> What is it to be a Responsible Investor?

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1 What is it to be a Responsible Investor? Dispelling the myths, leveraging the relationship Dr Ian Woods Head of ESG Research, AMP Capital March 2014

2 2 A little bit about me PhD in how combustion pollutants form Masters in Environmental Law and MBA Environmental and risk consultant in UK and Europe Environmental consultant in Australia and Asia Set up AMP Capital s Sustainability Fund in 2000 Established the Investor Group on Climate Change in 2006 A little bit about AMP Capital and our ESG capabilities $130bn in funds under management $18bn in funds under management (New Zealand) Real estate, infrastructure, fixed income, equities and multi-asset portfolios Signatory to the UN PRI (United Nations Principles for Responsible Investments) in 2007 Dedicated ESG professionals across the organisation // 2

3 Responsible investing - Investment philosophy History of sustainable investing First wave Ethical investing Second wave Socially responsible investing Third wave Responsible investing Based on an understanding that a company s financial performance is positively correlated with its ability to managing the environmental, social and corporate governance risks and opportunities that it faces Actively engages with companies as a responsible owner There will be an alignment of interests with an investor s social concerns, but this is a secondary consideration // 3

4 The world is changing: Companies are facing a wide range of new issues Climate change Technology change Demographic change Industry growth Resource scarcity / constraints Consumer behavioural change Regulatory change. Creating new opportunities and risks // 4

5 Responsible investing The investment logic Direct and indirect impacts on companies economic performance Reliance on: Weak regulation Uninformed consumers Underpaid labour Underpriced pollution of air, water or land is unsustainable. Companies performance on sustainability issues is an excellent proxy and leading indicator for the overall quality of their strategic management Sustainability factors are complex, difficult to research and below the radar of mainstream analysts. This creates mispricing opportunities and allows an information advantage for some investors. // 5

6 6 Myth 1: Responsible investment is about ethics and personal values The market is not amoral Responsible investment is looking at the bigger picture Responsible ownership Engaging Looking beyond short term investment returns Integrating ESG creating value // 6

7 7 Myth 1: Responsible investment is about ethics and personal values Understanding the importance of intangible drivers can lead to better informed investment decisions and avoid value destruction The majority of the value (approx. 75%) of the typical company is made up of intangible drivers Source UBS, Sustainable investing - July 2013 Better insights into how a company manages its intangible assets leads to better investment decisions ESG factors are complex and often below the radar, creates mispricing opportunities Performance on sustainability issues is a good proxy for management quality // 7

8 8 Myth 2: Responsible investors only look at environmental issues and long term issues Digging deeper The issues responsible investors consider Short term implications How confident are you that management will deliver? What other scenarios exist? // 8

9 Myth 3: Responsible investors have to give up returns for doing the right thing 2012 Deutsche Bank did a comprehensive study of performance of sustainable funds. It concluded: Overwhelming academic evidence that firms which have higher EGS ratings have lower cost of capital Compelling evidence that strong ESG performance is correlated to strong financial performance 9 Source: DB Climate Change Advisers, June 2012 // 9

10 Myth 3: Responsible investors have to give up returns for doing the right thing ESG brings investment insight into investment risks, which can bring better returns An Australian example The AMP Capital ESG Index 131 of the S&P/ASX200 (84% of market capitalisation) 10 // 10

11 Myth 4: Responsible investors is just about what you don t invest in the case for engagement 11 Investors can influence companies on ESG issues Focus on themes with objectives and seek tangible outcomes Focus is on long-term relationship with company Example of current key engagement themes Climate change Supply chain risk management/human rights Mining and communities Corporate governance Engagement with New Zealand companies Recently met with eight New Zealand companies Issues covered included: safety, supply chain and customer service Regular discussion with six others // 11

12 12 Engagement in action climate change Significant reduction in greenhouse gas emissions needed to address climate change But modern economies are heavily reliant on fossil fuels Smooth change better than abrupt change Needs action by government, companies and investors Doing nothing is not an option Physical impacts of climate change are significant Climate change is a systemic risk to investors Kicking the can down the road is not a good response But how can responsible investors respond? // 12

13 Engagement in action climate change 13 Climate change is an externality that needs to be internalised through a price on carbon to enable companies and investors to effectively manage over the long term effective policy is critical. This is reflected in AMP Capital by taking a long term collective engagement approach with both companies, investors and policy makers: Started engaging with companies in 2002 and is ongoing Started investor relevant sector research pieces in 2004 Established Investor Group on Climate Change in 2004 Engaged with policy makers from 2006 Developed portfolio carbon price risk assessment tools in 2008 // 13

14 14 Engagement in action supply chain and human rights Relying on an unsustainable supply chain how can a responsible investor respond? Example of a issue/sector thematic engagement Field trips to Asia in 2008, 2011 and 2012 Increased outsourcing to countries with high human rights risk Assessed the Investment risks to retailers Presented at New Zealand Responsible conference: Concluded: Too much focus on cheap labour costs can have a poor risk / reward ratio moving into Bangladesh / Cambodia can backfire 2013: Rana Plaza building collapse - accord on Fire and Building Safety in Bangladesh Rana Plaza building collapse on 24 April ,100+ workers killed and significant international media coverage. // 14

15 15 Engagement in action supply chain and human rights Engagement activities to date Publication of research externally, e.g. how sustainable are Australian retailers new sourcing strategies (2012) and presentations at forums / conferences + media articles Supply chain risk management forums (for investors and for companies). Engaged two New Zealand companies in September 2013 Benchmarking of Australian, New Zealand vs international retailers To identify best practice To identify engagement opportunities with tangible outcomes Broad themes Specific issues RIL Funds signatories to the Investor Statement on Bangladesh Engagement with international retailers Measuring success: Numerous Australian and International Retailers are now signatories to The Bangladesh Fire and Building Safety Accord Getting success with two new signatories, including Adidas and a number of Australian retailers // 15

16 16 Engagement in action extractives and communities Mining can bring significant economic benefits, especially to developing countries But There are significant OH&S risks Potentially significant environmental risks Significant social impacts (and not necessarily wanted) How can responsible investors respond? // 16

17 17 Engagement in action Extractives and communities Community impacts of mining companies Site visits to: PanAust Mine in Laos Kingsgate Mine in Northern Thailand Lonmin Marikana Mine in South Africa Gold and Copper Mines in Western Australia AGL s Camden and Gloucester CSG Fields Darling Downs CSG Fields Lonmin lessons Complex social, political and economic issues: Unions Corrupt/dysfunctional local authorities Legislation with unintended consequences Poor financial literacy Two families Legacy political issues Poorly trained/new local law enforcement officers Simplistic response can make things worse Lessons from one company can t necessarily be applied to others // 17

18 18 Engagement in action corporate governance Corporate governance, remuneration and engagement An example of market wide engagement theme An example of AMP Capital s long term commitment to engage with companies: Proxy voting and engaging with companies for over 13 years Increasingly meeting Boards to discuss key issues Investor issues for Boards: Composition and independence Risk oversight Executive and Board succession planning Which shareholders is the Board focusing on? Remuneration structures can tell you a lot about the governance of a company: Who and what a company values How open the company is with its shareholders. Pay is complex - no one pay structure will work for all companies Operating environments, ability to attract and retain quality employees, ownership structures and capital structures. // 18

19 19 Engagement in action corporate governance Linking engagement with investment decisions understanding alignment What is driving management through what is being rewarded The timeframe over which senior management are focused Conflicts of interest through related party transactions What risk are being managed Is short-term focus jeopardising long term performance All contribute to better and more informed investment decisions, especially avoiding downside risk and provide opportunities for shorts. Measuring success Steady improvement in corporate governance across the board as seen by: More women on Boards Better structured remuneration Better interaction between companies and shareholders // 19

20 20 Summary Responsible Investment and assessing ESG issues Want to know more? Adds investment insight Covers a wide range of material issues Provides competitive returns Leveraging ownership Engagement - leveraging ownership Taking responsibility that step further Can come in a variety of forms: Include policy makers and other investors climate change Sector specific supply chain and Human Rights Company specific Extractives and Communities Market wide proxy voting Engagement also provides Investment Insights // 20

21 Important note Neither AMP Capital Investors (New Zealand) Limited, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this presentation. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this document, AMP Capital Investors makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. // 21