Sharing economy unicorn Lyft has turned to the public markets for growth capital. Its initial public offering (IPO) is scheduled to price next week.
As long as Lyft was a private company, Lyft investors were limited to institutional investors, qualified (wealthy) individual investors, and employees. Following the IPO, the list of potential investors will broaden to include retail investors and a range of exchange-traded funds and mutual funds with environmental, social, or governance (ESG) themes. Accordingly, a wide range of investors will be able to purchase Lyft stock, which will trade on the Nasdaq, due to its strong overall ESG profile. The IPO is already oversubscribed.
Standing On The Shoulders of Giants: SASB and GRI
Investors seeking to apply an ESG lens can use the frameworks that sustainability standards organizations like the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) have been developing since 2000 and 2011, respectively, as a starting point. For example, the SASB framework includes greenhouse gas emissions, air quality, employee health and safety, and critical incident management as material ESG factors. More broadly, applying an ESG lens entails understanding the business model, from revenue drivers to the structure of the market and from factors that could potentially impede successful operations to competitive differentiation. According to an ESG portfolio manager, in a world of consumer choice, customers typically choose value over values, but if the cost is similar, customers choose the company that they feel better about. Customers overall have reason to feel good about Lyft from an environmental and social perspective, and Lyft believes that as ridesharing becomes more mainstream, riders will increasing .
E – Ridesharing: Throwing A Hail Mary To Limit Climate Change?
Broadly speaking, Lyft and other ridesharing services like UberPool represent carpooling. Auto sales in the US are declining this year as ridesharing and other new transportation options become more common in cities, environmental concerns lead Americans to reevaluate mass car ownership, and urbanization changes cars from a necessity to an expensive inconvenience for an increasing number of Americans. 46% of Lyft riders use their personal cars less because of Lyft, and 35% do not own or lease a car. This represents progress toward sustainability.
Despite the environmental benefits of lower demand for automobiles, Lyft and other ride-hailing companies like Uber, have added to traffic congestion in the US’s nine largest cities, according to a 2018 report authored by Bruce Schaller, former Deputy Commissioner for Traffic and Planning at the New York City Department of Transportation. The report elaborates that ride-hailing companies add 2.6 vehicle miles on the road for each mile of personal driving removed.
E – Lyft’s Commitment To The Climate: More Than Hot Air
Lyft’s environmental credentials would appeal to climate-conscious consumers. Last year, Lyft established a new business unit focused on fighting climate change called Green Cities Initiative. More specifically, in April 2018, Lyft began making all Lyft rides carbon neutral by establishing a carbon offset program and became one of the top 10 purchasers of carbon credits globally. Lyft also committed to purchase enough renewable energy to power Lyft’s offices, driver hubs, and electric vehicle miles.
Lyft also partnered with public transit agencies across the US, set a goal to achieve 50% shared rides by the end of 2020, purchased the largest bike sharing platform in the US, and launched a bikes and scooters program.
S – $10 Billion in Supplemental Earnings
Most Lyft drivers drive in their free time to supplement their earnings. Lyft drivers have the right to work when they choose and have earned $10 billion so far. 91% drive fewer than 20 hours per week, and Lyft provides them with access to career coaches. The part-time nature of the vast majority of Lyft drivers is representative of the broader gig economy, which provides a lot of work, but only 3.8% of jobs, according to the Bureau of Labor Statistics. Sustainable investing portfolio manager Jamie Odell expects the gig economy and benefits for gig economy workers to continue to grow in the medium term. Odell envisions the growth of autonomous driving to reverse any such gains for Lyft drivers in the long term.
S – A Labor Of Love – Employees vs. Contractors
Lyft is disrupting the highly regulated taxi industry in part by taking regulatory risks that provide it with an advantage over taxis. For example, Lyft classifies the bulk of its drivers as independent contractors, rather than as employees, thereby saving the cost of benefits that typically come with full-time employment, such as drivers’ unemployment, retirement, and health insurance.
The question of whether Lyft drivers are independent contractors or employees has parallels with the question of whether FedEx drivers are independent contractors or employees. Last November, two Lyft drivers, one in Massachusetts and one in California, filed proposed class action lawsuits, alleging the company inadequately paid them and misclassified them as contractors. By classifying the bulk of its workforce as contractors, Lyft and other companies like it are saving millions of dollars per year in drivers’ health insurance, retirement, unemployment, and other benefits that typically come with full-time employment. A good rule of thumb is that benefits cost 25% of the cost of salaries. Lyft’s approach to driver classification has parallels to that of FedEx. FedEx long maintained that its drivers were independent contractors before settling in 2015 with California drivers for $228 million.
G – Dual Class Shares
A group of asset managers, pensions, and unions wrote to Lyft’s board to recommend against Lyft’s plans for dual class shares, which involves a new share class for co-founders with 20 votes each. The investor letter called for Lyft to ideally adopt a one-share, one-vote governance structure and at a minimum include a sunset provision that phases out the extra voting rights over time to reduce the uncompensated risk that potential investors face. Lyft’s response to the investor letter is pending.
Uber: Another Ride To Hail?
There are a range of issues for an institutional investor contemplating a stake in Lyft to consider, and this article has touched on a handful. The good news for Lyft ESG analysts is that their work can be leveraged for the upcoming Uber IPO or for an investment decision on Yandex, the largest technology company in Russia and founder of Yandex Taxi. Just as today represents the early stages of the gig economy and the prevalence of autonomous driving, it also the early stages of ESG analysis on ride hailing.