March 2015

The moral maze: How poor company ethics can cost investors. “The Chartered Institute of Internal Auditors′ study shows that while 91 per cent of the FTSE100 refer in their annual reports to their high standards of business ethics and integrity, only 8 per cent provided a specific metric of their company′s ethical performance.”

[COMMENTARY] Most firms are good at touting their ethical codes and standards, but in reality quite a few don’t live up to them. Furthermore, though the public, regulators, and politicians cry out for improved corporate ethics, evidence suggests that these groups are equally guilty of unethical conduct.

The problem of poor ethics in companies simply reflects the level of ethics in the population generally. Also, studies demonstrate that the richer one is the more likely one is to engage in unethical behaviour. The investment industry is populated with high net worth individuals so it is no accident that there might also be a higher incidence of unethical activities in the industry.

Some of you might be interested to read, How Ethics Benefits Corporate Profits.
The moral maze: How poor company ethics can cost investors, by Joanne Frearson, March 17, 2015, Business Reporter, UK.

Boards Lack Social and Environmental Risk Governance, says expert Dr Raj Aseervatham. “Many boards are heavily populated by experts in finance and law as well as industry experts, and thinly populated with other expertise.. the prevalence of social and environmental skills on boards today is miniscule.”

[COMMENTARY] This is another important article. It explores the state of corporate boards today and how they must change to adequately deal with the rising importance of ESG in their companies today.
Boards Lack Social and Environmental Risk Governance, by Dr Raj Aseervatham, March 30, 2015, TriplePundit, USA.

2015 SHARE Model Proxy Voting Guidelines for institutional investors. “These guidelines have been developed by SHARE as a model for use by Canadian pension funds. The guidelines are written in the first person—“[the fund]”—to make them similar to guidelines that would be adopted by a board of trustees.”

[COMMENTARY] All voting investors might want to look at these guidelines. They’re informative on numerous issues of concern to every stockholder.
2015 SHARE Model Proxy Voting Guidelines, SHARE, March 2015, Canada.

At U.S. Companies, Time to Coax the Directors Into Talking. “Directors at European companies routinely make themselves available for investor discussions; in some countries, such meetings are required. Many directors of foreign companies even — gasp — give shareholders their private email addresses and phone numbers.

Their counterparts in the United States seem fearful of such contact. Large shareholders say that some directors of American companies refuse to meet at all, preferring to let company officials speak for them.”

[COMMENTARY] Not mentioned in this article is that American corporate directors might fear litigation or sanctioning should they disclose corporate information that might not be public. Nonetheless, European companies and their legal system promoting director-investor communication is a good thing. However, I do wonder if with such improved communications, directors might sometimes disclose to ’special’ investors information that might not always be public!
At U.S. Companies, Time to Coax the Directors Into Talking, by Gretchen Morgenson, March 28, 2015, The New York Times, USA.

87% of UK financial advisers asked about ethical investment by clients. “The number of financial advisers who are asked about sustainable, responsible, ethical investment has risen to 87% in 2014 from 73% in 2012. 22% expect their clients to require more advice about ethical investments this year than last. After a slip dip in 2013, the percentage of a financial adviser′s clients asking for sustainable investment has also grown from one in seven (15%) to just under one in five (19%).”

[COMMENTARY] These numbers are clearly positive for ethical investing! However, as just 200 financial advisors responded to the survey there might be a question of its statistical validity. It would be great to see such survey’s in the USA and Canada.
87% of financial advisers asked about ethical investment, by Simon Leadbetter, March 27, 2015, Blue & Green Tomorrow, UK.

New Morgan Stanley Report Challenges Misperceptions Regarding Sustainable Investing and Performance. “Although some investors may believe sustainable investing requires a financial sacrifice, a new report from the Morgan Stanley Institute for Sustainable Investing finds that investing in sustainability has usually met and often exceeded the performance of comparable traditional investments, both on an absolute and risk-adjusted basis, across asset classes and over time.”

[COMMENTARY] Morgan Stanley’s study clearly shows that most investors favour companies that seriously implement sustainability and ESG strategies into their operations. Thus, stock prices for these companies often outperform the general market.
New Morgan Stanley Report Challenges Misperceptions Regarding Sustainable Investing and Performance, press release, March 24, 2015, Morgan Stanley, USA.

Most institutional investors say ESG criteria raise risk-adjusted returns. “Mercer′s March survey into ESG attitudes shows that 57 percent of respondents believe ESG policies boost risk-adjusted returns while 34 percent say they lower their returns and 9 percent say they have no effect. About 20 percent see ESG issues as ‘very important′ to their stakeholders while 49 percent say they are ‘somewhat′ important.”

[COMMENTARY] Mercer’s survey results demonstrate that use of ESG criteria in the investment industry has become mainstream. Its taken a long time, but finally we can say it has happened. Ethical investors can be proud of having brought their values to the forefront of the investing world. It’s encouraging news too in that companies will need to increasingly focus on continually improving their ESG performance to satisfy analysts, stockholders and other stakeholders.

However, as everyone knows, a further intensification of ESG efforts by companies is required if we’re to successfully cope with climate change.
Most institutional investors say ESG criteria raise risk-adjusted returns, by Adam Brown, March 23, 2015, IRMagazine, UK/USA.

State of Green Business Report 2015, by GreenBiz/Trucost. “During 2013 alone, the largest 500 companies in the United States had a natural capital cost equal to 6.2 percent of the national GDP. If businesses had to pay these environmental damage costs, it would more than wipe out their profits.” [Underlining added.]

“There was a sharp increase in the number of companies who have committed to natural capital initiatives… U.S. companies emitted 16 percent less GHGs per dollar of revenue in 2013 than they did in 2009… The use of electricity from renewable sources by major corporations, expressed as a percentage of overall energy use, continues to grow year on year.”

[COMMENTARY] This report by GreenBiz/Trucost is exemplary. Business is becoming more sustainable but the pace to full sustainability is still too slow. And if businesses had to include all their natural capital costs profits would be wiped-out! Thus, at some point — if the data contained in this and other similar reports are to be believed and corporate actions for sustainability are not greatly increased — our consumption-oriented economies will endure major dislocations.

It’s a good time for ethical investors to review their holdings in the light of this reports’ findings.
State of Green Business Report 2015 (for download of report, pdf format), March 18, 2015, GreenBiz/Trucost, USA/UK.

Corporate Sustainability: First Evidence on Materiality (Harvard Business School study.) “We find that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing.

Further, firms with good performance on sustainability issues not classified as material do not underperform firms with poor performance on these same issues, suggesting investments in sustainability issues are at a minimum not value-destroying.

Finally, firms with good performance on material issues and concurrently poor performance on immaterial issues perform the best.”

[COMMENTARY] The results of Harvard’s study are significant! They should further encourage corporate management and investors alike on the importance of companies’ demonstrating good performance on sustainability issues. We’re entering a new era where ESG and sustainability are becoming a core focus of corporate management and investors.
Corporate Sustainability: First Evidence on Materiality, by Mozaffar Khan, George Serafeim, and Aaron Yoon, March 2015, all at Harvard Business School, USA.

Shareholders set to file record number of ESG-related proposals in 2015. “Shareholders had filed 433 resolutions related to ESG issues by the middle of February, compared with 417 in the same period last year, As You Sow says in its annual Proxy Preview report. The number represents a record for that time of year and the organization says the proxy season is on track to meet an overall annual record.”

[COMMENTARY] With the appreciation of ESG factors becoming increasingly mainstream in the financial community, the likelihood for success of ESG related shareholder ESG resolutions is growing. This is good news for ethical investors everywhere.
Shareholders set to file record number of ESG-related proposals in 2015, by Adam Brown, IR Magazine, UK/USA.

IMF to Co-host Ethics in Finance Robin Cosgrove Prize Award Ceremony.The International Monetary Fund will co-host the award ceremony for the 5th edition of the global Ethics in Finance Robin Cosgrove Prize. The Ceremony will take place at the IMF headquarters in Washington, USA, at a special event on the 21st September 2015. Ms. Christine Lagarde, Managing Director of the International Monetary Fund will congratulate the Prize laureates.”

“The global Prize aims to promote greater awareness of the importance of ethics in finance among young people with an interest in accountancy, banking and financial services… The global financial crisis has since shown the relevance of the theme and the significance of the Prize. The Prize for Innovative Ideas for Ethics in Finance is open to young people, aged 35 years or younger, from throughout the world.”

[COMMENTARY] This is a very worthy endeavour and I encourage those under 35 with an interest in this subject to submit their ideas! The fact that Christine Lagarde, IMF’s Managing Director is involved, demonstrates the importance of what the prize is attempting to do. For entering the competition or information on the prize, go to: Ethics in Finance Robin Cosgrove Prize.

Bank of England warns of huge financial risk from fossil fuel investments. “The new warning from one of the world′s key central banks follows a caution from its head Mark Carney that the ’vast majority of [fossil fuel] reserves are unburnable’ if climate change is to be limited to 2C, as pledged by the world′s governments. The bank will deliver a report to government on the financial risk posed by a ’carbon bubble’ later in 2015.”

[COMMENTARY] Could the US Fed ever issue such a warning? Most unlikely. The powerful US oil lobby wouldn’t allow it. Though ’oilmen’ don’t elect the Fed governors — many of those banks are massively tied to oil interests. So, bravo to the Bank of England for calling a spade a spade!

One of the biggest political issues in coming years will be whether the public clamour for stricter environmental regulations (ask any youngster how they feel on that subject) will succeed against the backdrop of huge financial losses in insurance, pension, and other portfolios.

If shareholder proposals to re-orient fossil fuel companies to renewable fuels are successful, some of the eventual losses on fossil fuel assets could be mitigated. However, ethical funds and managers who own fossil fuel investments so that they might engage with those companies will need to be nimble so they aren’t caught on the wrong side with those investments when the hammer of regulation comes down.
Bank of England warns of huge financial risk from fossil fuel investments, by Damian Carrington, The Guardian, March 3, 2015, UK.

Ethisphere Announces the 2015 World′s Most Ethical Companies. “The Ethisphere Institute, the global leader in defining and advancing the standards of ethical business practices, today announced the 2015 World′s Most Ethical Companies®. The latest list includes 132 companies representing more than 50 industries spanning 21 countries and five continents.”

[COMMENTARY] This is always a good list to peruse. Ethical investors might want to review their scoring and methodology. No one methodology captures everything, but Ethisphere’s is pretty good.
Ethisphere Announces the 2015 World′s Most Ethical Companies, press release by BusinessWire, March 9, 2015, CNBC, USA.

Canadian Mining Company Social Star in Cambodia. “For the Canadian mining and exploration company operating in Eastern Cambodia, corporate social responsibility (CSR) comes before the first hole is drilled in the ground—and not just in the corporate presentation.”

[COMMENTARY] Mining companies have a terrible image when it comes to operating in the developing world. However, it’s great to see that some mining companies are doing it right. Many ethical investors will never invest in mining companies. I can understand this. However, they might want to ask themselves where the steel will come from to satisfy China’s need for 20 million new cars each year. Recycling will only go so far.

Incidentally, MacCormick IMC, a Vancouver company, in 2013 published a social responsibility index of junior mining companies (generally gold and silver producers) listed on the Vancouver Stock Exchange. (Of course most of the big miners are already covered by the various SRI rating’s groups.)
Canadian Mining Company Social Star in Cambodia, by Valentin Schmid, March 6, 2015, Epoch Times, USA.

Global impact assets expected to hit $12.7 billion for 2014. “Global impact investing — investments designed to generate a social or environmental impact as well as often targeting a competitive investment return — were expected to grow to $12.7 billion last year, up 20% from the previous year, according to a report released Thursday by Global Impact Investing Network.”

[COMMENTARY] Impact investing is a wonderful marriage of promoting the social good while those investors providing the funds for such activities receive, potentially, decent returns. This is an area that many of the largest foundations on earth are targeting. Among them are — from this article — “the $32.4 billion Bill & Melinda Gates Foundation, $10.2 billion Ford Foundation, $4 billion Rockefeller Foundation, TIAA-CREF, J.P. Morgan Chase & Co., Prudential Financial, Morgan Stanley (MS) and UBS.”
Global impact assets expected to hit $12.7 billion for 2014, by Barry B. Burr, March 5, 2015, Pensions & Investments, USA.

Islamic Finance: Scholar Ethics Rule Pushed Globally by Malaysia. “Malaysia is pushing for its one-year old rules overseeing Islamic scholars to be implemented globally in a push for more rigid governance… Islamic finance institutions require rulings from scholars, known as fatwa, before they can sell securities or funds in an industry that Ernst & Young LLP projects will double to $3.4 trillion in assets by 2018. Ensuring that consistent standards are adopted would require coordination between the key markets of Asia and the Middle East along with effective sanctions to ensure compliance.”

[COMMENTARY] This is a huge issue as Islamic finance makes big strides in western capital markets. For many western bankers and fund managers, the scholars who must give their determination as to whether a particular investment, fund, etc., meets Islamic-shariah standards, is concerning. Some western interests have purportedly linked a few of these scholars to radical Islamic groups. Having a universal ethics and professional standards code will help alleviate such concerns and assist in the development of Islamic finance globally.
Scholar Ethics Rule Pushed Globally by Malaysia: Islamic Finance, by Y-Sing Liau, March 2, 2015, Bloomberg, Malaysia.

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