This article is part of a monthly series contributed by The ESG Group at Silver Leaf Partners, courtesy of Managing Partner, Michael J. Scanlon.
The 2 Morgans: Pushing for ESG Investing
Morgan Stanley’s 2018 Sustainable Signals report indicates that, globally, more than $22.8 trillion are invested sustainably, representing more than $1 in every $4 under professional management. 84% of asset owners are pursing or considering ESG integration in their investment process and 78% of asset owners seek to align with the UN Sustainable Development Goals (SDGs). Sustainable investing is growing at an annual compound rate of 11.9% according to Morgan Stanley.
J.P. Morgan’s report, ESG Investing Goes Mainstream, (apologies, no links to this report due to UK regulatory) also finds that ESG investment no longer requires foregoing returns as companies that are socially responsible are likely to lead in overall management capabilities. Shareholder and public demand for ESG investing and evidence that it can boost returns are inducing governments to pursue a more active regulatory program. J. P. Morgan has come out with a new ESG compliant index, JESG, and ESGQ, a proprietary stock selection metric, that facilitates responsible equity investing. Many organizations plan to implement ESG criteria in the next 12 months, and 60% of ESG criteria has been implemented for less than four years.
One of the more important institutional factors driving adoption of ESG principles is the need for a new “lens” of risk management. Consumer trends point toward greater return for sustainable companies and millennials are more than twice as likely as other generations to purchase products from companies they view as sustainable. Institutional asset owners are taking the view that a more quantitative recognition of ESG factors will provide unique insights into long-term risks and opportunities that might not be captured by traditional financial analysis. Summarized by analyst; Stephanie Ellis, BS of Economics at Babson College, 12/2018
Peace Boat’s 97th Circling of the Globe: Amazing Group!
With much appreciation to Peace Boat founder, Yoshioka Tatsuya, my family and I, along with a number of the Silver Leaf Partner’s (SLP) ESG group were honored guests on July 12th, 2018 at Pier 90 on the Hudson River, on the special cruise liner named “Ocean Dream” also known as the Peace Boat. We invite you to see photos from the event, read the event report, and learn more about Ecoship. As introduced during the event, Ecoshhip is designed to be the world’s most sustainable passenger ship that will not only reduce carbon emissions by 40%, but also sail as a flagship for the UN’s Sustainable Development Goals (SDGs) . Peace Boat will visit New York City again in October 2018 and on World Oceans Day in June 2019. Peace Boat, a Japanese non-governmental organization which runs educational cruises, is working on an ambitious project to build the most sustainable vessel in the booming industry. Now in the last stages of planning, the “Ecoship” will be built by Finland’s Arctech. It will cost about $500 million, financed in part by impact investors — funds, rich families and individuals who want to use their cash to improve the world as well as make a profit. “Ecoship was a dream for me,” said Peace Boat founder Yoshioka Tatsuya. “Using a conventional ship was frustrating for us, even though we tried our best to reduce the emissions.” A conventional cruise ship can burn hundreds of tons of heavy fuel oil a day and emit as much particulate matter as a million cars, according to German environmental group NABU. The “Ecoship” will be fueled by a much cleaner combination of solar panels, wind power and liquid natural gas, and should produce 40% less carbon dioxide than a traditional cruise ship. * Please join us when the Peace Boat returns to NYC, October 2018 and again in June 2019 and be part of the Peace Boat team!
GE is a Fossil Fuel Enabler, unfortunately for shareholders
Once the darling of both Wall and Main Street, General Electric (GE), now is in a declining business (E) and has been a terrible player in the financial world of trust and governance (G). It provides the technology and equipment to extract, process, and convert oil, gas, and coal into electricity and other hydrocarbon products. Hence, the company is indirectly contributing to climate change. The company’s Power and Oil & Gas segments represent 46% (up from 43% in 2014) of industrial segment revenues. In recent years, the company increased its fossil fuel exposure through the acquisitions of Alstom ($10.1B) and Baker Hughes ($7.5B). The acquisitions have not performed well due to poor execution, pricing pressure, volatile oil prices, and cautious customer spending patterns. Demand for gas turbines appears to be in free-fall—with shipments expected down 35-40% in 2018—owing to renewables and energy efficiency. In 2017, GE’s Power and Oil & Gas segments saw 45% and 84% profit declines (including charges), respectively. CEO Flannery sees the turnaround in Power as a “multiyear fix”. Power plants that are running on GE turbines may face significant stranded asset risk. Also, the long-term trajectory of the Power business is likely down as renewables become a larger part of the grid (GE has a natural hedge here since it also has a $9B onshore wind business).
Governance risks may also be a factor in GE’s dismal performance and there are plenty of red flags. There have been numerous senior management and board changes in recent years owing to the difficult results, including the surprise departure of CFO Bornstein last fall. A downsizing of the unwieldy 18-member board looks to be a positive change. GE has also revamped its executive compensation program to align more with business segment and cash flow performance. The company may also sever ties with its long-time auditor KPMG. That said, there are several legacy issues that call into question GE’s oversight and governance. In 2015, the Department of Justice opened an investigation for alleged violations (GE took a $1.5B reserve). In January of this year, General Electric Co. announced it will pay $15B to make up for the miscalculations of an insurance subsidiary as a new regime weighs future changes that could culminate in a breakup of a company conceived in the industrial age. Alstom has pleaded guilty to anti-competitive activity including widespread bribery and corruption. DoJ imposed a $772MM fine on Alstom in late 2014 and several executives were indicted. There is still pending civil litigation related to Alstom. Lastly, there is a new SEC investigation into GE’s revenue recognition practices and internal financial controls. None of these issues are likely to be fatal for GE, but nonetheless may add to investor weariness after a few tough years. Submitted by Kuni Chen, CFA, Director, Impact Investments at NatureVest.