End of Week Notes
The good, the bad, and the ugly
The good: Companies taking action on climate and plastic pollution, helped along by engaged investors. The bad: Facebook and Equifax pay hefty fines for not protecting their customers’ privacy. The ugly: global warming, especially if you are in Paris without air-conditioning.
As we trudge through the earth’s hottest summer on record — I had the pleasure of enjoying it in both New York and Chicago last week — we have confirmation from NASA that the average temperature of the planet soared to its highest level ever in June:
After last week, I’ve got to think July will give June a run for the money, especially as Europe suffers through a heat wave that saw Paris hit nearly 110 degrees Fahrenheit on Thursday, the highest ever recorded there:
As the climate crisis becomes more urgent, four automakers (Ford, BMW, Volkswagen, and Honda) reached an agreement with the state of California to adhere to stricter fuel efficiency standards than those in the rollback of the Obama Adminstration’s rule proposed by the Trump Administration. While the voluntary standards are weaker than the Obama rule, they are more stringent than Trump’s.
The agreement is an example of corporations responding to stakeholder concerns — in this case, concerns about the climate crisis — even when the federal government provides them cover to not do so. That’s a change from business-as-usual.
Among the stakeholders who increasingly expect large, powerful companies to provide global leadership on climate are sustainable investors, which form a growing proportion of shareholders of public companies.
On a related note, Coca-Cola and PepsiCo resigned their membership in the Plastics Industry Association this week:
The Plastics Industry Association has been working with the American Legislative Exchange Council (ALEC), a right-wing group that provides ready-made bill templates to Republican legislatures, on urging states to ban local governments from enacting plastic bag bans. Activists and sustainable investors urged Coke and Pepsi to take action:
Greenpeace, alongside investors and organizations like Walden Asset Management, As You Sow, Sierra Club, and The Last Beach Cleanup, have urged companies like PepsiCo and Coca-Cola to reject the Plastics Industry Association’s secretive lobbying against plastic bans. The association uses a front group, the American Progressive Bag Alliance (APBA), and works side by side with ALEC to push state legislators to prohibit plastic bans across the country. Thus far, 15 states with a combined total of 88 million people have passed these pro-pollution preemption laws.
One of the biggest changes sustainable investors can effect through engagement as shareholders with companies they own is weakening the political power of business trade organizations, which are bankrolled by membership fees paid by public corporations. The problem with these groups is two-fold:
One is these organizations have moved increasingly to the right over the years, opposing virtually all pro-consumer, pro-environment, and pro-climate regulation from their entrenched perch inside the Washington conservative establishment.
And the other is that they are becoming less representative of their corporate membership, as many public companies are responding to growing demands from multiple stakeholders for more responsible behavior and leadership on ESG-related issues that have material impact at both the company and societal level.
Sustainable investors get especially concerned when companies they own are saying one thing publicly about an issue like plastic pollution, while using shareholder money to pay fees to support trade groups that are undermining efforts to address it.
Such concerns are reflected in shareholder resolutions on lobbying activity disclosure. These resolutions received, on average, 31% support from in this year’s proxy season, as seen in the chart below:
Corporations Behaving Badly: Facebook and Equifax
Facebook was hit with a $5 billion fine by the Federal Trade Commission (FTC) this week for “deceiving users about their ability to control the privacy of their personal data”:
Few sustainable funds held Facebook when reports first surfaced in March 2018 that Cambridge Analytica, a data firm providing services to the Trump campaign, had improperly harvested Facebook user data for as many as 87 million users, something the company had known about since 2015 but had not disclosed.
From March 1, 2018 through yesterday, July 25, 2019, Facebook posted an annualized 8.8% gain, trailing the S&P 500’s 9.6% annualized gain.
Things have been a lot worse for Equifax shareholders since its data breach was revealed September 7, 2017, affecting nearly 150 million people. The company agreed this week to pay at least $650 million in fines.
Few sustainable funds owned Equifax, either, when the data breach was revealed. From Sept. 1, 2017 through July 25, 2019, Equifax has a negative return (-0.6% annualized) and the stock is far behind the S&P 500’s 13% annualized gain over that time period. Equifax stock’s return is miles behind those of its closest competitors, Experian and TransUnion. Those stocks have posted 27.3% and 33.4% annualized returns from Sept. 1, 2017 through July 25, 2019.
Postscript: Swell Investing closes
Sad to see the Pacific Life Insurance is closing down Swell Investing, a digital advice platform that offered customized self-indexed sustainable portfolios for retail investors and advisors.
The platform was only two years old but had 18,000 accounts with about $35 million in assets. That only works out to about a $2000 average account size. This will probably generate stories about how Millennials won’t put their money where their mouth is, but I don’t think Swell’s ESG focus was the problem. It was marketed and arguably pretty attractive to younger investors with very little to invest. It’s just hard to scale the robo-advisor concept that way. It may be attractive to a lot of young people and a great way to get them involved in investing, but they don’t have enough money to invest. Not yet, anyway. That said, the oldest Millennials are pushing 40, and many have saved some money and have started to realize they need to invest it. I expect many of them will seek out a financial advisor, not a robo.
Swell Investing also built self-indexed portfolios for advisors to use with their clients, which seems like a promising model that other providers, like Ethic, are doing. That’s an idea that seems to me worth pursuing.
