February 2022 Newsletter
News & Commentaries by Ron Robins
Latest Podcast: The Stocks Topping ESG Rankings. And More… “Topping ESG rankings (stocks): ‘Report–Meet the top 200 companies investing in a clean energy future’; ‘Barron’s 100 Most Sustainable Companies’; ‘Top 5 ESG Stocks To Radar Now’; ’10 Real Estate Companies That Are Both Greener and More Profitable’; ‘For Greenification in Munis, Try SMI’; and ‘This ETF is designed to help fight heart disease’; plus.”
— By Ron Robins
ESG Investing Needs to Expand Its Definition of Materiality. “What should the S in ESG refer to? It is logical to assume that it refers to social outcomes associated with our individual welfare or with thriving communities, and measures things like mental or physical health, education, and learning, or elements of subjective well-being like personal dignity or community cohesion. However, as currently conceived, the S in ESG regularly has very little to do with this intuitive and well-recognized understanding of social impact.”
[COMMENTARY]This paper has an excellent discussion of what the ‘S’ should stand for in ESG!
ESG Investing Needs to Expand Its Definition of Materiality, by Tom Adams, Lindsay Smalling and Sasha Dichter, February 23, 2022, Stanford Social Innovation Review, USA.
There is no silver bullet for ESG standardisation. “The ESG mobilisation of capital faces the Sisyphean challenges of political loggerheads and the slow crawl towards commercial-scale data.”
[COMMENTARY]The issue of whether to include nuclear and natural gas in the new green EU Taxonomy has provoked significant discussion about what is ‘green’, etc. Similarly for companies, how do you measure their ‘greenness’?
There is no silver bullet for ESG standardisation, by Jamie Gordon, February 23, 2022, etfstream.com, UK.
The Evidence Mounts Against Active Share. “Active share is a measure of how much a fund’s holdings deviate from its benchmark index, and funds with the highest active share tend to have the best performance.
Thus, while there’s no doubt that, in aggregate, active management underperforms and the majority of active funds underperform every year (and the percentage that underperform increases with the time horizon studied), if an investor were able to identify the few future winners by using active share as a measure, active management could be the winning strategy.”
[COMMENTARY]Active versus passive management of stock portfolios has been a hot topic for many years. It’s true that in recent times passive portfolio management such as most ETFs where there are few if any, stock changes in any given year, has generally outperformed active portfolio management.
However, this analysis has generally been done in rising markets. Most of these passive ETFs have only arisen in the past twenty years too. We have yet to see what might happen in a long-term bear market, should such a situation arise. Many active managers maintain that’s when active management will be the winner.
The Evidence Mounts Against Active Share, by Larry Swedroe, February 22, 2022, Advisor Perspectives, USA.
Report: Meet the top 200 companies investing in a clean energy future. “The Clean200TM is an educational tool intended to give individuals the ability to research companies that are effectively balancing people, planet, and profit.”
[COMMENTARY]The Clean 200 is one of the best lists around. What I especially like about this ranking is that the ‘greenness’ of a company’s revenues is given high priority! This is not so in nearly every other such list or ranking.
Report: Meet the top 200 companies investing in a clean energy future, by Corporate Knights and As You Sow, February 16, 2022, Canada.
We Need Universal ESG Accounting Standards. “ESG accounting is a mess. Competing initiatives mean there’s no uniform set of standards for measuring a company’s progress on sustainability. The good news is that a new initiative, the International Sustainability Standards Board, promises to do for sustainability reporting what the International Accounting Standards Board (IASB) does for financial reporting — develop standards for companies to report their performance to investors.”
[COMMENTARY]This is a highly insightful article by people who know what they’re talking about.
We Need Universal ESG Accounting Standards, by Robert G. Eccles and Bhakti Mirchandani, February 15, 2022, Harvard Business Review, USA.
The problem with ESG scores. “ESG ratings should place increased emphasis on CO2 intensity and emissions rather than the current focus on disclosing corporate policy and objectives, according to an Organisation for Economic Co-operation and Development (OECD) report on the Asia Pacific region.”
[COMMENTARY]I see this issue could become big in the years ahead as climate-warming increases. Investors might want to place increasing emphasis on a company’s carbon emissions than just their ESG score.
The problem with ESG scores, by Mubaasil Hassan, Curation, UK.
The truth about dirty assets. “The shift to the shadows is problematic for two main reasons. First, the claims being made by listed firms (and esg funds) that they are helping to decarbonise the planet are questionable. Selling a polluting asset does not, in itself, reduce emissions at all, if it keeps pumping oil or digging up coal.
Second, as dirty assets pass into private hands, it becomes harder to tell if their owners plan to reduce their output over time, or expand it.”
[COMMENTARY]Great points made in this article. Now, should there be regulation that those buying such assets be required to reduce the carbon intensity of these assets over time?
The truth about dirty assets, February 12, 2022, The Economist, UK.
The risk of not talking to clients about ESG is losing them, RI expert says. “I’ve worked with hundreds of advisors across Canada to help them get comfortable and proactive in the space and, from what I’ve heard, they’ve never lost a client by bringing it up. In fact, they’ve gained clients. However, some who haven’t brought it up have said they’ve lost clients.”
[COMMENTARY]I’ve argued this point for decades. Advisors must become proficient in ESG investing or gradually see their client base erode.
The risk of not talking to clients about ESG is losing them, RI expert says, staff, February 11, 2022, The Globe and Mail, Canada.
EU ‘green’ label for gas and nuclear sparks sustainable investing crisis. “The fear 20 years ago that a green investment label could itself enable greenwashing is now playing out two decades later in Europe.”
[COMMENTARY]An old colleague, Eugene Ellmen, who authored this article has unique insights into the EU positioning on this matter. His article is well worth reading.
EU ‘green’ label for gas and nuclear sparks sustainable investing crisis, by Eugene Ellmen, February 8, 2022, Corporate Knights, Canada.
Survey: Just 23% of Investors Align Most Investments to Their Values. “The NerdWallet survey of more than 2,000 U.S. adults — including 1,608 who currently have investments — conducted online by The Harris Poll asked investors about their thoughts on socially responsible investing, including whether they invest this way and how much of their portfolio aligns with their value systems.”
[COMMENTARY]At least the numbers are moving in the right direction. When, as in the USA, many investors are climate-change skeptics, these numbers aren’t surprising. It’ll be interesting to see how they change in the years ahead.
Survey: Just 23% of Investors Align Most Investments to Their Values, by Erin El Issa, February 8, 2022, Nasdac.com, USA.
ESG Investing Needs More Rigorous Standards To Evaluate Corporate Conduct. “The batteries in electric cars like the ones Tesla manufactures require cobalt, a mineral found in abundance in the Democratic Republic of Congo (DRC). While electric vehicles are important in the effort to combat climate change, there are credible reports of serious human rights violations at informal cobalt mines in the DRC, including widespread exploitation of child labor and safety hazards in deep, unstable tunnels…
Does Tesla deserve to be treated as an ESG champion?
[COMMENTARY]One of the top holdings of most ESG-sustainable funds is Tesla. Renewable energy requirements are growing massively for copper, cobalt, silver, etc. They require numerous new mines to satisfy such demand — and often from questionable jurisdictions. Are ESG-sustainable funds and investors in their excitement for such companies like Tesla overlooking the additional climate impacts of renewable energy? Should renewable energy-based companies, therefore, be given such high valuations?
ESG Investing Needs More Rigorous Standards To Evaluate Corporate Conduct, by Michael Posner, February 1, 2022, Forbes, USA.
U.S. markets regulator flags risks for ratings firms in ESG boom. “The SEC’s 2021 report, which is based on exams of ratings firms, said that by adding ESG factors, ratings firms may deviate from their usual methodologies, policies or procedures which may not be properly disclosed to investors, the SEC said.
Adding ESG ratings also raises the risks of new conflicts of interest if firms feel pressure to give higher ESG ratings than warranted when the subject is also a client, the SEC said.”
[COMMENTARY]The SEC raises valid concerns. How they can be handled is an open question.
U.S. markets regulator flags risks for ratings firms in ESG boom, by Chris Prentice, February 1, 2022, Reuters, USA.
Green Stocks Have Lower Returns but Less Risk. “Firms with high sustainable investing scores earn rising portfolio weights, leading to short-term capital gains for their stocks — realized returns rise temporarily. However, the long-term effect is that higher valuations reduce expected long-term returns.
[COMMENTARY]The phenomenon of high ESG performing stocks having relatively high prices and thus not performing as well as rising ESG performers has been observed before. This is why some investors — such as Engine No 1’s ETFs — believe that higher returns are possible by investing in ‘low’ ESG performing companies and motivating those companies further on the ESG path.
Green Stocks Have Lower Returns but Less Risk, by Larry Swedroe, January 31, 2022, Advisor Perspectives, USA.
What The Wall Street Journal Missed About Sustainable Investing. “Sustainable investing is hardly a ‘craze,’ asThe Wall StreetJournalheadline called it. Crypto is a craze; SPACs are a craze; day-trading meme stocks during the pandemic is a craze. Sustainable investing is part of a long-term shift in the way people approach their investments, and it is helping bring about a systemic shift toward stakeholder capitalism.”
[COMMENTARY]Well said. Jon Hale. It’s typical of ultra- conservative media to fall ‘behind-the-times.’ Ethical investing — and one of its newer incarnations, sustainable investing — has been around since biblical times. It’s just that in this age of global warming and its climate/environmental impacts, people everywhere have come to recognize that sustainable investing has to be given high priority. It’s here to stay and will continue to grow!
What The Wall Street Journal Missed About Sustainable Investing, by Jon Hale, January 28, 2022, Morningstar, USA.
ESG Investing For Dummies, by Brendan Bradley, For Dummies 2021.
“Even if you’re new to investing, you can use your money to make a difference. This book explains today’s ESG landscape so you can create a socially and environmentally responsible portfolio. You can consider stocks and bonds, and you can get an introduction to derivative and alternative instruments. Let ESG Investing For Dummies be among your advisors as you research investments; craft your portfolio, assess performance, and — most importantly — help make this world a more equitable and sustainable place.”