ESG IN THE NEWS
Surging oil prices present a dilemma for sustainable investors. Thanks to strong global demand and supply constraints, oil prices have surged 60%+ since December 2021. Meanwhile, the S&P 500 Index is down 8.2%year to date (as of March 3). The current Ukraine crisis threatens to push oil prices higher, with some pundits calling for $120 per barrel near term. Instead of investing more money in developing oil reserves, many believe a sharper focus on investing in renewable energy, electric vehicles, and other clean technologies can move us more quickly toward energy independence. Investors increasingly prefer such an approach, rather than empowering countries like authoritarian regimes, like Russia and Saudi Arabia (which together represent 25% of world oil production), who disregard basic human rights, rule of law, and the sovereignty of democratic neighboring countries.
Ukraine conflict calls into question sustainability of defense sector. In the past week, shares of defense contractors rose on the escalating conflict in the Ukraine. The idea is that rising geopolitical tensions should lead to bigger defense budgets over the medium term. Germany, for example, has already committed to double its military spending this year. Clearly, weapons of mass destruction would seem far from typical as a sustainable investment option, and yet sustainable investors must also consider a stark reality: Independent democratic countries like Ukraine must use those same weapons to defend against an unprovoked aggressor like Russia. Defense companies argue that “without security we cannot have a sustainable society.” This is an increasingly valid point in light of the events of the past week, and we expect to see more vigorous debate on whether defense companies can be considered “sustainable” investment options.
Sale of offshore wind leases raises $4 billion. In its first offshore wind lease sale, the US government raised a record $4.37 billon. The sale included six blocks covering almost 500,000 acres off of the New York and New Jersey coasts. Strong interest in the auction is a positive sign for clean energy investment going forward. The wind properties will generate 7 gigawatts of power and contribute towards President Biden’s 30 gigawatt offshore wind goal by 2030.
VALUES IN ACTION
Earth: Chipotle Mexican Grill increases ESG goals tied to executive bonuses. Chipotle Mexican Grill (NYS-CMG) is raising ESG bonus payments from 10% to 15% for key environmental initiatives in line with the company’s sustainability program. Key metrics include a 3.6% increase in sourcing more organic or locally grown ingredients. The company is also targeting a 5% reduction in GHG emissions in 2022 as well as a 50% cut in emissions by 2030. Chipotle also has ESG goals tied to diversity and equitable pay. At this time, Seeds has no direct exposure to Chipotle Mexican Grill (CMG) as our product governance scores on the company do not yet meet our criteria.
People: Tesla sued for alleged racist conduct. A lawsuit filed on February 10 by the California Department of Fair Employment & Housing (DFEH) alleges race discrimination and harassment at Tesla (TSLA). In the lawsuit, the DFEH alleges that Tesla discriminated against black workers in California and segregated them to the lowest paid jobs. The suit also highlights that black people are severely underrepresented among executives and senior officials at Tesla, and that racial slurs and graffiti were constantly used in the workplace. The DFEH cites hundreds of worker complaints after a three-year investigation. In response, Tesla issued a press release calling it a “misguided” and “unfair” lawsuit, highlighting the company’s commitment to anti-discrimination and how “no other company has done more for sustainability.” Seeds does not hold Tesla in any portfolios because of corporate governance and worker concerns.
Corporate Integrity: Johnson & Johnson and distributors ink$26 billion opioid settlement. On February 25, Johnson &Johnson (JNJ) and major pharmaceutical distributors agreed to settle over 3,000 state and local lawsuits for $26 billion. While denying any wrongdoing, aggressive marketing practices were a central theme in the lawsuits. Johnson & Johnson will pay $5 billion over nine years while McKesson (MCK), Cardinal Health (CAH), and AmerisourceBergen (ABC) will pay $21 billion over 18 years. The government will use these payments primarily for addiction treatment and prevention services. The opioid crisis is a prime example of what happens when corporate greed and poor governance collide. Over the past two decades, more than 500,000 people have died in addition to widespread addiction and overdoses that have strained the heath care system and destroyed families. Seeds does not own shares of Johnson & Johnson (JNJ), McKesson(MCK), Cardinal Health (CAH), or AmerisourceBergen (ABC) in its portfolios.
Applied Materials – An Indirect Semiconductors Play
With $24.2 billion in revenue, Applied Materials (AMAT) is a new holding in Seeds portfolios. Applied Materials is a leading provider of manufacturing equipment, services, and software to the semiconductor, display, and related industries. The company’s Applied Global Services segment provides solutions to optimize equipment, performance, and productivity while delivering greater customer value. With a vision to "Make Possible a Better Future "for everyone, Applied Materials is aligned around a 10-year sustainability roadmap with goals to grow the business and have a positive social impact. The company aims to have 100% of global energy consumption coming from renewable sources by 2030 with an interim goal of 100% in the U.S by the end of 2022.This can be achieved by building and maintaining on-site solar capacity, virtual power purchase agreements, and directly purchasing renewable energy from utilities. Applied Materials also focuses on community engagement, and awarded more than $14M in grants in 2020.
Advisors are missing a big opportunity if they are not offering sustainable investments to their clients. A recent survey conducted by FlexShares Exchange Traded Funds found a large disconnect between financial advisors and clients over ESG investments. A vast majority of clients (72%) were interested in ESG investments while 87% of respondents said their advisor had not offered ESG investment options. Almost 60% of survey respondents expressed an interest in aligning their investments with climate change and diversity, equity, and inclusion performance. The FlexShares family of ETFs has about $20 billion of assets under management.
· Seeds Head of Investments Kuni Chen, CFA, was interviewed for Business Insider on the realities of working in the ESG Industry
· In response to the Streetwise Column for the WSJ, we dissect why The Anti-Sustainable Investment Craze Is Flawed
· Wealthmanagement.com published our piece on Why ESG Managers Missed the Activision "Blizzard" And What Lessons We Can Learn From It