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The ESG investment industry is broken – The Globe and Mail

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James Rasteh is the founder and CIO of Coast Capital Management.

I grew up in France, where the French Declaration of Human Rights – liberty, fraternity and equality – was central to our value system and seemed guaranteed for all. My parents subsequently moved to Western Canada, where I became an activist youth. I often found myself protesting against the destruction of natural habitats like the Carmanah Valley in B.C., which seemed under a perpetual threat of being clear-cut.

Eventually, I joined the New York boards of organizations like Human Rights Watch and Pachamama, which respectively protect human rights around the globe, and prevent the destruction of the Amazon in Peru and Ecuador.

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By the time I was appointed to head up international investments at a well-known activist hedge fund, I was engaging with the boards of companies such as Petrobras to stop the building of unnecessary and environmentally disastrous pipelines across the Amazon. I was continuously and endlessly disappointed that other investors did not seem to care.

So the rise of the Environmental, Social, and Corporate Governance (ESG) investment industry was of great interest to me. It seemed that the community had finally developed conscience and conviction by factoring in sustainability and societal impact when deciding what to invest in. And at a time of extraordinary political dissent, marginalization of minorities and willful ignorance of facts – notably on the topic of climate change – one could find solace in institutional investors’ new-found embrace of ESG.

Yet over time, I’ve come to realize that the ESG investment industry is by and large little more than a marketing mechanism, and will not lead to productive change. Rather than follow ESG investment parameters and ignore “dirty” companies (the products of which society needs), investors who actually care about a greener and more just world and who actually want productive change must instead pursue an active investment approach, investing in and putting pressure on the boards of such companies to pursue more sustainable practices.

In 2015-16, for instance, I noticed that one of the largest positions held by Generation Investment Management – co-founded by former U.S. vice-president Al Gore and Goldman Sachs’ Asset Management head David Blood – was in Facebook. This is a company whose business is to collect every possible byte of their users’ data and resell the information to the highest bidder, regardless of the privacy violations that crop up along the way, which is a systematic (though legal?) violation of their users’ privacy.

Facebook has also amplified misinformation with so much success as to nearly unsettle the very foundations of democracy around the world. The fact that Mr. Gore’s asset-management company decided that this was the best ESG investment they could find was an inconvenient revelation.

But Generation is not the only ineffective player in this industry. Most funds are. Currently, ESG funds must pledge the UN Principles for Responsible Investing and follow certain “green” investment guidelines – which means they eschew any “dirty” company of industry. This makes no sense.

First of all, the United Nations’ PRI agency at times feels like a revenue-generation unit for that august yet defunct organization. Secondly, once a fund has procured its credentials from the UN, it must follow arbitrary investment guidelines based on inconsistent and often unavailable data. Thirdly, the whole process is backward-looking and does not account for changes going forward, such as expected future changes in business practices.

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The greater trouble, however, is that the process is not actually designed to produce positive change. Most companies that actually focus on environmental, social and governance concerns are adaptive, and led by principled leaders. The flight of capital toward these companies, and away from poorly managed ones, does nothing to improve the ESG parameters of the companies most likely to pursue destructive environmental or social practices. In fact, it does quite the opposite.

Investors would be better at achieving their goals by allocating capital to large and established companies where they can effect improvements in governance, environmental and social practices.

Mining, for example, is seen as a “dirty” industry, but one whose products are basic necessities for a prosperous society. Too often, ESG-focused investors lazily shun the sector. Without the oversight of such investors, these extractive industries are free to continue their environmentally poor practices, especially since industrial companies are notoriously loath to adopt new processes and technologies.

At Coast Capital, we are working to reverse this trend. We work with some of the world’s leading sustainability experts, geologists and mine engineers to identify key technologies that decrease mining pollution. Some of these dramatically decrease the arsenic, sulphate, manganese and heavy-metals pollution of effluent water by a factor of up to 1,000. This constitutes an extraordinary advance in the mining process.

As investors, we are uniquely well placed to ensure a speedy adoption of cleaner mining practices and technologies. We nearly always push for improvements in governance as well.

Thomas Edison once remarked that no one recognizes opportunity because it goes around dressed like hard work. And so it goes for most ESG funds. The collective mantra of ignoring offenders with a passive investment strategy is useless and uninspired.

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Investors must work much harder to actually understand the operations of their invested companies, and devise suitable paths to make these more sustainable. Failing that, ESG funds will remain a marketing ploy at best.

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More China coal investments overseas cancelled than commissioned since 2017

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More China-invested overseas coal-fired power capacity was cancelled than commissioned since 2017, research showed on Wednesday, highlighting the obstacles facing the industry as countries work to reduce carbon emissions.

The Centre for Research on Energy and Clean Air (CREA) said that the amount of capacity shelved or cancelled since 2017 was 4.5 times higher than the amount that went into construction over the period.

Coal-fired power is one of the biggest sources of climate-warming carbon dioxide emissions, and the wave of cancellations also reflects rising concerns about the sector’s long-term economic competitiveness.

Since 2016, the top 10 banks involved in global coal financing were all Chinese, and around 12% of all coal plants operating outside of China can be linked to Chinese banks, utilities, equipment manufacturers and construction firms, CREA said.

But although 80 gigawatts of China-backed capacity is still in the pipeline, many of the projects could face further setbacks as public opposition rises and financing becomes more difficult, it added.

China is currently drawing up policies that it says will allow it to bring greenhouse gas emissions to a peak by 2030 and to become carbon-neutral by 2060.

But it was responsible for more than half the world’s coal-fired power generation last year, and it will not start to cut coal consumption until 2026, President Xi Jinping said in April.

Environmental groups have called on China to stop financing coal-fired power entirely and to use the funds to invest in cleaner forms of energy, and there are already signs that it is cutting back on coal investments both at home and abroad.

Following rule changes implemented by the central bank earlier this year, “clean coal” is no longer eligible for green financing.

Industrial and Commercial Bank of China, the world’s biggest bank by assets and a major source of global coal financing, is also drawing up a “road map” to pull out of the sector, its chief economist Zhou Yueqiu said at the end of May.

 

(Reporting by David Stanway; Editing by Kenneth Maxwell)

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Bank of Montreal CEO sees growth in U.S. share of earnings

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Bank of Montreal expects its earnings contribution from the U.S. to keep growing, even without any mergers and acquisitions, driven by a much smaller market share than at home and nearly C$1 trillion ($823.38 billion) of assets, Chief Executive Officer Darryl White said on Monday.

“We do think we have plenty of scale,” and the ability to compete with both banks of similar as well as smaller size, White said at a Morgan Stanley conference, adding that the bank’s U.S. market share is between 1% and 5% based on the business line, versus 10% to 35% in Canada. “And we do it off the scale of our global balance sheet of C$950 billion.”

($1 = 1.2145 Canadian dollars)

 

(Reporting by Nichola Saminather; Editing by Leslie Adler)

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GameStop falls 27% on potential share sale

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Shares of GameStop Corp lost more than a quarter of their value on Thursday and other so-called meme stocks also declined in a sell-off that hit a broad range of names favored by retail investors.

The video game retailer’s shares closed down 27.16% at $220.39, their biggest one-day percentage loss in 11 weeks. The drop came a day after GameStop said in a quarterly report that it may sell up to 5 million new shares, sparking concerns of potential dilution for existing shareholders.

“The threat of dilution from the five million-share sale is the dagger in the hearts of GameStop shareholders,” said Jake Dollarhide, chief executive officer of Longbow Asset Management. “The meme trade is not working today, so logic for at least one day has returned.”

Soaring rallies in the shares of GameStop and AMC Entertainment Holdings over the past month have helped reinvigorate the meme stock frenzy that began earlier this year and fueled big moves in a fresh crop of names popular with investors on forums such as Reddit’s WallStreetBets.

Many of those names traded lower on Thursday, with shares of Clover Health Investments Corp down 15.2%, burger chain Wendy’s falling 3.1% and prison operator Geo Group Inc, one of the more recently minted meme stocks, down nearly 20% after surging more than 38% on Wednesday. AMC shares were off more than 13%.

Worries that other companies could leverage recent stock price gains by announcing share sales may be rippling out to the broader meme stock universe, said Jack Ablin, chief investment officer at Cresset Capital.

AMC last week took advantage of a 400% surge in its share price since mid-May to announce a pair of stock offerings.

“It appears that other companies, like GameStop, are hoping to follow AMC’s lead by issuing shares and otherwise profit from the meme stocks run-up,” Ablin said. “Investors are taking a dim view of that strategy.”

Wedbush Securities on Thursday raised its price target on GameStop to $50, from $39. GameStop will likely sell all 5 million new shares but that amount only represents a “modest” dilution of 7%, Wedbush analysts wrote.

GameStop on Wednesday reported stronger-than-expected earnings, and named the former head of Amazon.com Inc’s Australian business as its chief executive officer.

GameStop’s shares rallied more than 1,600% in January when a surge of buying forced bearish investors to unwind their bets in a phenomenon known as a short squeeze.

The company on Wednesday said the U.S. Securities and Exchange Commission had requested documents and information related to an investigation into that trading.

In the past two weeks, the so-called “meme stocks” have received $1.27 billion of retail inflows, Vanda Research said on Wednesday, matching their January peak.

 

(Reporting by Aaron Saldanha and Sagarika Jaisinghani in Bengaluru and Sinead Carew in New York; Additional reporting by Ira Iosebashvili; Editing by Sriraj Kalluvila, Shounak Dasgupta, Jonathan Oatis and Nick Zieminski)

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