You think you’ve seen the sun, but you ain’t seen it shine.
– Frank Sinatra
We begin the 2nd season of The Socially Inspired Investor by taking a deeper dive into the topic of Electric Mobility a.k.a. “The EV” movement. GM has announced that they will offer over 30 electrics by 2025 while publicly and loudly charting a path to an all-electric future. Clearly, Tesla has a huge lead but waking a giant rarely comes without consequence. Even Jaguar announced it will go 100% electric by 2025. Mercedes-Benz will shift its focus entirely to electric vehicles in 2025 and be prepared to sell nothing but electric cars by 2030.
As giddy as investors have been about EV, we are far from clear about how it will all develop. Experts tell us that gas combustible driven cars will still be the norm for the foreseeable future. Jeremy McCool, Founder and CEO of HEVO Power, is our featured guest on our PODCAST discussing the latest on the industry including their development of wireless EV charging.
But it’s not all roses. In our SPOTLIGHT ON section, we ask our experts to speak to the challenges and investments opportunities we face as we move toward mobility. Their observations were very insightful.
Despite the excitement, it appears the EV market currently faces epic supply chain disruptions – most notably a semiconductor chip shortage and the challenges of long charging times – especially during extended trips. And then there is the scarcity of many of the raw materials found in the batteries that these vehicles use.
Even tires will require innovation. The average EV vehicle can weigh almost twice as much as its older siblings (www.thehill.com). Companies like MICHELIN® see this as a unique opportunity to build market share and we investors should take note. On April 1, the MICHELIN® pilot® product line was launched, taking into account the higher weight characteristics associated with electric sports cars.
Yes, we are in the very early stages.
But yet we are very inspired about all the prospects that electric mobility can bring. Along the journey, we expect to find many good investment opportunities. With so much to be settled, the final story may be a long time coming. But in the investment world, this is not necessarily a bad thing. The market adage “buy the rumor, sell the news” should inform the investor when it comes to how to “play” the EV category.
Welcome back! We have a great new season planned. If you haven’t already done so, please subscribe at www.sociallyinspiredinvestor.com to receive notices of new issues and feel free to invite others.
We reached out to leading experts in the ESG investing industry to find out their responses, and this is what we found…
QUESTIONWhat are the challenges and investment opportunities we face as we move toward electric mobility?
ANSWERKarl Brauer, Executive Vice President at CarExpert.com
ANSWERThe move toward EV mobility is inevitable, but the rate and timeframe of this shift will be difficult to predict. Multiple variables, including government incentives, fuel prices, infrastructure build out, battery costs, and the health of the economy, will all play critical roles. So while it’s clear we’ve moved from an “if” to a “when” scenario, the “when” will likely take 10-15 years. Keeping investment in EVs proportional to this shift over the next decade will be the challenge across the industry.
QUESTIONWhat are the challenges and investment opportunities we face as we move toward electric mobility?
ANSWERNew energy sources coupled with innovations in cloud computing technologies are changing the entire transport industry. Challenges are associated with the availability, sustainable extraction and distribution of mineral and other resources associated with electric vehicles and necessary associated infrastructure. However, as performance and safety improves and battery costs fall, sales of electric vehicles are growing with numbers increasing from approximately 3 million electric vehicles to over 1 billion by 2050, when 75% of passenger car activity (passenger-kilometres), would be provided by electric vehicles under the Remap Case.
ANSWERThis makes investments along the entire electric vehicles value chain bankable in the run up to a carbon neutral economy by 2050, for both current auto companies, energy companies and startups too.
QUESTIONWhat are the challenges and investment opportunities we face as we move toward electric mobility?
ANSWERLiubov Volkowva, PhD, MBA, MS; Energy Markets and Sustainability at CIMA Energy, Mitsubishi Corp.
ANSWERThe EV market has grown at about 60% per year globally, topping 2.1 million in 2019. While the COVID-19 pandemic caused a temporary decrease in the use of vehicles and disrupted the automobile industry, it has boosted consumer interest in all-electric and hybrid electric vehicles (McKinsey Center for Future Mobility, March 2021). The key challenges and opportunities associated with the rapidly growing electric mobility market are changing consumer attitudes, drastically varying by region, EV charging infrastructure, regulatory changes, and battery technology and manufacturing, which primarily drive EV prices. In addition, the micromobility subsector, including electric bikes, scooters, and skateboards, with the $5.7 billion already invested since 2015, will continue expanding and present new opportunities for investors.
QUESTIONWhat are the challenges and investment opportunities we face as we move toward electric mobility?
ANSWERI believe we are in the midst of a pivotal point in history for electric mobility, especially as we recover from a pandemic that left many of us rethinking our individual impact while we were locked up. The EV market is hitting full speed with growing consumer demand for electric vehicles that are equipped with innovative technology and automation. Investment opportunities will arise as more companies shift their portfolios and investments to focus on green tech and disruptive technologies. Tax incentives and subsidies will still make or break the challenge of EV infrastructure and operating costs. There are also concerns on supply meeting demand as we are seeing increasing costs of raw materials that are needed for batteries. In the end, with enough investments to further develop R&D in existing companies and as new startups arise to make electric transportation more feasible, we will inevitably reach the goals of shifting into an electric mobile world.
QUESTIONWhat are the challenges and investment opportunities we face as we move toward electric mobility?
ANSWERJuliana Ennes, Communications and Strategy Development Consultant specialized in Renewable Energy
ANSWERWidespread adoption of electric vehicles in the United States faces challenges that go beyond what tax incentives can do. The public needs information.
ANSWERPeople and goods moving around the US by cars, trucks, trains, ships, airplanes and other vehicles account for 29% of the country’s GHG emissions. Over half of the transport-related emissions come from passenger vehicles and trucks with internal combustion engines.
ANSWERBoth public and private sectors aim at tackling this issue with electric vehicles. The Biden administration’s American Jobs Plan includes $174 billion towards encouraging Americans to switch to electric cars and trucks. In parallel, major car automakers have announced goals to phase out internal combustion engines. However, today EVs account for only 1.8% of new light-duty vehicles sold in the US.
ANSWERThere is a perception that costs are too high, even though studies show that albeit upfront costs are actually higher, in a lifetime of the vehicle this is offset by lower costs with maintenance and fuel.
ANSWERIt is true that batteries need more research and that the energy mix of the country and state where the car is being charged can elevate the carbon footprint of EVs. But studies show that even with coal and gas-power generation in the mix, EVs still can have a carbon footprint up to 40% lower than internal combustion engines.
ANSWERElectric vehicles are not a panacea and transport plans should still prioritize public transportation and bike infrastructure, but the switch is more than welcome and the technology is already there.
I know, you probably haven’t even driven one yet, let alone seriously contemplated buying one, so the prediction may sound a bit bold, but bear with me.
We are in the middle of the biggest revolution in motoring since Henry Ford’s first production line started turning back in 1913.
And it is likely to happen much more quickly than you imagine.
Many industry observers believe we have already passed the tipping point where sales of electric vehicles (EVs) will very rapidly overwhelm petrol and diesel cars.
It is certainly what the world’s big car makers think.
Jaguar plans to sell only electric cars from 2025, Volvo from 2030 and last week the British sportscar company Lotus said it would follow suit, selling only electric models from 2028.
And it isn’t just premium brands.
General Motors says it will make only electric vehicles by 2035, Ford says all vehicles sold in Europe will be electric by 2030 and VW says 70% of its sales will be electric by 2030.
This isn’t a fad, this isn’t greenwashing.
Yes, the fact many governments around the world are setting targets to ban the sale of petrol and diesel vehicles gives impetus to the process.
But what makes the end of the internal combustion engine inevitable is a technological revolution. And technological revolutions tend to happen very quickly.
This revolution will be electric
Look at the internet.
By my reckoning, the EV market is about where the internet was around the late 1990s or early 2000s.
Back then, there was a big buzz about this new thing with computers talking to each other.
Jeff Bezos had set up Amazon, and Google was beginning to take over from the likes of Altavista, Ask Jeeves and Yahoo. Some of the companies involved had racked up eye-popping valuations.
For those who hadn’t yet logged on it all seemed exciting and interesting but irrelevant – how useful could communicating by computer be? After all, we’ve got phones!
But the internet, like all successful new technologies, did not follow a linear path to world domination. It didn’t gradually evolve, giving us all time to plan ahead.
Its growth was explosive and disruptive, crushing existing businesses and changing the way we do almost everything. And it followed a familiar pattern, known to technologists as an S-curve.
Riding the internet S-curve
It’s actually an elongated S.
The idea is that innovations start slowly, of interest only to the very nerdiest of nerds. EVs are on the shallow sloping bottom end of the S here.
For the internet, the graph begins at 22:30 on 29 October 1969. That’s when a computer at the University of California in LA made contact with another in Stanford University a few hundred miles away.
The researchers typed an L, then an O, then a G. The system crashed before they could complete the word “login”.
Like I said, nerds only.
A decade later there were still only a few hundred computers on the network but the pace of change was accelerating.
In the 1990s the more tech-savvy started buying personal computers.
As the market grew, prices fell rapidly and performance improved in leaps and bounds – encouraging more and more people to log on to the internet.
The S is beginning to sweep upwards here, growth is becoming exponential. By 1995 there were some 16 million people online. By 2001, there were 513 million people.
Now there are more than three billion. What happens next is our S begins to slope back towards the horizontal.
The rate of growth slows as virtually everybody who wants to be is now online.
Jeremy Clarkson’s disdain
We saw the same pattern of a slow start, exponential growth and then a slowdown to a mature market with smartphones, photography, even antibiotics.
The internal combustion engine at the turn of the last century followed the same trajectory.
So did steam engines and printing presses. And electric vehicles will do the same.
In fact they have a more venerable lineage than the internet.
The first crude electric car was developed by the Scottish inventor Robert Anderson in the 1830s.
But it is only in the last few years that the technology has been available at the kind of prices that make it competitive.
The former Top Gear presenter and used car dealer Quentin Willson should know. He’s been driving electric vehicles for well over a decade.
He test-drove General Motors’ now infamous EV1 20 years ago. It cost a billion dollars to develop but was considered a dud by GM, which crushed all but a handful of the 1,000 or so vehicles it produced.
The EV1’s range was dreadful – about 50 miles for a normal driver – but Mr Willson was won over. “I remember thinking this is the future,” he told me.
He says he will never forget the disdain that radiated from fellow Top Gear presenter Jeremy Clarkson when he showed him his first electric car, a Citroen C-Zero, a decade later.
“It was just completely: ‘You have done the most unspeakable thing and you have disgraced us all. Leave!’,” he says. Though he now concedes that you couldn’t have the heater on in the car because it decimated the range.
How things have changed. Mr Willson says he has no range anxiety with his latest electric car, a Tesla Model 3.
He says it will do almost 300 miles on a single charge and accelerates from 0-60 in 3.1 seconds.
“It is supremely comfortable, it’s airy, it’s bright. It’s just a complete joy. And I would unequivocally say to you now that I would never ever go back.”
We’ve seen massive improvements in the motors that drive electric vehicles, the computers that control them, charging systems and car design.
But the sea-change in performance Mr Willson has experienced is largely possible because of the improvements in the non-beating heart of the vehicles, the battery.
The most striking change is in prices.
Just a decade ago, it cost $1,000 per kilowatt hour of battery power, says Madeline Tyson, of the US-based clean energy research group, RMI. Now it is nudging $100 (£71).
That is reckoned to be the point at which they start to become cheaper to buy than equivalent internal combustion vehicles.
But, says Ms Tyson, when you factor in the cost of fuel and servicing – EVs need much less of that – many EVs are already cheaper than the petrol or diesel alternative.
At the same time energy density – how much power you can pack into each battery – continues to rise.
Companies that run big fleets of cars like Uber and Lyft are leading the switchover, because the savings are greatest for cars with high mileage.
But, says Ms Tyson, as prices continue to tumble, retail customers will follow soon.
How fast will it happen?
The answer is very fast.
Like the internet in the 90s, the electric car market is already growing exponentially.
Global sales of electric cars raced forward in 2020, rising by 43% to a total of 3.2m, despite overall car sales slumping by a fifth during the coronavirus pandemic.
That is just 5% of total car sales, but it shows we’re already entering the steep part of the S.
By 2025 20% of all new cars sold globally will be electric, according to the latest forecast by the investment bank UBS.
That will leap to 40% by 2030, and by 2040 virtually every new car sold globally will be electric, says UBS.
The reason is thanks to another curve – what manufacturers call the “learning curve”.
The more we make something, the better we get at making it and the cheaper it gets to make. That’s why PCs, kitchen appliances and – yes – petrol and diesel cars, became so affordable.
The same thing is what has been driving down the price of batteries, and hence electric cars.
We’re on the verge of a tipping point, says Ramez Naam, the co-chair for energy and environment at the Singularity University in California.
He believes as soon as electric vehicles become cost-competitive with fossil fuel vehicles, the game will be up.
That’s certainly what Tesla’s self-styled techno-king, Elon Musk, believes.
Last month he was telling investors that the Model 3 has become the best-selling premium sedan in the world, and predicting that the newer, cheaper Model Y would become the best-selling car of any kind.
“We’ve seen a real shift in customer perception of electric vehicles, and our demand is the best we’ve ever seen,” Mr Musk told the meeting.
There is work to be done before electric vehicles drive their petrol and diesel rivals off the road.
Most importantly, everyone needs to be able charge their cars easily and cheaply whether or not they have a driveway at their home.
That will take work and investment, but will happen, just as a vast network of petrol stations rapidly sprang up to fuel cars a century ago.
And, if you are still sceptical, I suggest you try an electric car out for yourself.
Most of the big car manufacturers now have a range of models on offer. So take one for a test drive and see if, like Quentin Willson, you find you want to be part of motoring’s future.
The rise of ecommerce has catapulted electric vehicles to prominence. Concern about greenhouse gas emissions is driving the move away from diesel delivery vehicles towards trucks and vans using alternative power sources. Electric vehicles with a range of up to 150 miles are ideally suited to “last mile” deliveries, those with a limited radius.
The State of Washington has enacted ground-breaking legislation that sets a target for all model year 2030-or-later passenger and light-duty vehicles sold there to be electric. The new law is the most aggressive in the U.S. for moving to an all-electric future and puts Washington five years ahead of California’s 2035 mark. Fifteen other states, plus Washington, D.C., require all new trucks, vans, and buses to be electric by 2050.
Auto manufacturers are competing with start-ups to produce the most efficient and “smart” electric delivery vehicles. Volvo, Freightliner, Tesla, and China’s BYD are among the companies producing heavy-duty semi-trucks for regional shipments. Volvo’s VNR design, engineered in Virginia, will have a range of 150 miles before needing a recharge of one hour.
Ford and GM are competing to launch smaller electric vans for last-mile delivery. Ford will roll out an all-electric version of its Transit van in 2022, and GM’s BV1 is slated for production later this year.
GM has launched a subsidiary, BrightDrop, to focus on last-mile products — vehicles, e-pallets, software. GM Chairman and CEO Mary Barra stated, “We are building on our significant expertise in electrification, mobility applications, telematics, and fleet management, with a new one-stop-shop solution for commercial customers to move goods in a better, more sustainable way.”
BrightDrop has reportedly received interest from multiple shipping and delivery services, with a firm commitment from FedEx.
A UPS subsidiary, UPS Ventures, is investing in Arrival, a U.K.-based manufacturer of EVs with advanced driver-assistance systems. UPS is buying 10,000 units from Arrival over the next four years for its North American and European fleets.
Rivian Automotive is a California-based start-up with direct backing from Amazon.
According to Morgan Stanley analyst Adam Jonas, Amazon could become the world’s single biggest producer of CO2 emissions after China’s coal plants. However, Amazon claims it delivered in 2020 more than 20 million packages in electric vehicles across North America and Europe.
The company plans to deploy 100,000 additional EVs by 2030, sourced from Rivian. It has started to road-test them in Los Angeles and San Francisco and aims to be in 16 U.S. cities by the end of 2021.
Amazon is working with Rivian to test the vehicle’s performance, safety, and durability in various climates and geographies. The current fleet of vehicles being tested was built at Rivian’s facility in Plymouth, Michigan, and can drive up to 150 miles on a single charge.
Lithium-ion battery prices have seen a dramatic decline in manufacturing costs over the past decade. The below chart from a Bloomberg New Energy Finance report released today shows the steady march downward in prices.
Lithium ion battery prices have fallen nearly 90% over the past decade, according to BloombergNEF’s 2019 Battery Price SurveyBNEF
In fact, the chart may be understating things a bit. BNEF forecasts that the industry will see $100/kWh by 2023. However, one industry insider told me recently that he’s already seeing costs near that point. If so, that price level may prove to be an inflection point for several major industries.
The obvious first such industry is transportation. In a McKinsey & Co. report from March of this year, the researchers suggested that a $100/kWh cost for battery packs (along with some other cost-reduction areas) would lead to electric vehicle manufacturing cost parity versus comparable internal combustion engine (ICE) vehicles. McKinsey & Co. projected that this would happen in a 2025 timeframe, but battery cost reductions may be accelerating that greatly.
Incredibly, even while experts are saying sales of ICE vehicles may have permanently peaked last year, not all automotive OEMs are moving quickly toward the EV future. While some like GM and Volvo have said they will migrate their entire vehicle lineup toward EVs, others have been slower to do so. The rapid decline in battery prices, if it leads to faster-than-expected adoption of EVs, could mean that the next decade sees a lot of value creation and destruction in the automotive industry.
But it could also mean the same for the electric utility industry, as cheap energy storage could radically change the value proposition for grid-tied consumers thinking about installing solar and batteries.
When Superstorm Sandy hit the Atlantic coast, many manufacturers and other businessowners faced a stark recognition that power from the grid wasn’t always going to be available to run their operations. Now, in 2019, many businessowners in California are learning the same lesson, with the rolling blackouts by PG&E that left millions without power.
The obvious solution for many would be “microgrids”: Onsite distributed generation (typically solar) matched with sufficient battery capacity to together provide 48 or more hours of resiliency in the case of a grid blackout. But while solar prices continued to fall, prompting a continued high rate of solar installations in the U.S., the high cost of such battery capacity has held back the implementation of microgrids.
How does this impact the electric utility industry? It’s important to remember that utilities generate revenue not only by selling kilowatt-hours, but also by making large customers pay a “demand charge” based upon their single biggest 15-minute spike in power usage in a month. While power generation from distributed solar projects has been on the rise, between continued sales of kilowatt-hours and demand charges, utility revenues have continued to grow. Indeed, imposing demand charges onto residential customers has been seen by the utility industry as one potential way to counter any loss of revenues from kilowatt-hour consumption.
But microgrids with cheap battery storage will completely upset this calculation. It will make it cost-effective for business owners (and even homeowners) to generate and consume their own power onsite without paying the utility for those kilowatt-hours. Plus, for those customers still purchasing power from the utility, the batteries will also be used to reduce those monthly spikes in consumption that create the demand charges. Since demand charges can be upwards of 30% of a business owner’s utility bill, when businesses use batteries to reduce their demand charges, that is also lost revenue to the utility.
So batteries could negatively impact both of the main drivers of electric utility revenue. They will enable customers to effectively become their own utility, with some potentially cutting the cord altogether. This won’t happen overnight. But cheap batteries now make it possible, and the resiliency benefits alone might drive widespread adoption over the next decade.
Utilities will have one potential counter-balance to this phenomenon — as much of the transportation industry shifts increasingly over to electric drivetrains, that will add more potential demand for kilowatt-hours (and also more demand charge revenues). Plus, utilities can also buy their way into the microgrid business itself. But some utilities appear to be embracing this future much faster than others. As with the transportation industry, this will mean a period of potentially significant disruption within the utility industry, with winners and losers yet to be determined.
Finally, all of this will clearly impact the global energy industry, which supplies both the transportation and utility industries. EVs don’t consume gasoline, and microgrids typically won’t consume natural gas (a primary power generation source for utilities).
As the transportation sector shifts more to electricity, some oil and gas giants are investing heavily into building new lines of businesses serving the distributed electricity future. They are getting into the microgrid and EV business, in other words. Others prefer to spend their money on TV ads talking about how “green” they are, and doing some showcase research and development, while still remaining entirely focused on traditional oil and gas based strategies for the foreseeable future.
Once again, this dichotomy feels like we are entering a period when there will be potentially significant disruption to a major global industry where participants are choosing very different paths.
These are huge industries — transportation, electric utilities, and their upstream energy providers — that will be impacted by the proliferation of inexpensive batteries. That’s why today’s report by Bloomberg NEF is so note-worthy. As an investor, I’m certainly looking for ways to take advantage of the coming period of “creative destruction”.
To extend EV range, engineers are looking where the rubber hits the road.
Making tires for an electric vehicle is a ruthless exercise in compromise. Too much stick and the car won’t travel as far on a charge; too little, it will silently slide off the road. Exacerbating the equation is the fact that these vehicles are ponderously heavy.
Michelin, however, says it has finally perfected the mix after 30 years of tinkering with its rubber recipes. If EV ranges tick slightly higher in the next few months, the battery chemists won’t deserve all the praise; save some for the tire wizards.
Next: they want to make that same tire a data engine and, while they’re at it, fully recyclable.
Hyperdrive caught up with Alexis Garcin, chairman and president of Michelin North America, to talk about the company’s R&D blitz and how he’s preparing for a massive wave of electric vehicles.
It has more or less the same complexity as making a tire for a combustion car, but it brings it to another level. You have to ensure safety but you have to minimize resistance, because it has a direct link with the fuel consumption. And the high tech materials used have to be lighter and lighter, because if the car is getting heavier, we have to make sure that the tire won’t. That’s really a subtle mix.
So these tires are purpose-built for EVs?
In March, we unveiled the e.PRIMACY, which will come later this year for larger SUVs in the U.S. That tire is bringing up to 7% additional range to electric vehicles, because it is optimized to reduce the road resistance without compromising any of the performance. That’s a technology we mastered and we’re just rolling it out.
The second example is on the Pilot Sport, which we just released. It’s a dedicated tire for electric sports cars and it brings up to 37 miles of additional range, because of that optimization of running resistance.
What does R&D look like now?
We have massively re-accelerated our investments in what we call the high-tech material division. Those open us up to new domains, like aerospace, like medical and other industries. Our vision is to have a fully renewable and recyclable tire by 2050. Today, more or less, 30% of the tire is renewable and recyclable.
Is the size of vehicles today a challenge?
We have to adapt constantly our production system to that. Ten years ago, I would say we were massively producing 16- to 17-, maybe 18-inch products; today we are definitely in the 20, 22-inch range and already increasing production on 24-inch tires.
Has EV adoption changed your sales and distribution strategy?
I think personally what’s happening right now is a deep transformation of the auto industry and it pushes the car manufacturers to think about a new business model. The value stream will probably move from buying a car and getting maintenance to some services that you buy every month or some packages you can integrate every 6 months, depending on new features and technologies that are being developed. We were the first manufacturer, starting in 2012, to put an RFID chip in every medium- and heavy-duty truck tire. By 2023, every passenger car tire will be equipped with an RFID chip because we believe they are a nice business model. There are so many offers we can build around tires, because at the end of the day that’s the only part of the car touching the road.
Can you give me some examples?
I see the RFID as an enabler. It’s not there to store information; it’s just like your social security number. Once it’s in the cloud, every time that tire shows up for maintenance, you can track that mileage and then you can push some information to the driver: ‘By the way, it might be time for you to make a rotation,’ or ‘you should be very close to the minimum tread depth and you might think about changing your tires.’ This is the kind of information that we can very easily share and deploy today. It’s even more valuable for the B2B customers. When you have a 10,000-vehicle fleet, this is a gold mine, because it’s such a high source of efficiency.
Are you talking to automakers earlier in the process?
I would say so. They need a strong partner to cope with the challenges they face when they are designing the vehicle — the range and the weight and the noise and everything we just talked about. And each one of them might have a different approach in terms of their after-market strategies. The after-market — [warranties, long-term service, extra parts ]— will be completely revamped in the next five or 10 years.
When you have these conversations, with say, Tesla or Rivian, how customized do you get?
When we talk to [manufacturers], most of the time, the tires developed are made specifically to those cars. Because the cars are so unique, because of the interaction of the weight, the torque and the chassis of the vehicle, each one is different. Most of the tires are very, very tuned and made specific down to the model level. It’s much more complex than it appears.
Navigating the various ESG scores of mutual funds and ETFs from rating firms can be confusing.
Pay attention to the metrics being measured, including materiality.
“Material ESG issues are the ones which will cause a company a financial penalty if not handled correctly,” says Jon Hale, head of sustainability research for the Americas at Morningstar.
Sustainability ratings are useful tools for assessing the environmental, sustainability and corporate governance-worthiness of mutual funds and exchange-traded funds.
But how do you navigate between different ratings providers, especially when they can have different results for the same fund?
CNBC looked under the hood at some of the most pertinent issues.
What’s being measured?
″[Ratings] don’t have to agree, because the underlying methodologies are different,” said Larry Lawrence, executive director, ESG products, for MSCI.
To compare fund ratings in an apples-to-apples fashion, one must not only compare methodologies (here is MSCI’s as an example), but also at how the underlying holdings are treated in terms of rating distribution; carbon intensity; transition risks to clean energy, such as companies’ preparedness to do so; diversity metrics and so on, he said.
Another thing to consider when comparing ESG ratings is materiality.
“Material ESG issues are the ones which will cause a company a financial penalty if not handled correctly,” said Jon Hale, head of sustainability research for the Americas at Morningstar. “A typical sustainable fund may avoid investing in companies that don’t rate highly on their handling of ESG issues, but the focus is on which issues are material to a particular company.”
For example, he said, material issues for Exxon include green house gas emissions (environmental), community impact (social), and political lobbying and spending (governance). In the case of Facebook, social material issues have more to do with product and stakeholder impacts, diversity issues and data privacy.
Morningstar’s fund sustainability ratings, illustrated as a scale of 1 to 5 globes, represent the aggregated material ESG risks of the companies in a fund’s portfolio, Hale said.
He added that investors have recently begun to evaluate the ESG impact of sustainable funds, noting that more and more of these are issuing impact reports.
Other ratings providers focus on specific ESG issues right up front.
“We flag the companies that are burning down the Amazon, for example, [while other firms] are rating them,” said Andy Behar, CEO of As You Sow, a non-profit in Berkeley, California, that performs shareholder advocacy focused on ESG issues. “We’re splitting it apart issue by issue.”
A fund could have a sustainable name but may own companies that run private prisons or produce banned weapons — and still perform sustainably, he said.
As You Sow rates funds according to performance on seven issues: fossil fuels, deforestation, military weapons, civilian weapons, gender, private prisons, and tobacco. The organization also features seven separate databases, highlighting each issue area, such as fossil-free funds or gender equality funds.
Some are concerned about the lack of verifiable ESG data being collected.
“Most rating firms are relying on company-reported data or secondary data, which can’t be verified or audited,” said Maneesh Sagar, CEO of RS Metrics, which provides specialized environmental data to ratings firms. “It can also be biased and outdated.
“Right now there is no primary data on the asset level,” he added. “Moreover, raters tend to highlight whoever has the best reporting mechanisms.”
Dealing with divergence
“Nobody does a great job of analyzing sustainability at the fund level,” said Theresa Gusman, chief investment officer, First Affirmative Financial Network, headquartered in Colorado Springs, Colorado. “You’d be surprised at how different the scores could be from each vendor.”
To deal with this, First Affirmative combines different ratings, equally weighted, from MSCI, Morningstar, Sustainalytics and their own proprietary score based on Corporate Knights data. This combined data enables Gusman to ask deeper questions of the fund managers; for example, when many small cap funds have low ESG scores because they report less data.
“It’s expensive to the companies to report all these data — it’s a lot of work — so the scoring gets really skewed,′ she said. “The key is not to use the scores as the definitive answer to whether the fund is sustainable or not.
A news trader is a trader or investor who makes decisions based on news announcements. Breaking news, economic reports, and other reported events can have a short-lived effect on the price action of stocks, bonds, and other securities. News traders try to profit by taking advantage of market sentiment leading up to the release of important news and/or trading on the market’s response to the news after the fact.
News traders use scheduled announcements to take up positions that profit from short-term volatility.
News traders can also trade significant, unplanned events that impact the domestic or global economy.
New traders tend to hold positions for a very short period of time as the impact of news usually fades quickly after being made public.
Understanding News Trader
The adage “buy the rumor, sell the news” recognizes that rumors have one effect on a security’s price and news can have the opposite effect. For this reason, news traders focus on trading in the time leading up to the news or immediately after, when the market is still reacting to the news. These periods are characterized by a high amount of volatility that creates an opportunity to profit.
News traders try to profit from the timing or likely content of scheduled news announcements for the most part. When the news is scheduled, as with earnings releases or Federal Reserve meetings, news trading is more about playing the odds on the likely significance of the announcement. In fact, the Federal Reserve has tried to soften the market impact of its proclamations by foreshadowing every major policy decision well in advance, but even these policy signals have become tradable events.
When the news is a surprise to everyone, as in a natural disaster or black swan event, news traders try to position themselves to profit. Sometimes this means playing the volatility or making a call on the immediate directional impact of the news on current price trends.
FAST FACT In most cases, news traders are a type of day trader since they generally open and close trades in the same day.
News Traders’ Tools and Strategies
News traders leverage many different strategies with a focus on market psychology and historical data. Traders may look at historical data, for example, such as past earnings reports, to predict how upcoming news, like an upcoming earnings report, is likely to affect prices. By becoming familiar with specific markets, news traders can make educated guesses as to whether a security will increase or decrease in price following a news report.
News traders can also set up queries and alerts to gather breaking news and correlate it with changes in the price action on a chart. If certain criteria are met, the news trader will then enter a bullish or bearish position depending on the trading strategy. As news is timely and usually short-term in impact, the opportunity to profit only exists for as long as the news is fresh.
A popular strategy used by news traders is known as fading, which involves trading in the opposite direction of the prevailing trend as enthusiasm wears off. A stock might open sharply higher, for example, after a positive earnings announcement during pre-market hours. News traders might watch for this optimism to reach a high and then short sell the stock intraday as optimism wears off. The stock might still be trading sharply higher compared to the prior day, but the traders may have profited from the difference between the highs and lows of the day.
While all forms of investing in theory have ‘impact’, for good or ill, funds which carry the label look to ensure the positive impact is measurable.
LONDON: Demand for funds which cherry pick investments with strong environmental, social or governance (ESG) credentials has surged in recent years.
Many of these funds include terms such as ‘ethical’ or ‘impact’ in their names. But what do these words actually mean?
Below is a glossary of the key terms often used to describe investment styles and processes.
SUSTAINABLE/RESPONSIBLE INVESTING In the absence of a global consensus, the two are often used to describe a range of investment approaches used by fund managers to assess ESG issues before choosing to buy or sell an asset. This could mean looking at a company’s climate change preparations, its record on deforestation or its boardroom diversity to ensure it is operating in a way that is socially and environmentally sustainable over time. It also covers the way in which the asset is then managed, for example in the way the fund looks to influence company management on topics of concern.
ESG INTEGRATION The most commonly used process, including across funds with no specific sustainability objective, ESG integration is where ESG-related factors are systematically considered as part of the investment analysis conducted by a fund manager as a way to better manage risk and returns.
ETHICAL INVESTING One of several strategies that explicitly exclude certain stocks or sectors. Commonly used in funds which avoid the so-called ‘sin’ stocks such as companies tied to pornography, weapons, gambling, alcohol or tobacco, ethical investment funds allow an individual to invest in line with their environmental, religious or political values.
IMPACT INVESTING While all forms of investing in theory have ‘impact’, for good or ill, funds which carry the label look to ensure the positive impact is measurable. For example, by investing in projects where the financial return is linked to improving literacy rates or health outcomes in the developing world.
BEST-IN-CLASS As the name suggests, this approach picks companies that perform strongest on ESG-related issues, even if the sector is one that many would consider less sustainable, such as Oil and Gas. Unlike ‘ethical’ investing, which could see investors miss out completely if the sector they eschew surges in value, best-in-class investing allows funds to retain the option of exposure to the sector’s returns.
POSITIVE TILT Often used in index-tracking funds, a ‘positive tilt’ approach would see a fund buy more of the stock of companies in a given index with a good ESG performance, for example on carbon emissions, and less of those with a worse performance.
ENGAGEMENT Stewardship refers to the responsibility of a fund manager to manage their clients’ money in a way that creates long-term, sustainable value. One way they do this is by ‘engaging’, or talking to, the boards of the companies in which they invest to challenge them to perform better on ESG issues.
PROXY VOTING When words are not enough, fund managers can turn to the ballot box. Specifically, anyone who owns shares in a company has the right to vote once a year on a range of issues including whether or not to confirm the board in their jobs, and to support their proposed pay and bonus plans. In a mutual fund, where many thousands of people may share ownership, the fund manager or the fund management company running the fund decides which way to vote on their behalf.
When we first published the SII Digest and Podcast we could not have known the pivotal year we were about to experience. It turns out we had plenty to talk about. The amalgamation of environmental, social, and corporate governance events has been truly epic. We could not be prouder of how our team took on the challenge.
Covid-19 continues as a backdrop of course. Many of the companies that are helping us to endure through both the pandemic and the fight against climate change seem to score higher on the ESG scale – and now, with more confidence, we see the values of their stocks reflecting this potential. There seems to be little doubt within the professional investment world that sustainability and social responsibility must be taken into consideration.
This edition focuses on the whole of this past year. What have we learned? How far have we come? What do we see ahead? In our SPOTLIGHT ON section, we asked experts from the industry to weigh-in on these questions.
The SIIPODCAST hosted by Pat O’Neill, is a retrospective of the previous podcasts our first season – all 9 of them. This episode, our 10th, recalls some of the most interesting contributions from our amazing guests, a real treasure of information. Many thanks to Sureita Hockley, who expertly produces these podcasts and Paul Ellis who takes on the responsibility of sourcing our experts. The PODCAST team comes together in a roundtable style for a very informative session.
Originally, we thought it would be helpful to amplify all the smarts around environmentally and socially conscious investing. Our mission continues to make socially responsible investing more user friendly and actionable. We will continue down that path as we move into our next season.
We see the world coming together over this time with more of a shared purpose and clarity around ESG. The “pack” is getting stronger and that should be inspiring to us all.