360° Coverage : Why Investors Should Focus On 'Non-Financial' Issues

2 Updates
Why Investors Should Focus On 'Non-Financial' Issues

Why Investors Should Focus On 'Non-Financial' Issues

Jan 17 2014, 11:46am CST | by

Once a niche corner of the market, analysis of environmental, social and governance (ESG) trends is increasingly taking centre stage, as illustrated by the recent news that the US energy group...

Filed under: news


39 weeks ago

Why Investors Should Focus On 'Non-Financial' Issues

Jan 17 2014, 11:46am CST | by

Once a niche corner of the market, analysis of environmental, social and governance (ESG) trends is increasingly taking centre stage, as illustrated by the recent news that the US energy group FirstEnergy has agreed to calculate its carbon emissions, with a view to reducing them, after investors including the pension funds of New York and Connecticut asked it to become more sustainable.

“FirstEnergy is taking important steps today for shareholder value and the environment by looking holistically at how climate change is affecting the company over the long term,” New York Comptroller Thomas P. DiNapoli said. “Companies are enhancing long-term shareholder value when they prepare for future regulations that reduce greenhouse gas emissions.”

Amelia Timbers, energy programme manager at As You Sow, which along with the two states had filed a shareholder resolution that was withdrawn after the company agreed to take action, added: “The withdrawal of this proposal demonstrates that companies are starting to realise that investors are serious about climate change and want to see progress towards major greenhouse gas reductions. We have observed that companies that aggressively pursue climate solutions are some of the most profitable and admired in the sector.”

FirstEnergy’s move chimes with the issues raised in a new report, ESG Trends to Watch, in which the information provider MSCI has identified a number of ESG trends to look out for in 2014. The first issue it identifies is – to divest or not to divest? Momentum is building. The 350.org campaign garnered a high profile in 2013 but its successes were mainly restricted to university investors. However, Scandinavian investor Storebrand and Dutch bank Rabobank also announced they planned to sell their fossil fuel shares and now the UN’s climate chief Christina Figueres has called on other institutions to follow suit. “The pensions, life insurances and nest eggs of billions of ordinary people depend on the long-term security and stability of institutional investment funds,” she told an investment conference in Doha. “Climate change increasingly poses one of the biggest long-term threats to those investments and the wealth of the global economy.”

For most investors, outright divestment seems drastic to say the least, says Linda Eling-Lee, global head of ESG research at MSCI. “Yet, from a financial perspective, even the outside chance that some reserves could become ‘stranded assets’ if a red line is breached should prompt a hard look at the assumptions underlying the valuation of fossil fuel producers.” The firm expects investors to address the issue in a variety of ways, ranging from fully excluding holders of carbon reserves to increasing exposure to clean technology, as well as by engaging more with companies as New York, Connecticut and As You Sow did.

The next trend on MSCI’s agenda is the challenges facing emerging markets, where previously stellar growth rates in countries ranging from Turkey to South Africa to Brazil have been marred by social protests and strikes, reflecting the fact that rapid growth has masked the lack of progress in improving the lot of the poor. For investors, the question is whether limited progress in converting economic prosperity into an expanded pool of economically productive people could portend future limits to growth, says Eling-Lee.

While income disparities and human development indicators do not feature heavily in country credit ratings, “the long term ability of countries to sustain economic growth depends also on its ability to harness its natural resources and develop its human capital base”, she adds.

This is where ESG analysis can play a crucial role in making sure investors have the full picture when it comes to risk factors. “For example, of the 91 countries we analyzed in 2007, five out of the eight countries that had the largest discrepancies between their ESG rating and their credit rating received a credit rating downgrade sometime in the next four years. The five countries were Egypt, Italy, Portugal, Spain, and Tunisia.”

Using access to basic sanitation as a measure of a country’s progress in improving the lot of the very poor, MSCI notes that Nigeria, Russia and Romania “experienced either no progress or deteriorating access rates, despite a large gap with Developed Market Standards” while Brazil, South Africa and Turkey all made minimal progress. Such a lack of progress signals not only potential limits to the economy’s skill base but also weak government effectiveness in addressing pressing social and economic needs, which should give investors pause for thought.

More positively, the group highlights the growth of green bonds, where the money is allocated to environment-friendly activities, in 2013 and says the market “is likely to take off” in 2014. With many of the first green bonds issued by the multilateral development banks such as the World Bank and European Investment Bank, investors have been confident in the integrity of the environmental claims as well as the likelihood of earning the advertised return. But as more commercial players enter the market, there will be a need for standards such as those proposed by the Climate Bonds Initiative, to ensure the transparency and credibility of green bonds.

Investors will need to be cautious, or at least aware of the risks, of investing in green bonds from “dirty” issuers – for example if an oil company issues a green bond and then experiences a major oil spill, it could lead to reputational risk for any investors in that green bond.

The report also highlights the continuing shift in ESG investing from an approach based on excluding certain sectors to a best-in-class approach “as investors embrace integration of ESG assessments into their investment processes.”

However, Eling-Lee adds: “While a best-in-class approach may help reduce exposure to ESG risks within a sector, it typically is not designed to address differences in the environmental and social sustainability of different sectors – differences that are driving rapid depletion of the global stock of key resources.” But now some investors are looking at the resource intensity of different sectors as a risk factor. This may push increased investment towards sectors with lower resource dependency, such as financials, technology and healthcare, and away from energy, materials and consumer staples companies. If this trend becomes entrenched, the more resource-dependent sectors could see their cost of capital rise significantly.

Another challenge for companies will be the continuing controversy around the tax they pay and where. While the issue has garnered a great deal of media attention and consequent reputational damage for companies such as Starbucks, Amazon, Google and Apple, policymakers have been slower to take action. MSCI believes that 2014 will the year when they catch up, in the wake of plans to increase tax transparency last year from the OECD, the G20, the G8 and the EU. “Increasingly, major accounting firms are telling their corporate clients to re-examine their tax strategies with a view to mitigating reputational risk and to anticipating greater disclosure requirements on where taxes are paid,” the report says.

There are two key areas of vulnerability investors need to be aware of – first, those companies that pay far less tax than the average rate of corporation tax in the countries where they operate, even if this is perfectly legal. Such companies make easy targets for the media, politicians and activists. Second, companies with subsidiaries in tax havens are likely to face some tough questions and calls to justify their presence in those locations. Some 21.4% of the 1,595 companies in the MSCI World Index paid tax rates substantially below the weighted average tax rate of the countries in which they generate revenues – these 213 companies paid an average of 19.3% tax while the rest of the index was paying around 34%. That is some $70 billion a year in tax lost to governments and leaves these companies with some tough questions to answer, as well as threatening their licence to operate and leaving them vulnerable to pressure from governments to “pay their fair share”.

The issues highlighted above don’t feature in most investors’ analysis of potential investments – but they are great examples of why they should.

Source: Forbes Business


7 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new compan ...
Source: Business Times Singapore   Full article at: Business Times Singapore


7 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and ...
Source: Business Times Singapore   Full article at: Business Times Singapore


Don't miss ...


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

'Time to rename medicines for mental health'
London, Oct 20 (IANS) In order to remove confusion for patients who could be prescribed drugs that appear to be unrelated to their condition, the world's major psychiatry organisations are proposing to completely change the terminology of the drugs used in mental disorders.
How to prevent brain damage after trauma
New York, Oct 20 (IANS) A treatment to prevent the body's immune system from killing brain cells can reduce the brain damage caused by head injuries, a study co-authored by an Indian origin researcher has found.
Heart attack ups depression risk in women
London, Oct 20 (IANS) Women are at a higher risk of developing anxiety and depression after a heart attack than men, new research shows.
Vitamin B12 could detoxify pollutants
London, Oct 20 (IANS) Looking at how certain organisms manage to lower the toxicity of pollutants, researchers have discovered that vitamin B12 could be the key to combating pollution.

Latest from the Network

1,074 new dengue cases in Chinese province
Beijing, Oct 18 (IANS) China's Guangdong province has reported 1,047 new cases of dengue fever, health authorities said Saturday. Six people have already died in Guangdong -- five in Guangzhou and one in adjacent...
Read more on Business Balla
Blake Lively 'always' wanted to be mum
Blake Lively has ''always'' wanted to be a mother. The 27-year-old actress is expecting her first child with husband Ryan Reynolds and she admits she's been dreaming of this moment since she was a youngster. Speaking...
Read more on Celebrity Balla
Kris Jenner 'torn apart' by Bruce's new relationship
Kris Jenner feels ''torn apart and angry'' that Bruce Jenner is dating her former assistant. The 58-year-old matriarch split from the 64-year-old Olympic gold medalist last October following 22-years of marriage but is...
Read more on Celebrity Balla
Cheryl Fernandez-Versini won't move to France
Cheryl Fernandez-Versini doesn't want to move to her husband's home country of France. The 'X Factor' judge, 31, who comes from Newcastle, is adamant she won't be relocating any time soon to suit her new spouse Jean-...
Read more on Celebrity Balla
Lance Bass sets wedding date
Lance Bass has set a date for his wedding. The former *NSYNC singer and his partner Michael Turchin, who have been dating for two-and-a-half years, are to tie the knot on December 20, 2014, a representative for the...
Read more on Celebrity Balla
Nepal avalanche toll reaches 39
Kathmandu, Oct 18 (IANS) At least 39 climbers died while hiking on a key Nepali route after it was hit by a major snowstorm and avalanches earlier this week, BBC reported Saturday citing officials. Over 350 stranded...
Read more on Politics Balla
Jake Gyllenhaal says society is complicit in 'nightcrawling'
Jake Gyllenhaal says almost everybody in society ought to relate to his new movie 'Nightcrawlers'. The eagerly-awaited film concerns those people who monitor police scanners and then race to crime scenes to film eye-...
Read more on Movie Balla
India eves look for first win in AFC U-16 qualifiers
Dhaka, Oct 18 (IANS) India will hope to register their first win of the 2015 Asian Football Confederation (AFC) Under-16 Women's Championship qualifiers when they take on hosts Bangladesh in a crucial encounter at the...
Read more on Sport Balla
Moyes mulling return to management
London, Oct 18 (IANS) Former Manchester United manager David Moyes said that he is ready to revive his managerial career six months after being sacked by the 'Red Devils'. "I am ready to return. I have enjoyed the...
Read more on Sport Balla
Ebola fears loom over Ghana hosting AFCON
Accra (Ghana), Oct 18 (IANS) The Ghana Medical Association (GMA) cautioned the government Saturday against hosting the 2015 African Cup of Nations (AFCON), despite a request by the Confederation of African Football (...
Read more on Sport Balla