July 2017 Newsletter

July 2017 Newsletter

News & Commentaries by Ron Robins


Current State of Assurance on Sustainability Reports. “Corporate sustainability reporting is becoming more widespread with each passing year, and with that growth comes the need for companies to back up their sustainability claims. The author surveyed sustainability assurance reports from 2013, and the subsequent analysis provides advice for professionals and users.

63% of the world′s 250 largest companies by revenue get their sustainability reports assured, and 70% of those choose a major accounting firm to do so (KPMG Survey of Corporate Responsibility Reporting 2015.)”

[COMMENTARY] It’s good to see so many companies getting their sustainability reports assured. Hopefully, sustainable reporting assurance will become universal in the not-so-distant future. However, in the current deregulatory environment, this might be a challenge. Nonetheless, companies wanting to see their stock outperform will need to satisfy the rapidly growing and large ESG analyst community!
Current State of Assurance on Sustainability Reports, by Sunita Rao, July 2017, The CPA Journal, USA.

Passive managers are increasingly interested in ESG. “Passive managers are no longer treating stewardship responsibilities as a ‘box-ticking′ exercise, but are actively looking to influence investee companies and help improve environmental, social and governance (ESG) standards across the board. They vote and engage directly with firms on prominent issues such as executive pay, board diversity and climate change.”

[COMMENTARY] Many investment industry professionals have been concerned about the effects of passive funds on the health of stock markets. In particular, their indiscriminate buying stocks — whether a stock is ’good or bad.’ Incorporating ESG in defining a passive fund goes some way in resolving this concern.
Passive managers are increasingly interested in ESG, by Passive managers are increasingly interested in ESG Hortense Bioy, July 24, 2017, FT Advisor, UK.

Are Sustainability Rankings Consistent Across Ratings Agencies? “As more and more companies begin to devote serious attention to sustainability reporting, many different systems of rating the depth and effectiveness of sustainability efforts have arisen. The authors compare three leading sustainability rankings, examining their methodologies and results. Unfortunately, a lack of consistency and transparency from these rating agencies currently exists, impeding greater efficiency in the capital markets.”

[COMMENTARY] The studies findings will not surprise most ethical investors. Nonetheless, it’s good to see such academic support for what we know.
Are Sustainability Rankings Consistent Across Ratings Agencies? By Beixin (Betsy) Lin, PhD, Silvia Romero, PhD, Agatha E. Jeffers, PhD, CPA, Laurence DeGaetano, CPA and Frank Aquilino, CPA, July 2017, The CPA Journal, USA.

Morningstar, MMI Launch Sustainable Investing Initiative. “The Money Management Institute (MMI) announced today a joint initiative with Morningstar called The MMI/Morningstar Sustainable Investing Initiative, aimed at educating advisors about sustainable investing and how to better incorporate it into their practices.”

[COMMENTARY] Most financial advisors need some training in ESG related investing. This is one of many initiatives now happening globally. Well done Morningstar and MMI.
Morningstar, MMI Launch Sustainable Investing Initiative, by David H. Lenok, July 17, 2017, WealthManaghement.com, USA.

Green not the only colour for ethical bond investors. “The green bond market has boomed in the past decade but now a host of other financial products have begun to emerge, promising to tackle social issues including homelessness, access to education, clean water, crime prevention and helping disadvantaged children.”

[COMMENTARY] A good review of the market and growth of social bonds. This will interest many ethical investors.
Green not the only colour for ethical bond investors, by Kate Allen, July 17, 2017, Financial Times, UK.

Transition risk for oil & gas in a low carbon world. “This new analysis provides a way of understanding whether the supply options of the largest publicly traded oil and gas producers are aligned with demand levels consistent with a 2 degree Celsius (2D) carbon budget. By allocating the carbon budget to potential oil and gas projects, through applying the economic logic of a carbon supply cost curve, it is possible to identify which companies have the highest exposure to potential capital expenditure (capex) to 2025.

This report provides a snapshot of the potentially unneeded capex spend for 69 global oil and gas companies … highlighting for the first time, the wide-ranging degree of exposure amongst companies in the sector.”

[COMMENTARY] This is an important report for investors! The above quotes provide the explanation of what’s in it. Well done Carbon Tracker and PRI!
Transition risk for oil & gas in a low carbon world, press release, July 2017, UK.

ESG Reports and Ratings: What They Are, Why They Matter. “Report and ratings methodology, scope and coverage, however, vary greatly among providers. Many providers encourage input and engagement with their subject companies to improve or sometimes correct data. Third party ESG report and ratings providers include: (i) Bloomberg ESG Data Service; (ii) Corporate Knights Global 100; (iii) DowJones Sustainability Index (DJSI); (iv) MSCI ESG Research; (v) RepRisk; (vi) Sustainalytics Company ESG Reports; and (vii) Thomson Reuters ESG Research Data. This memorandum provides an overview and analysis of these providers.”

[COMMENTARY] Davis Polk provides a good overview of ESG raters and their methodologies. The review also covers ESG ETFs and portfolios.
ESG Reports and Ratings: What They Are, Why They Matter, by Davis Polk, July 12, 2017, 7 Davis Polk & Wardwell LLP, USA.

10 studies that show how and why ESG investing works. “How do ESG, or environment, social, and governance investments, perform? When do these strategies work, and why? Here′s a look at the circumstances under which ESG-related investing works the best, across different asset classes such as stocks and bonds.”

[COMMENTARY] Great compilation of studies relating the benefits of ESG to corporate financial performance and stock prices.
10 studies that show how and why ESG investing works, by TruValue Labs, July 10, 2017, USA.

CDP launches first climate impact fund rating platform. “The platform lists 2,500 European funds … equal to …2.5 trillion … and aims at helping investors in their investment decision-making taking the climate change impact of the funds into account.”

[COMMENTARY] A terrific new fund rating product for European investors! It’s ground-breaking in that it rates funds specifically on aggregate climate impacts of their holdings. Hopefully, this type of ratings’ service will develop for funds globally.
CDP launches first climate impact fund rating platform, press release, July 7, 2017, UK.

PRI finds disconnect between investors, ratings agencies on ESG factors. “’Investors and (rating agencies) struggle to agree on what is a reasonable time horizon to consider,’ said the report. ’Investors tend to align their time horizons with their investment objectives: some buy and hold long-term bonds until maturity (while) others trade more frequently.’”

[COMMENTARY] An interesting point is raised here. Should ratings agencies assign to companies different ratings over varying time periods? Would you like to see how the agencies rate a company over, say, one, three, five or ten years? It certainly would provide a fuller picture for investors. I know ratings agencies read this site so I wonder if any of them have an opinion on this? Let me know!
PRI finds disconnect between investors, ratings agencies on ESG factors, by Sophie Baker, July 5, 2017, Pensions & Investments, USA.

ESG ‘best signal′ for future risk in equities. “But ESG appears to isolate non-fundamental attributes that have real earnings impact: these attributes have been a better signal of future earnings volatility than any other measure we have found… US financials that did not survive the global financial crisis saw disproportionate ranks for diversity, shareholder rights and compensation policy.”

[COMMENTARY] Finally, what is common sense –that poor ESG factors can have a negative influence on corporate financial performance — has been found to be true in this Bank of America Merrill Lynch study.
ESG ‘best signal′ for future risk in equities, by Jessica Tasman-Jones, June 29, 2017, Fund Strategy, USA.

European Commission takes further steps to enhance business transparency on social and environmental matters. “These guidelines will help companies to disclose relevant non-financial information in a consistent and more comparable manner. The aim is to boost corporate transparency and performance, as well as encourage companies to embrace a more sustainable approach.”

[COMMENTARY] Europe again leads in the implementation of ESG. These new guidelines reinforce and expand upon the earlier ones dating back to 2014.
European Commission takes further steps to enhance business transparency on social and environmental matters, press release, June 26, 2017, European Commission, Belgium.

Canadian companies among the most carbon intensive in the developed world. “Genus Capital Management today released ’The Carbon Emissions Report: The Effect of Carbon Emissions on Investment Returns,’ which concluded that an investment portfolio’s carbon intensity negatively impacted returns by 9.2 per cent over the past seven years, after adjusting for other variables and risk factors…

High intensity emitters tend to be penalized by the market because their businesses are neither efficient nor forward facing. Divesting from fossil fuels is one way to minimize the carbon intensity of a portfolio. By conducting this research, we’re pleased to see that the results support the case for divestment and sustainable investing.”

[COMMENTARY] I’ve seen several studies of this nature. As ESG criteria are implemented by money managers, this type of outcome is to be increasingly expected.
Canadian companies among the most carbon intensive in the developed world, press release, June 28, 2017, Genus Fossil Free funds, Canada.

Featured Book

The New Grand Strategy: Restoring America′s Prosperity, Security and Sustainability in the 21st Century, by Mark Mykleby, Patrick Doherty and Joel Makower, St. Martin′s Press 2016
“The New Grand Strategy offers… a grand purpose of creating a sustainable future for Americans and the peoples of all nations. The goal may be grand, but the analysis is clear, simple, and accessible.”―Anne-Marie Slaughter, President and CEO of New America; former Dean of Princeton University’s Woodrow Wilson School of Public and International Affairs, Author of Unfinished Business.

Leave a Reply

Your email address will not be published. Required fields are marked *