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Active ownership: investing as ‘responsible stewards, not absentee landlords’

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Alex Blackburne explores the long-term financial benefits of active ownership.

There was a time when investors at both an institutional and retail level would be almost entirely disconnected from what their assets were doing. The norm was to invest, sit back and collect the (hopefully healthy) dividend each quarter.

In the last decade, though, things have changed. A new wave of responsible investors are now engaging with companies they invest in, on issues as varied as tax, remuneration, human rights and environmental sustainability. Why? Because they acknowledge that investment value is increased by the integration of environmental, social and governance (ESG) factors.

Finally, the age of stewardship and active ownership is here.

We need investors to be “responsible stewards, not absentee landlords”, says Simon Howard, chief executive of the UK Sustainable Investment and Finance Association (UKSIF) on the second annual Ownership Day.

They need to use the information and advice available to them to set the tone for how their funds are managed, and our research shows this is what the public – the people the funds are run for – want.”

Indeed, a YouGov poll conducted among British adults as part of Ownership Day found over half (53%) want public pension funds to engage with companies on paying fair tax. Fifty-one per cent want them to urge firms to pay the living wage, while 48% want excessive or disproportionate executive pay and bonuses to be addressed.

That’s all well and good, you might say, but does active ownership actually work? Various reports would suggest it does.

The 2012 Annual Responsible Investing Report from asset manager First State notes how the firm discovered serious environmental and health problems with some chemical products. It proceeded to engage with a range of companies, one of which – the Brazilian firm Natura – went on to remove the chemical in question, triclosan, from its products.

Elsewhere, the mining company Newmont was handed a shareholder resolution – when investors introduce issues for shareholders to vote on – in 2007. This followed a series of issues relating to its drilling activities in certain communities. An independent committee went on to conduct a thorough inspection of the company’s policies, which concluded that there was a disconnect between Newmont’s high standards and its real life practices. The board of directors swiftly developed an action plan to rectify the situation.

Active ownership is about creating better risk-adjusted returns over the long-term. And as with anything in the investment world, proving something has a financial or business case is key to its mainstreaming.

A chapter in the 2012 book, Contemporary Issues in Sustainability Accounting, Assurance and Reporting, describes how Calvert Investments and Domini Social Investments – along with the New York Office of Comptroller – submitted a resolution to retail giant Gap, calling for transparency over its treatment of workers. The organisations claimed that Gap’s brand was at risk of a major consumer boycott because of the poor labour standards in its supply chain. The resolution was subsequently withdrawn after Gap pledged to improve its disclosure and standards. Today, the vast majority – around 99% – of Gap factories are monitored, with the company working with local governments to improve labour rights.

Initiatives like the Principles for Responsible Investment (PRI) have helped thrust active ownership and shareholder engagement into the spotlight. Through the PRI, signatories can club together on certain issues. Whereas one committed shareholder alone might struggle to make their voice heard, 10 or 20 major institutional investors all speaking out at annual general meetings makes companies really sit up.

James Gifford, the PRI’s former executive director, told Blue & Green Tomorrow in last year’s Guide to Ownership that that ownership was about shareholders taking their roles as part-owners of a company seriously.

Investors are not just there to set a price for the shares; they’re not just there to buy and sell when the price is good or bad. They are there to monitor managers, and ensure that managers are acting in the long-term interests of the owners of that company. And that takes some proactivity”, he said.

Meanwhile George Latham of WHEB Listed Equities, a specialist sustainability investor, wrote in an article that ownership leads to “richer conversations with companies they are investing in.

We learn more about the quality of the management team, and we believe that we gain a better understanding of their likelihood of success. We believe this gives us an insight into the company’s valuation and provides us with a competitive edge in a way that improves the risk-return profile of our portfolios”, he added.

The fact that effective ownership is not yet common in the investment industry is therefore perversely good for our relative return.”

There are clear moral questions associated with issues like child labour and human rights. But if – as an investor – you recognise that sustainability and ESG factors add value to the investment process, active ownership is an important tool.

Companies should be held to account for their actions. They should be urged to avoid clear investment risks. They should act responsibly and ethically, and not just seek every last inch of profit. Responsible investors are ahead of the curve in recognising this, and their voices are getting louder and louder.

Further reading:

Ownership Day: age of ‘invisible investors’ passing

Shareholder revolts on the up as more investors begin to use ownership rights

Financial Times advises on how to become a shareholder activist

Why share ownership is better than share rental

The Guide to Ownership 2013

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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