About Good Returns  |  Advertise  |  Contact Us  |  Terms & Conditions  |  RSS Feeds Other Sites:   tmmonline.nz  |   landlords.co.nz
Last Article Uploaded: Monday, May 27th, 11:22AM
rss
Investment News

Investing: Understanding non-financial risks

Responsible investment is the topic du jour in the global investment world.

Tuesday, August 21st 2018, 8:30AM

by Pathfinder Asset Management

Karl Geal-Otter, Pathfinder Asset Management

Unfortunately, in New Zealand, the focus is largely on only one part - “Negative” exclusions. This involves removing companies in a portfolio that are involved in egregious industries, for example, controversial weapons, gambling, tobacco and thermal coal. This is a good first step but it's not enough. Going beyond exclusions, investors can use current controversies and Environmental, Social and Governance (ESG) scores (positive factors) to better understand future non-financial risks.

Research says using ESG works. A 2016 report by Bank of America Merrill Lynch found that investing only in the above average ESG scoring companies helped avoid 15 of 17 bankruptcies in their US stock universe, since 2008. While we’re not talking bankruptcy, Facebook is another real-world example of ESG scores helping to understand a business.

The Facebook example

Facebook has had a howler of an earnings season. A 42% growth rate in revenue would be a miracle for most companies but for Facebook, a high growth company with temperamental shareholders, it is the first guidance miss since 2015. Daily and monthly user numbers are also slowing, whilst its cost of business is expected to increase faster than revenue this year and into 2019.

After two years of negative headlines, data breaches and election meddling, shareholders had finally had enough. Facebook’s share price reacted to this negative news flow in late July – losing 18% in a single day. Losing US$120 billion is a lot, that’s more than the total market capitalisation of New Zealand.

Facebook has been unbelievably successful leading up to this point. But, the company is now starting to pay for years of a grow-at-all-costs mantra.

Learning from BP’s disaster

Using an ESG scoring framework can provide insights into future financial costs for a company due to some incident or wrongdoing. Take the BP Deepwater Horizon oil spill as an example – an environmental impact that cost the company billions from not having proper checks and balances in their environmental policy.

Facebook is in a similar position.  It has long had a poor governance rating, its governance score is one of the lowest of US-listed large-cap companies. Understanding its poor governance model and the very vocal gung-ho growth message from management, an analyst looking at more than just financial data may have been a little more pessimistic about the future of Facebook. And they should have, the company now needs to hire an additional 20,000 staff to deal with data security and political meddling. Facebook’s CFO, David Wehner, told investors the company is “making significant long-term investments” in safety and security. And that “those investments are in the billions of dollars per year; those will have a negative impact on margins”. How much? Almost a 10-percentage point decrease in margins from costs that could grow by 50-60%, into 2019. Grow-at-all-cost now has a cost.

Why ESG?

Avoiding these future financial risks is where responsible investing can not just do good (in terms of ethics) but add real financial value to a long-term investor. Poor ESG scores are a long-term indicator – they won’t tell you if a share price disaster is happening in the next week. But the share price impact from a serious ESG event can be as big as a company reporting a massive earnings collapse. As responsible investment evolves and becomes mainstream, the impact of these non-financial risk factors becomes more visible. 

Negative screening takes away “bad” companies in “bad” industries.  A fully integrated ESG policy takes away the “bad” companies in “good” industries. Responsible investment (through the assessment of non-financial factors) can add real value for investors.

 

Karl Geal-Otter is an investment analyst at Pathfinder Asset Management, a boutique responsible investment fund manager. This commentary is not personalised investment advice - seek investment advice from an Authorised Financial Adviser before making investment decisions.

Tags: ESG investment Pathfinder Asset Management

« Corporate Values, worth the effort?Perspective On Markets - It's An Age Thing »

Special Offers

Comments from our readers

No comments yet

Sign In to add your comment

 

print

Printable version  

print

Email to a friend

Good Returns Investment Centre is brought to you by:

Subscribe Now

Keep up to date with the latest investment news
Subscribe to our newsletter today

FundSource Research
  • Milford KiwiSaver Balanced Fund
    3 May 2019
    The Milford KiwiSaver Balanced Fund is a multi-asset portfolio that is best suited to long term investors who can accept some investment risk over the...
  • Milford KiwiSaver Active Growth Fund
    3 May 2019
    The Milford KiwiSaver Active Growth Fund is a multi-asset portfolio that is best suited to long term investors who can accept higher levels of investment...
  • Milford KiwiSaver Conservative Fund
    3 May 2019
    The Milford KiwiSaver Conservative Fund is a multi-asset portfolio that is best suited to medium term investors who can accept some investment risk over...
© 2019 FundSource Research.

View more research papers »

Edison Investment Research
  • Atlantis Japan Growth Fund
    3 April 2019
    Plenty of attractive investment opportunities
    Atlantis Japan Growth Fund (AJG) is advised by Atlantis Investment Research Corporation (AIRC). Lead adviser Taeko Setaishi says that although consensus...
  • Murray International Trust
    26 March 2019
    Disciplined investment process
    Murray International Trust (MYI) is managed by Bruce Stout at Aberdeen Standard Investments. He stresses the importance of sticking to his disciplined...
  • Standard Life UK Smaller Companies
    26 March 2019
    Following a well-established investment process
    Standard Life UK Smaller Companies (SLS) is managed by experienced UK smaller-cap specialist Harry Nimmo. He is somewhat cautious on the near-term outlook...
© 2019 Edison Investment Research.

View more research papers »

Today's Best Bank Rates
Heartland Bank 2.15  
Heartland Bank 2.15  
Based on a $50,000 deposit
More Rates »
Cash PIE Rates

Cash Funds

Institution Rate 33% 39%
ANZ 0.10    0.10    0.11
ASB Bank 0.10    0.41    0.42
ASB Bank 0.25    0.59    0.56
ASB Bank 0.30    0.61    0.64
ASB Bank 0.35    0.66    0.69
ASB Bank 0.40    0.72    0.75
BNZ 0.10    0.10    0.10
Heartland Bank 2.00    2.59    2.70
Kiwibank 0.75    0.77    0.88
Kiwibank 1.75    1.81    1.89
Nelson Building Society 3.75    3.90    4.08
SBS Bank 1.50    -    -
TSB Bank 1.60    1.64    1.71
Westpac 0.35    0.36    0.38
Westpac 0.10    0.10    0.11
Westpac 1.85    2.16    2.26

Term Funds

Institution Rate 33% 39%
ANZ Term Fund - 90 days 2.65    2.60    2.79
ANZ Term fund - 12 months 3.40    3.39    3.55
ANZ Term Fund - 120 days 3.00    3.09    3.22
ANZ Term fund - 6 months 3.25    3.45    3.60
ANZ Term Fund - 150 days 3.00    -    -
ANZ Term Fund - 9 months 3.40    -    -
ANZ Term Fund - 18 months 3.45    -    -
ANZ Term Fund - 2 years 3.50    -    -
ANZ Term Fund - 5 years 3.80    -    -
ASB Bank Term Fund - 90 days 2.60    2.67    2.79
ASB Bank Term Fund - 6 months 3.20    3.29    3.43
ASB Bank Term Fund - 12 months 3.20    3.33    3.48
ASB Bank Term Fund - 18 months 3.50    3.65    3.81
ASB Bank Term Fund - 2 years 3.65    3.81    3.98
ASB Bank Term Fund - 5 years 4.10    4.28    4.48
ASB Bank Term Fund - 9 months 3.60    3.75    3.92
BNZ Term PIE - 120 days 2.75    -    -
BNZ Term PIE - 150 days 2.80    3.38    3.53
BNZ Term PIE - 5 years 3.25    3.86    4.04
BNZ Term PIE - 2 years 3.10    3.91    4.09
BNZ Term PIE - 18 months 3.10    3.65    3.81
BNZ Term PIE - 12 months 3.15    3.38    3.53
BNZ Term PIE - 9 months 3.10    3.44    3.60
BNZ Term PIE - 6 months 3.25    3.75    3.92
BNZ Term PIE - 90 days 2.50    2.72    2.85
Co-operative Bank PIE Term Fund - 6 months 3.40    -    -
Heartland Bank Term Deposit PIE - 12 months 3.35    3.53    3.69
Heartland Bank Term Deposit PIE - 6 months 3.25    3.43    3.58
Heartland Bank Term Deposit PIE - 9 months 3.35    3.85    4.02
Heartland Bank Term Deposit PIE - 18 months 3.35    -    -
Heartland Bank Term Deposit PIE - 2 years 3.35    3.43    3.58
Heartland Bank Term Deposit PIE - 5 years 3.55    3.85    4.02
Kiwibank Term Deposit Fund - 90 days 2.65    2.72    2.82
Kiwibank Term Deposit Fund - 6 months 3.40    3.49    3.65
Kiwibank Term Deposit Fund - 12 months 3.50    3.39    3.55
Kiwibank Term Deposit Fund - 150 days 3.15    3.65    3.81
Kiwibank Term Deposit Fund - 120 days 2.95    3.03    3.17
Kiwibank Term Deposit Fund - 9 months 3.40    3.49    3.65
Westpac Term PIE Fund - 150 days 3.00    2.88    3.00
Westpac Term PIE Fund - 120 days 3.30    3.38    3.53
Westpac Term PIE Fund - 18 months 3.50    3.29    3.43
Westpac Term PIE Fund - 12 months 3.50    3.49    3.65
Westpac Term PIE Fund - 6 months 3.30    3.44    3.60
Westpac Term PIE Fund - 9 months 3.35    3.17    3.32
Westpac Term PIE Fund - 90 days 2.75    2.56    2.67
Westpac Term PIE Fund - 2 years 3.70    3.79    3.96
About Us  |  Advertise  |  Contact Us  |  Terms & Conditions  |  Privacy Policy  |  RSS Feeds  |  Letters  |  Archive  |  Toolbox
 
Site by Web Developer and eyelovedesign.com