This article is part of a monthly series contributed by The ESG Group at Silver Leaf Partners, courtesy of Managing Partner, Michael J. Scanlon.
ESG Research: Big Boys Put Muscle In
As the demand for ESG investment grows, major rating agencies are bolstering their ESG research departments to ensure they can provide credible information to the growing market segment.
Already well known for its global stock indexes, MSCI has recently established itself as “the market standard for ESG,” according to Amy Orr, the director of capital markets at the Heron Foundation. MSCI’s most notable ESG success came back in 2015, when Volkswagen was dropped from the MSCI ACWI ESG Index. The MSCI’s ESG research team noted a “deterioration in VW’s corporate governance practices” and “poor levels of director independence”, causing MSCI to downgrade the stock months before VW’s emission cheating scandal broke. The company’s track record of success has led to the widespread utilization of its ESG index. This year, Merrill Edge – the financial platform that offers access to online and advised investing, trading, brokerage and banking services – updated the dashboard for its online trading service to include ESG scores from MSCI.
Other agencies have also been taking steps to more robustly consider ESG risks in their credit risk assessments. Back in 2012, S&P introduced references to the management of environmental and social risks and the oversight of these risks by a company’s board of directors in the Management and Governance section of its credit rating methodology. S&P says it can point to 106 examples over the last two years where environmental and climate concerns—both event-driven and those occurring over a longer time horizon—resulted in a change of rating, outlook or CreditWatch action. S&P states that in 44% of these cases there was a positive rerating, and in 56% a negative rerating. Moody’s clarified its approach to integrating ESG into its rating methodology in 2015, saying that it reflects ESG considerations in its holistic assessment of credit risk through scored and non-scored factors, with a particular focus on 14 sectors with high or very high carbon transition risk (e.g., coal, oil and gas, building materials, steel, utilities and airlines).
In addition, just last month Sustainalytics released “Carbon Risk Ratings“, a new metric which tracks a company’s exposure to “material carbon vulnerability”: a measure encompassing more than just carbon footprint. The new rating system will monitor over 4,000 publicly listed companies across 147 industries around the globe. Morningstar will subsequently utilize Sustainalytics’ metric in its Portfolio Carbon Risk Score. Low-scoring portfolios will be granted Morningstar’s Low Carbon Designation, a market to help investors quickly recognize portfolios that support sustainability goals. Morningstar plans to rate 30,000 funds with the new metric.
EVs at the New York, Chinese and Berlin Auto Show
According to the Bloomberg New Energy Finance (BNEF) report Global EV Outlook 2018, over 1 million electric cars were sold in 2017 – a new record – with more than half of global sales in China. The total number of electric cars on the road surpassed 3 million worldwide, an expansion of over 50% from 2016. In the US Tesla’s Model 3 was the “single biggest” one-week launch of any product ever. Furthermore, manufacturing costs per kWh for EVs are decreasing and are projected to fall even more from an average of $209 at the end of 2017, to approximately $100 by 2024. The changes in EV demand can be followed at international car shows around the world. As EV trends grow, more electric cars are featured at massive international auto shows, forecasting future trends.
The New York International Auto Show (NYIAS) features the latest EVs from global automakers and gives insight into the future of EVs. The NYIAS has been presenting the latest trends in vehicles for over 100 years, and in recent years a focus on EVs has increased. Most automakers at the 2018 NYIAS featured at least one, if not more EVs. An immense range of cars were featured including: the BMW i8 a luxury hybrid, the Chevrolet Bolt with a range of 50 miles, the 2018 Honda Clarity, and the Koenigsegg Regera one of the most luxurious EVs.
Germany is host to the largest motor show in the world, the International Automobile Exhibition (IAA), which attracted over 800,000 people in 2015. The IAA has separate shows for commercial vehicles and for standard cars that occur on a biennial basis. Stuttgart and Hamburg in Germany have been taking drastic measures to ban diesel, and many other large cities in Europe including Paris and Madrid plan to ban diesel from city centers by 2025. Due to many major cities in Europe facing a potential ban of diesel , automakers are optimistic about an electric future for both public and private transportation sectors. Volkswagon, BMW, and Daimler placed great focus on EVs at IAA Cars 2017.
The Chinese auto market is currently the largest and fastest growing in the world. They will lead sales in EVs, accounting for 50% of the global market by 2025. The Beijing International Automotive Exhibition (Auto China) has taken place for 15 years and occurs on a biennial basis, like the IAA Cars show. This year special attention was placed on EVs as EV regulations in Beijing are changing, such that EVs must amount to 10% of auto manufacturers production by 2019. Many companies such as Toyota have made partnerships with Chinese companies in an attempt to capture Chinese market share successfully.
Nuns, Guns Ready to Rumble (G – Governance)
Sister Judy Byron chose religious life in the ‘60s, inspired by the Catholic sisters who educated her. Following in their footsteps, she became a middle school teacher, then principal of an elementary school, working to serve God and her community by guiding young minds. She never worried about guns in her classroom. They had fire drills, but not lockdowns. Her students weren’t afraid that someone would come to school to hurt them.
That changed after Columbine, then again and again in the following years. When 26 people — most of them first-graders — were killed at Sandy Hook Elementary School in 2012, Byron was left in disbelief. Surely, people would now have to come together to do something about gun violence. On May 9, at gunmaker Sturm Ruger & Co.’s annual meeting in Prescott, Arizona, their efforts faced a major test when investors voted on the first of two such resolutions targeting gun companies. Specifically, the measure will ask Sturm Ruger to spell out what it’s doing to mitigate gun violence. Byron hopes the results will send a message that companies can’t ignore. To take a stand on gun safety, about two years ago ICCR investors checked their portfolios to make sure they held stock in Sturm Ruger, Dick’s Sporting Goods, and American Outdoor Brands, the parent company of Smith & Wesson. Others, including the Adrian Dominican Sisters, purchased $2,000 worth of Sturm Ruger and American Outdoor Brands shares and sat on them for a year, a requirement for investors to voice concerns in public companies.
Colleen Scanlon, chief advocacy officer of Catholic Health Initiatives, was in Arizona to present the faith-based investors’ resolution.“We see the devastating impact of gun violence, and we think it’s a public health crisis and has extraordinary human and financial costs,” she said. “I guess we see this kind of as an obligation,” she said. “We always talk about our commitment to build healthy communities.” In the weeks leading up to the annual meeting, Scanlon and the sisters have been making their case to fellow shareholders, particularly large institutional investors. They’ve drawn on contacts in the financial industry from previous shareholder activism work, and in April, they sent out a memo hoping to persuade investors to vote with them. ( Thank you Colleen from all of us, we are so proud of your leadership! The Proposals were passed.)