There are many definitions of SRI, usually involving words like sustainable, ethical and responsible but what is SRI?
A Scottish youth minister suggested their share of the £9m government fund to help those areas particularly hit by youth unemployment could be sustainable investment. Quite true. If the result is that thousands of young people find work who would not have if they didn't have access to this fund. We know the benefits of reduced unemployment, the ability to feed the local economies etc. Would it be as simple as that? Can you just throw money at unemployment and make it ok? Probably not so what's being sustained? And in any case, couldn't we say all government spending was socially responsible since it all contributes to the welfare of society?
Back in January a UN panel said that governments must look beyond the standard economic indicator GDP. In their view, sustainability is about reducing poverty and improving the quality of life for millions of people, not profit, and the financial crisis was (at least in part) caused by short termism and did not reward sustainable investment.
'Sustainability', it's used so often these days, in so many different contexts from tuna fishing to fossil fuel excavation but what does it mean in regard to investment? And what's the priority? Sustainability or a good return? Do you have to be able to afford to be sustainable?
Social conscious, value based, morals, ethical investing which considers social and environmental factors, surprisingly SRI has it's roots in religion, I remember the sanctions against South Africa and protests at Greenham Common, people chose not to be connected, even through investment, to organisations (or countries) who behaved in a way in which they did not approve. They voted with their feet. But in today's global economic society can we be sure that what we invest in is socially responsible?
The way in which SRI is defined makes it subjective, what's an important moral issue to me based on my values and traditions may not be to you. What to you is an undesirable activity may to me to perfectly acceptable. Divesting securities means to remove selected investments from a portfolio based on certain social or environmental criteria, nice idea but it's not without cost. Shareholder activism also falls under this governance function whereby shareholders can apply pressure to avoid such practices as exploitative overseas labour.
But is it more expensive to invest responsibly? I assumed so until I read that the Domini 400 Social Index, the first benchmark for equity portfolios subject to multiple social screen, set up in 1990 had outperformed the S&P 500 every year since it's inception.
Social responsibility is the principle that companies should contribute to the welfare of society and not be solely devoted to maximising profits, but it doesn't look like you have to choose?
Sources: FT, BBC News. investopedia.com
Sunday 25 March 2012
Sunday 18 March 2012
Would you credit it?
Prior to the credit crisis, we took Woolworths for granted, did any of us ever think that one day it would no longer be a fixture on our high streets? Today, Twiglets and Sarson's malt vinegar are for sale. Whatever next? Buckingham Palace with a 'for sale' sign outside? It's surprising how many companies rely on borrowing and when that borrowing either becomes too expensive, or just isn't available any more, it spells disaster.
The abundance of inexpensive credit following the bursting of the dot com bubble and the Twin Towers attack meant that we could all have what we wanted, when we wanted it. We were encouraged to borrow at low rates to get those items we'd only dreamed of. There's lots of ways an individual can get hold of credit, big purchases usually come with a finance option, provided you've got a good credit rating. Credit cards with low rates, or even 0% were all the rage. Not any more.
The abundance of inexpensive credit following the bursting of the dot com bubble and the Twin Towers attack meant that we could all have what we wanted, when we wanted it. We were encouraged to borrow at low rates to get those items we'd only dreamed of. There's lots of ways an individual can get hold of credit, big purchases usually come with a finance option, provided you've got a good credit rating. Credit cards with low rates, or even 0% were all the rage. Not any more.
For a company, credit rating depends on two things, the likelihood of the debt not being repaid (a default) and the extent to which the lender is protected in the event of a default. It's about level of risk, the higher risk the country, the lower the credit rating. The highest rating is AAA and this represents quality indicating the capacity to repay interest and principle is extremely strong. This week it's been reported Britain is in danger of losing its triple A status. Moodys and Fitch have put the rating on a 'negative outlook' while Greece's rating has improved to B-, Fitch's first uplift in rating since 2003.
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
Sunday 11 March 2012
To buy (or merge), or not to buy (or merge)
There are many motivations for mergers or acquisitions and they certainly have an impact on share price, this week Alecto Minerals jumped 7.1% after completing the acquisition of Nubian Gold Exploration, an Ethiopian mining firm, International Power was lifted to its highest level in more than a year with the date approaching when GDF Suez can take full control. And yet it's an artificial change which can be as high as 30% but actually results in longer term shareholder wealth destruction.
It's been reported this week that Peugeot and General Motors (GM) are entering into a global alliance. With the specific aim of reducing costs and as long as the senior management can get along and the integrities of both companies remain intact, it should work well. It's neither a merger nor a full acquisitions, GM will own 7% of Peugeot and I think that in this case the right steps are being taken to increase shareholder wealth.
GM are strong in the global market, but not in Europe. Peugeot are weak in the world market but strong in Europe. Not rocket science is it? They've come together to create operating synergies (which will have the added benefit that they will reduce costs). Bringing the two companies together increases their buying power by combining their powers to achieve economies of scale. They're sharing some technical stuff too, platforms I think they call them but the cars will be different, they won't be the same car with different badges on as we've seen before with other manufacturers.
Both companies have had problems, Peugeot made a 500m Euros loss during the second half of 2011, it's Europe's largest car manufacturer and it relies on this market for its sales, but as we all know, the European market has been under pressure for some time. Peugeot have reduced their costs, improved their processes and diversified in an attempt to improve their financial position. GM were rescued from bankruptcy by the US government less than three years ago and rely on their strong performance in North and South America, Asia and China. That said it's quite an achievement for GM, they've turned things around showing the US were right to bail them out.
At the moment, production will stay with each individual company, I suppose it's a bit like an insurance policy, if things get tougher financially, they can pool production and close factories. It would be controversial, as would sharing top management but Nissan and Renault have done it and they've just reported further investment in at the Sunderland plant. And anyway, if it increases shareholder wealth, don't they have an obligation to consider it?
The only down side to this arrangement (excluding employee uncertainty) is from the perspective of the suppliers to the two car manufacturers. Because they're combining their buying power, will this put excess pressure on smaller firms to cut their prices? Could be a bit domineering and overbearing. Competition and bullying, it's a fine line.
There are so many benefits with this type of deal rather than an outright acquisition or a merger, they both get to keep their identities but have access to each other's markets, they're taking minimal risk but will reap the benefits from economies of scale, entry to new markets and increase their chances of survival. Only time will tell whether it works, it relies on shared vision, requires diplomacy, shared technical skills but most of all a desire to make it work.
Source: BBC News, FT, Arnold
It's been reported this week that Peugeot and General Motors (GM) are entering into a global alliance. With the specific aim of reducing costs and as long as the senior management can get along and the integrities of both companies remain intact, it should work well. It's neither a merger nor a full acquisitions, GM will own 7% of Peugeot and I think that in this case the right steps are being taken to increase shareholder wealth.
GM are strong in the global market, but not in Europe. Peugeot are weak in the world market but strong in Europe. Not rocket science is it? They've come together to create operating synergies (which will have the added benefit that they will reduce costs). Bringing the two companies together increases their buying power by combining their powers to achieve economies of scale. They're sharing some technical stuff too, platforms I think they call them but the cars will be different, they won't be the same car with different badges on as we've seen before with other manufacturers.
Both companies have had problems, Peugeot made a 500m Euros loss during the second half of 2011, it's Europe's largest car manufacturer and it relies on this market for its sales, but as we all know, the European market has been under pressure for some time. Peugeot have reduced their costs, improved their processes and diversified in an attempt to improve their financial position. GM were rescued from bankruptcy by the US government less than three years ago and rely on their strong performance in North and South America, Asia and China. That said it's quite an achievement for GM, they've turned things around showing the US were right to bail them out.
At the moment, production will stay with each individual company, I suppose it's a bit like an insurance policy, if things get tougher financially, they can pool production and close factories. It would be controversial, as would sharing top management but Nissan and Renault have done it and they've just reported further investment in at the Sunderland plant. And anyway, if it increases shareholder wealth, don't they have an obligation to consider it?
The only down side to this arrangement (excluding employee uncertainty) is from the perspective of the suppliers to the two car manufacturers. Because they're combining their buying power, will this put excess pressure on smaller firms to cut their prices? Could be a bit domineering and overbearing. Competition and bullying, it's a fine line.
There are so many benefits with this type of deal rather than an outright acquisition or a merger, they both get to keep their identities but have access to each other's markets, they're taking minimal risk but will reap the benefits from economies of scale, entry to new markets and increase their chances of survival. Only time will tell whether it works, it relies on shared vision, requires diplomacy, shared technical skills but most of all a desire to make it work.
Source: BBC News, FT, Arnold
Tuesday 6 March 2012
Foreign Direct Investment
The interlinked nature of today's global economy means that what happens financially in one country can have consequences in many others. There are many key challenges for the economy, Christine Lagarde, Managing Director of the International Monetary Fund (IMF) identified the following three areas: sovereign debt, growth and instability. Growth needs to be just at the right rate too, not too fast, not too slow together with a balance of spending and cuts by governments, global output is predicted to be 3/4% lower during 2012 than 2011. In addition, the unemployment rates make some predict a 'lost generation'.
According to the 2011 World Investment Report (WIR 2011) foreign direct investment (FDI) has not bounced back to pre crisis levels, $1.24 trillion is still 15% down. Recovery is predicted though, but it will take two years (all being well). Once again developing and transition economies seem to be the ones to watch, half of all FDI is down to them and they generated record levels of outflows, directed mainly to other nations in the South, although FDI in the lowest developed countries fell and remains uneven. The importance of developing countries on the world economy isn't a new concept but these figures only highlight that there are positive aspects in today's economy, but probably away from the Eurozone. Demand from emerging markets is increasing,
It's not just the nations involved which are fresh and new and exciting, it's the way they get involved that's new and fresh and exciting. They're using new production and investment models to assist their integration into the global economic community and build their profile as not just players, but competitors. BAN Ki-moon says that their potential has to be unlocked and that frameworks are needed in order for developing countries to fully benefit.
The World Trade Organisation aims to help developing countries build their trade capacity, there are 153 members who negotiate changes to trade rules. The Doha round is the latest round of trade negotiations and its aim is to introduce lower trade barriers and revised trade rules, but progress is slow. The fundamental objective is to improve developing countries trade prospects. Director General Pascal Lamy said recently that if Europe wants to exit the current crisis it needs to have independent fiscal resources and focus on developing its competitive edge. Sounds like Europe is too risky, too interlinked financially and too expensive to me.
There have been uprisings in places like Syria and Greece because people are feeling the strain of social instability, high unemployment and austerity measures. There are arguments for focusing on the bottom of the pyramid, or those with a lower income, selling the lower priced goods to the biggest market. Sounds like developing markets to me. We've become a nation of high end consumers who would not know a good low cost product if we saw one. We're all about luxury and expense, does anyone reading this NOT have a smartphone? It's become the norm.
The more involved the emerging markets become in the global economy, the more organisations such as the ILM and WTO will impact upon them and in today's economic times, that may pose a risk in getting involved in crisis stricken countries. In addition the links between politicians and big business in developed countries almost puts developing markets at a disadvantage. If there was a recession in advanced markets, it would have a big impact on emerging markets, so called 'hot money' too can be damaging, flowing into and out of a country in the short term can damage their economy. If emerging markets are going to play what has become a developed countries game, there'll be winners and losers, who they are, only time will tell.
Sources World Investment Report 2008, 2011. World Trade Organisation. FT. Arnold
According to the 2011 World Investment Report (WIR 2011) foreign direct investment (FDI) has not bounced back to pre crisis levels, $1.24 trillion is still 15% down. Recovery is predicted though, but it will take two years (all being well). Once again developing and transition economies seem to be the ones to watch, half of all FDI is down to them and they generated record levels of outflows, directed mainly to other nations in the South, although FDI in the lowest developed countries fell and remains uneven. The importance of developing countries on the world economy isn't a new concept but these figures only highlight that there are positive aspects in today's economy, but probably away from the Eurozone. Demand from emerging markets is increasing,
It's not just the nations involved which are fresh and new and exciting, it's the way they get involved that's new and fresh and exciting. They're using new production and investment models to assist their integration into the global economic community and build their profile as not just players, but competitors. BAN Ki-moon says that their potential has to be unlocked and that frameworks are needed in order for developing countries to fully benefit.
The World Trade Organisation aims to help developing countries build their trade capacity, there are 153 members who negotiate changes to trade rules. The Doha round is the latest round of trade negotiations and its aim is to introduce lower trade barriers and revised trade rules, but progress is slow. The fundamental objective is to improve developing countries trade prospects. Director General Pascal Lamy said recently that if Europe wants to exit the current crisis it needs to have independent fiscal resources and focus on developing its competitive edge. Sounds like Europe is too risky, too interlinked financially and too expensive to me.
There have been uprisings in places like Syria and Greece because people are feeling the strain of social instability, high unemployment and austerity measures. There are arguments for focusing on the bottom of the pyramid, or those with a lower income, selling the lower priced goods to the biggest market. Sounds like developing markets to me. We've become a nation of high end consumers who would not know a good low cost product if we saw one. We're all about luxury and expense, does anyone reading this NOT have a smartphone? It's become the norm.
The more involved the emerging markets become in the global economy, the more organisations such as the ILM and WTO will impact upon them and in today's economic times, that may pose a risk in getting involved in crisis stricken countries. In addition the links between politicians and big business in developed countries almost puts developing markets at a disadvantage. If there was a recession in advanced markets, it would have a big impact on emerging markets, so called 'hot money' too can be damaging, flowing into and out of a country in the short term can damage their economy. If emerging markets are going to play what has become a developed countries game, there'll be winners and losers, who they are, only time will tell.
Sources World Investment Report 2008, 2011. World Trade Organisation. FT. Arnold
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