Month: August 2015

Chemical Footprint: Screening Stocks for Chemicals of Concern

Chemicals are in virtually every product we buy from clothing, cosmetics, furniture, shampoo, fragrances, and building products to the food we eat and, of course, the pharmaceuticals used to treat illnesses. In short, life as we know it would not exist without chemicals.

Yet, chemicals also can be harmful and pose risks to human health depending upon their nature and the amount of time we’re exposed to them. So as a consumer, investor or business executive, it’s critical to understand your exposure to “chemicals of concern.”

Chemicals of Concern

Across the world, various regulatory, industry and government agencies have established lists of chemicals of concern. Any chemical that can potentially cause harm can be considered hazardous. However, certain chemicals can persist in the environment (air, water, land, plants and animals), build up in animal tissues and be toxic—causing different types of harm ranging from mild skin irritations to cancer.

Chemicals of high concern (CoHCs), as defined under the California Candidate Chemical List, include:

  • Carcinogens, mutagens or reproductive toxins (CMR)
  • Persistent bioaccumulative and toxic substances (PBT)
  • Other chemicals for which there is scientific evidence of probable serious effects on human health or the environment
  • A chemical whose breakdown products result in a CoHC that meets any of the above criteria

Sounds complicated but extremely important, right? Absolutely, socially responsible investors recognize that the improper use of chemicals can cause materially adverse investment performance and even greater harm to society. Therefore, it’s important that your investment manager conduct a broad screening for chemicals of concern when selecting stocks for your portfolio. Let’s look at a real-world example.

Lumber Liquidators (LL) – Linked to Health and Safety Violations

On March 1, 2015, Anderson Cooper, CBS News correspondent, reported on 60 Minutes that the laminate flooring sold by Lumber Liquidators (LL) may fail to meet health and safety standards because it contained high levels offormaldehyde, a known cancer causing chemical. As shown below, the stock price fell sharply just before and immediately following the report—then down 72% since the start of the year.

Source: Wall Street Journal Online

What went wrong?  Allegedly, it appears that Lumber Liquidators failed to properly control its supply chain by sourcing lower-cost, formaldehyde-tainted laminate flooring manufactured overseas. The flooring was tested by 3 independent labs and failed to meet California formaldehyde emissions standards (CARB-2) with levels, on average, six or seven times higher than allowed and in some cases as high as twenty times higher than allowed.

What were the repercussions? Lumber Liquidator’s CEO, Robert Lynch, resigned on June 16, 2015, and the company announced it would discontinue the sale of the laminate flooring manufactured overseas. Now, the company faces a growing number of product liability and securities lawsuits including allegations that its directors breached their fiduciary duties by failing to properly oversee the laminate flooring manufactured overseas.

This story offers an interesting case study on the importance of Socially Responsible Investing (SRI) and the value of careful environmental, social and governance (ESG) screening. Here are a couple of key takeaways:

I. Watch the Profit Margins  – 60 Minutes reported that Whitney Tilson, a hedge fund manager, correctly identified that Lumber Liquidators had doubled its profit margins in just two years. An unusual gain in a commodity business. These gains should have led more analysts to question the sustainability of the increased profits and the underlying business drivers.

II. Don’t forget the “S” in ESG – Some key social factors that can have a material impact on the value of a stock include (1) customer satisfaction (2) product safety and liability (3) supply chain management and (4) occupational health and safety.

In this case, Lumber Liquidators frequently advertised images of children playing on new hardwood and laminate flooring. Unfortunately, due to their size, children are also the most likely to first show symptoms of exposure to harmful chemicals. So, the risks of providing an unsafe product, used by children and in the home, ultimately destroyed customer satisfaction and caused homeowners to immediately rip the flooring out. Responsible investors should evaluate if the supply chain is sustainable and provides occupational health and safety to its workers.

Sustainable Investing: The ESG Approach

A sustainable approach to investing incorporates the analysis of material, non-financial ESG factors into the investment decision-making process and helps determine the final selection of securities for your portfolio. Analyzing material ESG factors ultimately helps investors rank order stocks before making final investment decisions.

Start with the Chemicals of Concern by Industry

When screening prospective investments, it’s helpful to start by identifying the chemicals of concern used in the industry you’re evaluating. Then determine the level of revenues from products containing those substances and explore the firm’s processes and controls for managing its chemicals. Look for information from industry, regulatory and government sources such as:

Benchmark and Rank Order Your Investments

After you’ve gained a broad perspective on the industry, it’s time to collect the sustainability metrics. In the Household and Personal Products industry, for example, the Sustainable Accounting Standards Board (SASB) suggests the following four metrics regarding chemicals of concern under its Product Environmental, Health and Safety Performance topic:

  1. Revenues from products that contain REACH substances of very high concern (SVHC) (Metric CN0602-05)
  2. Revenue from products that contain substances on the California DTSC Candidate Chemicals List. (Metric CN0602-06)
  3. Discussion of process to identify and manage emerging materials and chemicals of concern. (Metric CN0602-07)
  4. Revenues from products designed with green chemistry principals (Metric CN0602-08)

Ultimately, we’re trying to identify the firm’s “chemical footprint.” To that end, the Chemical Footprint Project (CFP) Assessment Tool (released on June 19, 2015) also provides a good resource for publicly benchmarking chemical use and management. It’s backed by over $1.1 trillion in purchasing and investment power with signatories that include Aviva Investors, BNP Paribas IP, Boston Common Asset Management, Calvert Investments, Miller/Howard InvestmentsTrillium Asset Management, Zevin Asset Management, Dignity Health, Kaiser Permanente, Staples, Target and many others.

In the final analysis, we’re looking for best-in-class performers and screening out firms with significant risks. In the long-term, integrating ESG analysis into the investment decision-making process will help identify companies with business models that are more sustainable, socially responsible and profitable.

Networking on the Green


The long, proud history of the CFA Society of Chicago, founded in 1925, was just barely preceded by the founding of Ruth Lake Country Club in 1922.  Nearly 100 years later, the two entities came together for an exceptional day of golf.

On August 3rd, more than 50 of the Society’s finest golfers and their guests descended on Ruth Lake to enjoy a fine time of fellowship and competition on one of the area’s premier country club courses.  The first nine holes were originally designed and built by David Foulis in 1922 with the second nine completed in 1923 to round out the 18 hole layout, creating a  fair but demanding track.  While the original design stood the test of time for over 80 years, an Arthur Hills redesign in 2005 brought it up to a higher standard of excellence.

The day’s events began with the group spending some timeDSC_2111 loosening up on the driving range and getting a feel for the glass-like putting greens.  At the same time, everyone was free to indulge in the full buffet lunch which was highlighted by bacon bratwurst, a selection of sandwiches, salads, and an assortment beverages.  After lunch, the participants were directed to their carts and sent out to their starting holes for the day’s golf.

As far as this writer’s round of golf went, the weather wasDSC_2113 fantastic!  Certainly all of the participants played both good and bad shots, had some punch shots fly straight through the trees, and others that were stymied by those same trees.  The putting greens were so quick that missed tap-ins could roll several feet past the hole, but certainly all would agree that they ran true for well-struck putts.  Overall, the course was in fantastic shape and provided a great test for all aspects of the competitor’s games.

After playing the course, the group gathered in the Club’s dining room for drinks and dinner.  As waiters provided drink service, a buffet was again laid out.  The dinner version offered various salads, sides, a mix of fish and chicken dishes, and a beef carving station.  This allowed time for the group to meet new friends, discuss the day’s play, provide recommendations for must-see courses in the area, and to potentially foster some new business relationships.

While the diners enjoyed their meals including delicious cake for dessert, Kim Augustyn presented awards and gift packages to the winners of the long drive, closest to the pin, and net team score contests.  We’d like to congratulate Thomas Campbell of Neil, Gerber & Eisenberg LLP for hitting his shot to 57” on the par-3 14th hole and Erik Kratz of Mid-Continental Capital for crushing his drive long and straight to win the long drive contest.  Jason Loy and Anthony Doughty of KPMG and Philip Figal and Scott Cosentine of Ashland Partners combined to shoot an incredible net 51 score to pick up the team honors.

Of course, we would also like to send special thanks to our sponsors for their generous support!

  • Eagle sponsor: Principal Funds Distributor, Inc.
  • Par sponsors: Allstate Investments, D3 Financial Counselors, LLC, ETF Managers Group, RBC Global Asset Management, and RiverNorth

With the 11th Annual CFA Society of Chicago Golf Outing in the books, all the participants will surely look back to remember a great Monday out of the office and will be looking forward to seeing what other outstanding area course will serve as host to next year’s event.

CFA Society Chicago Book Club:

On Saudi Arabia by Karen Elliott House

The CFA Society Chicago Book Club met July 21st for a lively discussion of On Saudi Arabia: Its People, Past, Religion, Fault Lines – and Future by Karen Elliott House.  The book is a fascinating look at the perspectives and interests propelling Saudi society and we were all surprised at how little we knew of this important trading partner and regional power including the following surprising facts:

  • 60% of the population is under 20 years old0307272168-195
  • 40% unemployment among 20- to 24-year-olds
  • 90% of private sector jobs are held by foreign workers
  • Individual initiative and risk-taking are frowned upon
  • Cinemas, music, men and women shaking hands, and books on Saudi Arabia are all forbidden
  • Saudis aren’t interest in democracy: seen by some as forbidden under Islam and by others as chaotic

The author conducts probing interviews with princes and religious leaders, stays in the home of a devout Muslim family, discusses the future with teenagers and college kids, and explores criminal behavior with ex-convicts.  She shows how the Saudi royal family uses religion and oil wealth as “opium of the people” to buttress their authority and maintain stability, but serious internal challenges are threatening the status quo.  Easy access to information tops the list.  Saudis are more informed and connected via social media and cable news and as a result are demanding transparency and fairness from government.  They also more openly question the royal family’s lavish lifestyle, which is in stark contrast to the conservative Islamic principles they advocate.  Meanwhile divisions among Saudis along tribal, religious, gender, reformist/traditionalist lines are increasing social tensions.  When the book was published in 2011 the Arab Spring was in full effect, fueled by these same internal dynamics.  This is still seen as a serious threat to the monarchy.

Saudi Arabia’s biggest external threat is Iran and its desire to expand influence in the region.  The Saudi monarchy has positioned itself as the leader of all Islam because the two holiest Muslim sites, Mecca and Medina, are in Saudi Arabia.  To an ambitious Iran these might be tempting to capture.  Increased Iranian prosperity following this year’s negotiated nuclear agreement could make them even more viable targets.  Add to that the increased competition in global oil production from fracking and alternative energy sources and its clear Saudi Arabia, while still strong, has some crucial challenges to address.

We debated various paths forward but ultimately agreed Saudi Arabia faces an unclear and possibly explosive future.  Resolving the poor education system was heavily discussed, since it generally fails to produce graduates with marketable skills and critical thinking ability.  But government corruption, dependence on royal favors and hand-outs hinders a productive working class.  Saudi men are reluctant to take jobs they see as beneath them.  Saudi women are largely sidelined, comprising a mere 12% of the workforce even though they increasingly educated and motivated.  Women are restricted to working only with other women, and often seek “acceptable” teaching or medical positions.  There’s a growing demand among women to lead more fulfilling lives, but many defend the status quo and feel it’s inseparable from their Islamic beliefs.  Women’s rights have become a proxy war between progressives and conservatives.  We also compared Saudi Arabia’s economic prospects to Russian and Chinese models, but its social code and wealth structure are just too different to be relatable.

Royal succession may offer a glimpse at Saudi Arabia’s future.  After his crowning earlier this year, King Salman made 29-year-old Prince Mohammed bin Salman deputy crown prince and concentrated unusually large responsibilities with him.  The prince now heads the state oil monopoly, the public investment company, ministry of defense, and leads the air war in Yemen.  This is shocking for a country that has stayed unified for decades by sharing positions among the royal family.  If this is any indication of its future, Saudi Arabia might become increasingly assertive in the region while enforcing religious conservatism internally.  We were also surprised that Saudis are generally not interested in gaining democratic freedoms.  The country is more a collection of tribes and Islamic factions than a unified state, and Saudis see a need for strong rulers to prevent internal wars.  Democracy is also seen by some as forbidden by Islam because elected leaders promise what they don’t have and praise themselves – both are Islamic taboos.

On Saudi Arabia offered a valuable look at the many layers of Saudi society and the challenges it faces.  It was fascinating to learn about this country that’s so important in the region and the world.


Upcoming Schedule:

August 18, 2015: “Superpower: Three Choices for America’s Role in the World” by Ian Bremmer

*NOTE: Author Douglas Sisterson is attending the PDDARI meeting which takes place just before the book club meeting on 8/18. He will be discussing his book “How to Change Minds About Our changing climate”.

September 15, 2015: “The New Cold War? Religious Nationalism Confronts the Secular State” by Mark Juergensmeyer

October 20, 2015: “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies” by Erik Brynjolfsson and Andrew McAfee

November 17, 2015: TBD


To sign up for a future book club event, please click here: