thematic research 10 for 2015 - home – sustainalytics · thematic research. about sustainalytics...
TRANSCRIPT
10 for 2015:Generating value in a fragile marketExecutive Summary January 2015
Thematic Research
About SustainalyticsSustainalytics supports investors around the world with the development and
implementation of responsible investment strategies. The firm partners with
institutional investors, pension plans, and asset managers that integrate environmental,
social and governance information and assessments into their investment decisions.
Headquartered in Amsterdam, Sustainalytics has offices in Boston, Bucharest,
Frankfurt, London, New York City, Paris, Singapore, Timisoara and Toronto, and
representatives in Bogotá, Brussels, Copenhagen and Washington, D.C. The firm has
200 staff members, including more than 120 analysts with varied multidisciplinary
expertise and a thorough understanding of more than 40 industries. In 2012, 2013
and 2014, Sustainalytics was voted best independent responsible investmentresearch firm in the Extel’s IRRI survey.
Copyright ©2015 Sustainalytics. BV All rights reserved. No part of this publication may be reproduced in any manner without the expressed written consent of Sustainalytics.
Nothing contained in this publication shall be construed as to make a representation or warranty, express or implied, regarding the advisability to invest in or include companies in investable universes and/or portfolios. The information on which this publication is based on reflects the situation as on the date of its elaboration. Such information has – fully or partially – been derived from third parties and is therefore subject to continuous modification. Sustainalytics observes the greatest possible care in using information and drafting publications but cannot guarantee that the publication is accurate and/or complete and, therefore, assumes no responsibility for errors or omissions. Sustainalytics will not accept any liability for damage arising from the use of this publication.
Sustainalytics will not accept any form of liability for the substance of the publications, notifications or communications drafted by Sustainalytics vis-à-vis any legal entities and/or natural persons who have taken cognisance of such publications, notifications or communications in any way.
Sustainalytics BVDe Entrée 83, Toren A, Amsterdam, 1101 BHThe NetherlandsPhone +31 (0)20 205 00 00
January 2015 10 for 2015
2 | P a g e
Executive Summary Generating value in a fragile market
Analysts
Dr. Hendrik Garz
Managing Director, Thematic Research
Doug Morrow
Associate Director, Thematic Research
Thomas Hassl
Analyst, Thematic Research
Key Takeaways Macro picture – short-term stability, but at what cost?
With the ECB’s EUR 1.1trn quantitative easing programme, financial and economic
imbalances are aggravated, and the risk of a new financial crisis has increased.
The economic and social costs of a new financial crisis could outstrip those of the
last one and may trigger fundamental systemic discussions.
Investors do not have many options to hedge themselves, due to already existing
or newly emerging bubble situations in many asset classes.
The “good news” is that investors can expect that the situation, which is
unsustainable over the mid- to long term, will probably be sustained over the
short term.
The slump in oil prices might lead to a positive growth surprise, which, ironically,
may exacerbate systemic risk when put into the above context.
The oil price drop has further lowered the probability for achieving a multilateral
climate agreement at the COP21 conference in Paris in December.
Generating value at the asset selection level in a fundamentally unsustainable
market environment is more than challenging, but analysis through an ESG lens
may assist in this process.
Micro picture – finding value through ESG?
We present 10 forward-looking company stories where ESG factors may have
material impacts over both the short and long run.
Our analysis supports a positive view of Intel, GlaxoSmithKline, Lafarge and
Holcim, Telenor and Pemex, with value drivers ranging from innovative
remuneration models and energy efficiency programmes, to human rights policies
and health and safety improvements.
We take a generally negative stance on DuPont, Lonmin, National Commercial
Bank, Coca-Cola and, to a lesser extent, Netflix, which faces important corporate
governance challenges despite beating analyst expectations for Q4 2014.
Our analysis can be used to supplement existing security selection models,
through tilting and other measures, or inform new investment strategies.
From asset allocation to asset selection Forward-looking, scenario-based
approach
As the Danish physicist and Nobel laureate Niels Bohr once famously remarked,
“prediction is very difficult, especially if it’s about the future.” We could not agree
more. Hence, in this report we take the approach of discussing possible scenarios for
the global economy and their implications from an ESG perspective. In addition, we
provide a dedicated Asian view regarding the economic background and ESG trends in
the region.
January 2015 10 for 2015
3 | P a g e
In the spirit of a top-down approach, we finally shift from the asset allocation focused
macro view to the asset selection micro view by presenting 10 company stories to
watch in 2015, taken from our core coverage universe of roughly 4,500 corporates. In
our view, all of these stories address key ESG issues that are likely to have a material
impact on companies from a business perspective. Our portfolio of ideas contains
stories from different regions and sectors and is well balanced, providing five stories
with a positive tilt and five with a negative tilt.
Macro View – Sustaining the unsustainable
Quantitative easing – The silver bullet to save the Euro? Is a new financial crisis looming on the
horizon?
Financial markets seem to be torn between hope and fear these days. Apparently, the
new historic highs for equity markets are not the result of conviction and confidence
on the part of investors, but rather appear to signal the lack of investment alternatives
and the hope of prolonged expansionary monetary policy. In this chapter we take a
look at the possible consequences of the recently announced quantitative easing (QE)
programme of the European Central Bank (ECB). We conclude that this programme is
trying to sustain the unsustainable, and that investors do not have many options to
hedge themselves, due to already existing and exacerbated or newly emerging bubble
situations in many asset classes. We also reflect on the possible default of Greece and
the risk of a breakup of the Eurozone becoming more tangible in 2015. Furthermore,
we elaborate on a contrarian, thought-provoking scenario that assumes an oil-price-
induced positive growth surprise and describe how this could eventually lead to a new
financial crisis with social unrest as a possible consequence.
Fixed income markets – When will the bubble burst?
Source: Robert J. Shiller (2015)
Pondering the consequences of a “lower
oil price world”
Oil price drop – A double-edged sword for the global economy Last but not least, we ponder the consequences of the new “lower oil price world” and
the current economic and political environment for the climate negotiations that will
culminate at the end of the year with the COP21 convention in Paris. We have doubts
that the odds are good to achieve an effective multilateral consensus. In the absence
of political leadership, we expect the focus to shift to companies and private
80
85
90
95
100
105
0
5
10
15
20
25
30
35
40
45
50
Inve
rse
(in
dex
ed)
inte
rst
rate
P/E
Rat
io
Price Earnings Ratio Long-term Interest rate (inverse)
January 2015 10 for 2015
4 | P a g e
households, which will be moving ahead with climate-friendly technologies based on
economic self-interest.
Crude oil price history (1930–2014) – The pendulum is swinging back
Source: Bloomberg
Investment implications – Some easy wins
As ESG analysts, we have neither the mandate nor the inclination to give
comprehensive investment recommendations. This is simply not our job and is done by
others. However, the macro picture we outlined above certainly has some obvious
implications at the strategic and tactical asset allocation level.
Don’t divest from high-quality fixed
income instruments too early, and don’t
overweight Oil & Gas or Banks
We draw four basic conclusions: (1) Investors are probably well advised not to divest
from high-quality fixed income instruments as long as there is hope that the QE
programme is going to work and uncertainties around Greece and the Ukraine conflict
prevail, despite the massive bond bubble they are sitting on. (2) The risk profile of
equities seems to be still attractive only if the oil price continues to show weakness and
as long as the crisis situations in Greece and the Ukraine do not completely get out of
control. (3) At the sector level it is clear that a low or even further-falling oil price and
a new financial crisis situation certainly do not invite investors to overweight Oil & Gas
and Banks in their portfolios. (4) Over the mid- to long term, the financial risks for
investors are high and cannot be fully hedged, due to the bubble situations that have
been emerging in many asset classes and the empirical fact that asset prices tend to be
positively correlated in down-market situations. Should markets turn into crisis mode
again, cash will certainly be king, but negative overnight rates may well become the
rule, not the exception.
The Asian View – Modest growth, high vulnerability China’s soft landing and another round of
“Abenomics” Overall, we do not expect Asia to become the world’s growth engine in 2015. Economic
momentum in China is likely to ease further due to continued structural reforms and
efforts to slow credit expansion. For Japan, we expect another round of “Abenomics”,
after the renewal of the prime minister’s mandate in December’s elections. A
continued aggressive monetary easing and fiscal stimulus will probably at least avoid
0
500
1000
1500
2000
2500
0
20
40
60
80
100
120
S&P
50
0
Blo
om
ber
g C
rud
e O
il H
isto
rica
l Pri
ce
Crude Oil Price (nominal) Crude Oil Price (real) S&P 500
January 2015 10 for 2015
5 | P a g e
Japan drifting into the much-feared deflationary downward spiral. On the other hand,
growth in India is expected to recover further in 2015 from historically low rates in the
years before.
ESG perspective – A mixed bag
With regard to these three countries’ ESG agendas, we expect a focus on bribery and
corruption (China and India), measures against anti-competitive corporate behaviours
(China), air pollution and water risk in India, and nuclear safety and the building up of
a renewable infrastructure in Japan. We also expect China and India to uphold the
principle of “common but differentiated responsibility” in international climate
negotiations. For Japan, we foresee that the new Stewardship Code will make listed
companies more active in incorporating ESG factors into their business practices.
10 for 2015 – A platform for ESG analysis The value-add of ESG analysis If our global and Asia-specific macro views form the basis of our conviction for asset
allocation, the 10 for 2015 move further into the investment process and provide
insight into asset selection. Covering eight countries and ten industries, the 10 for 2015
consist of ten salient mainstream business stories where ESG factors can be shown to
be driving potentially material financial impacts. Our analysis exemplifies the type of
enhanced risk and opportunity identification that is increasingly being used by
investors to either supplement existing security selection models or inform new and
innovative standalone investment strategies. In the table below and the summaries on
the next page, we outline the key findings of our assessment.
Our analysis supports a positive view of Intel, GlaxoSmithKline, Lafarge and Holcim,
Telenor and Pemex, with value drivers ranging from innovative remuneration models
and energy efficiency programmes, to human rights policies and health and safety
improvements. We take a generally negative stance on DuPont, Lonmin, National
Commercial Bank, Coca-Cola and, to a lesser extent, Netflix, which faces important
corporate governance challenges despite beating analyst expectations for Q4 2014.
Companies cover ten industries, eight
countries and include a balance of
positively and negatively tilted stories
Company overview
Source: Sustainalytics
January 2015 10 for 2015
6 | P a g e
Impact DuPont. We take a contrarian view and argue that the company’s business model in
the African seed market may be misaligned with the needs of smallholder farmers. We
also suggest that DuPont’s focus on a limited array of hybrid seeds could contribute to
biodiversity loss and Monsanto-type reputational risks for investors.
Negative
Impact Intel. We present a favourable review of Intel’s plan to build a “conflict-free” supply
chain by 2016. While we question whether Intel’s customers will be willing to pay more
for conflict-free electronics, we are intrigued by the possibilities for brand building.
Positive
Impact GlaxoSmithKline. We acknowledge that groundbreaking changes to the company’s
sales representative remuneration strategy may drag on short-term profitability, but
believe that they will help the company rebuild regulator and investor trust in the wake
of a record bribery charge in China.
Positive
Impact Lafarge and Holcim. We are bullish on the proposed merger of the world’s two largest
cement manufacturers, pointing to potential ESG synergies in energy and GHG
performance, as well as improved positioning in the growing market for sustainable
building materials.
Strongly positive
Impact Lonmin. We analyse the company’s exposure to the findings of the Marikana
Commission (expected in March 2015) and take a strongly negative stance, arguing that
the repercussions could range from reputational and brand effects to short-term
pressure on the company’s share price.
Strongly negative
Impact National Commercial Bank (NCB). We review the opening of Saudi Arabia’s equity
markets to foreign investors (beginning in 2015) and NCB’s attractiveness as a vehicle
to play the market for Shariah-compliant financial products and services. We highlight
risk factors related to NCB’s governance and project finance activities.
Negative
Impact Telenor. We find that the company’s advanced ESG practices may provide a hedge
against country risk in Myanmar, and argue that the lessons learned could potentially
be leveraged in future expansion to emerging markets in Sub-Saharan Africa.
Positive
Impact Pemex. While we question the extent to which the recent slump in oil prices may
discourage foreign investment in Mexico’s newly liberalised energy sector, we argue
that interaction with the world’s oil majors may ultimately lead to improvements in
Pemex’s health and safety performance and exposure to corruption issues.
Positive
Impact Coca-Cola. We show that the company’s recent entry into the energy drinks and milk
niches creates new and potentially under-appreciated ESG risk exposure. We gauge the
company’s strategic awareness of these risks to be low, although we find some pockets
of optimism.
Negative
Impact Netflix. We paint a picture of substantial shareholder discontent, pointing to corporate
governance challenges, including a non-responsive board of directors. We argue that
investors will be faced with a difficult choice if a takeover offer emerges in 2015, as
they have been largely rewarded to date for sticking with the board’s strategy.
Negative
Thematic Research