December 2011

UK Markets Value Corporate Social Responsibility. – [COMMENTARY] “In this paper, using corporate social responsibility (CSR) measures constructed from EIRIS data and mapped onto Environment, Employee and Community dimensions, as well as a Composite indicator, we show that all two out of the three dimensions of CSR, together with the Composite measure, are positively valued by markets… Overall, our results are consistent with CSR engagement enhancing shareholder value.”

This study is further confirmation that companies that score highly on CSR engagement (and incorporating it), perform better financially and in financial markets.
Do Markets Value Corporate Social Responsibility in the United Kingdom? By Graham Buckingham, Alan Gregory, and Julie M. Whittaker, December 2011, University of Exeter, UK.

Socio-Psychological Motives Of Socially Responsible Investors–A New Harvard Study. – [COMMENTARY] “In the aftermath of the 2008/09 World Financial Crisis, SRI is an idea whose time has come. Socially conscientious asset allocation styles add to expected yield and volatility… The pursuit of crisis-robust and sustainable financial markets through strengthened Financial Social Responsibility targets at creating lasting societal value for this generation and the following.” It is great to see researchers getting around to this type of study.
Socio-Psychological Motives of Socially Responsible Investors, by Julia M. Puaschunder, December 30, 2011, Harvard University, USA.

Harrington Investments Files Resolutions With Citigroup, Bank of America, and JP Morgan Chase, To Stop Indemnifying Directors Against Civil & Criminal Charges. – [COMMENTARY] “’The next time one of these banks commits a crime, their directors would not automatically have their defense paid for with shareholder funds… It is the fiduciary responsibility of corporate directors to ensure that publicly traded corporations have adequate oversight and legal compliance measures in place. Failure to do so is negligence and should be considered criminal neglect,’ said John Harrington, President/CEO of Harrington Investments.”

Harrington is right. If directors were not so wholly indemnified, those that take on such directorships would no doubt ensure that unbridled speculation which can take them and their firms down, would end. It is the freedom from adverse repercussions on their speculative activities and wrongdoings that has given directors, managements, traders, etc., the motivation to take imprudent financial risks.

Unfortunately, I fear that until the next financial crisis comes along–which may well be far worse than that of 2008–not much will change.
Portfolio Manager′s Message to Citigroup, Bank of America, & JP Morgan: “Stop Protecting Director Misconduct.” December 28, 2011, Harington Investments, Inc., USA.

Most UK Investors Interested In Discussing Ethical Investments With Advisors. – [COMMENTARY] “Research from Ecclesiastical Investment Management has found investors would consider ethical investments with the right education and advice. Over six in 10 of the non-ethical investors said they would be more likely to consider ethical investments if their IFA discussed it with them. The research also showed 24 per cent of investors would buy ethical products for health reasons and 29 per cent would buy for the ‘feel good′ factor.”

It is the same story in every country: most investment advisors unwilling to discuss ethical investments with their clients. These advisors fail their most important rule, ’know thy client!’
Interest in ethical investment on the rise, by Sarah Marquer, December 22, 2011, FT Advisor, UK.

IT Industry Generally Poor On Sustainability & Social Policies, Says Oekom Research AG. – [COMMENTARY] “With the exception of Ricoh, Intel and Motorola Mobility, the IT industry earns dismal grades when it comes to sustainability and social practices, averaging about a D+, Oekom Research AG says in a new report.” These are some findings green-ethical investors might want to pay attention to.
IT Industry Gets a D+ for Green Policy, Labor Practices, by Leslie Guevarra, December 19, 2011, GreenBiz, USA.

Church Of England Bans Investing In Payday Loan Companies. – [COMMENTARY] “Now the Church of England, which has investments worth over £8bn, has decided to extend its ban on investing in doorstep lending to cover the booming online payday loan industry. A Church spokesman said: ’The policy draws on Christian theology on the need for the greatest care to ensure that lending to poorer members of society is not exploitative.’” Unfortunately, the growth of these lenders is a sign of the times. Many ethical investors might want to review their mutual fund portfolios and see if such lenders appear in those portfolios.
Church of England ban on payday investments, by Nick Summerland, December 19, 2011,, UK.

Over 75% Of CFAs See No Prospect Of Improved Market Ethics In 2012. – [COMMENTARY] “The CFAs also trained their negativity on the securities industry itself. More than three-quarters of respondents said there was no prospect of improved integrity in the markets in 2012 despite efforts to tighten regulation and ward off abuses such as those that contributed to the financial crisis in 2007-08. And the worry that financial advisers are mis-selling products has become the most-cited ethical concern, unseating opaque derivatives markets as the top ethical issue facing global markets.”

These are troubling findings of the CFAs survey. As you know, markets need confidence to move higher. Until the ethical conduct of market participants improves, markets are unlikely to attract much new investment.
Financial Analysts Dim on 2012, Survey Shows, by Brendan Conway, December 15, 2011, Wall Street Journal, USA.

76% Of UK Investors Say Financial Advisors Never Mention Ethical Investments. – [COMMENTARY] “The research findings indicate that there is disparity between consumers who like the idea of SRI but don′t know enough about it. Independent Financial Advisors (IFAs) are assuming lack of interest in SRI and so they are not providing information or gathering knowledge about this very high growth investment arena.”

This is perhaps the one reason why generally throughout the developed world only about 2-4% of total mutual funds or unit trusts sold at the retail level are in identifiable ethical investments. It is clear that advisors are breaking what I argue should be their most important rule: to ’KNOW THEIR CLIENTS.’
IFAs are Ignoring Ethical Investing, December 15, 2011, The Investor Review, UK.

Dow Jones Indexes Named ’Best Islamic Index Provider’ By Islamic Finance News For Fifth Consecutive Year. – [COMMENTARY] “The Dow Jones Islamic Market Indexes were the first gauges intended to measure the global universe of investable equities that pass screens for Shari’ah compliance. With hundreds of indexes, the series is the industry’s most comprehensive family of Islamic market measures and includes regional, country, and industry indexes, all of which are subsets of the Dow Jones Islamic Market Index. An independent Shari’ah Supervisory Board counsels Dow Jones Indexes on matters related to the compliance of index-eligible companies.”

Congratulations to Dow Jones. As Islamic finance grows, it’s important to have quality measures of that growth. Such measures also inspire confidence in the products measured. I believe that some aspects of Islamic finance, such as avoidance of non-asset based speculation and the use of ethical-spiritual oversight boards, might be incorporated in some future conventional finance products.
Dow Jones Indexes Named ’Best Islamic Index Provider’ by Islamic Finance News for Fifth Consecutive Year, press release, December 15, 2011, Dow Jones, UK.

America Lags On ESG. ’Legal & Fiduciary Red Herrings’ Blamed. – [COMMENTARY] “’There′s no question in my mind that Northern Europe has got sustainable investing in its sights,’ Roger Urwin, global head of investment content for consultancy firm Towers Watson, told attendees of the ESG USA 2011 conference in New York on Tuesday. Australia and the UK look to be next to jump on the ESG bandwagon, but there are ’big and very ugly roadblocks in the US’ to sustainable investing, he said.”

I take a different slant. In the US, the degree of scepticism about human induced climate change is much greater than it is in Europe. Just look at what the Republican presidential hopefuls say on this issue! Thus, such attitudes influence American’s beliefs of the relevance of ESG issues.

Meanwhile, we all know that companies who lead in responding most effectively to ESG issues are generally ’best of sector,’ both financially and in comparative stock performance.
US lagging on ESG due to legal, fiduciary red herrings, by Gloria Gonzalez, December 15, 2011, Environmental Finance, UK.

US Wind Investment To Fall Two-Thirds If Production Tax Credit Not Extended, Says The American Wind Energy Association (AWEA). – [COMMENTARY] “Investment in the US wind sector will drop by nearly two-thirds to $5.5 billion in 2013 if the production tax credit (PTC) for wind projects is not extended, according to a Navigant Consulting study. Annual installations would fall to 2GW in 2013, down from more than 8GW in 2012… Jobs supported by the wind industry would decline from 78,000 in 2012 to 41,000 in 2013, the study found.”

I believe that all preferential tax credits and deductions given to energy in all its forms should be eliminated. Oil/gas/ethanol/nuclear producers receive mammoth market distorting government tax and indirect subsidies. With Bloomberg and others reporting that wind is close to parity to gas in kWh electrical generating costs in many geographic areas, wind and other renewables would get an enormous boost.
US wind investment to fall $10 billion in 2013 without PTC, by Gloria Gonzalez, December 13, 2011, Environmental Finance, UK.

Impact Investing Gaining Traction Says J.P. Morgan & Global Impact Investing Network (GIIN). – [COMMENTARY] “The report finds that the majority of the 52 surveyed impact investors have tempered optimism about the impact investing industry: they believe it is ’in its infancy and growing.’ The investors plan to invest almost USD 4 billion over the next year, and most expect that 5-10 percent of overall portfolios will be allocated to impact investments in ten years.”

Impact investing aims to solve social and environmental problems while generating profits to investors. Though presently small, it’s an area that will be of increasing interest to ethical investors–and governments. For governments, it might offer them a way of improving social and environmental conditions without the use of governments’ funds. That is increasingly attractive to them in today’s era of deficit cutting.
Insight into the Impact Investment Market, press release, December 14, 2011, J.P. Morgan and the Global Impact Investing Network (GIIN), USA.
Investment Group With $130 Bn In Assets Urges Fracking Companies To Be More Responsible. – [COMMENTARY] “Companies such as Exxon Mobil Corp. should identify the chemicals used and consume less water in fracturing to free gas trapped in rock, according to a report released today from the Investor Environmental Health Network and the Interfaith Center on Corporate Responsibility.”

The EPA released a report on December 8 showing chemicals used in fracking were found in a drinking water aquifer in west-central Wyoming. This article states that one-third of US natural gas production now comes from fracking. Many responsible investors and funds invest in companies engaged in fracking. They just might want to review those investments.
Investors Press Natural-Gas Drillers to Cut Fracking Risks, by Jim Efstathiou Jr., December 13, 2011, Bloomberg, USA.

UK Firms Lacking In Ethical Performance Measures. – [COMMENTARY] “A study conducted by the Chartered Institute of Internal Auditors showed that 91 per cent of FTSE 100 firms referred to business ethics and integrity in their annual statements, yet only 8 per cent provided a specific metric of their company′s ethical performance.”

Clearly, if there are no measures of ethical performance, companies are not taking ethics seriously. This problem is universal. It is gratifying that the UK Chartered Institute of Internal Auditors has conducted this study and illuminated a major problem in the way ethics are probably promoted in most large companies.
Firms keep investors in dark about ethics, by Ellie Duncan, December 12, 2011, WhatInvestment, UK.

Mexican Stock Exchange Launches Sustainability Index. – [COMMENTARY] “BMV’s new sustainability index is based on the 70 most liquid shares on the Mexican Stock Exchange. Companies eligible for inclusion on the index are assessed according to their performance, impact and responses to emerging environmental, social and governance (ESG) issues. These include climate change, human rights and policies and systems to counter bribery. BMV selected EIRIS, and its local research partner in Mexico, Ecovalores, as lead partners to develop the methodology and assessment framework behind the new sustainability index.” We may soon have more countries with sustainable stock indexes than those that don’t.
Mexico launches sustainability index with EIRIS research, press release, December 8, 2011, EIRIS, UK.

Unilever, AstraZeneca, Nike & Siemens, Are Tops In Climate Counts Ratings. – [COMMENTARY] “Unilever knocked Nike from its three-year reign as the top-scoring firm in the annual Climate Counts assessment of major consumer brands and their work toward corporate climate responsibility.” What’s encouraging, says Climate Counts, is the continuing improvement in scores and the number of participating companies.
Unilever Climbs to No. 1 in Climate Counts Ratings, by Leslie Guevarra, December 7, 2011, GreenBiz, USA.

Norway’s Giant Fund Bans Investments In FMC & Potash Corp. – [COMMENTARY] “The $558 billion fund will no longer invest in chemical and chemicals firm FMC Corporation and fertiliser maker Potash Corporation because it says they buy phosphate from Western Sahara, which it deemed a ’particularly serious violation of fundamental ethical norms’”. Norway’s giant fund is one of the few sovereign wealth funds with scruples.
UPDATE 2-Norway oil fund slams firms on ethics, governance, by Balazs Koranyi and Gwladys Fouche, December 6, 2011, Reuters, Norway.

Canadian Islamic Mortgage Lender’s Bankruptcy Might Hamper Progress Of North American Islamic Finance. – [COMMENTARY] “The insolvency of an Islamic mortgage lender in Canada may hinder the growth of sharia-compliant finance in North America, where the industry has struggled to gain traction in the absence of a supportive regulatory framework… Since Islam forbids the use of interest, sharia-compliant mortgages rely on a “diminishing musharaka” contract to help Muslims finance homebuying. A lender and a homebuyer share the costs of purchasing a home… When the value of the house is eventually paid off, full title is transferred to the homeowner… But it is unclear who ultimately owns the home in the case of a bankruptcy by the lender…”

Islamic finance globally is well over $1 tn., and growing rapidly. Considering the size and growth of North America’s Islamic population and the interest of many non-Muslims in Islamic finance, Canadian and US laws should become  accommodative to it.
Canada bankruptcy may hurt Islamic finance in North America, by Shaheen Pasha and Cameron French, December 5, 2011, Reuters, Canada.

EIRIS Says Two-Thirds Of South African Listed Companies Fulfil ’Base Requirements’ For Johannesburg’s Stock Exchange’s (JSE) SRI Index. – [COMMENTARY] “The announcement was made in Durban in parallel to the 17th Conference of the Parties on climate change (COP 17). JSE Director of Government and International relations, Geoff Rothschild, commented at the event that ’the JSE recognises climate change as being one of the most significant sustainability challenges facing us at this time.’” The JSE continues to be a world leader in encouraging its listed companies to take sustainability seriously.
South African Listed Companies Make Progress Tackling Climate Change, press release, mondovisione, UK.

Australia’s RIAA Reports Outperformance Of Australian Ethical Funds. – [COMMENTARY] “Responsible investment funds have outperformed their benchmarks in every one of the 12 categories covered in this report – over one, three, five and seven years and across Australian shares, international shares and balanced funds.” Obviously, Australian ethical funds have done something right over the past few years. It seems they’ve even outperformed ethical funds in many other parts of the world too. Congratulations to the Australians!
RIAA′s Responsible Investment Benchmarking Survey, December 5, 2011, RIAA, Australia.

European Asset Owners Diverge On Responsible Investing, Share Concerns About ESG Issues. – [COMMENTARY] “Novethic with the support of BNP Paribas Investment Partners is releasing the results of its second annual survey, ’European Asset Owners′ ESG perceptions and integration practices’. In 2011, more than 250 asset owners across 11 countries were surveyed on the incorporation of Environmental, Social and Governance (ESG) criteria into asset management. Managing a total of EUR 4,540 billion, these investors have gradually integrated the notion of ESG risks, although responsible investment is defined very differently from one country to another.”

It’s interesting to read, country by country, what they believe and how they understand and apply terms such as responsible investing (RI). What can be said though, is that European asset managers are increasingly interested in RI and ESG.
Novethic: European Asset Owners′ Have Diverging Views about Responsible Investment but Share a Growing Interest in Environmental, Social and Governance (ESG) Risks, press release, December 1, 2011, BusinessWire, France.

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