Our monthly spotlight on the latest in values-aligned investing across Wall Street and the world.
ESG IN THE NEWS
Market volatility drives some short-term outflows. According to Bloomberg data, ESG equity funds saw about $2 billion of outflows in May 2022 after strong inflows during 2020-2021. Equity funds took in $32.6 billion in May 2022 – so the ESG segment was an under performer. The shift in the trend was blamed on recent market volatility and the sharp spike in oil prices this year. The S&P 500 Energy Index is up almost 60% this year while the S&P 500 is down 14% YTD. Many ESG-focused investment strategies have a long-term investment horizon, so investors should not just react to short-term results. The year-to-date inflows into ESG funds has benefited from the launch of 20 ESG-focused funds in the US this year. More ESG product launches are expected this year amid evolving regulatory requirements and political debates over sustainable investing.
SEC proposes rules for sustainable investing disclosures. On May 25, 2022, the SEC proposed two rules for environmental, social, and governance disclosures that extend to registered investment advisers, registered investment companies, and business development companies. The SEC seeks to establish reporting rules and has proposed an update to the “Names Rule” under the Investment Company Act of 1940. Under the Names Rule, investment products will be subject to an 80% threshold requiring the product name to reflect an investment strategy that incorporates a consideration of ESG factors. Ironically, while the SEC clearly wants to create objective consistency for how firms label "ESG" products, the SEC's determination of whether a fund's investment process truly reflects an "ESG" approach remains hugely subjective.
VALUES IN ACTION
Earth: Southwest Airlines invests in sustainable fuel.
Southwest Airlines announced an investment in SAFFiRE Renewables, a company formed by D3MAX and the Department of Energy to develop sustainable aviation fuel (SAF). The project will convert corn stover (waste biomass) into renewable ethanol, which can be upgraded to sustainable aviation fuel. This type of fuel provides an 84% reduction in carbon intensity compared to conventional jet fuel. Southwest Airlines has set a goal to replace 10% of its jet fuel consumption with SAF by 2030, and to reduce its carbon emissions intensity by at least 20% by 2030. Southwest does not meet Seeds’ rules framework due to its environmental impacts and the related risks.
People: McDonald’s engages an outside firm to conduct a civil rights audit.
A shareholder proposal submitted by SOC Investment Group calls for a civil rights audit of McDonald’s operations. The proposal has seen strong support among McDonald's shareholders, and proxy firm Glass Lewis advised shareholders to vote in favor of the proposal. In response, McDonald’s reaffirmed its commitment to diversity and inclusion, and hired a third-party firm to assess its diversity efforts. We believe shareholder proposals for civil rights audits will become more common among the largest US companies. McDonald’s does not meet Seeds’ rules framework because of its human capital management and related risk exposure.
Corporate Integrity: Shareholder proposals try to protect reproductive rights.
Recent proxy proposals are forcing companies to take a stance on reproductive rights as more states put measures in place to restrict abortion. Activist investors have filed shareholder proposals with Walmart, Lowe’s, and TJ Maxx. These proposals want companies to produce a report analyzing the risks and costs of abortion access on employee hiring and retention. Key issues are whether companies plan to close or expand operations in states that are restricting abortion access. In addition, companies with a large female employee base will need to consider if health care benefits include reproductive benefits, including abortion. Lowe’s and TJ Max both meet Seeds’ rules framework. Walmart does not meet Seeds’ rules framework because the company’s human capital management and related risk exposure sits above threshold levels.
Mondelez International – Snacking Sustainably
With an $87 billion market capitalization, Mondelez is a snack food company focused on biscuits and chocolate. The company is best known for its Oreo, Ritz crackers, Triscuit, and Cadbury brands. The company is targeting 4%+ organic net revenue growth and 5-9% adjusted EPS growth in 2022. This level of performance is positive in the current inflationary environment. Mondelez has strong commitments to sustainability with a focus on sustainable ingredients, climate, packaging, and diversity. Mondelez sources 75% of its cocoa from Cocoa Life registered farmers. The Cocoa Life program has invested $400 million since 2012 to help communities in Ghana, Côte d’Ivoire, Indonesia, India, the Dominican Republic, and Brazil. On climate, the company has achieved a 21% reduction in greenhouse gas emissions since 2018 and is getting 32% of its electricity from renewable sources. The company considers 95% of its packaging to be recyclable and is working to use more recycled plastic content going forward. Lastly, Mondelez continues to make progress in diversity with 39% women in executive leadership and 5% Black management representation.
ESG investing is coming under fire from multiple fronts lately, and Seeds put together a three-part series to help advisors to stay informed. In the first article, we examined recent ESG underperformance due to the surge in oil prices. Critics of ESG investing have been quick to claim that the underperformance reflects flaws in the methodology. However, for many investors, short-term shocks from unprecedented market conditions should not necessarily change longer-term views on climate risk and other material risks related to traditional energy. In the second article, we explored the challenges around what actually qualifies as ESG - especially in light of S&P Global removing Tesla from its S&P 500 ESG Index as part of their annual rebalance. But as advisors try to cut through the noise, the financial services industry (and its related media) has an increasing responsibility to provide broader context and education.
- Seeds was nominated as a finalist on RIA Intel's inaugural awards list for the Most Innovative Technology of the Year category.
- Seeds Founder and CEO Zachary Conway joined Laton Spahr, CFA, Carin Stimolo, and Davis Janowski to talk about the technology drivers of next gen investing at WealthStack (Part of Wealth Management EDGE) 2022.
- Seeds took part in Adhesion Wealth’s 2022 Summit for a great two days of learning, networking, and fun with some of the best in wealth management.
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Seeds Investor LLC ("Seeds") is a Registered Investment Advisor ("RIA"), located in the State of New York. Seeds provides investment advisory and related services for clients nationally. Seeds will maintain all applicable registration and licenses as required by the various states in which Seeds conducts business, as applicable.
This document is for your private and confidential use only, and not intended for broad usage or dissemination. Past performance is no guarantee of future returns. 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. Opinions shown in this publication are solely those of Seeds and may not be accurate or complete. Seeds does not get any compensation from linking to news articles and does not take any responsibility for the accuracy of such articles or information therein.
*Holding examples mentioned are for illustrative purposes and may or may not represent actual holdings in an individual’s personalized Seeds Portfolio. Investors are to refer to their financial advisor or custodian for a list of actual holdings.
Seeds began managing advisory client assets March 23, 2020. Although this material is based upon information the advisor considers reliable and endeavors to keep current, the advisor does not assure that this material is accurate, current or complete, and it should not be relied upon as such. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of the advisor’s investment services are disclosed in the publicly available Form ADV Part 2A.