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A more reasonable face of ethical investment reporting

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Judging by our traffic on the day, lots of people were interested in a spat between Blue & Green Tomorrow and the Investors Chronicle during National Ethical Investment Week. In an informed and balanced contribution to the debate, IC has put forward the thoughts of its resident economist, Chris Dillow.

In a piece entitled Headwinds and tailwinds for ethical investors, Chris Dillow uses an aeronautical analogy to set out the challenges for ethical investors. Taking a more balanced approach than the article that got us hot under the collar, Dillow paints a picture of headwinds that hold the ethical sector back and tailwinds that speed it on its way.

The headwinds, those holding the sector back, he describes are the ‘good’ performance of tobacco (5m deaths per year, growing to 8m by 2030) and alcohol (2.5m deaths per year, plus millions of lives blighted). Citing our mutual friend, Adam Smith, he explores the compensating advantages of different stocks. ‘Doing good’, as patronising as that sounds, may reduce your yield but it also reduces the number of deaths you’re investing in too.

The final headwind is the positive screening in of higher risk, ‘fashionable’ green technology stocks. These aren’t necessarily going to be the go-to choice of a cautious investor due to failure rate of innovative ventures.

One of the tailwinds is what economist John Kay calls obliquity: “the fact that we can often achieve one objective by focusing upon something else”. By focusing on making great products, businesses do well. By focusing on something other than profit, such as reducing the pollution and waste endemic in manufacturing and distribution, costs fall and profits can rise, or a business can become more competitive. Dillow perfectly illustrates the opposite perspective with the short-termism of profit-maximising banks and the harm that has done to the sector, economy and society.

Another tailwind is the fact that talking the sector down has probably suppressed prices meaning the canny investor can acquire stocks cheap.

The three headwinds outnumber the two tailwinds but miss the critical one that ethical investors are not screwing over the planet and its people for a percentage.

Dillow goes on to say, “During the past 10 years the FTSE4Good UK index has underperformed the All-Share index over the last 10 years, rising by 36.8% compared with 56.7%. And in the past five years, many UK ethical funds have under-performed the average all companies fund.”

Whether the FTSE4Good UK Index is the best comparator here is questionable but at least we’re comparing Granny Smiths with Golden Delicious. Investing ethically (responsibly, sustainably, thematically or impact-first) is certainly a more complicated and involved style of investment that requires research or expert advice on specific fund make-up and performance over aggregate indices.

Mark Hoskin, over at the rather excellent Worldwise Investor, points out that UK Ethical Funds [have] outperform[ed] since Lehman’s collapse.

The final part of Dillow’s tailwind analogy is that investment strategies wax and wane in a phenomenon called evolutionary finance, just as in evolutionary biology.

“Imagine a new source of profits is spotted – say, that ethical stocks are cheap. The strategy ‘buy ethical companies’ then multiplies, as animals do if they find a new food source. This spread of the strategy bids up share prices, to levels from which subsequent profits are low or negative – just as the increase of a species depletes the food source. This causes some of the strategies – some members of the species – to die out. But as they shrink in number, so the food/profit source replenishes itself. And the cycle can then begin again.”

Despite all this fairness, Dillow has firm doubts that the tailwinds are with ethical investors, pointing out that many funds managers are similarly sceptical. As we know from the recent history of stock markets, fund managers as a group really know what they’re doing.

Nevertheless, it’s a more useful and superior contribution to the debate.

He ends his piece with a personal final thought: “I’m sympathetic to this rejection of conventional wisdom. But let’s be clear. To be an ethical investor requires you to hold some out-of-consensus attitudes.”

Out-of-consensus attitudes are what “push the human race forward”

After our “consternation” with Dillow’s colleague, we pointed out in the subsequent Twitter spat that unless investors held “out-of-consensus views”, we’d still have slavery. This was described as a “ridiculous” point, but in fact, many comparisons can be drawn up between the two.

Lest we forget, abolishing slavery was an out-of-consensus investment perspective at the time, simply because slavery was so hugely profitable. Returns on investment can be massive when your workforce is effectively free and has a tendency to reproduce itself. It’s also relatively low risk, because you can just kill them if they cause trouble. To prove that profitable point, the East India Company was actually exempted from the Slavery Abolition Act 1833.

In the 179 years since the Act, we have almost unanimously accepted that slavery is abhorrent. In another 179 years, promoting tobacco and alcohol in developing countries that have poor public health systems to cope with the outcomes and no public health education to discourage take up, will be seen as equally abhorrent. Especially when the death and misery that results is because we want to make an extra 1.5% a year on our investments (which is the annual difference between 36.8% and 56.7% over ten years) – and only then, if we invest in generic index-linked funds rather than pick funds carefully. Is a highly debatable extra 1.5% really worth 21,000 deaths a day and rising?

It’s very likely that in another 179 years, in 2191, future generations will look back at our consensus investment attitudes today (the cavalier use of fossil fuels, ruination of the environment and exploitation of developing countries, women and children) and conclude that we really were a morally bankrupt age. They’ll probably curse us for our complete stupidity, rather than conventional wisdom, and consensus short-sightedness.

Lest we also forget, it is only those who see the business or investment consensus as imperfect, who actually deliver the innovation and growth of the future.

As the great ‘out-of consensus’ thinker Steve Jobs said, and we can’t put  it better, “Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”

To put it bluntly, unreasonable, contrarian, out-of-consensus ethical investors are more enlightened, more engaged and more responsible global citizens. We prefer and applaud this out-of-consensus group over any other group of investors, advisers or funds.

The last word goes to George Bernard Shaw: “The reasonable man adapts himself to the world; the unreasonable one persists to adapt the world to himself. Therefore all progress depends on the unreasonable man.”

Further reading:

The Investors Chronicle’s masterclass in misleading ethical investment headlines

Ethical investors are not tree huggers, but air breathers (and responsible global citizens)

Witnessing financial capitalism’s failure

Simon Leadbetter is the founder and publisher of Blue & Green Tomorrow. He has held senior roles at Northcliffe, The Daily Telegraph, Santander, Barclaycard, AXA, Prudential and Fidelity. In 2004, he founded a marketing agency that worked amongst others with The Guardian, Vodafone, E.On and Liverpool Victoria. He sold this agency in 2006 and as Chief Marketing Officer for two VC-backed start-ups launched the online platform Cleantech Intelligence (which underpinned the The Guardian’s Cleantech 100) and StrategyEye Cleantech. Most recently, he was Marketing Director of Emap, the UK’s largest B2B publisher, and the founder of Blue & Green Communications Limited.

Editors Choice

2017 Was the Most Expensive Year Ever for U.S. Natural Disaster Damage

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Natural Disaster Damage
Shutterstock / By Droidworker | https://www.shutterstock.com/g/droidworker

Devastating natural disasters dominated last year’s headlines and made many wonder how the affected areas could ever recover. According to data from the U.S. National Oceanic and Atmospheric Administration (NOAA), the storms and other weather events that caused the destruction were extremely costly.

Specifically, the natural disasters recorded last year caused so much damage that the associated losses made 2017 the most expensive year on record in the 38-year history of keeping such data. The following are several reasons that 2017 made headlines for this notorious distinction.

Over a Dozen Events With Losses Totalling More Than $1 Billion Each

The NOAA reports that in total, the recorded losses equaled $306 billion, which is $90 billion more than the amount associated with 2005, the previous record holder. One of the primary reasons the dollar amount climbed so high last year is that 16 individual events cost more than $1 billion each.

Global Warming Contributed to Hurricane Harvey

Hurricane Harvey, one of two Category-4 hurricanes that made landfall in 2017, was a particularly expensive natural disaster. Nearly 800,000 people needed assistance after the storm. Hurricane Harvey alone cost $125 billion, with some estimates even higher than that. So far, the only hurricane more expensive than Harvey was Katrina.

Before Hurricane Harvey hit, scientists speculated climate change could make it worse. They discussed how rising ocean temperatures make hurricanes more intense, and warmer atmospheres have higher amounts of water vapor, causing larger rainfall totals.

Since then, a new study published in “Environmental Research Letters” confirmed climate change was indeed a factor that gave Hurricane Harvey more power. It found environmental conditions associated with global warming made the storm more severe and increase the likelihood of similar events.

That same study also compared today’s storms with ones from 1900. It found that compared to those earlier weather phenomena, Hurricane Harvey’s rainfall was 15 percent more intense and three times as likely to happen now versus in 1900.

Warming oceans are one of the contributing factors. Specifically, the ocean’s surface temperature associated with the region where Hurricane Harvey quickly transformed from a tropical storm into a Category 4 hurricane has become about 1 degree Fahrenheit warmer over the past few decades.

Michael Mann, a climatologist from Penn State University, believes that due to a relationship known as the Clausius-Clapeyron equation, there was about 3-5 percent more moisture in the air, which caused more rain. To complicate matters even more, global warming made sea levels rise by more than 6 inches in the Houston area over the past few decades. Mann also believes global warming caused the stationery summer weather patterns that made Hurricane Harvey stop moving and saturate the area with rain. Mann clarifies although global warming didn’t cause Hurricane Harvey as a whole, it exacerbated several factors of the storm.

Also, statistics collected by the Environmental Protection Agency (EPA) from 1901-2015 found the precipitation levels in the contiguous 48 states had gone up by 0.17 inches per decade. The EPA notes the increase is expected because rainfall totals tend to go up as the Earth’s surface temperatures rise and additional evaporation occurs.

The EPA’s measurements about surface temperature indicate for the same timespan mentioned above for precipitation, the temperatures have gotten 0.14 Fahrenheit hotter per decade. Also, although the global surface temperature went up by 0.15 Fahrenheit during the same period, the temperature rise has been faster in the United States compared to the rest of the world since the 1970s.

Severe Storms Cause a Loss of Productivity

Many people don’t immediately think of one important factor when discussing the aftermath of natural disasters: the adverse impact on productivity. Businesses and members of the workforce in Houston, Miami and other cities hit by Hurricanes Harvey and Irma suffered losses that may total between $150-200 billion when both damage and sacrificed productivity are accounted for, according to estimates from Moody’s Analytics.

Some workers who decide to leave their homes before storms arrive delay returning after the immediate danger has passed. As a result of their absences, a labor-force shortage may occur. News sources posted stories highlighting that the Houston area might not have enough construction workers to handle necessary rebuilding efforts after Hurricane Harvey.

It’s not hard to imagine the impact heavy storms could have on business operations. However, companies that offer goods to help people prepare for hurricanes and similar disasters often find the market wants what they provide. While watching the paths of current storms, people tend to recall storms that took place years ago and see them as reminders to get prepared for what could happen.

Longer and More Disastrous Wildfires Require More Resources to Fight

The wildfires that ripped through millions of acres in the western region of the United States this year also made substantial contributions to the 2017 disaster-related expenses. The U.S. Forest Service, which is within the U.S. Department of Agriculture, reported 2017 as its costliest year ever and saw total expenditures exceeding $2 billion.

The agency anticipates the costs will grow, especially when they take past data into account. In 1995, the U.S. Forest Service spent 16 percent of its annual budget for wildfire-fighting costs, but in 2015, the amount ballooned to 52 percent. The sheer number of wildfires last year didn’t help matters either. Between January 1 and November 24 last year, 54,858 fires broke out.

2017: Among the Three Hottest Years Recorded

People cause the majority of wildfires, but climate change acts as another notable contributor. In addition to affecting hurricane intensity, rising temperatures help fires spread and make them harder to extinguish.

Data collected by the National Interagency Fire Center and published by the EPA highlighted a correlation between the largest wildfires and the warmest years on record. The extent of damage caused by wildfires has gotten worse since the 1980s, but became particularly severe starting in 2000 during a period characterized by some of the warmest years the U.S. ever recorded.

Things haven’t changed for the better, either. In mid-December of 2017, the World Meteorological Organization released a statement announcing the year would likely end as one of the three warmest years ever recorded. A notable finding since the group looks at global land and ocean temperature, not just statistics associated with the United States.

Not all the most financially impactful weather events in 2017 were hurricanes and wildfires. Some of the other issues that cost over $1 billion included a hailstorm in Colorado, tornados in several regions of the U.S. and substantial flooding throughout Missouri and Arkansas.

Although numerous factors gave these natural disasters momentum, scientists know climate change was a defining force — a reality that should worry just about everyone.

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Environment

How to be More eco-Responsible in 2018

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eco-responsible
Shutterstock / By KENG MERRY Paper Art | https://www.shutterstock.com/g/kengmerrymikeymelody

Nowadays, more and more people are talking about being more eco-responsible. There is a constant growth of information regarding the importance of being aware of ecological issues and the methods of using eco-friendly necessities on daily basis.

Have you been considering becoming more eco-responsible after the New Year? If so, here are some useful tips that could help you make the difference in the following year:

1. Energy – produce it, save it

If you’re building a house or planning to expand your living space, think before deciding on the final square footage. Maybe you don’t really need that much space. Unnecessary square footage will force you to spend more building materials, but it will also result in having to use extra heating, air-conditioning, and electricity in it.

It’s even better if you seek professional help to reduce energy consumption. An energy audit can provide you some great piece of advice on how to save on your energy bills.

While buying appliances such as a refrigerator or a dishwasher, make sure they have “Energy Star” label on, as it means they are energy-efficient.

energy efficient

Shutterstock Licensed Photo – By My Life Graphic

Regarding the production of energy, you can power your home with renewable energy. The most common way is to install rooftop solar panels. They can be used for producing electricity, as well as heat for the house. If powering the whole home is a big step for you, try with solar oven then – they trap the sunlight in order to heat food! Solar air conditioning is another interesting thing to try out – instead of providing you with heat, it cools your house!

2. Don’t be just another tourist

Think about the environment, as well your own enjoyment – try not to travel too far, as most forms of transport contribute to the climate change. Choose the most environmentally friendly means of transport that you can, as well as environmentally friendly accommodation. If you can go to a destination that is being recommended as an eco-travel destination – even better! Interesting countries such as Zambia, Vietnam or Nicaragua are among these destinations that are famous for its sustainability efforts.

3. Let your beauty be also eco-friendly

eco-friendly

Shutterstock / By Khakimullin Aleksandr

We all want to look beautiful. Unfortunately, sometimes (or very often) it comes with a price. Cruelty-free cosmetics are making its way on the world market but be careful with the labels – just because it says a product hasn’t been tested on animals, it doesn’t  mean that some of the product’s ingredients haven’t been tested on some poor animal.

To be sure which companies definitely stay away from the cruel testing on animals, check PETA Bunny list of cosmetic companies just to make sure which ones are truly and completely cruelty-free.

It’s also important if a brand uses toxic ingredients. Brands such as Tata Harper Skincare or Dr Bronner’s use only organic ingredients and biodegradable packaging, as well as being cruelty-free. Of course, this list is longer, so you’ll have to do some online research.

4. Know thy recycling

People often make mistakes while wanting to do something good for the environment. For example, plastic grocery bags, take-out containers, paper coffee cups and shredded paper cannot be recycled in your curb for many reasons, so don’t throw them into recycling bins. The same applies to pizza boxes, household glass, ceramics, and pottery – whether they are contaminated by grease or difficult to recycle, they just can’t go through the usual recycling process.

People usually forget to do is to rinse plastic and metal containers – they always have some residue, so be thorough. Also, bottle caps are allowed, too, so don’t separate them from the bottles. However, yard waste isn’t recyclable, so any yard waste or junk you are unsure of – just contact rubbish removal services instead of piling it up in public containers or in your own yard.

5. Fashion can be both eco-friendly and cool

Believe it or not, there are actually places where you can buy clothes that are eco-friendly, sustainable, as well as ethical. And they look cool, too! Companies like Everlane are very transparent about where their clothes are manufactured and how the price is set. PACT is another great company that uses non-GMO, organic cotton and non-toxic dyes for their clothing, while simultaneously using renewable energy factories. Soko is a company that uses natural and recycled materials in making their clothes and jewelry.

All in all

The truth is – being eco-responsible can be done in many ways. There are tons of small things we could change when it comes to our habits that would make a positive influence on the environment. The point is to start doing research on things that can be done by every person and it can start with the only thing that person has the control of – their own household.

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