Sustainable investing: of vital importance, still a lot to do

This short article emanates from our attendance of the United Nations Environment Programme`s Swiss Symposium in Bern last week on May 6th

The often cited Stern Review (http://mudancasclimaticas.cptec.inpe.br/~rmclima/pdfs/destaques/sternreview_report_complete.pdf) says failure to act on climate change could in future cost 5-20% of global GDP pa, versus the cost of effective international mitigation now of perhaps 2% of GDP pa. So strong action is necessary. Out of Switzerland’s world-leading, cross-border AUM of CHF 2.1tn, only 4% is explicitly devoted to sustainable investing. Plus, demand for potentially environmentally damaging goods still looks to have massive growth ahead: for example, the world needs USD 8-35tn more infrastructure expenditure (depending on whom you believe); three quarters of Africans still live without electricity; and think of the billions of new car owners to come. To cope, the world must raise resource use efficiency by 4-10x by 2050.

 

Bank of England Governor Mark Carney has coined the term “tragedy of horizon”: most of the financial world is only thinking a maximum of 2-3 years ahead when putting to use the world’s USD 19tn of annual savings (macroeconomically speaking, funds available for investing). There are two major problems to address: (a) the time mismatch of 2-3 year investment horizon versus much longer term environmental costs; and (b) these environmental costs being externalities that financial innovation hasn’t yet devised a workable internalisation of.

 

It should be possible to solve this over time, but important challenges remain. The discourse at such conferences is still quite “fluffy” rather than “hard”, a reflection of the newness of the field. An exception to this was Californian public pension fund CalPERS, who seem to have mastered at least the governance aspect of sustainable investing. Definitions are still lacking (for example, are we clear yet on exactly what a “green bond” is?) and standards need to be harmonised. Environmental/social/governance issues are not necessarily non-financial in scope, but a whole new measurement system needs to be erected, and this takes time. Regulations (eg: banking licenses awarded or renewed only upon operations passing a sustainable finance test), enforced laws (eg: every public company must publish an “environmental profit and loss statement”, to precise standards), and policy making (eg: strong, internationally implemented use of tax incentives) will be critical in building this architecture.

 

The principle should be to allow red-blooded capitalism (ESG adherence creates plenty of business opportunities, after all) within a new regulatory and legal architecture that forces a faster  conversion to sustainable investing. Only 4% of total investing devoted to such is too small, and time is not a luxury of which we have much. Relying on pure voluntarism is not sufficient. The UNEP’s important work must soon lead to the creation of this architecture.

 

Mekong Man

CII: accounting shenanigans in Vietnam

MM has long been suspicious of the Ho Chi Minh City Infrastructure Investment Joint Stock Company (CII VN), Vietnam`s leading infrastructure stock, for its too-close-for-comfort relationship with Ho Chi Minh City`s political power structure and its consistent long term record of negative free cash flow. Vietnam will have need for loads of road building and other infrastructure over the coming decades, and these guys will sign on for plenty of the projects, but being so closely related to the politicos gives one a queasy feeling about how this company can truly be run in the interests of ordinary minority shareholders. This opinion has held up pretty well over the last five years: the stock has been an up-and-down dog, with an overall five year share price loss of 20% (in VND), versus a VN-Index rise of 6% over this time.

 

Today`s reading of broker HSC`s Vietnam Daily has brought this case to mind once again. There is a choice development here, which (no discredit to them, they`re just delivering the facts, ma`am) HSC dutifully reports on without a trace of irony: “CII will issue just under USD 50m worth of local currency bonds to another company called Metro Pacific Tollways Corporation at a premium…and book an immediate gain of c. USD 10m from this”. This, of course, is pure phantom profit. Normal humans do not make a profit immediately as a result of borrowing money from someone. If they do, they are playing games, obfuscating, and/or behaving like slippery weasels. One hopes the sell side analysts quickly start showing an underlying profit number for CII that excludes such items. The reason CII are able to report the profit is by officially borrowing USD 50m but actually receiving USD 60m – presumably by giving away something equivalent elsewhere in the deal: perhaps – for example – paying an above-market interest rate, or selling a plum asset to the lender on the cheap. Even if we assume tax on this gain at a full 22%, it contributes 27% of this year`s projected attributable net profit – which means that over two thirds of the net profit growth for 2015 being projected by CII management actually comes from this cheap ruse. How many other ruses are going on here?

 

This HSC summary of the recent AGM goes on to describe oodles of projects costing lots and lots. It all sounds very exciting – but more so for the eventual users of the highways, bridges and piped water, and not, we suspect, for the outside minority shareholders.

 

Mekong Man