Management

Fukushima Accident Dims Prospects for a Nuclear Revival

The ongoing Fukushima disaster is a major setback for the nuclear power industry. A much-anticipated “nuclear renaissance” will be slowed and likely curtailed, as happened after the Three Mile Island and Chernobyl accidents . Increased regulatory scrutiny and safety precautions will add to the rising costs of this industry, which is already losing ground to cost-competitive alternatives, like natural gas, renewables and investments in energy efficiency.

Government subsidies will be essential for continued nuclear power expansion. Government support is needed to: defray the high capital costs of building nuclear reactors, decommissioning them, permanently disposing of spent fuel, and indemnifying plant operators from potentially huge insurance liabilities. Growing public recognition of these “hidden” costs may further limit nuclear power expansion.

Nuclear power will remain a part of the global energy mix. It provides nearly 15 percent of global electricity needs. It is promoted as a carbon-free power source that fights climate change. Its use may grow in nations with limited energy resources, policies to cap carbon emissions, and where public opinion continues to view nuclear power as a comparatively safe and affordable form of electricity. However, even pro-nuclear nations are reassessing their policies in light of the latest nuclear accident at Fukushima.

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Investment Implications

New safety reviews will add to rising construction and operating costs of nuclear power plants. Added regulatory and investor scrutiny will increase costs in the following areas:

• Disaster planning and backup power
• Evacuation zones and community preparedness
• Storage and protection of spent nuclear fuel
• Plant financing and capital costs
• Insurance indemnification

MSCI ESG Research is factoring these cost considerations into its ongoing research of nuclear-generating electric utilities. Financial effects will vary by company and region. Electric utilities operating in countries with centrally planned generating systems, and which continue to receive substantial government support for nuclear power, will likely continue with their nuclear power expansion plans, albeit at a more tempered pace. Utilities operating in countries with more independent and decentralized regulatory systems, and which have reactors in areas of high seismic activity or in proximity to large population centers, are more vulnerable, and are likely to see a contraction of nuclear plant licensing extensions and new reactor orders.

MSCI ESG Research on Nuclear Power and Product Offerings

We take an in-depth and multi-faceted approach to companies involved in nuclear power. Our research addresses an array of client needs in portfolio screening, identification of controversies, and ESG ratings and profiles.

• ESG Manager: We track all publicly traded companies that manufacture or operate nuclear power plants so that concerned investors can screen these companies from their portfolios.
• Global Compact+: We alert investors to event risks at nuclear plants, including safety issues, questionable or unethical management practices, and regulatory decisions that invite controversy or reduce investor confidence in nuclear utilities.
• Intangible Value Assessment ratings and profiles: We assess risk exposure and management performance of nuclear plant operators in sector comparisons with other electric utility providers.

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Implications of the Japanese Nuclear Disaster: An ESG Research Perspective

The ongoing nuclear power crisis in Japan will have lasting implications for power generation around the globe. A much-anticipated “nuclear renaissance” could be curtailed as the world absorbs lessons from the worst nuclear accident since the Chernobyl disaster 25 years ago.

The United States, with 104 operating reactors, and Europe, with 143 reactors in 27 countries, now plan extensive reviews of their nuclear plants and disaster preparedness. China, with 11 operating reactors, has also suspended approval of more than two dozen new reactors.

This may give a boost to competing low-carbon generating sources, such as natural gas and renewable energy. MSCI’s Global Alternative Energy Index recorded a 10.1 percent gain in the first 10 days after Japan’s nuclear crisis began. This compares with a 22.8 percent loss for the MSCI Japan Electric Utilities Index over the same period. Coal may also get a short-term lift, since nuclear power is its chief rival in providing base-load power generation.

Source:  MSCI Sector and Thematic Indices

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'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.

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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:
 

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ESG for Everyone: New SIF Trends Report Details Public Policy Drivers of SRI Growth

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.”

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Q&A with a 'Quant': A Pro's Perspective on ESG Integration into Mathematical Modeling

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.

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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.

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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. 

[Click here to get access to more MSCI ESG research and analysis of the banking sector.]

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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. 

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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. 

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