For those readers interested in financial news (some might call it noise), the unfolding story of Chinese property developer Evergrande (a name which is ironic given its dire financial position) has spooked global equity markets.

The short version of the story is that the company is very highly leveraged i.e. it has borrowed US$300 billion from banks to fund its property developments and has hit material cash flow problems, leaving suppliers and debt repayments at risk. Property prices have risen dramatically in urban China over the past few years and the Chinese Communist Party (CCP) is now clamping down on bank lending to slow the boom, which is part of Evergrande’s problem. To add to the drama, Evergrande has also sold high risk retail products to its wealth management arm’s clients, which it appears to have misrepresented as low risk investments. Some of these investors’ funds have been diverted to shore up the company’s own working capital and some has allegedly been used to pay off other investors, which is the hallmark of a Ponzi scheme. More acutely, the company needs to meet an interest payment of US$84 billion this week* and the markets are waiting with bated breath to see if they manage to do so. Its bonds are trading at 25 cents on the dollar and its equity has fallen by 85% in value in 2021. Not pretty.

IF Evergrande default - some have suggested this could be the equivalent of Lehman Brothers collapse that set off the market falls leading into the Global Financial Crisis - AND if this then leads to the collapse of the company with repercussions for lending banks (most of which are Chinese), AND if there is a resultant fire-sale of properties, AND suppliers go unpaid AND this all precipitates a collapse of other development firms, THEN this could cause a major challenge for the CCP (not least that 1.4 million buyers who have put down deposits on unfinished properties) AND impact on Chinese growth on which the world depends. Could it THEN cause a contagion in global markets resulting in a major decline in stock markets around the world?

BUT, hold on a minute, what started as a potential corporate default has grown – in this story – into a major decline in world growth and a stock market crash! BUT in this case, much of the debt is in local currency and lent by banks that are mostly owned by the CCP, which can force them to roll or forgive debt and provide unlimited liquidity to the banking system. It does not mean that things will be easily resolved, BUT it does not mean that the conflated IF, AND, THEN story of conditional probabilities is likely to occur.

It is important to remember that many material world events occur on a regular basis, but do not always end up in negative market outcomes. Even COVID, which put a dent in equity market valuations in early 2020, has failed to turn into a prolonged downturn. Global markets are now well above their highs before the COVID-induced falls. Certainly it is true that on occasion a single event precipitates a market fall, but the problem is that we, as investors, have absolutely no chance of knowing which event this might be and position portfolios ahead of any anticipated fall. If this were possible, the market would already have fallen! In this particular case, it is important to note that Evergrande’s market cap is under USD6 billion - or put another way, Apple is over 400 times larger - so any portfolio holding would be miniscule at worst. The company represents around 0.01% of global equities and China is only 4% of the global equity markets. Our suggestion: don’t pay too much attention to the financial ‘news’!

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

*This article was originally written on the 23rd September 2021.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

It may have passed you by, but recently a little-known hedge fund called Engine No.1 (David) scored a direct hit with its shareholder slingshot to the forehead of one of the world’s mighty oil companies ExxonMobil (Goliath), stunning its adversary.  Despite only owning 0.02% of ExxonMobil, it put forward a motion at the latter’s AGM to put nominees on the board of directors. It gained two of twelve seats.  Quite a coup.  Its simple rationale was straightforward:

‘We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation’.

Engine No.1 website

In 2010, ExxonMobil was the largest public company in the World, with a value of around US$370 billion, but in 2020 it ignominiously dropped out of the Dow Jones Industrial Average index and today has a value of around US$250 billion.  That is an awful lot of shareholder value destroyed, given how strongly the broad US market has performed. Last year the company made a loss of around US$25 billion, but the CEO still got a pay rise! ‘Go figure’ as our American friends would say.

So how did such a small investor have such a large impact on this behemoth?  Simple. It co-opted major pension investors, such as the California State Retirement System, and the giant fund managers Blackrock and Vanguard - representing the investors in their funds - to vote in its favour.  Ironically perhaps, the Norwegian ‘oil’ fund, which was funded from profits from oil extraction, voted with Engine No.1. It is now one of the world’s leading investors focused on sustainability.

And why would they do that?  In large part because of the growing focus on the climate crisis - and sustainability more broadly - by investors in their funds, who want their voices to be heard. It also comes down to hard-nosed capitalism.  Companies such as Exxon, who appear blind to the train-wreck they face when no-one wants or needs to buy oil, potentially risk losing further value, in some investors’ eyes.  They believe that they can help these oil-tankers to change direction more quickly towards a more sustainable harbour and reap the financial rewards of doing so.  Engine No. 1 was pretty honest about it[1]:

‘Our idea was that this was going to have a positive impact on the share price…What we’re saying is: plan for a world where maybe the world doesn’t need your [oil] barrels.’

Chris James, Engine No.1 Founder (from FT)

Perhaps the key message of Engine No.1’s move is that, even though our individual impact may be small, collectively we can make a difference, through the consumer choices we make and the power of the markets to penalise companies that are out of sync with the values of the day and to reward those who adapt.  From an investment perspective, that means remaining invested in companies in order to have our say, via the fund managers who manage our money.

It may be David 1, Goliath 0, but this game has a long way to go. 

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]    FT.com, Hedge fund that beat ExxonMobil says it will have to cut oil output, May 27, 2021

There’s been a big increase in interest in sustainable investing in recent years. But what exactly do we mean by sustainable investing? And, if we invest with our conscience, can we expect to receive lower returns?

Robin Powell explores these issues in this short video, with the help of Dan Lefkovitz from Morningstar.

You will find plenty of helpful videos like this one in our Video Gallery. Why not have a browse?

Video transcript:

An important development in the financial industry in recent years has been the growth of sustainable investing. But what exactly does it mean? Here’s Dan Lefkovitz from Morningstar:

“We define sustainable investing rather broadly. We consider it to be a long-term investment approach that incorporates environmental, social and governance criteria - ESG. And, it can range from sort of old-fashioned, exclusionary screening, like you might’ve seen in an ethical or socially responsible fund. Avoiding stocks of alcohol, tobacco or gambling companies, perhaps coal. It can also be just integrating ESG factors into the overall investment analysis. And that sort of integration is actually the most popular form of sustainable investing today.”

Passively managed funds are very cost-effective, but, by definition, they generally invest in the whole market. So, is there a conflict between passive investing and sustainability? Dan Lefkovitz says, on the contrary, they complement each other well.

“It’s interesting, you might think that, but in fact, we’ve recently seen quite the opposite. So, we’ve seen big passive investment managers, the likes of BlackRock, Vanguard, and StateStreet become a lot more active with the companies that they own, simply because they are replicating an index. Now you are seeing passive investment managers who have to own these companies and feel like they’re sort of suck in a long-term relationship with no option for divorce, be more active when it comes to their ownership.”

If you want to combine passive investing with sustainable investing, there are funds available — particularly exchange-traded funds — that effectively do both.

Lefkovitz says: “We actually think that sustainable investing lends itself very well to index funds and to exchange-traded funds. The kinds of positive and negative screens that are typically employed with sustainable investing actually fit very well in index and exchange-traded fund format. There also seems to be an alignment between the demographic that sustainability appeals to and the exchange-traded fund. Younger investors like sustainability and they also like exchange-traded funds.”

Of course, all investors are ultimately looking for good returns. So, is there is a price to pay for investing with your conscience?

“The number one frequently asked question we get about sustainable investing is: “Do you sacrifice returns if you are investing sustainably?”. And, interestingly, maybe in theory if you’re limiting your universe and not investing in certain companies because they’re not sustainable, that would be limiting. In practice, our data show, that sustainable funds perform on par with their non-sustainable counterparts. There is even some evidence to show, that sustainable investing leads you to companies that are poised for outperformance.”

That’s it. Thank you to Dan Lefkovitz from Morningstar.

Picture: Shawn Bagley via Unsplash

Ask any parent, teacher, sports coach or line manager, and they’ll say the same thing. 

It’s easier to criticise than it is to praise. But the latter is far more likely than the former to produce the outcomes you want to see.

Of course, there’s a place for both the carrot and the stick, but all too often we get the balance wrong. Our in-built bias towards negativity means the tendency to blame comes much more naturally than the urge to encourage.

The oil companies

Take climate change, for example — and, in particular, what different companies are doing to tackle the problem, or indeed to exacerbate it. 

The big oil companies have rightly borne the brunt of criticism from environmentalists. True, they are, at least, finally acknowledging the need for action. Yet the resources that they invest in alternative energy remains only a tiny fraction of their expenditure on traditional oil and gas.

Calling out those firms that fail to match their words with action is of course important. But we also need to acknowledge the good guys — companies that are genuinely playing as part in addressing the climate crisis.

Several such firms were highlighted at The Values-Based Adviser, which IFAMAX helped to organise.

In his presentation, Dr Jake Reynolds from the Cambridge Institute for Sustainability Leadership highlighted two firms in particular that are really getting their act together.

Setting the standard

The first was the confectionery company Mars. Each year, according to the United Nations, an area the size of Bulgaria is lost to drought and desert. That’s enough land to grow 20 million tonnes of grain a year. To help reduce pressure on natural ecosystems, Mars has set as its goal freezing its land footprint, even as its business grows.

The second company singled out for praise by Dr Reynolds was Ikea. The Swedish flatpack furniture maker has substantially upped its game on the environmental front in recent years. As well as becoming climate positive, Ikea is committed to regenerating resources, protecting ecosystems and improving diversity.

Other firms that Dr Reynolds believes deserve recognition are the following:

Unilever (committed to sourcing all agricultural materials from 100% sustainable original by the end of next year)

Pirelli (improving methods of rubber extraction in Indonesia to extend tree life and reduce deforestation)

Fuji Xerox (now operating a closed-loop recovery system through product take-back, reuse and recycling, which is 99.5% effective)

Iberdrola (providing energy access to 4 million disadvantaged people by 2020, producing 50% less carbon dioxide by 2030)

Novo Nordisk (working with cities round the world to map and analyse the root causes of unsustainable planning) 

Balancing price with environmental impact

So, what are we saying? First of all, we’re not saying you should go out and buy these companies’ products and services. From a sustainability point of view, the less consuming we do the better.

But you should consider factors other than price when making a purchasing decision, and they should include environmental ones.

Remember too that you can support the efforts being made by responsible companies to tackle the environmental challenges we face by investing in a sustainable fund. 

The GSI Global Sustainable Value Fund, for example, which we at IFAMAX use, considers a company’s approach towards environmental, social and corporate governance (ESG) issues; companies with higher ESG scores are given a larger weighting than those with lower scores.

Seeing through the gloom

And one more thing. That negativity bias we referred to earlier also helps to explain how the climate crisis is covered in the media. There are so many more negative stories than positive ones that it’s not surprising that many of us find this whole issue depressing and overwhelming. 

The true picture is actually more positive. There are companies out there who are talking climate change very seriously. They deserve our support and encouragement.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

Weekly round-up: Week 48, 2019

Pictures: Ankush Minda and Adrià Crehuet Cano via Unsplash

2019 will doubtless go down in history as the year that Britain became obsessed with Brexit. Just now, there seems to be no escaping it. But is the media’s fixation on relations with Europe obscuring the fact that Britons are becoming increasingly concerned with a potentially far bigger issue? Climate change.

A survey in July by ComRes, commissioned by Christian Aid, found that 71% of the UK public think that, in the long term, climate change will be more important than exiting the EU. Six out of 10 adults said the government was not doing enough to tackle it.

In fact, several polls in the last year or so have produced similar results. An Ipsos MORI survey for the Evening Standard, published in August, for example, showed that 85 per cent of adults are now concerned about global warming. That’s the highest figure since the pollster started asking the question in 2005.

The impact of news coverage

What has caused this shift in opinion? Well, climate change has certainly featured prominently in the news. We’ve seen heavily publicised demonstrations by Extinction Rebellion in London; 16-year-old Greta Thunberg hit the headlines when she sailed to New York on a zero-carbon yacht to New York to address world leaders at a climate change summit; and the hottest July ever around the globe reinforced concerns that the effects of global warming are starting to escalate. 

In truth, however, opinions were changing before any of those news stories broke. Responding to a survey commissioned by the Department for Business, Energy and Industrial Strategy (BEIS) and published in March this year, 80% of the public said they were either fairly concerned (45%) or very concerned (35%) about climate change. The overall proportion of the population concerned about the issue was the highest since the study started in 2012.

It’s not just women and young people

Another interesting takeaway from these surveys is that old stereotypes appear to be breaking down. For example, a long-held view is that those most concerned about environmental issues tend to be either young or female. It’s still true that marginally more women express concern about global warming than men, but according to both the Ipsos MORI and BEIS polls, the gender gap is narrowing. Both studies also showed that levels of concern with climate change do not differ greatly by age.

Of course, we shouldn’t be surprised that the views of younger and older people are less polarised now than they were, as the older generation dies off. But academics have been pointing out for several years now that older people are actually more interested in environmental issues than is often assumed. 

In 2013, for example, a study called Age and environmental sustainability: a meta-analysis collated the results of multiple studies between 1970 and 2010, in order to “determine the magnitudes of relationships between age and environmental variables”. The researchers found that “most relationships were negligibly small”. They also concluded that “small but generalisable relationships indicated that older individuals appear to be more likely to engage with nature, avoid environmental harm, and conserve raw materials and natural resources”.

Walking the walk

That last finding is particularly significant. After all, it’s one thing to be concerned about the environment and quite another to do something about it. Studies have shown that, very often, people who claim to have green credentials fail to match their words with action. 

Another area in which older people are more likely to act in an environmentally sustainable way is in investing. Around the world, it’s generally the over-55s who are contributing the most to the sustainable investing market. Triodos Bank predicts they will continue to do so in the UK in every year until 2027.

Summary

In short, all the evidence appears to be pointing to an increase in interest in the environment and to a growing willingness to act on it. Nor is it just certain sections of the population whose attitudes are changing. 2019 may just be the year that, in Britain at least, the tide of public opinion finally turned on climate change.

Check out more of the latest news from IFAMAX:

Pay less attention to weather forecasts

How women view money and investing differently

A little encouragement goes a long way

Picture: Jeremy Bishop & Kartsen Würth via Unsplash