Responsible Investment in Emerging Markets. Sustainalytics Webinar 18 April 2012

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1 Responsible Investment in Emerging Markets Sustainalytics Webinar 18 April 2012

2 Today s webinar Introduction to Sustainalytics report ESG in Emerging Markets - Andrea van Dijk & Lotte Griek (Sustainalytics) Insights into investors values vs. reality of ESG in Asia Benjamin McCarron (Responsible Research) Discuss the investors perspective on ESG in Asia and Africa Rebecca Lewis (Arisaig) Q&A - Moderator Bob Mann, COO Sustainalytics 2

PRI Report on Progress 2011: 87% of the investment manager signatories reported integrating ESG issues to some

3 RI in Emerging Markets: Introduction Implementation of RI strategy less common for EM listed equities compared to DM equities. PRI Report on Progress 2011: 87% of the investment manager signatories reported integrating ESG issues to some extent into their management of emerging market listed equities, as opposed to 95% for developed markets equities. Still, investors perceive ESG risks to be larger in emerging markets than in developed markets.

ESG Performance in Emerging Markets Figures based on sample of 809 EM and 1,609 DM companies Figure I: Average EM and DM scores for ESG policies and management systems (Sustainalytics Global

4 ESG Performance in Emerging Markets Figures based on sample of 809 EM and 1,609 DM companies Figure I: Average EM and DM scores for ESG policies and management systems (Sustainalytics Global Platform) Indicator Average EM score - DM score DM average score EM average score Asia- Pacific CEE + Turkey Latin America North Africa + Middle East South Africa Whistleblower Programmes Board Independence Policy on Bribery and Corruption Figure II: ESG Indicators with Largest EM Underperformance (Sustainalytics Global Platform) 4

5 EM Companies Exposure to ESG Controversies ESG controversies or incidents Negative impact on stakeholders Violations Frequency / duration Degree of responsibility Company response Exposure Local ESG risks Legislation and enforcement Media / NGO scrutiny Cultural perception of the event ESG Controversies Sustainalytics Platform (January 2012) 5

Differences Within EM BRICS Countries Economic & political factors: Macro economic factors in BRICS countries Political differences Indicator World BRICS Brazil Russia India China South Africa GDP -

6 Differences Within EM BRICS Countries Economic & political factors: Macro economic factors in BRICS countries Political differences Indicator World BRICS Brazil Russia India China South Africa GDP - PPP (trillion) USD USD USD USD 2.38 USD USD USD GDP Growth 4.30% 6.26% 5.10% 4.30% 8.95% 9.85% 3.10% GDP Ranking (--) (--) Foreign direct investment (trl) 1091 (top 10 avg) 379 (BRICS avg) USD 426 USD 343 USD 225 USD 776 USD 125 Population billion 2.94 billion 206 million 138 million billion billion 48.8 million Corruption Perception Index 8.5 (euro avg) Other factors: Corruption Regulatory environment & enforcement Figure: Corruption Perception Index 6

7 ESG in BRICS Sustainalytics ESG findings & differing performance in BRICS countries 7

ESG in Brazil ESG trends: BM&FBOVESPA s Corporate Sustainability Index (ISE) & Carbon Efficient Index - ICO2 (Voluntary) Novo Mercado governance regulations Strong

8 ESG in Brazil ESG trends: BM&FBOVESPA s Corporate Sustainability Index (ISE) & Carbon Efficient Index - ICO2 (Voluntary) Novo Mercado governance regulations Strong NGO presence Key ESG issue(s): Environmental degradation destruction of the world s largest rainforest Community relations Risks to investors: Corruption Climate change 8

ESG in Russia ESG trends: Increasing call & appeal for foreign investment RTS and SKOLKOVO have started working on a joint project to establish and calculate Russia s first Sustainability Index.

9 ESG in Russia ESG trends: Increasing call & appeal for foreign investment RTS and SKOLKOVO have started working on a joint project to establish and calculate Russia s first Sustainability Index. Key ESG issue(s): Anticompetitive practices Health & Safety concerns resulting from outdated infrastructure and heavy focus on Oil & Gas sectors Risks to investors: State influence in business & ownership structure Corruption 9

ESG in India ESG trends: History of incorporating CSR in business models Interdependence between DM companies and suppliers CSR initiatives for Central Public Sector Enterprises Main key ESG

10 ESG in India ESG trends: History of incorporating CSR in business models Interdependence between DM companies and suppliers CSR initiatives for Central Public Sector Enterprises Main key ESG issue(s): Water management resulting in disgruntled society & community Child labour Risks to investors: Water management Corruption & family owned business structure & ability to influence management decisions 10

ESG in China ESG trends: Increased investor attention & presence of foreign business Shanghai Stock Exchange launched the Sustainable Development Industry Index in August 2011 Increasing

11 ESG in China ESG trends: Increased investor attention & presence of foreign business Shanghai Stock Exchange launched the Sustainable Development Industry Index in August 2011 Increasing international media attention Key ESG issues: Product safety - spill over effect to other producers of goods Labour practices Risks to investors: Transparency & censorship Reputational damage 11

ESG in South Africa ESG trends: King III & incorporating ESG reporting as a requirement JSE SRI established in 2004; 74 constituents in 2010 Key ESG issues: Labour issues and society &

12 ESG in South Africa ESG trends: King III & incorporating ESG reporting as a requirement JSE SRI established in 2004; 74 constituents in 2010 Key ESG issues: Labour issues and society & community concerns pertaining to mining sector & activities in sensitive countries (i.e. DRC) Risks to investors: Exposure to reputational risks following labour/human rights issues 12

13 Challenges for investors In order to address ESG risks in EM equity portfolios, (foreign) investors go through complex implementation processes. Disclosure gaps Language barriers Cultural differences/geopolitical dimension Knowledge of the local context 13

14 Adapting Western perspectives to engage companies in Asia Benjamin McCarron, Head of Research, Responsible Research April 2012 Political donations Human rights Using local examples

is simply the wrong question in a one party dominated state.

15 Counting political relations not political donations: What are the political contributions? is simply the wrong question in a one party dominated state. Responsible investors have to think differently. Could the fall of Bo Xilai affect engagement at this notorious company?

Human rights: use better language, better

16 Human rights: use better language, better approach The term Human Rights can have a political connotations. Changing terms and respecting development needs may give results when engaging in Asia. Burma sanctions suspension to drive engagement PTTEP s Burma exploration - new Zawtika pipeline key

17 Local flavours make for better conversations Strong recent examples that are relevant for an Asian audience. Climate change adaptation: In SE Asia, the effects on Auto and IT supply of the Thai floods. Building standards: LEED s emphasis on heating systems isn t relevant in Singapore, while local sourcing is implausible. The local Greenmark award caters to this. Animal Welfare: Massive outcry over bear bile looks to have derailed Guizhentang IPO.Early indications of a Chinese ethical consumer!

18 Investors perspective on ESG in Asia and Africa Rebecca Lewis, Investment Analyst, Arisaig Partners April

investment approach 20-year investment horizon Based on S-curve

19 Context: Emerging markets (Asia, Africa and Latam Fund) Concentrated portfolio (<30 stocks per fund) Research-driven investment approach 20-year investment horizon Based on S-curve consumption growth Ghana India Vietnam China UK USA USD per capita

Our ESG Strategy Across All Three Funds: Deep dive

sector and geographic influences Start with broad

material issues Quantitative Qualitative Focus on

20 Our ESG Strategy Across All Three Funds: Deep dive research on risks & opportunities Focus on understanding sector and geographic influences Start with broad analysis based on public disclosure Evaluation of material issues Quantitative Qualitative Focus on material issues Develop relationships, engagement is with people, not companies 20

21 Lessons To Date: EM reporting is still evolving and so engagement is a vital tool to enable analysis to move beyond disclosure to performance. Commissioned independent research helps to develop understanding (internally and externally) and demonstrates commitment. Dedicated investor relations personnel do not always exist and this should influence engagement approach. Engagement is a process and patience is required as the issues are complex. Local language expertise and local knowledge are both useful. Identifying local initiatives can help influence change (Stock Exchanges). 21

Questions and Answers Q&A: Contact Information: Bob Mann: Chief Operating Officer, Sustainalytics bob.mann@sustainalytics.com Andrea van Dijk: Senior Manager, Advisory Services, Sustainalytics Andrea.

22 Questions and Answers Q&A: Contact Information: Bob Mann: Chief Operating Officer, Sustainalytics Andrea van Dijk: Senior Manager, Advisory Services, Sustainalytics Lotte Griek: Manager, Research Products, Sustainalytics Benjamin McCarron: Head of Research, Responsible Research Rebecca Lewis: Investment Analyst, Arisaig Partners 22

Bridging the Gaps. Effectively Addressing ESG Risks in Emerging Markets. Andrea van Dijk, Lotte Griek and Chloe Jansen

Bridging the Gaps. Effectively Addressing ESG Risks in Emerging Markets. Andrea van Dijk, Lotte Griek and Chloe Jansen Bridging the Gaps Effectively Addressing ESG Risks in Emerging Markets Andrea van Dijk, Lotte Griek and Chloe Jansen June 2012 Bridging the Gaps: Effectively Addressing ESG Risks in Emerging Markets June