FT subscribers can click here to receive Moral Money every Wednesday by email.

Welcome to Moral Money! This week we cover the head of one of the world’s largest mining companies and how he is working on addressing climate change; the growing backlash against tax avoidance; and more from the SEC on its plans to rein in proxy advisers.

We’ve been blown away by the reception to our newsletter so far — and very happy to hear from companies that we would never have expected to be reading about sustainable finance. If you want more Moral Money articles throughout the week, make sure to check in on our hub page regularly at ft.com/moral-money — it has a wealth of news that you can’t afford to miss, and is updated daily. 

If you are tuning in for the first time, Moral Money is our new weekly newsletter covering sustainable finance and investing, and we will be breaking news, curating information and providing analysis on this bubbling revolution. Your feedback is critical to our success. Get in touch at moralmoneyreply@ft.com, forward this newsletter to colleagues who you think would find it valuable, and sign up here if you haven’t already.

Mining for good?

A senior UBS analyst wrote a stunning, must-read column this week about the potential impact of looming climate change, warning that it is probably too late to prevent serious damage. This seems likely to prompt (even) more investors to ponder turning their portfolios “green” by, say, selling carbon-producing stocks and bonds.

But is divesting assets really the best way to fight global warming? This week Andrew Mackenzie, BHP Billiton’s chief executive, insisted otherwise. Talking to the Financial Times, Mackenzie declared that green investors should stay invested in BHP stock to support efforts that the company is making to change its environmental stance. 

He unveiled three moves: the company is setting public goals next year on reducing greenhouse gas emissions from its products even after they have been sold; spending $400m over the next five years to reduce carbon emissions; and tying executive pay more closely to environmental targets for the company.

Is this just greenwashing? Some activists might snort “yes”. After all, $400m is unimpressive compared with the size of BHP Billiton’s revenues of almost $44bn last year. But Mackenzie’s decision to tie his pay to emissions among BHP Billiton’s customers is striking. So is the fact that he is setting targets for those customers — and so-called Scope 3 emissions — as, until now, mining groups have indignantly insisted that they could not be held accountable for what happens to their products. 

It will be interesting to see whether Mackenzie’s plea works — and persuades ESG investment funds to stop divesting the stock. (If you have tips on this, Moral Money would love to hear them.) It will also be intriguing to see if other CEOs follow Mackenzie’s stance; all eyes on Anglo American, Glencore and Rio Tinto, to name but a few. (Gillian Tett)

SEC’s Jackson supports rules for proxy advisory firms

FILE PHOTO: Robert Jackson Jr. testifies to the Senate Banking, Housing and Urban Affairs Committee on his nomination to be a member of the Securities and Exchange Commission on Capitol Hill in Washington, U.S., October 24, 2017. REUTERS/Joshua Roberts/File Photo
SEC commissioner Robert Jackson: 'Twitter is a little different. It’s a medium, it’s informal. It can be responsive, there can be retweets, there can be a conversation, in ways that are not contemplated by every single SEC rule' © Reuters

The Securities and Exchange Commission should act to ensure the information that proxy advisory firms send to investors about ESG issues (or anything else) is accurate, the agency’s Democratic commissioner Robert Jackson has said.

In an interview with the FT on Tuesday, Jackson said he was “really glad” to see SEC chairman Jay Clayton last week support giving companies a look at proxy voting material compiled by firms such as Institutional Shareholder Services (ISS) and Glass Lewis before it is sent out to investors.

Soon, ISS and Glass Lewis may distribute voting materials to investors without getting input from companies.

“I’m open to making sure information that investors get is based on all the facts,” Jackson said. “I think it could be complicated and costly and we would need to dig in, but my strong sense is that there are steps the SEC can take to make sure that the facts investors are getting are accurate.”

The move will be welcomed by corporate boards that face rising scrutiny and pressure from shareholders over ESG issues and complain that proxy materials can sometimes be inaccurate. However, it may dismay some investors, since some fear that letting companies review material would delay proxy voting, particularly when ESG issues are contentious.

Clayton last week outlined a number of changes to the proxy voting process that he wants advanced. (Patrick Temple-West)

The taxing problem of . . . taxes

This decade, the Global Reporting Initiative has done important work to create a framework to measure sustainability at companies by looking at metrics such as their environmental footprint, governance and diversity.

It is now adding a new metric: that unpopular matter of taxes. Later this year, the GRI will introduce tax reporting guidelines to its list of sustainability metrics. 

It remains to be seen exactly how this will play out. But the reform could have widespread implications, given that more than 90 per cent of the world’s largest 250 corporations use GRI’s standards to report on their sustainability performance.

And the GRI’s move comes at a time of a growing public backlash against companies seen to be shirking their responsibility in contributing to society. Right now, only a minority of companies — 27 per cent — publicly report the taxes they pay on a country-by-country basis, according to RobecoSAM, an asset manager focused on sustainability. And very few companies have a public tax policy that prohibits the use of offshore tax havens.

However, the UN Principles for Responsible Investment group, which counts 2,200 asset owners as signatories, has been discussing tax avoidance since 2015 and last year published a 30-page report on how investors can engage companies on the topic.

The issue, as RobecoSAM sees it, is not solely about doing good for the world, either. There is a rising reputational risk for companies that minimise tax bills — even legally. On top of that, the financial benefits may not last much longer. “Current tax configurations are not sustainable, and therefore policy action is inevitable,” the company wrote, predicting that the “subsidy” some companies are enjoying from tax avoidance policies will soon evaporate.

The politics are shifting this way, too, at least in Europe. Take note, for example, of how Bruno Le Maire, the French finance minister, lambasted tech giants at the G7 meetings for their failure to pay (in his view) their fair share of taxes — echoing President Emmanuel Macron’s big initiative on “making capitalism fairer”. 

Or listen to an impassioned plea issued at the World Economic Forum at Davos this year by Dutch historian Rutger Bregman, which went viral: “We can invite Bono once more, but we’ve got to be talking about taxes. That’s it. Taxes, taxes, taxes. All the rest is bullshit, in my opinion.”

ESG investors should stand warned. (Billy Nauman)

Grit in the oyster

Many companies and investors say they try to “do well by doing good”. As a reminder that many still fall short, here’s a little grit in the ESG oyster.

Do they even know it’s tax avoidance?

For a great example of the reputational risk of using tax shelters, look no further than the backlash against Bob Geldof from the “Mauritius Leaks” story that broke on Tuesday from the International Consortium of Investigative Journalists.

The report, from the same group that brought us the Panama Papers and Paradise Papers, is based on a trove of documents from the Mauritius office of law firm Conyers Dill & Pearman. Their story details how Geldof’s Africa-focused private equity company, 8 Miles, set up shop in Mauritius to allegedly “pay rock-bottom tax rates on the island tax haven and less to the desperately poor African nations where the companies do business”.

Geldof’s company — which aims “to deliver improved environmental, social and governance outcomes in the creation of market-leading African companies” — defended the decision to base its operations on the tiny island. A spokesman said to the ICIJ that “Mauritius is used by many private equity investors” who need a stable, centralised African location from which they can direct their investments on the continent, and that its investments “create jobs, improve communities . . . [and generate] increasing tax revenues which support the governments where we operate”.

Geldof himself did not comment but he has vigorously defended himself against prior accusations.

What the story shows is that being legal and in line with international corporate norms is no longer a protection against a PR nightmare — especially when someone such as Anand Giridharadas, a vocal critic of “reputation laundering” and the author of Winners Take Allamplifies the story to his half-million Twitter followers.

Chart of the week

A graphic with no description

The value of European carbon credits hit a record high last week as incoming European Commission president Ursula von der Leyen promised environmentally friendly policies including carbon neutrality by 2050, a new EU carbon border tax and a green deal on investment within her first 100 days in office. (FT)

Smart reads

  • The Intercept had a fascinating deep dive into the problems the world faces from plastics. Spoiler alert: it’s pretty grim and recycling alone is not going to fix things. But as activists increase the pressure to ban single-use plastics around the world, the industry isn’t going down without a fight.
  • In 2014, India became the first country to mandate that corporations give a portion of their proceeds to charity. Since then, a cottage industry has popped up for go-betweens who link companies to charities, often for a fee. But one of the largest middlemen is now facing accusations that it took money from charities and did not deliver on its promises. The Ken, a business news publication in Bangalore, has the full story.

Tips from Tamami

Nikkei’s Tamami Shimizuishi keeps an eye on Asia to help you stay up to date on stories you may have missed from the eastern hemisphere.

It was no laughing matter when Akihiko Okamoto, president of Yoshimoto Kogyo, one of Japan’s largest talent agencies, told a group of comedians that he “has the power to fire them all” if they don’t obey his orders and stop talking to the press about alleged ties to organised crime.

Though he claimed he meant the comments as a joke, the fallout from his statement has resulted in Okamoto taking a 50 per cent pay cut and apologising publicly for committing a possible act of “power harassment” (pawa-hara in Japanese).

This is the second big scandal to hit the entertainment industry in recent months and puts a spotlight on Japanese corporate governance standards. The Japanese Fair Trade Agency censured a different talent agency earlier this month for allegedly pressuring television stations to keep former members of a popular boy band off the air after they left the agency, according to Nikkei Asian Review.

Hearing such a story might make you think that corporate governance standards are lagging in Japan. However, some who study the market think things are changing for the better.

“2019 is a year of huge change for corporate governance in Japan,” said Zuhair Khan, a strategist at Jefferies who closely follows the issue.

For example, Kinya Seto, the former chief executive of toilet maker Lixil Group, was reinstated in June after shareholders rejected his dismissal at the company’s latest annual meeting. Seto was abruptly replaced in October by Yoichiro Ushioda, who hails from one of the company’s founding families. The minority shareholders demanded better governance and the ousting of Ushioda. “It is one of the first incidents among major Japanese companies that ordinary shareholders win over the current management and founding families,” Khan observed.

With more institutional investors embracing a stewardship code in Japan, the voice of minority shareholders is getting louder. The number of proposals brought by shareholders hit a record high this year. Khan thinks the Lixil case is particularly important because it sends a message to foreign fund managers that “proxy fights matter in Japan now”. Stand by for more battles — and media stories.

Further reading

  • Banks and investors are dropping private prisons like a bad habit, but many of these companies are still common holdings in pension portfolios. (Pensions Expert)
  • Corporate boards have become much more likely to head to the negotiating table on environmental issues rather than face shareholder votes they may lose. (Agenda)
  • A growing number of activist hedge funds are beginning to incorporate ESG into their shareholder campaigns. (FundFire)
  • BlackRock has bought a majority stake in GE’s solar business and will spin it out into a new company. (Bloomberg)
  • The launch of the world’s first “Rhino Bond” opened a new door in responsible finance, but the question remains — do social impact bonds work? (FT)
  • Standard Life Aberdeen and BNP Paribas Asset Management are pressuring cement companies to prepare for a low-carbon economy. (FT)
  • Amundi’s plan to create an “inequalities” fund will certainly pique investor interest, but David Stevenson wonders what they can actually to do to fix the problem. (FTfm)
  • The world’s oil tankers could lose almost a third of their value as the transition to a low-carbon energy system creates more stranded assets. (FT)
  • Coal usage is dropping — and not because of green regulations. Market forces are simply making it uneconomical. (Bloomberg)
  • Large fund managers such as Legal & General Investment Management are pushing Japanese companies to put more women into management and board positions. (Nikkei Asian Review)

Get alerts on ESG investing when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article