Ever scratched your head and wallet over sustainable-investing?
Ever thought that stock-buy-outs, advisors and investment products, how CEOs perceive the investor-community, the link between economic-growth and debt-levels, the way ESG can swing between inadequacy and mess, and the very way we invest our money can be the butterflies that cause (or stop) the storms we want (or fear)?
Ever thought about the end-of-life toxic burden that even something as pro-environment as a solar panel can inflict? Ever considered that industries into electric cars and solar energy can, ironically, be big polluters in some time?
If you haven’t , ever, now is the time and this page is a good cue.
After all, activism and awareness are ripping away shells of indifference, and bubbles of ignorance, with a new-found fervour now. People are actually coming out of their cocoons and urging for environment-consciousness and sustainability-thrust in corporate goal-setting, policy formulation, board-compensation, disclosure, and reporting.
What is palpable in Morgan Stanley’s recent report ‘Signs of a Low-Carbon Future in Oil & Gas Corporate Governance’ could be just the stirring of a big undertow making its way through corporate moats. For instance, of the 19 oil and gas companies that Morgan Stanley analysed, with an eye toward executive compensation and climate, 14 turned out to have incentives tied to environmental reporting and practices. If in 2016, investors filed 175 climate-related resolutions with U.S. companies (according to advocacy group Ceres) 150 such resolutions have been filed so far in 2017 too, with 23 per cent directed at oil and gas companies.
Then we also have what findings from Osmosis Investment Management in London contend- an investment strategy based on resource efficiency not only produces returns in excess of global benchmarks, it also identifies forward-thinking management teams, aware of the economic imperatives brought about by resource constraint.
With all these ears and eyes now peeled for the ‘green’ word, there are a lot of what-ifs, why-s, why-not-s that have been dotting the very-appealing but very-esoteric domain of sustainable investing. But we have Ron Robins here, who has been following ethical-sustainable investing since the late 1960s and also happens to be founder of the notable sustainable-ethical investing site Investing for the Soul.
From 1969, when Mr. Robins held investment-industry positions in securities analysis, over-the-counter trading, and global private equity sales – to 2017 where he is creating interesting DIY tutorials, hand-holding individuals with personal values-based ultra low-cost performance-vetted stock portfolios; he has come a long and unprecedented way indeed. Let us soak in some fine-prints, and elephants-in-the-room alike, here as Ron shares his visceral and no-words-minced view from where he is standing and watching this new world rumble.
Can you explain this nugget from your recent editorial – “The DIY sustainable-ethical investor often trades less, again resulting in lower fees. This is frequently due to the‘loyalty’ they have towards their investments.“
Because the investor invests in companies that are dear to their values, they’re less inclined to sell them. Thus, they trade less and because they trade less they incur, in aggregate, potentially lower fees.
If – according to a recent study by Allianz Global Investors, only 14 percent of 1,061 investors had a conversation with their advisors about ESG investing, and 61 percent of the clients had to bring up the subject themselves – who is to blame – the industry, the connotations of controversy that ESG areas may have in today’s political climate, the culture, the conditioning, the investor, the fund advisor or something/someone else?
The main holdup to clients investing in ESG is mostly the advisor, but also the investment industry itself. The advisors and industry have established sales, commission arrangements, etc., that generally favour their own established branded products. Also, it means the advisors have to learn about a segment of the industry that they often do not believe in. Advisors mostly still think that if you limit the ‘universe of investments’ it inevitably means lower returns. Also, many advisors believe that the sin stocks—alcohol, tobacco, gambling, etc., — outperform most market segments. All these advisor beliefs have proven mostly false now.
As you rightly underline: “for an optimal DIY path, investors first determine their personal values, then what industries they best align with..” .
What values work best – climate change responsibility, human rights, violence-related concerns or something else? What industries are more predisposed to such investing needs – automotives, fossil-fuel, utilities, oil and gas, technology, or any other area?
It’s difficult to specifically state what values ‘work best‘. That kind of research has yet to be done on a large scale. Nonetheless, as you probably know, companies emphasising sustainability, for instance, generally have had frequently superior stock performance relative to other companies in the same industry that do poorly on sustainability measures.
As to what industries are ‘predisposed to such investing needs’ is difficult to answer. For instance, everyone raves about electric cars and solar energy, yet these industries are presently becoming big polluters.
Electric vehicles and their manufacturing have large quantities of toxic substances as do solar panels and their manufacturing footprints. Solar panels have a life expectancy of about 20-30 years and are becoming increasingly efficient—which means their replacement might be well before their life expectancy. Yet, nowhere is there any thought or program as to what happens to them and their toxic materials after they’re no longer wanted.
Don’t get me wrong, I think these industries have the potential to do much for sustainability and climate change. However, we’re a long way from really solving the kind of problems I’ve mentioned. So, it’s for reasons like this that it’s very difficult to match personal values such as you mentioned with best ‘predisposed’ industries to our ‘higher’ values.
This is interesting – can you decode this further? “Another factor I have observed is that robust CSR policies often grant firms a lower cost of financing, with investment in good employee relations, environmental policies and product strategies rewarded with a reduced cost of equity.”
Yes, one can basically say that when a company performs well, that is when its corporate social responsibility policies and activities are particularly-good; the credit and equity markets usually perceive such companies as having lower risk. Hence, their cost of accessing capital, whether it be debt or equity, is lower than it might be for similarly profitable companies but which are perceived as having more ‘difficulties’ in the way they conduct their affairs.
A Morgan Stanley paper reckons that even if 97 per cent of CEOs consider sustainability to be an important factor in business success, only a miniscule portion believes that investors are interested in hearing about it? Why this disconnect between what CEOs think and what investors want on sustainable investing?
The disconnect often arises because investments in corporate sustainability activities are frequently unprofitable in the short-term and CEOs believe their investors are mostly short-term focused. Often sustainability investments take many years to show financial benefit. However, this perception by CEOs is dying as they realize that a growing number of their investors—now perhaps even the majority—are adopting ESG criteria which is much more long-term oriented.
How much do current annual sustainability reports that are offered by a few corporates cover? What’s the significance of financially-material information, earnings calls, 10-Ks and annual reports and standards like ESG/SASB here?
Big subject!!! This could take an essay! Actually, most companies in the S&P 500 produce sustainability/CSR reports now. In brief, the ESG information currently provided by companies is still largely inadequate. There are no generally-accepted standards for what is ‘material’ to company profits; there are no accepted standards of ESG measurement; what is material to one industry is irrelevant to another (i.e. oil company versus a bank!); no auditing standards; no regulated- or compulsory-auditing of what companies report. So, it’s a mess.
Hence, comparing companies on ESG issues, even in the same industry, is difficult. The ESG ratings’ agencies such as Sustainalytics, MSCI, and numerous others attempt to do this. And generally do a decent job with the information they have. However, the same company can frequently have quite different ratings between different raters.
Now, regulators around the world are tackling these issues and I believe in the years to come we’ll have much better and more reliable information. SASB is one of many groups engaged in this process.
Is there a conspicuous lack of investor/shareholder activism in this area? What can/should they insist on – More disclosure, more involvement in goal-setting, more numbers or more green-executive-pay-links?
All the above. Actually the number of shareholder resolutions concerning ESG has risen rapidly in recent years.
Is it tough for a corporate to have two bottom-lines to watch: is it a conflict or an illusion they tend to conjure – (the CSP – Corporate Social Performance and CFP – Corporate Financial Performance islands)?
In reality, each one supports the other and the two combined is more than ‘1+1’ but 3. This is why; as I replied above, why financing costs are frequently lower for high performing CSR/ESG companies. Such companies also attract and retain generally superior talent and thus have lower HR costs, etc., etc. So CSP can definitely improve CFP!
What’s your view on the concept and viability of Long-term-Stock-Exchanges?
Definitely a good idea. Haven’t heard this phrase before though. I do know of specific exchanges devoted to socially responsible companies.
One reason for the massive growth in corporate stock-buybacks is the short-term orientation of corporate management. Stock buybacks might give a temporary boost to stock prices but often at the expense of long-term corporate profitability. Incidentally, stock buybacks-were mostly illegal in the US before 1982 because it was thought that companies should use their profits for new investment!
Are the likes of Andreessen right when they try ideas like OpenInvest or Series-Seed Documents?
I think the concept of OpenInvest is good. However you cut it though, nothing could be cheaper than buying individual stocks and holding them for a few years. For example, say you buy $3,000 of stock in a company and hold it for three years and your trading fee is $8.00, that’s a miniscule 0.09 per cent annually. OpenInvest charges 0.5 per cent annually on portfolio value. They also limit their stock universe to the S&P 500. In my one hour DIY Ethical-Sustainable Investing Pays Tutorial, I show how anyone can create such an ultra-low-cost portfolio mirroring their values in just one hour and in three hours can have their ultra low-cost performance vetted personal values-based portfolio.
Maintaining that portfolio can be like paying themselves hundreds or thousands of dollars for each hour they spend on it from the savings of paying out investment fees.
You quoted some words from Professor Lane’s book in 2011: “amidst the satisfaction people feel with their material progress, there is a spirit of unhappiness and depression haunting advanced market democracies throughout the world, a spirit that mocks the idea that markets maximise well-being and the eighteenth-century promise of a right to the pursuit of happiness under benign governments of peoples choosing…”
In short – developed countries’ individuals seek excessive material consumption which then creates unsustainable levels of consumer debt – Do you find these musings more relevant in 2017-18?
Yes, equally so. And the fact that we’re rapidly using-up the earth’s resources and the likelihood of 2-5 degree Celsius increase in climate temps by 2100 adds fuel to the above statements.
Furthermore, as the US economy expands, debt-levels are again reaching new highs. In many other developed countries, debt-levels are even more serious. I could go much further into the economics of it all, but suffice to say the world’s central banks have their work cut-out in raising interest rates, normalizing their balance sheets, etc., without causing massive economic turbulence, increasing hardship, and even greater unhappiness! (By 2020, depression will be the second leading cause of world disability-World Health Organization.)
Tough bites need tough molars (Image courtesy freedigitalphotos)
Regulatory involvement can create some action in CSR space, but can it not also spur more corruption?
Not sure how this relates to increased corruption. After all, CSR is a lot about improving corporate ethical behaviour. Oh, I think you’re referring to a study that came out a few months ago. It said that some CEOs in high performing CSR companies get lax and end-up getting their companies into deep problems. BP is cited by some in this regard. BP, at one time, was well rated by ESG raters as having good CSR policies but became lax and it wound up with the massive oil spill in the Gulf of Mexico.
Are we living in a better world today than yesterday – financially, politically, environmentally, on activism/awareness-levels, and consumer-wise?
Wow. You’re asking some enormous questions here! All I will say is that if humanity is to survive, we need a higher level of consciousness than we have now and we need to conduct all our affairs in a holistic way that promotes good human relations, ethics and sustainability.
That’s very much why I’ve been so engaged with ethical-sustainable investing for 48 years and the practice of Transcendental Meditation for nearly as long as that.
Pratima H
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