GMO, the investment firm, has ideas for climate proofing investment portfolios. Municipal bonds might have considerable climate risks. S&P’s ESG product raises conflict of interest issues as in financial crises of 2008-9. YUM! Brands takes an environmental leadership role in the food industry and radical new wind power technology could disrupt the wind energy industry.

Transcript & Links April 26, 2019

Hello, Ron Robins here. Welcome to my podcast Ethical & Sustainable Investing News to Profit By! Presented by Investing for the Soul, April 26, 2019.

Now again, if any terms are unfamiliar to you, simply Google them!

Also, you can find a full transcript, live links and sometimes bonus material at my podcast page located at investingforthesoul.com/podcasts

News

So, here are some key items of news for the period April 12 to 26, 2019.

The first item is titled, 3 Ways to Make Your Portfolio More Climate-Aware, by Jon Hale at Morningstar.

I really respect Jon. He’s doing an incredible job at Morningstar in orienting that famous investment research firm towards ESG. In his latest post he highlights the work of GMO—no that’s not genetically modified organisms—but a top-notch investment house. For decades I’ve heard—and you too I’m sure—that if you narrow your investment universe you will get lower returns. Well, consider this from Jon’s post, quote,

“Grantham and his colleagues at GMO looked at what happens when you remove a single sector from an S&P 500-based portfolio. They created S&P 500 portfolios ex energy, ex healthcare, and ex the other eight sectors in the index, going back to 1989, 1957, and 1925.

They found that the range of returns for the ex portfolios was only 50-60 basis points annualized, distributed above and below the S&P 500’s return. In the case of the ex energy portfolio, it underperformed the S&P 500 by just 5 basis points annualized from 1925 to 2017, underperformed by 7 basis points annualized from 1957 to 2017, and outperformed by 3 basis points annualized from 1989 to 2017.

Grantham’s conclusion: ‘You can divest from oil–or about anything else–without much consequence for performance.'” Close quote.

So, according to GMO, divest from fossil fuels and not worry about lower returns! Nonetheless, I would be happier if this research was written-up and published in an appropriate peer-reviewed journal and critiqued. Incidentally, Grantham says that the fossil fuel sector is way overpriced considering its risks.

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Now, do you invest in, or are considering investing in, municipal or local authority bonds? Have you thought about climate change risk concerning municipal bond investments? Well, you should! Bernice Napach writing in ThinkAdvisor under the title, How to Reduce Investment Risk From Climate Change and Other ESG Woes, writes, and I quote her, that, “If no counter action is taken, such as reducing fossil fuel use, close to 60% of U.S. metro areas will lose 1% of more of gross domestic product, which will not be offset by comparable growth in other metro areas.” Close quote.

Think about all the risks—and costs—municipalities might face regarding fires, flooding events, excessive winds, etc. So, before investing in municipal bonds, be satisfied concerning their climate change risks and plans. By the way, this article has a great map of the US showing those areas likely to be affected by Category 4 and 5 hurricanes between 2060 and 2080. It’s quite alarming.

Also, be sure to understand municipalities long-term pension and other liability risks. Many analysts believe these alone could sink many American cities in the decades ahead. Hence, even with the tax advantages in some jurisdictions, tread carefully in municipal bond waters!

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If you want a good understanding as to the state of ESG data and information for investors, read the post, What investors actually want from sustainability data, by Ariel C. Pinchot and Giulia Christianson on Greenbiz.com. Needless to say, it’s still a work in progress. If you’ve ever tried to analyze ESG info across companies—even in the same industry—it’s usually impossible as they often use different metrics. Furthermore, unless the data is independently audited and verified, it can’t be relied upon. The article describes in detail how these issues might be soon overcome.

Incidentally, you should subscribe to Greenbiz.com. It’s a great source of information for ethical and sustainable investors.

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Many ethical and sustainable investors shy away from the fast food industry because of the poor health and negative environmental issues they help create. Well, here’s some good news in a post, titled, Yum! Brands shows leadership among fast food peers, takes encouraging first step to mitigate its climate change impacts.

Quoting the post, “The parent company of KFC, Taco Bell, and Pizza Hut committed to pursue a science-based target to reduce greenhouse gas emissions from its operations, franchises and supply chain (Scope 1, 2, and 3 emissions), and to explore purchasing renewable energy.”

Sometimes it pays well to invest in companies that are just beginning to make strides on ESG issues. Studies show that such companies often offer better alpha, that is, upside stock price potential, than established ESG winners.

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One new interesting ESG barometer on the horizon is a new ratings’ service by S&P called S&P Evaluation. S&P will rate—at the request of the companies themselves—the ESG credentials pertaining to the company’s ability to operate successfully in the future. You can read about in the post, Official ESG Evaluations from S&P Coming to Insurance Sector in Near Future, by Don Jergler, Insurance Journal. Quoting the post,

“‘The ratings giant on April 11 announced the roll out of its ESG Evaluation, describing it as ‘a new benchmark that provides a cross-sector, relative analysis of an entity’s capacity to operate successfully in the future.'” Close quote.

Well, S&P’s new ESG Evaluation product sounds great. However, I see some big snags with it. First, companies request to be rated—unlike the rating groups such as Sustainalytics and MSCI, etc., who rate companies regardless of what the companies themselves might want. Secondly, though not mentioned, S&P’s standard credit ratings require companies themselves to pay to be rated. Is this yet another conflict of interest like the one that got these credit rating agencies in hot water back in 2008/9? Can you trust such ratings then? Thirdly, will the details of the ratings be public or just a rating’s number? That’s important as its the details that many ethical and sustainable investors will want to see.

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Now we have another survey of financial professionals showing that it’s the ‘g’ for ‘governance’ in ESG that’s really important to them. However, for many of you listening to this podcast, I’m sure that you might think the environment and or social criteria are at least equally important. I think this just illustrates the state of ESG currently. There’s still much dispute about the quantity, quality, and standardization of the E and S information for it to be in the forefront for many investment professionals.

The survey was reported on Nasdaq by Kurt Schact with the title, ESG in Investment Management: New Age or Just Noise? The depth of the survey is extraordinary as 1,100 financial professionals and 23 workshops in 17 investment centers around the world took part, says the article.

The survey was conducted by the CFA Institute and Principles for Responsible Investment (PRI). This confirms other surveys that have tried to determine the relative importance of each of the three variables that make-up ESG.

What this might mean for you is that when doing your own ESG research on companies—and looking for maximum gains—you might want to weigh governance more highly than environmental and social factors. At least for now.

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Incidentally, if you’re invested in wind turbine companies, beware, as there’s a possible new disruptive competitor with a radically new kind of wind turbine that could be twice as efficient as present ones. This new development in wind turbine efficiency—if Vestas and others are unable to replicate it due to patents, etc.—could mean dramatic shifts in the industry ahead! See the post, Wind Power For Half The Price? Clarkson Professor Says Yes.

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So, there we have it for this podcast!

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Come again! Bye for now!

© 2019 Ron Robins, Investing for the Soul. All rights reserved.