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Aug 04, 2023

The week in IR: US investors could face restrictions on Chinese stock ownership, firms with good ESG scores pollute as much as low-rated rivals and Robinhood shares fall on decline in users

Our pick of stories from around the web that you might have missed this week

- Reuters reported that a US congressional examination of Chinese stock holdings in BlackRock funds built on MSCI indexes could presage a broader clampdown on US institutional investment in such shares, analysts said, as Washington fears American capital could help Beijing gain military or technological advantages.

Relations between the two countries are at a low point amid friction on issues including Taiwan and the Ukraine war. The Biden administration is weighing new restrictions on outbound private investment in China on top of existing bans on certain technology sales and other trade measures.

A US congressional committee said earlier this week that BlackRock and index provider MSCI were facilitating investments in companies that Washington has tied to Chinese human rights abuses or its military.

BlackRock said on Tuesday it is one of 16 asset managers offering US index funds holding Chinese companies. It said it complies with all US laws and will engage with the select committee. MSCI said it is reviewing the committee's inquiry.

- The Financial Times reported that, according to research from Scientific Beta, companies rated highly on widely accepted ESG metrics pollute as much as companies with low ratings. This lack of correlation holds even if companies’ carbon intensity - their carbon emissions per unit of revenue or market capitalization – is compared purely to their environmental rating, Scientific Beta found.

‘ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings,’ Felix Goltz, research director at Scientific Beta, said. ‘It doesn’t seem that people have actually looked at [the correlations]. They are surprisingly low.’

The researchers found that 92 percent of the reduction in carbon intensity that investors gain by solely weighting stocks for their carbon intensity is lost when ESG scores are added as a partial weight determinant. Even just using environmental scores ‘leads to a substantial deterioration in green performance,’ they found.

Keeran Beeharee, vice president for ESG outreach and research at Moody’s, agreed that ESG investment does not necessarily help an investor create a low-carbon portfolio, or any other specific goal. ‘[There is a] perception that ESG assessments do something that they do not. ESG assessments are an aggregate product, their nature is that they are looking at a range of material factors, so drawing a correlation to one factor is always going to be difficult,’ Beeharee said.

- Robinhood Markets reported higher second-quarter revenue on Wednesday as interest rates continued to buoy the online brokerage’s interest income, achieving profitability for the first time as a public company even as it saw fewer users, according to Reuters.

Shares of the company, which was at the center of 2021’s retail trading frenzy, were last down 4 percent in extended trading as investors scrutinized the platform's decline in monthly active users.

Net interest revenue soared 243 percent to $442 mn in the second quarter compared to a year earlier, as the brokerage's margin investing business benefited from the US central bank's monetary policy tightening campaign to combat decades-high inflation.

Taking some of the shine off gains from higher rates, retail traders – who had used Robinhood's platform through most of 2021 to pump money into so-called meme stocks – pulled back amid volatile market conditions.

- Bloomberg opined that leading activist hedge funds, the dozen or so most-prolific firms, are all able to generate an impressive five-day stock pop when they show up to beat the S&P 500 by a median of 3.9 percent, according to a report by Lazard looking at 629 activist campaigns over the past 5.5 years involving companies with market values of at least $500 mn.

Longer term, though, their performance is more of a mixed bag, Lazard found. One year after a position is public, the median return relative to the S&P drops to 1.2 percent.

‘Leading activist hedge funds have distinguished performances because the market recognizes they probably have the greatest ability to affect change and the most outstanding performances in prior campaigns,’ said Mary Ann Deignan, head of capital markets advisory at Lazard. ‘Said differently—they are just better stock pickers.’

The median performance of four other groups – non-leading activist hedge funds, ESG-focused activists, long-only institutions and episodic activists – also beat the S&P over five days. Only the leading activists, though, were still ahead of the S&P after a year.

- ABA Journal reported that as stories of some CEOs' outrageous behaviors continue, the amount of activist shareholder activity keeps growing, say Kenneth Mantel and Megan Reda, partners at Olshan Frome Wolosky in New York. They represent investment funds, family offices and people trying to bring change at public companies – and maybe get a seat on the board.

According to them, the first quarter of 2023 had some of the highest activist shareholder activity on record. They say the increase started with the #MeToo movement in 2017, when The New York Times published an article about Miramax’s Harvey Weinstein, a former film producer, focusing on three decades of his alleged sexual harassment and unwanted physical contact.

Other CEO conduct, such as embellishing a resumé or making controversial comments, can invite activist shareholder activity too, they say. And as long as the media continues to cover the improprieties, public companies will continue to be targets.

- The board appointed by Florida Governor Ron DeSantis to oversee Disney World's operations in the state has abolished all diversity, equality and inclusion (DEI) programs in its district - but a source familiar with the situation told Newsweek it is separate to the company.

DeSantis, in February, created the Central Florida Tourism Oversight District (CFTOD) to remove Disney's self-governing status following a dispute with the company over LGBTQ+ rights. After the US Supreme Court in June struck down affirmative action, which had allowed for colleges and universities to use race as a factor in deciding admissions, the district administrator said on Tuesday he was scrapping all DEI programs in the area.

CFTOD said in a press release: ‘Today, District Administrator Glenton Gilzean announced the abolition of all DEI programs at the Central Florida Tourism Oversight District. The announcement comes after the Reedy Creek Improvement District implemented hiring and contracting programs that discriminated against Americans based on gender and race, costing taxpayers millions of dollars.

‘The announcement comes after an internal investigation into the district's policies. The district's DEI committee will be dissolved and any DEI job duties will be eliminated. CFTOD staff will also no longer be permitted to use any staff time to pursue DEI initiatives,’ the press release added. No action on DEI initiatives was taken by Disney World [on August 1].

Staff Writers

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