So, read any good ESG books recently?

So, read any good ESG books recently?

Since I’m currently writing an ESG book for institutional investors, I thought I might take a look at what’s out there. There were a bunch published in the 2010-2011 time frame, but there have been considerable developments since then, and these seem a bit dated. So I just went on Amazon and picked a bunch of books from 2015 onwards, including several published this past year. It’s a hot area indeed. It’s also a highly arbitrary list. I decided to take a pass on some of the more specialized ones (Environmental Governance in Taiwan, that sort of thing) as well as those focusing just on environmental or climate issues. There are quite a few of these, as you might suspect. Then there are the ones which are clearly targeted to businesses, with a “How to make your company sustainable” meme. Interesting, no doubt, but probably not what investors are looking for. I also mostly passed on the “How to Make Money with Socially Responsible Investing” sort of thing, or anything that looked targeted to individual investors. I wanted to focus on books that looked designed for institutional investors. And there are some quite expensive ones from the past two years, including the £150 one from Routledge, that I’m going to hold off on. My budget is limited, and I assume that’s the case for most of us. And I’m holding off on some of the SASB publications, in part because I want to wait on them–I already expect them to be top notch, and I want to get these other books out of the way before I delve into the SASB books.

I also learned that if you do an Amazon search under “ESG,” you get a variety of books on what we’re interested in. You also get a raft of mysteries by Erle Stanley Gardner, and a bunch of geology books. Actually, a search under Sustainable Investing brings up many of the same books. So, where to start?

Let’s get the general complaint out of the way first. By and large, what’s out there seems to assume that bondholders aren’t that material to, or interested in, these discussions. How else to explain their near-complete absence in these books? Well, that’s not completely true–some of them have a little box or something with a two paragraph discussion usually called “bondholders.” This is not helpful. As I never tire of reminding people, we’re the ones who are going to be financing the great energy transition that everyone loves to talk about these days–and pretty much everything else that’s a big ticket item, and there are a whole lot of those coming along. For one thing, we have more money. This whole approach needs to be rethought, especially now that rating agencies (well, Moody’s and S&P anyway) are stepping up their analysis of ESG issues, particularly climate, in the assessment of medium and longer term credit trends.

Well, as is usually the case, there’s a mix. So let’s start with a short and nicely affordable little publication from The CFA Institute, which has published a handy little introduction to the subject in Environmental, Social and Governance Issues in Investing: A Guide for Investment Professionals. This is a short but to the point overview of what the CFA institute thinks portfolio managers and analysts should know about ESG. Like most such books, the default assumption is that investors are equity investors–aside from a brief discussion of Green Bonds and Social Impact bonds, bondholders are largely ignored. Nonetheless, there are a number of worthwhile aspects to the volume, the principal one being its brevity. In 42 pages we find a pretty good summary of what’s driving interest in ESG these days, and the high points, as it were, of ESG investing.

It does have something of a haphazard feel to it–there are some company examples offered for various points, but no real discussion of why those companies were chosen and not others. More mystifying to us, the Governance chapter, which we would expect to have a heavy emphasis on items of interest to shareholders, like many other such lists, does not list litigation as a governance issue. From our standpoint, litigation often reflects a significant failure of governance, and is a pretty fundamental indictor of management performance. And there’s the irritating sense that the CFA Institute is playing catch-up here, and knows it. Still, if you’re looking for a short, inexpensive introduction to ESG, this one isn’t bad. The page dispelling much of the usual bullshit on Fiduciary Responsibility alone should be required reading. (It should also, obviously, be a core component of the CFA curriculum.)

Then there’s one that institutional investors can safely ignore. Mark Andrich’s The Sustainable Investor’s Handbook (2017) is a mess. There are some good discussion points–ESG is NOT the same as Sustainability, 300 MSCI indicators cannot possibly all be material, and “Best in Class” is often a useless concept. Andrich tries to develop a simple approach to Sustainability by basing it on categories derived from the UN Platform for Sustainable Development. But simplicity often has disadvantages, and this is one of those times–Andrich’s categories end up being so vague as to be nearly meaningless. And it allows him to finesse the issue of governance completely, by arguing that since large companies are publicly listed, “then governance procedures are in place, and unless you are a professional investor or analyst undertaking meetings with management, it will be difficult to find governance issues.” So you can leave those groups out of Andrich’s potential readership–that sentence makes it clear that Andrich is not writing for a professional investor, in spite of some grand pronouncements in the introduction. It’s also preposterous.

Actually, Andrich is correct to point out that the World Development Goals are a good set of targets to aspire to. But they turn out to provide not as much guidance as he seems to think they do–or, more likely, he has a considerably simpler approach to this than I might. So his categories (for which he provides cute little avatars) are clothing, communications, energy, food, health, housing, knowledge and education, transport, waste and water. But he doesn’t seem to be very discriminating once he gets someone classified, and he has hardly anything negative to say about someone once they fall into some bucket. So a whole raft of agribusiness-related companies, ranging from Mondelez, Conagra, General Mills, and Collins Foods (which owns KFC) somehow make it onto his list of 150 Most Sustainable Global Companies. He seems indifferent to the issues surrounding private water companies, since he has quite a few of them on the list. And he just loves the health care and pharmaceutical industries–of his 150 companies listed, 95 are in the Health basket, including many private hospital and pharmaceutical firms with interesting legal issues. There goes governance, apparently, and so much for sector allocation concerns. And even there, inconsistencies abound. Procter & Gamble, which doesn’t to my knowledge produce anything you could actually eat, is listed as a food company (although it’s also as a Health company, presumably from its Vicks and Oral-B brands.) And forget about manufacturing–the number of companies that actually make durable goods you can count on one hand. Sadly, lazy thinking all around.

I had high hopes for he volume edited by Cary Krosinsky and Sophie Purdom–Sustainable Investing: Revolutions in Theory and Practice (Routledge 2017). Happily, it provides quite a lot to think about; unhappily, it proves frustrating in its frequent vagueness. It purports to be an overall summary of the current state of the art, and is somewhat successful in this regard, with a couple of significant caveats. There are some heavy hitters here, and the overall volume contains enough useful information to require some attention. There are a number of very useful chapters, even for seasoned investors–the chapters on real estate, climate smart landscapes, fiduciary duty (particularly good), Sharia finance, Paris and climate finance, reducing carbon exposure in portfolios, are all worth reading. The chapter of the difficulties of ESG data collation and analysis was particularly good, I thought. And throughout there are references, some with a clearer justification than others, to criteria for portfolio inclusion or exclusion. The intentions here are good.

Sadly, there are also a number of chapters which read as if they were written by university undergraduates–and it turns out they were. Hence, this is a volume of very uneven quality. It reminds me of that old comment about calling someone a great thinker because they have lots of ideas is like calling someone a great general because they have lots of soldiers. Ideas abound in this volume, granted. It’s the level of potential for actualization, to say nothing of synthesis, that is largely unaddressed, and feels a bit chaotic. And I suspect the reason for this is the relative absence of actual investors, and the wildly divergent backgrounds of the contributors.

The volume includes a wide range of papers covering a broad array to topics. Even better, there is some discussion of the role of bondholders, although it’s limited mostly to the discussion of Green Bonds (which itself isn’t very complete, and, sadly, is sometimes in error in the case of one paper.) Moreover, some of the other discussions of the role of debt financing seem, well, a bit narrow. There is an otherwise useful paper, for example, on renewable energy funding that has some discussion of the role of debt financing, but which seems to think that it’s mostly project financing, and which seems unaware of the role of Green Bonds here. A potentially interesting chapter on Greening China’s finance manages to discuss the issue without once mentioning the word “bond.”

The core assumption here, as is the case throughout the book, is that the capital that needs to be raised here is going to be mostly equity capital. Even Helene Winch’s otherwise excellent review of Infrastructure ends up being a bit vague on how the $100 trillion (give or take) of funding for new infrastructure is actually going to be accomplished. Once again, “investors” turns out to be a too-convenient catch-all category. There is a short and somewhat jumbled (and pretty unsatisfactory) chapter on what the author terms “sustainable fixed income,” and this is about as close as we get to the overall role of bondholders. Sadly, the paper ends up being hopelessly full of unsubstantiated claims (including what seems to be a misunderstanding of how legally binding the “Use of Proceeds” section actually is,) and some flat out errors on Green Bonds. But at least someone recognizes the existence and importance of this asset class.

This is all a bit surprising in a 300 page book, and one has to wonder about editorial scrutiny in these situations. I think the problems of the volume derive, largely, from the fact that the contributors here are mostly academics or NGO representatives–there actually aren’t a whole lot of investors here. On the other hand, there seem to be more than a few economists, and a surprisingly high number of undergraduate and graduate students. Well, it’s nice to give people the opportunity to get something on their resume, but often their contributions are, shall we say, less than completely useful. There’s a decided millennial feel to a number of contributions, which is clearly a positive, since they’re the ones who will be on the hook financially for most of this. But it does lead to occasional oddities, such as the often-repeated mantra of the environmental advantages of ride-sharing from Uber and Lyft, and the usual adulation for the idea of driverless cars. Investors hear this constantly, and are sorting through the hype at present, which is becoming amore time-consuming process, and one would expect, at this point, a little more critical attitude. And even where the chapters provide a good historical overview of some topic–industrial ecology, for example–the linkages one might expect to see–to the Circular Economy work at McKinsey and The Ellen Macarthur Foundation–don’t get made. These sorts of examples encapsulate the major weakness of the volume–there’s a lot of high-level thinking here, but practical examples for investors? Not so much. Transportation, for example, seems to be automobiles–there’s no mention of railroads, airlines, or shipping companies. This is odd simply because Krosinsky clearly tells us that transportation is one of the areas to be addressed in reducing fossil fuel consumption. To deal with this issue only with articles on electric cars and ride-sharing seems a bit odd.

There are a couple of topical issues that get overlooked here as well. Stranded Assets barely get a mention. In fact, the entire issue of potential asset impairment, while receiving lots of nods throughout the volume, does not get explored in any detail. One might expect at least a cursory discussion of what sectors might be more vulnerable to these problems, for example–and while again there are some token nods in this direction, there is little detail offered above what we already know–fossil fuels bad, renewable energy good. Well, yes, but we already know this. Risk is another concept not fully explored. Again, there are lots of references to various risks, but really only descriptive references to types of risks, some of which don’t align very well with how investors approach the concept. Krosinsky’s chapter here is a potentially useful overview, but it needs a more detailed analysis than the three pages he gives it.

And there is virtually nothing on materiality, and why the concept is important. If there’s one thing that investors want out of this prodigiously-growing literature, it’s some guidance on how to assess what is going to be potentially material and what is not. And the critical issue here is that what is material for the share price might not be material for a bond rating. Child labour is a terrible thing, but no one’s bond ratings are going to get downgraded by rating agencies on the back of it. The lack of discussion here is especially surprising given how much attention the major accounting firms have been devoting to rethinking and granulating the entire concept of materiality over the past decade.

So, in summary, a frustrating volume. There is a lot of good solid information here, but professional investors will need to exercise some caution, since it’s not clear to whom the volume is actually addressed. There’s actually a lot here for someone starting to look at the area, but for someone with a relatively current knowledge base, I suppose the answer to how useful this volume will be depends on which desk you’re sitting on. One suggestion for the next volume, if there is one–fewer, but longer and more in-depth, contributions. There are far too many two to three page papers here. And a bit more focus, please–sometimes the papers read as if the mission is to convince the reader of the importance of some ESG issue; other times they seem to assume this.

For something completely different, we move to How to Make Money with Socially Responsible Investing, by Penny Gale. At £2 for a kindle version, how could I not? And it’s just about worth the money. Yes, yes, I know I said I was going to avoid this sort of book, but I weakened, and I’m glad I did. Kindle tells me that the reading time is one hour, and that’s about right–every page turn is 2%. Can’t beat that. Like the Andrich book it’s positioned for individual, even naïve, investors–but unlike the Andrich book, it doesn’t pretend to be something it’s not. It’s actually a pretty useful guide–it does a good job of explaining different types of screening, for example, and why they’re used. Gale has sensible things to say about topics such as workplace diversity and shareholder activism, and even has a good word for bonds (“Don’t forget about bonds,”) even if it’s only a short paragraph. The best thing about this book–aside from the fact that you can breeze through it in an hour, or less? Gale doesn’t make mistakes–there are no howlers here. There is even a pretty useful glossary. For a brief first take on SRI investing, you could do worse, and for £2, why not? I couldn’t begin to tell you who Penny Gale is, by the way.

Ironically, the book I enjoyed the most is not the one I expected–ESG Risks and Responsible Investment in Financial Markets, by Agnes Neher. Why did I not expect this? Well, first of all, it’s basically an academic work–a Ph.D. dissertation, to be precise. Secondly, it comes from a publisher I had never heard of–Metropolis, which turns out to be a small German house specializing in economics. It’s so specialized I can’t find an English link on Google (the website, thankfully, has both German and English.) So I was not optimistic.

Happily I am, as is often the case, wrong. It’s a very good overview indeed, mainly I think because it’s written for people who already know something about the complexity of financial markets. And, yes, it’s academic, but it’s consistently informative for people who may need a little convincing of the merits of Responsible Investment–and, indeed, it will be useful for those who already are persuaded. Finally, if there was a way to my heart here, she’s found it–“risks.” This is bound to appeal to a bond guy like me. If I were to mention a single book that bond people should be reading about this area, or at least skimming, it’s this one, for all its academic tone.

For a start, she understands the difference between ESG risks and financial risks. This is an important point, often overlooked by, well, everyone. The thing about ESG risks is that they’re difficult to encapsulate in traditional financial risk analysis, and Neher makes this clear right at the start. So, points for that. Much of the book, in fact, is an effort to granulate the various ESG discussions that are out there is a way that is sensible to financial professionals. This is a tall order, and Neher does a good job here. Also in Neher’s favor is the fact that she gives Social and Governance issues equal time. My own tendency, as a bond guy, is to emphasize climate risks, since this is where asset valuations are going to be hit the hardest. Neher has some nice short discussions of these categories from a risk perspective that should be helpful for investors.

She is also mindful of definitional issues, which often prove confusing for even seasoned investors. What, exactly, is Responsible Investment? Neher has a handy little history of the term, sort of a guide for the perplexed, as well as some discussion of the most over-used phrase in finance, Sustainability. She also provides the best discussion of the Universal Owner thesis I have come across, with a long chapter on why Universal Owners need to be Responsible Investors. (This raises a corollary point. Why doesn’t the Universal Owner thesis get more attention than it does? I don’t imagine it shows up in the CFA curriculum, or in the Finance Departments of major business schools. Why not?)

But for the most part this is a descriptive book of research and data analysis. Neher has assembled an impressive array of data and statistics for those looking to bolster their case to the investment committee as to why ESG investing is a good thing. All that data out there that shows that ESG issues matter to portfolio performance? She’s got it neatly summarized. Who reports on ESG issues, and how systematically? Ditto. She also discusses some of the limits of agency sovereign ratings in contrast to other (ESG-based) approaches, such as sustainability ratings, not all of which are completely convincing, but which offer interesting possibilities for future directions in research. There is a lot of data analysis here relating to sovereign ratings and how well they capture various ESG issues–in fact, much of the book relates more to the sovereign level than the corporate one, which receives very little mention. That’s ok–for a dissertation of this sort, it’s easier to granulate the issues that relate to sovereign ratings than any other category, I suspect, plus easier to find other rating approaches for comparison purpose.

In fact, the book is packed with data. I won’t go into the range of Neher’s research, but it’s pretty impressive, and she seems appropriately cautious on her conclusions. There’s a whole lot of hypothesis testing here, particularly in the area of reporting–it’s an academic dissertation, after all–that will be of less interest to portfolio managers and analysts than to academic researchers, but the overall conclusions that ESG issues matter, and that investors need to be taking more note of them, seems pretty well documented. Neher also has a good discussion of the issues surrounding what sort of ESG reporting should be regulated, and how, including the notion of independent verification, and who does it. There is a lively and important discussion to be had regarding “hard” versus “soft” regulatory approaches, and Neher summarizes it nicely.

So, overall, a pretty good and informative book, one that I suspect is targeted at a public policy audience and not necessarily investors. It’s not an easy read, but, as mentioned, it’s intended as an academic publication, and makes no pretense to be otherwise. Still, actual investors could find it useful. My major complaint? There’s no index, and this is a book that could use one.

Finally, a mention of an inexpensive and highly useful set of books is in order. These are a three volume set of, really, an annotated reference list of ESG publications, put out under the rubric of The CSR International Research Compendium, and there’s one for each letter–Environment, Society and Governance. Each volume contains abstracts or summaries of major papers published in that topic area from 2009 to 2014, drawn from CSR International’s monthly research summaries. Highly recommended for academics, public policy professionals, and investors. At 99p for each Kindle volume, it’s money wisely invested. My only complaint here is that the table of contents isn’t linked to the actual page, as it often in with Kindle, so you need to search for the page. Doable, but not that convenient. Still, for the price, who’s quibbling?







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