Dow Jones Sustainability North America Index Dow Jones Sustainability United States Index

Transcription

1 Dow Jones Sustainability North America Index Dow Jones Sustainability United States Index Launch Event 23 September 2005 New York, USA 1

2 Program Sustainability Investing A Market Overview Jane Ambachtsheer Global Head of SRI, Mercer Investment Consulting Sustainability Indexes The Role of Benchmarks Bailey Bishop Principal, State Street Global Advisors The Dow Jones Sustainability Indexes John Prestbo Editor, Dow Jones Indexes Expanding the offering The DJSI North America and DJSI United States Alexander Barkawi Managing Director, SAM Indexes 2

3 23 September 2005, New York Dow Jones Sustainability Indexes Sustainability Investing A Market Overview Jane Ambachtsheer

4 Agenda 1. SRI: An evolving concept 2. Is SRI a trend? 3. The view from investment managers 4. SRI activities and implementation options 5. UN Principles for Responsible Investment 6. Predicting future developments Mercer Investment Consulting 4

5 Evolution of SRI From ethical investing towards mainstream Traditionally, SRI was limited to ethical investing, and was embraced by faith-based or mission-based investors More recently, another type of socially responsible investing has emerged, which is embraced by a broader set of investors This new SRI is based on the belief that environmental, social and corporate governance (ESG) factors can be material to risk and return (mainly through their potential to impact corporate earnings) This new SRI can be difficult to define, but is encompassed by: SRI, Sustainable investment, Responsible investment, Engagement We refer to both: Environmental, Social and Corporate Governance Issues (ESG) Socially Responsible Investing (SRI) Mercer Investment Consulting 5

6 Evolution of SRI What is driving this process of mainstreaming? A growing body of literature suggests that corporate social performance can impact stock price SRI funds can produce comparable risk/return characteristics SRI proponents argue that indications of superior social and/or environment performance can be a proxy for good management and a source of superior financial performance Environmental issues are of increasing concern to society and governments (e.g. G8 focus on climate change) Investors are becoming more engaged as a mechanism for policing the corporate sector in a global economy Pension and private funds are a key element in the financial infrastructure of most societies beneficiaries increasingly expect them to be supportive Mercer Investment Consulting 6

7 How do the SRI philosophies differ? Mission-based investors Mission-based investors believe that: A certain type of investment is wrong (e.g., alcohol, firearms) and/or Funds should use their financial muscle to influence and ultimately change society Mercer Investment Consulting 7

8 How do the SRI philosophies differ? Mainstream investors Mainstream investors seek simply to optimise returns within certain risk constraints. However, a growing number of these investors believe that: Environmental, social, and corporate governance issues can have a material impact on corporate performance, and/or Behaving as active owners of capital will help to preserve (or possibly, to enhance) shareholder value Mercer Investment Consulting 8

9 Socially responsible investing % age of investors who regard as important Now Time Mercer Investment Consulting 9

10 Socially responsible investing Fashion? % age of investors who regard as important Now Time Mercer Investment Consulting 10

11 Socially responsible investing Minority interest? % age of investors who regard as important Now Time Mercer Investment Consulting 11

12 Socially responsible investing Trend? % age of investors who regard as important Now Time Mercer Investment Consulting 12

13 We believe SRI is a trend Of the three scenarios, we believe that SRI for mainstream investors is a trend, and that it is near the beginning Our clients are increasingly looking for help on these issues Mercer Investment Consulting 13

14 SRI: Incentivising the investment chain What do investment managers think? Our recent Fearless Forecast surveyed 220+ investment managers worldwide, and asked them to predict in which time frame active ownership, screening, and the integration of ESG analysis will become a common component of mainstream investing? Findings Almost 80% of managers predict that active ownership will become a mainstream investment practice within 5 years (89% in 10 years) Almost 40% predict that positive or negative screening will be mainstream with 5 years (65% in 10 years) 37% predict that the incorporation of ESG factors will become mainstream within 5 years (73% in 10 years) Overall, pan-europeans are the most bullish, US managers the least Source: 2005 Fearless Forecast Mercer Investment Consulting, Inc. and Mercer Human Resource Consulting Limited. See for full survey findings. Mercer Investment Consulting 14

15 Many investment managers see ESG as a trend Results of manager predictions by region Active ownership (shareholder engagement/activism, proxy voting) Positive or negative screening for social or environmental factors The integration of social/environmental corporate performance indicators Over next 1-2 years Over next 3-5 years Over next 6-10 years Never Source: 2005 Fearless Forecast Mercer Investment Consulting, Inc. and Mercer Human Resource Consulting Limited. See for full survey findings. Mercer Investment Consulting 15

16 Mercer s SRI range of activities We focus on three things: 1. Intellectual capital development We participate in SRI networks, speak at conferences, write articles and research papers, conduct surveys, etc. 2. Consulting We undertake ad-hoc SRI-specific assignments, and Support integrated SRI + traditional consulting 3. Research We research SRI products (in conjunction with our mainstream manager researchers) We have extended our research of investment managers to cover voting, engagement, and integrated analysis regarding environmental, social and governance (ESG) factors Mercer Investment Consulting 16

17 SRI implementation options A broad array The opportunities for implementing SRI have broadened beyond traditional scope. The continuum of options cover: 1. Proactive ownership Develop proxy voting guidelines Participate in shareholder engagement Encourage engagement from managers Engage third-party engagement overlay expertise Participate in public policy debate Motivate the sell-side (e.g., via the Enhanced Analytics Initiative) 2. Portfolio holdings and investment manager review Undertake audit to identify environmental, social and governance (ESG) risks; review ESG practices of managers Mercer Investment Consulting 17

18 SRI implementation options A broad array 3. Investment structure and monitoring process alignment Structure mandates to address ESG factors Engage your investment managers in the process Engage your investment consultant in the process Ask for reporting on these factors 4. Investments with specific ESG characteristics Equity products Fixed income products Alternative investments Private equity and venture capital Community investment Property Mercer Investment Consulting 18

19 Traditional manager research A key part of our business involves researching investment management firms globally More than 250 investment consultants are involved, including 41 who are dedicated full-time to manager research We have current ratings in place for over 4,000 investment strategies Ratings reflect Mercer s view on prospective future performance relative to benchmarks over medium term (3 to 5 years), and there is clear evidence of value added Europe 13 manager researchers 700+ research meetings p.a. North America 20 manager researchers 1,500+ research meetings p.a. Asia-Pacific region 8 manager researchers 600+ research meetings p.a. Mercer rating A, A, A- A- above average probability of of outperformance B+, B+, B, B, B- B- average probability of of outperformance C below average probability of of outperformance N not not rated Mercer Investment Consulting 19

20 New manager research Extending research to incorporate SRI factors In addition to our traditional manager research, we have begun evaluating mainstream manager behaviour with respect to voting, engagement, and integration of ESG analysis This research stems from beliefs such as: ensuring that votes are actively cast fulfils the obligations of active ownership engaging with companies to promote sound corporate social responsibility business practices reflects a commitment to active ownership, and could lead to enhanced returns (or risk reduction) over the long term ESG criteria can have material financial impact on a company s performance. Managers with access to good information on ESG criteria can therefore use this information to their advantage Mercer Investment Consulting 20

21 New manager research How it will be used Mercer developing this approach has generated some controversy within the industry, but we feel it s an important development in continuing to provide the best advice to our clients The new research will be used with interested clients in reviewing incumbent managers, and as a consideration in new manager searches Mercer Investment Consulting 21

22 Mainstream investors addressing ESG issues UN Principles for Responsible Investment A set of global Principles for Responsible Investment is currently being developed The purpose of these Principles is to facilitate the integration of ESG issues into mainstream investment practices Process convened by UN Secretary-General and implemented by UNEP and UN Global Compact Institutional investors are driving the process (20 asset owners representing > US $1.7 trillion), supported by a multi-stakeholder group of 70 international experts Focus on investor behaviour rather than corporate behaviour Framed in terms of fiduciary responsibility Global investors planning to take action towards integrating ESG within ownership practices and investment decision-making Mercer Investment Consulting 22

23 Predicting future developments what we expect to see 1. Continued promotion and adoption of global principles and guidelines Increased integration of global principles and guidelines into institutional investment decision and policy making, such as the Global Reporting Initiative, UN Global Compact and Principles for Responsible Investment 2. Growth of collaborative engagement activity by investors Collaboration includes: a) pooling resources for the purpose of research, and the development and promotion of joint standards b) the pooling of shareholder power to influence corporate behaviour We expect to see continued growth of and participation in investor groups and mechanisms such as the Carbon Disclosure Project, the Extractive Industries Transparency Initiative, the Council for Institutional Investors, the Investor Network on Climate Risk etc. Mercer Investment Consulting 23

24 Predicting future developments what we expect to see 3. Continued focus on corporate governance Alignment-of-interests between traditional mainstream community and SRI professionals on corporate governance provides synergies in promoting change 4. Increased integration of ESG into mainstream financial analysis A number of factors will lead to increased incorporation of ESG issues within mainstream financial analysis, including: Growing acknowledgement of the potential for ESG issues to impact financial performance Demand from investors, and developments such as our new research 5. Investment consultants lowering their guard as gatekeepers Often cited as a barrier to the adoption of SRI or ESG related approaches, investment consultants will become increasingly open to (or even specialists in!) SRI Mercer Investment Consulting 24

25 Program Sustainability Investing A Market Overview Jane Ambachtsheer Global Head of SRI, Mercer Investment Consulting Sustainability Indexes The Role of Benchmarks Bailey Bishop Principal, State Street Global Advisors The Dow Jones Sustainability Indexes John Prestbo Editor, Dow Jones Indexes Expanding the offering The DJSI North America and DJSI United States Alexander Barkawi Managing Director, SAM Indexes 25

26 Launch of the: Dow Jones Sustainability North America Index and Dow Jones Sustainability United States Index September 23, 2005 Bailey Bishop, Jr., CFA Principal

27 Socially Responsible Investing SRI investors can: Invest actively or passively Regardless, benchmark choice is important Use standard benchmarks (e.g. S&P 500, Russell 3000) Well known, widely published Create custom benchmarks Can be costly, not publicly available Use SRI benchmarks Publicly available, independently calculated

28 Methods of SRI Implementation Negative screening Avoiding companies in businesses thought to be objectionable Positive screening Looking for companies that have positive impact through product offerings, community involvement, employee relations etc. Best of class Buying shares of companies doing the best jobs among their peers

29 Historically Negative Screening and Standard Indexes Most Common But this can result in significant risk relative to the market Abortion/contraception screening can significantly reduce health care exposure Environmental screening can eliminate many large caps in manufacturing, chemical, energy, and utility sectors Human rights screening can eliminate many apparel and some large cap retail companies Performance of screened funds often tied to an overweight to the technology sector

30 So We Turn To SRI Benchmarks Not all SRI benchmarks are the same however Benchmark construction and methodologies can be quite different Know the segment of the market that your benchmark is measuring Understand how the Index rebalances and the implications of trading those changes

31 Available SRI Indexes Index Comparisons As August 31, 2005 Capitalization in US$ Billions Inception Number Weighted Total % US Date with Screening of Ave. Market Market Cap Provider Real Assets Process Holdings Market Cap Cap Coverage* Calvert Social Negative Index June 30, 2000 and Positive ,958 46% Domini 400 Negative Social Index June 3, 1991 and Positive ,048 40% FTSE4Good Negative US Index July 31, 2001 and Positive ,448 36% *As represented by the Dow Jones Wilshire 5000

32 SRI Focus is Changing Away from negative and positive screens and to: Global climate change/environment concerns Corporate governance issues Best in class approach

33 DJSI North America and United States Indices Best of class approach Leading sustainability companies integrating environmental, economic and social criteria No industries/sectors left behind Caters to global investors, both active and passive Fills a void that has existed in currently available indexes

34 Program Sustainability Investing A Market Overview Jane Ambachtsheer Global Head of SRI, Mercer Investment Consulting Sustainability Indexes The Role of Benchmarks Bailey Bishop Principal, State Street Global Advisors The Dow Jones Sustainability Indexes John Prestbo Editor, Dow Jones Indexes Expanding the offering The DJSI North America and DJSI United States Alexander Barkawi Managing Director, SAM Indexes 34

35 DJSI Partners Creates and licenses indexes for use in investment products, calculates 3,000+ indexes in real time Provides and services the Dow Jones STOXX SM indexes, Europe's leading regional equity indexes. Focuses exclusively on sustainability investments, offers indexes, research, asset management and private equity services 35

36 DJSI Overview Integrated assessment of economic, social and environmental criteria with a strong focus on long-term shareholder value Consistent rule-based methodology, primary research (direct contact to companies) Focus on best-in-class companies Yearly review and continuous monitoring of companies 56 licenses with asset managers in 14 countries. 4.1 billion USD managed against the DJSI family Assurance of the assessment process by PwC 36

37 DJSI Product Range DJSI World (317 Components) DJSI World ex Alcohol (310 Components) DJSI World ex Tobacco (315 Components) DJSI World ex Gambling (307 Components) DJSI World ex Armaments & Firearms (313 Components) DJSI World ex Alcohol, Tobacco, Gambling, Armaments & Firearms (295 Components) 37

38 DJSI Product Range (cont d) DJSI STOXX (156 Components) DJSI STOXX ex Alcohol, Tobacco, Gambling, Armaments & Firearms (145 Components) DJSI EURO STOXX (72 Components) DJSI EURO STOXX ex Alcohol, Tobacco, Gambling, Armaments & Firearms (69 Components) 38

39 DJSI Assets Assets based on DJSI (in million USD) /99 03/00 09/00 03/01 09/01 03/02 09/02 03/03 09/03 03/04 09/04 03/05 39

40 DJSI Media Coverage Articles in Factiva with reference to Dow Jones Sustainability Indexes YTD 40

41 DJSI Corporate Recognition [Hewlett Packard] also cites detailed feedback from the DJSI assessment process as a stimulus for improving its internal management processes. Financial Times, 29 November

42 Program Sustainability Investing A Market Overview Jane Ambachtsheer Global Head of SRI, Mercer Investment Consulting Sustainability Indexes The Role of Benchmarks Bailey Bishop Principal, State Street Global Advisors The Dow Jones Sustainability Indexes John Prestbo Editor, Dow Jones Indexes Expanding the offering The DJSI North America and DJSI United States Alexander Barkawi Managing Director, SAM Indexes 42

43 DJSI Assessment Criteria (I) Overview % 33% 100% 40% 33% 60% 33% 20% Economic Dimension Environmental Dimension Social Dimension Total Industry Criteria General Criteria 43

44 DJSI Assessment Criteria (II) Criteria & Weightings Economic Codes of Conduct / Compliance / Anti-corruption Corporate Governance Investor Relations Risk & Crisis Management Customer Relationshop Management Industry Specific Criteria Environmental Environmental Performance (Eco-Efficiency) Environmental Policy / Management Environmental Reporting Industry Specific Criteria Social Human Capital Development Labor Practice Indicators Talent Attraction & Retention Stakeholder Engagement Corporate Citizenship / Philanthropy Social Reporting Industry Specific Criteria Weighting (in%) Depends on Industry Depends on Industry Depends on Industry 44

45 DJSI Information Sources 1. Online Questionnaire 2. Company documents and policies 3. Media and Stakeholder Analysis 4. Company interaction & visits 45

46 DJSI North America Selection Dow Jones Global Index 600 largest North American companies 50 DJSI clusters Component Selection Top 20% of companies in terms of sustainability in each DJSI cluster DJSI North America 111 Components 48 DJSI clusters 46

47 DJSI North America Product Range DJSI North America (111 Components) DJSI North America ex Alcohol, Tobacco, Gambling, Armaments & Firearms (105 Components) DJSI United States (93 Components) DJSI United States ex Alcohol, Tobacco, Gambling, Armaments & Firearms (87 Components) 47

48 DJSI North America Allocation As of 31 August 2005 US Canada Brazil Mexico Chile Venezuela Large Mid Small 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Automobiles & Parts Banks Basic Resources Chemicals Construction & Materials Financial Services Food & Beverage Health Care Industrial Goods & Services Insurance Media Oil & Gas Personal & Household Goods Retail Technology Telecommunications Travel & Leisure Utilities 0% 5% 10% 15% 20% 25% DJGI Americas DJGI North America Largest 600 DJSI North America 48

49 DJSI North America Performance USD, Total Return /98 06/99 12/99 06/00 12/00 06/01 12/01 06/02 12/02 06/03 12/03 06/04 12/04 06/05 DJSI North America DJGI Americas DJGI Americas Large-Cap 49

50 DJSI North America Performance USD, Price Return /98 06/99 12/99 06/00 12/00 06/01 12/01 06/02 12/02 06/03 12/03 06/04 12/04 06/05 DJSI North America S&P500 50

51 DJSI United States Allocation As of 31 August 2005 Automobiles & Parts Banks Basic Resources Chemicals Construction & Materials Financial Services Food & Beverage Health Care Industrial Goods & Services Insurance Media Oil & Gas Personal & Household Goods Retail Technology Telecommunications Travel & Leisure Utilities 0% 5% 10% 15% 20% 25% DJSI United States DJGI United States 51

52 DJSI United States Performance USD, Total Return /98 06/99 12/99 06/00 12/00 06/01 12/01 06/02 12/02 06/03 12/03 06/04 12/04 06/05 DJSI United States DJGI United States DJGI United States Large Cap 52

53 DJSI United States Performance USD, Price Return /98 06/99 12/99 06/00 12/00 06/01 12/01 06/02 12/02 06/03 12/03 06/04 12/04 06/05 DJSI United States S&P500 53

54 SAM Indexes Phone info@sustainability-indexes.com 54