iBankCoin
Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
86 Blog Posts

ESG : SOCIAL INVESTING = INVESTING

Even the Asian elephant in the room is endangered.

Over 80% of the market value in the S&P is attributable to intangible factors (environmental capital, sustainability governance and stakeholder relationships). Less than 20% is accounted for by physical and financial assets.

Global sustainable investing assets grew by 61% over the 2012-2104 period and now stand at $21.4 trillion. The domicile of these assets is telling; 99% are in the United States, Canada and Europe.

Environmental and social issues affect both valuation and financial performance. If your investment decisions focus only on financial disclosures, you will not be getting a complete picture of the drivers of value.

Global ethical principles have never been more important or, it appears, more wanting than in current times (i.e. VW, Phoney Express aka Well Fargo, global Trumpism, and global lawsuits imperiling not just returns but the very viability of global commerce beyond national borders).

Community manager education world tree concept with colorful abstract leaves and earth icon illustration. EPS10 vector file organized in layers for easy editing.

The UN supported Principles for Responsible Investment (PRI) ,a not-for-profit organization, held their 10th anniversary conference in Singapore last week (Sept. 6-8th) which I attended. No conference bag full of binders and junk mail at this conference, your 1 page agenda fold up into your name tag and all meals were vegetarian, a subtle but effective message. Forbes Magazine The conference domicile was not chosen by chance. Asia has been termed the cradle of disorder for a reason, it is home to 5 of the world’s 7 billion population and on metrics of social investing if the game has even started it is is the 1st inning. When a region has practices like dynamite fishing and farmers still clear land with a match much work lies ahead.

Chris Sanderson, Co-Founder of The Future Laboratory focussed largely on the sustainability of the capital markets. He characterized global citizens as being tired of austerity, wary of politicians and perhaps even more wary of brands. Backlash culture; http://shop.thefuturelaboratory.com/products/backlash-brands-report.

Elliott Harris, Head of the United Nations Environmental Program (UNEP) gave a rousing speech on environmental and social sustainability. The end game is that all investments will be social. Elliott introduced the concept of thick profit versus thin profit, a concept akin to quality, hard to define, but you know it when you see it.

Georg Kell of Arabesque Partners Arabesque spoke of  Generation S, a cross-section of all age groups working towards making the world a better place, one worthy of handing down to future generations. While ESG (environmental, social & governance) alpha may prove illusory, ESG smart beta appears to have legs.

Millennials were of course discussed with the most shocking realization being that the oldest ones (born 1990) are in their mid 30’s now! Generation D (Digital), whose only need or want in life is wifi and lithium, was out in full force, albeit well behaved and overall attentive. The 600 conference attendees were largely baby boomers, representing approx. 50% of global financial assets under management (AUM), signatories to the PRI whose mission states, “We believe that an economically efficient, sustainable global financial system is a necessity for long term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.” Clear, concise, devoid of the typically mumbo jumbo one gets when issues like climate change and the environment are normally tabled.

The session run by GS alum David Blood, Managing Partner at Generation Asset Management Generation Investment Management was excellent. Al Gore is the Chairman of Generation Investment Management. If Obama delays the election to allow Clinton to get her legs perhaps they could run as a Third Party choice? Could not lose with the ticket “Blood & Gore”. Both men can readily point out Aleppo on a map too. In any event, David’s sage words rang true to all in attendance. Finance and capitalism is not working for everybody was a key statement. The transition to a low carbon economy will clearly not be an easy one. A full 1/3 of aggregate world equity and fixed income market value lies in the cross hairs. We can do this the hard way or the easy way, but de-carbonization is a trend now moving under its own power. Mr. Blood noted that while the majority of global asset managers in attendance (120 signatories, 50% of global AUM) were managing to sustainability factors, those not present (i.e. non PRI Signatories) are largely American. The reasoning to date for USA firms reluctance is that becoming signatory could put them in breach of their fiduciary duty. We must collectively get the remaining 50% on board as priority #1.

esg-programs-11

Investing for the long term. Short termism. A great panel on investing for the long term had some serious panel power. The headliner was Hiro Mizuno, CIO of Government Pension Investment Fund, Japan (GPIF), the world’s largest funded pension plan. GPIF manage their liabilities to a 100 year time frame. Their most recent result showed a loss of ¥5.3tln (US$5.2bln) for the current fiscal year through March 2016. The fund’s quarterly loss through June 30, 2016 was > ¥5tln (-3.88%). They run ¥130 trillion (US$1.27 trillion) leading Mizuno-san to characterize the latest qtly loss as peanuts. The joke was not well received, perhaps because it was so unexpected, leading Hiro to quip that perhaps there were Japanese pensioners in the audience. The fund increased their allocation to equities in recent years. Global equity investment totals US$600bln, 80% of which is allocated in a passive fashion and 20% ($120bln) of which is actively managed. All investment are mandated to external manager, counter to the global trend in the pension arena of in-sourcing. Fellow panelist Paul Smith, President & CEO at the CFA Institute noted that one advantage of being old is that “you see everything twice” with such decisions as out-sourcing vs. in-sourcing set to very long term market cycles.

Several panels touch on infrastructure finance with GPIF mentioning their joint investment effort with Canada’s CPP on ESG brownfield infra projects. Mizuno-san noted the challenges of crafting/originating greenfield projects as funding challenges often drive the cheap option and the cheap option is usually dirty (materials, supply chain, etc.). GPIF will not finance dirty deals, full stop.

A deeper discussion ensued on better was to measure and compensate performance with a general aversion shown to managing to qtly earnings guidance. The average hold period for SPY, the > $100bln S&P 500 SPDR, the largest ETF tracking the benchmark for US stocks is 5 days. In the last 15 years 52% of the Fortune 500 companies as no longer in existence. In 1955 the average Fortune 500 company life expectancy was 55 years, in 2015 it is 15 years. Traditional valuation metrics clearly must evolve to address the realities.

ESG toolkit for Fund Managers: http://toolkit.cdcgroup.com/

Q&A with Author of the PRI’s Practical Guide to ESG Integration for Equity Investing

The ESG investment construct must be turned on its head, to my mind. Social investing = investing and “dirty” or non-socially minded investment should be the type requiring explicit sponsor/board/member approval. JCG

Follow me on twitter @firehorsecaper

shenzhen-beach

Shenzhen “beach” September 2016

Mark Carney, Chair, Financial Stability Board (FSB). Awesome 30 minutes of your life, watch it. Carnage, indeed.

 

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18 comments

  1. Dr. Fly

    Behold the new world order revealed

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  2. tradercaddy

    Thanks for the early morning read.
    I haven’t laughed this hard since I last saw a Three Stooges marathon.
    I don’t even know where to begin but it’s good to see a bunch of trust fund babies able to put their elitist University degrees into $$ making useless careers.
    As soon as I saw “UN” I knew it would have something to do with controlling the masses through bureaucratic entanglement and loss of freedom (bye bye League of Nations).
    And check out the 0bama delaying the elections so their bribe Queen Hillary can recover from her allergies (of course loser Gore would like this – can Soros be lurking pulling strings).
    This is why we have the 2d Amendment. Just in case the fascist elitists want to play the masses.
    And check out the Board, Staff, and Advisory members for this Arabesque Partners.
    How diverse. Where are the Jews, African-Americans, Hispanics, etc. Love their uniforms (looks like the Stepford wives).
    This is why Brexit was successful and why it will be going from country to country.
    It’s about freedom and democracy- just like the American and French Revolutions.

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    • firehorsecaper

      Cad, I’m a Canadian expat hence largely enjoying the US election action from the sidelines. We all of course have a vested interest in who becomes the new leader of the free world. Regardless of ethnic make-up, youth is an overlooked virtue …. not a job for 70 year olds me thinks.
      Much of the post was a recap of the responsible investing conference, which was truly legit in terms of scale, purpose and content.

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  3. tradercaddy

    Agreed that youth is a virtue, however, I’m not sure it is overlooked.
    On the other hand, I’m not sure how youth is defined as most Presidents were in their 50s and 60s at the time of inauguration (need to be at least 35 yo to run).
    The problem I have is when the person running for President has been a career politician with no private industry experience (and I don’t mean lobbying as an attorney).
    I do have to disagree about the legitimacy of the conference (as I read it) in terms of purpose and content (not the scale). Truly a bunch of elitists who believe they are smarter than the masses (with a few hypocrites thrown in like Gore).

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  4. peaches

    Elitists are smarter than the masses. The mob is, was and always will be retarded.

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    • Bullish

      Agreed!

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    • Dr. Fly

      There is some unfortunate truth about elitist being better informed, as a whole. But that doesn’t mean they should discard benevolency for acrimony.

      Let us not forget who fought this countries wars and won them. It wasn’t the book worms. It was the plumbers and lug wrenches.

      It’s a very sad thing to see well educated people treat others as chess pieces on a board.

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    • moosh

      There are just as smart people within the makeup of the masses, I would add. They just don’t use their intelligence to try and control others. In general, I would say the masses go about their lives and add value to society and are not part of any mob, atleast not yet.

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    • peaches

      Touche. I believe it is the duty of the better educated to protect and help others thrive. Our current administration and Hillary are most definitely not in that camp. But it doesn’t mean every A student, or every Wall Street employee is a blood sucking vampire.

      I don’t see what is so wrong with a sustainable investment conference when Goldman Sachs tells us one day a college degree might not be worth it for most Americans, and tells us on another day that structured finance backed by student loans and auto loans might be a legitimate investment vehicle. There is too much profit to be made off of making people go broke. Most Americans don’t trust the financial industry for good reasons, others are too busy drinking light beer and yelling at a screen to learn anything.

      George Soros has as much a right to vote with his wallet as Rupert Murdoch or the degenerate Saudi scumbag princes do. Maybe I’m missing something.

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    • peaches

      Moosh… BLM? or may I dare you to waste an hour of your time and listen to the crowd at a Trump rally recording? Millions of Muslims who can’t read classical Arabic?

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  5. Bullish

    This post is great. Good read.

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  6. Dr. Fly

    Did you watch the video with Carney? Watch it. It’s the economic turmoil to come, planned destruction. I hate it.

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  7. mx2101

    Excellent post by Firehorsecaper.

    My malcontent view:

    The elephant in the room is the sustainability, green, and climate change movement does not focus on population growth as the fundamental cause of the problem. Instead they seek transfer of wealth and political power. Apparently reproduction is the third rail no one will touch. It doesn’t require “death panels” or denial of medical care.

    Imagine a USA where the population has decreased to 150 million over 25 years, and a similar decrease worldwide. I think population reduction is a more organic and sustainable way to protect the environment than political, financial or technological maneuvers.

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  8. firehorsecaper

    On the elitist versus the masses comment, one point. The level of financial literacy is low across the globe, with all finance professionals are lumped together as one (investment advisor, asset manager, rating agency, pension fund, hedge fund, insurance company, family office, etc.) by the masses. The trust bond has been broken and the baseline assumption is that we collectively want to take advantage, not for a few percentage points, but for all their marbles. The finance profession is facing an existential challenge.

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  9. randy

    This is just plain misinformed. ESG investing is not the same as social or ethical investing. Fiduciaries may, and in some cases must take ESG factors into account to assess value and risk. That is ESG investing. It is not at all clear that fiduciaries can legally take ESG factors into account to achieve social or ethical goals. Also the data supports better returns when ESG factors are taken into account, but returns are not so good where the purpose is socially responsible investment. There is a big difference. Just have a cup of tea and repeat “ESG good; SRI, not so good”.

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    • firehorsecaper

      ESG: ‘Environmental, Social And Governance (ESG) Criteria’
      The Environmental, Social And Governance (ESG) Criteria is a set of standards for a company’s operations that socially conscious investors use to screen investments. Environmental criteria looks at how a company performs as a steward of the natural environment. Social criteria examines how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits and internal controls, and shareholder rights. Investors who want to purchase securities that have been screened for ESG criteria can do so through socially responsible mutual funds and exchange-traded funds.

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  10. firehorsecaper

    SRI has not been put forward as a separate asset class. It is about considering ESG issues while investing in the same asset classes as in traditional investing.

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  11. pb

    $DB – Here be dragons. Commenting appears to be disabled on original article.

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