ESG NOTE S1E9: Credits Pricing ESG, Lego, Flood Water, Happy Birthday Fearless Girl, Office Lunch Thief Mystery

ESG Note is four topics from recent headlines at the intersection of investment, strategy and sustainability, with all the hyperlinks.

In ESG Note S1E9, credits pricing ESG, beware of the Lego, too much (flood) water, happy birthday Fearless Girl, with 3 quotes and 3 data points, and a story about the office lunch thief. Published on Monday, 2 April 2018 by Graham Sinclair @esgarchitect in Boston.

BIGGER THAN FROZEN YOGHURT?

How can this be happening? Said most of the the finance world from New York to Maine on Monday morning as a dusting of snow blew through. This is not unusual, but it is unwelcome. Forget all the cheerful color of the spring celebrations over the weekend. Back to being frozen. In finance we have something becoming not unusual: corporates are tying their financing to explicit environmental, social and governance (ESG) goals. BNP Paribas APAC flagged how Singapore Stock Exchange-listed Olam International [SGX:O32] secured a three-year sustainability-linked revolving credit facility aggregating US$500 million. Clearly the bankers have seen a new market that they can step into. Maybe they’re hoping to have stumbled on a Black Panther situation, the US$1.3 billion phenom that is now the most successful action movie ever, having tapped into the neglected space for heroes from Africa, or Wakanda.

One of my favorite yoghurt makers led with one of the biggest innovations since frozen yoghurt. I highlighted the Danone deal as one of the best innovations in finance in ESG Note S1E7. In case you missed it, the Danone deal with BNP Paribas and other banks builds into their pricing of the credit a rate impact (penalty) based upon the sustainability rating by ESG ratings shops (Sustainalytics and VigeoEiris) and based upon the percentage of revenues from the B Corps that Danone owns (Danone owns 4 right now). Agribusiness major Olam International has a similar deal, again with BNP Paribas calling shotgun but with 15 banks splitting the risks of the US$500m (15? are they that worried?!). The 15 banks are mandated as lead arrangers providing the facility in equal parts: ABN Amro Bank, ANZ, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Commerzbank, Commonwealth Bank of Australia, DBS, HSBC, ING Bank, Mizuho Bank, National Australia Bank, Natixis, Rabobank International, Standard Chartered and UniCredit Bank. The Olam deal is again reliant on Sustainalytics for the external ESG validation, although the exact ESG metrics are blackboxed. Olam’s wholly-owned subsidiary Olam Treasury Private Limited is the co-borrower to the facility. ING Bank is the sustainability coordinator for the facility, while BNP Paribas is the facility agent. The Asset reported that progress will be measured by Sustainalytics and if the performance milestones are met, the interest rate for part of the loan will be reduced for the following year. Those BNP Paribas bankers are loving life right now. The iconic Boston brand claims that America runs on Dunkin, but the world, it runs on food. Firms like Bunge and Olam are the agribusiness giants that are all about trading commodities. Olam has a cohort of management talent including Indian-Africans, and recruits most years at Harvard Business School’s largest student-run conference, the Africa Business Conference. That makes sense because Africa is the largely unfarmed continent that the world will turn to this century to feed our 10 billion humans, with the soils of Iowa and Ukraine all farmed to the maximum, the equally fertile soils of Zambia look appealing. Olam’s debt analysts are happier than the sell-side equities analysts.

Proactively tying finance to sustainability will become less unusual. More finance sector activity can be expected. “We would need at least 4 planets to keep up our current lifestyle. But we have only one,” said EU Commission president Jean-Claude Juncker at the EU sustainable finance conference. Valdis Dombrovskis, EU Vice-President, in charge of Financial Stability, Financial Services and Capital Markets Union discussed the EU Strategy for encouraging the financial sector to support green and sustainable projects. With threats of cuts at Deutsche and the looming threats of machine learning and blockchain, getting close to their corporate clients must be the one happy place for bankers, and green bonds is the no-brainer to offer to the clients seeking financing before rates go up further. How is every bank not bulking up their green bonds team? Any corporate or municipality or sovereign must know there is unmet demand for green bonds as it tracks toward the US$ 1 trillion market that Ms Christiana Figueres calls for? From China, which is benefiting from some solid planning on green policy, add to your arguments for “what are the benefits of issuing green bonds?” two obvious ones: "investor base diversification and improvement of reputation" per Chen Yaqin, Deputy Director of Market Development, Industrial Bank of China reported at #CBI18. The world's second-biggest economy plans to invest $360 billion in the renewables sector by 2020. As this financing trend plays out, I agree with Jon Lieberkind: look to the thematic research and ESG Investing sell-side coverage by Mr Sarbjit Nahal at Bank of America Merrill Lynch Global Research.

BEWARE OF THE LEGO BLOCKS

Lego is a legendary brand. The Lego brand skyrocketed in 2017 surpassing Google as the world's most powerful brand, worth US$7.6 bn in 2017, up 68% from 2016 according to Brand Finance. But like Messi, Senna, Serena or LeBron, even legends go through bad patches. Lego has reported the first decline in revenues in 13 years for FY17, per Reuters. The reasons for the drop in top line are many. Let's start with the typical purchaser: how was your Lego purchase history in 2017? Lego remains a premium product, with a decades-old brand built on good times playing as a kid or older kid. Pricing and cashflow are strong enough to open its own retail stores; we have 6 in the greater Boston area. I connect Lego also with adult play encouraged at MIT Media Lab, where Lego has been used in idea sessions and urban planning role play. Legos are great toys for kiddos and adults. They’re also torture if you stand on them in the dark of the night. Every parent knows the pain of standing on one of the sharp edges of a hard plastic Lego block in the dark of the night. It is so excruciating and unforgettable it delivered one of the interweb’s perfect memes: the great white shark screaming above the surface of the ocean (read the fascinating story behind the pic). That’s exactly how it is. Every parent knows.

[Robert A. Petersen @Sonikku_a Rare image of a shark stepping on a Lego. 8:23 AM - 29 Sep 2016]

The Lego ESG story goes beyond brand positioning and the merits of which superhero or movie franchise they do (or do not) partner with. On the environment, the hard plastics are not recyclable. That’s a big problem. The tie to petroleum chemistry and the fit with boys age 5-9 for race cars will have meant the various sets made sense. Lego’s tie-in with big oil hurt as the pressure on fossil fuel companies for oil disasters or financing climate confusion “research” or failing to face up to their investors on what risks their exploration and production assets face from a climate ganged world and a shifting consumer space. Greenpeace targeted the Shell tie-in pretty effectively. The video is such a smart and visually powerful way to deploy the company’s own product to make the point. When the company is only one product, that cuts to the core. That’s why the Greenpeace campaign was so effective, leading to the two companies ending their tie-in in 2014 pretty quickly. On one of the current ESG mega issues, gender diversity, the little blocky Lego figures added more women and shipped a neat Lego Women of NASA box set.

So how to reboot Lego brand and product sales, in a purpose economy where stakeholders matter? Back in 2015, the story was of an actual Lego product being a better investment than gold, or Lego stock. Is it possible that Lego can fight this bad investment markets patch by finding anchor investors with the patient capital of the sustainability set? Education is always a winner, if you can find the paying customer and protect your intellectual property. I think Lego has nailed that. So where is the growth? The answer is in monetizing the brand up and down the price point scale, with no loss of brand integrity. The Star Wars stuff like the 7,500 piece Millennium Falcon makes money at the upper end of the price scale, but how many geeks can get that signed off by their life partners?! I think Lego could trim their price points a little with no threat to brand position and which would grow top line revenues. The haircut could quickly open up the next band down of parents, grandparents and kiddo play finders willing to pay for a toy that lasts a lifetime. Fast forward to “Lego will sell its first sustainable pieces later this year” per @ThuyOng at The Verge. Is there a sustainability upgrade here? Plastics can be made from different stocks, not just fossil juice. The new Lego pieces are made from polyethylene, a soft and durable plastic made from sugar cane. Technically the Lego bricks are identical to those produced using conventional plastic and make up 2 percent of Lego’s total plastic elements. 2% is not a lot of the 1.5 million elements needed for this masterpiece, by Lego master builders “mini Shenyang” in Shenyang, Liaoning province in northeast China as reported by China Daily. How can Lego get to 100%, and how will investors like you nudge them along?

TOO MUCH WATER

Too much ocean water. Here in northeast USA we’re starting to thaw and think about where our short sleeve shirts are. Well, until winter said “hold my (warm) beer…” this morning. The winter storms slammed low lying areas, and this coast has many. The dramatic winter storm Riley photos from Scituate MA were compelling. Winter storm Skylar has come and gone, the season’s fourth blizzard. The photos of flooding in Fort Point Channel just across from the Boston Federal Reserve reminded me of the years crossing that bridge freezing in winter, heading to KLD’s office (KLD is one of the grandfather ESG ratings and indexes shops that is today a part of MSCI ESG). The flood risks were obvious as I cycled down the Charles River bikepath passing HBS and made a mental note of the kayak rentals...

Disruptive tidal flooding that now affects the U.S. Gulf and Atlantic coastlines on 3-6 days per year will strike as often as 80-180 days a year by the 2040s, according to a major report from the scientific agency within the United States Department of Commerce, National Oceanic and Atmospheric Administration (NOAA), “Patterns and Projections of High Tide Flooding along the U.S. Coastline Using A Common Impact Threshold” PDF. Thanks to meteorologist Bob Henson author of "Meteorology Today" and "The Thinking Person's Guide to Climate Change” for flagging.

There was something heroic and alarming in the images of the temporary flood barrier, L-shape structures around the Boston Fed. Heroic because they seemed so limited as a response to the anger of a flood tide. So alarming because you realize this is necessary now, well before the global warming raises the sea levels 6-11 ft, and because someone in facilities management is taking sandbags to a floodfight. Go and price your building’s flood insurance down I95 in Rhode Island to see how climate change changes economics, regardless of what you “believe”. Don’t take it from me, take it from the government of one of the original 13 colonies making up the USA, this from their website:

The impacts of climate change upon Rhode Island’s built and natural environments are wide-ranging, discernible and documented, and, in many cases growing in severity. Rhode Island will experience warmer air and water temperatures, more extreme weather events such as droughts, intense precipitation, severe storms and flooding, increasing rates of sea level rise, shorter winters and longer summers, and less snowfall and ice coverage. Climate change has the potential to pose significant risks for Rhode Island’s water, wastewater, surface transportation, and energy infrastructures and utilities, our natural environment, and our health, welfare, and economic well-being.

Reading that, somewhere a WSJ editorial member just spat out his morning tea. Changing water flood patterns affects all built environments. You cannot simply, as Tom Randall did, sleep in your Model S(!) as you drive away from your rising tide. Mr Randall’s the guy with the proprietary widget predicting Model 3 production - the Model 3 is the USA’s best selling electric vehicle. And it does not help to simply drink yourself away from the floods and rising sea levels problem (Mr Musk infamously did with Teslaquilla on Sunday 1 April!).

No, this is built environment, like those Florida launching pads for the NASA Apollo missions and SpaceX that will one day be water launches. While pollution in the air is hard to see, water creeping up to the front step is pretty obvious. After the big sustainable finance summit in the EU, the other recent major movement comes with the UN Environment, together with nine investors from six countries with US$ 3 trillion AuM piloting climate transparency. The investment group, including Norges Bank Investment Management (NBIM), Aviva, Caisse de Dép?t et Placement du Québec (CDPQ), Desjardins Group, Nordea and Storebrand Asset Management, will pilot the recent recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). The outputs and conclusions of this group will stimulate and ease TCFD adoption by the wider industry, including the 1,900 investor members of the Principles for Responsible Investment. No word on how they will recommend reporting that joins the dots to flooding, but if you have an investor voice, use the stakeholder consultations to add it in there.

HAPPY BIRTHDAY, FEARLESS GIRL

The most significant symbol in finance and investment is the Fearless Girl. The little statue is one year old, she may not be afforded a permanent home, and has changed the (investment) world. Happy birthday, Fearless Girl. Symbols are powerful. It’s why Ms Katniss freaked out the overlords during "The Hunger Games” with her salute to the downtrodden masses in District 12. A sculpture at a juncture on a busy financial district street corner is as good as it gets taking forward the need for gender diversity (and all diversities). Fearless Girl was an immediate hit when she popped up on Wall Street on 7 March 2017, the day before International Women’s Day to kick off State Street Global Advisors’ push to get more women on boards. In the past year, 152 companies added women directors and the Boston-based investment management firm gained almost US$13 million in free publicity, according to Apex Marketing Group reported by Jeff Green in Bloomberg. SSgA counts US$ 2.8 trillion AuM with 2,500 employees, the world’s third largest investment firm measured by assets under management.

I used the powerful symbolism of The Fearless Girl statue standing her ground against the Wall Street raging bull in my keynote speech “Go. All. In. Making Financial Services Work On One Planet For Everyone”. Symbols and anniversaries must be marked and celebrated to check how far we have (and have not) come. Research cited in HBR in 2015 claims that CEOs with daughters run more socially responsible companies and are more open to gender equality. A study of S&P 500 companies using KLD data from 1992-2012 found that when a firm was led by a CEO with at least one daughter, it scored an average of 11.9% higher on “corporate social responsibility (CSR)” metrics and spent 13.4% more of its net income on CSR than the median. So it matters that the stock exchange that has over one quarter of all market capitalizations has a CEO, Tom Farley, who “[j]ust showed this to my 3 daughters”

In a world drowning in empty gestures and emojis, it is important the statue of a larger cultural and economic issue of systematically excluding women has led to stuff actually getting done. A year full of #metoo and #timesup saw SSgA get through some hard yards reviewing their 6,000+ names in equity portfolios and screening 400 company boards for action. In conversation with one of the SSgA stewardship team on the sidelines of an investor event, the real activity was described as both successful and expanding. The geography of of engagement is adding Canada and Japan to last year’s shortlist of USA, UK and Australia. I’m assuming the decision calculus relied on the portfolio coverage, existing client demand for action, asset gathering opportunities prospects and availability of data and team resources to deploy. Four out of five are English language and rely on Anglo-American institutional frameworks, so Japan has probably required more effort not just on getting the language right in the nuances but also the available resources into a business culture overweight XY chromosomes for decades.

ESG is about stopping externalities from being sidelined, diminished and gaslighted. That’s why a sculpture is a simple but useful tool. So it is that financial services vendor FactSet also sent through a note on The Legacy of Fearless Girl, describing “[i]n its original statement, SSGA said that it would give companies in the Russell 3000, FTSE 350, and S&P/ASX 300 one year to address their overall lack of female directors or as an advisor to many of them, would vote down initiatives brought by nominating and/or governance committees...how much has changed? [T]he number of companies with female-majority boards has doubled, though that number is still only .33% of the Russell 3000.” Yes, if you want one, the artist Kristen Visbal is now selling two-foot reproductions of the famous statue of a young girl facing off against Wall Street's “Charging Bull”, at $6,500 each for limited edition of 1,000 total.

These cultural changes do not happen quickly or easily. Recall in Iceland it is now illegal to pay men more than women in companies or government agencies with more than 25 humans. The regulatory push and the compliance stick have their places. It must be a good time to be talent recruitment with a book of women who deserve the opportunities now opening up. At last. Some drama has erupted around the pick for the most influential seat in the Federal Reserve banking system, New York Fed, because it votes every time while other banks rotate through. The upset comes because the hiring of another male “seems to reinforce the status quo that a woman has to be absolutely perfectly qualified to get top positions while a man can have significant shortfalls in his resume and still come out ahead” per Ms Julia Coronado founder of independent research firm MacroPolicy Perspectives and former Fed economist.

Fearless Girl would also make a pretty good awards statuette too. One strategy to explore as women have more influence over the market for investment advice and financial services is to simply draw a line and say, no more. The way that talent insisting on an inclusion rider in movie contracts could be the only way to rapidly change an industry where the inclusion numbers are “disgraceful” per Walter Hickey, Chief Culture Writer at analysts FiveThirtyEight. A funny cartoon in 1980 became a real tool for cultural change in 2018. The $38 bn entertainment industry and their global 1.2 billion audience scrambled to google “inclusion rider” after the speech by Oscar winner Frances McDormand. Some research was useful to back up the claims, per FiveThirtyEight project: “We pitted 50 movies against 12 new ways of measuring Hollywood’s gender imbalance. The Bechdel-Wallace Test — more commonly abbreviated to the Bechdel Test [after Alison Bechdel the cartoonist who coined it] — asks two simple questions of a movie: Does it have at least two named female characters?1 And do those characters have at least one conversation that is not about a man? A surprising number of films fail the test. Although the test is punchy and has become pervasive, it doesn’t address the core inequalities in Hollywood films.”

The tide has turned, although the fight back is real. To re-purpose that infamous 1970s New York headline, “New York Pension Funds to All-Male Boards: Drop Dead”! Or as the WSJ reported, “snubs all-male Boards” [harrumphs]. New York State Common Retirement Fund the third-biggest U.S. public pension fund with US$192 billion has grown impatient with the pace of progress on gender diversity in the boardroom. Governance researchers at Equilar Inc. predict that the Boards of companies in the broad market benchmark Russell 3000 index won’t achieve gender parity until 2048. In the understatement of the year, Thomas DiNapoli, New York state’s comptroller, was reported as saying “[w]e need to speed up that time frame,’’. The largest retirement plan in the USA, CalPERS, is moving too. It is being closely watched, from inside and outside. The new chair of the Board of Trustees, Ms Priya Mathur, gently but firmly pressed the Sustainable Investment team at CalPERS about gender diversity, even as they take their engagement and proxy voting to their portfolio companies in the Russell 3000 universe.

Where a statue will not travel, marking a moment in the business day is useful. The #GenderBell initiative uses the platform of stock exchanges and their open or closing bells to highlight gender imbalance. In 2018, the exchanges participating counted a high of 60 participating exchanges for the twentieth anniversary of International Women’s Day. The head of CalPERS’ sustainable Investing work, Ms Anne Simpson, was honored in the closing bell moment at NYSE celebrating Womens History Month, helping “Ring the Bell for Gender Equality”.

QUOTABLE

Complexity in ESG stakeholders.  "We know from our communication with clients over time that they have points of view at every point on the spectrum for many social issues." - Glenn Booraem, Investment Stewardship Officer at Vanguard Group, Inc. quoted in interview with S&P, 1 March 2018.

Volatility and investment.  “How investments linked to volatility in the stock market proliferated is a classic story of Wall Street salesmanship and old-fashioned greed. In a few short years, financial engineering transformed expectations about the ups and downs of the stock market into an asset class that could be marketed and sold - as tradable as stocks but, it turns out, sometimes far riskier...$8 billion of products tied to one index alone” - Dakin Campbell et al, Bloomberg Markets, 7 February 2018.

Getting to zero. “As the scientist who led the chapter on future scenarios and projections in the latest federal climate science report, I say: YES, exactly.” Climate scientist Katharine Hayhoe in response to Jesse Jenkins MIT Institute for Data, Systems, and Society PhD candidate on @JesseJenkins: “Forget arguing over 1.5 C or 2 C or 350 ppm or 450 ppm or whatever! Drive CO2 towards zero as fast as possible. Period. The "as possible" part will be governing, not whatever target to global community supposedly agrees to. Focus on what we can do to change what's possible.”

DATAPOINTS 

31% median operating margins.  Assets under management by 44 pure-play publicly traded money managers worldwide studied by Casey Quirk, a practice of Deloitte Consulting, rose 16% in 2017 to an estimated $14.3 trillion, operating margins, or profit as a share of manager revenue, by 2 percentage points to a median 31% in 2017, as quoted in Pensions & Investments.

US$ 51 trillion women.  Boston Consulting Group estimates between 2010 and 2015 private wealth held by women grew from $34trn to $51trn. Women’s wealth rose as a share of all private wealth from 28% to 30%. By 2020 women are expected to hold $72trn, 32% of the total, reported in The Economist.

2% reduction required. To meet its Paris Agreement target in 2025, the US will need to do considerably better – a 1.7%-2% average annual reduction will be required. Power sector emissions continued to decline in 2017, but emissions from the transport, buildings and industrial sectors all grew, offsetting half the decline in the power sector. Growth in aviation emissions alone offset more than one third of the emissions decline from falling coal use in the electric power sector. As reported by Trevor Houser and Peter Marsters at RHG, March 2018.

AND FINALLY: THE OFFICE LUNCH THIEF MYSTERY

Out of 17.3 million NCAA Tournament Challenge brackets, 550 entries correctly predicted Loyola-Chicago, Michigan, Villanova and Kansas as the Final Four participants, per ESPN. What’s better than your team winning through to the finals of the crazily competitive national university sports knockout competition? This! This legendary tweetstream from Zak Toscani In Los Angeles, "Comedian / Writer / Owner of the Island of Kokomo," that received the Twitter nod of approval for great storytelling entertainment from the equally legendary Lin-manuel Miranda (of Hamilton fame): “Co-worker got his lunch stolen and they’ve agreed to let him watch the security camera tape. This is the most excited I’ve ever been at any job ever. Ever.” - @zaktoscani. You’ll want to read all the way to the end...

HAVE A GOOD WEEK

I’ll be calmly encouraging Villanova men’s basketball team for the NCAA championship win tonight. Please send any examples of your team winning or your ESG news, comments, quotes and factoids on investment, strategy and sustainability to @esgarchitect. Live well, do work that matters, and stay connected in 2018.