Back in 1967 when Dustin Hoffman’s character in the movie “The Graduate” was given the career advice, “plastics,” very few thought that product could strangle the planet 60 years later. But according to MSCI’s report, 2019 ESG Trends to Watch, plastic has become its own trade war, and something companies are striving to control.
These and other findings in the MSCI report spotlight environmental, social and governance trends that could affect companies and investors in 2019, and should be on an advisor’s radar going forward.
1. Plastic has become a big problem.
Of the 8.3 billion metric tons of virgin plastics produced in the past 70 years, 79% has been placed in landfills or the “natural environment,” according to the MSCI report. In fact, “its ubiquity has become so disruptive that the UN Environmental Programme declared that ‘unless we take action, there will be more plastic [in the ocean] than fish by 2050.’”
Further, with China and companies elsewhere curbing the types of waste they will take in, exporting countries and companies are looking for solutions. By 2021, single-use plastics will be banned in the European Union. Cities across the United States have taken the same steps.
Companies are noticing, and in fact, according to MSCI there was a 340% increase in mentions of “plastic waste” in earnings calls between 2017 and 2018, noted Matt Moscardi, co-head of the ESG Editorial Board of MSCI, who moderated a webinar on the topic.
MSCI notes there already has been an “uptick in revenue for those companies in the container and packing industry of the MSCI ACWI Index with a majority of their revenue made from innovative paper-based packing solutions.” A corresponding decrease in revenues is seen in plastic-packaging firms. Despite that, Linda-Eling Lee, global head of ESG research for MSCI, noted in the webinar that only 30% of companies in their index currently plan to phase out plastic.
2. Regulations on the business of ESG investing will grow.
This is a complex area that affects both the information that companies must provide and whether a product truly is sustainable as advertised. Each country and region has put together or is developing frameworks on different levels. In fact, with the growth of the ESG market, the European Commission has proposed that advisors ask clients directly about their sustainable preferences.
MSCI reports that in 2019, it anticipates that regulatory developments “will escalate around ESG investments, rather than ESG disclosure for issuers.”
3. Climate change is a near-term portfolio threat.
“Thinking about climate change risk as a long-term threat is a misconception,” Lee stated during the webinar, noting that progress on climate change needs to be made faster to prevent further damage. Already, she notes, climate change is taking a toll on investments, especially in real estate portfolios, where properties in areas of rising sea levels are being discounted.
Moscardi noted in the webinar that some investors, such as Michael Burry of “The Big Short” fame, already are investing by hedging climate change effects, such as buying land with water rights or property in Canada that might become more arable with longer growing seasons.
Lee said that “investors cannot ignore” the effects of climate change, but “must think holistically, and allocate to change the future but also protect themselves on the downside.”
4) A “big signal” revolution will change how to gather ESG information.
MSCI predicts that in 2019, investors will “turn their attention from data proliferation to signal proliferation, recognizing that the value of ESG data as a relevant factor depends as much on knowing why they own something as on knowing what they own.”
In gathering information about companies, MSCI uses not only company reports, but leverages “alternative data to fill the gap on disclosure,” Moscardi said. New “signal” sources are as varied as satellite images of parking-lot activity, job postings and land-use data, the report states. In fact, “IBM has estimated that 90% of data in use today was created in just the last two years.”
If investors just focused on company disclosure of issues, they would be missing much, according to the report, which found fewer than 1% of companies in autos, pharmaceutical and food industry disclosed comprehensive information on product safety recalls. Instead, the vast majority of that information was found through text-mining. (Some firms, such as Nuveen, use controversy scoring.)
(Related: Skeptical About ESG? Don’t Be. Here’s Why)
5) Leadership in the Age of Transparency is on notice.
Corporate scandals are front and center today, hitting stock prices hard. MSCI found there has been a 22% increase in company controversies in the past five years. And the reputational damage these scandals cause can last years.
MSCI believes 2019 will be the year that investors quit asking questions after a scandal, and instead ask before, “What are my rights as a shareholder?”
Even today, MSCI showed companies can have a tin ear. Those companies with low level of responsiveness to misconduct cases had 49% of their boards replaced, with only 14% of CEOs replaced. Those with the highest investor influence had 58% of boards replaced and 44% of CEOs replaced. As MSCI noted, “unless shareholders have recourse, companies are less likely to react to a controversy.”
The good news is pension funds such as Calpers are putting companies on notice that refreshing boards will be a prerequisite for their investment. In fact, starting in 2019, Calpers will vote against any board members who have been on longer than 12 years. They also will require diversity of the board.
As the report notes, “the age of transparency means there are fewer and fewer places for questionable corporate practices and even personal conduct to hide …. As a result, 2019 may mark a turning point for investors tired of paying the cost for companies slow to adapt when the internal becomes external and the whole world can judge misconduct for itself.”
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