Replicable Analysis And Algorithms – Future Truth ESG By Fighting Greenwashing
January 3, 2023
Corporations, investors, regulators, and the public want to know if ESG commitments institutions make are truthful – not greenwashed. While the global economy in 2023 faces war in Europe, increasing inflation, rising interest rates, challenging energy markets, and growing political challenges, at the same time, regulators are now actively targeting ESG commitments for greenwashing.
Even now the concept of ESG is being politicized – yet ESG has evolved with and been a part of the professionalization of capital markets for the last 90 years since the collapse of the markets in 1920s when analysts disregarded and did not address governance risks.
Yet tools exist today that can assist corporations, investors, regulators, and the public determine the materiality of greenwashing risks.
Responsible Alpha and Deception And Truth Analysis (D.A.T.A.) demonstrate below – in a stepwise manner – how technology can enable truth telling and determine if commitments may not be accurate.
To demonstrate we will consider the following real life case study of how we and a mutual hedge fund client assessed New Fortress Energy (ticker: NFE). NFE, founded in 2014, is an $8 billion integrated gas-to-power infrastructure company operating globally in two segments: Terminals and Infrastructure, and Ships.
About New Fortress Energy
On NFE’s website under the About section, the company tells you immediately that they are ‘Powered by positive energy’ and that their vision and mission is:
“We want to light the world. Billions of people around the planet lack access to affordable power. Electricity should not be a luxury good.
“As a liquefied natural gas (LNG) company, our mission is to provide capital, expertise and vision to address this problem while also making positive and meaningful impacts on communities and the environment.”
“…access to affordable, reliable, cleaner energy is not a privilege, but a human right…Creating that access – in an environmentally responsible way – is our fundamental mission.”
For a company that transports liquid natural gas from one location to another around the world – a non-sustainable activity – to have such high aspirations is noteworthy.
Yet is the above flowery language supported by their record?
Sustainalytics, the Morningstar Company that rates listed companies based on their ESG performance, ranks NFE in the top 30 percent of NFE’s ‘Construction & Engineering’ peer group, or 99 out of 339 peers. But in Sustainalytics total universe of rated companies, NFE ranks 11,960 out of 15,101, or in the bottom 79% of all companies.
In other words, NFE is ranked by Sustainalytics as a relatively clean shirt in a dirty industry.
A review of Sustainalytics analysis though shows that the primary driver of their ranking is their opinion of the industry in which NFE operates, rather than the specifics of the company itself.
In other words, Sustainalytics’ analysis of NFE is more general than specific, more systematic than unsystematic.
Testing Greenwashing
Responsible Alpha is a globally scaled ESG consultancy who are frequently hired by investors to investigate material greenwashing claims at companies. Responsible Alpha’s approach is similar to a private investigations team, and, in fact, they were hired to investigate NFE because of suspicions that NFE might be greenwashing.
The investor hired in collaboration Deception And Truth Analysis (D.A.T.A.) and Responsible Alpha to test this greenwashing claim using the DATAbase tool of pre-scored regulatory filings by U.S. publicly-traded companies since 2008 for each company’s deceptiveness and truthfulness. The following is the time series history of the DATA Score for NFE.
Figure 1: NFE’s historical DATAbase scores.
DATAbase scores range between 100% and +100% with any negative score meaning a document is deceptive, in the aggregate, and any positive score indicating that a document is truthful, in the aggregate.
So, how did NFE score?
As you can see above, since going public in 2019 NFE’s documents have always scored as truthful, in the aggregate. At the time of Deception And Truth Analysis (D.A.T.A.) and Responsible Alpha’s collaboration with the investor, NFE had just issued its second quarter financial results (a 10Q) on August 4, 2022. That document scored as +17.39% and is in the 91.91% percentile of all truthful documents in DATAbase historically.
Good, right? But let’s look deeper.
At a high level it would be easy to conclude that NFE is not engaged in greenwashing given its consistently high DATA Score.
But it’s not all rainbows and unicorns because 42.62% of the document’s fragments scored as deceptive.
In other words, in the aggregate NFE is truthful in its regulatory documents, but it does deceive about some things.
What are those?
The second Deception And Truth Analysis (D.A.T.A.) tool used by Responsible Alpha – the DATAREDline tool – enabled Responsible Alpha to immediately drill down to the key issues worth investigating further at NFE.
Specifically, the analysts using DATAREDline determined which fragments in NFEs regulatory filing were deceptive fragments.
Figure 2: NFE’s Q2 2022 DATAREDline report.
The highlighted fragment in the DataREDline view (see right side pane, above) is NFE’s most deceptive. Additionally, the left side shows the underlying language associated with this fragment. Specifically, the first half of the 10Q fragment says:
“In addition to administrative services, an affiliate of Fortress owns and leases an aircraft chartered by the Company for business purposes in the course of operations. The Company incurred, at aircraft operator market rates, charter costs of $1,125 and $1,340 for the three months ended June 30, 2022 and 2021, respectively, and $2,147 and $2,949 for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022 and December 31, 2021, $1,248 and $944 was due to this affiliate, respectively.” (Note 24. Related party transactions: Management services p. 32, New Fortress Energy Inc. 10-Q August 2, 2022 – dollars in are thousands, e.g., $1,125,000)
“The Company has leased land from Florida East Coast Industries, LLC ( FECI ), which is controlled by funds managed by an affiliate of Fortress. The Company recognized expense related to the land lease of $ 103 and $ 103 during the three months ended June 30, 2022 and 2021, respectively, and $ 206 and $ 229 during the six months ended June 30, 2022 and 2021, respectively, which was included within Operations and maintenance in the condensed consolidated statements of operations and comprehensive income (loss).As of June 30, 2022 and December 31, 2021, the Company has recorded a lease liability of $ 3,329 and $ 3,314, respectively, within Non-current lease liabilities on the condensed consolidated balance sheet.” (Note 24. Related party transactions: Land lease p. 32, New Fortress Energy Inc. 10-Q August 2, 2022 – dollars in are thousands, e.g., $1,125,000)
This fragment uncovered something strange, and was it greenwashing?
NFE and the Case for Greenwashing
What was it that was uncovered?
The disclosed link was an article published by an organization called FloridaBulldog.org on September 17, 2020 entitled, “Fortress forgave huge Trump loan, got federal permits to transport LNG by rail.”
Summarizing the article:
In 2005 Fortress Investment Group loaned $130 million to Donald Trump’s Trump Organization, via its subsidiary, Fortress Credit to help finance the construction of the Trump International Hotel and Tower Chicago.
The Trump Organization was in danger of defaulting on the loan in 2012 and Fortress Investment forgave all but $48 million of the approximately $150 million owed (principal + interest). This should have been a taxable event.
Once in office, the Trump administration awarded two special permits to transport LNG along Florida’s east coast to Doral’s Energy Transport Solutions, owned by NFE.
The permit allows Florida East Coast Railway, a subsidiary previously owned by Fortress Investments, to ship LNG.
These permits allowed the company to transport LNG much further than was typical under such permits. Previously, it was considered too dangerous to transport LNG by rail over such long distances.
First, the transactions described above involving subsidiaries are not arms-length transactions and raise issues surrounding governance at NFE. Second, it is hard not to infer an implied quid pro quo in the above sequence. Both raise questions about NFE and its overall ESG record, especially as it relates to the ‘G’ in ESG: governance.
Conclusion
Corporations, investors, regulators, and the public have tools to test ESG commitments and scores in a replicable and consistent manner – to wash away greenwashing.
Analysts well versed in these tools today are helping these institutions make better-informed decisions, decisions that support the transition to a low-carbon, sustainable, and equitable future.
Using analysis and algorithms, you too can future truth ESG and fight greenwashing! Article was originally co-written by Jason Voss, CFA and Gabriel Thoumi, CFA, FRM