Market Direction and Stock Trends

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Moral Money: when the going gets tough does ESG go out of the window?
By: Financial Times | October 16, 2019

• Your guide to the investment and business revolution you can’t afford to ignore

It’s become something of a given — to Moral Money readers, at least — that companies need to adopt a broader purpose than simply pumping out profits if they are to help build a more responsible form of capitalism. Marc Benioff (pictured above) became the latest chief executive to say as much this week, writing in the New York Times that “the culture of corporate America needs to change”.

But how? That is the question an FT series on the company of the future set out to answer by focusing on businesses around the world that may serve as models. As the series wraps up, it’s worth reviewing what we learnt. 

From Danone, the purpose-driven French yoghurt maker, we heard that there is still a disconnect between what asset managers say and do (“I’ve been receiving letters from Larry Fink, but apparently his portfolio managers are not reading them,” chief executive Emmanuel Faber told the FT’s Andrew Hill.) Japan’s Hitachi pointed to the importance of using a crisis to shake up the company’s governance. (“Many companies want to change, but every company needs a moment that makes it happen.”) And as Levi Strauss tests whether its long-term principles can thrive in short-termist public markets, its chief cautioned that “profits through principles doesn’t mean we’re a non-profit organisation”. 

The FT’s editorial board concluded that action is needed in three areas to encourage long-term, sustainable growth:

1. Align asset managers’ and owners’ goals more closely with those of the purpose-led companies in which they invest. 
2. Accelerate improvements in non-financial measures that assess the impact companies have on society and the environment. 
3. Structural and regulatory solutions including a more relaxed attitude to two-tier shareholder structures and ways of discouraging a nearsighted focus on quarterly earnings. 

Do you agree? We’d like to hear from you at [e-mail]. 

One thing is clear: there are still trade-offs between purpose and profit, which we explore in an innovative news game you can try here. 

Moral Money can also reveal that FT readers who played the game have so far been more focused on delivering the next quarter’s numbers than prioritising their environmental and social responsibilities or making long-term investments. And when times got tough, 55 per cent of them fired the barista. (Andrew Edgecliffe-Johnson)

ESG investors split over recession fears

This is the week when downtown Washington becomes a traffic jam, as it plays host to the annual World Bank and IMF meetings, with thousands of policymakers, financiers, economists and journalists. And at this autumn’s event, there is likely to be plenty of chatter about whether the world is heading for recession. 

There will also be a flurry of debate about climate change and environmental, social and corporate governance (ESG): judging from the official programme, this is set to be one of the week’s hottest topics, with a record number of high-profile events featuring illustrious figures such as Kristalina Georgieva, the new head of the IMF, and the European Central Bank’s Philip Lane. (Moral Money will be reporting back on the impending announcements on our hub page and newsletter). 

But should these two topics be debated in conjunction with each other? Some ESG players believe they should. Until recently, some cynics have suspected that the current boom in ESG was partly driven by the wider bull market. The fact that times were relatively good gave investors enough space to investigate new ways of managing their money; or so the argument went. 

If that is correct, this might imply that a looming recession or decline in global asset prices will hurt the ESG landscape. However, another idea is now starting to bubble in the ESG community too: if (or when) markets slide, ESG will gain added value for investors because it will enable them to diversify. After all, as one investor told Moral Money at the Global Impact Investment Network conference last week in Amsterdam, it can be hard to convince asset owners of the financial merits of ESG (or impact investing) when they can just put their money into the S&P 500 and get sky high returns.

Right now, nobody knows which theory is correct: since most of the industry was not around before 2009. But the louder the recession chatter gets, the more this debate will start to matter. Moral Money would love to hear your views.

Private prison assets on lockdown?

Last week, California became the first US state to ban private prisons. This could be a serious blow to the controversial industry which may become untouchable for investors — regardless of their views on socially responsible investing. 

The sector has already been under fire this year, with numerous major banks pledging to cut off funding to Geo Group and CoreCivic (the two largest US private prison operators) in the face of an activist campaign sparked by the Trump administration’s family separation policies.

Fitch downgraded the sector’s credit rating in July as a result of the banks’ decision, but the immediate effect on the companies has been muted since the private prison operators have enough cash on hand to last them a few years. 

In June, for example, after Bank of America announced it would be ending its relationship with Geo Group, the private prison operator pointed out that BofA had recently extended its $900m line of credit through to May 2024. 

Legislation like California’s is a different story, however, and if other states follow suit it could have a major impact. If Donald Trump loses the 2020 presidential election, that impact will be amplified. 

President Barack Obama had moved to cut off federal contracts to private prisons in 2016 (a decision almost immediately undone by President Trump) and Democratic frontrunners Elizabeth Warren, Bernie Sanders and Joe Biden have all taken aim at the industry on the campaign trail.

Some large institutional investors such as the New York City pension funds have already cut their private prison holdings on ethical grounds, but if the current trend keeps gaining momentum these companies could become stranded assets, meaning divestment would be the sound fiscal choice as well. (Billy Nauman)

Grit in the oyster

Many companies and investors say they try to “do well by doing good”. As a reminder that many still fall short, here’s a little grit in the ESG oyster.

Carbon pricing going in the wrong direction

Not enough of the world’s biggest fossil fuel emitters are using carbon taxes or emission trading systems to staunch greenhouse gas emissions, according to an IMF report this month.

The average price on global emissions is currently $2 a ton, a tiny fraction of what is needed for the 2°C target, the IMF said. Limiting global warming to 2°C or less requires policy changes such as an immediate global carbon tax that will force the price of a ton of CO2 to $75 in 2030.

An early start to reinforce the Paris climate accord process could be made through a carbon price floor system among countries with the largest emissions, the IMF said. But the biggest polluters have not implemented price floors yet.

“If the top three emitters (China, United States, India) participated, such an agreement would already cover more than half of global emissions,” the IMF said. (Patrick Temple-West)

Chart of the week


For the three months ending in September, open-end and exchange-traded sustainable funds attracted more than $4bn for the third consecutive quarter, according to an October 11 Morningstar report.

The tally comes as the iShares ESG MSCI USA ETF drew in about $900m in September, almost quadrupling the fund’s total assets in one month, according to Bloomberg data. The ETF ended August with about $296m of total assets and had $1.2bn on September 30.

The BlackRock fund quickly joined the small group of ESG ETFs with more than $1bn of assets. Earlier this year, Ilmarinen, Finland’s oldest pension company, said it would put $1.6bn in two ESG ETFs: another BlackRock fund and one with DWS, the fund management arm of Deutsche Bank.

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