'Corporate Environmental Management and Credit Risk': Moskowitz Prize Study Finds ESG Impact on Debt Costs
Each year, the winner of the Moskowitz Prize for scholarly research of socially responsible investing (SRI) is announced at the “SRI in the Rockies” conference. The 2010 Prize winner is “Corporate Environmental Management and Credit Risk,” by Rob Bauer and Daniel Hann. Their study found that companies with strong environmental records consistently pay lower costs for debt, while firms with weaker records face higher costs of financing and lower credit ratings.
SRI strategies have typically been focused on equity investing, but some believe that environmental, social and governance (ESG) metrics could help investors evaluate credit risk and quality. (See this Dec. 1 article from Citywire of the UK, and these 2009 comments from Ran Fuchs of MSCI.) The Bauer/Hann study appears to confirm the utility of ESG research for fixed-income investment.
Co-authors Bauer (former head of research at Dutch pension fund ABP) and Hann (a PhD candidate at Maastricht University) studied the environmental practices of 582 US firms between 1995 and 2006. Their performance data was drawn from the database of KLD, which is now part of MSCI ESG Research. Along with finding that a company’s environmental performance is associated with its cost of credit, Bauer and Hann also found that this association has grown stronger in recent years – a trend they expect to continue.
Investors Seek More Disclosure by US Chamber of Commerce Members: Secrecy of Trade Groups' Political Spending at Issue
Earlier this month, a coalition of investors filed resolutions at four corporations whose members sit on the Board of the US Chamber of Commerce. The filers called for Accenture, IBM, Pepsi, and Pfizer to “review their policies and oversight of political expenditures, especially through trade associations,” according to a release by coalition member Walden Asset Management.
The Supreme Court’s January 2010 Citizens United decision explicitly permitted unlimited, anonymous political spending by private organizations, including unions and corporations. This decision has already sent waves of undisclosed money through the US political system. In the November elections, out-of-state oil companies spent millions on a California ballot proposition, while the Chamber spent almost $30 million on campaigns nationwide, according to BusinessWeek:
On December 2, MSCI ESG senior analyst Olga Emelianova will present “Green is the New Black,” a webinar on environmental, social and governance (ESG) issues in the global apparel retail sector. While every business faces some universal ESG issues, some concerns are especially relevant to Adidas, The Gap, and their global sector peers.
Global Sustainability Index Fund Wins 'Gold' Mutual Fund Award: Northern Trust's Fund is Based on MSCI ESG World Index
Earlier this month, Northern Trust announced that its Global Sustainability Index Fund (NSRIX), which tracks the MSCI ESG World Index, won the highest award in the first S&P Mutual Fund Excellence Awards Program. Of the 30 “Gold” winners, the NSRIX is the only one focused on ESG, and the only one whose constituents are passively determined by tracking an index.
The MSCI ESG World Index is a market capitalization weighted index of large and mid-cap companies in developed markets - North America, Europe and Asia-Pacific. The index is comprised of companies from the MSCI World Index that rate favorably relative to their sector peers in environmental, social and governance management performance based on analysis generated by MSCI ESG proprietary research.
The MSCI ESG World Index is one of 22 MSCI ESG Indices. Click here for more information.
Earlier this month, the US Social Investment Forum (SIF) released its 2010 Report on Socially Responsible Investing Trends. The Report has been a standard reference for the American SRI market since the first was produced in 1995. (MSCI is one of two lead sponsors of the 2010 Trends Report.)
SRI has grown steadily over that period, and since 2007, its growth has accelerated dramatically. While total US assets under management grew less than 1 percent, sustainable/SRI assets expanded more than 13 percent over the past three years.
Along with other data to support this growth story, the Report also explores themes that deserve wider notice. These include the pivotal role played by institutional investors; the expansion of "positive" environmental, social and governance (ESG) integration methods; and how public policy changes are driving further ESG integration by investors – including those who aren’t explicitly “socially responsible.”
In a November 2 Wall Street Journal article, reporter Carolyn Cui wrote that “math geeks and altruists are forging unlikely alliances in the quest for better investment returns.” “Quants and Do-Gooders Unite” provided recent examples of the integration of environmental, social and governance (ESG) data into mathematical modeling of possible portfolio performance.
ESG factors are conventionally understood as “qualitative” attributes of a given business, rather than as comparative data that could tell investors how that business’s stock may perform. For example, a traditional socially responsible investor (SRI) might seek to avoid holding any companies that produce military weapons. For that investor, the only numbers needed are binary; a company either passes their “no weapons” screen or not.
Over the past 20 years, SRI/ESG research firms have sought to enable more subtle and granular analysis of corporate ESG performance. MSCI ESG Research progenitors Innovest and KLD developed comprehensive frameworks to generate comparative data across a spectrum of ESG indicators, from carbon emissions to executive compensation practices. IVA, Global Socrates, and the KLD Indexes (now MSCI ESG Indices) support both qualitative and quantitative approaches to portfolio construction.
While Ms. Cui’s article highlights the novelty of “math geeks and altruists” working together, such détente isn’t without precedent. In 2005, KLD worked with Barclays Global Investors to create an exchange-traded fund based on what is now called the MSCI KLD 400 Social Index.
The 2010 midterm elections have provided plenty of political theater, and one of the strangest scenes may be West Virginia Governor Joe Manchin firing a rifle at a “cap and trade bill.” An October 27 Boston Globe article explored how Gov. Manchin, a Democrat running for Senate, has positioned himself to the right of his party on many issues. The political logic behind his animus towards climate legislation can be summed up in one word: coal.
Gov. Manchin is a vocal – and, apparently, armed – supporter of the coal industry’s positions on climate change and mountaintop coal removal (MTR). As a Governor, however, he can only do so much, as key parameters of coal mining’s regulatory framework are set by the US government.
MSCI ESG Analyst Sam Block researches the coal industry, and as he explains below, federal regulation of coal mining can change drastically depending on which party is in power. If Republicans retake one or both houses of Congress, they could counter the EPA’s anti-MTR efforts under President Obama. Complicating the issue is that other Federal agencies, as well as the courts, also have a say in how the coal industry is regulated.
China Revises State Secrets Law: State Asks Internet and Phone Firms for More Complicity in Censorship
On October 1, a revised version of China’s State Secrets Law went into effect. Although little reported in the West, the revised law has serious implications for information and communications technology companies operating in China. The update includes an article holding network operators and internet service providers (ISPs) responsible for censoring content and turning violators over to authorities.
China’s definition of “state secrets” continues to encompass citizens’ reporting of government corruption, malfeasance, and labor and environmental abuses. ISPs were already required to hand user data over to authorities if “state secrets” were involved, but now they will be expected to actively search user data for “secret” content. Perhaps in anticipation of the new rules, the Telegraph (UK) reported that state-controlled wireless provider China Mobile had begun monitoring the content of users’ text messages earlier this year.
If publicly-traded firms comply with the new law, will investors be complicit in repression? Human rights observers report that the Chinese government has repeatedly detained ordinary people who pass on “secret” information. Complicating the picture for investors is the fact that some state-controlled Chinese firms, like China Mobile, are also publicly traded.
US Gov't Revising Nutritional Guidelines: Food Industry Marketing a Factor in Rising Childhood Obesity
Every five years, the federal government reviews and adjusts its dietary recommendations for Americans. The latest revisions, which will be released in December, are being developed amidst alarm over childhood obesity rates. Children in the US and other nations are heavier than ever, and public health experts are asking why.
One suspected culprit is the packaged food industry, because of the kinds of products that it markets directly to children. Recent industry initiatives, while welcome, haven’t done enough to get empty calories out of the American childhood diet.
'Our Judgments are Shaped by Facts and Experience' MSCI ESG Analyst Sharon Squillace on the Newsweek Green Rankings
The current issue of Newsweek presents the 2010 Green Rankings of the 500 largest US companies, and the 100 largest companies worldwide. This is the second annual Green Rankings, and like last year, MSCI ESG Research was a core provider of research and analysis for the project. Joel Makower at Greenbiz.com writes that the Green Rankings have “become a major metric in corporate America.” He describes how, in a recent meeting with 30 corporate sustainability officers, almost all of them knew their firms’ positions on the list.
Mr. Makower also provides some points to keep in mind as we compare one company’s ranking to another’s, and compare this year’s list to last year’s. He explains that the methodology changed somewhat since last year; that the scores are normalized so that a “100” score doesn’t indicate perfection, but rather than a firm has done comparatively better than all others; and that there is some “subjectivity” behind the analysis and rankings of each company.
Sharon Squillace, the MSCI ESG Research Analyst responsible for the Green Rankings project, offered to explain some of the thinking behind the Rankings methodology. She writes that the availability of accurate performance data by researched companies helps temper the “subjectivity” of a firm’s Green Ranking:
Foreclosure Problems Make Investors Wary of Big US Banks: Could ESG Risk Analysis Have Given an Early Warning?
On Monday, the New York Times reported that Bank of America would resume foreclosures in 23 states where such actions had been suspended in recent weeks. The moratorium had been put in place because of concerns over both the foreclosure process and a growing concern about how, in many cases, it was unclear which entity actually held the mortgage notes for the properties in question.
Why end the moratorium now, when such questions are still outstanding? The Times’ Floyd Norris noted that B of A was scheduled to report quarterly earnings on Tuesday, and suggested that the speedy resumption of foreclosures “is likely to be greeted favorably by shareholders.”
But do investors really want to see a perfunctory halt to the review of American mortgage practices? The Financial Times reported Friday that the SEC is beginning an investigation of the mortgage mess, which would indicate that there is a lot that investors and the public still don’t know about this problem. More information and analysis of lending, servicing and securitization practices could help markets properly value bank stocks.
Towards this goal, the MSCI ESG Research team presented an October webinar entitled “A New Normal for Banks: Sustainable Finance After the Crisis.” Click here for a free replay of this webcast.
Oil & Gas Firms Spend Millions on California's 'Prop 23': 80 Percent of S&P 500 Don't Disclose Political Spending
When a business faces new regulations, is shareholder capital best spent on complying with the rules, or on lobbying to overturn them? How companies answer this question will be of growing concern for investors in coming years.
On Wednesday, the Los Angeles Times reported on a shareholder campaign targeting three large oil and gas companies for their spending on an effort to overturn California’s greenhouse gas (GHG) regulations. The ballot initiative, called “Proposition 23,” would delay or prevent implementation of the 2006 Global Warming Solutions Act, known as “AB32.”
The fight over Prop 23 highlights two related issues. First, corporations’ political spending – now explicitly protected speech after the Supreme Court's 2010 Citizens United ruling – could give them more influence over laws and regulations that involve their businesses. And second, the oil and gas sector is only the first whose competitive landscape could be redrawn by GHG restrictions, such as the low-carbon fuel standards of AB32.
MSCI Signs on to UN Principles for Responsible Investment: In Post-Crisis World, PRI Growth Accelerates
This morning, MSCI announced that it has become a signatory to the United Nations Principles for Responsible Investment (PRI). The text of this announcement is presented below.
The global financial crisis hasn't stifled institutional interest in responsible investing. In fact, as reported by Investments & Pensions Europe, the number of PRI signatories has jumped 30% since July of 2009. The 800-plus firms signing on to the PRI include asset owners, investment managers, and service providers like MSCI. Owners and managers who are PRI signatories are responsible for more than $22 trillion of combined assets under management.
Forty-eight years ago this week, President Kennedy summoned Americans to put a man on the moon. Today we need a new Apollo project to re-launch our economy and protect our planet.
This 21st century race features the United States against a new rival, China, which recently surpassed Japan as the world’s second-largest economy and the U.S. as the world’s largest carbon emitter. Both countries face a common adversary in global warming, which shows no respect for politics or international borders.
Continue reading In the Spirit of Apollo, We Need an "Earth Shot" for Climate Change
On August 23, the Wall Street Journal published an editorial by Dr. Aneel Karnani that questioned the value of corporate social responsibility (CSR). His argument was directed against “pleas” and “appeals” for executives to “act voluntarily in the public interest and against shareholder interests.” He called CSR “irrelevant or ineffective,” an “illusion, potentially a dangerous one.” A reader unfamiliar with the term might surmise that CSR is actually a dangerous chemical, like DDT.
The socially responsible investing (SRI) community, as expected, took issue with Dr. Karnani’s column. Social Investment Forum (SIF) CEO Lisa Woll wrote to the Journal, countering the polemic with real-world evidence about the positive impact of corporate sustainability efforts. (With permission from SIF, Ms. Woll’s letter is printed in full at the bottom of this article.)
Besides its empirical shortcomings, Dr. Karnani’s case also betrays a methodological flaw that is both common, and instructive: While we can tell what he takes issue with, it’s never quite clear who he’s talking about. Here is the plainest statement of his thesis about corporate social responsibility:
Since the 2009 acquisition of KLD by RiskMetrics – and the subsequent 2010 sale of RMG to MSCI – we KLD alums have fielded many questions about the future of our legacy businesses.
I’m happy to report that MSCI has made a concrete commitment to the ESG index business. Below is the text from this week’s announcement introducing MSCI ESG Indices. This also includes a table of the Indices’ new names.
If you’d like to learn more about the 20-year history of the KLD index business – the first of its kind in the world – take a look here: http://www.kld.com/about/20years/
Also see these ESG Insight articles on this topic:
Continue reading MSCI ESG Indices: Building on 20-year Track Record of KLD
“Separate doctors from industry”: So read the headline of an Aug. 16 op-ed in the Boston Globe. Few realize the headline could have appeared 180 years ago.
[See bottom of this article for links to other ESG Insight articles on the health care sector. – Ed.]
Continue reading Separating Doctors from Industry: Re-Engaging in an Ancient Struggle
On August 24, the New York Times celebrated the huge progress made over the past 30 years on acid rain.
In an editorial, the Times noted regulatory action taken since 1990 has led to reduced toxicity in Adirondack lakes and forests, and they have rebounded. It called for further action, preferably legislative, to improve on these gains.
It’s worth recalling what a hot-button issue this was amongst eastern environmentalists 30 to 40 years ago, and drawing lessons from it for today.
Beware of Simple Numbers Describing Complex Ideas: A Response to Stephen Budiansky in NYT on Locavores' 'Misleading' Statistics
Stephen Budiansky has published a New York Times op-ed critical of locavores’ math. He asserts that statistics showing that locally-grown food is always the most sustainable choice “are always selective, usually misleading and often bogus.”
The fuel usage numbers cited to justify the virtue of eating locally are unsupported, concocted, in Budiansky’s view. He concludes:
Eating locally grown produce is a fine thing in many ways. But it is not an end in itself, nor is it a virtue in itself. The relative pittance of our energy budget that we spend on modern farming is one of the wisest energy investments we can make, when we honestly look at what it returns to our land, our economy, our environment and our well-being.
After ten days of escalating public debate in which the Saudi Arabian government threatened to ban BlackBerry services because of security concerns, the Kingdom relented on August 9. Other governments have also expressed concern over BlackBerry’s stringent data encryption, including the United Arab Emirates, Algeria, Kuwait, Indonesia, India and Lebanon. The UAE has announced a ban on BlackBerry services as of October 11, and India has threatened to suspend all services unless Indian authorities get access to encrypted communications by August 31.
Some governments believe that access to private communications is a necessary security measure. Critics maintain that Saudi Arabia and the UAE are at least partly motivated by a desire to limit freedom of expression and strengthen their already strict policing of the internet for political content.
This is the latest in a series of “tense standoffs” between governments and private corporations over questions of individual rights and national security, as described by a July 2010 ESG Insight article. Such conflicts include Google’s faceoff with China over questions of internet censorship and Nokia Siemens Networks’ provision of “lawful intercept” capabilities to Iran, which allegedly allowed authorities to monitor and censor internet traffic during the disputed June 2010 elections.
Saudis, Others Want the Same Access as US, Canada
Along with questions about whether Western companies should provide surveillance capabilities to undemocratic regimes, these disputes also highlight a possible double standard. Nations like the US and Canada, home of BlackBerry maker Research in Motion (RIM), are largely understood to have access to personal internet traffic. The US has an advantage in that many encrypted email services such as Gmail and Yahoo have servers on US territory, rendering them subject to court-ordered disclosure.
“Economic reality confounds economic theory,” said Union Theological Seminary (Richmond) Prof. Mark Valeri to the Boston Globe. The Globe interviewed him Aug. 1st about his new book, Heavenly Merchandize: How Religion Shaped Commerce in Puritan America.
For 250 years, scholars have argued about which drove the rise of capitalism: religious transformation – the Reformation and its offshoots – or economic change?
Continue reading 'Heavenly Merchandize': New Book on How Puritans Became Capitalists
Answering SRI Skeptics, in Germany and Beyond: Some Research on Historical Returns, Plus New Standardized ESG Metrics
Trend stories are a staple of the news media, and two articles this past weekend explored the prospects for socially responsible investing (SRI). What’s interesting is that one story (in the Boston Globe) found that SRI’s trend line points up, while a piece in the Financial Times asked why its growth has stalled. This divergence comes because the Globe considered the US market, where SRI mutual funds have kept growing even as mainstream equity funds shed billions. The FT looked at a lagging market for SRI: Germany.
The FT reporters found “rather typical” explanations for Germans’ lack of interest in environmental, social and governance (ESG) integration. But it should be noted that the ESG community has taken concrete steps towards answering skeptics in Germany, and around the world. These steps include ongoing academic research into the performance impact of ESG integration, and an initiative to develop standardized metrics for comparative evaluation of company performance. MSCI’s ESG team has supported both of these efforts.
Importing Electronics, Exporting E-Waste: Financial, Human Costs of Electronics Disposal Spread Worldwide
An August 1 article describes the unintended consequences of what should be a success story: California’s ambitious e-waste disposal program. By offering cash to firms who collect and dismantle old computers and TVs, the state has also “built a magnet for fraud totaling tens of millions of dollars, including illegal material smuggled in from out of state,” writes Tom Knudson of McClatchy Newspapers.
Despite its problems, the California program has helped keep 840 million pounds of monitors and TVs out of landfills, according to McClatchy’s research. Domestic dismantling of e-waste is an important step towards stopping an ugly global trade in discarded electronics. While shiny new gadgets flow from Asia to customers in the US and Europe, old ones are shipped back to developing nations, where poor people perform the toxic task of stripping minerals from the machines.
From WikiLeaks to the “Facebook spy,” government exposure through new media outlets has made headlines this summer. The Internet’s capacity for spreading information threatens secrecy, and thereby weakens the power of those who hold secrets, whether they’re individuals, companies, or governments.
The tense relations between China and Google, among other foreign firms, have shown how a government’s desire for secrecy and control of its citizens can conflict with its need to participate in the global information economy. In January 2010, the US-based search giant balked at Chinese government demands for Google to censor its google.cn search results. Google had in fact previously complied with such demands, but starting in March, the firm automatically redirected visitors to google.com.hk, its uncensored Hong Kong-based site.
In July, however, the two sides compromised. As reported by CNN, Google will retain its license to operate in China, and Chinese users will retain access to google.com.hk. So what grand bargain resolved what the New York Times called a “tense standoff”? Nothing more than an extra click: Chinese google.cn users must now opt to see uncensored google.com.hk results.
Last week, the Harvard Business Review blog presented some Harvard faculty responses to the newly signed Dodd-Frank financial reform bill. The Business School Professors’ sentiments range from the “cautious optimism” of Robert Steven Kaplan to Robert C. Pozen’s assertion that the act “misses the main cause of the crisis,” which was Fannie Mae/Freddie Mac, in his opinion. And while David A. Moss believes that the bill takes important steps to rein in “too big to fail” banks, Clayton S. Rose says that “little has been done” to defuse the systemic risks of such institutions.
None of the Professors focus on what Joseph Fuller, co-founder of Monitor Group, has called “The Terminator” of modern financial markets: computer-based modeling and trading programs. In a 2009 piece in The American Scholar, Mr. Fuller argues that the work of “quants” worsened the financial crisis. He also describes regulatory steps that could help dampen the volatility produced by automated trading programs.
Neither the Dodd-Frank Act nor Harvard’s Professors assign high importance to quant-driven volatility, but Mr. Fuller’s argument suggests that they should. Automated models drive hair-trigger, lockstep responses to market signals. “The Terminator” has also discouraged the sort of qualitative historical analysis that many investors, including those who consider environmental, social and governance (ESG) factors, believe is the key to long-term value creation.
As BP gets closer, hopefully, to permanently containing the spill at the Macondo well in the Gulf of Mexico, the disaster has raised questions about BP’s future, that of its sector peers, and the prospects for further unconventional oil and gas production.
The Integrated Oil & Gas team of RiskMetrics ESG Analytics, part of MSCI, has considered these issues as part of our recently published annual company and industry reports. (We will present this research in a webcast on September 15th- click here in September to register). This article sums up our perspective on four key questions:
More Shareholders Call for Political, Climate Risk Disclosure: A Post-Season Review of 2010 Environmental and Social Proxy Proposals
During the 2010 US proxy season, shareholder resolutions seeking enhanced disclosure on climate change and sustainability attracted greater approval than in years past. 2010 also saw increased support for proposals that ask companies to report on their political contributions. Another hopeful sign was the withdrawal of an unprecedented number of environmental and social resolutions, as more companies agreed to address such issues before they came to a vote.
Can Stifling Iran's Oil Sector Stop its Nuclear Ambitions? US Admits New Sanctions No 'Silver Bullet'
On July 1, US President Obama signed into law the Iran Sanctions, Accountability, and Divestment Act of 2010 (SADA). The President said the new law’s sanctions were intended to punish Iran for its ongoing uranium enrichment program, according to Reuters. Still, White House spokesman Robert Gibbs said that sanctions were not a “silver bullet.” By setting out to weaken Iran’s oil sector, SADA could have perverse consequences, depending on how the Iranian regime responds to potential future energy shortages.
Two days after drafting my post on Jeffrey Immelt’s observations on American industry, I read Tim Duy’s superb piece on the loss of manufacturing jobs. (Hat tip to Steve Clemons and New America Foundation’s indispensible “Views on the Global Economy: Your Daily Briefing” (July 6, 2010).)
Mr. Duy cites statistics and provides graphs illustrating the problem. His recounting of conventional wisdom on this subject is spot on. His links to a recent exchange between Yves Smith and Rajiv Sethi are also worth following.
But most interestingly, in view of Jeffrey Immelt’s Rome comments, is the three bloggers’ focus on former Intel CEO Andy Grove’s important Bloomberg.com article, “How to Make an American Job Before it's Too Late.” Mr. Duy quotes Rajiv Sethi:
The Financial Times has reported provocative remarks made in Rome last week by General Electric CEO Jeffrey Immelt to a group of Italian executives.
The whole article deserves reading, but I want to focus on one FT quotation of Mr. Immelt: "People are in a really bad mood [in the US]. We are a pathetic exporter . . . we have to become an industrial powerhouse again but you don't do this when government and entrepreneurs are not in synch."
A dispute over oil rigs in Venezuela shows that not all the risks of oil drilling are environmental. On June 24, Reuters reported that the Venezuelan government has seized 11 rigs from Helmerich & Payne, an American drilling services firm. The Texas-based company had stopped production at the rigs and said that Venezuela’s state oil company, PDVSA, owes it about $43 million.
RiskMetrics ESG Analytics Oil & Gas Sector analyst Dana Sasarean says that oil services firms face political and security risks worldwide:
[Ed. Note – The Dodd-Frank financial reform bill could significantly reshape the American economic landscape. Some of its provisions will affect core activities of the socially responsible investing (SRI) community, such as proxy campaigns involving executive pay and corporate environmental, social and governance (ESG) practices.
The Social Investment Forum (SIF), of which RiskMetrics is a member, has coordinated the SRI community’s input on what became the Dodd-Frank bill. SIF Director of Programs (and RiskMetrics alum) Peter DeSimone wrote a succinct summary of Dodd-Frank for the SIF listserv, and he has graciously permitted us to repost his letter here. If you have further questions about the implications of the bill for investors, please contact SIF.]
On June 21, HBO televised Gasland, a documentary about the environmental impact of hydraulic fracturing, an increasingly common method of natural gas extraction. As described previously by ESG Insight, fracturing, or “fracking,” extracts gas from underground rock formations by forcing drilling fluids into the ground at high pressure. Fracking fluid contains toxic chemicals that can contaminate groundwater, and investors have already called for drilling and energy firms to better account for the risks of this practice.
“Thousands of complaints have been lodged with state and federal agencies by people all over the country whose lives and communities have been transformed by fracking operations,” reports Christopher Bateman in an in-depth article in Vanity Fair.
ESG Investing Can Restore the Legitimacy of Financial Markets: Pax World's Joe Keefe Addresses Boston Fed
In recent months, ESG Insight has, unfortunately, had plenty of bad news to write about. From the risks of coal mining to BP's safety practices to conditions in Chinese factories, longstanding environmental, social and governance (ESG) issues have become front-page news.
These crises, in their pathos and urgency, have shifted public attention away from what had been The Crisis: the collapse and tentative recovery of global financial markets. We have considered ESG perspectives on the financial crisis since it first made headlines, in fall of 2008. Some socially responsible investors (SRI) saw signals of trouble before it surfaced, as in the case of subprime lending.
From the ESG perspective, the crisis came from “short-termism” – a confluence of quick trading, information asymmetry and conflicts of interest among market players, and a deceptive diffusion of risk. Risk flowed from subprime “liar loans,” to mortgage-based securities that were speciously rated “AAA,” to seemingly stable investors worldwide. The resulting gusher of paper wealth came suddenly; in retrospect, it’s not surprising that it vanished just as fast.
Perhaps the ESG/SRI perspective can help build a less volatile, more resilient, more realistic global economy. Sustainable and socially responsible investors should ask: If short-termism was so contagious, can a focus on long-term value creation also spread throughout the global economy?
Is Afghanistan's Potential Mineral Wealth Blessing or Curse? Extractives Industry Transparency Initiative Seeks Better Deals for Poor Nations
This week, a New York Times report has added to the discussion of Afghanistan’s fate with a survey of the nation’s potential mineral wealth. As Afghanistan contemplates its possible future as a mining economy, its leaders could learn from other poor – but resource-rich – nations around the world. In too many cases, mineral wealth has done little to improve the well-being of ordinary citizens. Instead, resource extraction has just enabled rent extraction: powerful local interests, including landowners and governments, have tended to cut lopsided deals with foreign customers. Tremendous amounts of wealth may change hands, while most citizens remain poor.
The Extractives Industry Transparency Initiative (EITI), a multi-stakeholder effort to raise standards of disclosure worldwide, has tried to shed light on such unbalanced arrangements. EITI’s eight-year history suggests that Afghanistan faces a difficult journey towards broadly-shared, mining-based prosperity.
'An Unbalanced View of Company Behavior is a Risk for Innovation': A Conversation with Wim Leereveld of the Access to Medicine Foundation
[Ed. Note – On June 21, Access to Medicine Index 2010, which ranks major global pharmaceutical companies on their efforts to increase global access to medicine, will be released to the public. Index 2010 is an initiative of the Access to Medicine Foundation, a Netherlands-based non-profit organization dedicated to improving access to medicines to societies in need. Click here to learn more about the Foundation. UPDATE: The Index 2010 report is available for download here.
The Access to Medicine Index is the brainchild of Wim Leereveld, a Dutch entrepreneur with extensive experience in the global healthcare sector. Supporters of the Access to Medicine Foundation include the Dutch and UK governments, among other charitable organizations and NGOs.
As with the first Access to Medicine Index in 2008, Index 2010 was researched by a dedicated RiskMetrics ESG team, led by Senior Analyst Afshin Mehrpouya. Click here to learn more about Index 2010’s methodology, including the companies, countries, and diseases that Index 2010 considers.
Mr. Leereveld graciously agreed to share some of his thoughts on Access to Medicine with ESG Insight readers. We appreciate his participation, and the efforts of the entire Access to Medicine team.]
Corporations and Communities Compete for Water: Investors Push Business to Reduce Consumption, Improve Access
A recent Economist feature considered the role of business in managing the world’s water supply. Industrial production of goods – from soft drinks to microchips – consumes far more water than agriculture, and competes with other uses in arid climates worldwide.
Water is a human necessity, but is it a human right? If so, should access to water be guaranteed by governments? This question engages the United Nations, and governments in both poor and wealthy nations. There is growing evidence, though, that even without an “official” declaration of water’s special status, businesses will be compelled to help ensure access to water.
The Historical Perspective on BP: ESG Analytics Research on Firm's Labor and Environmental Practices
As part of their coverage of the ongoing Gulf crisis, Forbes and BusinessWeek have each reported on how socially responsible investors (SRI) view BP. Both articles cite sources who mention BP’s positive steps in alternative energy development, among other environmental, social and governance (ESG) initiatives.
The RiskMetrics ESG Analytics team (now part of MSCI) maintains a detailed historical record of the ESG practices of thousands of companies worldwide, including BP. While some investors may have been “vexed” by BP's recent struggles, according to BusinessWeek, our research and evaluations have tracked the firm’s labor safety and environmental issues for years. As described by a previous ESG Insight article, SRI/ESG investors may actually have been more prepared than most for the risks of BP's ESG practices.
In response to client inquiries, we’ve compiled here some of the most relevant RiskMetrics ESG indicators and evaluations regarding BP. Much of this information is proprietary, but we can share a snapshot of our work with ESG Insight readers. [Click here to learn how to gain full access to our data.]
From the Appalachians to the Gulf of Mexico to China, industrial workplaces have dominated headlines in recent months. Globalization has reduced the power of developed-world labor and stretched supply chains around the world. This has complicated workers’ efforts to ensure workplace rights and safety.
Last month, RiskMetrics’ New York office hosted “Labor Organization in a Global Economy,” a Sustainability Practice Network event. This panel discussion explored the role of traditional unions in today’s US economy, along with new approaches to managing and improving the global supply chain.
A 13th employee of electronics-producing giant Foxconn has attempted suicide in 2010, according to the Associated Press. This follows a worker leaping to his death on Wednesday, even as Foxconn’s CEO led a tour of its facility, AP’s William Foreman reports.
While few Americans had probably heard of Foxconn before this recent spate of tragedies, its products are among the most familiar in the world. Apple, Dell, Hewlett-Packard and Sony are among the firms whose electronic devices are built by Foxconn’s more than 700,000 employees. And the firm’s environmental, social and governance (ESG) practices have been studied in detail by labor rights groups and other researchers, including the RiskMetrics ESG Analytics team.
Scrutiny of Chemicals More than Skin-Deep: New ESG Research of Cosmetics and Household Product Firms
While the news is dominated by an oil spill that can be seen from space, other less-visible chemicals have also drawn attention from consumers, regulators and investors. Concerns about the safety of common household products will create both risks and opportunities for their manufacturers, according to a new report from the RiskMetrics ESG Analytics team. We will present the findings of our study of 13 major global firms in a free webcast on May 27 – click here to learn more and register.
Oil Sands 'Like the Gulf Disaster in Slow Motion': New Ceres/RiskMetrics Report on Risks of Extraction
Have we already seen “Peak Oil Sands?”
This is the prospect raised by “Canada’s Oil Sands: Shrinking Window of Opportunity,” a new RiskMetrics ESG Analytics report. Produced for investor coalition Ceres, the study accounts for the present and future costs of extracting usable fuel from the oil sands of Alberta.
While this region is now the site of the world’s largest investment in unconventional oil, research shows that production costs, market shifts and political changes may swallow any future return on that investment.
This provocative conclusion raises serious questions for oil industry shareholders, as the firms they own have sunk $200 billion into oil sands development projects. What does ESG research uncover that the industry doesn’t know? Or rather, what costs are left out of its projections?
If Business is a Horse Race, CEOs are Jockeys: Research Justifies Executive Pay with Data from the Track
A new study from Clemson University compares greyhound racing and Thoroughbred racing and reaches interesting conclusions on (human) compensation schemes. So reports Richard Korman in “Off to the Pay Races” – a real must-read – posted on the Miller-McCune site on May 1.
As carbon-curbing “cap and trade” legislation works its way through Congress, investors are asking how fossil fuel firms will cope with a shifting energy landscape. In April 2010, F. Emil Jacobs, ExxonMobil (XOM) Vice President of Research and Development, told a Sustainable Investment Research Analyst Network (SIRAN) analyst call about his firm’s research into alternative energy sources.
One big initiative is the production of fuel from algae. In 2009, ExxonMobil announced its partnership with Synthetic Genomics Inc (SGI), one of the world’s leading researchers and developers of algae biofuel. This is promising, but in the context of XOM’s other post-petroleum projects, there is reason to doubt that the biggest of Big Oil has truly embraced a new, sustainable ethos.
Under UK Carbon Scheme, 'Green' Firms to Receive Cash from Dirtier Peers: New RiskMetrics Research on Law's Impact on UK Real Estate Sector
How will new carbon-reduction regulations affect the global economy? Those grappling with this question should consider the example of Britain, which implemented sweeping new rules on April 1, 2010. The UK’s Carbon Reduction Commitment Energy Efficiency Scheme (CRC) will directly affect approximately 5,000 organizations, public and private. The CRC aims to reduce carbon emissions produced by large “low energy-intensive” organizations by approximately 1.2 million tons per year by 2020, and to reach an 80% reduction by 2050.
The UK’s real estate investment trusts (REITs) serve as a valuable test case for the impact of CRC. Commercial property currently accounts for 14% of total UK carbon emissions, and as REIT tenants include other large corporations and government agencies, their response to CRC will ripple throughout the UK economy.
The new carbon scheme’s impact on British REITs is the topic of an April 2010 RiskMetrics ESG Analytics Issue Brief. This article summarizes our report’s main findings, our methodology, and some of the implications of the CRC’s “carrot and stick” approach to carbon reduction.
Tuesday evening, the Ceres coalition’s annual conference began in Boston. The group formed in 1989 in response to the Exxon Valdez’s grounding on March 24, 1989. The backdrop to its 2010 conference could not be more dramatic, more urgent.
Continue reading The 2010 Ceres Conference: Oil & Water Will Never Mix
The FTSE KLD 400 Social Index (KLD400) celebrates its 20th anniversary this month. The world’s first benchmark index constructed using environmental, social and governance (ESG) factors, the KLD400 sparked a new era of responsible investing, helping transform the field from a small niche into today’s $6.7 trillion global market. [Source: Eurosif 2007] Since 1990, the KLD400 has outperformed the S&P 500, proving that a portfolio constructed using ESG criteria can, over the long term, deliver competitive risk-adjusted returns.
Dan DiBartolomeo and Lloyd Kurtz, who was one of the original KLD employees apart from the firm's founders, have studied the risk and return characteristics of socially screened portfolios over the past two decades.
Dan and Lloyd spoke to us about the KLD400’s contribution to mainstream investing, how SRI has evolved over the past 20 years, and some of the challenges that remain. [Ed. Note – Biographical info for Dan and Lloyd can be found at the end of this interview.]
As the Gulf of Mexico oil slick continues to spread, the New York Times and others are considering what it will mean for BP, which controls the oil rig that caused the disaster. Reporter Clifford Krauss wrote that, besides the monetary cost of cleanup, the cost of “long-term damage to BP’s reputation…is likely to be far higher.”
Mr. Krauss quotes BP head Tony Hayward asking his executives, “What the hell did we do to deserve this?” But BP’s historical record for employee safety suggests that while no one “deserves” such a tragedy, the firm may have earned its damaged reputation.
In an April 2009 profile of BP, RiskMetrics analyst Yulia Reuter summed up the direct costs of its health, safety and environmental practices:
What does “analytics” mean? When we first began using the word in 2000-2001, we got this question often. It struck me as I read Walter Kiechel’s excellent Harvard Business Review blog post on the state of “strategy” in business thinking that I don’t remember when I last got the question. But as we’re now part of a much larger ESG Analytics team, it is a question well worth answering nonetheless.
Continue reading Musings on the Meaning of 'Analytics'
During this proxy season, the Securities and Exchange Commission (SEC) has been shedding more light on the reasons for its rulings on no-action petitions to exclude shareholder proposals from corporate proxy statements. In many cases, the staff of the SEC's Corporation Finance Division has been including nuggets of information that provide some enlightenment on why the agency made a particular decision.
Before this season, the ruling letters had been limited to largely unadorned comments that companies either must--or need not--include disputed resolutions under specified sections of SEC Rule 14a-8, the shareholder proposal rule. These opaque rulings made it more difficult for proponents to revise their omitted proposals to survive future challenges.
Continue reading 2010 Proxy Season: SEC Reveals its Reasoning on ESG Proposals
At last week’s nuclear security summit, President Obama “issued a specific warning” to the Iranian regime, the New York Times reported. The President is working to secure United Nations Security Council support for new multilateral sanctions and penalties against Iran unless it curtails its nuclear weapons program.
Even if other nations decline to join the President’s effort, the climate for Iranian trade could change markedly. Both houses of Congress have passed bills that will build on the existing Iran Sanctions Act (ISA), which was passed in 1996. State legislatures are also increasing pressure on businesses that trade with Iran. Oil and technology companies have already been affected by these moves, giving a glimpse of possible dislocations to come.
Health Care Reform May Hasten Shift to Part-Time Employment: New RiskMetrics Study of Bill's Impact on Major Retailers
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, which requires that large employers either offer healthcare coverage to their full-time workers, or pay a substantial penalty.
RiskMetrics ESG analyst Linda-Eling Lee has been studying the potential impact of health care reform (HCR) on the consumer retail sector. Ms. Lee has collaborated with RiskMetrics’ Center for Financial Research and Analysis (CFRA) on a series of issue briefs; their most recent report was delivered to clients on April 9.
Employee benefits are a key subject of environmental, social and governance (ESG) research, and this latest study reveals that large retailers’ labor practices will, under HCR, have a significant impact on the bottom line.
Responsible Investor’s Hugh Wheelan has written a comprehensive survey of “the explosive talking point of this year’s corporate proxy season”: a shareholder resolution calling for BP to disclose the assumption behind its proposed $2.8 billion Sunrise development of Canadian oil sands. While 150 investors support the resolution, many big shareholders plan to vote against it at BP’s April 15 annual meeting.
Mr. Wheelan describes this fight as one that pits “environmental risks” against “potential company profit.” This is certainly true, but there is also evidence that BP’s expected profits are based on overly optimistic projections. By demanding more disclosure from BP and its Canadian partner, Husky Energy, shareholders are seeking to protect their investments, as well as the environment.
The first response to the Upper Big Branch (UBB) mine disaster has been, as it should be, a massive effort to help its victims and their families in and around Montcoal, West Virginia. But looking beyond the immediate human tragedy, many are considering the implications of the disaster for UBB owner Massey Energy and the American coal sector as a whole.
The Associated Press and others have reported that, while Massey shares have plummeted in value this week, some of its US competitors have benefited. Some investors believe that these companies will take market share from Massey and avoid the consequences of that firm’s poor safety record.
This conclusion, while understandable, may be mistaken. A review of major Appalachian coal mining firms shows that, compared to their global sector peers, their employee safety practices are subpar. Investors and lenders who are now leery of Massey should consider that its closest competitors may harbor serious risks as well.
So far, proponents have been unable to get a 2010 shareholder campaign going on issues involving "net neutrality"—an umbrella term describing Internet service providers' control over access to the World Wide Web.
As shown by the high-level dispute over Google’s presence in China, corporate media practices can have major diplomatic and economic consequences. Indeed, net neutrality advocates include President Obama and Secretary of State Clinton.
But even as leaders proclaim their support for net neutrality overseas, SEC regulators have declined to allow neutrality-related shareholder proposals in the US. Also, a panel of US Court of Appeals judges has ruled that the FCC overstepped its authority in 2008, when it fined Comcast for slowing Web traffic for some users.
A previous ESG Insight article addressed net neutrality, among other 2010 proxy campaigns; this piece provides more detail on a still-pending proposal from Open MIC, the Open Media and Information Companies Initiative.
According to its mission, Open MIC “seeks to use private sector and capital market mechanisms to influence corporate media management policies.” In addition to net neutrality, the group also seeks greater access to broadband data services and better reporting from media and telecom firms on their security, censorship and information access practices.
Investors should note that the government’s position on net neutrality is far from settled.
The Progressive Era (1895-1920) is the American historical reference point for most looking at issues of corporate accountability. Its name suggests gradual, conservative change. In fact, the Progressive Era saw changes that were anything but gradual across our social and political systems.
To grasp the Progressive Era’s scope, consider Louis Brandeis, the man most lawyers associate with the time.
Continue reading Progress & Quackery: Lessons for Today from the Progressive Era
[Ed. Note: Earlier this month, ESG Insight shared a piece from RiskMetrics analyst Carolyn Mathiasen about environment-related proxy proposals for 2010. Here she continues her survey with an overview of social-issue proxy campaigns. For more information, also see the Proxy Season Resource Center.]
Corporate political contributions, pay disparity, and board diversity are among the top social issues for the 2010 U.S. proxy season. So far, investors have filed more than 200 proposals on social issues, which also include human rights, sexual orientation discrimination, and Internet "neutrality," according to data tracked by RiskMetrics Group's ISS Governance Services. (Investors also have submitted 130 environmental and sustainability proposals this year.) And as the annual meeting season draws near, there have been some interesting withdrawals and omissions.
On March 24, Responsible Investor reported on a new study of how ESG integration affects portfolio risk and returns. Risklab, a unit of Allianz Global Investors, found “a high probability that companies that don’t manage ESG issues will be more volatile,” in the words of RI’s Hugh Wheelan. The Risklab study, “ESG Risk Factors in a Portfolio Context,” explains the motivation behind its methodology:
“Strategic Asset Allocation (SAA) has been described as the most important factor driving long-term portfolio returns. Estimates conclude it accounts for up to 90% of portfolio risks, outweighing market timing and stock selection in importance. Yet…little has been researched on the link between ESG and the risk/return profile of an entire portfolio.”
The Securities and Exchange Commission’s decision to ratchet up corporate disclosure on climate change comes at the right time. The SEC last issued interpretative guidance on environmental disclosure 25 years ago, and the new document comes in time for the 2010 proxy and annual report season.
The Commission took pains to say it was not passing judgment on whether the climate is changing. But it did say companies must meet investors’ demand for carbon emissions and other climate risk data—and that such disclosures may no longer be considered voluntary.
As you may be aware, RiskMetrics Group has entered into a definitive merger agreement to be acquired by MSCI Inc. (Click here to see the joint press release.)
We are writing this message to affirm our continued commitment to the ESG business.
By joining forces with MSCI, we will have more opportunities to expand the reach of ESG investing. MSCI’s market-leading index business, plus Barra’s factor and risk models, will provide platforms for us to strengthen the integration of ESG factors into investment risk management. We are excited about what this merger will mean for the ESG Analytics team, and for all of our clients.
Earlier this month, Green Century Capital Management and As You Sow filed shareholder resolutions calling for utilities to disclose how they will address the risks associated with coal ash. Boston-based Green Century and As You Sow, an advocacy group, believe that the storage and reuse of coal ash could have broad consequences for both the environment and shareholders.
Coal ash made headlines in 2008, when a storage pond operated by the Tennessee Valley Authority (TVA) spilled 5.4 million cubic yards of the ash into nearby waterways. The EPA has indicated that the spill won’t be contained until 2013, and TVA estimated the resulting costs at $231 million through 2009.
In a press release announcing the shareholder resolution, Emily Stone of Green Century (a KLD Index client) said that the TVA spill shows that existing regulations don’t adequately mitigate ash’s environmental and financial risks.
More Risk-Averse US Businesses Headquartered in Regions with More Churches: Research in Miller-McCune Magazine
A broad study of publicly-traded US corporations links the strong presence of churches in corporate headquarters locales with an aversion to financial risk-taking and a focus on slow, steady growth.
Miller-McCune, the invaluable magazine on research, reports in detail on a study by Giles Hilary and Kai Wai Hui of the Hong Kong University of Science & Technology, “The Influence of Corporate Culture on Economic Behavior: Does Religion Matter in Corporate Decision Making in America?” which appeared in the September 2009 edition of the Journal of Financial Economics.
'4.8 Billion People Have Access to Medicine - 2 Billion to Go': A Look at the 2010 Access to Medicine Index
On March 9, The Access to Medicine Foundation released the methodology for this year’s Access to Medicine Index, which will be released this summer. First published in 2008, the Index ranks major pharmaceutical providers on their efforts to help poorer nations fight their deadliest diseases.
Innovest, which is now part of RiskMetrics Group, led the development of the 2008 Index. RiskMetrics Group’s ESG Analytics team has again worked with Access to Medicine to revise and update its Index methodology to incorporate feedback from stakeholders, and also to keep up with changes in the global health situation.
Top ESG Issues for 2010 Proxy Season: Climate Change, Toxics and the Impact of Natural Gas 'Fracking' on the Water Supply
[Ed. Note: In the March 5th issue of Risk & Governance Weekly, RiskMetrics analyst Carolyn Mathiasen surveyed this season’s environment-related proxy proposals. While much of the information in that report is available only to RiskMetrics clients, Carolyn and R&GW Editor Ted Allen graciously agreed to share an edited version with ESG Insight readers. Learn more about the 2010 proxy season at the Proxy Season Resource Center.]
Environmental questions are receiving a lot of attention from shareholders during the spring US proxy season, including 39 resolutions about global climate change. Other prominent shareholder concerns include the impact of hydraulic fracturing, a method of extracting natural gas that may contaminate major US aquifers; the toxicity of common consumer goods; and the quality of corporate reporting on environmental, social and governance (ESG) issues.
Investors should note that the SEC has been generally supportive of 2010 resolutions on these ESG topics, which was not always the case in years past. Also notable is that some companies are resisting an AFL-CIO climate-related resolution because, they argue, it is too broad in its demands.
Responsible Investor has reported that Norway’s sovereign wealth fund is stepping up its engagement with the companies whose shares it owns. In some cases, Norges Bank’s Global Pension Fund will opt for “active ownership” of a company that violates its ethical norms, rather than avoiding the stock entirely. Engagement “might reduce the risk of continued violations of ethical norms better than exclusion, which leaves the fund with no influence once shares are sold,” wrote RI’s Hugh Wheelan.
US disclosure-based regulation ... suffers from two critical failings. First, it lacks coherence in that shareholder rights are presently too weak to compensate for the hands-off regulatory approach. Second, disclosure has been deployed excessively as a regulatory tool, resulting in inundation of information.1
So wrote Simon Wong, managing director at Governance for Owners and Adjunct Professor of Law, Northwestern University School of Law, in the Financial Times on Feb. 28.
Continue reading Too Much Information on Publicly-Traded Corporations?
On February 19, Bloomberg reported that Alcatel-Lucent “agreed to pay $137.4 million and change internal procedures to avoid U.S. prosecution for alleged bribes paid in Costa Rica, Taiwan and Kenya, according to a company regulatory filing.”
This settlement is part of a “serious crackdown” on violators of the US Foreign Corrupt Practices Act (FCPA), says Jan Fetter-Degges, Manager of RiskMetrics Group’s Global Sanctions Service. “Over the past year, the Justice Department has levied unprecedented fines on firms accused of foreign bribery and accounting fraud.”
In response to the U.S. Supreme Court's Citizens United v. Federal Election Commission decision, investors and lawmakers are mobilizing to obtain more disclosure on corporate political spending.
Continue reading Investors, Legislators Respond to Citizens United Ruling
Frequent enough tourist destination cities, like Boston, and you’ll get to know shell games. Players will try to guess which of three shells covers a pea or a stone. Try to take a picture, and you suddenly learn it’s a team con. It’s not just the operator’s flashing hands that tease the mark’s wits.
Reading the four opinions written by the majority in the January 21 US Supreme Court decision in Citizens United v. Federal Election Commission1 brought to mind this team sport. Comment has focused mainly on the majority opinion – and the Court’s decision – written by Justice Kennedy. Three concurring opinions – one each by Chief Justice Roberts, Justice Scalia and Justice Thomas – have attracted less attention than they should.
Continue reading Reading Citizens United v. FEC: The Old Shell Game
ACES will Make Carbon Data Material for Oil & Gas Sector: New Research on Impact of Federal Clean Energy Bill
Most discussion of the impact of proposed clean energy legislation has focused on consumer-facing energy firms, such as major oil companies and electric utilities. The American Clean Energy and Security Act, which has already passed the House, will affect wholesale energy companies, as well. As oil and gas remain integral to the US economy, how this sector’s firms respond to these provisions will have broad implications for consumers and investors.
A generally favorable Reuters story on Mary Schapiro's progress as SEC chair ends on what is, to me, a very sad note:
[Redoubtable Columbia Law Professor John] Coffee said changing the SEC's culture was a little like changing the culture of the Roman Catholic Church. "A new pope can come in, but the curia is still there and the cardinals still have their set traditions."
Continue reading Mary Schapiro and the SEC: Reviving a Culture of Excellence
RiskMetrics Group today announced its sixth annual Global ESG 100. The Global ESG 100 companies are selected from a pool of 2,000 firms in more than 50 countries for their effective management of environmental, social and governance (ESG) risks and opportunities.
This year's list welcomed 35 companies, 20 of which have never been listed, including Sharp Corporation, which has strengthened its environmental performance and ramped up solar cell production. Other newcomers included Safeway Inc., Discovery Communications Inc., Abertis Infraestructuras, Danske Bank A/S, and Osaka Gas Company.
Most comments on the January 21 US Supreme Court decision in Citizens United v. Federal Election Commission (1) have focused on the effects of direct contributions by corporations to candidates. Are such contributions invitations to corruption, or exercises of protected speech by persons associated in corporations?
But for those concerned about corporate governance or corporate accountability in any of its forms, Citizens United has a context and implications that go well beyond elections and freedom of speech. These challenge fundamentally the notion of corporate social responsibility (CSR) and socially responsible investing (SRI).
In this post and some that will follow, I want to explore how Citizens United affects what proponents of CSR and SRI have advocated.
Continue reading Citizens United v. FEC: Changing the Corporate Social Contract
Last weekend, Haitian microlender Fonkoze served its customers in a manner worthy of a James Bond movie. While Haiti's commercial banks remained closed after the January 12 earthquake, Fonkoze reopened 34 of its 42 branches, disbursing both deposited funds and remittances from abroad. Last week, to ensure a steady supply of currency in Haiti, Fonkoze transferred $2 million in cash from its US account to a Florida Air Force Base.
On Saturday morning, after a C-17 cargo plane brought the money to Port-au-Prince, helicopters delivered it – hidden in office supply boxes – to ten drop points, from which Fonkoze employees restocked their branch locations.
Tuesday night, Louis Auchincloss died at 92. Widely lauded as a chronicler of the WASP aristocracy, I think he is much better categorized as a novelist of ethics.
As someone who grew up in a family of lawyers, Auchincloss's stories of the dilemmas of a private lawyer resonated. I well remember the evening I stumbled on Tales of Manhattan (1967). I read it in one sitting. The Injustice Collectors (1950) followed a few days later.
Continue reading Louis Auchincloss: Novelist of Ethics
Like Companies, Investors Should 'Comply or Explain': RiskMetrics Studies Corporate Governance for European Commission
In the aftermath of the global financial crisis, many investors have grown concerned about standards of corporate governance. In fall of 2009, the European Commission released a study of corporate governance monitoring and enforcement practices in its member states. The study was undertaken by RiskMetrics Group in collaboration with BusinessEurope, ecoDA and their affiliates, and Landwell & Associates and their affiliates.
In most EU states, national governance codes set rules with which corporations must comply, or else explain why they have not complied. The RiskMetrics study found support for "comply-or-explain" regimes, but also found "some deficiencies," including "unsatisfactory level and quantity of information on deviations by companies and a low level of shareholder monitoring."
Patchwork Carbon Regulations Could Distort Energy Markets: A Snapshot of the Global Oil & Gas Sector
On January 14, investors responsible for $13 trillion in assets jointly called for a strong policy response to global climate change. Coming on the heels of the UN Framework Convention on Climate Change (UNFCC) summit in Copenhagen, the Investors' Summit on Climate Risk showed broad private-sector support for public policy initiatives to combat climate change.
What will be the practical impact of carbon pricing for investors? A survey of RiskMetrics research shows that gaps in the existing regulatory patchwork could create perverse advantages for companies, investors and governments who avoid strong carbon regulations.
Last week, I asked the Social Investment Forum listserv to recommend organizations who are working to help the people of Haiti. I was heartened by the response. Links to donate to these groups are listed below.
I also spoke with RiskMetrics analyst Yasmine Lonon, who helped research a study of developing-nation disaster risk for the World Bank's Disaster Management Facility. In response to a question from our colleague Jane Meacham, who noted that there's almost no private insurance in Haiti, Yasmine explained how a lack of insurance hinders disaster preparedness:
Laundering Cotton From Child Labor: Without True Global Standards, Uzbek Harvest Will Reach Global Market
Reports on the retail sector, including apparel sellers, are a staple of January's post-holiday business news. However the last quarter looks to retailers, it has told a grim story about the retail supply chain. In November 2009, the BBC reported that Uzbekistan's fall cotton harvest was gathered, in large part, by children. Boys and girls as young as 11 were forced out of school and into the fields by the Uzbek government, which depends on cotton sales for most of its revenue.
Child labor is sadly common in much of the world, but Uzbekistan – the third largest producer of cotton in the world – presents an especially egregious case of a national industrial policy founded on the conscription of children.
In a report released January 6, shareholder coalition Ceres found that many asset managers don't account for risks associated with climate change. Ceres surveyed 84 managers who are collectively responsible for $8.6 trillion in assets. 44% don't believe that climate risk is financially material; more tellingly, as Barry B. Burr notes in Pension & Investments, 71% only consider climate risk when they're marketing a "green" fund.
On Dec. 31, Index Universe published a helpful survey of funds based on environmental, social and governance (ESG)-screened indexes. Lorne Abramson, a California-based adviser and manager, compares the strategies, costs, and performance of a number of exchange-traded and separately-managed index funds.
"Investing Responsibly" addresses two persistent misconceptions about ESG investing:
1) ESG screens limit returns by imposing sector bias on portfolios.
2) ESG investing is a "boutique" approach that conflicts with conventional investment strategies.
Mr. Abramson argues that ESG can play a complementary role in portfolio construction:
"The focus of this survey is ultimately from the standpoint of ESG as an 'overlay' component, building upon the fundamental investment principles of global asset class diversification, frictional cost minimization and tax efficiency. In other words, it assumes ESG is not a separate asset class, but a means of investing in existing, traditional asset classes."
Unbalanced Indexes Can Still Outperform
Mr. Abramson acknowledges that ESG screening does introduce sector bias to some indexes. This may be deliberate, as part of a "green" strategy focusing on clean-tech firms, for example. Other funds, such as the recently launched FaithShares ETFs, may avoid those businesses, like gambling or alcohol production, that conflict with certain religious teachings.
The world's longest-running ESG-screened index, the FTSE KLD 400 Social Index (KLD400), is tracked by an iShares exchange-traded fund (listed as DSI). Historically, the KLD400 has been somewhat underweight in energy and basic materials, and overweight in financial and technology stocks. This sector bias helps explain why the KLD400 outperformed the market in the late 1990s, during the "tech bubble."
For the record, since inception, the KLD400 has outperformed the S&P 500, delivering annualized returns of 9.51%, versus 8.66%, as of 12/31/09. It has also outperformed at the 1-, 3- and 5-year marks. (The KLD400 lagged at the 10-year mark, at the end of the "tech bubble.")
Select Social Index Seeks Sector Neutrality
Mr. Abramson also mentions the iShares ETF based on the FTSE KLD Select Social Index (SSI). The SSI seeks to closely track the sector composition of its benchmark, the large-cap FTSE All-World US Index. This index includes strong ESG performers from sectors like energy and basic materials. As explained by the SSI's methodology:
"The FTSE KLD Select Social Index (SSI) is optimized to maximize exposure to positive environmental, social, and governance factors while exhibiting risk and return characteristics similar to those of the FTSE US 500 Index. The Index is sector-diversified, holding companies with the highest social and environmental scores from each sector."
Click here to see SSI performance data. Since inception, the SSI has delivered annualized returns of 2.41%, versus 2.26% for its unscreened benchmark. Like the KLD400, the SSI has outpaced its benchmark over 1-, 3-, and 5-year periods.
Other Options in an Expanding Marketplace
"Investing Responsibly" discusses other passive-strategy ESG funds, and considers the industry trend towards globalization. For example, Pax World and Northern Trust have launched ESG products based on KLD global benchmark indexes.
While he notes that "there are still noticeable asset class gaps" in the marketplace, Mr. Abramson foresees "growth and innovation continuing in both the ESG and indexing arenas." By enabling investors to use ESG criteria as a complementary tool, he believes that passive funds will make it easier "to incorporate one's values into a broadly diversified, cost- and tax-efficient asset allocation plan."
For another perspective on passive ESG strategies, see Marla Brill's "Sustainability Indexes: Pros and Cons" at FA Green.