December 2011 Newsletter

December 2011 Newsletter

News & Commentaries by Ron Robins


Harrington Investments Files Resolutions With Citigroup, Bank of America, and JP Morgan Chase, To Stop Indemnifying Directors Against Civil & Criminal Charges. – [COMMENTARY] “’The next time one of these banks commits a crime, their directors would not automatically have their defense paid for with shareholder funds… It is the fiduciary responsibility of corporate directors to ensure that publicly traded corporations have adequate oversight and legal compliance measures in place. Failure to do so is negligence and should be considered criminal neglect,’ said John Harrington, President/CEO of Harrington Investments.”

Harrington is right. If directors were not so wholly indemnified, those that take on such directorships would no doubt ensure that unbridled speculation which can take them and their firms down, would end. It is the freedom from adverse repercussions on their speculative activities and wrongdoings that has given directors, managements, traders, etc., the motivation to take imprudent financial risks.

Unfortunately, I fear that until the next financial crisis comes along–which may well be far worse than that of 2008–not much will change.
Portfolio Manager′s Message to Citigroup, Bank of America, & JP Morgan: “Stop Protecting Director Misconduct.” December 28, 2011, Harington Investments, Inc., USA.

IT Industry Generally Poor On Sustainability & Social Policies, Says Oekom Research AG. – [COMMENTARY] “With the exception of Ricoh, Intel and Motorola Mobility, the IT industry earns dismal grades when it comes to sustainability and social practices, averaging about a D+, Oekom Research AG says in a new report.” These are some findings green-ethical investors might want to pay attention to.
IT Industry Gets a D+ for Green Policy, Labor Practices, by Leslie Guevarra, December 19, 2011, GreenBiz, USA.

Over 75% Of CFAs See No Prospect Of Improved Market Ethics In 2012.– [COMMENTARY] “The CFAs also trained their negativity on the securities industry itself. More than three-quarters of respondents said there was no prospect of improved integrity in the markets in 2012 despite efforts to tighten regulation and ward off abuses such as those that contributed to the financial crisis in 2007-08. And the worry that financial advisers are mis-selling products has become the most-cited ethical concern, unseating opaque derivatives markets as the top ethical issue facing global markets.”

These are troubling findings of the CFAs survey. As you know, markets need confidence to move higher. Until the ethical conduct of market participants improves, markets are unlikely to attract much new investment.
Financial Analysts Dim on 2012, Survey Shows, by Brendan Conway, December 15, 2011, Wall Street Journal, USA.

76% Of UK Investors Say Financial Advisors Never Mention Ethical Investments. – [COMMENTARY] “The research findings indicate that there is disparity between consumers who like the idea of SRI but don′t know enough about it. Independent Financial Advisors (IFAs) are assuming lack of interest in SRI and so they are not providing information or gathering knowledge about this very high growth investment arena.”

This is perhaps the one reason why generally throughout the developed world only about 2-4% of total mutual funds or unit trusts sold at the retail level are in identifiable ethical investments. It is clear that advisors are breaking what I argue should be their most important rule: to ’KNOW THEIR CLIENTS.’
IFAs are Ignoring Ethical Investing, December 15, 2011, The Investor Review, UK.

America Lags On ESG. ’Legal & Fiduciary Red Herrings’ Blamed.
“’There′s no question in my mind that Northern Europe has got sustainable investing in its sights,’ Roger Urwin, global headof investment content for consultancy firm Towers Watson, toldattendees of the ESG USA 2011 conference in New York on Tuesday. Australia and the UK look to be next to jump on the ESG bandwagon, but there are ’big and very ugly roadblocks in the US’ to sustainable investing, he said.”

I take a different slant. In the US, the degree of scepticism about human induced climate change is much greater than it is in Europe. Just look at what the Republican presidential hopefuls say on this issue! Thus, such attitudes influence American’s beliefs of the relevance of ESG issues.

Meanwhile, we all know that companies who lead in responding most effectively to ESG issues are generally ’best of sector,’ both financially and in comparative stock performance.
US lagging on ESG due to legal, fiduciary red herrings, by Gloria Gonzalez, December 15, 2011, Environmental Finance, UK.

US Wind Investment To Fall Two-Thirds If Production Tax Credit Not Extended, Says The American Wind Energy Association (AWEA).– [COMMENTARY] “Investment in the US wind sector will drop by nearly two-thirds to $5.5 billion in 2013 if the production tax credit (PTC) for wind projects is not extended, according to a Navigant Consulting study. Annual installations would fall to 2GW in 2013,down from more than 8GW in 2012… Jobs supported by the wind industry would decline from 78,000 in 2012 to 41,000 in 2013, the study found.”

I believe that all preferential tax credits and deductions given to energy in all its forms should be eliminated. Oil/gas/ethanol/nuclear producers receive mammoth market distorting government tax and indirect subsidies. With Bloomberg and others reporting that wind is close to parity to gas in kWh electrical generating costs in many geographic areas, wind and other renewables would get an enormous boost.
US wind investment to fall $10 billion in 2013 without PTC, by Gloria Gonzalez, December 13, 2011, Environmental Finance, UK.

Impact Investing Gaining Traction Says J.P. Morgan & Global Impact Investing Network (GIIN). – [COMMENTARY] “The report finds that the majority of the 52 surveyed impact investors have tempered optimism about the impact investing industry: they believe it is ’in its infancy and growing.’ The investors plan to invest almost USD 4 billion over the next year, and most expect that 5-10 percent of overall portfolios will be allocated to impact investments in ten years.”

Impact investing aims to solve social and environmental problems while generating profits to investors. Though presently small, it’s an area that will be of increasing interest to ethical investors–and governments. For governments, it might offer them a way of improving social and environmental conditions without the use of governments’ funds. That is increasingly attractive to them in today’s era of deficit cutting.
Insight into the Impact Investment Market, press release, December 14, 2011, J.P. Morgan and the Global Impact Investing Network

Investment Group With $130 Bn In Assets Urges Fracking Companies To Be More Responsible. – [COMMENTARY] “Companies such as Exxon Mobil Corp. should identify the chemicals used and consume less water in fracturing to free gas trapped in rock, according to a report released today from the Investor Environmental Health Network and the Interfaith Center on Corporate Responsibility.”

The EPA released a report on December 8 showing chemicals used in fracking were found in a drinking water aquifer in west-central Wyoming. This article states that one-third of US natural gas production now comes from fracking. Many responsible investors and funds invest in companies engaged in fracking. They just might want to review those investments.
Investors Press Natural-Gas Drillers to Cut Fracking Risks, by Jim Efstathiou Jr., December 13, 2011, Bloomberg, USA.

Unilever, AstraZeneca, Nike & Siemens, Are Tops In Climate Counts Ratings. – [COMMENTARY] “Unilever knocked Nike from itsthree-year reign as the top-scoring firm in the annual Climate Counts assessment of major consumer brands and their work towardcorporate climate responsibility.”

What’s encouraging, says Climate Counts, is the continuing improvement in scores and the number of participating companies.
Unilever Climbs to No. 1 in Climate Counts Ratings, by Leslie
Guevarra, December 7, 2011, GreenBiz, USA.

Canadian Islamic Mortgage Lender’s Bankruptcy Might Hamper Progress Of North American Islamic Finance. – [COMMENTARY] “The insolvency of an Islamic mortgage lender in Canada may hinder the growth of sharia-compliant finance in North America, where the industry has struggled to gain traction in the absence of a supportive regulatory framework… Since Islam forbids the use of interest, sharia-compliant mortgages rely on a “diminishing musharaka” contract to help Muslims finance homebuying. A lender and a homebuyer share the costs of purchasing a home… When the value of the house is eventually paid off, full title is transferred to the homeowner… But it is unclear who ultimately owns the home in the case of a bankruptcy by the lender…”

Islamic finance globally is well over $1 tn., and growing rapidly. Considering the size and growth of North America’s Islamic population and the interest of many non-Muslims in Islamic finance, Canadian and US laws should become accommodative to it.
Canada bankruptcy may hurt Islamic finance in North America, by Shaheen Pasha and Cameron French, December 5, 2011, Reuters, Canada.

Australia’s RIAA Reports Outperformance Of Australian Ethical Funds.– [COMMENTARY] “Responsible investment funds have outperformed their benchmarks in every one of the 12 categories covered in this report … over one, three, five and seven years and across Australian shares, international shares and balanced funds.” Obviously, Australian ethical funds have done something right over the past few years. It seems they’ve even outperformed ethical funds in many other parts of the world too. Congratulations to the Australians!
RIAA′s Responsible Investment Benchmarking Survey, December 5, 2011, RIAA, Australia.

European Asset Owners Diverge On Responsible Investing, Share Concerns About ESG Issues. – [COMMENTARY] “Novethic with the support of BNP Paribas Investment Partners is releasing the results of its second annual survey, ’European Asset Owners′ ESG perceptions and integration practices’. In 2011, more than 250 asset ownersacross 11 countries were surveyed on the incorporation of Environmental, Social and Governance (ESG) criteria into asset management. Managing a total of EUR 4,540 billion, these investors have gradually integrated the notion of ESG risks, althoughresponsible investment is defined very differently from one country to another.”

It’s interesting to read, country by country, what they believe and how they understand and apply terms such as responsible investing (RI). What can be said though, is that European asset managers are increasingly interested in RI and ESG.
Novethic: European Asset Owners′ Have Diverging Views about Responsible Investment but Share a Growing Interest in Environmental, Social and Governance (ESG) Risks, press release, December 1, 2011, BusinessWire, France.

Solar Spat Threatens US-China Trade War. – [COMMENTARY] “China is hitting back at the US by launching its own probe into the US government′s support for renewable energy. This comes just weeks after US federal officials announced they would investigate a complaint by domestic solar companies accusing the Chinese solar sector of unfair trade practices.”

When it comes to trade and economic policies, China has ’checkmated’ the US long ago. China lured US manufacturers to its shores, got their technology, and then created its own companies to outcompete them. Meanwhile, China buys US treasuries with its huge foreign exchange dollar surpluses to eventually ’indenture’ the US. China thinks long-term; the US–just until the next election.

Now China has also overtaken the US in renewable and alternative energy spending. And a huge chunk of a new $1.7 tn spending programme over the next five years is going towards those sectors.
Solar spat threatens US-China trade war, by Gloria Gonzalez, November 30, 2011, Environmental Finance, UK.

New Book

Dilemmas in Responsible Investment, by Celine Louche and Steven D. Lydenberg, Greenleaf Publishing 2011.
“Through its focus on responsible investment in practice, Dilemmas in Responsible Investment is, I believe, one of the most profound and important books that has been written on the subject of responsible investment.”—Rory Sullivan, Senior Research Fellow at the University of Leeds, England.

Corporate Governance Failures: The Role of Institutional Investors in the Global Financial Crisis, by James P. Hawley, Shyam J. Kamath, and Andrew T. Williams, University of Pennsylvania Press, 2011.
“Corporate governance, the internal policies and leadership that guide the actions of corporations, played a major part in the recent global financial crisis… the performance of large, supposedly sophisticated institutional investors in this crisis has gone for the most part unexamined. [This book] exposes the misdeeds and lapses of… institutional investors leading up to the recent economic meltdown.”—Book description.

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