An investor is a person or organization that puts money into financial schemes, property, etc. with the expectation of achieving a profit. Due to their possible influence on ratings investors of rating agencies are of special importance. Someone who provides a rating business with capital and someone who buys a stock are both investors. An investor who owns a stock of a rating agency is a shareholder.
The exuberant regulation of the credit rating agencies is always sprouting new flowers. The instrumentalization of rating agencies for political goals is being discussed at the United Nations, although right now it is becoming clear what negative effects it has when rating agencies are used for political sanctions.
At the “High Level Meeting on the Role of Credit Rating Agencies in the implementation of the 2030 Agenda for Sustainable Development” high-ranking representatives of the United Nations Department of Economic and Social Affairs are discussing issues that are not relevant to current affairs. The meeting is about “old acquaintances”, criticism of the leading rating agencies. It’s about banalities like the fact that credit ratings play an important role in international capital markets as they provide creditors with assessments of a debtor’s relative risk of default. “Nonetheless,” writes the United Nations Department of Economic and Social Affairs, “inaccurate ratings can impact the cost of borrowing and the stability of the international financial system, as demonstrated during the 2008 global financial crisis. During the economic crisis that emerged as a result of the COVID-19 pandemic, attention has returned to the role of credit ratings on debt sustainability and stability.”
The leading international agencies have been aware of the issues raised by the debaters for many years. The problems have been addressed and systematically tackled for some time. As a consequence of the discussions, it can only be stated that the leading agencies may not have been sufficiently successful in documenting their work to date in a transparent manner and also in communicating it to the appropriate places.
In the middle of the war with Ukraine, much more urgent or questions are overlooked. Today experts from Switzerland have their say and hit the nail on the head. The main issues are as follows:
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Understanding the importance of sustainability has popularized an asset class that used to be reserved for the state, churches and nobles. Forest – to be precise its wood – has always served people as fuel, product and building material. Forest has now become the epitome of sustainable investments. The idea of sustainability emerged in a time of crisis and scarcity. Around 1700, the mining industry and livelihood of thousands was threatened in Saxony. The problem was an acute scarcity of timber. The mining industry and smelting of ores had consumed whole forests. Trees had been cut at unsustainable rates for decades without efforts to restore the forests. In Germany, the term sustainability is associated with Hans Carl von Carlowitz. He was raised in and influenced by the aforementioned environment of wood scarcity. He traveled widely in his youth and learned much from the forced discipline of the French minister Jean Baptiste Colbert, who had enacted a forestry reform in France. Carl von Carlowitz’ view that only so much wood should be cut as could be regrown through planned reforestation projects, became an important guiding principle of modern forestry.
In this preliminary article you can learn more about some risks and rewards of buying forests and what you should consider when buying forests. Given the popularity of forest investments, the question arises as to which ratings are available to investors as decision-making aids. The first question to be asked is which instruments can be used by investors to tap into this asset class. The most common investments in forests are shares, direct investments or closed-end funds. Whereas in direct investments investors invest directly in one or more trees on specific areas and leave the management to a service provider, closed-end forestry funds are less individual.
A forestry share is a security which securitises a share in a stock corporation whose capital is invested to a large extent in forest property or wood processing. Primarily Scandinavian and North American forestry stock corporations are traded. There are no German forestry stock corporations with significant free float on the stock exchange. Buying forestry shares does not necessarily mean planting new trees.
A closed-end forestry fund or closed-ended forestry fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds known for corporate stock and bond investments, new shares in a closed-end forestry fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the secondary market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.
Direct investment in forest means becoming the owner of the forest yourself and thus acquiring all the rights and obligations of a forest owner. The investor needs to be able to maintain regular forest care. As a forest owner, you also have certain obligations, since you are legally obliged to ensure road safety. This means that all trees and branches that are located in places with increased traffic – for example on country roads or hiking trails – have to be felled or trimmed as soon as they pose an increased risk for humans. Buying forests also means taking responsibility.
The implications for the rating approaches to these investment alternatives are considerable.
Forestry shares being tradable on the stock exchange at any time are subject to extreme fluctuations in value. The valuation of most listed forestry shares has a history of having fluctuated by several hundred per cent. Such fluctuations in value mean that ratings of these stocks can quickly become out of date. In fact, a buy recommendation can turn into a sell recommendation within a day if the stock market price quickly exceeds the fair value. Most forestry share companies are predominantly wood processors, who are strongly affected by economic fluctuations and thus by fluctuations in pulp or timber prices. Therefore there is a strong dependence of many forestry shares on economic trends.
Direct forestry investments in precious woods, on the other hand, can react better to market fluctuations by postponing the harvest. The trees are left in the forest until the harvest is worth it – they become bigger, taller and more valuable every day. Fuctuations in precious wood prices have historically been significantly lower than those of timber or wood used for pulp production.
In Germany in particular, the very contradictory regulations must be observed. For decades, the German government has not consistently supported wealth creation through property acquisition. Pay attention to the municipality’s right of first refusal. In this sense, there are no secure legal bases for forest investments in Germany, because rights of first refusal can hinder both buying and selling. In addition, the following contradictions must be observed.
The yields generated from a direct forestry investment are generally tax-exempt while the price gains of forestry shares and forestry shares dividends are subject to the almost 30 per cent flat rate withholding tax including solidarity surcharge and church tax. On the other hand, the transaction costs are significantly higher than with stocks. In addition to the purchase price, land transfer tax, notary and fees, which often make up ten per cent of the purchase price, are added, thus significantly reducing the returns for forest investors. Property tax has to be paid annually and wood production in Germany is relatively expensive due to environmental regulations and certifications. In addition to the actual purchase price, there are also other costs when buying a forest which would not be part of the rating analysis of an independent forest rating. For example, you have to include the costs for the notary, usually 1.5% of the purchase price (the percentage can be higher for small areas) and the property transfer tax, around 4% – 6.5% of the purchase price. You must also not ignore the broker’s commission.
As a forest owner, you also have to pay additional costs.
Property tax, accident insurance and, if applicable, contributions from the soil and water associations are to be mentioned here. With the management of the area, the ancillary costs are always offset by possible income from the sale of wood.
Forest areas in other countries offer far higher returns, although buying forest in foreign countries can be difficult for foreigners. It is much easier to hire companies to lease or buy forests or fallow land in other countries, to manage them in order to generate yields for investors. The country rating must be taken into account for every investment abroad. The country rating is used to assess the economic, social and political risk that an investor will be prevented from receiving the income due to him.
Forest investment providers advertise the scarcity of forest. They argue, that the benefits of forestry investments are the growing demand for the raw material wood. Whether there are fewer and fewer forest areas and whether the demand for wood exceeds the supply has to be tested continuously.
Forestry investments are not always socially beneficial, especially when stock corporations and other big companies buy cheap land in foreign countries and perhaps even displace locals, or the price of land for local residents rises immeasurably as a result of land purchases. Forests are not always ecologically friendly. Thousands of hectares with cloned eucalyptus or teak planted in rows are no gain for nature. Many insecticides and pesticides that pollute and destroy the soil and the environment are sometimes used to increase output.
In any case, structurally rich forests with many different tree species offer a better and safer alternative to planted conifer monocultures that are based on only one tree species. Although these grow faster, they are also susceptible to storms, snow, ice and pests. Mixed forests of deciduous and coniferous trees are not only more stable and better adapted to climatic changes, they also allow you to react more quickly to changes in the demand for wood species on the market.
Any forest rating should also pay attention to the age of the forest. Young forests, in which there are only a few old trees, initially require more maintenance. Of course, they can more easily be designed according to your ideas. The young forest will initially generate little income from wood sales through its maintenance. Forests of old age with significantly taller and thicker tree trunks enable an early profit from the logging and sale, but require care for the new generation of trees.
Good soil and suitable tree species mean that larger quantities of wood of better quality can be expected in the long term.
This is likely to be reflected in the cost of purchasing the forest, especially if the seller has had the forest valued by an appraiser. Regardless of the quality of the soil, its location is a decisive criterion for price formation. So it depends a lot on where the forest is located. A forest area near Munich will therefore cost significantly more than a similar one in the countryside in Saxony-Anhalt. The standard land value is derived from the average price of areas sold in the area and, in addition to the special features of the forest area offered, serves as an aid to determining the actual value.
If the forest is well cared for and there is already a lot of high-quality wood to be expected on the area initially, then you should also expect higher costs. In any calculation, bear in mind that there are usually additional costs for managing the forest. So you cannot count the expected cubic meters of harvest one-to-one with the wood prices and use this to conclude the profit. If the area is difficult to access, the wood harvest is also time-consuming. If it is a particularly protected forest, for example in a nature reserve, then management is only possible to a limited extent. The ideal value of these forest areas is all the higher for one or the other, especially if rare animal and plant species live in this forest. You should therefore be clear about your goals in advance and only acquire forest if it fits your previously set goals.
In addition, a forest rating process should include a step in order to check any “contaminated sites”. For example, if the forest is on a former military site, the trees there may have been damaged or the ammunition in the ground has to be laboriously cleared.
All closed-end forestry fund investments have one risk factor: the long contract term. Even with sustainable forestry investments which respect human rights and the environment, the planted trees need lots of time to grow. On ecologically farmed land, they probably take even longer to grow than the fast-growing trees in monocultures, which are harvested earlier, to produce cheap pulp and biomass. During long contract terms, much can happen: companies can fall victim to mismanagement or go bankrupt, the regions in which the forests grow can become politically unstable.
Natural events such as fire, earthquakes, droughts or floods also have a lot of time to occur over the years.
Forestry investment are therefore right for investors in particular if they do not shy away from risks, have the necessary financial means and staying power until the trees generate returns. If you take over a neglected forest that does not promise stability and is therefore susceptible to pests or storms, that does not necessarily mean that it is a bad deal. Careless forest care can have a positive impact on the purchase price and there may be a lot of potential in your future forest. An unkempt forest can be a deterrent, but it is up to the investor to shape and maintain the forest. What possibilities are opening up in the forest and what additional costs have to be reckoned with for any maintenance measures? With almost every intervention in the forest, whether in well-tended or unkempt forests, financial resources are necessary.
Some native tree species have been planted in the wrong locations in the past. This can result in poor growth, instability and increased susceptibility to damage. To select tree species that are appropriate to the location requires a lot of expertise. To increase the stability of a forest and make it fit for the next centuries requires a forestry rating first.
Ecological goals or enjoying forest ownership are important motives for some investors. Because while it has a personal value for some, only the regularly generated income plays a role for others. However, if one compares direct forest investments with other investment options such as stocks, then short-term gains are generally not to be expected. Every rating approach for direct forest ownership has to take this into account. Forest ratings are possibly the ratings with the longest time horizon. Long-term bond ratings – for comparison – usually only refer to a forecast period of four to five years.
Forests give us the sustainable resource wood, which will also be of ever greater importance in the coming generations.
That makes the forest relatively stable as a system. However, for a fast growing return, other investment methods are a better alternative. So buying a forest is a decision that should be made not only for financial reasons, but also for a certain amount of idealism and enjoyment of nature. Forest investors are similar to investors who invest for ethical, ecological or social reasons.
Forest has been in great demand in Germany for a number of years and has often been family-owned for generations. In addition to the forest exchange, there are a few other real estate portals and tender platforms on the Internet that also offer forest. Depending on the respective provider, there may be costs for registration or an application. In some cases, brokers are also placed between the buyer and seller from the outset.
A responsible forest office or an auction houses in the area, the member newspapers of forest owners’ associations for forest pieces on offer or the advertising section of the regional newspapers might provide information on forest for sale. With currently estimated 1.9 million forest owners in Germany, investors are also well advised to ask around in their private or professional environment. The chance that you have forest owners in your circle of friends is quite high.
Sustainability is currently the most important trend in asset management and the integration of sustainability criteria in investment processes is already considered an “operating license” for many. Asset managers primarily use what are known as ESG scores, i.e. scores that are created according to ecological and social criteria as well as those for the appropriateness and correctness of corporate governance. A handful of rating agencies are in this business.
“But such an ESG integration should not be equated with sustainable investing,” warns Louis Larere, pointing out the following weaknesses in ESG ratings:
ESG rating providers differ greatly in their assessments of the same company. The ratings are only correlated to an average of 61 percent. In the banking sector, on the other hand, the assessments of the creditworthiness of different providers for a company are 99 percent correlated.
The peer group approach of rating agencies leads to biased results. If companies are only compared with their industry or their sector, this leads, for example, to the Portuguese oil company Galp Energia receiving an MSCIESG rating of “AAA”, while Fresenius is only awarded “BBB” and thus in the health sector belongs to the bottom 50 percent.
These flaws in the system make it theoretically possible to put together a portfolio that consists exclusively of oil, gas and tobacco companies and that would also receive an MSCIESG rating of “AA”. Good ESG ratings do not mean that a company is also a sustainable investment. There is also the risk that the focus on ESG ratings will create a “green bubble” and that the same companies will always be added to the portfolios by investors. The resulting overvaluation reduces the potential returns on such “sustainable” portfolios.
Louis Larere’s criticism is remarkable, as it shows the fine balancing act that rating agencies have to walk. When it comes to credit ratings, the agencies are often accused of having too similar ratings because – as Louis Larere correctly observes – even when different methods are used by different analysts, the rating agencies come to the same conclusions for most debtors.
The supervisory authorities that watch over the credit rating agencies are meticulous to ensure that the activities of the competitors remain strictly separate in the credit rating and that as many agencies as possible are in tough competition with one another. However, the consequence of this supervision of credit ratings has not yet been that the agencies have come to significantly different judgments, so that many smaller competitors of the leading agencies are redundant. The situation is different with ESG scores, for which there is no supervision in either the USA or Europe.
Zadig Asset Management, one of the partner boutiques of iM Global Partner, is therefore moving away from the schematic application of ESG ratings and focusing on companies that are in a transition phase to a more sustainable business model and will achieve radical improvements in two or three years and whose turnover contributes at least 10 percent1 to achieving the United Nations Sustainable Development Goals (SDG). Across the portfolio, the SDG share of sales is currently around 40 percent. With this anti-cyclical view of the market, Zadig is able to create portfolios that differ significantly from those of the competition.
The COVID-19 pandemic has profoundly affected the lives of countless people around the world, with women being the hardest hit.
Not only because they have a higher risk of COVID-19 infection due to their work in the health sector, but also because they are over-represented in professions where keeping your distance is more difficult and dismissals are more common. Many women have had to take a break from work to look after family members. In addition, women are often employed in micro and small businesses, where they are paid lower wages and have little legal and social protection. If in informal employment their situation is even more precarious. These factors make the decision to quit working life easier. This is how gender equality is reversed.
Activity rates show that there are record numbers of women leaving the labor market worldwide, and this trend could persist. The longer women stay away from the labor market, the higher the risk that their knowledge and skills will dwindle and that they will permanently lose their income and their prospects. Even before the pandemic, no country was able to fully achieve gender equality, as is the aim of the UN Sustainable Development Goals. In terms of access to (quality) education and participation in the labor market, as well as women-run businesses, such equality is now further away than ever before. Since the beginning of the pandemic, girls in low-income countries have been losing access to education in large numbers, says Triodos Investment Management in a communication on impact investing.
So-called “Inclusive Finance” can help achieve gender equality in the post-pandemic economic upswing. Without education, the chances of access to the labor market are considerably reduced. But women also encounter other obstacles in their professional lives. Access to credit is a major concern for small and medium-sized businesses worldwide. Insufficient access to financial services is a major concern. This situation will be exacerbated by the pandemic. Other barriers are closely related to the traditional role of women and the availability of childcare.
In general, financial integration enables people and companies to better manage and plan their economic situation. More precisely, “inclusive finance” can help make the post-pandemic economic recovery gender-sensitive. Some asset managers have been investing to generate social and environmental impact alongside a healthy financial return for decades already. One example is Triodos Investment Management.
Triodos Investment Management‘s claim is to place a high value on a number of sustainability criteria in its investments, including income, environmental protection and gender issues. In terms of gender equality, some of the barriers can be removed and women and girls enabled to participate in society. “The companies and financial institutions funded by Triodos Investment Management can enable women to develop their potential and participate in the economy”, according to the Triodos Investment Management.
Christian Angermayer sees a huge opportunity and the perfect timing for his continued investment into Rock Tech Lithium: “The world is focused on the rise of electric cars – driven by innovators such as Tesla and now also Apple. And rightly so. The era of fossil vehicles is over. Many still underestimate the massive change we are seeing, which will sweep away many traditional car makers. But all the new EV players need Lithium batteries. It fascinates me how much many stakeholders still underestimate the lithium shortage we will in my view soon encounter. Rock Tech Lithium has a bold vision not just to become one of the premier producers of the raw material, but also an innovative Chemtech company”.
Rock Tech just announced the successful closing of its non-brokered private placement of 9,994,447 units of the Company at a price of $0.85 per Unit for gross proceeds of $8,495,279.95. “We have received very positive feedback and high demand for our private placement from renowned institutional investors, confirming that we are very much on the right track,” said Dirk Harbecke, Chairman of Rock Tech, who invested significantly himself. “The collected funds will help us to further accelerate our project development – a huge opportunity in an environment where other projects, also of the global players, still remain on hold due to the corona crisis uncertainties.”
The Offering round was led by Apeiron Investment Group, the family office of Christian Angermayer, who subscribed for over 30% of the Offering and will, after closing, own 19.6% of the Company on a partially-diluted basis. Dirk Harbecke subscribed for over 11% of the Offering, bringing his partially-diluted ownership position, after closing, to 17.7%.
Proceeds from the private placement will be used, says Dirk Harbecke, to fund a Pre-Feasibility Study (“PFS”) on a lithium hydroxide converter, continuing investigations of the Company’s innovative lithium hydroxide processing circuit, further development and permitting work at the Company’s Georgia Lake lithium project and general working capital.
“Innovative market leaders can excel in emerging countries”, writes a clever investor in his “Christmas letter”, who may be quoted here, but wants to remain anonymous, since his letter is only addressed to his “investors and serves to maintain contact with a few other acquaintances / friends”: “When it comes to innovation, the big US tech companies seem to get the most attention, but this could shift to China and other emerging markets.”
His letter has been reaching his investors and a small circle of acquaintances and friends for decades now. His website doesn’t bother with design, perhaps along the lines of https://www.berkshirehathaway.com/. He has learned that modesty, discretion and restraint are useful for his work. “Accordingly, you are welcome to use the information, but please do not quote me. And a comparison with Warren is flattering, but not correct in terms of size alone; he employs 25 people,” jokes our contact with regard to his own staff.
Anyone who has had the privilege of reading his annual Christmas letters for so many years will remember many of his predictions, which later became a partly joyful and partly bitter reality. Is it because of his strict logic? This and his track record can be thought about elsewhere, here it is permitted to quote a tiny part of his forecasts for 2021:
“We will see,” he foresees, “how emerging-market companies evolve from imitators to true innovators. We used to refer to companies like Alibaba as ‘Amazon China’ or Baidu as ‘Google China’, but these companies actually have their technology developed and localized while accelerating its growth in ways other than the US. “
“Successful newcomers may grow faster than more established companies,” says his math, “probably long before they make a name for themselves outside of their local markets. Pinduoduo, an e-commerce company in China that hasn’t been around for 10 years, but already has a market cap of more than $ 100 billion, and the $ 150 billion multi-service platform Meituan counting over 450 million active users, and companies like these will spring up like mushrooms across industries . “
The Christmas letter bears witness to optimism: “The forecast for the treatment of cancer looks good: The cure for cancer may be closer than you think. Breakthroughs in gene therapy and new applications of artificial intelligence are accelerating drug development. Some types of cancer – may be by 2030 – can be functionally cured by cell therapy. New, reliable tests will enable a very early detection and localization of the development of cancer. After 2030, cancer as one of the main causes of death could be largely eradicated by early detection. “
The next wave of pharmaceutical innovation could come from an entirely unexpected place: “There will likely be many global blockbuster drugs from China by 2030. The country has the largest population of cancer patients in the world, and one in two people is taking a clinical trial, compared to one in 20 in the US. I expect China will start producing new drugs in five to ten years at a tenth the cost of the US. “
The rivalry between the US and China could determine geopolitics: “What felt like an eternity ago, in the time before COVID-19, the trade conflict between the US and China determined the economic framework, but the frosty relations between the two superpowers will also be with the remain one of the most important investment themes for the new US presidents. “
It’s not just about geopolitics. This conflict will also have a direct impact on companies as they will be forced to take sides and perhaps adapt the way they work on both sides. Our investor and advisor reminds you that the US wanted to issue implementing regulations banning the popular TikTok and WeChat apps if the US segments of these companies are not being sold by their Chinese parent companies.
“It is advisable to avoid those players who could get caught in the crossfire, but there are still plenty of great investment opportunities. Chinese internet companies that operate purely on the domestic market, such as Alibaba and Baidu will not suffer from the trade war,” summarizes the capital market expert, “and there are cross-industry innovative startups that were founded by great entrepreneurs.”
The Munich investment boutique Quant IP is launching a new tranche for private investors for its equity fund Quant IP Global Innovation Leaders Fund. This gives investors the opportunity to invest small sums in the fund or to take out a savings plan. “We want to give self-decision makers the opportunity to invest in our successful strategy and create an offer with which consultants can also reach customers with savings plans,” says Lucas von Reuss, founder and managing director of Quant IP.
The new tranche comes 15 months after the launch of the Quant IP Global Innovation Leaders Fund. The global equity fund was able to achieve a performance of almost 12 percent in this period, outperforming its benchmark MSCI World by around 6 percentage points *. The fund achieved this with comparatively lower fluctuations and thus confirmed the good results from the back test.
So far, the fund has mainly attracted independent asset managers. “We are convinced that our approach will also convince private investors – who doesn’t want to invest in the most innovative companies in the world?” This is how von Reuss sums up the fund’s basic investment idea. At Quant IP, these are identified on the basis of patent data that is quantitatively evaluated. Stock selection and portfolio construction are rule-based on the basis of the Quant IP Innovation Score, which summarizes several indicators that measure innovation growth, quality and efficiency.
Structurally, the focus in the broadly diversified portfolio is on the IT and healthcare sectors. The fund tends to be overweight in Japanese stocks and holds fewer US stocks than the benchmark. The stocks of the Japanese online group Z Holdings, the Google parent Alphabet and the computer manufacturer HP are currently heavyweights.
Every rating has to start with the unequivocal identification of people. It is not just about the identity of debtors and their civil address registration, but also that of managers in companies such as board members, or who else is responsible for a legal entity. In order to enforce claims against a natural person, in most legal systems around the world the address at which a person is registered is important. A personal guarantee from a managing director is worthless to creditors if their whereabouts cannot be determined or if an alleged address proves to be incorrect.
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