A train derailment in Ohio reminds of us why ESG investing is important.
As a child growing up south of Pittsburgh, Pennsylvania I vividly remember the Koppers Chemical plant discharge of Vanadium Pentoxide that caused the snow to turn green. An oral lethal dose for humans is between 5 and 50 mg/kg or between 7 drops and 1 teaspoonful for a 70 kg (150 lb.) person. Toxicity is about the same magnitude as pentavalent arsenic. A person with chronic respiratory disease is at greater risk when exposed to this substance. The misinformation around reporting what happened and when it happened ensued leading to a local investigation, unfortunately Chartiers creek in Bridgeville and the surrounding ecosystem took years to recover. Seeing this at an early age made an impact that helped shape my view around Sustainable investing and ESG examination of a company’s environmental, social, and governance practices as well as their impacts.
On Feb. 3, Norfolk Southern train derailed in Ohio losing 50 railcars, causing a fire that raged for days in the region. Ten of the 50 derailed cars contained hazardous chemicals including butyl acrylate and vinyl chloride, which were among combustible liquids that authorities feared could set off a major explosion. Business owners and residents filed lawsuits against Norfolk Southern, alleging the company was negligent. The coming days and weeks will determine to what extent regulation, corporate governance, maintenance and human error led to this tragedy.
As a professional investor spending the last 30 years investing in Sustainable Infrastructure, I find myself talking to investors about how ESG investing emphasizes the “E” or environmental approach which considers how a company performs as a steward of the physical environment. The "E" takes into consideration a company’s utilization of natural resources and the effect of their operations on the environment, both in their direct operations and across their supply chains. Companies that neglect to consider the effects of their policies and practices on the environment may be exposed to higher levels of financial risk which may negatively impact their stock price over the longer term.
The "S” stands for Social aspects looking at the company’s relationships with internal and external stakeholders. Do workplace conditions reflect a high regard for employees’ health and safety? Or does the company take unethical advantage of its customers?
The “G” stands for Governance and according to the IMF countries lose over one-third of potential benefits from infrastructure investment due to inefficiencies. Strong infrastructure governance can reduce more than half of these inefficiencies. Infrastructure companies or projects with poor governance practices can pose significant risks to investors.
Sustainability statements may have good intentions and when one examines Norfolk Southern website statement they attempt to address some of the very issues that are at the heart of the East Palestine accident, “Investing in technology pays dividends for the planet. Norfolk Southern uses computer-based solutions — data analytics, artificial intelligence, and machine-learning algorithms — to increase efficiencies and shrink our environmental footprint. Just as important, focused investments on physical improvements such as modernizing our locomotive fleet and maintaining our rail infrastructure ensure safe and efficient operations while further reducing our impacts on the environment.”
Whether Norfolk Southern is the unfortunate poster child for poor corporate governance in a U.S. railroad industry rife with public safety issues remains to be seen. Most recently the Railroad Workers United Union called for public ownership of a rail system beset with “profiteering, pillaging and irresponsibility.”
Transportation Secretary. Buttigieg went down on record on regarding the Toxic Ohio train derailment: "While this horrible situation has gotten a particularly high amount of attention, there are roughly 1,000 cases a year of a train derailing."
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Further examination finds that while Norfolk Southern incidents involving hazardous materials have surged nearly 600% in the last decade as they increased train sizes by 20%, cut staff by 40% and battled new safety measures.
Norfolk Southern has announced it is creating a $1 million fund for the East Palestine victims.
At Capital Innovations, we believe that doing the right thing for our clients, our people and our communities leads to better results for all stakeholders. We approach responsible investing in a manner that is consistent with Capital Innovations’ long-term commitment to sustainability. And, as active investors, we strive to embed ESG best practices throughout our investment, risk and talent management processes, while delivering investment performance and staying true to our role as a fiduciary and risk manager.
Michael D. Underhill
Chairman Emeritus United Nations Principles of Responsible Investment Infrastructure Workstream
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