on driver economics. “They don’t do much to educate drivers on expenses,” Campbell said. “They will take you, but not tell you that you won’t make money.”

Drivers are 100 percent responsible for expenses and Campbell said if these gigantic technology companies can’t figure it out, “I don’t think drivers can do it any better. We need to see more options going forward,” he said. Campbell thinks there is reason to believe that it will be worth Lyft and Uber’s time to focus more on this.

Last week’s strike in Los Angeles was precipitated by Uber cutting driver rates by 25 percent. “They are lowering rates and paying drivers less and less so the next obvious opportunity is to help reduce driver expenses so they can cut rates even more.”

One of the missions that Lyft says is part of its core business model is tackling inequality.

Lyft states: “The average cost of a new vehicle in the United States has increased to over $33,000, which most American households cannot afford. Moreover, a society built around personal car ownership has resulted in inadequate or unaffordable transportation solutions for the aging, disabled, unhealthy and underprivileged.”

But there’s no mention of homeless drivers who live in their cars, or the vicious cycle of driver rate cuts. Lyft said on Friday that it does not need to compete with Uber on rate cuts, but don’t be surprised if the price war continues.

The reason, according to UCLA Labor Center senior research analyst Lucero Herrera, is that the current business model for both Lyft and Uber only has two choices: Either they increase rates and can offer drivers more of a share and that in turn decreases demand, or they decrease the rate they pay drivers to offer cheaper rides and increase demand. The latter “is the only choice that has proven successful in terms of growing,” and even that has not been profitable, Herrera said.

“That’s one of the worst parts,” Campbell said. “You don’t have much control, any control, on key asks like pricing.

“When they cut rates by 20 cents a mile and you are no longer making enough to cover rent, there’s nothing you can do.”

Campbell said his belief in prior years had been that the companies would ultimately lose so many drivers they would need to stop with the rate cuts, but now he is less sure. “Uber said two-thirds of all drivers are quitting after six months and pay is the No. 1 issue. … At a certain point I thought you would have to run out of drivers, but a lot of time has come and gone and frankly lots of people are in need of work,” Campbell said, adding that new drivers don’t know what older drivers used to be paid, either.

This is an issue with significant repercussions for society, according to Herrera, who was one of the authors of a UCLA study on the gig economy and drivers in LA.

“It’s concerning when companies spend very little time thinking about drivers and drivers’ ability to earn a living,” the UCLA researcher said. “We are finding these people are fully committed to the work and working longer hours, and more days out of the week, and getting trapped into work (getting into debt to be able to drive for Uber and Lyft).”

The 2018 UCLA study found that 44 percent of drivers were having difficulty paying for gas or insurance, and so, to make ends meet, were working longer hours, taking out loans and using credit cards.

Driving is a top source of adult male employment in the U.S., from trucks to taxis and rideshares, Ceres sustainability expert Reid said. “Just like the transitioning we’ve seen with coal plants and coal mining, you can’t automatically plunk these workers into different spheres.

“It is a major public policy and corporate governance challenge.”

Striking driver-organizer Moore, who has a day job as a municipal employee, said she has recently worked longer driving hours for less take-home pay. “We can’t be expected to come home with $5 an hour and be happy we have a job,” she said. “This recent cut was Uber and it causes real harm in families.

“I saw a grown man break down in tears telling me what the 25 percent cut meant to him,” Moore added. “Drivers are making far less than minimum wage after expenses.”

Moore said that two years ago, a “good night” for her meant $150 to $200 in between 8 and 10 hours. Last Friday, she made $90.

“While the company is providing a novel mobility service, there remain a number of important questions that need to be answered before an ESG label can be applied to the company, including whether drivers are being treated fairly,” said Danielle Fugere, president of shareholder advocacy group As You Sow. She said investors need to understand a new business model is not the same as an enlightened one and other concerns include whether drivers are adequately screened, whether the service is increasing traffic congestion and air pollution, and whether it is cutting into or deliberately undercutting transit ridership.

If the solution to these environmental and social issues is going to come from Lyft management, the voting structure of the public shares is not likely to help prod them. Like many tech IPOs, Lyft’s founders retain a huge hold over voting even though they own a minority of shares: Forty-nine percent of the company’s voting power, while holding just under 5 percent of the overall shares.

“We are particularly concerned that the company is offering shares under a dual class voting structure, which means that public shareholders will have limited voting rights and less ability to successfully raise concerns with management and boards,” Fugere said. “Shareholders have historically been highly effective in flagging important public policy issues that negatively affect company bottom lines, decrease company value, increase costs and litigation, or cause reputational risk.”

There are plenty of compelling reasons to invest in Lyft, a business that is growing and targeting a huge market ripe for disruption. Investors have good reason to overlook the billions in losses if they believe the Lyft business model is on the way to long-term profits, but they should not be fooled by the narrative about making lives better.

In recent years, as Uber battled a public relations nightmare, Lyft positioned itself as the ethical choice in rideshare. It noted in its IPO filing, “As a part of our ongoing commitment to social impact and improving the communities we serve, we expect to invest the greater of 1 percent of our profits or $50 million annually toward our social impact efforts.”

“It is up to investors to ensure that companies claiming this moniker are truly implementing such practices and not just greenwashing their services,” Fugere said.

Driver-organizer Moore had a message for investors who believe their dollars include a conscience: “People who worry about ethical investments and have stock portfolios and don’t want to invest in guns or tobacco, why would you want to invest in a poverty pimp?”

She said Uber and Lyft are “Exxon Mobil meets Walmart” and she does not distinguish between the two. “There is no ‘better’ one.”

Campbell, who remains a part-time driver, does not have nearly as negative a view of these companies. He said Lyft has, to its credit, historically had the more driver-friendly image for a reason: It was the first to offer tips, had “power driver” bonuses before Uber and offered other tangible products and services that were more driver-friendly, and all of which forced more competition on improving the experience for drivers. But he also said the overall number of drivers striking this past week impressed him. “I was skeptical, and surprised how organized it was.”

The bonus that Lyft offered drivers to coincide with the IPO was nice, and something many drivers asked him about because it was the only way their contributions to the business success could be recognized in the IPO event. But it was the minority of drivers who were eligible.

“Pay for drivers has gone down over the past five years while the companies are bringing in more money and doing more rides than ever and valuations are higher than ever,” Campbell said. “The bonus? It’s something. I’ve done a thousand rides for Lyft, someone who has done 10,000 rides is a lot more important.

“They didn’t have to do it, but for the most part it won’t have a big boost to their image,” he said. “Over time, if you ask me if Lyft or Uber are really distinguishing themselves from a driver point of view, it seems like they are becoming more similar than ever. From a cold-hearted business perspective, it won’t improve bottom line driver retention.”

“People are choosing Lyft,” co-founder and president John Zimmer said told CNBC on Friday. “Lyft is focused on consumer transportation, focused on North America, and focused on taking care of our drivers and passengers, and that’s paying off.”

Lyft’s mission-driven language worked on some consumers, who chose Lyft over Uber in recent years and felt that made them part of a virtuous club of riders.

But for investors who are willing to believe there is a similar “ethical” or “goodness” premium about the market’s newest publicly traded stock, know this: You might be taken for a ride.

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