Shell and BHP
Commodity firms are comparatively often involved in social and environmental scandals. They usually operate in politically unstable countries where corruption and poor working conditions are the order of the day. In addition, the extraction of raw materials is always associated with an intervention in nature and can very quickly have catastrophic effects on the flora and fauna of entire regions. Our two example companies Shell (oil and gas producer) and BHP (mine operator) failed exactly here and were blacklisted by MSCI and UN Global Compact (in the case of BHP also by the "Guiding Principles for Business and Human Rights"). While they have a good ESG rating (meaning that they are actually among the more sustainable players within their industry), they are nevertheless involved in serious scandals.
Shell has been blamed primarily for its oil production in Nigeria. In the process, large parts of the Niger Delta were polluted - with massive effects on nature, but also on the health and economic basis of the population. The story at BHP sounds similar: A dam burst at the Germano iron ore mine in Mariana, Brazil, killing 19 people and spilling over 30 million cubic meters of toxic sludge. Both events not only caused great suffering, but also continue to burden the two companies legally and financially to this day. A lack of sustainability is therefore often accompanied by an economic risk.
Boeing and Lockheed Martin
Even if the defense industry does not exactly attract attention with high sympathy ratings, it is not per se excluded from our investment universe. However, there are business areas that are particularly sensitive and therefore require special attention. On the one hand, these are nuclear weapons, and on the other, so-called "controversial" weapons (e.g., cluster bombs).
Both Boeing and Lockheed Martin are active in these business areas and are therefore excluded. Both produce or service U.S. intercontinental ballistic missiles (with or without nuclear warheads) and manufacture cluster munitions. Boeing also builds the U.S. Air Force's famous B-52 bomber. An aircraft, therefore, that was developed with the claim of being able to drop nuclear bombs.
RWE and Evergy
What do RWE and Evergy have in common? Both produce electricity - once in Germany and once in the USA - and they are both excluded from the OLZ universe. But why? The answer is thermal coal! The mining and burning of lignite not only leaves damage to the landscape, but is also extremely harmful to our climate. RWE generates about 18% of its revenue from coal-fired power plants, while Evergy's figure is almost 30%. This puts them both above our limit of 10%. By the way, this also applies to the producers of oil sands, which are mainly domiciled in Canada.
Nissan
Our last example is the Japanese carmaker Nissan, which attracts negative attention mainly because of its poor corporate governance and mismanagement compared with the rest of the sector. MSCI gives the company the lowest possible ESG rating of "CCC". Together with Renault, Nissan holds cross-shareholdings in the other company (Nissan 15% in Renault, Renault in turn 43% in Nissan). These cross-shareholdings carry the risk of double counting the actual value of the company and are not compatible with good corporate governance. In addition, Nissan is in constant conflict with the regulatory authorities - whether for violations of financial regulations, falsification of consumption data or manipulation of emissions tests.
Conclusion
The examples listed were just a small selection of companies that do not meet our sustainability criteria. From the MSCI World Index of over 1,500 stocks, we currently exclude a total of 65 stocks that frequently violate more than one of the listed criteria. However, the investment universe is large enough that this reduction in degrees of freedom is acceptable. In return, we can significantly improve the ESG profile of our fund and guarantee a minimum standard of sustainability.
