ESG for beginners

Nils Bolmstrand's appointment as chief executive of Nordea Asset Management in January marked the start of a new chapter for the business. Overseeing €217 billion of assets is a big challenge for anyone in a senior position but when his predecessor Christian Hyldahl was so successful - whilst at Nordea, it recorded annual inflows of €14.4 billion, it is added pressure. 

Bolmstrand is very open and positive regarding the business, promoting the use of active management and sticking to investment principles. Nordea's principles are actually so strict that their reputation has developed into one that promotes strong environmental, social and governance standards - creating the ESG mindset. Whilst some companies simply adopt corporate governance standards to appease investors and stakeholders, Nordea has gone that extra step further. Not only focusing on governance standards such as appropriate appointments, they also focus on environmental issues. Their asset managers are banned from investing in companies that are hit by scandals. 

Critics may argue that the strong ESG guidelines promoted at Nordea are simply a marketing ruse to trick investors and reach out to those who are focused on ethics. This could be the case - however, even if it is a ruse, it is working really well for Nordea. 

Their ESG range of funds "Stars" which was launched in 2011 invest in companies in different markets that score highly on corporate governance metrics such as business ethics and labour standards. The fund is worth £1.7 billion and has actually improved by 17.4% since 2012. Whilst it could be said by critics that they are profiting from what could be a marketing trick, Nordea could also be taking advantage of the benefits of being ethical. 

Another controversial reason to defy the critics is that Nordea are willing to go against massive powers such as Donald Trump. With its ESG standards, Nordea banned its fund managers from investing in any companies that are building the Dakota Access oil pipeline, which Trump has heavily pushed forward. 

It will be interesting to see how Nordea react in future to potential scandals and whether they keep up  with their strong ESG guidelines and prove the critics wrong. 

Mad markets and property bubbles

Shown in 2009, The City Uncovered with Evan Davis is shocking to watch and look back at what actually happened worldwide with unstable markets, crashing currency and commodity prices and the loss of millions of pounds.

With markets created in the 17th century, you could never predict what would actually happen many years later. They started as simple stock sharing, with haggling and price discovery. Becoming more organised, stock markets grew with products traded daily. From beavers' testicles (?!) to oil, products have changed wildly since the 17th century.

Focusing on the United States housing market, as mentioned by Evan Davis, growth was modest but steady between 1995 and 1999. The housing bubble was created in 2000 when the stock market crashed and new loans were available. An important thing to remember is that the housing market was praised for creating wealth and helping people to gain assets and help the economy grow by borrowing money. With increasing house prices, people wanted a piece of the pie.

Then came the housing market crash in 2007. Many lenders and banks filed for bankruptcy including Lehman Brothers. The stock market then had its worst week ever losing $8.4 trillion. The crash of the banks and stock market had a bigger impact on society. Unemployment rose and the US had over 3 million foreclosure filings in 2009.

Moving onto Australia, and echoing warnings of what happened to the United States, the OECD has advised that with a 250% increase in house prices since the 1990's, Australian banks need to limit mortgage lending and avoid risky loans. Household debt in Australia has also risen and if the government does not intervene, the hint of a slowdown in Australia's housing market could create wider problems in the economy.

The documentary also focuses on the UK, especially London and the focus on property. It would be great to say things have improved loads since the documentary, but this is not the case. Home ownership is decreasing year on year, with people only being able to afford to rent homes. Shockingly, over 50% of households are renting already in London. Even with the housing crash, house prices have risen by around 7% every year since 1980, adding to the huge property bubble. This bubble can only be maintained with increasing government support.

With the snap general election announced last week and Brexit looming over us, it will be interesting to see how the property bubble survives.

The ethics of being a decent person

"Avoiding further self-inflicted crises – and the human damage they cause – will require more attention to both institutional norms and ethical leadership. That responsibility ultimately lies at the very top."

This statement can easily be applied to a multitude of ethical scandals. When crises happen, it is usually the lower level employees who take the brunt of the responsibility. The actual blame lies with those at the top of the hierarchy - the CEO's with incentive systems, the managers who don't set ethical boundaries, the boards who do not consider ethical codes of conduct. THESE are the people who should be criticised and should be blamed for the culture they create.

Firstly, let's take a look at the Wells Fargo ethics and code of conduct. Their "vision" is to satisfy customers' financial needs and help them succeed financially. Their values include leadership, what's right for customers and ethics.

.....riiiiiiiighhttttt

Sounds like an average bank's typical ethics code until you remember that they had to pay a $100 million fine to the Consumer Finance Protection Board in 2016 for their unethical actions. They also agreed to pay $5 million to customers and $185 million in penalties. 

Since 2011, Wells Fargo employees had been secretly creating millions of unauthorised bank accounts and credit card accounts for customers without telling them. This allowed employees to boost sales figures and make more money. Sounds like the fault lies with the employees, right? Wrong.

The culture created by senior managers and CEO John Stumpf meant that employees felt pressured to hit sales targets and feared they would lose their jobs if they didn't perform well enough. Even after the scandal, CFO John Shrewsberry still blamed the employees for "under performing". 

However, these employees did try to reach out and get help. A former Wells Fargo employee refused to carry out tasks, like opening fake accounts and called the ethics hotline and emailed Human Resources, informing them of the unethical sales activities. After sending that email, he was fired eight days later. Apparently, he was consistently late to his job.

It might be easy to blame the employees for actually carrying out these unethical tasks. However, the blame lies with the higher level managers. They set the culture. They create the rules. They pressure employees. If an employee reaches out and acknowledges what is going on, he is penalised. 

What are employees supposed to do - risk losing their job or be unethical? 

A wolf in a 2,000 dollar suit

Described by Forbes as "a twisted version of Robin Hood, who robs from the rich and gives to himself and his merry band of brokers", Jordan Belfort (portrayed by Leonardo DiCaprio in the Oscar nominated film The Wolf of Wall Street) served 22 months in prison for securities fraud and money laundering. He used his brokers to aggressively sell risky stock that he owned shares in to inflate the price and then sell this stock on to make a profit. The film was criticised for portraying his lifestyle as glamorous with little mention of the victims of his scam. Belfort himself has said that his life of sex and drugs was even worse than shown in the film.

Is it really ethical to portray these characters as those with luxury lifestyles when their actions affect real people? Do these portrayals only serve to make society forget about the actions of others who have committed these crimes?

Enron - the seventh largest company in the United States. The company hid hundreds of millions of dollars worth of debt and fooled investors and analysts into thinking it was a stable company. Their shell companies recorded fake revenues to create the illusion of incredible figures. After being found out, Enron's chief auditor ordered employees to shred documents. It is incredible that after being so deceitful, these individuals still feel no guilt and try to avoid taking responsibility for their actions.

WorldCom - they recorded operating expenses as investments. They thought it acceptable to "invest" in the cost of pencils, pens and paper. The $3.8 billion that should have been recorded as expenses was actually classed as investments. After discovering the company was actually unprofitable, investors had to watch the stock price drop to less than 20 cents. This brought to light the unforgivable impact on the other people inside the company. Not only were investors affected, but thousands of employees lost their jobs.

The selfish actions of a few high and mighty men can severely impact the lives of "the little people" in society. It is important to remember this whenever you're innocently admiring Jordan Belfort's multiple sport cars and helicopters.

The importance of clarity

This North Yorkshire plant was once the UK's biggest coal-fired power station, owned by Drax. Now moving to convert three of the six generating units to burn wood pellets instead of coal, you could be forgiven for thinking "what on earth has happened here?"

The company has explained that they are struggling with dramatic shifts in the UK electricity market, for example installations of wind and solar farms plus increased government rules on carbon emission to combat climate change. This has led to a drop in annual profits and when this was announced, shares fell more than 10% this month. Whilst the 17% fall in earnings was expected, analysts still predict a less generous dividend policy in the future.

As well as announcing financial results, Drax announced they would carry out a review of its dividend pay-out policy in line with reinventing the business. They did say that they would discuss this dividend policy with shareholders as they are moving from coal electricity generation to new businesses.

In a bold move, the chief financial officer has confirmed they will not be cutting the dividend and that the review was just a result of the way the company's earnings had changed as a result of dealing with government efforts to wean the UK off coal power.

In an attempt to diversify operations by launching a new strategy, Drax have invested £340 million in the acquisition of a business-to-business energy supplier as well as looking into building four gas power plants to fill gaps in the UK market. Interestingly, analysts have argued that with the business transformation being confirmed last year, expectations were raised regarding dividend information. It is surprising that Drax haven't communicated any more specific information, considering investors and shareholders have been waiting a long time for clarity.

An important question to consider when looking at a corporate dividend policy is: if Drax have made such great investments like the £340 million acquisition, should dividends be lowered? It is interesting that Drax have said that they won't cut the dividend pay-out and yet haven't provided shareholders or investors with any more clarity.

The bird-in-the-hand theory argued by Linter and Gordon states that dividends are preferable to capital gains because of uncertainty. Future gains are uncertain and investors would rather have the money now than leave it tied up in uncertain investments. Drax should consider this and aim to improve their communication with their investors and shareholders to avoid risking the relationship.

Developing on the theory, if a company pays low dividends, investors may sell those shares and buy shares in a company paying higher dividends which means the share price would decrease in the company paying lower dividends. Contrastingly, higher dividends could indicate a lack of attractive investments and lower future investment returns whilst low dividends could indicate many attractive investments and therefore, better future prospects.

Ending on an important point to think about...

If Drax and its management are planning to cut the dividend pay-out, they need to ensure they communicate to investors and shareholders the reason for doing this clearly as share price and shareholder wealth could suffer.



GlaxoSmithKline: performance vs capital

Founded in 2000 as the result of a merger, GlaxoSmithKline was the sixth largest pharmaceutical company in the world in 2015. It has suffered its scandals - pleading guilty to promoting unapproved use of drugs in 2012 and funnelling $3.8 billion to doctors in China for 6 years but the organisation as a whole has had great success including creating the world's first malaria vaccine.  


With the appointment of Emma Walmsley as the new chief in September 2016, it raised a lot of questions about the future success or failure of GlaxoSmithKline.


After spending the majority of her career working within L'Oréal and specifically consumer products, it was part of her role to convince the company's investors and colleagues of her ability to turnaround GSK. With a few turbulent years, profits were hit hard after the decline of the Advair severe asthma treatment which was GlaxoSmithKline's biggest product. In 2016, improvements started after the company developed new respiratory medicines and improved growth in HIV drugs. However, these new drugs were a joint venture with Pfizer, a more successful pharmaceutical company. It is still important that GSK develops links and products with competitors as it can improve bonds and relationships. A potential future impact that Emma Walmsley should consider is the drug price and healthcare issue in the US and the potential privatisation of the NHS - these could both impact her strategy.


With a dependence on the highly competitive respiratory medicine market and the past chief preferring to increase growth through sales volume rather than profit margins, it will be interesting to see in which direction Walmsley chooses to take the company.


Focusing on the capital structure of the company,  GlaxoSmithKline has one of the highest yielding dividends in the pharmaceutical industry at approximately 6%. The board has defended the pay-out throughout the company's turbulent years and has also promised to keep the pay-out at a steady rate, showing the company are actually invested in their shareholders. However, will this impact badly on the business in other aspects or areas? Let's have a look...

• Although the dividend pay-outs are high, Glaxo's investors are looking for an improvement in the share price performance, as the company have been lagging behind their peers and competitors for years.
• Committing to this level of dividend pay-out will limit the funds available for other parts of the business, for example acquisitions or future investment in Research and Development

If Walmsley decides that she wants to take radical action to improve GSK's long-term growth, the capital structure of the business will be questioned. Apparently, she aims to give GlaxoSmithKline a performance edge compared to competitors so it will be interesting if she chooses to change the company's capital structure. After already having to prove herself as a qualified chief, it could cause ripples throughout the company.


Whilst there are lots of theories about how capital structure should work - managers don't seem to fit any of the observations so it can be hard to predict how managers will react and potentially change structures within the business.


As we know, debt is cheaper than equity. With equity, there is a higher risk and high returns are demanded - like GSK's dividend pay-out. With debt, risk and cost is lower. A lender may require a lower rate of return compared to ordinary shareholders in exchange for security or collateral. Obviously, depending on debt could lead to the company becoming financially distressed. Management would have to focus on short-term liquidity rather than long-term growth which could be frustrating for Walmsley who seems to be particularly focused on GSK's future growth, strategy and objectives. It would also cause uncertainty in customers' and suppliers' minds - causing a direct impact on sales isn't helpful since GSK are trying to gain a performance edge.


The trade-off model indicates that up to a certain point, gearing and lending can actually increase shareholder wealth. Beyond this point, it becomes too risky, affecting share price and shareholder wealth. This would be detrimental to the success of GlaxoSmithKline as they currently have a good relationship with shareholders thanks to their consistent dividend pay-out, and the fact that investors want the share price to improve.

Masters of Money vs The Father of Communism

"Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win. WORKING MEN OF ALL COUNTRIES, UNITE!"

I understand that reading that quote, you might be thinking "what the..." or "are we back in the 1800's?" and I would have probably agreed with you before looking into his views. However, whilst Karl Marx's ideas could be considered radical, confusing and downright strange at times, I propose that he actually provides an insight into the global financial crisis.

Whilst other theorists like Keynes and Hayek argued that the government should take control of the power of money, Marx actually proposed that the unfair regime of capitalism should be abolished. His sense of urgency and proposal that things cannot go on forever as they are can be related to the 21st century and could be an insight into the 2008 financial crisis. Described as the worst financial crisis since the Great Depression in the 1930's, the global crisis was a disastrous event which affected economies worldwide. It was the collision of capitalism and globalisation which created this disaster.

With the collapse of the Lehman Brothers, a global bank, the biggest financial crisis in 80 years began. This all links to Marx's theories: the US economy has simply been spending too much but also borrowing too much whilst the rest of the world depended on the US consumer for global demand. This selfish and immoral behaviour proves exactly what Marx was trying to say. With not only the impact on Europe and the USA, growth was affected in Kenya and Cambodia, proving that the selfishness of one country can create a global ripple effect.

Marx suggested that economic relationships are at the heart of everything. With bosses squeezing the workers to make a profit, and the same workers not being able to afford what the bosses are trying to sell in society. With ordinary people not having enough money to spend thanks to the distribution of wealth to those in power, it is no wonder that people felt the pressure to borrow more.



Some disagree with Marx, a particular favourite of mine that made me laugh is "everything is bound to collapse if you wait long enough". But unfortunately, as an ordinary person and not a member of the upper class, I do not share that specific opinion. It seems that viewpoints like that seem to excuse what we have experienced in society. We cannot allow global financial crises to happen just because someone thinks "oh well, it was bound to happen at some point". Others suggest that if capitalism is so disastrous, how could it have created such amazing things? We have so many things available to us - fresh food flown in from other countries and the widest variety of products. BUT it is important to look at the dark side of this society. How are these products readily available to us? Shops. Businesses. Organisations. Companies. What is the main aim of these shops/businesses/organisations/companies? Profit. Some argue that profit is one of the things driving the world forward. Whilst Marx appreciated that profit brings amazing things to society, it is also the basis for global crises.

Marx's theory of bosses v workers proposes that the capitalist bosses can exploit their workers for a small wage, going on to then sell the products in society for more than they pay their workers. Sound familiar, Mike Ashley? This theory could easily be applied to companies worldwide today. Debenhams was recently named and shamed by the government for paying less than the minimum wage to its staff as well as Argos and of course, Sports Direct. Since the government started this practice in 2013, more than 1,000 employers have been named publicly.

I will admit, when I first looked into Karl Marx and his ideas, it was refreshing to see his point of view, especially since he was considered revolutionary at the time of his writings. However, after I considered he started writing 150 years ago, it was scary to realise that his points could easily be applied to the world today.

Ending on a lighter note... whilst watching the Masters of Money documentary, it did make me laugh to see that Karl Marx's first home had been turned into a museum full of products with his face on available to buy. I wonder whether he would appreciate this blatant show of capitalism.