March 2014 Newsletter

March 2014 Newsletter

News & Commentaries by Ron Robins


World′s Largest Investors Launch Effort to Engage Global Stock Exchanges on Sustainability Reporting Standard for Companies. “Sustainability advocacy group Ceres, in collaboration with BlackRock and other major institutional investors, today announced an initiative to engage global stock exchanges via the World Federation of Exchanges (WFE) on a possible uniform reporting standard for sustainability reporting by all exchange members.”

[COMMENTARY] Ceres is doing all ethical investors a terrific service by getting-on-board the likes of Blackrock and other major institutional investors to coax exchanges to higher sustainability standards. We can only wish them well in this endeavour.
World′s Largest Investors Launch Effort to Engage Global Stock Exchanges on Sustainability Reporting Standard for Companies, press release, March 26, 2014, Ceres, USA.

CFAs Poll: Which ESG Factors Are You Most Able to Include in Your Investment Decisions? “When we asked subscribers of the CFA Institute Financial NewsBrief which type of issues they are most capable of including in their investment decisions, governance issues topped the list… (which 45% of respondents chose) tend to apply to companies regardless of the type of business they are in, and they seem to be easier to relate to than environmental issues (which 16% of respondents chose) and social issues (which 6% of respondents chose). But a third of our 509 respondents reported that they do not include ESG issues in investment decisions at all. It is not clear why.”

[COMMENTARY] Usman Hayat, the author of this piece speculates that because CFAs are quantitatively based and usually with a short-term orientation, that such an analytical framework doesn’t work well for ESG issues which are usually long-term in nature. This reminds me of economists with their economic modelling. Trying to put human action–the buying of stocks, etc.–into quantitative modeling and forgetting about all other factors, is absurd. How many of these quant types forecast the 2008/9 financial crises!

As remarked here some weeks ago, for CFAs to be really useful in our new era, their training needs to incorporate much about how to analyze and measure ESG factors.
Poll: Which ESG Factors Are You Most Able to Include in Your Investment Decisions? By Usman Hayat, March 27, 2014, Blogs/CFA Institute, USA.

World Federation of Exchanges (WFE) Launches Sustainability Working Group. “The World Federation of Exchanges (WFE) has formed a new sustainability working group at its Working Committee meeting in Mumbai last week. The new Sustainability Working Group is comprised of representatives from a diverse array of global stock exchanges with a mandate to build consensus on the purpose, practicality, and materiality of Environmental, Social, and Governance (ESG) data.”

[COMMENTARY] It’s clear that stock exchanges prefer to act in unison with regards to sustainability reporting for their listed companies. This is good in that companies can decide where to list their stock on factors other than reporting requirements. However, this also means that exchange company sustainability reporting requirements might be only as robust as are acceptable to the largest number of exchanges.
World Federation of Exchanges (WFE) Launches Sustainability Working Group, press release, March 25, 2014, USA.

A Ranking of Top Executives by Their Employees. “The chief executives of LinkedIn, Ford Motor Company, Northwestern Mutual, Goldman Sachs and Intuit were among the top scorers this year in Glassdoor′s ranking of the leaders at 51 big companies. Yahoo and General Electric anchored the bottom of the list.”

[COMMENTARY] Such a ranking could be useful in assessing what companies to invest in. When a company’s employees think highly of their executives you know that company has a loyal and likely motivated work force. Employees like that are usually innovative and highly productive. And profits usually follow.
A Ranking of Top Executives by Their Employees, by Elizabeth Olson, March 25, 2014, Dealbook, The New York Times, USA.

America’s 100 Most Trustworthy Companies. “To develop the ranking, GMI reviews the accounting and governance behaviors of more than 8,000 publicly-traded companies in North America. In assessing each company, GMI considers factors including high risk events, revenue and expense recognition methods, SEC actions, and bankruptcy risk as indicators of a company′s credibility.”

[COMMENTARY] GMI’s methodology is good and covers large, mid and small cap companies.
America’s 100 Most Trustworthy Companies, by Kathryhn Dill, March 18, 2014, Forbes, USA.

Scoping Paper: Mining and Metals in a Sustainable World, World Economic Forum. “The stakeholder landscape for mining and metals companies is becoming increasingly diverse, with growing expectations for companies to operate in a responsible and sustainable manner. But what defines ’sustainability’?”

[COMMENTARY] For many ethical investors, mining is probably a necessary evil. If you want cars, a nice home, etc.–and like you billions more people desire them–mining has to be done. It just has to be done in accordance with optimal ESG policies. This scoping paper is helpful in that debate and might provide insights as to what to look for if you want to invest in ethical miners.
Scoping Paper: Mining and Metals in a Sustainable World, World Economic Forum, Switzerland.

The Most Ethical Companies In The World. “In an effort to honor those companies that are leading their industries in compliance, corporate governance, and social responsibility, the Ethisphere Institute released its eighth annual list of the World′s Most Ethical Companies. Thousands of companies from around the globe were nominated for this year′s list. A total of 144 companies were ultimately selected, representing 41 industries in 22 countries.”

[COMMENTARY] This list of the world’s most ethical companies is predominantly American. Of the 144 that make the list on the Yahoo! Finance site, I count 105 are American and only 21 European. Yet, European companies consistently outperform American companies in CSR reporting. It’s inconceivable that American companies are that much more ethical than those in Europe, or Japan, for that matter.

To be considered for the list companies first have to be nominated. Then Ethisphere does its work in assessing them. I believe Ethisphere needs to revise its process of how companies get to be considered. Despite that, it’s a good list for ethical investors to peruse.
The Most Ethical Companies In The World, by Jacquelyn Smith, March 21, 2014, Business Insider, USA.

Combine ESG and ‘smart′ beta, says AXA IM. “Combining smart beta strategies with a consideration of environmental, social and governance (ESG) requirements can generate higher risk-adjusted returns, according to AXA Investment Managers. AXA IM conducted a back test of portfolio performance over almost five years and found a combined beta smart ESG strategy portfolio would have outperformed both the MSCI world index as well as a smart beta strategy on its own.”

[COMMENTARY] This is an interesting approach designed to reduce portfolio volatility (’smart’ beta) and only includes ESG stocks in the portfolio. Some analysts argue that the best ESG stocks have a naturally lower beta. Nonetheless, such research further supports ethical investing.
Combine ESG and ‘smart′ beta, says AXA IM, March 19, 2014, Investor Daily, Australia.

Indian Government Clarifies CSR Regulations. “The activities that can be undertaken by a company to fulfil its CSR obligations include eradicating hunger, poverty and malnutrition, promoting preventive healthcare, promoting education and promoting gender equality, setting up homes for women, orphans and the senior citizens, measures for reducing inequalities faced by socially and economically backward groups, ensuring environmental sustainability and ecological balance… “

[COMMENTARY] What companies can do under India’s new CSR law is extensive. See the link below for a great explanation of the law. Personally, though I’m terrifically in favour of CSR, I have doubts about legislating it this way. Companies that do CSR right excel in the marketplace and in their stock prices. These are the factors that really propel CSR.
An overview of CSR Rules under Companies Act, 2013, by Ekta Bahl, March 10, 2014, Business Standard, India.

Corporate Social Responsibility Reduces Stock Price Crash Risk. “We find that firms’ CSR performance is negatively associated with future crash risk after controlling for other predictors of crash risk. The result holds after we account for potential endogeneity. Moreover, the mitigating effect of CSR on crash risk is more pronounced when firms have less effective corporate governance or a lower level of institutional ownership. The results are consistent with the notion that firms that actively engage in CSR also refrain from bad news hoarding behavior and thus reducing crash risk. This role of CSR is particularly important when governance mechanisms, such as monitoring by boards or institutional investors, are weak.”

[COMMENTARY] This a great study demonstrating the importance of CSR in reducing stock price crash risk. It might even win the Moskowitz Prize–the most important prize in SRI. Both management and stockholders now have an armoury of studies demonstrating the benefits of CSR for every company! Seeexcellent article on this study.
Corporate Social Responsibility and Stock Price Crash Risk, by Yongtae Kim, Haidan Li, and Siqi Li, all at Santa Clara University – Leavey School of Business,Journal of Banking and Finance (Forthcoming), February 14, 2014, USA.

Shareholders File Record-Breaking Number of Social, Environmental Resolutions. “Investors have filed 417 social and environmental shareholder resolutions so far this year at least 50 more than the same time in 2013 and 20 percent more than in February 2012, according to an analysis of proxies.”

[COMMENTARY] The growing number of these resolutions indicates that more and more investors are concerned about ESG issues and that companies are increasingly taking notice of them. This is a good development–though I believe it’s just really starting to get going.
Shareholders File Record-Breaking Number of Social, Environmental Resolutions, March 6, 2014, Environmental Leader, USA.

Top 100 TSX-V (TSX Venture Exchange) miners shows that the best performing miners place strong emphasis on social management. “Annually, MacCormick reviews PWC′s Top 100 Junior Mining companies by market cap. listed on TSX′s Venture Exchange. The review analyzes those Top 100 companies against MacCormick′s in-house CSR index which consists of 10 CSR categories and a 3-tier rating system for each category. Of MacCormick′s Top 20 CSR reporters: 8 were exploration, 10 in development and 2 in production. The report also dives into the financial performance of those Top 20 companies for a closer look at financial indicators from which to correlate financial and social performance.”

[COMMENTARY] This is terrific news. Many ethical investors don’t relate to mining, but it’s a necessary and important aspect of our global economy. It should just be conducted with high ethics and a keen awareness of ESG factors. MacCormick’s CSR index of junior mining companies is revolutionary and will encourage this. I’m really keen to see how it evolves!
Diamonds In The Rough, press release, March 4, 2014, MacCormick IMC, Canada.

Apple, eBay, Gap, Intel throw weight behind Climate Declaration.“A group of 140 California firms have reiterated calls for [California] legislators to deliver ambitious action on climate change with the release of a new declaration signaling their support for policies that serve to cut emissions and drive investment in clean tech… ’We, the California-based companies below, are proud to sign the Climate Declaration in recognition of the economic opportunities associated with reducing our greenhouse gas emissions, the development of renewable energy and alternative transportation fuels and the preservation of clean water for ourselves and for future generations.’”

[COMMENTARY] This is good for the environment and good for business. These companies see the opportunity and want California to continue to lead among American states in climate regulations. Judging by who are among the signatories to the declaration, it might even get a response from Washington!
Apple, eBay, Gap, Intel throw weight behind Climate Declaration, by BusinessGreen staff, March 3, 2014, GreenBiz, USA.

Powerful global finance institute fails to train future leaders on sustainability. “By skimming over environmental and social factors, is the Chartered Financial Analyst Institute [CFA] failing to train tomorrow’s financial leaders for today’s sustainability challenges?”

[COMMENTARY] They’ve found a formula that works so well–having become the global standard qualification for financial analysts (140,000 students)–that they don’t want to change. They argue that the course content is arrived at by consulting with the investment community. One can only guess exactly who it is they might be consulting with.
Powerful global finance institute fails to train future leaders on sustainability, by Jo Confino, March 4, 2014, The Guardian, UK.

New EU rules require companies to report social impact. “Member states today approved a compromise deal with MEPs that would require large listed companies to file annual reports on their corporate social responsibility, detailing their policies and activities on issues such as human rights, corruption and protecting the environment.”

[COMMENTARY] This is great news and demonstrates leadership by the EU in CSR concerns. Though companies grumble about all the new reporting requirements, the fact is stakeholders, especially investors, have a right to this information. Such information might be vital in assessing the ethics of a company–and hence its long-term financial performance as well.
New EU rules require companies to report social impact, by Nicholas Hirst, February 26, 2014, European Voice, Belgium.

New Research Studies

Corporate Social Responsibility and Stock Price Crash Risk, by Yongtae Kim, Haidan Li, and Siqi Li, all at Santa Clara University – Leavey School of Business,Journal of Banking and Finance (Forthcoming), February 14, 2014, USA.

Speaking of Corporate Social Responsibility, by Hao Liang, Tilburg University; Christopher Marquis, Harvard University; Luc Renneboog, Tilburg University; and Sunny Li Sun, University of Missouri. March 2014, USA/Belgium.

Featured New Book

The Evolution of a Corporate Idealist: When Girl Meets Oil, by Christine Bader, Bibliomotion March 2014.
“Thought-provoking…a good primer on the C.S.R. phenomenon…effortlessly gulped during a long airplane flight. The writing is clear and concise, and if the book doesn′t leave one convinced that every multinational has suddenly developed a guiding conscience, it does offer some encouragement that many are on the way.”—Bryan Burrough, The New York Times.

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