June 2017 Newsletter

June 2017 Newsletter

News & Commentaries by Ron Robins


More Companies Reporting on ESG. “Around 82% of S and P 500 companies published corporate sustainability reports in 2016, according to the Governance and Accountability Institute, up from 20% in 2011 and 72% in 2013.”

[COMMENTARY] These are great numbers and demonstrate how companies are responding to investor demands for increased ESG reporting. For companies, there’s the additional benefit of measuring themselves on ESG variables, many of which are material to their operations and can help improve their financials.
More Companies Reporting on ESG, by Leila Mead, June 27, 2017, International Institute for Sustainable Development (IISD), USA.

Institutional Investors More Likely to Invest in Companies with Business-Driven ESG Disclosures, According to New White Paper. “Ninety-eight percent of institutional investors say a company with strong environmental, social and governance (ESG) initiatives makes for a more attractive investment, according to the newly released white paper, Is Your ESG Report Getting Noticed?, developed by Burson-Marsteller, a strategic communications and global public relations firm, and research firm PSB.”

[COMMENTARY] Wow. Such studies and surveys are coming thick and fast. They demonstrate how ESG has become popular in finance today. It’s been a long time coming.
Institutional Investors More Likely to Invest in Companies with Business-Driven ESG Disclosures, According to New White Paper, press release, June 26, 2017, Burson-Marsteller, USA.

Can Good Corporate Citizenship Be Measured? “A new study that tries to quantify and correlate stock performance with E.S.G. factors is generating a lot of chatter among the investor class. The study, developed by a team of quantitative strategists led by Savita Subramanian at Bank of America′s Merrill Lynch Global Research unit, appears to be the most expansive, looking at several hundred companies over a decade starting in 2005.”

[COMMENTARY] Interesting analysis. Largely supportive that a focus on ESG may provide improved returns. However, I’d appreciate it if the study mostly discussed in this article were published in a recognized financial journal with proper peer review. For me, the ’gold standard’ in ESG – financial performance is, ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies. Admittedly, it only looks at ESG and corporate financial performance, whereas, Subramanian’s et al study above relates ESG to stock performance.

For another view on ESG and investment performance, see, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, by Arabesque Asset Management and Oxford University.
Can Good Corporate Citizenship Be Measured? By Andrew Ross Sorkin, June 26, 2017, The New York Times, USA.

95% of European pension funds ignore climate change impact: Mercer. “With NASA stating that April 2017 was the second hottest since records began in 1880 (with 2016 the hottest), Mercer′s recent report has found that only 5% of 1,241 European pensions schemes have considered the investment risk posed by climate change. As a result the consultancy has called for ’more urgency from the industry’ to address the issue. The 2017 report … Mercer′s 15th edition … gathers information from 1,241 institutional investors across 13 countries, reflecting total assets of around …1.1 trillion.”

[COMMENTARY] These findings are surprising given the relatively high level of purported integration of ESG by European money managers. It would be interesting to hear from Mercer and the compilers of other relevant studies as to why there is this apparent contradiction.
95% of European pension funds ignore climate change impact: Mercer, by Gary Robinson, June 26, 2017, International Investment, UK.

Individuals and institutions split on benefits of ESG investing: survey. “Individuals believe the environmental, social, and ethical records of the companies they invest in are important, said Natixis, while professionals at institutions and within ’the investment community’ were more sceptical about the efficacy of these strategies, for example having concerns about performance measurement.”

[COMMENTARY] The findings of this Natixis Global Asset Management survey highlight — in part — why the financial industry has taken so long to respond to client ESG interests. Despite the arguments made in this article, I suggest that investment professionals not only disregarded their clients interests but have taken an extraordinarily long time to understand what ESG is and its potential alpha. Another issue is that most investment professionals have become short-term oriented, whereas, ESG investing is more about performance over the long-term.
Individuals and institutions split on benefits of ESG investing: survey, by Susanna Rust, June 15, 2017, IPE, UK.

Millennials Think About Charity Entirely Differently — they invest in companies making a positive impact and “social entrepreneurism.” “A study by Bank of America-owned U.S. Trust showed the youngest of the three generations isn’t as interested in writing a check for a good cause — millennials would rather contribute in other ways, which could affect how an advisor manages their wealth. Only 36 percent of millennials defined ’giving’ as making a charitable financial donation, versus 61 percent of Gen X participants and 83 percent of Boomers.”

[COMMENTARY] This is good news for advisors and the financial markets. It assists the overall orientation towards ESG and is positive for improved ethical behavior in all financial market participants.
Millennials Think About Charity Entirely Differently, June 14, 2017, WealthManagement, USA.

Americans Question Motives Behind CSR. “According to the latest annual Harris Poll Reputation Quotient study, which tracks the perception of the 100 most visible companies in the U.S. by asking consumers to rank their reputations across a half-dozen key attributes, 45 percent said they believe companies embark on CSR initiatives because they believe it′s a role they should play as leaders in their communities.

Conversely, a similar amount — 40 percent — said they believe companies develop CSR initiatives only to bolster their public image and establish social value for stakeholders.”

[COMMENTARY] I believe it’s a great thing that companies embark on CSR activities. However, I wonder if the term CSR has outlived itself? I find ESG a much better differentiator between companies as I believe it delivers a better corporate focus (organizationally and financially) and possibly reduced ’greenwashing’ for consumers.
Americans Question Motives Behind CSR, by Jon Gingerich, June 12, 2017, O’Dwyer’s, USA.

16th annual Best 50 Corporate Citizens in Canada report. “This year′s Best 50 Corporate Citizens in Canada ranking is a reflection of this new disclosure climate. Corporate Knights had maintained 12 key performance indicators for a number of years due, in part, to how widely disclosed these data points were on an industry-wide scale. Additional metrics were not adopted because of the limited value provided by assessing companies on a metric that isn′t available for the majority of companies in the research universe.

With sustainability disclosure practices improving (albeit slowly), Corporate Knights was able to add two new metrics to the ranking methodology this year: the supplier score and the clean air productivity score.”

[COMMENTARY] The Best 50 Corporate Citizens in Canada is always a good read and helpful to ethical investors.
16th annual Best 50 Corporate Citizens in Canada report, June 6, 2017, Corporate Knights, Canada.

Wegmans, Publix Super Markets, Amazon, Tesla And USAA Draw Top Social Responsibility Scores In Harris Poll. “Other companies receiving ’excellent’ corporate social responsibility ratings are Lowe′s, UPS and L.L. Bean. Monsanto, Wells Fargo and Goldman Sachs garnered ’critical’ corporate social responsibility marks in the Harris Poll study, which asked more than 23,000 consumers to rate the 100 most visible companies in the U.S. on social responsibility attributes such as: supports good causes, environmental responsibility and community responsibility.”

[COMMENTARY] Some of the names at the top of this list are surprising. Wells Fargo has been engaged in some unethical customer practices, while Monsanto is criticized by a number of health critics.
Wegmans, Publix Super Markets, Amazon, Tesla And USAA Draw Top Social Responsibility Scores In Harris Poll, press release, June 7, 2017, The Harris Poll, USA.

Do SRI Funds Have a Future in [US] 401(k) Plans? “SRI funds are slow to crack the $6.7 trillion 401(K) market, even though investor demand is strong.”

[COMMENTARY] This story covers the results of a survey with 600 US financial advisors. The numbers of advisors claiming to be engaged with SRI funds makes me question how the advisors might’ve interpreted that and other questions. If the advisors are right, then a large percentage of their client base should already be in SRI products. However, I doubt that is the case. Though, it’s great to see these numbers!
Do SRI Funds Have a Future in [US] 401(k) Plans? By Mark Miller, June 2, 2017, Wealth Management, USA.

Sustainable Investment Market Report 2017 … Sustainable investment market in Germany, Austria and Switzerland makes significant gains yet again. “The strongest growth in sustainable investments was recorded in Switzerland (+39%), followed by Austria (+24%) and Germany (+15%). ’Each year, we see increasing numbers of investors opting for sustainability in the management of their assets,’ says Volker Weber, Chair of the Board of Directors at FNG, commenting on the latest market figures. ’Institutional investors, in particular, are increasingly being won over, while we know from asset managers that more and more of them see factoring in non-financial criteria as a normal part of their fiduciary duties.’”

[COMMENTARY] These are huge one-year growth figures. Quite likely a few very large funds were particularly responsible. Sustainable investing is now mainstream almost everywhere.
Sustainable Investment Market Report 2017 … Sustainable investment market in Germany, Austria and Switzerland makes significant gains yet again, press release, June 1, 2017, Eurosif, Europe.

Institutional Investors to Boost ESG Investments. “Nearly 80% of asset managers and asset owners incorporate environmental, social and governance (ESG) factors into their decision-making, according to a survey from BNP Paribas Securities Services. The report, titled ’Great Expectations: ESG … What′s next for asset owners and managers,’ found that among the asset owners incorporating ESG, 46% plan to invest at least half of their assets into funds that incorporate ESG by 2019.”

[COMMENTARY] This survey indicates tremendous growth for ESG based institutional investing strategies in the next few years. It’s certainly a positive for all ethical investors.
Institutional Investors to Boost ESG Investments, by Michael Katz, June 1, 2017, Chief Investment Officer, USA.

Now, this is controversial: FAU Study Says Corporate Social Responsibility Does Not Prove to Be a Profitable Investment for Most Companies. “Companies that try to ’do good’ are likely to find that Corporate Social Responsibility (CSR) is bad for their bottom lines, according to a new study from Florida Atlantic University’s College of Business. ’We found that emphasizing Corporate Social Responsibility is not good for shareholders,’ said David Javakhadze, Ph.D., assistant professor of finance, who investigated the relationship between CSR and efficiency with which firms allocate their capital resources. ’If you’re an investor you should think twice before you invest in those firms that emphasize CSR.’”

[COMMENTARY] Since numerous studies including those from elite universities such as Harvard and Oxford have shown that companies excelling in ESG (CSR?) perform as well or better financially and in stock returns, this new study is an outlier. Nonetheless, it’s worth reviewing and critiquing.
FAU Study Says Corporate Social Responsibility Does Not Prove to Be a Profitable Investment for Most Companies, press release, June 1, 2017, Florida Atlantic University College of Business, USA.

Canadian investors are interested in responsible investments, and they want gender pay equity and more women in corporate leadership. “The report, sponsored by OceanRock Investments Inc., found that while 77% of investors are interested in RI, a staggering 73% know very little or nothing about it. These results highlight the ’RI awareness gap’ … a significant gap between investor interest vs knowledge about RI.

’A strong majority of investors told us that they are more likely to choose responsible investments if their advisor suggests suitable options or if their financial institution, credit union or online brokerage informed them about responsible investments,’ said Deb Abbey, CEO of the RIA.”

[COMMENTARY] At the beginning of Canada’s 2017 RIA Conference in Vancouver, the RIA announces some incredible survey findings: Canadian investors want responsible investing!
2017 RIA Investor Opinion Survey, press release, June 1, 2017, RIA, Canada.

Diversity, ESG relatively low scheme governance priorities: survey. “Board diversity, ESG investing, and external reviews are relatively low governance priorities for pension scheme trustees and managers, according to a report. It was produced by Winmark, which runs professional member networks to facilitate peer learning, and Sackers, a law firm. It was based on a survey of 84 pension schemes … trustees and pension managers … and 13 in-depth interviews with chairs of trustee boards and other pensions experts.”

[COMMENTARY] It could be that many UK pension schemes are relatively underperforming as so many scheme trustees appear ignorant of the potential returns that a focus on ESG might bring to their schemes.
Diversity, ESG relatively low scheme governance priorities: survey, by Susanna Rust, May 28, 2017, IPE, UK.

UK Ethical investing sector held back by lack of awareness, says new survey. “More than half of the UK population want their wealth to have a positive impact on society but are unsure where to turn to for help, highlighting a knowledge deficit in the area of ethical investing.

The survey, conducted by positive savings platform Ethex, shows lack of knowledge, understanding and confidence in what is on offer is holding many investors back from investing in ethical products.

50 percent of those asked did not feel they know enough about positive investment and savings, although 45 percent were willing to learn more. In addition, 39 percent did not know whether to expect a stronger or weaker financial return from positive investments when compared to traditional ones and 55 percent did not think they were wealthy enough to make positive investments.”

[COMMENTARY] Most investors in the developed world have for over two decades wanted to be invested in ethical, socially responsible, and sustainable companies. It’s always been the vested interests in the mainstream financial industry that never got the message — until quite recently.

It’s peculiar how an industry priding itself in its marketing and customer relations has been so out-of-touch with their clients — and for such a long time. I’ve always asked, whatever happened to the ’know thy client’ rule.
Ethical investing sector held back by lack of awareness, says new survey, by Miranda Wadham, May 25, 2017, The Investment Observer, UK.

Featured Book

Impact Investment: A Practical Guide to Investment Process and Social Impact Analysis, by Keith A. Allman, Wiley Finance 2015.
“A detailed guide which is a ’must read ’ for new and seasoned investors as well as those seeking investments to support entrepreneurial, social, and environmental ventures that aim to generate financial returns.

The manual describes every step of a rigorous investment journey … from investment analysis and valuation, to preparation of a term sheet, to closing the deal and post-investment monitoring and exit. In that sense, it is a primer for anyone wishing to understand what a thorough financial investment process looks like, whether an investor or an entrepreneur seeking investment.”—Pamela Hartigan, Director, Skoll Centre for Social Entrepreneurship, Sa…d Business School, University of Oxford, UK.

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