May 2022 Newsletter
News & Commentaries by Ron Robins
————————————————————-
Latest Podcasts:
————————————————————-
Latest Podcast: Best US Corporate Citizens. And More… Articles covered include: “5 Renewable Energy Stocks To Watch In The Stock Market Today”; “100 Best Corporate Citizens”; “2 green stocks that I think are no-brainer buys for the future”; “A top fund manager has been buying these ASX tech shares after the market selloff”; and much, much, more…
— By Ron Robins
————————————————————-
SEC Proposes New Rules for Sustainable Funds Aimed at Standardizing ESG Disclosures. “The U.S. Securities and Exchange Commission has proposed two rules that, if adopted, will help investors better identify, understand, and compare funds that feature environmental, social, and governance criteria in their investment process.”
[COMMENTARY]Let me first say that I agree with stricter rules deterring greenwashing! Now should these new SEC rules be adopted I believe two things will happen. Firstly, there could be relatively fewer funds claiming ESG credentials. Secondly, fees will likely rise as fund expenses increase.
(Funds are already implying potentially higher costs. See SEC Greenwashing Rule Gives Funds Chills Over Emission Reporting, Bloomberg Law.)
SEC Proposes New Rules for Sustainable Funds Aimed at Standardizing ESG Disclosures, by Jon Hale, May 27, 2022, Morningstar, USA.
————————————————————-
It’s Time to Give Companies Standalone Climate Ratings. “Investors are increasingly using ESG ratings for their investment decisions. But we need to assign companies a stand-alone rating focused on climate risk that’s distinct from the ESG rating system. Such a climate-specific rating can distill complex information regarding a company’s carbon footprint and climate risk into an intuitive, user-friendly format, while avoiding the flaws that currently mar ESG ratings.”
[COMMENTARY]The argument is that many investors would want this.
It’s Time to Give Companies Standalone Climate Ratings, by Felix Mormann and Milica Mormann, May 24, 2022, Harvard Business Review, USA.
————————————————————-
Comment: If We Don’t Define ESG, Its Enemies Will. “Much more troubling is the growing animosity toward ESG on the political right in the United States. ‘ESG,’ in their telling, is just one more front in the anti-American progressive takeover of the country.”
[COMMENTARY]Can there be a precise definition of ESG? What do you think? The highly respected Jon Hale at Morningstar writes in this piece that we ought to encourage the word sustainability rather than ESG.
Comment: If We Don’t Define ESG, Its Enemies Wil, by Jon Hale, May 23, 2022, Morningstar, USA.
————————————————————-
Does integrated reporting quality matter to capital markets? Empirical evidence from voluntary adopters. “Potential implications of our results are that the standard setters should work to improve the specificity and rigor of their guidelines, and analysts should become more involved in developing IR guidelines to make them more relevant to their information needs. IR seems to unfold its benefits better in mandatory settings, which could call for regulators to make IR mandatory.”
[COMMENTARY]This is a research paper. Integrated reporting–the combined reporting of the annual report, financial statements and ESG/sustainability information — is studied here. I’ve been in favor of this reporting for decades. Also see Integrated Reporting as an Academic Research Concept in the Area of Business by Hugo Moraga.
However, it seems much work still needs to be done for it to be fully useful for investors.
Does integrated reporting quality matter to capital markets? Empirical evidence from voluntary adopters, Luca Leukhardt, Michel Charifzadeh, and Fabian Diefenbach, May 20, 2022, Corporate Social Responsibility and Environmental Management.
————————————————————-
Can Elon Musk save ESG? “As I explained in my recent three-part series on ESG ratings, the ratings reflect risks to companies and its shareholders, not necessarily to people and the planet. And while the ratings agencies insist they make that fact crystal clear, and most professional investors agree that they do, there remains a general — and not illogical — perception among many that high-scoring companies, from an ESG perspective, are ‘good’ companies for the world.
Moreover, ESG ratings primarily focus on whether a company has systems in place to manage their direct impacts and those of their supply chains. As such, they are relatively short-term in their focus.”
[COMMENTARY]I’m so glad that the author of this article, Joel Makower, makes it clear that a high ESG rating may have nothing to do with whether the company is benefiting people and the planet! Some big tobacco and fossil-fuel companies also have high ESG ratings!
Can Elon Musk save ESG? By Joel Makower, May 23 ,2022, GreenBiz, USA.
————————————————————-
ESG-conscious companies worth 50% more, Schroders finds. “Referencing its SustainEx tool, Schroders found a ‘good’ company (one that is highly environmentally friendly) would be worth roughly 50 per cent more than a bad one with the same earnings.
Using its SustainEx, which looks at the dollar-value of the impact individual companies have on society before scaling this relative to their sales, Schroders found bad companies were valued at 17-times their last 12-months earnings. However, good companies were on 25-times.”
[COMMENTARY]I can’t comment on the methodology. However, Shroders is a highly respected firm in the ESG space. However, I would hope it gets peer reviewed and published in a suitable professional journal.
ESG-conscious companies worth 50% more, Schroders finds, by Carmen Reichman, May 20, 2022, FT Advisor, UK.
————————————————————-
The Benefits And Costs Of Climate-Related Disclosure Activities For Companies And Investors. “One can make the argument that if climate information and its analysis is useful for management and the board, the additional cost of reporting it externally is a relatively incremental one.”
[COMMENTARY]Professor Robert Eccles opf Harvard and Oxford fame presents insightful information on this important subject.
The Benefits And Costs Of Climate-Related Disclosure Activities For Companies And Investors, by Robert G. Eccles, Tenured Harvard Business School professor, now at Oxford University, May 18, 2022, Forbes, USA.
————————————————————-
Lies, damn lies and diluted ESG metrics. “Fund managers talk toNicholas Prattabout the dangers of ESG metrics that boil complex risks down to a single number.”
[COMMENTARY]The lesson here is to understand the numbers before using them. If you don’t understand them, don’t use them.
Lies, damn lies and diluted ESG metrics, fund managers, May Edition, Funds Europe, UK.
————————————————————-
$100bn Assets Divestment By Oil Majors Sparks Environmental Concerns. “However, they frequently sell to buyers that disclose little about their operations, have made few or no pledges to combat climate change, and are committed to ramping up fossil fuel production.
A new study, however, warned of expected large environmental pollution with such uncoordinated efforts.”
[COMMENTARY]Is it possible for governments to regulate the conditions under which polluting assets can be sold?
$100bn Assets Divestment By Oil Majors Sparks Environmental Concerns, editor, May 12, 2022, Marine & Petroleum, Nigeria.
————————————————————-
Taking companies to court over climate change: who is being targeted? “Catherine Higham and Honor Kerry analyse climate cases filed in 2021 against companies in different sectors and consider what the future holds. They find that that while fossil fuel companies remain a primary target of activist litigation, climate litigants are now casting their net more broadly.”
[COMMENTARY]How far could this go? As case law and regulation in this area build, can it become a strong influence on companies (and governments) to become more sustainable and climate-friendly?
Taking companies to court over climate change: who is being targeted? By Catherine Higham and Honor Kerry, May 3, 2022, London School of Economics, UK.
————————————————————-
University of Guelph study finds sustainability practices good for business in times of crisis. “A University of Guelph study found companies prioritizing sustainability in their business practices are better off in times of crisis and have economic growth.”
[COMMENTARY]This study throws a different light on some understandings concerning ESG in difficult economic times. For instance, the researchers found that ‘low’ ESG companies did better than ‘high’ ESG companies in the 2008/9 financial crises. However, it reversed during the recent pandemic!
University of Guelph study finds sustainability practices good for business in times of crisis, by Guelph Today staff, May 1, 2022, Guelph Today, Canada.
————————————————————-
Measuring health impacts could expand ESG metrics. “What has not been explicitly recognised is the impact of the private sector on human health. The fact that companies’ activities, services and products affect human health is not disputed. These include not only direct effects such as respiratory diseases in coal miners, but also indirect ones such as obesity-driven illnesses caused by excess consumption of sugar through fizzy drinks and processed foods marketed by consumer goods companies.
Initiatives such as the sugar tax recognise that private sector activities have a significant influence on health outcomes and, as such, the private sector can be nudged towards behaviour that leads to more positive health outcomes.”
[COMMENTARY]Some great points are made here. One is why should companies be allowed to make large profits while sickening the public and entities such as governments left to pay for the ill health created? Surely, companies should contribute to those costs in a meaningful way.
Arguments against such a policy include where do you draw the line as to what sickens the public, what the costs are, and who bears them?
Some sort of ESG score concerning product/service health effects could be useful!
Measuring health impacts could expand ESG metrics, by Joseph Mariathasan, May issue, IPE Magazine, UK.
————————————————————-
We’ve Opened the Door Too Wide for Oil and Gas Companies. “Under the fog of war and anxiety about the midterm elections, the White House is poised to hand over generous amounts of public money to ahighly profitable energy industry— support that could lock in additional emissions for decades to come.”
[COMMENTARY]I believe energy prices should be largely left to the free market with support provided only to means-tested low-income groups. That way fossil-fuel prices can rise to a point where there’s significant demand destruction and hence less need to support fossil fuel expansion.
We’ve Opened the Door Too Wide for Oil and Gas Companies, by Kate Aronoff, April 29, 2022, The New York Times, USA.
————————————————————-
ESG Ratings: Solution or Starting Point? “In our view, there’s no substitute for integrating consideration of ESG factors into fundamental security analysis. Rather than outsource ESG assessments to third-party providers, investors and analysts must conduct in-depth, hands-on research and engage actively with issuers. That approach enables investors to achieve real insight into a business and its activities, and to get a proper understanding of its future prospects as well as its past.”
[COMMENTARY]Most investors use the ESG raters because of convenience and rating expertise. Ideally, it’s probably best to do all the in-depth ESG research yourself. But what investors or organizations have the time, money, and resources to do that? (However, when I started as an analyst in 1970, that’s exactly what we did!)
ESG Ratings: Solution or Starting Point? By Michelle Dunstan, April 29, 2022, Advisor Perspectives, USA.
————————————————————-
With Too Much Love From Institutional Investors, Companies With High ESG Ratings May be Overvalued. Activists Are Taking Note. “Activists and others are looking for companies with low marks on environmental, social, and governance check lists.”
[COMMENTARY]Some studies suggest greater stock profits can be had with companies who are just getting started with ESG.
With Too Much Love From Institutional Investors, Companies With High ESG Ratings May be Overvalued. Activists Are Taking Note, by Jessica Hamlin, April 22, 2022, Institutional Investor, USA.
————————————————————-
Featured Book
Making Money Moral: How a New Wave of Visionaries Is Linking Purpose and Profit, by Judith Rodin and Saadia Madsbjerg, Wharton School Press 2021.
“Anyone who wants to understand the link between capital markets and progress towards a more sustainable, peaceful, and prosperous world should put this book at the top of their reading list. Through real-life examples and in-depth conversations with experts, Making Money Moral demonstrates the power of bringing together the world of finance and the world of impact.”–Jeff Skoll, Founder and Chairman, Skoll Foundation, Co-Founder, The Rise Fund.
