Affirmative Impact - Winter 2017

Posted on Tuesday, January 17, 2017

Impact Investing and the Dakota Access Pipeline

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By Laura Isanuk

A thousand-year-old Lakota prophecy tells of a black snake that would one day rise from the deep and move across the land bringing destruction and great sorrow. The Sioux believe that the black snake has arrived in the form of the Dakota Access Pipeline.

The Dakota Access Pipeline (DAPL) will be 1,172 mile, 30-inch diameter pipe connecting the oil producing regions of North Dakota to Illinois if/when finished. It may also be a textbook example of environmental injustice within the United States.

DAPL has sparked the interest of a broad swath of Americans interested in social justice and attracted thousands of people from around the country to stand defiantly in protest with the Standing Rock Sioux.

Fortunately, on December 4, 2016, the Department of the Army paused construction of the pipeline with a commitment to develop an Environmental Impact Statement "with full public input and analysis" and explore alternate routes for crossing Lake Oahe, an Army Corps of Engineers project on the Missouri River.

Consultation Required

President Clinton signed Executive Order 13175 in 2000 requiring all Federal agencies to have a strategy for including native voices in regulatory decisions that would impact them. President Obama signed a memorandum reaffirming that Order in 2009. In 2012, the Army Corp of Engineers published official guidelines which require that land management decisions be viewed through the lens of when the tribe signed the effective treaty.

The Standing Rock Sioux voiced their opposition to DAPL in 2014, noting that it would defy treaty boundaries. Mark Trahant, an independent journalist and a journalism faculty member at the University of North Dakota observed that there was a gross misrepresentation by Energy Transfer Partners (ETP), the company building the pipeline. In fact, ETP did not even mention the tribe in their plan for DAPL. The pre-consultation requirement was clearly not met. ETP only tried to re-engage with the tribe at the eleventh-hour-as the final permit was being sought to run the pipeline under the river.

From the Tribal Chairman

Standing Rock Sioux Tribal Chairman, Dave Archambault II, recently spoke with advocacy experts from the SRI community. He expressed his pleasure with the Army Corp of Engineers refusal to grant the final DAPL permit.

Archambault also spoke of his frustration that ETP has no corporate social responsibility department, no community relations procedures, and no human rights policies. It's no wonder that the company attempted to push the pipeline through in spite of public opposition.

Chairman Archambault also talked about the travesties that the peaceful DAPL protestors experienced in September-November, 2016 - from guard dogs with unlicensed and even untrained handlers, to the spraying of water on protesters in below-freezing temperatures. Utilizing such horrific tactics essentially forced conflict between law enforcement and protestors.

Investor Risks

When the pipeline was first being planned, oil was $100/barrel. Over the past year, the price of oil has had a tough time going above $60. Oil production in the Bakken region of North Dakota peaked in late 2014. Since then it has fallen 20% and continues to drop 1-2% each month. The rig count has also fallen dramatically, from 200 at the 2014 peak to just 40 today.AI- Bakken Oil Production Graphic

Now, any decision to reroute DAPL will require an environmental impact assessment which will include public hearings, consultation, and agreement with the affected tribes. This process could take months, even years.

The top three oil producers in the region have had credit downgrades. And due to elevated public awareness of the conditions on the ground at the Standing Rock encampments, banks financing the project are facing escalating reputational risk. With the construction delay, pipeline investors have cause to avoid or restructure their agreements. The original contractual deadline had oil from the Bakken region arriving in Illinois beginning in January 2017. If prices stay low and production stays low, shippers are likely to be interested in re-negotiating those contracts.

An interesting hypocrisy for many of the banks backing the pipeline is that they are signatories to the Equator Principles. An analysis by Sustainalytics of companies complying with the Principles found ETP at the very bottom of the list. For some investment analysts this shows serious gaps in the due diligence process of the banks involved in financing DAPL.

First Affirmative Involvement

The November 2016 SRI Conference on Sustainable, Responsible, Impact Investing, an industry event hosted by First Affirmative, included a standing-room-only strategy session called "Dakota Access Pipeline and the Future of Native Sovereignty in the U.S." Investors and other stakeholders discussed the risks related to DAPL and actions investors could take to support the Standing Rock Sioux Tribe.

First Affirmative has co-filed shareholder resolutions at Morgan Stanley and Goldman Sachs that address the financing of DAPL and similar projects that affect indigenous peoples. Morgan Stanley is being asked to assess how its existing indigenous rights policy, which currently guides project financing, could be extended to the direct financing of other companies involved in projects on indigenous people's lands.

The Goldman Sachs resolution asks the company to describe its financing of enterprises involved in the project and explain whether their existing indigenous rights policy was applied to investment decisions. The Goldman resolution also requests that the report include options to improve implementation of its indigenous rights policy.

The tribe is "not opposed to energy independence, economic development, or national security concerns," Chairman Archambault explained. Native Americans "were the first people here. We know what is sacred and what is meaningful for us. This is not about money; it's about people."

Year in Review: Sustainable Investing Thrives

By Michael Sakraida

The sustainable, responsible, impact (SRI) investment sector continued its fast-paced growth in 2016 and became ever more important to the conventional investment industry, as we built a broader and more solid foundation for the notion that investors can do good and do well, at the same time.

If there were a President of SRI and she were delivering a State of the Union Address, the essential message would be that the "movement is strong!" Here are six reasons for this positive claim.

1. Responsible investors are the driving force. Wall Street did not cook this one up. In fact, investors (certainly not government) have been driving the evolution and acceptance of responsible investing. There are now 1,500 companies around the world with more than $62 trillion in assets under management that are signatories to the UN PRI (Principles for Responsible Investing). The efforts we put into directing investment capital toward creating a future that works for everyone are more important now than ever before - especially for millennials. Millennials are purpose driven and care about investing for the greater good. High net worth millennials are especially enthusiastic about investing responsibly.

2. Companies increased their love of ESG. During the past year we saw more and more companies focus on "doing well BY doing good" (as opposed to "doing well WHILE doing good"). The business case for responsible corporate citizenship strengthened as company leaders gained a deeper understanding that the actions taken to improve their ESG ratings (Environmental, Social, Governance) tend to enhance profitability and increase the company's share price.

3. Mainstreaming of ESG. Analysis of environmental, social, and corporate governance factors is helping portfolio managers be more successful and make more money. More and more "conventional" investment managers are using ESG analytics because of the powerful insights derived from the process and because of the enhanced ability to identify, avoid, and mitigate risk.

4. Improved ESG analytics. Enhanced ESG analytic tools and big data made 2016 a leap-ahead year. Responsible investing can no longer be criticized as "heart-over-head." Morningstar, in partnership with Sustainalytics, released a guide to the overall sustainability of mutual funds. Sixty stock exchanges around the world are now engaged as peer members of the Sustainable Stock Exchanges Initiative and some 38 exchanges have sustainability reporting standards. Going forward, the CFA (Certified Financial Analyst) exam will include a section on ESG analysis, which will improve the ESG abilities of all future financial analysts,

5. The US SIF Foundation's bi-annual Trends Report identified $8.72 trillion in U.S. investment assets professionally managed using sustainable, responsible, impact investment strategies or used in filing proxy resolutions with public companies on environmental, social, and/or governance issues. That's nearly one-fifth of all investment assets under professional management in the United States. Some believe that the recent presidential election may spur more responsible investing.

6. Increased promotion of SRI/ESG. A greater percentage of the investing public was exposed to SRI/ESG investing by the media in the past year. And more and more investment advisors are feeling the interest from clients, educating themselves, and teaming up with experts like First Affirmative to offer properly diversified responsible investment portfolios designed to help clients achieve their financial goals while having a positive impact on our world. 

In short, 2016 was an outstanding year for responsible investors and investment professionals. Onward and upward!

Fossil Fuel Divestment Doubles to $5 Trillion

A December 12, 2016 article in The Guardian revealed that the value of investment funds committed to selling off fossil fuel assets doubled in the past year to $5.2 trillion.

UN Secretary General, Ban Ki-moon, welcomed the new report and said that "it's clear the transition to a clean energy future is inevitable, beneficial and well underway, and that investors have a key role to play."

The fossil fuel divestment campaign began on university campuses in 2011, but concerns over investments in coal, oil, and gas have now entered the financial mainstream - with more than 80% of the funds now committed to divestment being managed by commercial investment and pension funds.

Morningstar Dispels Myth of SRI Underperformance

AI- S&P500 Vs KLD400 GraphicA recent Financial Advisor magazine article quotes a Morningstar report that says investor fears about leaving returns on the table when utilizing sustainable, responsible, impact investment strategies are baseless.

"In fact," Morningstar said, "sustainable or responsible funds and indexes perform on a par with similar conventional funds and indexes."

The Morningstar report cites the oldest socially responsible index, originally known as the Domini 400 Social Index, now known as the MSCI KLD 400 Index, as an example of competitive performance over the long term. Since being launched in 1990, it has outperformed the S&P 500 Index.

"The index makes a strong case that socially responsible investments do not lead to inferior returns." Of course, past performance is no guarantee of future results.

Solar Capacity Doubles

AI- Solar Panels ImageMany people are aware that solar is a fast-growing segment of the U.S. energy mix, but few have an appreciation for just how much solar has grown in a very short time. The new US Solar Market Insight 2016 Q4 report from GreenTechMedia (GTM) Research really puts this into perspective.

The installation of 4,143 MW of new capacity increased total installed solar PV in the U.S. by 99% in the third quarter of 2016. That's right; solar essentially doubled in one quarter. States with the most installations were California, Utah, Texas, Georgia and Colorado. 

Companies with Gender-Diverse Boards Gain Financially

A new report from MSCI, The Tipping Point: Women on Boards and Financial Performance, reinforces belief in the financial advantages gained by gender-diverse companies. Research has consistently shown that having more women in senior positions and on the board of directors has a positive impact on a company's financial performance and improves market returns for investors.

During the five-year period between 2011 and 2015, U.S. companies that started the period with at least three women on the board experienced median gains in Return on Equity (ROE) of +10% and Earnings Per Share ( EPS) of +37%.

In contrast, companies that began the period with no women directors experienced a negative median change in ROE of -1% and a negative EPS of -8% over the same period.

Such superior performance from companies with at least three female board members may derive from better decision-making by a more diverse group of directors. But outperformance may also be tied to greater gender diversity among senior leadership and the rest of the workforce, which has been correlated with reduced turnover and higher employee engagement. 

What Does the Shift to Clean Energy Mean for Jobs?

Dramatically declining costs are driving a relatively quick shift from fossil fuels to renewable energy and energy efficiency. There are now more jobs in the U.S. in solar than in either oil and gas extraction or coal mining.

What does the advance of wind, solar, and energy efficiency mean for future job growth? The answer depends largely on how many jobs each sector creates.

AI- Jobs Created In Energy TableThe World Bank estimates that in the U.S. wind and solar creates about 13.5 jobs per million dollars of spending, and that building retrofits (energy efficiency) creates 16.7 jobs per million dollars of spending. This is double the 6.9 jobs per $1 million spent for coal and more than three times the 5.2 jobs per $1 million spent on oil and gas.



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