March 2017 Newsletter

March 2017 Newsletter

News & Commentaries by Ron Robins


Clearing the Deck For ESG Integration.“Advisors are rapidly running out of excuses to avoid, environmental, social and governance investing (ESG)… A recent survey by State Street, voluminously titledThe Investing Enlightenment: How Principle and Pragmatism Can Create Sustainable Value through ESG, casts light on the increasing client demand of ESG investments and financial viability of integrating ESG factors into active investment strategies.

It questioned almost 600 institutional investors and 750 individual investors about incorporating ESG factors into investing and business decisions. In doing so, it also identified a single major sticking point preventing widespread acceptance of ESG analytics — ’a lack of transparent, standardized and quality data.’”

[COMMENTARY] This article is a great, brief read on the results of an important and extensive study by Robert Eccles (Chairman, Arabesque Partners) and Mirtha Kastrapeli (Head of Sustainable Investment Research, State Street). There are some surprising statistics in their study for the responsible-ethical investment industry to digest!
Clearing the Deck For ESG Integration, by David H. Lenok, March 27, 2017, Wealth Management, USA.

Global RI assets surpass US$22.89 trillion, a 25% increase from 2014. “The largest responsible investment strategy globally is negative/exclusionary screening (US$15.02 trillion), followed by ESG integration (US$10.37 trillion) and corporate engagement/shareholder action (US$8.37 trillion). Negative screening is the largest strategy in Europe, while ESG integration leads in the United States, Canada, Australia/New Zealand and Asia ex Japan.

Japan′s primary RI strategy is corporate engagement and shareholder action. The fastest growing strategy, although also the smallest in absolute dollar terms, was impact/community investing.”

[COMMENTARY] The continuing rapid growth of RI assets is great news. It’s interesting to see that globally negative/exclusionary screening comprises 65.62% of these assets! I suspect that ESG integration and engagement/shareholder actions will rise as a proportion of RI assets in the years ahead.
Global RI assets surpass US$22.89 trillion, a 25% increase from 2014, press release, March 27, 2017, The Global Sustainable Investment Alliance.

More Catholic capital flows toward impact investing. “Pope Francis may be only the world′s third-greatest leader (behind Theo Epstein and Jack Ma, according to Fortune), but his 2014 endorsement of impact investing was still a big deal. Last year, the Vatican doubled down at a second conference to explore how the church and faith-based institutions can ’harness the power of impact capital to attain and sustain their social mission.’”

[COMMENTARY] Religious leaders of almost all faiths are increasingly promoting the importance of private capital in assisting in their faith’s social, economic, and environmental goals. This account of Catholics’ increasing impact investing investments demonstrates what is happening today.
More Catholic capital flows toward impact investing, by Marina Leytes, Impactalpha, USA.

ESG-oriented millennials may have too-high hopes. “Citing the 2016 Schroders Global Investors Survey, Waterman told attendees at the ALFI European Asset Management Conference that investors aged 35 and under expected an average of 10.2% per year in returns, compared to a global stock market performance of 3.75% at the time of the survey…

Waterman noted a general trend toward ’short-termism’ as investors planned to hold their investments for an average of just 3.2 years. Among all respondents, just 18% said they would hold their investment for more than five years. Zero in on millennials, and the statistic shrinks to just 8%, while 41% said they would invest for under a year.”

[COMMENTARY] Despite all the good things being said about millennials interest in ESG-focused investing, their expectations on investment returns and holding periods are troubling.
ESG-oriented millennials may have too-high hopes, by Leo Almazora, March 24, 2017, Wealth Professional, Canada.

Think tank questions PRI signatories’ ESG capacity. “Dedicated ESG specialists are rare at institutions signed up to the Principles for Responsible Investment (PRI), in particular at asset owners, according to analysis carried out by climate and energy think tank E3G… E3G said this meant that over 500 PRI signatories directly employed one or no ESG staff. There are more than 1,700 signatories to the PRI.”

[COMMENTARY] Many people, myself included, wonder how many of the PRI dignitaries take ESG seriously and how much is for PR purposes. Now E3G has provided some insight into that. It’s clear that a large number of those institutions who signed the PRI aren’t too serious about implementing ESG.
Think tank questions PRI signatories’ ESG capacity, by Susanna Rust, March 21, 2017, IPE, UK.

ESG factors can indicate overall stock risk, says AQR. “In AQR Capital Management′s new paper … ’Assessing Risk through Environmental, Social and Governance Exposures’ … the firm said it found a strong positive relationship between companies′ ESG exposures and the statistical risk of their equity.”

[COMMENTARY] In surveys where investment managers are asked about why they use ESG criteria, they frequently say to manage future risk. Now, AQR provides confirmation of that belief. With research appearing almost daily supporting the application of ESG in investment decisions, it seems that investors everywhere should be applying it. (To read the actual study, click here.)
ESG factors can indicate overall stock risk, says AQR, by Rachel Fixsen, March 20, 2017, IPE, UK.

Are Sustainable Funds More Expensive? “Funds with an ESG mandate tend to be a bit more expensive than other funds, but the differences are not large. There are reasonable explanations for this pattern. Most ESG funds are not very large, so they are not able to benefit from the economies of scale found in funds with huge asset bases; as ESG funds gather more assets, more of them should be able to lower costs for shareholders.

Also, funds with an ESG or impact mandate usually have extra costs for shareholder advocacy and similar activities that aim to move companies in a positive direction… There are plenty of cheap ESG options for investors who seek them out, including a growing number of sustainable index funds and exchange-traded funds.”

[COMMENTARY] There’s been little in-depth objective analysis comparing the costs of buying and holding ESG funds versus those of conventional funds. Morningstar has done a great service here in delving into them. This is an important article for all investors to review.
Are Sustainable Funds More Expensive? By David Kathman, March 17, 2017, Morningstar, USA.

‘Climate is King′ Says BlackRock; Companies Must Now Address Risk. “The world′s largest asset manager is stepping up pressure on companies to address how climate risk will affect its portfolios. In a recent post on its website, BlackRock said it believes climate risk is a “systemic issue” and that corporations should be compelled to develop disclosure standards.”

[COMMENTARY] Such remarks from the world’s largest asset manager are bound to influence corporate climate change policies globally. Furthermore, Blackrock is backing-up its remarks with actions as it seeks to discuss these issues with the companies it invests in.
‘Climate is King′ Says BlackRock; Companies Must Now Address Risk, by Jan Lee, March 16, 2017, TriplePundit, USA.

ESG growing in importance, ERM survey reveals. “Over 95% of investors believe their company portfolios contain untapped environmental, social and corporate governance (ESG) opportunities, according to a recent survey by London-headquartered global environmental consultancy ERM.”

[COMMENTARY] The article reviews the results of a survey that show extraordinarily positive views among private equity managers regarding the importance of integrating ESG in investment decisions.
ESG growing in importance, ERM survey reveals, March 15, 2017, Environmental-Analyst, UK.

Ethisphere Announces 124 Companies to Make the 2017 World′s Most Ethical Companies List. “Ethisphere′s notion that the financial value and ethics are inexorably tied together has been explained through an analysis of how the stock price of publicly-traded 2017 honorees compare to the S&P 500 over the last two years. The analysis demonstrates a 6.4% premium Ethisphere refers to as an ‘ethics premium.′”

[COMMENTARY] I like Ethisphere’s work. Their list is always worth a review.
Ethisphere Announces 124 Companies to Make the 2017 World′s Most Ethical Companies List, press release, March 13, 2017, Ethisphere, USA.

Why and How Investors Use ESG Information: Evidence from a Global Survey. “Survey data from more than 400 senior investment professionals provides insights into why and how investors use environmental, social, and governance (ESG) information as well as the challenges in using this information. This study also documents what investors believe will be important ESG styles in the future…

The primary reason survey respondents consider ESG information in investment decisions is because they consider it financially material to investment performance. ESG information is perceived to provide information primarily about risk rather than a company′s competitive positioning.”

[COMMENTARY] A study concerning ESG co-authored by Harvard’s George Serafeim is always an important read. The co-author Amir Amel-Zadeh of Oxford University’s Sa…d Business School has impressive credentials as well.
Why and How Investors Use ESG Information: Evidence from a Global Survey, by Amir Amel-Zadeh and George Serafeim, March 13, 2017, Harvard Business School Working Knowledge, USA.

The World′s Leading Companies on Human Rights. “One clear leader, as mentioned throughout the study, was Marks and Spencer (M&S). The U.K. retail giant… Ranking slightly behind M&S were H&M and Adidas.”

[COMMENTARY] This article details important research for everyone particularly interested in the ’S’ of ESG in many of the world’s largest companies. The study cited in the article was compiled by Aviva Investors, the Human Rights Resource Center (BHRRC), and various non-profits and European governments.
The World′s Leading Companies on Human Rights, by Leon Kaye, March 13, 2017, TriplePundit, USA.

How ’Responsible’ Are Europe’s Mega-Managers Investing $22.4 Trillion? “Research conducted by ShareAction, a non-profit group in the U.K. that campaigns for responsible investment, ranks the 40 mega-managers who, between them, invest over …21 trillion ($22.4 trillion) … The top five performers (scoring out of a possible 90 points) are: Schroder Investment Management (82), Robeco Group (81), Aviva Investors (80), Amundi (77.5), and Standard Life Investments (76.5).

[COMMENTARY] It’s informative for all of us in the ethical investment world to see how managers are ranked using criteria related to responsible investment. Now, where are similar rankings for North American or Asian managers?
How ’Responsible’ Are Europe’s Mega-Managers Investing $22.4 Trillion? By Dina Medland, March 12, 2017, Forbes, USA.

Is the finance sector really equipped to assess climate risks? “10 years after the sub-prime mortgage crisis that triggered a global financial crash, analysts are still largely ignoring long-term financial risks, such as those from climate change, the energy transition and disruptive low carbon technologies…

Although most asset owners analyzed in the report, such as pension funds and insurers, have long-term liabilities of 20 years or more, those managing these assets are far more short-term in their thinking, turning over these portfolios every 21 months on average.”

[COMMENTARY] As many of you will agree, a short-term focus concerning portfolio performance may not be compatible with long-term liability management. Although the financial community is starting to embrace ESG, ESG is mostly about long-term performance and so requires a different mindset.
Is the finance sector really equipped to assess climate risks? By Michael Holder, March 9, 2017, GreenBiz, USA.

Responsible Investing Growing in Importance Driven by Ethical Principals, Institutional Investor Demands, and Business Opportunities, Says New Survey from CAIA and Adveq. “More than three quarters (77%) of respondents to the survey agree Responsible Investing1 is more important than it was three years ago, while 78 percent anticipate it will be more important three years from now. Adoption of industry standards (71%), pressure from institutional investors (67%), and positive investment return outcomes (64%) will be the largest drivers of greater adoption of Responsible Investing and ESG approaches, according to survey respondents.”

[COMMENTARY] Again, we see more good news regarding the adoption of ESG in the investment industry. However, mentioned in this survey by 69% of respondents, was again the need for “standardized comparable data.” When this is finally available ESG will finally take its place at the helm of investment analysis.
Responsible Investing Growing in Importance Driven by Ethical Principals, Institutional Investor Demands, and Business Opportunities, Says New Survey from CAIA and Adveq, press release, March 9, 2017, The CAIA Association and Adveq, USA.

Dalbar: Active Investors Do Better Long-Term; Passive Investors Do Better Short-Term. “The study concludes that the choice of active or passive investing should be based largely on the needs and preferences of the investor and the cost of providing asset allocation and capital preservation strategies that are not available in passive fund.”

[COMMENTARY] The predominant trend in recent years has favored passive funds. In fact, active management has been widely ridiculed even by the likes of Warren Buffet. Now comes Dalbar, a highly distinguished research authority on these matters, adding fuel to the debate of active versus passive investing.
Dalbar Announces Active versus Passive Analysis, press release, February 27, 2017, Dalbar, USA.

Socially Responsible Funds Underperform. (Is this true?) “In a new paper that will appear in the April 2017 issue of the Journal of Banking and Finance, a top scholarly journal, the authors study over 2,000 funds. They argue that prior studies on SRI or CSR funds are flawed because those studies simply categorized funds as being either socially-responsible or conventional. This categorization leads to too many other differences between funds, and it ignores the fact that firms can have varying degrees of social responsibility.

So, in the new study, they compare low-CSR funds to high-CSR funds. They find that high-CSR funds underperform relative to low-CSR funds. Their evidence is both compelling and robust.”

[COMMENTARY] We’ll have to wait til the study is out to truly critique it. Initially, my reaction is how the term ’CSR’ is defined. Are the researchers only concerned with social issues? Even with that, how is it defined? Do the researchers include environmental and governance factors? One thing is for sure, it’ll likely be quite controversial!
Socially Responsible Funds Underperform, by Kenneth A Kim, February 28, 2017, FA Magazine, USA.

The Evolution of Corporate Social Responsibility Assurance … A Longitudinal South African Study. “Although the extent to which companies have provided independent assurance over their CSR disclosures has steadily grown, the study also revealed that the majority still did not. Although the pool of CSR assurance providers has widened to become more inclusive, contrary to the expectation that the dominance of the Big 4 audit firms would gradually be eroded, the study found that the Big 4 audit firms were actually consolidating their position in this area.”

[COMMENTARY] I’ve long held that CSR disclosures should be independently audited — as per financial statements — and the results available to all stakeholders. Though the above study was South African based, it provides some insight into the possible state of CSR auditing today. Hopefully, similar studies will be done, particularly in the USA, Europe, and Japan.
The Evolution of Corporate Social Responsibility Assurance … A Longitudinal South African Study, by Barry Ackers, February 25, 2017, Social and Environmental Accountability Journal, UK.

Featured Book

Sustainable Investing: Revolutions in theory and practice, by Cary Krosinsky and Sophie Purdom, Routledge 2016.
“As we make the vital sustainability and low carbon transition, we are finally moving from persuading to doing, from testing to investing. This book gives a great guide to the reasons change is needed, the methods, tools and ideas to make that change, plus all the latest thinking that goes along with that.”—Dave Gorman, Director of Social Responsibility and Sustainability, Responsible Investment lead, University of Edinburgh, UK.

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