Doing well by doing good

E*TRADE Securities2

08/17/17

It’s one thing to say you’re committed to responsible business practices. It’s another thing to show it. In May, 62.3% of ExxonMobil shareholders told the company to put more bite behind its climate change bark.1

Voting against management’s claim that its policies and reporting were sufficient, investors called for greater disclosure from Exxon on how climate change affects the value of its assets, including oil fields, refineries, and pipelines. Many viewed the resolution’s outcome as a landmark event towards increased transparency into the corporate impact on, and potential financial implications of, climate change.

More broadly, investors interested in factoring environmental, social, and governance (ESG) standards—used to evaluate corporate behavior and future financial performance—into their investing strategy may find the development at Exxon another step in ESG becoming more mainstream.

ESG research blossoming

Increasingly, many in the investment community screen corporations specifically for ESG factors, such as carbon footprint, energy and water use, employee compensation and benefit structures, philanthropy, and product safety, among others. What’s more, investment strategies built around a set of approaches that integrate ESG factors are becoming more prevalent.2  

With an estimated $22 trillion of assets managed under such responsible investing strategies,3 that research is not just about doing the right thing—studies show that integrating ESG into investment analysis can lead to better financial returns. One recent Deutsche Asset & Wealth Management study aggregated the results from 2,250 individual studies and found that 62.6% of meta studies identified a positive correlation between effective ESG implementation and corporate financial performance.4

On the other side, there are more than a few cautionary tales about what can happen when corporate ESG strategy is lacking, and what can done in response:  

  • Environmental—The U.S. Environmental Protection Agency sounded the alarm on Volkswagen’s emissions testing in September 2015 upon discovering that the carmaker used “defeat devices” to pass emissions tests. News of the scandal stripped Volkswagen’s market cap of roughly $20 billion and sunk its stock nearly 30% in a day. A potential upside from Volkswagen’s emissions oversight could be a renewed commitment to clean air and clean auto, as the company agreed to make significant investments that support zero-emission vehicle technology as part of it settlement with regulators. 
Volkswagen 8/24/15-2/1/16

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  • Social—August 2016 brought word that Mylan Pharmaceuticals had increased the price of emergency allergy treatment EpiPen® by nearly 500% in the U.S. since 2007. Critics cited that as an ethical breach of affordable treatment, and it earned Mylan a congressional hearing. In response to the outcry, Mylan launched the first generic EpiPen® auto-injector at a discount of more than 50% to the branded medicine. The company also enhanced its patient assistance program and offered rebates to those in need.
Mylan Pharmaceuticals 2/16/16-12/28/16

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  • Governance—Wells Fargo had to return $2.6 million in fees and pay $186 million in fines after it was discovered employees opened roughly 2 million fraudulent customer accounts to boost sales. The lack of internal controls to curb such activity likely helped drop the stock to a 31-month low in September 2016. In an effort to regain its public standing, beyond the repayments it made, Wells Fargo has restructured business lines, implemented operational controls for its customer accounts, and invested in new training for its employees. 
Wells Fargo 7/7/16-11/8/16

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Recognizing future trends

Attention to such events has helped take socially responsible investing (SRI) from “being values-driven to being value-driven,” according to Michael Jantzi, CEO of ESG and corporate governance research firm Sustainalytics.5 And that increased focus on the social component, where there’s an emphasis on contributing to the common good, may in part be a function of a changing economy that’s driving ESG into investment decisions for corporates and investors alike.   

Possible ESG-related trends to consider when plotting future investment strategies include:  how companies respond to climate change; the advancement of renewable energy sources; how technology changes consumer preferences across all sectors, notably in consumer discretionary; what changing demographics, including average life expectancy, could mean for industries like health care; and how globalization evolves with geopolitics, as well as trade and fiscal policies.

It appears that ESG factors play an increasing role in how markets assign value to companies, and may be another factor investors may want to consider when building their portfolios.     

 

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1. Mufson, Steven. “Financial firms lead shareholder rebellion against ExxonMobil climate change policies,” The Washington Post, 31 May 2017. https://www.washingtonpost.com/news/energy-environment/wp/2017/05/31/exxonmobil-is-trying-to-fend-off-a-shareholder-rebellion-over-climate-change/?utm_term=.653597c8eff2

2. Hale, Jon. “What is Responsible Investing?” Morningstar, 26 Jul. 2017. http://www.morningstar.co.uk/uk/news/160196/what-is-responsible-investing.aspx

3. Global Sustainable Investment Alliance. 2016. 2016 Global Sustainable Investment Review.  http://www.gsi-alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf

4. Deutsche Asset & Wealth Management. Dec. 2015. ESG & Corporate Financial Performance: Mapping the global landscape. https://institutional.deutscheam.com/content/_media/K15090_Academic_Insights_UK_EMEA_RZ_Online_151201_Final_(2).pdf

5. Baldwin, William. “This Man Will Purify Your Portfolio,” Forbes, 25 Apr. 2017. https://www.forbes.com/sites/baldwin/2017/04/03/this-man-will-purify-your-portfolio/#28b8ae10280a