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On Today's Bloomberg Intelligence Show, we dig inside the big business stories impacting Wall Street and the global markets.
Each and every week, we provide in depth research and data on some of the two thousand companies and one hundred and thirty industries are analysts cover worldwide.
Today, we'll take a look at why US judge ruled against the government's proposals to break up Google Plus.
We'll look at why more AI researchers are leaving the tech giant Apple.
But first we begin with news from the food and beverage company craft hinds.
Because this week Craft Hines announced its plans to split into two separate publicly traded companies. One company will sell condiments and box meals, while the other will include its slower growing grocery products like lunchables.
For more, Scarlet and I were joined by Jen Bartashi's Bloomberg Intelligence senior retail analysts. We first asked Jen what this news means for craft Hns ten years after its initial merger.
It was just about a decade ago that they put the companies together with the plans that it would become kind of a package food powerhouse. But trends have changed and consumers have changed, and it just hasn't materialized the way they originally thought it would.
So what did the two companies get out of this merger then?
So, you know, when they when we're looking at what they brought together, they brought together some products where they were able to recognize some synergies, They were able to do some co branding, some you know, product development, that
sort of thing. But as I said, the consumer has changed and demand for shelf stable packaged food products is just less than it was, and so we've seen multiple years where scanner data shows that Kraft Heiind's brands have sort of been shrinking a little bit, and I think this separation is an attempt to kind of reinvigorate growth in different parts of their portfolio.
You mentioned several times how the consumer has changed. Let's dig into that a little bit more. Are we talking about because of the anti obesity drugs like GLP one? Is it a case where RFK and Make America Healthy Again is really taking root? I mean, this is kind of a slow moving shift in the consumer, right.
It is, indeed, Scarlet, it's a slow moving shift, and it started, you know, coming out of the pandemic. In the pandemic, everybody sort of retreated to familiarity, right, They went back to brands, they went back to shelf stable products. And since then there's been more emphasis on things that are more natural, lower sodium, healthier for you, that sort
of thing. And while craft Tiinn's has been making updates to their portfolio, it is hard to envision how kind of electric orange mac and cheese has a long term growth, a long term growth appeal to people where you know, there's pressure from as you said, RFK on more like natural colorantce and things like that. So you know, their portfolio is caught in that crosshairs.
When you put companies together. The pressurelease often talks about the synergies that are going to be the cost synergies, maybe some revenue synergies. Maybe are there disynergies when you break them apart?
Yeah, there are dissynergies. The company expects about three hundred million dollars in disynergies. You know, thankfully most of their manufacturing practices are fairly separate, but there is a component to that craft. TIGNDS actually said in May they were exploring strategic options. There's been repeated rumors that it would result in a split of two companies, so the confirmation isn't necessarily unexpected news.
Paul, disynergies, Does that just mean upfront costs?
I think I need a new CFO, I need a new accounting department. I don't know, Well, so go ahead, JD Jed's what's next for the packaged food business? I mean, is this just a industry wide secular decline?
Well, right now it appears to be, especially in North America, a bit of a secular decline. Pockets of growth are becoming more and more isolated, and so when you're looking at scanner data, the problem is the consumer. As I said, they're shifting behaviors, but they're just not buying as much as they used to. And you see this even with Walmart or Target or Kroger, where people used to buy in multiples and stock up their pantries, and they just
don't shop that way anymore. They're buying more on an as needed basis, and part of that is the macroeconomic environment, and so that just doesn't favor these companies right now where historically they've been pantry staples. And so right now when consumers are looking what they're going to make for dinner tonight, a bigger portion of their plate is fresh foods. So the perimeter of grocery stores are doing much better than the center of the store, which is these shelf stable products.
Let's talk about the folks who brought these two companies together. Is Berkshire Hathaway run by Warren Buffett and three G Capital run by a group of Brazilian operations. Guys, where did they stand in all this gen what happens to do? They each still hold steaks in the companies, I mean, do they come out looking better ten years later.
Well, Berkshire Hathaway still has a large stake in the company. I think they owned just over twenty five percent of the outstanding shares. But you know, they did relinquish their their chairs on the board shortly before the strategic options were announced, or that the company was exploring strategic options, So they've been slowly pulling back you know, from the time of their initial steak. They're probably still going to come out ahead, but it has been a ten year play for them.
Do we know where they're going to put their shares? Are they can go equally between the two companies, because I'd like to invest alongside.
Warren Buffet I think at this point, I don't think that's been disclosed, but it is certainly something that everyone will be watching for.
What will you be watching for, Jen, in terms of how competitors respond or react or move in, you know, to kind of take advantage of this breakup.
I think what will be interesting is to watch the level of promotional activity. There will likely be some some effort to take market share, and craft Times is likely to up their marketing spend in order to try to drive volumes just ahead of when this split actually becomes realized to sort of show improvement in some of their legacy brands. So what that really sets up a stage for is actually probably good for the everyday shopper and
that they'll be probably more sale items, more discounts. But it also means that it's less profitable sales for the companies that are involved in chasing that market share, so it will be interesting to watch how it unfolds. Companies only expecting this to close or to be realized that this second half of next year, so there's some time for those dynamics to play out.
Our thanks to Jen bartashis Bloomberg Intelligence senior retail analysts.
We turn next to more news in the consumer product space. This week, activist investor Elliott Investment Management announced it built a stake of about four billion dollars in the food and beverage company PepsiCo.
This makes Elliott one of PepsiCo's largest investors, and after the announcement, Elliott outlined its plans for the beverage company. This includes potentially restructuring its beverage unit and reviewance Snack's offerings.
For more on all of this. Scarlett and I were joined by Kensha Bloomberg Intelligence, senior consumer products analysts. We first asked Ken what the future looks like for PepsiCo and whether the company could eventually break up.
I wrote a report or Bloomberg Intelligence saying that given the weakness of the stock, is really just a matter of time where these talks are going to be revived. Recall, back in twenty fourteen, try On, an activist, actually advocated that breaking the company up between beverages and foods. The company decided not to do it. It made the case that it was getting good synergies between the two. Fast
Forward Elliott isn't quite going that far. And Elliot's letter it said it believes that value can be created by simply having the beverage side, roughly forty percent of the business, just refranchise their bottling operations and plain English, what that means is to divest those capital intensive operations manufacturing operations that create the finished product from the syrups and concentrates
that Pepsi, the beverage company sells. That's really the golden part of that business, you know, the jewel that business is the concentrate business. That's what Coca Cola does. Coca Colatus sells concentrate syrups or high margin to third parties to make the product. PepsiCo chooses to do it in house. That results in tying up capital, lower margins, and so on.
At the same time, Eliot is also saying on the food side, perhaps some SKU rationalization is due, meaning there's a lot of food products there that they may not be well suited to sell. The Freda Ley is doing it really well, although it's a kind of a slowdown right now with many consumer products. It's the Quaker foods. I think it's really targeting and saying, you know, maybe some reduction there maybe in order. So that's really what what the gist is today with Pepsi.
All right, Ken, thank you for that very very detailed rundown. I want to pick up on what you were talking about with the bottling business, refranchising the bottling business, which is what Coca Cola does right now. What does Coca Cola give up by doing that? I mean, there had to be a reason why Pepsi chose to keep it in house up until now.
Yeah, that's a great question, Scarlett. So go back in time with ten fifteen years ago or so, both companies had done that. They both had separated those businesses. Petsico decided to retain or it so and then it brought it back and it decided to keep it and made the case. At the time that's the soft drink business
was in a downturn, volumes were weak. They thought by gaining more control of those bottling operations, they could right size the ship if they could get it back in order lining the interest between the bottlers and the company. Because I'm gonna remember Coca Cola. By separating it, it is to some degree giving up a little it's accepting a little risk. I mean, these are third parties, or these are independent companies. They can sell beer, they can
do other things. PepsiCo didn't want them to do that. PepsiCo said, look, we want you to be fully aligned with what we want. So that's what they said. They gained from that, and I guess there's some truth to that, But you're giving up a lot also for the factors that I mentioned before.
Ken, you've been covering this consumer space for a long time. You've seen the cycles come and go. It seems like we're in a cycle of breaking these companies up. I mean you've seen this game before. How do you think this is going to play out across the consumer space?
Well, you know, given the PepsiCo stock before today was down about twenty percent over the last two years. So it's really disappointed investors. And beyond that, it's that their long term algorithm of high single digit comparable EPs growth is not going to happen this year. They're looking at flat this year, and investors see the writing on the wall, they see a slow down, and they're saying, look, maybe there's more than just a cyclical element here. Maybe there
are some structural things this company can do. I think Elliott's making some good points here, and I think PepsiCo ought to follow through on some of these if they want to regain some of the low sentiment that's out there among investors.
Do you expect other investors to jump in here and kind of ride on Elliott Management's coattails? I mean, is Elliott going to be empowered to ask for more going forward?
That's a great question. I think there's going to be some supporters of Elliott. Like I said, I think Elliott's making some fair points. PepsiCo has been really disappointing on the operational side. And like I said in the Stock Front, I think it ought to be open ears to listen to what Elliott says. I think others will support Elliott in this case.
Yes, our thanks to Ken Shape Bloomberg Intelligence senior consumer products analysts. Coming up, we'll look at why the department store chain Maycy's raised its guidance.
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We moved next to some news from the tech giant Alphabet. This week, US judge ahmit Meta ruled against the government's proposal to break up Google.
This includes a forced sale of its Chrome browser in the biggest antitrust case in three decades, and the ruling is seen as a setback for the US government in its bid to curb the power of big tech companies.
For more, Scarlet and I were joined by Jenniferree, Bloomberg Intelligence senior litigation analysts. We first asked jen for a clarification on the recent court ruling.
You know, really the court aligned much more so with what Google proposed than what the Department of Justice post. No divestiture of Chrome or contingent divestor of Android, because that was in there. Some data sharing, no exclusive agreements, some search syndication, meaning a search engine can basically provide results that just comes straight from Google, right, They're mimicking Google.
The surprising thing though here, and what was great for Apple is that the judge said Google could continue to pay for search default positions. That's with Apple. With Mozilla, it pays some OEMs to pre install Google Search on the Android phones that they group that they manufacture, and that I think was a really big surprise.
How is this remedy consistent with the original ruling, with the original finding of the court.
You know, I actually have a really big problem with aligning those two things because I don't think that it is. In terms of no Chrome divestiture, I think it's very consistent. And Paul, you know, I've been on this show before and I've been saying for two years that there would not be a chrome divestiture ordered here. But where it's inconsistent is with this default position. Because having a monopoly is not illegal, but it's the conduct that maintains the
monopoly that's exclusionary, that is illegal. And what the judge found in that liability decision that the conduct that was illegal were the default agreements. Right, This was exclusionary. This kept other search engines from being able to grow and scale and get better. He's allowing those default positions to stay in place. Now it's a shorter term, it's only for one year. Theoretically, in one year or one year after that, other search engines that have improved can compete
for that contract. But it's still odd to me that what is found to be illegal is allowed to continue.
What does this mean for just Silicon Valley in general? Can I sit back if I'm a CEO in Silicon Valiant saying Hm, the courts are maybe a little bit more aligned with our industry how we think about the world than maybe the government.
I would say that the way Silicon Valley can think about it is that this judge was cautious, and this judge did talk about needing to apply caution when you're dealing with tech markets and Silicon valley companies, because judges don't understand it. They don't want to m pack the route, the innovation and the natural course of the industry, right, They don't want to distort that, And so it does suggest that it's more likely a judge is going to
be cautious in future remedies for other cases. But what I think everybody has to keep in mind, because I've seen people talking about the fact that there's read through for some of these other monopolization cases, I don't really think that there is, because the facts are entirely different case by case, the markets are entirely different, and what made a divestitor remedy inappropriate here doesn't necessarily exist as
a fact pattern. Let's say an FTCB Meta or usdojb Apple or the other DOJ case against Google in the ad tech space. Those are different cases with different facts, and I don't think that there's necessarily a read through that companies are safe from divestiture orders because of this one.
Do we think that AI the quickness and how it's developing played any kind of role in the judge's decision here?
Oh?
Absolutely, the judge even observed that in the liability hearing, which was now a year and a half or so ago, that AI barely came up at all other than by Google, it barely came up. But in the remedies hearing it was all about AI and the witnesses were all AI. And he says, it just shows in a year, a year and a half, how much things have changed, and the fact that you now have real competition to general search other than other general search engines. And I think that impacted him a lot.
Our Thanks to Jennifer Ree, Bloomberg Intelligence Senior litigation analyst.
Staying on tech, this week, we learned that the tech giant Apple lost Gian Jang, its lead AI researcher for robotics to meta platforms.
Three more AI researchers are also leaving Apple's in house large Language Models team to join other companies. The departures are part of an exodus of AI talent from Apple, and the AI departures may only worsen with a potential shift toward using third party models.
For more on this and all things Apple, Scarlet and I were joined by Mark German, Bloomberg news Managing editor for Global Consumer Tech First to ask Mark if he thinks it's a problem Apple is losing its AI experts.
It's only a problem if it impacts the consumer, and right now, Apple's AI efforts are impacting the consumer because Apple Intelligence and Siri lag very much in comparison to competing products on other platforms. Now, this can all be turned around. Right You've got the ability for Apple to do partnerships. I predict there'll be some sort of big AI partnership for Apple. I've reported that they were in
talks with Google and AI partnership. I've reported they've been in talks with Anthropic and Open Ai on potential AI partnerships. They get one of those done, it's a different ballgame. They buy a company. I reported first reported over the summer that they've talked to Mistral reported that they talk to Perplexity. I don't expect either of those deals to
get done, but that certainly shows you where their head's at. Okay, if this all gets turned around with a major new version of Siri next year, if they get the Apple Intelligence pipeline heading in the right direction, if they buy and hire the right LLLM people, they could be in pretty good shape. Don't forget Apple has the best ecosystem, they have the best hardware, and they're able to deploy new features and operating system upgrades faster than any other company.
And so at the end of the day, this is still their game to lose because there are so many levers they can pull, especially with their cash balance, to turn this thing around.
So why haven't they done any of those things so far? Why are they waiting? What's the hold up?
Well, you know Apple, Unfortunately for them, they're very tied to a couple cycles, right. They have their spring cycle and then they have their fall cycle. The fall cycle has been set for some time. There's really no changing that. That's locked and loaded. You'll see the introduction of those products and those software features next Tuesday at the iPhone
seventeen launch event. The spring is really the next opportunity for there to be major new features, right, that's when they're going to roll out pretty big update to iOS twenty six called iOS twenty six point four. At that time, I expect them to release an overhauled version of Siri that are going to fix a lot of these.
Issues that's all supposed about now.
It is a long time, yeah, it is a long time. And the truth of the matter is that the AI space runs far more quickly than even the mobile space. You saw a lot of innovation in the smartphone space for the last two decades. AI is moving ten times as fast.
As that, and they're aware of that. They're smart people. I guess they've made the decision that they're comfortable with their timing. Did they run the risk of making a fund fundamental error in their judgment of that timing.
I don't think they're comfortable with the timing. I think that the timing was actually even further out. I wasn't expecting a major new version of sery with incredible enhancements for consumers, probably not until the end of twenty six or sometime. Even had the tail out of twenty twenty seven. So this is going to be happening at least six
to twelve months sooner than Apple had originally planned. They are probably one or two years away if they did nothing of starting to bleed share to competing smartphones with major AI features right now. Tell you the truth. We talk about AI all day every day. It's very important to the market. It's very important for the current technology age. Nobody's buying phones because of AI or not because of AI, but we are moving towards that, and that is going
to happen. It's one or two years away, and so if they're not in good shape by then, they're going to start being impacted not only in terms of what we talk about, not only on Wall Street in the stock market, but in actual purchasing decisions by consumers, because right now consumers only care about a few things when they buy new phones. They want to fix their broken screen, yep, they want a better camera.
That was Mark German, Bloomberg News Managing editor for Global Consumer Tech. We move next to earnings in the retail space.
This week, the department store chain Makesy's raised its annual outlook and reported it's best comparable sales growth in three years. This comes despite new tariffs and moderation in consumer spending.
Meanwhile, the discount retail company Dollar Tree raised its annual sales guidance. However, it disappointed investors, stating the benefit from price heights would disappear.
For more on these companies, Scarlett and I were joined by Emily Cone, Bloomberg Consumer team Leader. If We first asked Emily for her key takeaways from Macy's most recent quarter.
I think this falls in line with what we've heard from other retailers. Shoppers are still shopping, They're being precise about what they're spending on, being choosy. They called out home furnishings and apparel as strong sellers, also citing high demand for fine watches, jewelry, mattresses. So they are shopping. I think the main question I have is how long will this last?
How promotional are some of these retailers. How promotions do they have to be? Because I know that goes right to the margin.
Yeah, I mean that's an interesting segue into Dollar Tree. I think Dollar Tree raised prices so far this year to offset the cost of tariffs, and shoppers felt that and that doesn't have that has a limit. There's only so far you can raise prices, and I think that is starting to eat away at their bottom line. They can't really raise prices that much anymore. I think these
retailers are in a difficult spot. They want to keep let prices low because of how the consumer is feeling, but also their costs are up on account of tariffs.
I would imagine Dollar Tree has a lot less cushion. As you say, to raise prices, given who they're targeting, and given how they're seeing a lot of higher end consumers trade down to Dollar Tree than a Macy's. Macy's did say explicitly that price increases are on the way, didn't they.
Yes, they said that they have already started and that they're coming. But their sales are strong, and I think you know they're in the midst of a turnaround. There were signs that Tony Springs strategy is taking hold. Comp sales rose more at his reimagined stores than they did overall.
What is what's different about a quote unquote reimagine good question.
I think that is a really good question. I think these are the stores where they believe that they can have the greatest edge. So they're doing a lot to reinvigorate sales. They're redesigning the stores, they're rethinking their assortment, and these are the stores that they say we should really watch. This is the future of Macy's.
Let's put this into context. What we heard from Macy's, what we heard from Dollar Train. Of course, Dollar General earlier in the month, or was it this month or last week? In any case, what are we hearing from retailers overall because investors are punishing some and rewarding others. Even though the message, I would say is fairly consistent that consumers are spending, they're just being really, really weary and careful.
I think you nailed it. I think retailers continue to point to strong sales momentum. People are shopping even in the face of tariffs and threats of inflation. I think the question I have is knowing that retailers stock up months ahead of time, They had their inventory that they
sold through now months ago, perhaps even before tariffs. I don't think we've really seen the full paths through of the costs of tariffs yet, and I think we'll continue to see that in the coming months, and especially during the all important holiday shopping season.
Let's go there. What's Is there a consensus building to how the holiday season may shape up?
It's still early. I think the outlook isn't great so far. Although Tony Spring did say that the back to school shopping season was he used the word good, and he said that back to school is generally a good bell weather for the holiday shopping season. So there was a slight note of optimism there, but not totally bullish.
That was Emily Cone, Bloomberg Consumer team leader, coming up a look at how the Trump administration is impacting the clean energy transition.
You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two thousand companies and one hundred and thirty industries.
You can access Bloomberg Intelligence via bi go on the terminal. I'm Scarlet Foo.
And I'm Paul Sweeney. This is Bloomberg.
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On Bloomberg Intelligence, we often look at research from Bloomberg and EF previously known as New Energy Finance.
They're the team at Bloomberg that tracks and analyzes the energy transition from commodities to power, transport, industries, buildings, and agriculture sectors. And this week we took a look at how the Trump administration is impacting the clean energy transition.
For more. Scarlett and I were joined by Antoine Wagner Jones, Bloomberg BNEF, head of Trade and Supply Chains. First to ask Antoine to explain how the Trump administration is now impacting the transition to cleaner energy.
There's a few things that have happened that are quite dramatic. In recent months, there's been a bill that has been passed by the Trump administration which seeks to reverse a lot of what was brought in under Biden under the Inflation Reduction Act, which was this big climate bill that gave all of this federal money, mostly in the form of tax credits for clean energy. A lot of that's
being cut. So there was a really big, high profile tax credit for electric vehicle that's going to be gone as of this month, and a lot of the other stuff is made much harder to access. So this is a big problem for many of the manufacturers who have led to over one hundred and ten billion dollars of announcements for factories in the United States. There's a lot of question marks about the fate of those factories and the business case under the current environment.
Does the current administration want a transition to clean energy to green energy?
The current administration is focused on a number of different things, such as when it comes to energy date load increasing due to data centences one a nuclear revival for the United States is another. When it comes to clean energy, when it comes to electric vehicles, those are things that are being actively diminished in terms of their rollout and support at a federal level. So the answer is no, they are pushing against it.
So how are companies within the entire supply chain, how are they reacting?
They're waiting and seeing force. For example, there's a number of different things that are happening where it's just not clear what the outcome is going to be. One of the things is that in the most recent bill that's been passed by the Trump administration, there's a number of rules around whether or not you can have any kind of Chinese involvement in a factory project at any real level.
It seems incredibly expansive beyond what was done under the Biden administration, and the guidance for that isn't out yet. And that's just one of the things where uncertainty is just continuing. We're still waiting for clarifications on that specific rule. And then if you zoom out again the tariff situation,
the volatility there. We've had recent news around you know, the ultimate Supreme Court decision, which will likely impact many of the so called reciprocal tariffs, is going to be you know, something that we are waiting for early next year, and That's just one example of how even with the tariff situation, things are changing by the day, and there's
a lot of uncertainty there too. So in you know, in terms of new investments, very little is happening because people are waiting and seeing and that's due to the volatility not just in terms of federal support and the fate of those programs, but also in terms of trade policy.
And there was the one big beautiful bill as well. How did that change up the landscape?
So that scrapped the electric vehicle tax credit, for example, that is gone. That has also brought a whole host of what's called foreignenety of concern rules around accessing many of those tax credits. Those rules were in place under the Biden administration, but in a much more restricted form. These are being expanded be far beyond what they were,
and the aim there is really interesting. Originally there was a thought that the Trump administration when it came to Chinese involvement investments in the US, would be much less ideological,
much more quote unquote transactional. That doesn't seem to be the case with this bill, where suddenly you have a new series of rules which is going to make extremely hard for any project where there's any you know, any kind of doubt as to some Chinese investment in the form of debt financing inputs into a factory from going ahead and receiving tax credits. That's one big outcome from the spill, and we're still waiting on the guidance for that and how it's going to play out.
I mean, does the US have the capability to be self sufficient in transitioning to cleaner energy or does it need a global supply chain.
It needs a global supply chain. So what we've done, we've just published a huge report sort of detailing the current installed capacity for lots of different sectors in terms of factories online in the United States. We look at what's been announced, we make a call as to what could come online. And when it comes to some products like downstream products for things like solar modules, so solar
panels in their finished form. When it comes to lifthiumine battery cells, so that's batteries in their finished form, the US actually has a pretty good shot at being self sufficient by twenty thirty we think. However, and this is a big however, when it comes to the inputs, the components that go into those things. So for a battery, it's stuff like the cathode, the anode, You're going to
have to rely on other trade partners. If we suddenly have rules which shut out China from those supply chains, that means that the mapping exercise that we've don suddenly becomes quite relevant where you begin to say, oh, well, Japan has a surplus in separators that are used for
making batteries. South Korea as a surplace in cathodes. And that's when you start having this sort of rejigging of all the different puzzle pieces and where procurement teams are going to be very busy over the next few months.
Can any of that be brought back to be made in the US on shore manufacturing.
That's the aim. And under the Biden administration, where you had not just tariffs that were relatively stable, but you also had visibility in terms of future support, and you also had demand side policies which meant that there'd be local demand for your product that was locked in. Even under those circumstances, still quite hard to do with the kind of price increases you see in the US. We've got a lot of announcements we'll see whether those factories
get built now. But in terms of that midstream, we haven't seen as much in the way of announced investments, and it's very unlikely that we're going to see anything in the short term under the current environment. So the short answer is no, not anytime soon.
Is it.
What are the capital markets like for any of this these days? I would think with the uncertainty that you've laid out for capital markets must have they dried up.
Yeah, capital for these it's become a lot harder, and we've seen a real fall in terms of VC funding for for example, for a lot of these projects, there's
been a shift towards things like AI defense spending. And there's also some big question marks around, you know, the suitability of some of these early stage funds for funding clean energy and climate technology in general, the returns profiles are very different to many other sectors, and that means that, Yeah, that means that there's an increased relevance to the kind
of policy changes we've been seeing recently. And actually, when it comes down to it, you really do need a lot of state support, even you know that that needs to be qualified when it comes to evs. That might be the case we're still going to see a lot of deployment of solar power, for example, and things like batteries, because costs have just gone down so dramatically that a lot of that will be built even without the kind
of federal support that we saw until recently. So there is a silver lining for some sectors, but for many sectors we're going to see some real difficult in terms of financing.
Our Thanks to Antoine Wagner Jones, Bloomberg bn EF, head of Trade and Supply Chains, we move.
Next to some recent research by Bloomberg Intelligence on Environmental, social and governance investing.
Now, in simple terms, ESG is a framework used to evaluate a company's management of environmental, social, or governance risks, and since the war in Ukraine, roughly half of the ESG registered equity funds in Europe have been allocating at least some capital to companies that manufacture, supply, or transport nuclear arms.
Now, according to Bloomberg Intelligence, that number may only increase. This comes as recent guidance in an EU proposal leaves nuclear arms out of its definition of controversial weapons.
For more guest hosts, Lisa Mattail and Alexis christoffers spoke with Shaheen contractor Bloomberg Intelligence senior ESG strategist.
The first asked Shaheen to break down how ESG funds are tied to nuclear arms.
Traditionally, I mean ESG funds defense. This whole thing has been quite controversial, so historically ESG funds tend to exclude such sectors such weapons. I guess now the companies I analyze are part of not just banks exclusionless you know, biggest one of the biggest asset owners, things that excluded. What's happened now is that the EU and a new rule. It's defined controversial weapons, but it's left nuclear weapons out, so it now defines it as cluster ammunition, land mines,
things like that. So it's now explicitly not for the lack of better words, controversial according to the ALA.
But doesn't that sit in direct conflict with what these ESG funds are supposed to be about, like ethically and morally or is this really not following the money at the end of the day.
So it's it's I guess Traditionally ESG has been about you know, socially responsible investing, values investing. Actually those are two separate things. So if you want to go based on your values, your ethics and yes, but ESG now or you know, the way we analyze it, it's following the money. It's financially material metrics that lead to out how.
It all leads there, because I mean, initially always do no harm, right, no significant harm? Correct, And so it's hard to make the argument that nuclear weapons may not do significant harm.
So I would say a lot of these values things, they're so subjective. I'm not saying that they do significant harm, but I'm just saying it's so subjective and never changing.
That's the point that is true.
But it could boost returns if defense continues.
To aub performed.
Correct, So the two things it could booster, it turns. But at the same time, some values based investors might you know, it might go against their mandates. So I guess the point is we cannot assume that these funds now no longer have such exposures. It would lead to greater fund scrutiny. That's the point of this. You have to examine the fund.
So who's going to be driving this push into these ESG funds sort of focusing or including now nuclear weapons.
So driving the pushes it's always been Europe. If you're talking about you know who's investing into this, it's always been Europe. North America, i would say, is seeing a bit of pause when it comes to these kinds of investments. It has been for a while.
And when you look into that, I was looking at some of the numbers that you put. You said, five ESG funds have seven percent or more of their portfolio invested in companies excluded. How significant is that figure?
So seven percent of your portfolio in such companies, it's quite substantial. It's concentrated. Now the number behind that that five, Yes, she funds, it's not that much. I think, contrary to what people might think. You know, historically exposure to such companies that are involved in uklear weapons like Saffron Jacob Solutions, it hasn't increased. So before the war, the Russia Ukraine War, people might have thought it increased, but actually it didn't. But it could going forward.
Russia's invasion of Ukraine did it push money into these ESG funds inclusion of nuclear weapons?
So it did not push ESG funds to increase allocation into these companies. That's the point. And it's interesting because you would expect that it did, but I think not just bank you know, being on not just banks exclusion list has such a like stigma to it historically that it didn't that being said, that could change now.
So I'm still confid. So why does the E you want to change things?
I don't know, right.
So I guess so let me so.
Historically, the EU defined controversial weapons, as you know, according to international treaties and UN principles, so it was always up in the air as to whether what was included. So some asset managers exclude nuclear weapons, some didn't, so it was always a gray area. It was never defined. Now it's explicitly defined as not being included. If that makes sense.
It does, it does, But what do they risk pushing away value based divestors.
Yes, so that's the point. You know, it could boost returns, but then you have this conflict for people where this does not align with their value. So it's that dual conflict. So again the point is funds might need additional scrutiny. I can't if that doesn't align with my values. I can't assume that those companies are not in this sort.
Of the next generation of investors are doing that because you're talking about younger investors where those things sort of matter in a way they maybe didn't for the prior generation.
Yes, I mean, survey show that a lot of you know, research shows that how this pans out, we'd have to see as the younger generation takes on.
Well, I was gonna statish, where where does this go from here?
I think where does this go from here? So I think if we continue to focus on ESG as sort of risk and returns, I think that's why we go from here. These values based things are very subjective.
Our thanks to Shaheen contractor Bloomberg Intelligence senior ESG strategists.
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Mm hmm