Sustainable Investing Opinion Briefs: September 16 – September 30, 2018

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Sept. 29. 2018 – A UBS Investor Watch survey report covering more than 5,300 investors in 10 markets finds that for many investors there is “no trade-off between personal values and returns.” However, “return expectations vary significantly” across countries.  Overall, 50% of respondents, on average, expect sustainable investments to outperform.  The US is at the low end of the scale with only 19% seeing no trade-off between the performance of sustainable investments and traditional investments.  The study also finds investor’s inability to “quantify impacts” is the largest impedance to sustainable investing along with their “confusion about terminology” related to sustainable investment approaches.   This is a recurring complaint and in our view the ideal entre for financial advisors to be of value to their current and new clients.  The low “no trade-off” number for the US is an excellent sales story.

Sept. 18, 2018 – A Moody’s Investors default research report compares the credit performance of subsets of project finance bank loans issued between 1983 and 2016 and finds that green projects demonstrate lower default risk. The study covered a total of 5,859 infrastructure loans issued within various industry sectors and geographic regions segmented by advanced economy as well as emerging market and developing economies. The loans were further segmented based on use of proceeds criteria.  Green projects, accounting for a subset of 1,978 loans, were defined and isolated for purposes of this study using the Green Bond Principles (GBP) criteria.  These included projects involving renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, terrestrial and aquatic biodiversity conservation, clean transportation, sustainable water and wastewater management, climate change adaptation, eco-efficient and/or circular economy adapted products, production technology and  processes, and green buildings.

The study concluded that green use-of-proceeds project finance bank loans experienced a lower default rate than non-green use of proceeds project loans, but the difference is likely due to subsample characteristics other than greenness.

Issuers might seize upon these finding to conclude that the lower default risks for green projects should translate to lower spreads and thereby lower their cost of capital while investors might take this as a signal to expect price premiums for these and other types of green bonds. Such conclusions are, in our opinion, premature. Moody’s is attributing the results to sampling characteristics other than greenness.  For example, the results could be linked to project size as a determining factor or the role of public finance institutions that might have a strong incentive to support local infrastructure projects even if that means raising taxes or fees to ensure that such projects, for example mass transit, don’t default. That said, we believe that the results are promising and invite further research and analysis into the financial performance of green companies and instruments.  At the very least, the research report’s findings supports the idea that green oriented investments are likely to perform no worse than traditional ones.

Sept. 18, 2018 – Investors face analytical difficulties when using ESG scoring systems to compare companies. In a Wall Street Journal article, “Social, Environmental Investment Scores Diverge” by James Mackintosh, the author reviews differences in scoring methods from major providers.  Difference are considered to result from each provider’s approach that relies upon varying sustainability factors and subjective measures and, not inconsequentially, variations in the weightings of various factors starting with the broadest environmental, social and governance considerations.  In fact, the low correlations across different scoring methods have been cited by industry practitioners.  This reliance is present for individual investors as well as for fund managers relying on 3rd party scorers. We are not surprised by this.  The challenge of “standardizing” sustainability factors and investor values related to them is expected to persist.  Near-term, disclosure and more disclosure is the watchword.

Sept. 17, 2018 – An article in Barron’s, entitled “How to Spark Excitement in Lifeless ESG ETFs” by Eric Balchunas, concludes that based on assets accumulated in ESG ETFs they “have been a giant dud”. He suggests that that there are a number of ways to solve the problem, such as by lowering ETF expense ratios to less than 20 bps, eliminating confusing ESG labelling, and being more specific in fund names regarding their ESG focuses. Yes, we agree that these and other changes could help to attract assets to ESG ETFs which have to-date attracted only $9.1 billion in net assets, but greater involvement by financial advisors would help.  Another not insignificant consideration is the inclusion of these ETFs on allocation platforms.

Sept. 17, 2018 – Jeffery Gitterman stated at his firm’s Sustainable Investing Conference that was held recently that “despite interest, few advisors are actually investing in” ESG investments.  Among the reasons given for advisors to invest in these investments:  it is a way to attract and retain clients, especially among women and younger investors and they offer a way to align and customize investments to client’s values.  Further, performance alone is often not enough for some investors and ESG considerations and ESG type funds offer additional investment attributes that could attract clients. We agree that these are all good reasons for advisors to increase the use of ESG investment options. We also realize that it will take time to get these messages across.  While responsible investing in not a new concept, the broader more encompassing ESG investing approach is relatively new and to expect the advisor community to “jump in” overnight is unrealistic.  That said, early entrants into this market will grow with it.

Sept. 17, 2018 – Crystal Kim in Barron’s dated September 17, 2018 entitled “Investing’s X Factor: Gender” reports that investment funds “aiming, in part, to foster gender equality have proliferated-and dollars have followed.” The article cites data attributed to Veris Wealth Partners showing that exchange-traded funds and mutual funds have attracted more than $1.2 billion in assets and double what it was a year ago.  Further, the article reports that “gender diversity can pay off.  The relatively young SHE ETF is up 9.7% this year through Wednesday, versus the S&P 500 9.5%.  In the same stretch, Pax Global Strategy advanced 4.7%, beating the 1.9% of the MSCI ACWI, and index that, like it, covers both developed and emerging markets.”

The idea that gender diversity on its own can pay off, in our view, is still very much debatable.  As noted in our recently published research article entitled “Revisiting Gender Diversity:  California Senate Bill 826, peer reviewed academic research studies indicate that the presence of more female board members does not much improve a firm’s performance and that there is no business case for-or against-appointing women to corporate boards. Women should be appointed to boards for reasons of gender equality, but not because gender diversity on boards leads to improvements in company performance[1].” Moreover, within the context of a managed portfolio, fund performance will likely be largely influenced by other factors, such as decisions made by portfolio managers around country, sector and stock selection.

With the August launch of the Impact Shares YWCA Women’s Empowerment ETF, investors interested in the gender diversity theme can now chose from three ETF options, including SPDR SSGA Gender Diversity Index ETF and Workplace Equality Portfolio ETF, one ETN, the Barclays Women in Leadership ETN, and two mutual funds, Glenmede Women in Leadership Fund and Pax Ellevate Global Women’s Fund. These have attracted $650.1 million through July 31, 2018. That’s 46% lower than the $1.2 billion cited above and reflects an increase of $108 million, or 19.9%, versus July 2017.

Finally, our research fails to support the idea that these gender diversity themed ETFs and mutual funds have performed well. Based on performance results through the end of July when compared against each fund’s prospectus index, the longest available of the five funds is also the only fund to consistently outperform its benchmark over the four time intervals of 12-months, 3-years and five-years, is the Pax Ellevate Global Women’s Leadership Fund. The only fund of the five investing in US and foreign stocks of companies in developed markets, both share classes have outperformed their prospectus designated non-ESG benchmark form a low of 0.3% to a high of 1.08%, and the results have been achieved with lower volatility relative to the benchmark.

[1] Source: Does Gender Diversity on Boards Really Boost Company Performance, May 18, 2017

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