How investors can take action on Earth Day
Monday, April 22, 2019
Monday, April 22, 2019
A deep dive of sustainability topics with Ethic's lead data scientist
How investors can take action on Earth Day

Every year on April 22nd, hundreds of millions of people around the world educate, advocate and campaign for the health of our environment. The theme of this year’s Earth Day, Protect Our Species, arrives amid unprecedented biodiversity loss – characterized by some scientists as the sixth mass extinction. [1] Unlike earlier waves of species decimation, which were caused by phenomena such as volcanic eruptions and asteroid impacts, this one is caused by us.

Growing awareness of this unfortunate reality has sparked all sorts of mitigation efforts. The private sector is increasingly engaged, launching a variety of initiatives including those to incorporate more sustainable environmental practices into investor portfolios. This isn’t a fringe movement: investors with social and environmental aims surveyed by the Global Impact Investing Network reported $228 billion dollars under management at the beginning of 2018, with nearly three quarters of respondents indicating they were trying to address climate change through their investments. [2] One out of every four dollars of professionally managed assets in the U.S. incorporates environmental, social, and governance criteria, according to the Forum for Sustainable and Responsible Investment. [3] A survey commissioned by the Global Investor Coalition on Climate Change—including some of the world’s largest institutional investors—indicated that 81 percent of asset owners and 68 percent of asset managers view climate change as material to their portfolios. [4]

Investing with environmental concerns in mind isn’t always straightforward and requires thoughtful diligence on the tradeoffs involved. Certain environmental protections may stymie socioeconomic benefits. A company’s environmental footprint is tied to its supply chain, raising questions about how far back one’s analysis should span. While a business may report low carbon emissions, it may also dump toxic waste in nearby rivers.

It’s no surprise, then, that the dichotomy between “sustainable” and “unsustainable” companies isn’t always clear cut. Our world is complex, and having candid conversations about the gray space in between is essential.

In honor of this year’s Earth Day, let’s examine three issues important to species protection and explore how investors are addressing them in their portfolios.

Plastics

Plastics are everywhere, providing ease at low cost for a variety of products and services. Their use has increased twenty-fold in the past 50 years, and is expected to double again in the next 20, according to the World Economic Forum. [5]

But plastic has a dark side. Nearly a third of plastic packaging “escapes collection systems,” according to the report, ending up in oceans, rivers and city streets. If this trajectory continues, plastics in the ocean will outweigh fish by 2050, the organization suggests. Animals ingest, and are ensnared by, disposed plastics. Harmful chemicals from the products contaminate soil and groundwater, damaging ecosystems. The fact that plastics require fossil fuels and that they don’t biodegrade [6] compound the problem further.  

Investors considering the plastics problem are looking closely at regulation and consumer risk. Global policymakers are banning single-use plastic bags, charging more for their use, taxing other plastic products and using deposit systems to reward recycling. [7] Some businesses are giving themselves deadlines to switch to more sustainable packaging, trying to stay ahead of legislation and changing consumer preference toward biodegradable options.

Ethic Example: Monster Beverage is a frequent divestment target in Ethic portfolios, in part for its industry-lagging approach to packaging material waste. While competitors like PepsiCo have implemented programs to reduce packaging content and improve recyclability, Monster has shown less of a commitment to mitigating these issues. [8] Future legislative or regulatory reform around packaging waste may expose the company to material financial risk due, so we remove the company by default.

Pesticides

Pesticides were born out of convenience. They eradicate weeds, pesky insects, and harmful disease, allowing crops to grow in greater abundance [9] and feed more people. Yet evidence suggests that their use can harm pollinators [10] and surrounding ecosystems, leaching into nearby water supplies. [11] They have been linked to a host of health dangers for humans, including cancer and birth defects. [12]

Roundup, the well-known weed-killer made by Bayer AG’s Monsanto, has recently faced legal scrutiny over its alleged role in life-threatening illnesses. [13] Various countries and cities have banned or limited glyphosate, a key ingredient in Roundup and other herbicides.

Some investors are pressuring companies to examine pesticide use throughout their supply chains. [14] Others are backing the development of less-toxic alternatives. Some of the largest makers of pesticides, including Bayer and DuPont Co., are developing more environmentally friendly solutions. [15]

Ethic Example: Bayer has long been excluded from many Ethic portfolios for its involvement in pesticides production, but only after its June 2018 acquisition of Monsanto did the German conglomerate begin to be flagged for its exposure to controversies around negative societal and community impacts. Clients who removed Bayer, either for its earlier pesticides business or for its purchase of scandal-prone [16] Monsanto, have avoided exposure to various public health-related lawsuits following the acquisition.  

Palm Oil

Palm oil exports provide significant income to farmers in developing countries such as Indonesia and Malaysia, and its production has been shown to reduce rural poverty. The product is used in a vast number of everyday goods, keeping lipstick smooth and chocolate shiny. [17]

However, the operation can be quite land-intensive, endangering species in the fertile rainforests in which oil palm trees grow and contributing to pollution and greenhouse-gas emissions. A series of 2015 forest fires in Indonesia, mainly in peatland areas often used for palm oil farming, were emitting more carbon dioxide per day than the entire U.S. economy, according to the World Resources Institute.

The world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global (GPFG), has in recent years divested from 60 companies due to deforestation risks, including 33 businesses involved in palm oil. In 2016, Dimensional Fund Advisors sold off shares of palm oil producers in two of its sustainability portfolios. The Roundtable on Sustainable Palm Oil (RSPO), a collection of palm oil industry stakeholders, has been pursuing more sustainable production methods since its founding in 2004.

Ethic Example: Nearly every Ethic global markets portfolio with any environmental focus excludes Korean industrials giant POSCO, whose subsidiary POSCO International is responsible for substantial deforestation at its palm groves in Indonesia. POSCO has been subject to a broad range of boycotts and divestments, from both investors and companies seeking to lessen their exposure to unsustainably produced palm oil. While removing their exposure from POSCO’s stagnant performance, divesting clients also substantially decreased their carbon footprint, as the company ranks among the top 100 global emitters.

Earth Day serves as a call to action. As we reflect on species protection this year, it is incumbent on all of us to understand what’s at stake. Advisors, clients, and all investors can take responsibility for the environmental impacts of their investments, and can make informed decisions on how best to allocate their capital toward more sustainable ends.

There are many ways to take action. We encourage you to get started.

This information was provided for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Before making any investment related decision or implementing any strategy, Ethic Inc. recommends that investors consult with a professional adviser and discuss all opportunities in the context of their personal situation.

Sources and footnotes

[1] Schlossberg, Tatiana (2017) New York Times. “Era of ‘Biological Annihilation’ is Underway, Scientists Warn.” https://www.nytimes.com/2017/07/11/climate/mass-extinction-animal-species.html

[2] Annual Impact Investor Survey (2018) Global Impact Investing Network. https://thegiin.org/assets/2018_GIIN_Annual_Impact_Investor_Survey_webfile.pdf

[3] Report on U.S. Sustainable, Responsible and Impact Investing Trends (2018) USSIF Foundation. Report Highlights. https://www.ussif.org/files/2018%20_Trends_OnePager_Overview(2).pdf

[4] Global Investor Survey on Climate Change (2013), Global Investor Coalition on Climate Change. https://globalinvestorcoalition.org/wp-content/uploads/2013/08/2013%20Global%20Investor%20Survey%20Report%20Final.pdf

[5] “The New Plastics Economy, Rethinking the Future of Plastics” (2016), World Economic Forum. Accessed. http://www3.weforum.org/docs/WEF_The_New_Plastics_Economy.pdf

[6] Wolchover, Natalie (2011). Live Science. https://www.livescience.com/33085-petroleum-derived-plastic-non-biodegradable.html

[7] “How Can Investors Help Create A Plastics Economy That Works?” (2018), PRI Association. https://www.unpri.org/environmental-issues/how-can-investors-help-create-a-plastics-economy-that-works-event-roundup/3409.article

[8] "Beverage Industry Report" (2018), MSCI.

[9] Hossard et. al. (2014). “Effects of Halving Pesticide Use on Wheat Production” Scientific Reports, Nature Research. https://www.nature.com/articles/srep04405

[10] Woodcock et. al. (2016). “Impacts of Neonicotinoid Use On Long-Term Population Changes in Wild Bees in England”. Nature Communications, Nature Research.

[11] Trautmann and Porter et. al. (2012) “Pesticides: Health Effects in Drinking Water” Cornell University Cooperative Extension. http://psep.cce.cornell.edu/facts-slides-self/facts/pes-heef-grw85.aspx

[12] Nicolopoulou-Stamati et. al. (2016) “Chemical Pesticides and Human Health: The Urgent Need for a New Concept in Agriculture” Front Public Health. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4947579/#B82

[13] Zaveri, Mihir (2019). “Monsanto Weedkiller Roundup Was ‘Substantial Factor’ in Causing Man’s Cancer, Jury Says,” New York Times. https://www.nytimes.com/2019/03/19/business/monsanto-roundup-cancer.html

[14] “Shareholder Proposal Regarding Pesticide Pollution” https://www.iccr.org/sites/default/files/page_attachments/pepsico_resolution_argument_for_proxy_memo.pdf

[15] Bunge, Jacob (2014). “The Race is On To Find Organic Pesticides” Wall Street Journal. https://www.wsj.com/articles/organic-farms-get-new-weapons-against-pests-1413914796

[16] Burger, Ludwig (2018). “Roundup Cancer Verdict Sends Bayer Shares Sliding” Reuters. https://www.reuters.com/article/us-monsanto-cancer-lawsuit-bayer/roundup-cancer-verdict-sends-bayer-shares-sliding-idUSKBN1KY0M5

[17] “Which Everyday Products Contain Palm Oil?” (2019) World Wildlife Fund. https://www.worldwildlife.org/pages/which-everyday-products-contain-palm-oil

[18] Harris et. al. (2015) World Resources Institute. https://www.wri.org/blog/2015/10/indonesia-s-fire-outbreaks-producing-more-daily-emissions-entire-us-economy

[19] Taylor, Michael (2019). “Norway’s Wealth Fund Ditches 33 Firms Over Deforestation” Reuters. https://www.reuters.com/article/us-norway-pension-palmoil/norways-wealth-fund-ditches-33-palm-oil-firms-over-deforestation-idUSKCN1QH1MR

[20] Chasan, Emily (2016). “Dimensional Dumps Palm Oil From Sustainable Funds” Bloomberg Briefs. https://newsletters.briefs.bloomberg.com/document/9ez21n9mlwlzjvdta/investing

[21] Climate Action 100+ (2019). https://climateaction100.wordpress.com/companies/

Contributors

Travis Korte is the Data Science Lead at Ethic. Previously, Travis organized civic-minded technologists at Hack for LA and advised a wide range of clients on data science, data policy, and quantitative methods. You can follow him on Twitter at @traviskorte.

Melissa Mittelman creates content at Ethic and is an alumna of Bloomberg News, where she covered private equity & deals. Melissa previously worked at Deutsche Bank, providing institutional, cross-asset sales coverage for ultra-high-net-worth investors.