Opinion Briefs Coverage: Opinions cover topics ranging from hedge fund ESG practices, greenwashing, WSJ Future of Finance social investing apps, ESG sub-adviser due diligence, PE firms attracted to companies with poor ESG records and Carnival Corp. (CCL) poor governance and environmental conduct.
June 18, 2019 – While alternative (“hedge”) funds continue to lag mutual funds with respect to demonstrating “good ESG practices,” their numbers are growing. A study by LGT Group as reported in RealAssets by Chris Sloley, finds that the percentage of “hedge fund firms viewed as ‘excellent’ or ‘good’ increased from 9% in 2018 to 15%.” The report also found that the largest alternative investment firms are “more likely to have ESG policies in place.” We are not surprised as to the lagging numbers attributed to alternative funds relative to long-only mutual funds. We believe that “culturally” there is a divide between these two sectors as well as, possibly, a lesser emphasis on sustainable investing by institutions for their alternative sleeves. It also does not surprise us that the largest alternative firms have some sort of sustainable investing policies in place. However, in each instance it is important to understand the nature of the policies before rendering a judgement about their demonstrated quality.
June 13, 2019 – Summarizing the opinions of Victoria Leggett a co-pm of UBAM Positive Impact Equity fund, Chris Sloley reports in Citywire that she considers greenwashing to be hopefully a “temporary issue.” Ms. Leggett goes on to state that as investors and asset managers become more aware of the issue, and “those marketing the funds” are required to “substantiate their claims”, the problem “will, ultimately, solve itself.” This remains to be seen, especially when marketing and promotional dynamics are at play. True, some of the more blatant rebranding tactics that lack accompanying transparency and process/outcome disclosures may subside, but in our estimation, correcting the temptations for some marketing or promotional pullback may not be realized in the short-term. Unfortunately, greenwashing, even by a small group of fund managers, can cause broad reputational damage for the entire industry in an area that is especially sensitive not only to investors, but for society in general.
June 11, 2019 – An article in the Wall Street Journal’s special Future of Finance report features a lead article by Dieter Holger entitled “Startups Target Millennials with Social Investing Apps” makes the case that more than any previous generation, millennials are likely to invest in companies that mesh with their social and political concerns and Fintech companies have taken notice by offering a host of new financial tech products that cater to their social investing preferences. The article cites a 2018 Bank of America survey showing that some 77% of high-net-worth millennials currently own or are interested in so-called impact investments.
“At the top of the offerings are smartphone applications that allow investors to choose portfolios that have themes representing different causes—often very focused causes, such as companies with ethical practices in their supply chain or a higher share of women in leadership compared with their peers. In some cases, people can also tweak their portfolios easily, dropping an offending stock with just a tap of the screen. And all of the transactions can be done without calling in a broker or adviser, usually for fees that are lower than those pros charge.”
“Though many of the apps are still getting off the ground, they are seeing rapid growth, and are expected to grow even more as socially conscious, digital-savvy millennials accumulate wealth, adding an expected $11.6 trillion in assets in the U.S. alone over the next decade, according to the Deloitte Center for Financial Services.”
We agree that sustainable investing has gained significant traction in recent years, especially on the part of institutional versus retail investors, but that this mix is expected to shift over time as growth ratchets up (for example, 72.3% of assets attributable to fixed income mutual funds that are classified as socially responsible are sourced to institutional investors, as of May 31, 2019. In actuality, the number may be even higher). But in our view, the success of sustainable investing mobile apps, and sustainable investing more generally, will likely be linked to the capacity of such offerings to establish or leverage off a widely accepted and understood taxonomy for qualifying investments based on sustainability criteria, aligning these against individual preferences, which vary from one individual to the next, measuring impact on some level and disclosing same to investors over time. Otherwise, we believe that such offerings can be exposed to reputational risks and are in danger of contributing to investor disillusionment.
June 4, 2019 – A study by Cerulli Associates reports that 42% of “sponsors” say that ESG factors are “not important to them when choosing a sub-adviser.” This is down from 69% last year. These findings which are reported in CityWire Selector (“An ESG headache: when sub-advisory becomes sub-optimal”), state that lagging demand, a lack of proof of value added and succinct marketing messages are deterrents. Another suggested reason is that “sponsors are behind on building out their ESG due diligence function.” We agree with this last reason and have covered the due diligence/oversight of sustainable investment managers and funds in our last 2 webinars. We also published research reports specifically identifying critical issues when conducting the due diligence process for such managers and funds. These are available at: www.sustainableinvest.com.
June 3, 2019 – Private equity firms are increasingly attracted to companies with poor ESG records according to an article by Selin Bucak, “Wanted: portfolio companies with a bad environmental track record” in Financial News. Lagging ESG records are believed to depress a company’s share price and offer potential future opportunities to PE managers. ESG problems are essentially viewed by PE managers as areas that they can remedy and eventually create value from. While we have no argument as to PE managers’ investment strategies in this regard, we are also sensitive to the possible implications for other market participants. Mutual funds and other investors may not be privy to such “activist” strategies and consequently, could be exposed to unexpected risks as a result of PE manager’s actions.
June 3, 2019 – Poor governance and environmental conduct on the part of Carnival Corporation (CCL) and its Princess Cruise Lines, Ltd subsidiary were in evidence when the parent and subsidiary companies pleaded guilty in a hearing held on Monday June 3, 2019 to six probation violations, including the dumping of plastic mixed with food waste in Bahamian waters. The company also admitted sending teams to visit ships before the inspections to fix any environmental compliance violations, falsifying training records and contacting the U.S. Coast Guard to try to redefine what would be a “major non-conformity” of their environmental compliance plan. In addition to accepting management responsibility for the probation violations and agreeing to pay a penalty of $20 million for environmental violations, Carnival had to agree to various governance changes. Carnival has had a long history of dumping plastic trash and oily discharge from its ships, with violations dating back to 1993. For active value-based investors, the latest developments is expected to lead to an update of the firm’s investment thesis and a potential re-calibration of Carnival’s valuation. At the same time, Carnival’s destructive and repeated environmental violations and governance breaches may have reached a tipping point for values-based investors and this could invite consideration to limit or eliminate entirely exposure to the stock. Depending on the nature of their investments in Carnival, however, investor options may be somewhat limited (for example S&P 500 Index investors are stuck with Carnival in their mutual fund or ETF) and, in the end, the course of action that is most likely to have a direct impact on the company’s behavior, we believe, may be to avoid taking cruises on a Carnival line until such time as the company begins to evidence compliance with its environmental commitments.