Sustainable investments: improving the risk-return profile of your portfolio

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1 Sustainable investments: improving the risk-return profile of your portfolio Presentation at the Invest10 Erol Bilecen, Director, Head Client Services Sustainable Investment September 15, 2010 Sustainable Swiss Private Banking since 1841.

2 Agenda Who is Bank Sarasin? What does sustainable investment mean? Performance: A question from the past Risk: the new additional perspective Invest10 September 15,

than 1 500 employees Headquarters in Basel Offices in Berne, Geneva, Lugano, Zurich, Delhi, Dubai, Dublin, Frankfurt, Guernsey, Hong Kong, Qatar, London, Mumbai, Munich, Nuremberg, Oman,

3 Sarasin Sustainable Investment: Bank Sarasin & Co Ltd. a highly regarded Swiss private bank Swiss Private Bank, founded in 1841 Specialised in asset management and private banking CHF 96,2 billion / EUR 72,8 billion of assets-undermanagement More than employees Headquarters in Basel Offices in Berne, Geneva, Lugano, Zurich, Delhi, Dubai, Dublin, Frankfurt, Guernsey, Hong Kong, Qatar, London, Mumbai, Munich, Nuremberg, Oman, Singapore, Warsaw, Vienna Rabobank (Standard & Poors* rating: AAA) is the majority shareholder with a 46% stake in its equity capital and 69% of its voting rights *Standard & Poors issues credit ratings of corporations: AAA is the best rating and denominates reliable and stable borrowers As at 30/06/2010 Invest10 September 15,

4 Sarasin Sustainable Investment: a continuing success story Development of the sustainable assets As at 30/06/2010 in million EUR Sustainable Assets in million EUR (left scale) Sustainable Assets as Percentage of all assets that Sarasin manages through asset management mandates and its own investment funds (right scale) Source: own calculations Invest10 September 15,

Sarasin Sustainable Investment: Winner in the category «Best Research House/Consultant in ESG» Bank Sarasin has long been at the forefront of the socially responsible investment world.

5 Sarasin Sustainable Investment: Winner in the category «Best Research House/Consultant in ESG» Bank Sarasin has long been at the forefront of the socially responsible investment world. Its entire governance rests on SRI and ESG principles and this has seen it grow into one of the most respected dedicated SRI ESG financial services companies in the world.( ) It is also a leading SRI and ESG research and support group. «Best Research House/ Consultant in ESG» Extract from the IPE/TBLI Group ESG Leaders Awards Report 2009 on Bank Sarasin Investment & Pensions Europe (IPE), is the premier industry magazine for pension fund managers Invest10 September 15,

6 Why did Bank Sarasin become so interested in sustainability? 26. April November 1986 Invest10 September 15,

7 Agenda Who is Bank Sarasin? What does sustainable investment mean? Performance: A question from the past Risk: the new additional perspective Invest10 September 15,

8 What does sustainable investing mean? Yield Economy Risk Liquidity Sustainable Investments Environment Society Invest10 September 15,

9 Focus so far: The one-million-dollar question: Does sustainable investment pay-off? Repetto and Austin (2000)* use discounted cash flow models and scenario analysis to show that the financial impact of future environmental regulation may be quite material (up to 11% of market value) for U.S. pulp and paper companies in coming years. Dowell, Hart, Yeung (2000)* show that between 1994 and 1997, U.S. multinational corporations with high global environmental standards tended to have higher price/book ratios than companies adopting local environmental standards, even after adjusting for factors such as industry membership, R&D intensity, and advertising intensity. Gompers, Ishii, and Metrick (2001) demonstrate that firms with corporate governance practices favoring management tend to have lower price/book ratios, and that firms in the bottom quartile of their corporate governance ratings had significantly below-average riskadjusted returns over the time period. Stone, Guerard, Gultekin, and Adams (2001) show that the returns of a stock selection model were not harmed by the implementation of social screens for the time period. Bauer, Koedijk, and Otten (2002)* measure the risk-adjusted performance of 103 German, U.S., and U.K. screened mutual funds for the time period, and find no significant differences betwen their returns and those of unscreened funds. Lee and Ng (2002)* find that Transparency International's ratings of national corruption are a powerful explainer of variation in price/book ratios for the time period. Source: Invest10 September 15,

10 Focus so far: The one-million-dollar question: Does sustainable investment pay-off? Orlitzky, Schmidt, and Rynes (2003)* perform a meta-analysis of past studies of corporate social performance, and find a statistically significant positive association with corporate financial performance. Guenster, Derwall, Bauer, and Koedijk (2005)* find that Innovest environmental ratings have a significant relationship with both firm valuation and operating results. Barber (2006)* finds that CalPERS' corporate governance initiatives created over $3 bn in shareholder wealth from Hong and Kacperczyk (2006) show that tobacco stocks have outperformed market averages for decades, and demonstrate that this is true even after accounting for market risk, size, and valuation effects. Edmans (2007)* finds that stocks of firms on Fortune magazine's '100 Best Companies to Work For' list outperformed market averages, even after accounting for market risk, size, momentum, and style effects. Statman and Glushkov (2008)* confirm Hong and Kacperczyk's findings on sin stocks, but also find that companies with a variety of social positives tend to outperform the market. Source: Invest10 September 15,

11 But what about risk? Yield Economy Risk Liquidity Sustainable Investments Environment Society Invest10 September 15,

12 Example for environmental risks: Impact of a failed product policy on a company s credit ratings Case study: General Motors AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC CC C D Sarasin Sustainability-Matrix General Motors Extract of sustainability profile published in Nov. 2007: GM s vehicle fleet has the lowest CO 2 -efficiency in comparison to all car manufacturers with 246 g CO 2 / km. This can be explained by the high average weight of its car models. 30% drop in sales of SUVs due to rising gas prices Hummer and other brands are for sale and GM survival depends on a federal bailout Q Q Q Q Q Q Q Q Q Q Source: Bloomberg. Historic S&P credit ratings for long-term foreign currency issued bonds. Sarasin sustainability company ratings as at Q Invest10 September 15,

13 Example for social risks: Impact of unethical business practices on a company s credit ratings Case study: Citigroup AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC CC C D Citigroup recognizes problems with its exposure to non-performing sub-prime mortgages Sarasin Sustainability-Matrix Citigroup Government bailout, designed to rescue the company from bankruptcy Extract of sustainability profile published in Oct. 2006: Due to strong diversification in terms of products and geographic exposure the group has become a complex conglomerate. This makes Citigroup prone to scandals, damaging its reputation. Q Q Q Q Q Q Q Q Q Q Source: Bloomberg. Historic S&P credit ratings for long-term foreign currency issued bonds. Sarasin sustainability company ratings as at Q Invest10 September 15,

14 «It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.» Warren Buffet Invest10 September 15,

15 Bonds the benefits of risk filtering during the financial crisis Indexed Performance 30/06/ /06/2010 in EUR /04 12/04 06/05 12/05 06/06 12/06 06/07 12/07 06/08 12/08 06/09 12/09 06/10 Sarasin Sustainable Bond EUR Lipper Bond EUR Source: Lipper. Net asset value at the beginning of the graph = 100. Calculation of the performance without taking any issuing commission into account. Individual costs such as fees, commissions and other payments are not reflected; if taken into account, these would have a negative impact on the development of value. Historical changes in value are not a reliable indicator of future values. The Sarasin Sustainable Bond EUR belongs to the risk category 1 (risk categories: 1 low, 2 moderate, 3 average, 4 above average, 5 high) Invest10 September 15,

16 «Only when the tide goes out do you discover who's been swimming naked.» Warren Buffet Invest10 September 15,

17 The financial crisis as the low tide Selected industries in comparison to the overall research universe Median of 5Y CDS for all rated companies within our research universe with outstanding CDS in basis points. Period: 31/12/ /06/ /06 06/07 12/07 06/08 12/08 06/09 12/09 06/10 Automobiles Oil & Gas Building Materials Mining Overall research universe Airlines Source: Bloomberg, own calculations. Invest10 September 15,

18 Intra-sector comparison of CDS for companies that are part of our research universe Sector: Basic Materials Median of 5Y CDS for all rated companies within the sector in basis points. Period: 31/12/ /06/ /06 06/07 12/07 06/08 12/08 06/09 12/09 06/10 Sustainable companies Non-sustainable companies Source: Bloomberg, own calculations. Invest10 September 15,

19 Intra-sector comparison of CDS dispersion for companies within our research universe Sector: Basic Materials Median of 5Y CDS for all rated companies within the sector in basis points. Period: 30/06/ /06/ Sustainable companies Non-sustainable companies Source: Bloomberg, own calculations. Invest10 September 15,

20 Credit rating distribution for companies within our research universe Sector: Basic Materials Percentage distribution of credit ratings as at 30/06/ % 50% 40% 30% 20% 10% 0% AAA AA+ to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ to B- CCC+ CCC CCC- D Sustainable companies Non-sustainable companies Source: Bloomberg, own calculations. Percentage distribution of credit ratings Percentage distribution of credit ratings for all companies in our research universe with outstanding bonds and a S&P credit rating (AAA=low default risk, D = default) on long-term, foreign currency issued bonds. The research universe consists of all companies with a sustainability rating Invest10 September 15,

21 Intra-sector comparison of CDS for companies that are part of our research universe Sector: Financial Median of 5Y CDS for all rated companies within the sector in basis points. Period: 31/12/ /06/ /06 06/07 12/07 06/08 12/08 06/09 12/09 06/10 Sustainable companies Non-sustainable companies Source: Bloomberg, own calculations. Invest10 September 15,

22 Intra-sector comparison of CDS dispersion for companies within our research universe Sector: Financial Median of 5Y CDS for all rated companies within the sector in basis points. Period: 30/06/ /06/ Maximum Sustainable companies Non-sustainable companies 75. Percentile Median 25. Percentile Source: Bloomberg, own calculations. Invest10 September 15,

23 Credit rating distribution for companies within our research universe Sector: Financial Percentage distribution of credit ratings as at 30/06/ % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% AAA AA+ to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ to B- CCC+ CCC CCC- D Sustainable companies Non-sustainable companies Source: Bloomberg, own calculations. Percentage distribution of credit ratings Percentage distribution of credit ratings for all companies in our research universe with outstanding bonds and a S&P credit rating (AAA=low default risk, D = default) on long-term, foreign currency issued bonds. The research universe consists of all companies with a sustainability rating Invest10 September 15,

24 And what about sovereign bonds? AAA Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba Quelle: Bloomberg Invest10 September 15,

25 The current state and thinking ahead Over-indebtedness Over-ageing Public debt (gross, % of GDP) Zimbabwe Germany Japan Japan Poland 150 USA Jamaica 40 Italy Singapore Greece Optimum Germany USA 0 Portugal Norway Netherlands 0% 2% 4% 6% 8% 10% 50 UK Poland Switzerland Sweden Brazil Spain Share of population Mongolia South Africa 100 China Australia Bulgaria 90 Qatar Russia Estonia 80 0 Brazil China 50 Foreign debt (net, % of GDP) Optimum Uganda 10 South Africa 0 Source: IMF, OECD, CIA, Sarasin Age (5-year groups) Age (5-year groups) 0% 5% 10% 15% 20% Share of population Source: United Nations, Sarasin Invest10 September 15,

Our view on country sustainability Sarasin Sustainability-Matrix Japan Netherlands Germany Sweden high Resource efficiency Spain Greece Poland China Switzerland

26 Our view on country sustainability Sarasin Sustainability-Matrix Japan Netherlands Germany Sweden high Resource efficiency Spain Greece Poland China Switzerland UK Chile Costa Rica Romania USA South Africa Botswana Australia Brazil Cyprus Zimbabwe Russia low low Availability of resources high Invest10 September 15,

27 «Many studies have asked whether, if we exclude companies from consideration for our portfolio, do we do worse? Remarkably, the answer is no. In many ways, SRI concerns anticipate broader social movements, by excluding stocks due to trends that the entire market will have to respond to. So SRI is thinking ahead.» Nobel Prize Winner Joseph Stiglitz Invest10 September 15,

28 Important Information This document is provided for marketing-communication of Bank Sarasin & Co. Ltd, Elisabethenstrasse 62, P.O. Box, 4002 Basel (hereafter bank"), for information purposes only and is for the exclusive use of the recipient. It does not lodge claim to completeness of product characteristics. It does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. The recipient is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary with the help of a professional advisor. The opinions expressed in this document are those of the bank at the time of writing and are subject to change at any time without notice. Every investment involves risk, especially with regard to fluctuations in value and return. Investments in foreign currencies involve the additional risk that the foreign currency might lose its value against the investor s reference currency. It should be noted that historical returns and financial market scenarios are no guarantee of future performance. Historic performance data, forecast calculations and other simulations are not a reliable indicator of future performance. We can therefore not provide any guarantee that the values forecast in the model calculations will materialize. Calculation of the development of value without taking account of issuing commission. Individual costs such as fees, commissions and other payments are not reflected. This Document was produced by the bank with the greatest of care and to the best of its knowledge and belief. However, the bank provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. If nothing is indicated to the contrary, all figures are not audited. This publication is only intended for investors based in Switzerland This document is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Persons domiciled in the USA or US nationals are not allowed to own units of the mentioned funds, and it is illegal to publicly offer issue or sell these investment fund units to said persons. The prospectus, the simplified prospectus, the management regulations and the annual and half-yearly reports of Sarasin Investment Funds SICAV may be obtained free of charge from their representative and paying agent Bank Sarasin & Cie AG, Elisabethenstrasse 62, P.O. Box, CH-4002 Basel and from all other branches of Bank Sarasin & Co. Ltd. The entire content of these documents is protected by copyright (all rights reserved). No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of the bank. The use, modification or reproduction of parts or all of the documents is permitted for private, non-commercial use only. However, any notes relating to the copyright or brand names may not be changed or removed. Any other use requires the prior written consent of Bank Sarasin & Co. Ltd. Furthermore, our General Terms and Conditions apply. You may obtain these at any branch or have them sent to you upon request Copyright by Bank Sarasin & Co. Ltd. 28

29 Thank you for your attention! Sustainable Swiss Private Banking since 1841.

Some Historical Examples of Yield Curves

3 months 6 months 1 year 2 years 5 years 10 years 30 years Some Historical Examples of Yield Curves Nominal interest rate, % 16 14 12 10 8 6 4 2 January 1981 June1999 December2009 0 Time to maturity This