A hypothetical mutual fund screened to exclude companies identified as having poor corporate governance practices significantly outperformed its benchmark, according to a study conducted by Northfield Information Services for Portland, Maine-based The Corporate Library.
The Governance Alpha Fund (GAF) was created in 2003 and has beaten the Russell 1000 index by 279 annualized basis points over the past five years.
"The Corporate Library's ratings-based screens were used to exclude any companies identified as having poor corporate governance and high governance risk at the time of rebalacing, effectively creating an enhanced index portfolio," the study states.
"A $100 investment in GAF at inception of the fund would have returned $171.14 over the next five years versus $149.92 if the money had been similarly invested in the Russell 1000 benchmark."
The GAF fund excluded companies with an excessive focus on management interests (e.g., composition of the board and key committees), runaway agency costs (e.g., CEO compensation that is poorly aligned with shareholder interests), management and/or board entrenchment (e.g., overly-powerful takeover defences), board-level accounting weaknesses and subordinated public shareholder interests (e.g., dominant or controlling shareholder concerns).
To request a copy of the report, please contact Drew Buckley at dbuckley (at) thecorporatelibrary.com.
Thursday, July 30, 2009
Wednesday, July 29, 2009
Suncor- tomorrow's General Motors?
Prof. Gordon Laxer believes the environmental impact of the tar sands is such that there is no way to continue with these projects. “The climate change agenda is going to make the tar sands impossible. (If we continue) Canada is going to be the pariah of the world.” Speaking to the Peak Oil meetup in Toronto, the founder of the Parkland Institute gave us an Alberta spin on the tar sands, largely from an Edmonton point of view, but peppered with quotes from Calgarians.
Even Peter Lougheed, the former Premier of Alberta, thinks the pace of development has been extreme. In an article in the Calgary Herald earlier this month, he stated, “ ‘The oil sands have created in our province, because of the rapid growth that has occurred in the past decade, a very high-cost economy,’ He conceded that his opinion is ‘in the minority’ but added the government is well aware of his position on the subject.”
Laxer feels we are wasting other resources in our quest for oil. “In 2006 Canada used 12% of our natural gas to produce the dirtiest oil on earth.” Jim Dinning, the former Treasurer of Alberta agrees that ‘you all know that we’re consuming our natural gas asset at an accelerated rate, especially in the oil sands. As a source for electricity, steam and hydrogen, natural gas is expensive and its price is volatile. In fact,injecting natural gas into the oil sands to produce oil is like turning gold into lead.
When asked if it would be politically feasible to rein in tar sands development, Prof. Laxer opined that it would be difficult, but that there was some agreement around ‘no new approvals’ as the first step. Groups calling for a moratorium on new approvals for tar sands development include the Alberta Federation of Labour, the Council of Canadians and the Sierra Club. Ethical Funds released a white paper last fall on tar sands development, “We are proposing that institutional investors join us and call on oil sands companies to suspend new oil sands development pending the introduction of a comprehensive land use plan, while at the same time speeding up the development and introduction of potential solutions that could improve environmental and social performance.”
However, a number of tar sands issues, such as the tailings ponds, have proven intractable. Syncrude’s ‘tailings pond’, a toxic reservoir, is now the second largest dam in the world. And we have no idea what to do with it. Perhaps the time has come to recognize that the tar sands can never be a responsible source of energy. Wedded to a product that is increasingly out of step with the world’s environmental demands, tar sands developers may be the car companies of tomorrow.
Even Peter Lougheed, the former Premier of Alberta, thinks the pace of development has been extreme. In an article in the Calgary Herald earlier this month, he stated, “ ‘The oil sands have created in our province, because of the rapid growth that has occurred in the past decade, a very high-cost economy,’ He conceded that his opinion is ‘in the minority’ but added the government is well aware of his position on the subject.”
Laxer feels we are wasting other resources in our quest for oil. “In 2006 Canada used 12% of our natural gas to produce the dirtiest oil on earth.” Jim Dinning, the former Treasurer of Alberta agrees that ‘you all know that we’re consuming our natural gas asset at an accelerated rate, especially in the oil sands. As a source for electricity, steam and hydrogen, natural gas is expensive and its price is volatile. In fact,injecting natural gas into the oil sands to produce oil is like turning gold into lead.
When asked if it would be politically feasible to rein in tar sands development, Prof. Laxer opined that it would be difficult, but that there was some agreement around ‘no new approvals’ as the first step. Groups calling for a moratorium on new approvals for tar sands development include the Alberta Federation of Labour, the Council of Canadians and the Sierra Club. Ethical Funds released a white paper last fall on tar sands development, “We are proposing that institutional investors join us and call on oil sands companies to suspend new oil sands development pending the introduction of a comprehensive land use plan, while at the same time speeding up the development and introduction of potential solutions that could improve environmental and social performance.”
However, a number of tar sands issues, such as the tailings ponds, have proven intractable. Syncrude’s ‘tailings pond’, a toxic reservoir, is now the second largest dam in the world. And we have no idea what to do with it. Perhaps the time has come to recognize that the tar sands can never be a responsible source of energy. Wedded to a product that is increasingly out of step with the world’s environmental demands, tar sands developers may be the car companies of tomorrow.
Tuesday, July 28, 2009
U.S. mutual fund discloses carbon footprint
Boston-based Green Century Funds is now disclosing the carbon footprint of its balanced fund, claiming to be the the first retail American mutual fund to do so.
Green Century hired analysis firm Trucost to perform an analysis, which revealed that the carbon footprint of the balanced fund was 66% less than the S&P 500, as of April 30, 2009.
The study found that that the fund's low carbon intensity is attributable to its underweighting or avoidance of the utilities, oil and gas and resources sector.
"The debate over climate change is over. With emissions restrictions pending in the U.S. and internationally, we believe it is in the best interest of our shareholders to recognize and understand the carbon footprint of our fund's investments," says Green Century Funds president Kristina Curtis.
"With the reality of climate change upon us and the economy in flux, it is urgent thqat we move toward a low-carbon, resource efficient and sustainable economy," added Lisa Woll, CEO of the U.S. Social Investment Forum. "We are proud of our member investment firms that are leaders in addressing critical environmental issues."
Trucost's carbon audit involved calculating the direct and indirect greenhouse gas emissions for each company in the Green Century Balanced Fund portfolio. Companies in the portfolio that contributed the most greenhouse gas emissions were Air Product & Chemicals, General Mills and 3M. The fund's top ten holdings as of June 30, 2009 were IBM, AT&T, Xerox, Federal Home Loan Bank of Chicago, General Mills, SLM Corp., Telefonica S.A., Johnson & Johnson, Advance Auto Parts and Oracle Corp.
As far as we know, no Canadian fund has conducted a similar analysis. However, considering the TSX's high exposure to the oil and gas sector, any fund seeking to replicate the performance of the Canadian benchmark would likely score poorly in a carbon audit.
Green Century hired analysis firm Trucost to perform an analysis, which revealed that the carbon footprint of the balanced fund was 66% less than the S&P 500, as of April 30, 2009.
The study found that that the fund's low carbon intensity is attributable to its underweighting or avoidance of the utilities, oil and gas and resources sector.
"The debate over climate change is over. With emissions restrictions pending in the U.S. and internationally, we believe it is in the best interest of our shareholders to recognize and understand the carbon footprint of our fund's investments," says Green Century Funds president Kristina Curtis.
"With the reality of climate change upon us and the economy in flux, it is urgent thqat we move toward a low-carbon, resource efficient and sustainable economy," added Lisa Woll, CEO of the U.S. Social Investment Forum. "We are proud of our member investment firms that are leaders in addressing critical environmental issues."
Trucost's carbon audit involved calculating the direct and indirect greenhouse gas emissions for each company in the Green Century Balanced Fund portfolio. Companies in the portfolio that contributed the most greenhouse gas emissions were Air Product & Chemicals, General Mills and 3M. The fund's top ten holdings as of June 30, 2009 were IBM, AT&T, Xerox, Federal Home Loan Bank of Chicago, General Mills, SLM Corp., Telefonica S.A., Johnson & Johnson, Advance Auto Parts and Oracle Corp.
As far as we know, no Canadian fund has conducted a similar analysis. However, considering the TSX's high exposure to the oil and gas sector, any fund seeking to replicate the performance of the Canadian benchmark would likely score poorly in a carbon audit.
Friday, July 24, 2009
Fiduciary II - a follow up to Freshfields
...or 'I read 60+ pages so you don't have to'
“The single most effective document for promoting the integration of environmental, social and governance (ESG) issues into institutional investment has arguably been the ‘Freshfields Report’ published in 2005, which the UNEP FI Asset Management Working Group (AMWG) commissioned to Freshfields Bruckhaus Deringer, a leading international law firm….In the four years since the launch of the original Freshfields report, we have seen more innovation and evolution in the field of ESG integration than in any other similar time span in history.”
The follow up report, released earlier this month and referred to as Fiduciary II, makes a series of recommendations intended to help institutional investors move more quickly along the path of ESG integration. Fiduciary II is divided into three parts. Part I provides legal commentary on fiduciary duty and the implementation of ESG in investment mandates, see ‘Institutional Advisors at Risk, UN report warns’ July 15. Legal opinions are provided by Paul Watchman of Quayle Watchman Consulting, who was the principal author of the Freshfields report, and Michael Gerrard, Robert Holten and Aron Estaver of Arnold & Porter LLP in the United States.
Part II provides an analysis of investment management consultants responses to a survey on how they are working with ESG. Some interesting points are made around how investment timeframes and the practice of evaluating short term performance against a benchmark may work against inclusion of ESG factors which typically occur over the medium to long term. “They felt that placing too much emphasis on short-term investment performance was detrimental to the pursuit of long term performance goals. It was in the domain of long-term performance that ESG factors were believed to have the biggest impact on investment returns.” The questionnaire itself is reproduced in Appendix C of the Report.
Part III brings us up to date on practical developments on the integration of ESG into the investment process. Here we get information on entities such as the Norwegian Pension Fund and the Marathon Club, as well as overviews of studies such as the FairPensions survey of 30 asset managers in the UK.
The introductions to the report refer to the historic moment at which we find ourselves, with the global financial markets found wanting and at a crossroads. “Many of us in the field of responsible investment believe that the financial meltdown actually represents a unique opportunity to ‘recast’ some of the most basic tenets of fiduciary investment. After the fallout of the crisis, many fiduciaries will wisely look at the impact of the crisis on their investments, and look for new approaches to steward and allocate their assets.”
“The single most effective document for promoting the integration of environmental, social and governance (ESG) issues into institutional investment has arguably been the ‘Freshfields Report’ published in 2005, which the UNEP FI Asset Management Working Group (AMWG) commissioned to Freshfields Bruckhaus Deringer, a leading international law firm….In the four years since the launch of the original Freshfields report, we have seen more innovation and evolution in the field of ESG integration than in any other similar time span in history.”
The follow up report, released earlier this month and referred to as Fiduciary II, makes a series of recommendations intended to help institutional investors move more quickly along the path of ESG integration. Fiduciary II is divided into three parts. Part I provides legal commentary on fiduciary duty and the implementation of ESG in investment mandates, see ‘Institutional Advisors at Risk, UN report warns’ July 15. Legal opinions are provided by Paul Watchman of Quayle Watchman Consulting, who was the principal author of the Freshfields report, and Michael Gerrard, Robert Holten and Aron Estaver of Arnold & Porter LLP in the United States.
Part II provides an analysis of investment management consultants responses to a survey on how they are working with ESG. Some interesting points are made around how investment timeframes and the practice of evaluating short term performance against a benchmark may work against inclusion of ESG factors which typically occur over the medium to long term. “They felt that placing too much emphasis on short-term investment performance was detrimental to the pursuit of long term performance goals. It was in the domain of long-term performance that ESG factors were believed to have the biggest impact on investment returns.” The questionnaire itself is reproduced in Appendix C of the Report.
Part III brings us up to date on practical developments on the integration of ESG into the investment process. Here we get information on entities such as the Norwegian Pension Fund and the Marathon Club, as well as overviews of studies such as the FairPensions survey of 30 asset managers in the UK.
The introductions to the report refer to the historic moment at which we find ourselves, with the global financial markets found wanting and at a crossroads. “Many of us in the field of responsible investment believe that the financial meltdown actually represents a unique opportunity to ‘recast’ some of the most basic tenets of fiduciary investment. After the fallout of the crisis, many fiduciaries will wisely look at the impact of the crisis on their investments, and look for new approaches to steward and allocate their assets.”
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