November 2014 Newsletter

November 2014 Newsletter

News & Commentaries by Ron Robins


US Sustainable, Responsible and Impact Investing Assets Grow 76 Percent in Two Years. “Sustainable, responsible and impact investing (SRI) assets have expanded 76 percent in two years: from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, according to the US SIF Foundation′s latest biennial survey, the Report on US Sustainable, Responsible and Impact Investing Trends 2014. As a result, assets managed with SRI strategies now account for more than one out of every six dollars under professional management in the United States…

The assets managed at the start of 2014 by investment firms considering ESG issues grew more than three-fold—from $1.4 trillion at the start of 2012 to $4.8 trillion.”

[COMMENTARY] The numbers are great, though note the growth in assets of “firms considering ESG issues” accounts for more than the entire growth in the headline number. Obviously, the proven relatively higher financial returns by integrating ESG factors into portfolio screening are drawing ever more asset managers into ESG believers.
US Sustainable, Responsible and Impact Investing Assets Grow 76 Percent in Two Years, press release, November 20, 2014, US SIF Foundation, USA.

Deep Misalignment Between Corporate Economic Performance, Shareholder Return And Executive Compensation. “New research details an over-reliance on accounting metrics that do not measure capital efficiency, and how total shareholder return obscures a line of sight to the underlying drivers of economic performance… Only 12% of CEO Pay Determined by Economic Performance; More than 75% of S&P 1500 Companies Not Equipped to Measure, Manage Key Factors Driving Sustained Corporate Value.”

[COMMENTARY] Echoing other researchers and commentators, these findings again demonstrate that reliance on total shareholder return (i.e. stock price increases and dividends) over durations of mostly one to three years — the most common way of basing executive compensation — is absurd. Such measures only focus management on short-term stock market public relations and stock buybacks! Thus, medium and long term corporate prospects and profitability are frequently sacrificed for short term stock gains.

Ethical investors might want to scrutinize executive compensation when selecting investments.
Deep Misalignment Between Corporate Economic Performance, Shareholder Return And Executive Compensation, press release, November 24, 2014, USA.

Analysis Shows Growing Support from U.S. Mutual Funds for Action on Climate Change Risks. “One-third of votes cast across 42 fund families supporting climate-related shareholder resolutions on average in 2014, according to an analysis by the sustainability advocacy group, Ceres… the 2014 proxy season saw one of the sharpest increases ever in support for climate-related resolutions in the past decade, with 11 fund groups … including GMO, John Hancock, Delaware and Oppenheimer … increasing their support for climate… Morgan Stanley, for example, supported climate resolutions 70 percent of the time in 2014 … a shift from supporting only 13 percent in 2013… however, eight fund families failed to cast a single vote in support of a climate-related resolution in 2014, the most noteworthy being Vanguard.”

[COMMENTARY] Mutual fund managers — increasingly applying ESG criteria to their investments — are beginning to see the financial significance to companies incorporating climate change risks/mitigation and sustainability in their operations. It’s strange that Vanguard is a hold out since it’s a signatory to the UN’s Principles for Responsible Investment (PRI) which demands adherence to ESG principles.
Analysis Shows Growing Support from U.S. Mutual Funds for Action on Climate Change Risks, press release, Ceres, USA.

Banking culture breeds dishonesty, scientific study finds. “A banking culture that implicitly puts financial gain above all else fuels greed and dishonesty and makes bankers more likely to cheat, according to the findings of a scientific study. Researchers in Switzerland studied bank workers and other professionals in experiments in which they won more money if they cheated, and found that bankers were more dishonest when they were made particularly aware of their professional role.”

[COMMENTARY] I have seen similar research and findings before concerning financial industry employees. However, despite such observations, investors follow almost without question the financial recommendations from the financial/investment advisors at these institutions. Rarely do investors ask how independent and impartial (for instance, preferential fees for selling particular products) is the advice they’re given.

Similarly, why do the media almost always go to the large (biased) financial institutions for comments on the economy and financial markets? I’ve investigated this before. The media say that economists in academia (who I argue are less likely to be biased) are difficult to reach, whereas economists at financial institutions respond on the first ring of the phone!
Banking culture breeds dishonesty, scientific study finds, by Kate Kelland, November 19, 2014, Reuters, UK.

New study: Are Ethical Investments Good? “We find that there are positive and statistically significant long-run abnormal returns for firms being included in the MSCI KLD400. These abnormal returns are associated with higher shareholdings by institutional investors (who are subject to higher public scrutiny), higher analyst coverage and higher growth opportunities.”

[COMMENTARY] The benefits of ethical investing are again seen in this study, which analyzed the returns on companies both included and dropped from the MSCI KLD400.
Are Ethical Investments Good? By Gariet Chow (University of Western Australia), Robert B. Durand (Curtin University of Technology), and SzeKee Koh (Singapore Institute of Technology), November 13, 2014, Australian Journal of Management, Vol. 39, No. 4, 2014, Australia.

Study Links SRI With Enhanced Portfolio Performance. “Harvard University professor Allen Ferrell and two colleagues at Tilburg University in the Netherlands won the 2014 Moskowitz Prize for Socially Responsible Investing, awarded yesterday at the 25th annual SRI Conference–The Conference on Sustainable, Responsible, Impact Investing–in Colorado Springs, Colo. Almost 600 financial professionals are attending the three-day event.”

[COMMENTARY] Congratulations to Allen Ferrell, Hao Liang and Luc Renneboog for their insightful and valuable study that has won them the 2014 Moskowitz Prize! What’s truly useful about their study is that they reviewed ESG activities of companies in 59 countries. Most studies of a similar nature were usually more regional. Also, their findings — with such a huge dataset to use — are really exciting, finding that “certain aspects of CSR (e.g., environmental, labor and social protection) are associated with increased executive pay-for-performance sensitivity and the maximization of shareholder value.”
Study Links SRI With Enhanced Portfolio Performance, by Leila Boulton, November 11, 2014, FA Magazine, USA.

Charities prefer active investments says Newton survey. “Respondents from 74 UK charities with just under …6bn of combined investment assets took part. Broadly, the survey found that 65% choose a purely active management approach to investing; 67% are either exclusively or predominantly invested in pooled funds; Just over a quarter (25.7%) are invested in alternative assets; 60% apply a socially responsible policy, but appetite for social-impact investment remains low; and finally portfolio returns and income are the biggest concerns for respondents.

[COMMENTARY] The data speaks for itself. What I find both surprising and happy about is that 60% of the charities are now investing with an SRI orientation. However, it’s uncertain if these findings are applicable to any other country.
Charities prefer active investments says Newton survey, press release, November 5, 2014, FTSE Global Markets, UK.

Conservation impact investing is about to boom. “The conservation impact investing market totalled $23 billion from 2009 to 2013 and is expected to increase to $37.1 billion over the next five years, according to a report released Thursday by The Nature Conservancy′s NatureVest division and EKO Asset Management. Conservation impact investments are intended to return principal or generate profit while driving a positive impact on natural resources and ecosystems.

In April, with support from JPMorgan Chase & Co., the Conservancy launched NatureVest, a dedicated division focused on deploying $1 billion in impact capital for conservation over the next three years by convening investors, developing and executing innovative financial transactions and building an investment pipeline across multiple sectors.”

[COMMENTARY] It seems a whole new area of investing is opening up for ethical investors–that of conservation impact investing. Investing for profit in projects benefiting the environment. This could be a truly win win situation both for investors and the environment.
Conservation impact investing is about to boom, by Mike Hower, November 5, 2014, GreenBiz, USA.

UN calls on pension funds to cut investments in fossil fuels. “The United Nations is calling on pension funds to cut investments in oil companies and other fossil fuel businesses in a bid to tackle climate change.

Speaking at a climate change summit in Copenhagen yesterday, UN secretary-general Ban Ki-moon said big investors such as insurers and pension funds should cut their investments in fossil fuels and focus on renewable energy sources instead.”

[COMMENTARY] Ban Ki-moon’s advocacy for fossil fuel divestment is in some ways significant–but also’ ceremonial.’ It’s significant in that the head of the UN is advocating for fossil fuel divestment but ceremonial in that it largely falls on deaf ears until governments enact carbon caps and limits. However, carbon caps and limits will (must) happen eventually, so ethical investors taking his advice could be rewarded over the long-term.
UN calls on pension funds to cut investments in fossil fuels, by Samuel Dale, November 4, 2014, Money Marketing, UK.

Europe retail market for socially responsible investing up 18 pct.“The European retail market for funds focused on socially responsible investing grew 18 percent to 127 billion euros ($161.82 billion) in the 12 months to June 2014, a report on Wednesday showed. The number of funds also rose, to 957 from 922 in the year earlier period, the report by Vigeo, which evaluates corporate responsibility, and fund analyst firm Morningstar said.”

[COMMENTARY] France and the UK led the growth. It’s great to see the SR-ethical retail funds significantly outpacing conventional funds in asset growth rates. This is a further sign that ethical investing is moving into the mainstream investing arena.
Europe retail market for socially responsible investing up 18 pct., October 29, 2014, Reuters, UK.

Featured New Book

The Business of Doing Good: Insights from One Organisation’s Journey to Deliver on Good Intentions, by Anton Simanowitz and Katherine Knotts, Practical Action Publishing, January 2015.
“A lucid and thought-provoking account of how things actually work in the field, based on the history and experience of AMK in Cambodia. It should become a well-thumbed staple for many of us working in social investment generally and microfinance especially.”—David Woods, Managing Director, Oikocredit International.

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