Tag Archives: UBS

01.14.18
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ESG issues are a sleeper risk that remain on investors’ blind side, despite what history teaches us

Casting my eye at the scattering wrecks of companies brought low by poor decision-making in the last 20 years, it can be said that there was a common theme is the prioritisation of profit-making and personal enrichment that fuelled the road to hell. Little thought was given to values that would contribute to the long-term sustainability of the company and benefit the broader community group.

BP’s Gulf disaster revealed a history of shaving the safety margins to maximise profit, a multitude of banks with their trading scandals which revealed a blatant disregard for the law and belief that self-enrichment trumped all things, the many multi-national companies that shuffle money to avoid paying a reasonable tax in countries where they enjoy the benefits of stability and certainty that a decent tax base funding infrastructure, education and health provides.

It is heartening to see that a recent survey by the CFA Institute of more than 1,500 investment portfolio managers around the world are taking more interest in environment, social and governance (ESG) issues but the underlying value set remains the same. It is telling that 61% of respondents would only be willing to pay 50% or less of what they spend in independent verification of financial statements on independent verification of ESG reporting by companies. Just 11% would spend as much in ESG verification as they would on financial verification.

It is also heartening that, according to Management Today, Mark Hafaele, the Chief Investment Officer at UBS has had a change of heart and recognises that companies that take ESG seriously can deliver share price growth and profitability. According to an interview in Management Today, Mr Hafaele noted that the consideration of ESG issues can de-risk investment returns.

It is fascinating, however, despite the rich lessons history has to offer, the professional investment industry still places far more value in reviewing the financials of a company – which can be a very creative story, rather than the reporting on environment, social and governance matters which can reveal much better a company’s approach to a broader stakeholder group and genuine understanding of a risk wider than ‘will this affect my share price this quarter’.

It is myopic also that most conversations about risk are associated with some sort of mathematical modelling and an analysis of numbers. Unfortunately, the impact of human decision making, driven by their underlying values is very difficult to create a data set around, except if you learn from history and consider philosophy. Ignoring what cannot be inputted into a mathematical model and measured means you increase your risk of being blind-sided by the inevitability of human fallibility driven by a set of values that promote fear and greed.

11.19.14
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Tax avoidance is rewarded by the financial markets

This weekend the leaders of the G20 nations met in Brisbane and corporate tax avoidance, or ‘minimisation’ was on the agenda. There has been outrage in recent months as it was revealed that large companies have routed money through complex structures in countries such as Luxembourg in order to minimise the tax. The objective is to maximise profits for shareholders and minimise a company’s contribution to the community benefits derived from tax payments.

Some of the companies are global household names such as Ikea, Pepsi, Deutsche Bank and use these methods. Apple and Amazon have been at centre of similar controversies in the recent past. While many commentators are focused on the impact on the public purse of those countries where revenue is generated, very few are asking why the dominant value of profit maximisation is allowed to continue to reign. It is just assumed that is what companies will do and markets will accept it.

Why is profit maximisation more important than paying reasonable tax to help develop the countries from which corporations derive their revenue? Why does short-term earnings results designed for the investment markets get more senior management attention than long-term investment in the future of societies for hospitals and health care, schools, roads, public transport and the like? This community investment through tax payments also benefits the very same companies which use the infrastructure networks such as roads, rail, airlines and ports, and whose employees and their families go to the schools and use the hospitals.

It is because those in senior management at these companies and those that control the investment decisions at large institutional investment groups, prioritise a very narrow set of short-term profit-driven values over the longer term goals of a rise in living standards for all. We know that they share the same values because investment funds participate in the same tax minimisation schemes. Public investment funds from Canada, Australia, as well as investment giants like Citigroup, Credit Suisse, ABN Amro, AIG, Dexia, Fidelity, Schroders, State Street and UBS were also on the list of tax offenders released by the International Consortium of Investigative Journalists.

These investment houses manage billions of dollars of citizen’s retirement and other savings through a variety of mutual funds. And because they have the power to make the investment decision, they impose a narrow set of profit-driven values on their decision. They do very little to gather the views of the citizen investors or reflect them in the investment decisions.

As those who provide the money for these funds to invest, we have a responsibility to make it clear that we are not only the ultimate shareholders of these funds who want a long-term return from our savings but we are also the people who use the infrastructure, the schools and the hospitals that improve our societies’ standards of living, as opposed to wanting our investments to produce a short-term return to boost the bonus payments of our professional money managers.