IC Market Espresso 13 Jul 2020

ESG – the Present and the Future of Investing

For today, we decided to present you with a brief article regarding increasing ESG practices in the investment community and how present is ESG in Croatia and Slovenia.

ESG could be defined as responsible investing strategy and practice which includes 3 key factors in investment decision making and active ownership. ESG is an abbreviation composed of the 3 key components:

  • Environmental factors – climate change, the responsible/sustainable use of limited resources, waste, pollution etc.
  • Social factors – human rights, child labor, modern slavery, working conditions etc.
  • Governance factors – management remuneration, tax strategies, political lobbying and donations, corruption, diversity etc.

Do ESG Practices Lead to Higher Returns?

Although there are a number of studies which show mixed results regarding the direct relationship between higher return on investments and ESG investing, many studies show a positive correlation between disregarding these factors and higher volatility. This does not come as a surprise given that disregarding ESG factors could lead to higher amount of affairs/scandals which in turn could not only have a negative social or environmental effect but could therefore be reflected in the return on investment.

However, to further explore this idea our colleagues from the Asset Management department recently wrote a blog (Croatian only) comparing an ESG portfolio to S&P 500. For the purposes of their blog, they constructed two portfolios consisting of companies with a high ESG score (according to Sustainalytics). Both portfolios included the same stocks (such as Verizon, Amazon, Alphabet etc.), however one portfolio was an equal weight index, while the other was weighted based on the ESG score and rebalanced each year based on the new score. As visible in the graph below, in the past 3 years, both portfolios have significantly outperformed the index (S&P 500). It is important to state the we can not necessarily conclude whether such a performance came as a result of the growing awareness of the investors about sustainable investing or did the portfolio just pick “lucky” stocks.

Relative return of ESG portfolio compared to S&P 500

Source: InterCapital Asset Management

Growing Popularity of ESG Practices

Another reason why ESG is becoming more important and present in the investing world is that there is a growing number of clients who take into consideration ESG factors when deciding on which fund to invest in. According to 2016 US Trust Wealth and Worth Survey, 68% of Gen X and 93% of Millennials find ESG factors important when making investment decisions. Therefore, asset managers are becoming more transparent with their investments in regard to the implications of their investments on the environment and the society. This also applies to other institutional investors such as pension funds. The positive trend could be observed when looking at the share of assets of pension funds being managed by third parties in Europe which jumped to 40% in 2019, compared to 20% in 2015.

There is no doubt that ESG funds are becoming more popular, while their true potential is yet to be seen. Since the beginning of 2017 until October 2019, ESG funds have doubled on a global level reaching USD 683bn. Of that, the majority of funds (roughly 72%) are allocated in equities which make up for only 2.6% of the global equity funds. The low base definitely indicates that there is a lot of room for the continuation of the upward trend of ESG investing in the long term. When looking at the EU, 6.6% of assets under fund management is invested taking into account ESG practices, which is quite higher than the global level of 2.5%.

Share of ESG assets in total assets managed (by asset class) (%)

Source: Societe Generale

Share of ESG assets in total assets managed (by market) (%)

Source: Societe Generale

ESG in Croatia & Slovenia

One could argue that ESG investing is still at its early phases in Croatia and Slovenia. However, we see ESG practices definitely as the future of investing in terms of transparency of both companies and institutional investors in the region. This to some extent will come as a consequence of regulators already increasingly emphasizing that responsible investing is an integral part of asset management services.

At the EU level, asset management companies will need to start announcing how they integrate ESG factors into investment decisions (most likely sometime between 2020 and 2022). Recently, Croatia’s  regulator (HANFA) announced that the International Organization of Pension Supervisors (IOPS) has adopted Supervisory Guidelines on the integration of ESG factors into investment and risk management of pension funds.

Therefore, it is interesting to see how the companies are currently standing in terms of ESG practices. One way to do so is by looking at the Bloomberg’s ESG Scorecard, which is a tool to generate custom, transparent ESG scores to understand company and portfolio ESG performance for any Equity or Corporate Bond Portfolio. Scores are calculated based on company performance on the Environmental, Social and Governance pillars and are calculated up to 100 (the higher, the better score). Note that some companies do not have an ESG score (or have a low score), which does not necessarily mean that they do not abide by ESG practices, but it is also possible that Bloomberg did not retrieve such data from the companies.

Bloomberg’s ESG Score of Croatian and Slovenian Companies

Source: Bloomberg, InterCapital Research

As visible from the graph above,  HT leads the list with and ESG score of 61.97, followed by Ad Plastik with 45.76. The early adapters to ESG practices could possibly benefit from having high ESG scores as it might attract a new pool of investors who are seeking investments in companies with implemented ESG practices. We support the fact that many companies from both Croatian and Slovenian prime market are already publishing many ESG reports, such as sustainability reports and find such practices deeply important not only from an environmental and social stand point but also as a way for companies to distinguish themselves among many others.

TNG Announces the Expiration of their 2 ECO Product Tankers

According to the fleet employment strategy, the Company will secure new employment for the vessels on the spot market.

TNG published an announcement on the ZSE regarding the expiration of their ECO product tankers. To be specific, the time charter for the ECO product tanker “Dalmacija” has expired after a period of 16 months, out of a maximum of 24, and in accordance with the contractual terms, the vessel was redelivered on beginning of July 2020, from the charterer with whom it successfully operated during the specified period.

Furthermore, the ECO product tanker “Pag” was redelivered on 10 July, and the contract was used for a period of 5 months, out of a maximum of 6. According to the fleet employment strategy, the Company will secure new employment for the vessels on the spot market in order to fully utilize the commercial and operational potential of the vessel within current market terms.

Kraš’ Major Shareholder Opposes Current SBB Program Rules

Kappa Star Limited announced that they oppose the exclusion of priority rights of the existing shareholders in the share buyback program.

Kraš published a document on the Zagreb Stock Exchange in which Kappa Star Limited, the second largest shareholder of Kraš (30.0%), announced their counter proposal to the GSM regarding the share buyback program.  

Kappa Star Limited stated that they support the proposal of the Management and Supervisory Board regarding the share buyback program, however they oppose the exclusion of preemptive rights of the existing shareholders, as one of their fundamental rights.

The mentioned counter proposal is subject to approval at the GSM which will be held on 24 July 2020.

 To read more about Kraš, click here.

Dalekovod Concludes an Agreement with a Major Creditor

Dalekovod notes that the economic value of the settlement amounts to approx. HRK 70m. Taking this into account, the company would operate with a net debt / T12 EBITDA of 4.33 (compared to current 5.31).

Dalekovod published a document on the Zagreb Stock Exchange announcing that they have entered into a settlement with the largest individual creditor of the Pre-Bankruptcy Settlement HETA Asset Resolution on the regulation of relations from three leasing contracts, concluded in 2008, on basis of which HETA is the exclusive creditor of the property, galvanizing plant in Dugo Selo.

The settlement covers a financial debt of almost HRK 100m, which is the amount of approximately a third of the total financial debt of Dalekovod d.d. which has an impact on cash flow according to the pre-bankruptcy settlement.

Galvanizing plant has been operating on the market for a long time, where, in addition to operations for the needs of the Group, it performed about 50% of its operations. The Group notes that in the first five months of 2020 Cinčaonica usluge had operating revenue of HRK 17.8m, EBITDA of HRK -1.7m and EBT of HRK -1.9m.

HETA takes over the lease assets and sells them to the end customer, NFS Cink member of the Czech Signum Group, which already includes 9 galvanizing plants in the Czech Republic, Slovakia and Croatia, and the production of metal structures, and which will continue to perform corrosion protection in the galvanizing plant in Dugo Selo with employees who were part of the Group.

Dalekovod notes that the economic value of the settlement amounts to approx. HRK 70m, resulting in a reduction of the Group’s total financial debt of HRK 61m and a predictable cash receipt of HRK 8m. Taking this into account, the company would operate with a net debt / T12 EBITDA of 4.33 (compared to current 5.31).

The Group adds that the settlement significantly improves Dalekovod’s financial position, reduces total balance sheet debt, significantly improves cash flow, which was very negatively affected by the repayment of liabilities under this lease to HETA, which in the next two and a half years accounted for about 2/3 of all repayment under the concluded pre-bankruptcy settlement.

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