Integrating ESG what does it mean in Practice?

Transcription

1 Principles for Responsible Investment Integrating ESG what does it mean in Practice? Katie Swanston Head of Implementation Support, PRI

2 The PRI

3 The six Principles 1. We will incorporate ESG issues into investment analysis and decision-making processes 2. We will be active owners and incorporate ESG issues into our ownership policies and practices 3. We will seek appropriate disclosure on ESG issues by the entities in which we invest 4. We will promote acceptance and implementation of the Principles within the investment industry 5. We will work together to enhance our effectiveness in implementing the Principles. 6. We will each report on our activities and progress towards implementing the Principles

4 900 signatories $30 trillion AUM Apr 06 Okt 06 Growth in PRI signatories and AUM Apr 07 Okt 07 Apr 08 Okt 08 Number of signatories Apr 09 Okt 09 Apr 10 Okt 10 Apr 11 Sep 11 Assets under management

5 Signatories include CalPERS, USA VicSuper, Australia BT Pension Scheme, UK National Pension Service, S. Korea PGGM, Netherlands PREVI, Brazil

6 The PRI is not: About sacrificing returns to save the world About philanthropy About exclusion of unethical stocks from portfolios A prescriptive/compliance-based standard

7 The PRI is: A toolkit for integrating ESG issues into investment and informing investment decisions Grounded in fiduciary duty Voluntary and aspirational A global collaborative investor network A forum for discussion and concrete action on longterm risk issues and value drivers A secretariat providing practical support

8 Responsible investment

9 Reminder: RI what and why? What: Incorporation of ESG issues into investment processes Why: We are facing a series of big issues and trends: Climate change, corporate governance, human rights, water depletion, clean energy, deforestation, biodiversity loss, retirement security These issues can affect investments directly and indirectly many/most investors do not address them adequately Environment: BP Employee issues: Massey, Foxconn Corporate governance: Newscorp

10 Impact on companies Real value looks past quarterly reporting (Financial Times, 18 April 2011) 'Vedanta refinery expansion plan rejected by India citing forestry rules' (Bloomberg, 21 October 2010) Billions more wiped from BP's value as shares plunge on oil spill failures (The Guardian, 1 June 2010) French government calls in CEO of France Telecom after 23rd employee suicide in 18 months (Associated Press, 14 September 2009)

11 Climate change impact Utilities CO2/ Listed equities Autos gco2/km Climate change Property Real estate Environmental performance PE/infrastruct ure Construction materials Manufacturers Renewable energy Energy efficiency

12 Corporate governance impact Risk management Corporate governance Company boards Executive pay Independent directors Audit committee

13 What can investors do? Address the issues before investment decisions are made: ESG affects investment selection Address the issues after the investment decision has been made: use position as a shareholder to exercise influence

14 Signatory performance

15 2011 PRI assessment results Use of ESG research and extent it is applied to portfolio construction (internal active managed assets) Large Moderate Small Not at all

16 ESG integration

17 What works and what doesn t CEO / management buy-in RI team part of front office KPIs and incentivisation Allocating resources RI/ESG research reaches people Training (to all staff) ESG in RFPs Communication and reporting RI/ESG as a separate department A single RI champion Unsystematic data collection

18 Challenges Knowledge Information and disclosure Materiality Uniformity Qualification and quantification Research Sharing

19 Current practices: IMs Before the investment decision: Research thematic, fundamental Identify material ESG issues Scenario testing Qualification and quantification Stock selection (overweight / underweight) Investigate specialist strategies

20 RARE Infrastructure Cash flows capture ESG where it is possible to quantify impacts, for example carbon costs in the EU Emissions Trading Scheme Discount rates are adjusted for ESG risks, for example a history of detailed disclosure, or conflicts of interest between a controlling shareholder and minorities. Higher risks result in a higher cost of capital Portfolio construction starts with the outputs from internal and external research, along with many other inputs, and synthesises information into stock weights

21 Quotient Investors Seeks to add alpha and provide risk control measures versus a major large cap equities benchmark ESG characteristics are combined with measures of deep value, relative value, quality growth, earnings growth, momentum and other measures to arrive at an assessment of stock price Provides a high degree of exposure to companies with good ESG characteristics Using ESG data used as a source of returns

22 PGGM Integration process in three phases: Phase I Inventory: Draw up an ESG Framework for the investment category. Investigate and determine which and to what extent ESG factors affect the financial performance of the underlying investments Phase II Implementation: Determine how the specified ESG framework is expressed in the investment process Phase III Internalisation: ESG factors form a natural part of the overall investment process

23 Current practices: AOs ESG in Requests for Proposals: One third of PRI AOs write ESG into manager contracts AOs are asking for evidence that ESG is integrated into research and investment processes AOs are asking how ESG is integrated into management structures and processes, staff training, etc. AOs are asking their investment consultants for guidance on ESG ESG reporting requirements incidents and responses

24 BT Pension Scheme The Trustee believes that long term factors, including ESG will impact the returns of the scheme moving toward full integration of ESG across investment decisions on strategy, asset allocation and manager selection and monitoring Due diligence questionnaires include questions on ESG topics such as investment process, fee structures and risk management Influence and challenge fund managers to deliver more effectively on ESG risk management

25 Environment Agency Active PF Managers have to show how they: Identify and select companies for investment Undertake research on ESG issues Encourage companies to improve their ESG performance Use their votes at AGMs to influence corporate decisions Report on voting record and direct engagement Identify themes that impact performance

26 VicSuper Address sustainability issues in passively managed investments through proxy voting, company engagement and collaborative engagements Enhanced passive investment : investments designed to achieve similar risk and return characteristics as an index, that are representative of the index, but are selected based on their sustainability credentials

27 ESG integration in other asset classes

28 Fixed income and RI How does analysis of ESG issues reduce default risk? How do bondholders engage effectively with management when they do not have voting rights? Can ESG issues have an impact on the creditworthiness of countries? Should credit ratings agencies do more to integrate ESG risks into their corporate ratings? Can ESG analysis improve understanding of investment risks associated with fixed income derivatives?

29 Private equity and RI PE is well-suited to active ownership and consideration of ESG issues Dialogue between GPs and LPs is growing LPs consider ESG in mandates with intermediaries, internal DD and fund selection process GPs take into account ESG risks when making decisions on investment in portfolio companies

30 Hedge funds and RI Responsible investment in hedge funds is only just emerging as a practice Engagement from asset owners and fund of hedge funds is critical to encourage single hedge fund managers to consider ESG issues in investment process Challenges for RIs to consider: fund governance, transparency, derivatives, short selling and leveraging RI helps mitigate some of these risks, support sustainability, build trust and integrity in the industry and align interests between AOs and hedge fund managers

31 Conclusion Responsible investment is growing rapidly as a mainstream trend around the world Driven by strategic trends in investment, the economy and society Enhance risk management and identify new opportunity, within fiduciary obligations Enables more informed investment decisions Developments with ESG in stock selection, portfolio construction and asset allocation Developments with ESG and other asset classes

32 Appendix

33 Regulatory trends UK, Denmark, South Africa pension funds required to consider ESG OECD recommendation that all pension funds should integrate ESG Germany new code on ESG reporting by companies European Commission considering a code on stewardship (investor responsibility) Listing rules for companies South Africa, Thailand

34 Developments at PRI Mandatory fees over 95% of signatories have paid More in-country work US, Korea, Australia, Germany Implementation support tools Fixed income, equities, commodities, hedge funds, AO RFPs/IMAs Complete review of Assessment process Mandatory reporting of specific issues from 2013 Link reporting more strongly to investment practice Benchmarking of performance will continue Consultation with signatories in autumn 2011

35 Academic research BAUER, R. & HANN, D Corporate Environmental Management and Credit Risk. Working Paper, European Centre for Corporate Engagement, Maastricht University. EDMANS, A Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices. Forthcoming Journal of Financial Economics. EICHHOLTZ, P., KOK, N. & QUIGLEY, J. M Doing Well by Doing Good? Green Office Buildings. Forthcoming American Economic Review. HOEPNER, A. G. F., YU, P.-S. & FERGUSON, J Corporate Social Responsibility across Industries: When can who do well by doing good? Working Paper, School of Management, University of St. Andrews. KEMPF, A. & OSTHOFF, P The Effect of Socially Responsible Investing on Portfolio Performance. European Financial Management, 13,