E-newsletter of Investing for the Soul  
                             
December 30, 2018

 

Ron Robins, Editor. E-mail /289-271-0873            Latest news at http://investingforthesoul.com/

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Clients more open to advice on ESG investing. "According to Legg Mason’s Global Investment Survey, advised investors are more than twice as likely to choose companies or funds according to environmental, social and governance (ESG) factors (50 per cent versus 18 per cent DIY investors).

The survey found that more than three-quarters of advised investors said they would like to move money into funds that take ESG considerations into account when selecting securities.

Further, 54 per cent of investors said they avoid businesses with controversial track records, and 89 per cent of investors believe that fund managers should actively 'police' companies they invest in to ensure they are acting responsibly."

[COMMENTARY] Yes, another study illustrating the importance of advisors in promoting ESG investing to their clients. I wonder about the number of fund managers actually 'policing' their investments though!
Clients more open to advice on ESG investing, by Adrian Flores, December 21, 2018, IFA, Australia.

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“Impact investment” funds advertise great returns and social impacts. They aren’t delivering. "When you do the math, impact investing seems worse for the world and worse for your pocketbook than just investing traditionally, earning higher returns, and donating the difference. Impact investments are often marketed as a cost-free way of doing good. But they’re not cost-free, and under typical circumstances it doesn’t look like they’re doing much good."

[COMMENTARY] The arguments presented in this article are largely reliant on a new paper by John Halstead of Founder’s Pledge and Hauke Hillebrandt at the Center for Global Development. Judging by their degrees they're highly intelligent people.

However, their thesis seems largely dependent on biased, philosophical arguments with little or no empirical data to support their views. In a few cases though, they do make some useful observations such as sustainable funds investing in tobacco and fossil fuel companies.

Such misrepresentation is unfortunately common and that's why investors who really want investments to closely resemble their personal values are better off with an individual stock portfolio which can easily be accomplished.
“Impact investment” funds advertise great returns and social impacts. They aren’t delivering, by Kelsey Piper, December 18, 2018, VOX, USA.

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3 Reasons ESG Investing Lags Behind Interest [in ESG]. "'There are several factors at play to help explain why financial advisors have not wholeheartedly adopted ESG mutual funds and exchange-traded funds (ETFs),' Brendan Powers, senior analyst at Cerulli, said in a statement.

Survey respondents listed 1). a sense that ESG strategies do not fit into client investment policy statements (26 percent), 2). negative impact on investment performance (24 percent) and 3). cost (19 percent) as the top reasons for the lack of uptake.

Another potential explanation? It might be an instance of ‘old dog, new tricks.’"

[COMMENTARY] I believe that last comment is among the more likely. Furthermore, when scrutinized for their validity, the three reasons advisors gave for not advocating ESG investing are weak, at best, illustrating their disinterest in really knowing their clients and unwillingness to examine the performance of ESG investing products!

Also, another major factor is that most advisors are in the latter phase of their careers with 36% (says Cerulli) planning to retire in the next 10 years.

Rather than not being able to teach an old dog new tricks, it's really that the old dog doesn't want to learn new tricks.
3 Reasons ESG Investing Lags Behind Interest, by Jessa Claeys, December 14, 2018, 401K Specialist, USA.

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The Year Wall Street Got Sustainable Investing. "On October 23, 2018, the Financial Times published an article stating that Larry Fink, CEO of the world’s largest asset manager, BlackRock, had announced that 'sustainable investing will be a core component for how everyone invests in the future.'

In my opinion, [Amy Domini] Mr. Fink’s statement means that we early advocates have convinced the world of the need for adding “people and the planet” into our way of investing, and it means that the world’s most conventional asset manager doesn’t need an academic catch phrase to hide behind."

[COMMENTARY] Amy is one of the 'greats' and early pioneers of socially responsible investing. This article she just wrote is a milestone in time concerning where we now stand.
The Year Wall Street Got Sustainable Investing, by Amy Domini, December 14, 2018, TriplePundit, USA.

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ESG investing a recipe for disaster. "The attempts being made to expand the fiduciary obligations of pension fund trustees to incorporate ESG and, as yet, ill-defined ‘sustainability’ responsibilities are flawed and dangerous to the extent they weaken the obligation to maximise the financial interests of members...

Empirical evidence to date, using data sets that are publicly available, suggests G is a rewarded investment factor but not when other common factors are already included. ESG factors are likely to correlate with other widely used factors, such as quality, thus adding little, if any, reward. E and S, if anything, have been shown to detract from returns. "

[COMMENTARY] A provocative headline, but a comment of many fiduciary fund managers. Much more research needs to be done concerning the E, S, and G, individual factors on influencing stock prices.
ESG investing a recipe for disaster, by Paul Bevin, December 11, 2018, Top 1,000 Funds, Australia.

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Investors’ Search for ESG Risk & Value. "A survey of institutional investors, coordinated by Donnelley Financial Solutions (DFIN) and SimpleLogic revealed a disconnect, between the ESG information public companies are disclosing in their corporate social responsibility reports, 10-K, proxy and other public disclosure documents and what investors are seeking as 'decision-useful' in assessing risk, as well as the value of the company's sustainability strategy."

[COMMENTARY] This is an old story. Nonetheless, progress is being made as companies realize the potential positive impact on their stock price by disclosing relevant material and quantifiable corporate information. Companies publishing ESG metrics often enjoy a stock price premium relative to those companies that don't.
Investors’ Search for ESG Risk & Value, by DFIN, September 10, 2018, Financial Executives International, USA.

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Europe's Largest Insurers Move To Limit Coal And CO2-Related Risks. "'We also stopped insuring projects to build coal-fired power plants or any operation for oil sands mining and associated pipelines.--Thomas Buberly, chief executive of AXA.”

[COMMENTARY] The Canadian and US governments have big pipeline projects involving oil sands' products. Will this shift to avoiding such insurances become the industry norm and affect the development of these projects? Will it make these projects even more expensive? Will governments become the sole insurer of new oil pipelines? Investors have to begin to ask these questions.
Europe's Largest Insurers Move To Limit Coal And CO2-Related Risks, by Ken Silverstein, December 7, 2018, Forbes, USA.

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Winners of 2018 IRRC Institute Research Award Examine Pressing, Big Picture Investor Issues. "An academic research paper examining the corporate stewardship of index fund managers and a practitioner paper looking at how to measure the amount of sustainable investing in equity portfolios are the winners of the 2018 Investor Responsibility Research Center Institute (IRRCi) annual investor research competition. Each winning research team will share a $10,000 award."

[COMMENTARY] The IRRC Institute awards are among a few prized awards in the sustainable-ethical investment research space. The two winning papers are:

1) Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy, is co-authored by Lucian Bebchuk, James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, Harvard Law School and Scott Hirst, Associate Professor, Boston University School of Law and Research Director, Program on Institutional Investors, Harvard Law School. And,

2) Are Sustainability Factors Associated with Stock Price Informativeness? This research is authored by Zabihollah Rezaee, Professor, School of Accountancy, University of Memphis and Anthony C. Ng, Deakin University, Australia.

Winners of 2018 IRRC Institute Research Award Examine Pressing, Big Picture Investor Issues, press release, December 6, 2018, IRRC Institute, USA.

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Lies, damned lies and ESG rating methodologies. "CLSA picks out one company which is a really good example — yes, it's our old friend Tesla. According to CLSA, as of 17 September FTSE rated Tesla last for global auto ESG. MSCI, meanwhile, rated it best. In Sustainalytics' rankings, it fell around the middle of the pack."

[COMMENTARY] So, thinking about Tesla's ESG ratings makes one wonder what to believe. It is important for investors to understand the methodologies (where possible) of the ESG ratings' agencies before deciding to use them.

Clearly, if you feel that the ratings' agencies 'values systems' don't represent you, consider taking my Tutorial: Creating A Profitable Personal Values-Based Portfolio. In that tutorial, I show you how to find, research, and evaluate stocks, mutual funds, and ETFs according to your personal values.
Lies, damned lies and ESG rating methodologies, by Kate Allen, December 6, 2018,
FT Alphaville, UK.

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The 2018 [Canadian] RIA Investor Opinion Survey. "Based on an Ipsos poll of 800 individual investors in Canada, found that 80% of respondents are concerned about climate change and the environment. It also found most investors view climate change as a financial issue: 70% of respondents believe climate change will have negative financial impacts on companies in some industries within the next five years, and 79% believe this to be true within twenty years...

66% of respondents said they would like a portion of their portfolio to be invested in companies that are providing solutions to climate change and other environmental challenges."

[COMMENTARY] The survey this year appears to be focused on Canadian investor attitudes concerning their investing around climate change. Also, it illustrates how worries about climate change have induced large numbers of investors to think about sustainable-ethical investing. However, the bottleneck for many of them acting on their beliefs (see below) are their advisors.
The 2018 [Canadian] RIA Investor Opinion Survey, press release, December 6, 2018, RIA Canada, Canada.

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Why Are Advisors Reluctant to Hop on the ESG Train? "Some reasons found in a recent survey by financial consultant Practical Perspectives include lack of interest by clients, lack of training and education, or lack of a compelling reason to use ESG products. One advisor called it “a fad.”

[COMMENTARY] Several things remain unsaid here. They include: advisors' compensation is often tied to particular products; advisors aren't interested and don't want to know client's personal values (it gets too messy), and advisors' general unwillingness to look at something new. Let me know if you're aware of other reasons or believe my views are faulty. Nonetheless, this article/survey is important reading for all advisors!
Why Are Advisors Reluctant to Hop on the ESG Train? By Ginger Szala, December 4, 2018, ThinkAdvisor, USA.

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Companies must address ESG issues to be deemed trustworthy by investors — Edelman survey. "Results of the second annual Edelman Trust Barometer Special Report: Institutional Investors show that 89% of investors have changed their voting and/or engagement policy to be more attentive to ESG practices, with 63% reporting that this change has taken place in the past year."

[COMMENTARY] Edelman is renowned for the quality of its surveys. This data, together with the comments of Larry Fink of Blackrock, the world's largest asset manager, clearly illustrate that ESG criteria are frontline concerns for assets managers today. We've come a long way!
Companies must address ESG issues to be deemed trustworthy by investors — Edelman survey, by James Comtois, November 30, 2018, Pensions & Investments, USA.

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Education ‘main barrier’ to engaging in responsible investing. "The survey [by First State Investments and research firm Kepler Cheuvreux], which assessed the attitudes of more than 400 millennials globally about SRI, found that while more than four in five (81%) would be interested in investing in socially responsible or sustainable investment products, a similar proportion (82%) believe more education is needed to drive interest in SRI. Almost half (49%) of those surveyed currently have investments, but despite the apparent interest in responsible investing, just 9% currently invest in a fund focused on sustainability issues."

[COMMENTARY] Several things stand out from this survey. The first is that most millennials aren't, yet, investing in SRI, or even investing generally. Secondly, they know little about SRI. Thirdly, the majority prefer "digitisation, including digital investment platforms and live chat functions" as a means by which to invest. Also, being an online questionnaire might induce a bias to the results. Furthermore, for many parts of the world, SRI is virtually unknown with few products to invest in. The referenced study, published here, does not provide a geographic breakdown.

It's clear that millennials are still a largely untapped market for SRI/ESG/ethical investment products.
Education ‘main barrier’ to engaging in responsible investing, by Robbie Lawther, November 29, 2018, International Advisor, UK.

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OECD, UN Environment and World Bank call for a radical shift in financing for a low-carbon, climate-resilient future. "Delivering a new report, Financing Climate Futures: Rethinking Infrastructure, to the G20 at its Summit in Buenos Aires, the three International Organisations said governments need to adopt a more transformative agenda on low-carbon, climate-resilient investments if they are to meet the Paris Agreement goal of cutting CO2 emissions to net zero in the second half of the century and build resilience to climate change."

[COMMENTARY] I agree with the above call. However, even though most people believe that human activities are heating the planet and massive weather-related costs will be incurred, they reluctant to presently pay for it. Perhaps a few more climate disasters close to home will convince taxpayers that incentives to create new low carbon industries and consumption are truly timely.
OECD, UN Environment and World Bank call for a radical shift in financing for a low-carbon, climate-resilient future, press release, November 29, 2018, UN Environment Programme.
 

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Disclaimer: Neither The Soul Investor nor Ron Robins makes investment recommendations. Nothing in this newsletter should be interpreted as a recommendation or solicitation to buy/sell any securities or investments. The Soul Investor is a source of general information and resources for spiritual investing, ethical investing, and socially responsible investing (SRI). Investors should consider their actions thoroughly and consult their professional advisers prior to taking any investment action. The Soul Investor does not necessarily agree with the opinions expressed in articles in its newsletter or offered on the web pages to which it might be linked. Such opinions are the responsibility of the writers themselves. Furthermore, The Soul Investor does not offer or provide any warranties, representations, guarantees, implied or otherwise, as to the accuracy, legality, copyright compliance, timeliness or usefulness of the information, materials or services in this e-newsletter, or other sites, to which it might be linked. Also, Mr. Ron Robins is not an investment advisor, nor is he licensed with any professional investment related body, and thus is not able to, nor does he make, any investment recommendations.

The Soul Investor is a publication of Investing for the Soul, a registered business name in Ontario, Canada. Copyright © 2018 Ron Robins. All rights reserved.