Weekly Viewpoints on Sustainable Investment by Graham Sinclair with commentary on sustainable investment strategy, changes in the investment markets, and issues of environment, social and corporate governance [ESG] architecture. ESGextra viewpoints are from a growth markets perspective in frontier and emerging markets [see also Visual Notes at esgarchitect.tumblr.com and Tweets @esgarchitect or @SinCoESG].
In the week that began with Citi [C] becoming the US government's latest shareholding, JPMorganChase [JPM] was pitching their core competency as a lender, and Goldman Sachs [GS] was looking to stretch their sustainability advantage branding their research and investment products. JPM was busy offering a full page advertisement in WSJ Eastern edition A5 Tues 25 Nov pitching to the WSJ readership on their commitment to lending [“Our Business Is Lending. And That’s Exactly What We’re Doing”], including “in a responsible way”. Yes, I can only imagine what my mate who taught me how to build a BS filter for company ESG claims, the KLD research director in Boston, will say about that one!
Goldman Sachs was taking the front foot in the FT Mon p.3 with the first above-the-line hardcopy advertisement I have seen for GS Sustain, a fair advertising budget commitment to go above-the-line. Of course GS hedged bets by burying the ESG lead in the body, the sub-title “innovative thinking finds innovative companies”, and one has to mine the paragraph further for “a unique global equity strategy that brings together ESG (environmental, social and governance) criteria, broad industry analysis and return on capital to identify long term investment opportunities”. But GS now fronts their homepage with GS Sustain. Clearly someone is taking a big bet, and perhaps with freefall markets, a good time to try something completely different.
GS Sustain has a colourful history. It's strong underpin is from the GS sell-side in London via the work dating back to 2003 of Anthony Ling in the Energy Equity Research team, and then taken forward by Sarah Forrest, Marc Fox and colleagues. Sarah is now an Executive Director for Global Investment Research. After finally establishing a coordinated framework in early 2007 – GS Sustain – which launched to plaudits from the usual UN Global Compact types and affiliates in Geneva last July, the GS Sustain brand has been slowly building. Like IBM, no presenter looks dumb when quoting GS – a false security to be sure – but expedient for now. Indeed, in my MBA865 seminar at Kenan-Flagler Business School, Sustainability in Investment Strategy at Chapel Hill last week, one of the most informed students referred to “it’s Goldman Sachs!” as the GS halo in the ESG space proves to light the way for less skeptical inquiry of how sustainability plays in. Clearly GS benefits from being one of the two last i-banks standing, [mostly!], and may push for competitive advantage on sustainability matters in the FT, the print daily which positions itself in US as more global than the WSJ or NYT Business Day as a major business daily. Companies, as they do with any positive third party assessment, but especially when it is a major i-Bank brand, are only to happy to tout their standing in any competitive assessment, such as BG Group[LON: BG] a natural gas company.
I was first alerted to the new GS Asset Management product built off the GS sell-side’s GS Sustain framework in Manhattan at the Sustainable Investing 2008, People. Plant. Profit. on September 23-24th, 2008 at The Harmonie Club, New York City. At that time the product was available offshore only, but now institutional US clients may access it. The conference was hosted by Financial Research Associates, LLC for the first time, as a new conference publisher entering the sustainability space, with assistance from SIF.
In the next two weeks I will be having a more solid look at GS Sustain GSAM product as forward planning for when it has run a year at least and we may start recommending the strategy from an informed understanding to the benefit of asset owners and multi-managers. I like that GS Sustain is in the game, for sure, but a close examination of some of the underlying criteria makes me cautious based on my past experience of ratings that are built on "box checking". The framework looks good, but underlying data, and assumptions like memberships of an initiative or international organization sending signals about sustainability, may be sub-optimal. I am cautiously positive, and our recommendation at Sinclair & Company to investors is to observe closely, and stress-test the ideas before becoming convinced. I have not reviewed the strategy in detail since hearing about it in late Sept, partly because the most impressive aspect of the Sustainable Investing 2008 event had me moving to other thinking. Other than Tim Smith’s usual excellent chairmanship [when not chairing SIF, he is in Boston as Senior Vice President at Walden Asset Management], was the compelling speech by Joe Keefe CEO of PAX over lunch, one of the best expositions on where ESG/sustainability investment is in 2008, and where it may go, an extract of which is here.
And of games, well, it just would not be right to cover emerging markets and London in the same story, and fail to mention Saturday's smashing game the Springboks played against England which CNN titled "Springboks Thrash England at Twickenham". Rugby, like life, rewards grit as well as grace, with patience a coaching watchword lately. So comprehensive, the Brits found time to boo their team. Yikes! The tackles, the tenacity and the touch South Africa showed against England in their backyard, racking up the Roses’ biggest ever loss at home, was a fresh reminder of the entrepreneurial and rugged nature of the boys from the bottom end of Africa.
Sarah is an Aussie, so she would have enjoyed it, and the headliner from The Australian "Springboks Outclass England at Twickenham". The boys from Goldman are credited with the BRIC monikercoined the term ‘BRIC’ in our Global Economics Paper, ‘Building Better Global Economic BRICs’, published on November 30, 2001. Maybe they had seen Bakkies [“bricks”] Botha make a tackle sometime before, like the try-saving one he made on Saturday? [sidenote: should every rugby player hope for a wikipaedia entry?!]. Yes, I know, South Africa has the ability to play sublimely one week [has Australia recovered from 50-odd thwack at Ellis Park, their biggest ever Test loss?] to the slack - only one Tri-Nations title in all these years. But as I pitched at the Paris UN PRI Board meeting in Nov 2007 - to the sullen looks from the Englishman directly after Springboks won in Paris [and a smile from the Frenchmen] - nice to see EM on top. A small smile for EM slips out when running through the scoreboard from Saturday: Emerging Markets 42 vs. Developed Markets 6.
The England coach called it “brutal” and “a lesson”. Pretty much sums up the financial meltdown for EM and the rest of the world too, and the bleak '09 outlook. Enough said.
It has been a rough spring in emerging markets in the South [this photo is from April, obviously]. The emerging markets, as simplified and represented by the BRICS moniker [Brazil, Russia, India, China, South Korea and South Africa], have been bounced out the back of the financial services meltdown wagon. The benchmark indices catch you up on the story quickly, and the forex cross-rates quickly offer the impact - Brazilian ranches, Russian dachas or South African wine estates are cheap right now for payers in USD! Yes, as a fixed income manager mate in Cape Town will attest, this creates a serious challenge for his vacation strategy – which weakened forex rate best matches the exotic destination he would like to visit in January?!
“…expect GDP growth in the BRICs to be lower this year than last, the structural changes in these economies-and indeed in the world economy-are likely to make the impact of the global slowdown less severe than in the past…one of the key underpinnings of the BRICs' strength: capital flows”
BRIC is the original acronym coined by the GS EM team in NYC, although BRICS is my preferred acronym, and ChIndia the population-weighted current favourite on CNBC. And whether local or foreign, how tough the investment forecasting game is may be illustrated by reflecting on conclusions like…
“Overall, the deterioration in capital flows that we anticipate this year is manageable, and we remain bullish on the BRICs currencies. We expect appreciation of 8% against the USD in China, 4% against the USD/EUR basket in Russia, and 5% against the USD in India. In Brazil, we think the Real could strengthen over the next three months, but it is likely to weaken later in the year.”
The personal finance regulars in WSJ Tues covered the sad EM tale with their “SmartMoney” screens, from being up 50% p.a. in China in ‘06 and Brazil in ‘07, now down about the same magnitude in ‘08, with the Fidelity Latin America fund down -65.6% YTD @ 20 Nov. Yikes! No wonder Fidelity is letting go staff in BOS to trim expenses. Interesting as always to note the pricing – of the no-load funds, the passive tracking option from Vanguard [Vanguard Emerging Markets Stock VEIEX] proves to be cheapest as always, with 40bps annual fee. And like Wal-Mart soaring in these tough depression days as consumers know where to purchase lots of cheap stuff, maybe Vanguard will gather assets even as the regular 401k contributions have to go somewhere. But retirement advisors, a growing advisory service category according to FRC, will need to be longer-term orientated to recommend emerging markets to US clients in 2008. Like Africa, EM is not for sissies! Donald Hanna, MD and Global Head of Emerging Markets Economic & Market Analysis at CITI in New York, offered a bleak look at where EM may be for ‘09 in a presentation in BOS last Thurs. His take on Brazil and South Africa seemed fair...hard times ahead.
Standard Chartered, a bank and a solid emerging markets play based on their strong network in Middle East and Africa, is raising around USD3 bn through a rights issue and just hosted an Investor Trip to its banking operations in India, Abu Dhabi and Dubai from 17 to 20 November 2008. Standard Chartered has a network of over 1,750 branches and outlets in more than 70 countries across the Asia Pacific Region, South Asia, the Middle East, Africa, Europe and the Americas and employees about 75,000 employees from 115 nationalities. Their branding tied to marathon running and cricket hints at their EM exposure. Although without an in-house money manager [I pitched them on joining the PRI in EM project back in Dec 07], nor with direct exposure to toxic US mortgage assets or developed markets financial services, the tough times ahead imply the need for more capital on hand. STAN has some good programmes in EM, as the programme head Mariannne Mwaniki covered last July at for the Global Compact 4th annual Communication on Progress (COP) workshop at the Palais des Nations in Geneva.
Many EM banks did not have direct exposure to sub-prime. But similar to our experience in the South African market, where banks and money managers were prevented from reckless exposure by capital restrictions allowing only 15% offshore investment and hence no major exposure to the developed markets contagion, the resulting flight from risk – perceived or real – has smacked the forex rates and JSE as investors pulled back cash from every accessible liquid markets. At STAN I like some of the work done to play in local communities, for which STAN has won acclaim. STAN have used the IFC Equator Principles guidelines on STAN project finance in developing countries since their inception and adopted the revised Equator Principles 2 (EP2) in June 2006. I think EP2 is solid, but I know NGOs like Banktrack.org have their doubts, and I look forward to research to check in on progress on the ground from a former Boston College Center for Corporate Citizenship colleague now at HKS.
In the STAN [Standard Chartered PLC, LON:STAN] core banking business, the opportunity “at the bottom of the pyramid” makes sense: improving access to sustainable financial services plays an important role in empowering people, both socially and economically, and grows the STAN client base. In Q1 '08 STAN’s Robert Tacon was elected to head UNEP FI, the UNEP/financial sector initiative that organizes conferences and publishes pamphlet [see basic PPT from Seoul July '08 here]. It was a pity when he left in later this year, although I am not sure really what happened there… STAN’s above-the-line campaign, including the FT US print on p.8 of Mon 24 Nov US edition, makes clever connection to their business + community approach with a board room morphing into a well. Solid brand positioning is their reward for a clear marketing message.
STAN is not in Eastern Europe, Latin America, nor the Far East. When we last spoke in his role in sustainability at STAN, Rob's view was that it was:
Look at what organization sets itself as objective, for example, is environmental and social factors on the agenda?
And if it is, then how is it implemented?
His opinion was that companies that take into account ESG will do better. The aim of training is to show why ESG is important, as a long run issue, while in the short term is about reputation. But the benefits to organization need time to manifest itself, it also depends who they are investing for. In EM, he confirmed, it is very hard to convince people, far more difficult to crack sustainability in many respects.
At least STAN has not copied Barclays which has basically shattered investor confidence by rushing to the “Medici” in the Middle East for cash, apparently GBP 7bn [USD 11bn], rather than UK government money with strings. STAN is tapping existing shareholders first. Barclays, which itself bumped up EM exposure by taking a controlling interest in ABSA, one of the big four in South Africa, managed to upset all shareholders with their plan. But being stuck up a creek without a paddle, the investors apparently agreed Mon to let Barclays proceed, knowing that the whole Board is up for a vote next April. Do not be surprised when the door swings the other way at the first next opportunity. George Dallas, the director of corporate governance at F&C Asset Management [and former head of S&P’s CG effort before that was frittered away so needlessly like other ratings agencies], was piqued on Mon. F&C had “reluctantly” voted for the capital raising, but George was quoted as saying "We think that this amounts to a clear and egregious abuse of pre-emption rights. We object that the consequences of voting against this particular transaction would make a bad situation worse". F&C sees "environmental, social and governance [ESG] issues as fundamental drivers of long-term corporate performance, a principle that is central to F&C’s philosophy as an asset manager", and sell their responsible engagement overlay [REO] service.
The Barclays meeting was a fun example of live capitalism right up there with Gordon Gecko’s Wall St address. Shareholders at the 200-strong gathering were still asking questions after 2 hours when Marcus Agius, the bank's chairman, closed the meeting and one shareholder was apparently checked by security guards as he approached the stage. Chairman of Barclays? It too is not for sissies! SRIX.GS
