November, 2022

At ACS Group, we recognize that the application of a Socially Responsible Investing approach is not a one size fits all methodology. There is nuance in every investment and understanding this nuance and making a judgement call based on both Financial Investment and Socially Responsible Investing merits is at the heart of what we do. After careful consideration, we have determined that fertilizers producers are suitable investments for both the ACS Responsible Beta Funds and the ACS Sustainable Future Fund. We view their products as key inputs in feeding our global population. Below we briefly describe the sector, our financial outlook for it and the ESG analysis we conducted, balancing Environmental versus Social considerations.

What are fertilizers?

A fertilizer is a natural or synthetic substance containing the chemical elements that improve growth and productiveness of plants. The farming and subsequent removal/consumption of annual crops, such as corn, consumes the nutrients that are naturally in the soil. Instead of letting the fields sit empty, to help regenerate some of these chemicals, farmers instead put fertilizer on the soil. Much of fertilizers used are synthetic, as opposed to natural (e.g., manure, compost, or bone meal).

There are three primary nutrients provided by fertilizers:

What is our Financial Outlook for the Fertilizer Sector?

The Fertilizer sector has been a laggard over the past decade. The Solactive Global Fertilizer/Potash index, which tracks the top public fertilizer companies, has returned just over 2%/annum since 2011, compared to roughly 13%/annum for the S&P 500 over that period.  However, fertilizer stocks tend to be more cyclical and could perform better than the broader market during certain periods.

The period we are in currently has some significant tailwinds for the fertilizer sector. In the short-term, the Ukraine war is having a two-fold impact on fertilizer companies. Firstly, it has created a reduction in global supply of fertilizer from Belarus and Russia, which has increased the price of fertilizers. Secondly, there is increasing pressure on global food supply and crop production levels, due to reduced grain exports from Ukraine. This creates an environment for higher crop prices, which leads to higher fertilizer demand, which, in turn, should create more profitability among fertilizer producers in stable regions.

In the longer term, the fertilizer sector has a lower correlation with other cyclical sectors, such as energy, and may improve overall portfolio risk. In addition, changing weather patterns because of climate change has put pressure on yields for existing farming and farmland operations. Fertilizers will be an increasingly important input to enable high production levels.

Socially Responsible Investment: Pros

The primary reason to invest in fertilizers is that they are a crucial input to perhaps the most critical human function on this planet, the production of food. It is unlikely current levels of global calorie consumption could be achieved without the use of synthetic fertilizers, and even more so if we consider the growing middle class and its demand for higher protein diets. For example, the use of chemical fertilizers is estimated to increase crop yields in Western Canada by over 50% annually.[1]

Chemical fertilizers are also consistent and straightforward to use. This enables farmers to grow food supply and prevent shortages more predictably. The usage levels of chemical fertilizers and the growth of human population follows a near identical growth chart.

Socially Responsible Investment: Cons

The primary concern is the amount of energy used in production of chemical fertilizers. Carbon Brief estimates that approximately 1.4% of annual CO2 emissions are due to fertilizer production.[2] Ammonia is created by combusting greenhouse gases, and phosphorus and potassium is produced with mining operations which emits CO2.

Secondly, there is a concern that excess fertilizers use may cause contamination of ground water and other surrounding ecosystems. Related to this, monoculture, the common practice of growing a single crop year-after-year on a field, is an intensive farming technique which depletes soil nutrients. As such, it has high fertilizer demand, further perpetuating the amount of synthetic fertilizer introduced into ecosystems.

Conclusion

Feeding our human population is the foremost need on our planet. Chemical fertilizers enable us to do this efficiently and more effectively. As such, the social considerations outweigh the environmental concerns in this case and contribute to us viewing fertilizers as a net positive. That said, as owners of these companies, we need to be good stewards, and thus commit to the following principles:

ACS as Environmental Stewards


  1. McKenzie, Ross, “Pros and cons of using chem fertilizers”, Top Crop Manager, November 2, 2015 (accessed November 11, 2022): https://www.topcropmanager.com/pros-and-cons-of-using-chem-fertilizers-18067/
  2. Viglione, Giuliana, “What does the worlds reliance on fertilisers mean for climate change”, Carbon Brief, July 11, 2022 (accessed November 12, 2022): https://www.carbonbrief.org/qa-what-does-the-worlds-reliance-on-fertilisers-mean-for-climate-change/

Carbon Capture Utilization and Storage (CCUS) has been proposed and endorsed by numerous scientific, academic, and corporate actors as an essential component in the transition into clean energy. It has been backed by climate experts such as the Intercontinental Panel on Climate Change as a key component of achieving net zero emissions in CO2 by 2050. It has been identified as a potentially strong mitigator of CO2 emissions in hard-to-abate sectors such as fertilizers, aluminum, steel, and cement, a bridge to emerging net zero technologies, and a bridge for renewable energy sources.

CCUS technology currently exists in various types and can be divided into two sub-groups of point-source capture and direct air capture. Point-source capture aims to capture carbon directly from industrial processes that would emit CO2 into the atmosphere. Point-source capture technologies can be observed alongside power generation facilities or industrial sectors that heavily emit CO2. The process occurs through the chemical separation of CO2 from streams of gas or synthetic gas, upon which the separated CO2 is stored or used as fuel for the production of industrial or consumer goods. Point-source capture can be further divided into three separate technologies: pre-combustion, post-combustion, and oxy-fuel. Pre-combustion technology entails the removal of carbon at the synthetic gas stage, in which the feedstock (carbon or natural gas) is transformed by oxidation processes into synthetic gas. Under this process, the synthetic gas - consisting of hydrogen, carbon monoxide, and CO2 - is broken down, in which the CO2 is separated, captured, transported, and stored. By contrast, post-combustion technology separates CO2 from flue gases following the combustion stage using a chemical solvent. The flue gas is released through equipment that separates and captures the CO2 within it. Post-combustion capture is the most commonly employed method for industrial emitters of fossil fuels such as cement and steel producers or power generation sites, which can retrofit their facilities to include post-combustion equipment. The final method of point-source capture, oxy-fuel combustion, is the least developed of the three methods. It entails the combustion of fossil-fuel in nearly pure oxygen rather than air, which produces flue gas which is primarily composed of CO2 and water. Capturing the CO2 through oxy-fuel can be easier than standard combustion processes, as the gas holds lower nitrogen content than pre- or post-combustion methods. However, separating oxygen from air demands higher levels of energy than other combustion methods, an obstacle which developers of oxy-fuel technology are attempting to mitigate through technological advancements. Point-source capture plays a central role in reducing the carbon footprints of industries and individual corporations which emit high levels of COin their operations. However, despite its efficacy in preventing the emission of additional carbon into the atmosphere, point-source technology offers little in reducing the amount of CO2 already present in the atmosphere.

Direct air capture (DAC) technology, also known as carbon dioxide removal (CDR) technology, offers the capacity to directly remove existing CO2 from the atmosphere, presenting a more proactive mechanism in the net zero project. Although companies are developing multiple different technological methods, DAC technologies mainly employ solid sorbent filters which chemically link with CO2 and subsequently release captured CO2 into storage or containers to be transported for further use.

Once captured, CO2 can be stored or employed for various purposes. Captured CO2 is stored primarily underground. It is often stored in deep saline formations, which consist of rock formations that are layered with brine. Other common storage areas are coal beds, basalt formations, and shale basins. Captured CO2 can also be stored in oil and gas reservoirs, in which CO2 infusions can be employed to extract more oil and gas from the sites. This process is known as Enhanced Oil Recovery (EOR). Beyond the extraction of additional oil, captured CO2 can be used as fuel for manufacturing goods. Examples of uses for captured CO2 involve outcomes such as jet fuel, automobile seats, biofuel, and building materials.

CCUS is touted by numerous experts as an essential piece in the transition to clean energy. It is especially deemed important in commercial sectors where de-carbonization will require more time to develop, such as aviation, aluminum, or steel. It is also identified as a potential bridge for renewable energy sources such as blue hydrogen, which can be produced from technologies that can separate natural gas into hydrogen and CO2. Moreover, some net zero technologies such as clean fuels and bioenergy are related to CCUS technology, in which strengthening CCUS infrastructure could simultaneously strengthen the scalability of net zero technologies.

However, there also exist several barriers for CCUS technology which impede it from occupying a larger role in achieving net zero emissions. The technology remains in early stages of development, with high figures for both fixed costs for installation and variable costs for operations. For instance, fixed cost estimates for very concentrated CO2 streams such as ethanol and natural gas are approximately USD $15-25/t CO2, and between $40-120/t CO2 for dilute gas streams such as cement and power. Although point-source technologies such as post-combustion offer lower fixed costs as many fossil fuel facilities can be retrofitted into carbon capture sites, it simultaneously demands higher variable costs to operate the technology and extract the CO2. DAC technology, meanwhile, is currently the most expensive of all existing CCUS technologies, priced at between $250-600/t CO2. In comparison, reforestation efforts would cost on average below thresholds of $50/t CO2. Although CCUS technologies continue to become more efficient and cost-efficient with simultaneous public and private sector support, the technology has not yet reached a point in which it is widely affordable for widespread use and implementation. Another point of concern is that point-source carbon capture technology - currently the most scalable version of CCUS - only addresses scopes 1 and 2 of CO2 emissions. Scopes 1 and 2 of emissions are limited to emissions produced at the industrial production and power generation. Limited to the first two scopes of emission, point-source capture does not work to reduce a company’s scope 3 emissions, which accounts for the indirect emissions resulting from the activities of a company’s capital goods, purchased goods and services, or owned assets. Given that scope 3 emissions account for more than 90% of total CO2 emissions for numerous companies, currently prominent CCUS methods may not have as broad of an impact in emissions reductions as argued by proponents of CCUS.  

For a more in-depth look at how CCUS technology operates, visit the following resources:

Financial Times | Carbon capture: the hopes, challenges and controversies

New York Times | Carbon Capture Explained | How It Happens

FreeThink | Carbon Capture Technology Explained

Real Engineering | Carbon Capture - Humanity's Last Hope?

Sources:

Carbon Capture From Flue Gas and the Atmosphere: A Perspective

CCS explained - Carbon Capture

Pre-Combustion Capture

Direct Air Capture

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change.

The Weapons Industry Explained

We define the weapons industry as including companies involved in the manufacture and sale of guns, missiles, other arms, warplanes, warships, tanks, and other related military technologies.  We do not invest in companies that derive any revenue from the sale of controversial weapons (e.g. cluster munitions, landmines, incendiary weapons), or derive any revenue from directly producing other weapons that threaten human life (e.g. handguns). We do not invest in companies that derive greater than 5% of their revenue from the supply of components that contribute to the lethal use of a weapon and in many instances, we use a lower threshold than 5%. Lastly, we do not invest in companies that derive greater than 10% of their revenue from non weapon, military goods and services (e.g. maintenance of attack vehicles, training on weapons systems).

Advantage Capital Strategies Group does not include all military-related purchases in the weapons industry, as some are related to search and rescue, peacekeeping, and other activities that do not pose a risk to human life.  For example, many satellite manufacturers have small military contracts.  In these cases, the company’s products continue to be used for communications purposes in a military setting, and these contracts represent a small portion of the company’s total revenues.  Following the approach used by the Stockholm International Peace Research Institute (SIPRI), we do not include peacetime provision of purely civilian services in our calculation, such as janitorial and catering services.

The Economic Rationale for Divestment

There is not as clear of a ‘stranded asset’ case to be made in divesting from the weapons industry compared to the coal industry, for example.  Stranded assets are assets that “have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities.” These assets may be affected by environmental factors such as climate change and the social response to such factors, including the implementation of new legislation.

However, the manufacture and sale of weapons is an industry dependent on many external factors, including government regulation.  It can also be affected by public pressure and international governing bodies such as the United Nations.  For example, the debate surrounding gun control legislation in the United States poses an economic risk for gun and ammunition manufacturers and retailers.  The industry can therefore be greatly impacted by changes in government policy, which introduces a risk factor in investment.

The Social Rationale for Divestment

At Advantage Capital Strategies Group, we believe that the manufacture and sale of weapons inherently threatens the safety and wellbeing of our communities both locally and globally.  To produce a weapon is to imply its future use and the risk of loss of human life. 

Gun violence has reached epidemic proportions in the United States. It is estimated that 100 Americans are killed by guns every day, and many more are injured. Furthermore, gun violence disproportionately affects children: firearms are the second leading cause of death for American children and teens. This loss of life is completely preventable. 

Gun violence has become so prevalent that the majority of American adults have been affected either directly or know someone who has experienced gun violence. According to evidence compiled by Politico, it is a myth that guns sold for consumer use do more harm than good; guns are rarely used successfully in instances of actual self-defense.

Advantage Capital Strategies Group is divesting from other weaponry such as missiles and tanks for much the same reason as explained above for guns.  While missiles and tanks may not directly affect our local communities, they are created with the intent to cause destruction and harm to human life in warzones and global communities.   

The Environmental Rationale for Divestment

The use of weapons can also prove destructive for our environment.  The 1992 United Nations Rio Declaration on Environment and Development states that “warfare is inherently destructive of sustainable development.”  Furthermore, it acknowledges the fact that “peace, development and environmental protection are interdependent and indivisible.” This statement indicates that warfare inherently distracts from environmental progress.

In addition, evidence published in the journal Environmental Reviews indicates that military activity including the use of weapons negatively impacts the environment through “dramatic habitat alteration, environmental pollution, and disturbance [contributing to] population declines and biodiversity losses.”

Further Reading:

www.gunviolencearchive.org/

www.msci.com/documents/10199/273691/MSCI_ESG_Research_Firearms_Divestment_in_the_US_Issue_Brief_February_2013.pdf/a6efa52d-bc66-42a8-a719-d6bd48f1c1b5

Works Cited

Oxford University: www.smithschool.ox.ac.uk/research/sustainable-finance/publications/Stranded-Assets-and-Scenarios-Discussion-Paper.pdf

Everytown for Gun Safety: everytownresearch.org/gun-violence-america/

Politico: www.politico.com/magazine/story/2015/01/defensive-gun-ownership-myth-114262#.VLhsjS42d6I

UNESCO: www.unesco.org/education/pdf/RIO_E.PDF

NRC Research Press: www.nrcresearchpress.com/doi/10.1139/er-2015-0039#.XNWRYzBKhQI

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social and economic effects and takes action to mitigate risk both through screening and advocating for change. 

The Tobacco Industry Explained

The tobacco sector includes companies that produce and market cigarettes and other nicotine-containing products such as cigars, pipe tobacco, and smokeless tobacco.  Many of these companies also produce electronic smoking products that use heated tobacco units, also known as “e-cigarettes.”  Large tobacco companies often produce multiple brands of tobacco products; for example, the publicly-listed Philip Morris International owns brands such as Marlboro and Parliament.  As of 2016, the global value of the tobacco industry was US $816 billion

According to the World Health Organization (WHO), tobacco use is an epidemic, one of the biggest public health threats the world has ever faced. Tobacco products are harmful to the health of those who use them and even those who do not, and they are also harmful economically and environmentally.

The Economic Rationale for Divestment

Smoking trends vary worldwide for many reasons, including what regulations governments impose on tobacco products and when these regulations were first introduced.  Northern Europe and North America are in what the WHO terms the fourth and final stage of smoking trends, meaning smoking prevalence is on the decline. In 1964, the United States Surgeon General declared that there was a direct correlation between smoking and cancer; since then, smoking rates have steadily decreased.  However, smoking is still a major health concern, and exposure to tobacco continues to be the leading risk factor for all-cause disability-adjusted life-years (DALYs) in Canada. Disability-adjusted life years refer to years of healthy life lost due to disease or disability.

It is estimated that the total economic cost of smoking, accounting for both health expenditures and productivity losses together, is equivalent to 1.8% of the world’s annual gross domestic product. Developing countries are impacted to a greater extent, bearing about 40% of this cost. In Canada, cigarette sales have declined steadily on a per capita basis since 2001, with 2016 sales totaling about 28.6 billion units of cigarettes. In the US, about 249 billion cigarettes were sold in 2017 as compared to 258 billion sold in 2016, which represents a 3.5% decrease in sales. However, in countries such as China that are at earlier stages of smoking trends, the rate of tobacco use among adult men remains extremely high.  This is also because there are fewer regulations imposed on tobacco products, and cigarettes remain very affordable. It will inevitably take time and effort for many countries to reduce smoking prevalence.

The Social Rationale for Divestment

Tobacco use affects the health of direct users as well as those who are exposed to second-hand smoke.  The WHO estimates that tobacco is responsible for the deaths of more than 7 million people each year, and up to half of all people who use tobacco will be killed by it. Those who smoke are at increased risk of developing heart disease, stroke, and lung cancer, among other debilitating and life-threatening health conditions. It is estimated that smoking one cigarette reduces your life span by 11 minutes, and smokers have a life expectancy of at least 10 years less than non-smokers.

However, the impacts of smoking extend beyond loss of life.  Tobacco use leads to disability and long-term health problems, which in turn accounts for billions of dollars in lost productivity and health-care expenditure. The direct costs of smoking-related illness include hospital stays and medications; the indirect costs refer to the value of lost productivity in current and future years due to disability and mortality. Both of these costs contribute to the economic burden of smoking-related illnesses. 

The most recent Canadian findings indicate that 3.7% of all healthcare expenditure is due to smoking-related illness, and globally that number is even higher, with smoking-related illness accounting for 5.7% of global health expenditure.

There are also health impacts associated with the harvesting of tobacco.  Green tobacco sickness (GTS) affects tobacco harvesters and is caused when workers handle raw tobacco, which is toxic when it comes in contact with unprotected skin.  It is estimated that anywhere from 8% to 47% of tobacco harvesters suffer from GTS. According to the WHO, children are particularly vulnerable to GTS, which is of concern as oftentimes children from poor families are employed in the tobacco fields as an extra source of family revenue.

The Environmental Rationale for Divestment

According to the WHO, tobacco cultivation and curing are some of the most environmentally destructive agricultural practices in low- and middle-income countries. Although there are economic benefits provided to the farmers who grow and harvest tobacco, the WHO states that these benefits are offset by the long-term environmental impacts of tobacco farming, which damages the agricultural and environmental integrity of the surrounding area, often irreversibly.

Furthermore, tobacco plantations are directly associated with deforestation.  Forest clearing often occurs to make space for tobacco plants, and wood is also needed to cure tobacco leaves.  The WHO estimates that in China, tobacco farming alone is responsible for 18% of national deforestation.

The manufacture of tobacco products such as cigarettes is a resource intensive process, using large amounts of energy and water.  It is estimated that tobacco companies use as much energy to produce their products as would be required to assemble approximately 2 million vehicles. The manufacture of tobacco products also generates a large amount of waste, some of which is evident in our communities: about 30-40% of all litter picked up during annual international coastal and urban clean-ups are cigarette butts. Importantly, the costs of cleaning up end-product waste are not borne by the tobacco product manufacturers or distributors but rather by local communities and governments.

According to the United Nations Environmental Program, the tobacco industry would not be profitable if they had to pay for the environmental impacts of their manufacturing. The chemicals that leach out of discarded cigarette butts, including nicotine, arsenic, and known human carcinogens, enter into our shared waterways, affecting aquatic life and indirectly affecting tobacco users and non-users alike.

Works Cited

PR Newswire: www.prnewswire.com/news-releases/cigarette-market-global-industry-trends-share-size-growth-opportunity-and-forecast-2017-2022-300411299.html

World Health Organization: www.who.int/news-room/fact-sheets/detail/tobacco

Canadian Medical Association Journal: cmajopen.ca/content/7/1/E140.full

University of Waterloo: uwaterloo.ca/tobacco-use-canada/adult-tobacco-use/cigarette-sales-and-sources

Centers for Disease Control: www.cdc.gov/tobacco/data_statistics/fact_sheets/economics/econ_facts/index.htm

World Health Organization: www.who.int/tobacco/surveillance/policy/country_profile/chn.pdf?ua=1

NCBI: www.ncbi.nlm.nih.gov/pmc/articles/PMC1117323/

The Lancet: www.thelancet.com/journals/lancet/article/PIIS0140-6736(17)30819-X/fulltext

British Medical Journal: tobaccocontrol.bmj.com/content/27/1/58

NCBI: www.ncbi.nlm.nih.gov/pmc/articles/PMC5868082/

World Health Organization Report: apps.who.int/iris/bitstream/handle/10665/255574/9789241512497-eng.pdf?sequence=1

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk through screening and advocating for change.

We are not currently divested from single-use plastics but are monitoring the industry as a possible screen in the future.

What are single-use plastics and how are they made?

Single-use plastics are plastic products designed to be used only once, and they include items like plastic shopping bags, straws, plastic plates and cutlery, and cotton swabs, among other items.  While some plastics are produced for multiple uses and are found in electronics and even aircraft frames, single-use plastics make up 40% of all plastics produced and are designed to be thrown away after one use. Problematically, these plastics often end up in landfills or our oceans.

Plastics can be made using a variety of primary chemicals including cellulose, coal, natural gas, salt, and crude oil. However, of these primary chemicals crude oil is the foundational component, and crude oil is used to make petrochemicals for plastic production.  Further stages of processing are required to make plastics of various types, but ultimately conventional plastics and crude oil are inseparably intertwined.

The Economic Rationale for Divestment

Plastic production companies are at risk of becoming stranded assets.  According to the Financial Times, the petrochemical industry “is the only major source of oil demand where growth is expected to accelerate.  These forecasts assume a steady, strong demand for plastic will translate into increasing consumption of feedstock.”

However, there are many factors that may prohibit this anticipated growth, including decreased demand for single-use products as well as government intervention.  For example, Canada has announced its plan to ban single-use plastic products by 2021. Kenya has already banned plastic bags, and the European Union recently announced a sweeping ban on single-use plastics that will come into place in 2021.

The Financial Times acknowledges that these factors – decreased demand and government intervention – have the “potential to halve the standard assumed growth in plastic demand of 3 per cent annually for 2017-40.” If plastic companies continue to assume increased demand, “stranded assets may lie ahead.”

The Social Rationale for Divestment

As mentioned above, the single-use plastics industry is at risk of being negatively affected by consumer habits and government regulation.  As the discussion surrounding single-use products grows, consumers adjust their shopping habits in small ways, such as by swapping plastic bags at the grocery store for reusable cloth bags.  Public pressure also influences government to enforce new regulations, as seen in Kenya, Canada, and France.

Consumer pressure can also influence large corporations: Coca-Cola, PepsiCo, Amcor, and Unilever are just a few of the companies who have “pledged to convert to 100 percent reusable, recyclable, or compostable packaging by 2025.”

Many environmental activists are advocating for single-use plastics producers to pay for the environmental costs of their waste, a discussion that is similar to the one demanding cigarette manufacturers bear responsibility for the cost of cleaning up cigarette butts.  As part of the Canadian ban on single-use plastics, the Trudeau government has also floated the idea of requiring plastic packaging companies to pay for the collection and recycling of the plastic products they produce. If imposed, this “polluter pays” principle brings with it inevitable economic consequences for plastic producers.

The Environmental Rationale for Divestment

While single-use plastics may be convenient for consumers, their environmental impact is undeniable: there are 9.2 billion tons of plastic in the world, 6.9 billion tons of which have become waste. It is estimated that at least 8.8 million tons of plastic ends up in the ocean each year, and this plastic goes on to kill millions of marine mammals, including turtles and whales. According to National Geographic, “on some beaches on the Big Island of Hawaii, as much as 15 percent of the sand is actually grains of microplastics,” which are miniscule pieces of broken up plastic that can be almost invisible to the naked eye. The profound amount of plastic waste in our oceans and in our communities is a serious problem that affects us all, and it can only be addressed by reducing plastic consumption and improving recycling programs.

Works Cited

National Geographic: news.nationalgeographic.com/2018/05/plastics-facts-infographics-ocean-pollution/

Plastics Europe: www.plasticseurope.org/en/about-plastics/what-are-plastics/how-plastics-are-made

Financial Times: www.ft.com/content/281addec-2ed9-11e9-80d2-7b637a9e1ba1

CBC: www.cbc.ca/news/politics/plastics-ban-trudeau-mckenna-1.5168828

National Geographic: www.nationalgeographic.com/magazine/2018/06/plastic-planet-waste-pollution-trash-crisis/#close

Time Magazine: time.com/5560105/european-union-plastic-ban/

The Globe and Mail: www.theglobeandmail.com/canada/article-single-use-plastics-ban-poses-challenge-for-canadas-fossil-fuel/

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change.

The Predatory Lending Industry Explained

Predatory lending refers to payday lenders, pawnbrokers, rent-to-own stores, subprime mortgage and auto loan providers, and cheque cashers. These types of loans can be acquired by almost anyone regardless of financial background, but they come with exorbitantly high interest rates and other fees.  Payday loans are not provided by financial institutions such as banks, which are regulated by the federal government, but rather by providers who are regulated provincially.  Many provinces do not have restrictions on payday loans, although recently there have been some provincial efforts to better control the industry. 

Advantage Capital Strategies Group does not invest in companies engaged in predatory lending because of the negative social effects of this industry.  There are currently no predatory lending companies on the S&P 500.

The Economic Rationale for Divestment

Predatory lenders are subject to provincial regulation, but they are not currently subject to the same federal regulations as financial institutions such as banks.  The operation of predatory lenders is a contentious issue, as they often provide necessary financial services to those who could otherwise not access them, but charge extremely high interest rates while doing so. 

Recently there has been a push from certain organizations for provinces to impose stricter regulations on payday loan providers.  For example, Alberta recently implemented strict regulations on the interest rates predatory lenders can charge, a change that has severely crippled the industry in that province. The possibility of further provincial or federal regulation on predatory lenders represents an economic risk for these companies and therefore for investors.

The Social Rationale for Divestment 

Payday loans and other types of predatory lending are problematic because they ultimately prove unaffordable and they disproportionately affect vulnerable people who cannot afford to pay for them. 

Payday loans often have annual interest rates of close to 400%, as compared to loans provided by banks where interest rates traditionally range from 3-8%. Almost any individual would struggle to pay off a loan with 400% interest, but low-income individuals are at a particularly severe disadvantage.  In fact, annual interest rates over 60% are not only almost impossible to pay off, they are also criminal according to section 347 of the Canadian Criminal Code. However, payday loans are uniquely exempt from the Criminal Code and are regulated by the provinces.

Low-income individuals, particularly the working poor, are disproportionately affected by predatory loans because they often do not qualify for bank loans due to low finances.  Contrastingly, predatory lending firms will lend to anyone, regardless of income and financial health.  The working poor may even be unable to open up a bank account because of their financial situation, meaning they must visit a payday loan provider just to cash their paycheck.  Individuals may take out payday loans to pay for necessities such as rent, utility bills, food, or unexpected expenses such as funerals. Not only do these loans come with exorbitant interest rates, they are also accompanied by high service fees.

Companies that provide predatory loans are no doubt aware of their active role in perpetuating the cycle of poverty: storefront locations are predominantly concentrated in low-income areas. These loans play a role in perpetuating the cycle of poverty and debilitating debt faced by many Canadians.

The Environmental Rationale for Divestment

There are no significant negative environmental impacts associated with the predatory lending industry.  Our primary driver for divestment is social.

Further Reading

Poverty: Predatory Lending: spcoxford.ca/wp-content/uploads/2017/12/FactSheetonPredatoryLending.pdf

Works Cited

Canada Without Poverty: www.cwp-csp.ca/2015/03/cashing-in-on-poverty-predatory-lending-explained/

McMillan: mcmillan.ca/Canadian-interest-rate-rules

Canadian Centre for Policy Alternatives: www.policyalternatives.ca/newsroom/news-releases/payday-loans-and-predatory-lending-services-last-resort-survey

Canada Without Poverty: www.cwp-csp.ca/2018/01/slowing-down-the-predatory-lending-cycle/

Huffington Post: www.huffingtonpost.ca/2015/07/31/predatory-lending-canada_n_7898598.html

CBC: www.cbc.ca/news/canada/calgary/alberta-payday-lenders-suffering-bill-15-1.4114628

ACORN Canada: www.scribd.com/document/35804053/Conflict-of-Interest-How-Canada-s-biggest-bank-support-predatory-lending

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change.

The Nuclear Power Industry Explained

Nuclear energy is created when nuclear reactions occur and release heat, which is used to produce steam that powers turbines and creates electricity. This electricity can then be used to power electric cars, heat and light our homes and businesses, and more.

Advantage Capital Strategies Group is not screening for companies who derive their primary source of revenue from the production, use, or supply of nuclear power.  While we acknowledge that nuclear power is a complex industry, we have chosen not to divest primarily because nuclear power is a renewable energy source that produces fewer greenhouse gases than coal, oil, or gas.

We have not divested from companies that use nuclear power as part or all of their electricity supply, produce nuclear power, or mine uranium. 

The Economic Rationale for Investment

In terms of cost, nuclear energy reactors are considered to be one of the most efficient methods available for producing power. Energy generated by nuclear power is very efficient because of the power of uranium: one kilogram of uranium contains the same amount of energy as two or three million kilograms of oil or coal.

Public sentiment towards the use of nuclear power for energy represents a risk to investment that must be monitored.  Changes in public sentiment could pressure governments to impose stricter regulations or prohibitions on nuclear power.  Although extremely rare, nuclear disasters that may occur due to natural disasters or human error also represent a risk, albeit one that is low likelihood.

The Social Rationale for Investment

One concern often voiced about nuclear power is the fear that it could lead to the production of nuclear weapons.  Advantage Capital Strategies Group does not invest in any form of weapons production.  Historically, nuclear weapons and nuclear power have existed independently of one another.

There are more than 20 countries who have invested in the production of nuclear power exclusive of nuclear weapons.

The Environmental Rationale for Investment

Unlike coal, oil, and gas, nuclear energy is almost entirely free of greenhouse gases such as carbon dioxide, and it is entirely free of sulfur dioxide and nitrogen oxides. This makes nuclear energy a ‘cleaner’ energy source than coal, oil, or gas.  Nuclear power could help ease global dependency on fossil fuels and therefore aid in the fight against climate change.  Currently, nuclear power is responsible for generating about 15% of the global electricity supply.

One of the main concerns with nuclear power is the safe disposal of nuclear waste generated by the power plant.  Nuclear waste is safe if disposed of properly, often buried deep underground where it decays over time.  According to the Government of Canada, “all the radioactive waste in Canada, including used nuclear fuel, is currently held in safe, secure and environmentally sound interim storage facilities.” Overall, the production of nuclear power produces far less waste than the production of fossil fuel power.

Works Cited

Conservation Institute: www.conservationinstitute.org/pros-and-cons-of-nuclear-energy/

Euro Nuclear: www.euronuclear.org/info/encyclopedia/f/fuelcomparison.htm

Encyclopedia Britannica: www.britannica.com/technology/nuclear-power

Environmentalists for Nuclear Energy: ecolo.org/base/baseen.htm

Government of Canada: nuclearsafety.gc.ca/eng/waste/index.cfm

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change. 

The Industrial Prison Industry Explained

The industrial prison sector refers to companies who profit off the operation of incarceration facilities and/or profit off the provision of services to privately owned incarceration facilities.  Companies involved in this industry are largely concentrated in the United States, which contracts private companies to incarcerate and provide services such as healthcare and food to a portion of the country’s criminally-convicted individuals. 

Advantage Capital Strategies Group is screening for companies involved in the prison industry primarily because of the detrimental social effects of this industry and because the industrial prison system is inherently at odds with the purposes of a prison.  From an economic perspective, companies who depend on prisons for maintaining or growing their profits are also dependent on maintaining or growing the current rate of incarceration.

However, if the aim of a prison is at least in part to rehabilitate its occupants back into society with the ultimate goal being to reduce or eliminate recidivism, then it is clear that private prison companies are inherently incompatible with the intended goals of a prison. 

There are currently no private prison stocks on the S&P 500.

The Economic Rationale for Divestment

Companies who provide services to prisons or operate private prisons rely on stable or increasing rates of incarceration, which means that private-prison corporations such as CoreCivic Inc (CXW) and Geo Group Inc (GEO) spend millions to support the prison-industrial lobby, which encourages the government to create stricter laws so that more people are incarcerated, often for ‘lesser’ crimes that in other jurisdictions might instead be punished through non-prison related sentences, such as fines or community service.  These companies are solely dependent on a single customer, the government, for their revenues.  While there is stability in this dependence, growth is limited, thereby minimizing the benefit.

The Social Rationale for Divestment

Recent estimates place the annual revenues of the private-prison industry at around US $4 billion, but that figure does not include the privatized services such as food service and telecommunication provided to prisons, some of which are state-owned. The business of

prisons – often referred to as the prison-industrial complex because of its size – is primarily concerned with the design, building, and maintenance of prisons as institutions, but it also extends beyond this to include companies that provide privatized services to prisons.  Companies that profit off prisons range from food services suppliers to transportation companies to telecommunications businesses.

For example, it is estimated that telecommunications companies make over $1 billion per year off calls prisoners place at in-prison pay phones, a number that is unusually high because of the inflated rates charged to prisoners who have no other option but to pay or not use the telephone at all. These charges, which can go as high as $25 for a 15-minute call, affect not only the prisoner who needs to call their lawyer, but also his or her family. 

Indeed, the prices of telecommunication from prison inevitably increases the emotional and economic impact of incarceration on families who are already deprived of the income of their incarcerated family member and who often also have to supply the incarcerated family member with funds to purchase toiletries such as toothpaste and other basic necessity products that many prisons do not provide in adequate quantities. It is estimated that 82% of families are responsible for financially supporting their incarcerated family member, and of these families, one in three go into debt because of this. Furthermore, this financial burden falls disproportionately on women and minorities. 

Notably, private companies contracted to provide services for prisons often cut corners to increase profits, meaning they understaff the facilities they operate or purchase discounted rotting fruits and vegetables, for example.  This is of concern for the basic human rights of incarcerated individuals, and it is also of concern for the greater public.  Understaffed operations led by private companies have a documented higher rate of prisoner escapees during transportation compared to state-run operations.

According to the World Prison Brief, the United States has the highest incarceration rate in the world, with 655 prison or jail inmates for every 100,000 adults age 18 and older. The US also has the largest overall number of people behind bars. Proponents of prison reform argue that private prisons do not ultimately have reducing recidivism as their primary goal, because to do so would be to act against the interests of their business.   

Prison Labour

The prison-industrial complex also uses its inmates as labourers to increase profits.  Prison labour has been flagged as problematic because it pays extremely low wages – usually less than $1 per hour, and even as low as 4 cents per hour – and does not provide any labour rights for workers or the ability to unionize, meaning the potential for labour abuse is high. 

Critics also question how directly transferable the skills learned by prisoners in any labour position offered by the prison will ultimately serve.  For example, some large retail corporations profit off the prison-industrial complex indirectly, by selling un-sellable product (such as returns, slightly damaged goods, or overstock) to a liquidator, which then has the products “demanufactured” by prison labourers, meaning the product is scrubbed of any identifying marks such as branding or UPC codes so that it can be re-sold at another retail outlet. While most companies have issued statements firmly condemning the use of involuntary prison labour, prison labour is technically voluntary because prisoners are paid – albeit minimally - and made to sign a form stating that their labour is indeed voluntary. However, critics of prison labour often refer to it as a form of “modern slavery” due to the extremely low pay and lack of labour rights.

The Environmental Rationale for Divestment

There are no significant negative environmental impacts associated with the industrial prison industry.  Our primary driver for divestment is social.

Works Cited

The Nation: www.thenation.com/article/prison-privatization-private-equity-hig/

The Atlantic: www.theatlantic.com/magazine/archive/1998/12/the-prison-industrial-complex/304669/

National Criminal Justice Reference Service: www.ncjrs.gov/html/bja/piecp/bja-prison-industr.html#background

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change.

The Gambling Industry Explained

According to the Government of Canada, the gambling industry “comprises establishments primarily engaged in: operating gambling facilities, such as casinos, bingo halls and video gaming terminals; or providing gambling services, such as lotteries and off-track betting.” Gambling profits sometimes comprise a significant portion of the revenues of cruise lines, hotels, and resort companies.

Advantage Capital Strategies Group has chosen to divest from companies who derive at least 10-30% or more of their total revenues from the gambling industry.

The Economic Rationale for Divestment

The gambling industry is highly dependent on government regulation in North America and Europe.  In Canada, gambling is only legal when it is conducted through the provincial government, which may contract out the operation of the facility to a private company but continue to retain a majority of the revenues. For example, Great Canadian Gaming Corporation is contracted by the province of British Columbia to operate gaming facilities; the provincial government retains 2/3 of revenues while Great Canadian retains the remaining 1/3. Online gambling is also regulated by the provinces.  Accordingly, the industry is greatly impacted by changes in government policy, which introduces a risk factor in investment.

There is also significant black market competition in the gambling industry, particularly in the United States.  The black market industry is not subject to the same state and federal taxes that regulated gambling must adhere to in the US.  The American Gaming Association estimates that Americans spend approximately $150 billion in black market gaming. This illicit competition poses another risk factor for investment.

The Social Rationale for Divestment

Advantage Capital Strategies Group has identified two primary social motives for divesting from the gambling industry.  The first is that gambling losses disproportionately affect those in low-income brackets.  Recent research indicates that individuals in low-income brackets spend on average 2.8% of their household income on gambling as compared to 0.5% spent by those in higher income brackets. This is of concern as studies indicate a link between problem gambling and poverty.

Our second social motive for divestment is problem gambling.  Problem gambling occurs when an individual who engages in gambling has difficulty restricting the resources – time and money – they spend on gambling.  This can affect not only the individual but also his or her family and the community, and it is considered a public health issue.  According to Statistics Canada, problem gambling affects 1 in 15 Canadian gamblers. 

Furthermore, problem gambling disproportionately affects those in marginalized groups, including Indigenous populations, those with mental illness, homeless individuals, and those living in disadvantaged neighborhoods. Problem gambling has also been identified as a factor leading to increased probability of homelessness.

In Canada, government receives much of the revenue from gambling, allowing it to be spent on government programs, including social services such as problem gambling treatment programs.  In other jurisdictions, this is not necessarily the case.

The Environmental Rationale for Divestment

There are not significant negative environmental impacts associated with the gambling industry.  Our primary driver for divestment is social.

Works Cited

Government of Canada: www.ic.gc.ca/app/scr/app/cis/summary-sommaire/7132

ICLG:  iclg.com/practice-areas/gambling-laws-and-regulations/canada

Great Canadian Gaming Corporation: gcgaming.com/where-the-money-goes/

ESPN: www.espn.com/chalk/story/_/id/24028247/what-legal-sports-betting-united-states-means-offshore-sportsbooks

Gambling Research Exchange Ontario: www.greo.ca/Modules/EvidenceCentre/files/Hahmann_and_Matheson_(2017)_Problem_gambling_and_poverty.pdf

University of Calgary: prism.ucalgary.ca/ds2/stream/?#/documents/8700ea04-09b1-4a89-9c6e-c77ab16e0b71/page/13

Introduction

Advantage Capital Strategies Group identifies industries that have detrimental environmental, social, and economic effects and takes action to mitigate risk both through screening and advocating for change.

The Fossil Fuel Industry Explained

The term ‘fossil fuels’ refers to forms of energy that are created from organic material that is millions of years old. Fossil fuels include: coal, petroleum, natural gas, oil shales, bitumens, tar sands, and heavy oils, all of which can undergo combustion to produce heat for energy.

Companies that profit off of fossil fuels can be involved in the industry at various stages of production. These include:

• Upstream industry: engages in exploration  and production of oil and gas Midstream  industry: transports oil and gas (e.g. pipelines) 

• Downstream industry: refines oil products  and sells and distributes oil and gas (e.g. gas  stations) 

• Utilities industry: converts fossil fuels into  energy that is then sold for commercial and  residential use 

• Utilities often use a mix of fossil fuels and  renewable sources to generate electricity. For  our analysis, we consider a utility company  to be fossil fuel dependent if it derives  more than 30% of its total energy supply or  revenues from coal, oil, or gas. 

In terms of coal, we have chosen to only screen  thermal coal, referring to coal used to produce  energy for utilities. We are not screening for  metallurgical coal, which refers to coal used to  produce steel. This decision is based off the fact  that metallurgical coal is a requirement for the  production of steel and there is currently no  feasible alternative. 

The Economic Rationale for Investment

Companies that derive a majority of their  revenues from fossil fuels have the potential to  incur significant losses due to stranded assets.  According to HSBC, there are three factors that  could lead to fossil fuels becoming stranded  assets: 1) the implementation of climate change  regulation, 2) economic factors and fossil fuel  price fluctuations, and 3) the development  of innovations in the energy sector such as  advancements in renewables.2 

A reduction in the individual consumption of  fossil fuels could also lead to stranded assets.  As public sentiment towards fossil fuels shifts,  people may focus on reducing their own fossil  fuel consumption by purchasing an electric  vehicle, installing solar panels, or making other  carbon-free lifestyle changes. 

Furthermore, the price of solar and wind is now  on par with many other fuel types for electricity  generation, and electric cars are becoming  mainstream. According to Forbes, the cost per  KwH for solar and wind ranges between $0.06  and $0.10, which is competitive with the cost of  electricity generation from fossil fuels, which is  in the range of $0.05 to $0.17 per KwH.3 

The Social Rationale for Investment 

There is a large overlap between the economic  and social rationales for fossil fuel divestment  as the social response to the negative effects  of fossil fuel consumption can drive fossil fuel  assets to become stranded assets. The worldwide  divestment campaign is one example of a social  movement that poses a threat to the fossil fuel  industry. 

There is a significant worldwide push for fossil fuel  divestment at institutions such as universities  and national funds, with $8 trillion in globally

managed assets committed to the divestment  from fossil fuels.4 In July 2018, Ireland became  the first country to divest its assets from fossil  fuels, a significant achievement in the fossil fuel  divestment movement.5 This movement poses a  significant economic risk for the share prices of  fossil fuel companies, as it represents decreased  demand for the stock. 

Regulators, especially those countries who have  signed the 2015 Paris Agreement on Climate  Change, may feel pressure from citizens or global  allies to impose new legislation restricting the  sale of fossil fuels by either banning certain  fossil fuels completely, imposing a carbon tax, or  heavily subsidizing ‘green’ energies. These forms  of regulation could further depress the value of  the fossil fuel industry. 

The Environmental Rationale for Investment

There is also an overlap between the social and  environmental rationales for divestment. The  environmental impacts of climate change pose a  threat to our local and global communities.  

The overwhelming majority of scientists believe  that humans are causing climate change,  predominantly through the burning of fossil fuels.  According to the International Panel on Climate  Change (IPCC), about 78% of the total greenhouse  gas emission increase since 1970 is due to CO2  emissions from fossil fuel combustion.6 These  greenhouse gases are harmful because they  contribute to the greenhouse gas effect, which  traps heat in the atmosphere and results in  warming on a global scale, i.e. global warming.7 

The 2015 Paris climate agreement agreed to  “holding the increase in the global average  temperature to well below 2 degrees Celsius  above pre-industrial levels and pursuing efforts  to limit the temperature increase to 1.5 degrees.”8 

Without efforts to reduce emissions, the IPCC  estimates that global mean surface temperatures  will increase by 3.7 to 4.8 degrees Celsius by 2100  compared to pre-industrial levels.8  

Warming of 1.5 to 2 degrees Celsius will bring with  it inevitable environmental effects, including  heatwaves, a decrease in the availability of  freshwater, reductions in agricultural yields,  a rise in sea level, and coral bleaching, among  other impacts.9 The difference between 1.5 and  2 degrees comes down to intensity: 2 degrees of  warming will result in more dramatic, negative  changes in all of the above. 

Signatories of the Paris Agreement include  Canada, China, and India, all of whom have  pledged to keep emissions below that amount.  The US is also a signatory, however President  Trump has announced his intention to leave the  agreement by 2020, when it is permitted under  the terms of the agreement. At the current rate of  greenhouse gas reductions, the world will fail to  meet the goals of the Paris Agreement and we are  set to overshoot 2 degrees Celsius of warming.  

The most effective way to reduce emissions is to  stop burning fossil fuels. Recent studies indicate  that “globally, a third of oil reserves, half of gas  reserves, and over 80 per cent of current coal  reserves should remain unused from 2010 to 2050  in order to meet the target of 2 degrees Celsius.”10  This means that these reserves must remain in  the ground and not be extracted or consumed,  a statement that implies we must reduce our  global dependency on fossil fuels. If the global  community exceeds these recommendations, 2  degrees Celsius of warming is likely inevitable. 

Divesting from fossil fuels signals to companies  and the industry that they should be exploring  new and cleaner technologies.

Works Cited 

1. Encyclopedia Brittanica: www.britannica.com/science/fossil-fuel 

2. HSBC Global Research: www.businessgreen.com/digital_assets/8779/hsbc_Stranded_assets_what_next.pdf 

3. Forbes: www.forbes.com/sites/dominicdudley/2018/01/13/renewable energy-cost-effective-fossil-fuels2020/#55c17b114ff2

4. Corporate Knights: www.corporateknights. com/channels/responsible-investing/qa money-talk-bill-mckibben-15568031/ 

5. New York Times: www.nytimes.com/2018/07/12/climate/ireland-fossil fuels-divestment.html 

6. IPCC: www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_summary for-policymakers.pdf 

7. NASA: climate.nasa.gov/causes/

8. United Nations Climate Change: unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement 

9. Vox: www.vox.com/energy-and-environment/2018/1/19/16908402/global warming-2-degrees-climate-change 

10. United Nations Climate Change: unfccc.int/news/most-fossil-fuels-must-stay-in-the-ground-new-study