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Running Out Of Time: how to analyse ESG data ? The example of tax avoidance
By: Greg Schneider-Maunoury
Emergency time for sustainable investment. We have now access to ESG data thanks to CSRD and other regulations. But we need to know what to do with this data. Companies have been requested to disclose more ESG data. They can now ask: What for ? We are now questioned on our own legitimacy, our own license to operate. What do we do with this data, for the companies assessment, for our financial materiality, but also for the societies in which we operate.
We now know that there is no single ESG criteria that could explain an overperformance. Still, ESG criteria are interesting to understand long term strategy of the company and then to reassess sales growth, asset quality or actualisation rate. For an asset manager, these advanced analyses require data but moreover seniority, trust and a good level of mastering financial materiality of ESG related issues. Simultaneously, the regulation, not only in the EU, provides framework to incite asset managers to focus on long term analysis, in attempt to assess long term performance. Still, with the clock ticking, will we have time to develop the scenario analysis required by the aim of long term performance ? Yes, if we are able to include public issues in our own analysis, If we are able to show that it is not a technical or moral issue, but rather a strategic issue (financial materiality) and a political issue (impact materiality).
Let start this discussion with an example on corporate governance, tax optimisation risk. Tax optimisation is not a (good or bad) practice. Academics demonstrated as early as 2014 that is both a strategy and a risk continuum. As a consequence, it cannot be assessed as a compliance-based box ticking methodology and should be assessed as a risk to be measured. Whereas long term strategy assessment is still complex due to lack of data (on accounting choices notably), it is possible to assess the level of risk, generated by management choice and borne by investors.
In 2024, among Stoxx50 companies, 10 have tax-related intangibles representing more than 4% of total assets. In the context, 6 have no R&D that would justify these intangibles to investors. This is a clear financially material risk. On the other side, some companies have both low tax related intangibles and tax rates close to the theoretic tax rate. These companies generate lower tax-related risks and potentially lower market risks.
This tax optimisation issue is not only focused on financial materiality. It also entails an impact materiality. The level of effective tax rate is still an issue, with 2 companies making profit and having effective tax rates under 15%. 8 other companies make profit and still have effective tax rates over 15% and under 20%. Investors could generate questions to countries about the acceptance by tax authorities of tax strategies (accounting methods, assumptions on losses and future gains).
With this analysis of data, ESG analysis could bring valuable data on:
- Financial materiality: for investors, first in the restatement of income assessment (notably in comparison with peers), second in the assessment of long-term perspective of the company.
- Impact materiality: for governments and public opinion to better identify the taxation policy and contribute to the public debate.
This tax issue, and the suggested methodology to assess it (set of selected indicators, list of fully available data) is an example of what sustainable analysis could provide, and how it could improve both financial analysis (and investment decision) and contribute to public debate and consensus towards better accepted common goals and policies. This contribution to public debate and consensus could definitely improve the social legitimacy of sustainable finance.
Green super: Why investors hesitate to walk the talk
By: Michelle Bowes - Financial Review
When financial giant Macquarie reported a slide in full-year profits recently, the results demonstrated that making money out of the green energy transition is not easy.
And if a company that says it’s the “home to one of the world’s leading specialist green investment teams” finds it a difficult exercise, what hope is there for the retail investor looking to align their finances with their ethics or otherwise ride the touted green tailwinds?
One of the easiest ways to make a green or sustainable investment play is by choosing a green super fund, or a sustainable investment option offered by a broader super fund. But statistics indicate few Australians do.
The latest Responsible Investment Association Australasia (RIAA) consumer sentiment report found three-quarters of Australians would consider changing providers if their fund didn’t align with their values.
But Mano Mohankumar, senior investment research manager at super research house Chant West, says despite this, green super isn’t heavily invested in. “While fund members are thinking about it more, it doesn’t translate to them investing in it more broadly,” he says.
RIAA found 78 per cent of Australians are wary of greenwashing, up 6 per cent from 2022. And many believe they don’t have enough money in their super to make it worth changing. Fifty-five per cent of women and 44 per cent of men cite a low super balance as a reason to not switch to an ethical alternative.
Australian Ethical, Future Super and Verve Super are true-to-label green super funds – they screen out fossil fuel investment and invest in companies that support the green energy transition or address the impact of global warming across their asset base.
They also have a social impact agenda. Verve Super also invests to support gender equality.
Verve and Future have been awarded 4.5 out of 5 by the Ethical Advisers Co-Operative, while Australian Ethical has a rating of 3.5 out of 5. The lower rating is, in part, due to Australian Ethical investing in some companies that have small revenue exposures to fossil fuels.
Verve posted a one-year return to June 30 of 9.93 per cent. It only has one investment option. Future Super’s balanced impact option returned 8.3 per cent and its renewables plus growth option – its greenest choice, which targets a 20 per cent allocation to renewable energy and climate solutions – returned 8.29 per cent.
That compares with the Chant West median one-year return for growth options of 9.1 per cent. Only Verve outperformed the median. (Chant West classifies all of these options as growth options, based on the level of growth assets held.)
Australian Ethical’s growth option returned 7.8 per cent in the year to June 30 and its high-growth option posted 9.2 per cent. Neither beat the Chant West median one-year high-growth return of 10.8 per cent (Chant West classifies both as high-growth options).
Across a three- and five-year horizon, it’s a similar story.
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Recent Supreme Court decisions are already slowing climate progress
Supreme Court rulings limiting federal authority have upended the legal landscape — and could discourage bold climate policies.
During its last session, the Supreme Court’s conservative majority dealt blow after blow to federal agencies’ authority to draft and enforce policies, including those aimed at mitigating climate change. Its decisions have already created upheaval for courts considering issues ranging from the approval of a solar project to vehicle emissions rules. This has upended the legal landscape for judges and for regulators, and could slow climate progress as a result.
The uncertainty has alarmed, but not surprised, legal experts who earlier this summer predicted that four rulings limiting federal authority could curtail the ability of the Environmental Protection Agency and other agencies to limit pollution, govern toxic substances, and mitigate global warming.
“It’s going to throw climate policy into many years of litigating what these cases actually mean when applied to individual rulemakings,” said Deborah Sivas, an environmental law professor at Stanford University. “That’s not good for the energy transition that we actually need to go through.”
In its most consequential ruling, the Supreme Court overturned the so-called Chevron doctrine, which has since 1984 granted federal regulators broad leeway to use their expertise to interpret ambiguities in the law. Another ruling effectively eliminated a six-year statute of limitations on lawsuits against federal regulations, opening the door to challenges against any policy regardless of how old it is. A lawsuit against the Securities and Exchange Commission invalidated the use of in-house administrative law judges, jeopardizing a key enforcement mechanism used by more than a dozen agencies. And the conservative majority, ruling in Ohio v. EPA, blocked a federal smog reduction plan, a victory for polluters and conservatives who have long argued that EPA regulations create undue burdens.
The flurry of litigation stemming from those decisions started with the Supreme Court. On July 2, shortly after discarding Chevron, the court, in a case challenging the Federal Energy Regulatory Commission’s approval of a solar energy project, sent the matter back to the U.S. Court of Appeals for the District of Columbia Circuit. Justices asked the lower court to reconsider it “in light of Loper Bright Enterprises v. Raimondo,” the decision overturning Chevron deference.
That could be an issue, because the D.C. Circuit cited Chevron when it ruled in favor of FERC in February. Utilities had challenged the agency’s decision to make a solar and battery storage facility in Montana eligible for benefits under a 1978 law that requires utilities to purchase power from small renewable energy projects. Utility groups argued that the project in question shouldn’t qualify because its combined power capacity exceeded the size allowed under that law. The D.C. Circuit, invoking Chevron, deferred to the agency in upholding its decision.
Sivas said the judges most likely will stand by their decision, but will have to explain their reasoning without relying on Chevron. Although this case ultimately could demonstrate the limits of Chevron in turning back regulatory actions — jurists, after all, have other precedents they can cite, including the Skidmore deference that favors agencies when they provide persuasive reasoning for their actions — it is indicative of the litigation to come now that the Supreme Court has “watered down the influence of agencies,” she said. “We’re already in the thick of it.”
Appellate judges, taking cues from the Supreme Court, have started returning cases to lower courts for reconsideration in light of the high court’s latest rulings. Last month, the 5th Circuit asked a Texas district court to revisit its decision upholding a Department of Labor rule allowing retirement fund managers to consider climate risks when making investments. Republican state attorneys general and fossil fuel companies considered the rule “arbitrary and capricious,” but the Texas court cited Chevron when rejecting their challenge in September. A reversal could imperil the ability of investors to align financial decisions with climate action.
Weighing up AI’s climate costs
By: Azeem Azhar and Carl Benedikt Frey - Equities.com
LONDON – Historically, technological revolutions have brought higher carbon dioxide emissions – with the first Industrial Revolution being powered by coal, and the second heavily by oil. Will artificial intelligence – the general-purpose technology of our time – do the same? The early signs are concerning. Microsoft’s CO2 emissions jumped some 30% since 2020 as the company invested in AI infrastructure, and Google’s are up almost 50% over the past five years.
But there are two countervailing forces to consider: demand and efficiency. While demand has grown, efficiency has improved. Chips from companies like Nvidia are getting better, and the next generation is expected to be five times faster than the current one. Equally, OpenAI and other industry leaders are making their models more efficient to train and run.
Still, given the surging demand for AI, energy consumption worldwide could still grow, even as models become more efficient. What really matters is emissions, and to project those, we need to know how the electricity to power AI data centers will be generated, and how AI will impact carbon-intensive industries.
According to the International Energy Agency, data centers accounted for roughly 1-1.5% of electricity use worldwide in 2023, and this share is sure to grow in the short term. Microsoft, Google, and Meta nearly doubled their cumulative electricity consumption between 2020 and 2022, and that was before the arrival of ChatGPT. Since then, they have only strengthened their commitments to expanding this infrastructure.
While data centers represented roughly 1% of energy-related CO2 emissions in 2023, the electricity systems that power them are rapidly decarbonizing. In the United States, 41% of electricity was produced from zero-carbon sources in 2023 – marking a one-quarter increase over the past decade – and in Europe, the proportion is closer to 60%. In the US, Europe, the United Kingdom, and China, renewables are the fastest-growing means of producing electricity.
At the same time, Goldman Sachs expects data-center energy demand to grow 15% per year until 2030, with AI accounting for one-fifth of that growth. Even if two-fifths of US data centers’ energy needs are met by renewable energy, AI infrastructure would emit roughly 26 million tons of additional CO2 annually.
But while that is a huge amount in absolute terms, it needs to be put in context. The additional emissions from AI would represent 0.4% of current emissions, and less than the “scope 1” (direct) emissions of any of the three biggest US airlines. Notwithstanding the breathless headlines about AI’s carbon footprint, America’s energy system is so large that the direct impact of AI represents more of a perturbation than a systematic change.
Moreover, there is compelling evidence that AI can reduce emissions across a variety of hard-to-decarbonize sectors. Since aircraft contrails alone are responsible for about 35% of aviation emissions, Google and American Airlines are exploring how machine learning can be used to minimize contrail formation. The early results show that roughly one-sixth of aviation emissions worldwide could be avoided (more than all the current output from AI data centers in the US combined).
Similarly, food waste (which accounts for 6% of global emissions) can be reduced by using AI to forecast demand, manage production levels, and optimize schedules across the supply chain. AI is already being used to reduce emissions from industrial processes (currently 30% of the global total), such as by aiding in the development of biologically inspired materials that are less reliant on fossil fuels (but still meet industries’ mechanical standards), and by reducing the cost and increasing the efficiency of material recycling. And AI will aid climate adaptation as well, by improving weather forecasting and early-warning systems. Timely preparation has the potential to save lives and reduce economic losses.
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Investing in pizza, then people: How Sal Lupoli reinvented a dying town
By Paula DeLaurentis - Equities.com
Lawrence, Massachusetts, was hanging on by a thread before Sal Lupoli set his sights on the city.
Just a short trip north of Boston, Lawrence didn’t have much going for it after the 1930s when the textile industry folded and left dozens of large-scale mills to fall into disrepair and blight.
The buildings, typically five to seven stories with 15-foot-high ceilings and large windows, were more or less skyscrapers laid out horizontally. Without massive industry to occupy them, they had no practical use for the people of Lawrence.
At least not until Lupoli found them in the early 2000s.
An Italian upbringing, business sense and, of course, pizza
Lupoli grew up in East Boston, a second-generation immigrant and one of six sons. He grew up poor, and his mother, he said, had to work to keep the family afloat.
His father taught him from a young age to work for the things he wanted — a lesson Lupoli still embraces today.
“One of the lessons I was taught is to never push your face against the glass and want something so bad. Don’t ask for it — just move on,” he said.
After graduating from Northeastern University in 1988, thanks to a full athletic scholarship for football, Lupoli expanded on a business plan in school and used the experience gained from working in a small pizza business in Boston’s North End to open Sal’s Pizza in 1990.
His father took out a third mortgage and Lupoli sold his first car to fund a 780-square-foot storefront in Salem, New Hampshire, that he opened with his brother, Nick.
By 10 years in business, Lupoli had built a very comfortable life. At that point operating about 15 pizza stores, Lupoli had pulled himself out of poverty and also helped improve the lives of his parents and brothers.
“When you’re given an opportunity to make a difference in people’s lives, you get addicted to it. And I did,” he said.
Risking it all on the most unlikely of bets: Lawrence
By the early 2000s, Lawrence had experienced about 70 years of poverty since the departure of the textile industry. Dubbed one of the 40 poorest cities in the country during the Clinton administration, the city of about 90,000 people didn’t have much hope.
As residents struggled to make ends meet, Lawrence became a haven for insurance fraud. About 400 homes burned down each year — more than one per day, Lupoli said.
The city still has a large immigrant population, about 80% Latino. Lupoli recognized the similarities between his own upbringing and the plight of Lawrence residents and became emotionally invested.
“At 35 years old, I mortgaged everything,” he said.
Lupoli took loans against his pizza stores, his own home and even his mother’s home to invest the money into Lawrence with a 20-year plan.
