Sustainable investors target Pfizer’s pandemic profits

Welcome back to Moral Money. We have a corporate governance tale to tell today. Stop us if you’ve heard this one before.

You can imagine the heads nodding as the chief executive told the ethics conference how much his company valued principled directors with “independent and inquiring minds”. It’s the sort of message that has become de rigueur since governance put the G in ESG.

But the year was 1999, the chief executive was the late Ken Lay and the company was Enron, which, as Andrew Hill reminds us in his FT column, filed for bankruptcy 20 years ago this week.

The anniversary has lessons for governance-watchers today. First, as the lawyer Michael Peregrine and Professor Charles Elson wrote earlier this year, the energy company’s collapse was “where it all began”, prompting the Sarbanes-Oxley Act reforms and reshaping our understanding of corporate responsibility. Second, in their words, “it can still happen”: think of Wirecard, Greensill and other recent scandals.

Lay’s 1999 speech is a reminder that until Enron’s collapse, many saw its executives as innovators — with some justification, Texas Monthly argues. Understanding such complexities within organisations “might help us design less simplistic approaches to ethics — and social and environmental responsibility”, Alison Taylor at NYU Stern’s Ethical Systems unit observed this week.

In the meantime, however, it’s worth remembering that the third leg of the ESG stool is still fragile. Governance priorities are also evolving — notably around increased attention on political spending transparency. Read on for more on this in today’s newsletter. — Andrew Edgecliffe-Johnson

ICCR questions Pfizer’s Covid-19 windfall

When Pfizer chief executive Albert Bourla goes into a restaurant and gets “a standing ovation because everybody feels that we saved the world”, he feels satisfied, he said this summer.

That view of Pfizer’s role in the pandemic response is far from universally held, as highlighted in a stellar investigation this week by a global cast of FT reporters. The pharmaceutical company faces scrutiny for a vaccine pricing strategy that has sent its profits into overdrive, as well as for its supposed sluggishness in helping developing nations to access vaccines.

Now it is coming under shareholder pressure, from a pioneer of the sustainable investing movement. For half a century, the Interfaith Center on Corporate Responsibility, with its global membership of investors who currently manage more than $4tn, has been a thorn in the side of corporate boards.

This week, the ICCR unveiled a suite of shareholder proposals that its members will put to Pfizer and other major pharmaceutical companies next year. The proposals focus on the need for greater transparency in parts of the companies’ business models. Notably, they call on Pfizer and fellow Covid-19 vaccine maker Moderna to report on how to facilitate a rapid expansion of vaccine production in low- and middle-income countries.

The stalling global rollout of vaccines — as highlighted by the emergence of the new Omicron variant first identified in South Africa — “is a cost to the global economy”, Meg Jones-Monteiro, ICCR’s director for health equity, told me. “Investors should recognise it is in their best interest from an economic standpoint, even aside from the human impact perspective, to get most people vaccinated.”

Vaccine makers have warned of practical obstacles to large-scale production in the developing world, but the shareholder motions aim to extract far more detail on their reasoning, Jones-Monteiro said. In Africa, 94 per cent of people have yet to receive a single vaccine dose.

The proposals will also call for US-based vaccine makers to publicly assess whether their pricing policies reflect the hefty government support they received for the jabs’ development. The US government committed to purchase over $5bn worth of the vaccine created by BioNTech and brought to the market by Pfizer, while it was still under development — a vital boost to the programme.

Pfizer’s price per vaccine is significantly higher than peers such as AstraZeneca (which has so far pursued a non-profit sales model), and it has secured price rises in negotiations with authorities in the US, EU and UK.

In the third quarter, Pfizer reported adjusted earnings of $7.7bn — well over double the figure a year before — while its revenue rose 134 per cent, driven overwhelmingly by the coronavirus vaccine business. “No one’s saying they shouldn’t make money,” Jones-Monteiro said. “It’s just the extent of it.” (Simon Mundy)

Donations rise up US boards’ political risk agenda

Political spending has risen up the corporate governance agenda this year, particularly in the US after the backlash against contributions to Republicans who disputed the 2020 election results.

A new study out this week shows that more US boards are now taking oversight of their companies’ political donations, understandably, following the reputational risks that cropped up for corporate funders of Republicans who refused to certify Joe Biden’s win even before the January 6 Capitol riot.

The number of S&P 500 companies disclosing board oversight policies grew by 14 per cent in the past year to 295, according to an annual index compiled by the Center for Political Accountability and the Wharton School’s Zicklin Center for Business Ethics Research. The number disclosing some or all of their political spending grew by a similar margin.

For the first time this year, the number of top-tier companies outnumber the number in the transparency index’s bottom tier. Chipmaker Intel was applauded for “making public a policy to explicitly steer clear of conflict or misalignment between its core values and its political donations”, CPA said.

For all the progress towards disclosure, however, companies as prominent as Berkshire Hathaway and Netflix still rank at the bottom of the non-partisan CPA-Wharton Zicklin index. They may need to explain that fact to investors scanning for underrated ESG risks. (Andrew Edgecliffe-Johnson and Patrick Temple-West)

Buried out of sight, sustainable derivatives support green financial ecosystem

Just as healthy gardens need an underground ecosystem of roots, soil and earthworms to function, today’s financial markets rely on swaps and derivatives — products generally overshadowed by bonds and equities.

The ecosystem for green bonds is also hungry for plumbing products that align with environmental or social interests. Banks ranging from Australia’s ANZ to the US’s JPMorgan have created sustainability-linked derivatives for clients.

Now the derivatives trade group, the International Swaps and Derivatives Association (ISDA), is trying to help members figure out how sustainability-linked derivatives (SLDs) fit into existing regulatory regimes.

In a report on December 1, ISDA detailed how SLDs might be classified as over-the-counter derivatives, how cash flows are affected and other knotty regulatory questions. The EU, UK and US Commodity Futures Trading Commission are all looking closely at the sustainable finance market, prompting a need for banks to sort out the requirements for SLDs, ISDA said.

And threats of regulation and enforcement are increasing. The UK has launched a task force to tackle greenwashing, ISDA noted.

ISDA this week also attempted to foster growth of a new species in the garden: carbon credits. This week, ISDA published a paper outlining standards for carbon credits to encourage their use.

Developing legal necessities for carbon credits will help create a liquid trading market, ISDA said. That, in turn, will help establish a price for carbon and help channel funds into emissions reduction projects.

The voluntary carbon credits market is surging — but it’s still tiny (as Simon reported from Glasgow last month). The legal framework project ISDA launched for carbon credits won’t win headlines, but it could help cut carbon emissions. There is little time to waste. (Patrick Temple-West)

Chart of the day

Across 10 major urban areas, more than $19tn of assets in homes and buildings are exposed to devastating coastal flooding, HSBC reported in a study released this week.

Public transportation also faces a $208bn annual funding gap across 100 cities in investment needed to meet emissions targets — yet another financial hurdle for urban hubs seeking to mitigate or adapt to climate change.

The green bond market “potentially has a big role to play” in financing the transition for cities, HSBC wrote. Despite the “greenium”, or cheaper funding that the bonds offer, scepticism of the market has grown with some arguing it lacks rigorous criteria and adequate penalties.

Smart read

• Last year, seven international financial institutions threatened to divest from investments in Brazil if the country failed to improve its performance on tackling deforestation. Since then, the situation has worsened — but while Nordic bank Nordea and Netherlands-based Robeco have followed up with divestments, the rest of the group have not. Read the full story, from the FT’s Bryan Harris and Michael Stott in Brazil, here.