ALIGNING INVESTMENTS WITH YOUR ORGANISATION S MISSION MAY 2017

Transcription

1 ALIGNING INVESTMENTS WITH YOUR ORGANISATION S MISSION MAY 2017 DR IAN WOODS HEAD OF ESG RESEARCH REBEKAH SWAN HEAD OF DISTRIBUTION

2 OBJECTIVES OF THE SESSION? RESPONSIBLE INVESTING: ESTABLISHING A POLICY/FRAMEWORK WITH YOUR ORGANISATION > How do you get started? > What are some practical steps involved in establishing and executing a responsible investment policy for your organisation? 2

3 WOULD YOUR ORGANISATION BE HAPPY TO HAVE BEEN INVESTING IN THIS? Image sources:

4 THINKING ABOUT YOUR INVESTMENT OBJECTIVES ARE YOU CLEAR ON: > Balance between capital growth and income? > What is your risk and return volatility appetite? > How much risk does the organisation want to take? 4

5 THINKING ABOUT YOUR INVESTMENT OBJECTIVES SOME KEY QUESTIONS FOR YOU TO CONSIDER > How much investment knowledge do management/trustees have? Do they need advice? > Has the organisation got an investment objective? > Have they agreed their appetite for risk? 5

6 Potential return THINKING ABOUT INVESTMENT OBJECTIVES ASSET CLASSES AND THEIR RISK PROFILES HIGH Shares Alternative investments Property Fixed interest Cash LOW LOW Defensive assets Expected risk Growth assets HIGH 6

7 EXERCISE FIVE MINUTES WHAT ARE THE ISSUES FOR YOUR ORGANISATION? > What are your investment objectives? > What is your risk appetite? > Is it agreed with your board? > Have you got sufficient investment expertise/advice to answer these questions? 7

8 INVESTMENT OBJECTIVES ORGANISATION MISSION 8

9 WHAT IS YOUR MISSION? 9

10 Environmental Social Governance WHAT ARE ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) ISSUES? NON-FINANCIAL ISSUES WHICH ARE MATERIAL TO THE SHORT OR LONG TERM RETURN TO ASSET OWNERS AND THEIR INVESTMENTS Can be systemic issues Can be industry or company specific Climate change Environmental policy Sustainability best practice Environment management Water supply Sustainable transport Waste management Reduce emissions Climate impact Consumer rights Supply chain management Health and safety Product safety Labour relationships, including with unions Community relations Stakeholder relations Human rights Child labour Social disharmony Companies: Board structures Executive pay Shareowner rights Accounting / audit Business ethics Conflicts of interest Reduce emissions Climate impact Funds: Fund governance Advisory committee powers and composition Valuation issues Fee structures 10

11 HAVE ESG ISSUES IMPACTED COMPANY VALUE? LESSONS FROM THE PAST BP Deepwater horizon incident Environment, process safety 11 AWB Iraq oil for food scandal Ethics Wells Fargo Employee incentives Company culture and governance US/UK banks GFC Incentives and risk management BHP OK Tedi Environment and community Rio Tinto Bougainville copper Political risk Volkswagen Production scandal Governance, company culture, health and safety Paypal Hacked confidential information Cyber security Pike River Mine collapse Poor governance, health and safety > What value could have been saved with foresight (rather than hindsight)? > How can you systematically consider these in investment decisions? Image sources: Shutterstock

12 ALIGNING INVESTMENTS WITH ORGANISATION S MISSION > What would be incompatible with your mission? > What would your stakeholders think? > Is their reputation risk? the front page test 12

13 EXERCISE FIVE MINUTES LIST 10 IN THE ORDER OF IMPORTANCE > What would you be important to your organisation to exclude? > What sectors or causes would you like to support in a positive way? 13

14 WHAT ARE SOME OF THE OPTIONS? Divestment why? Engagement why? ESG integration Portfolio tilting Proxy voting Impact investing Social investments 14

15 Number of Studies GREATER FOCUS ON ESG HOW HAS IT PERFORMED? 2012 DEUTSCHE BANK STUDY: PERFORMANCE OF SUSTAINABLE FUNDS > Overwhelming academic evidence that firms which have higher ESG ratings have lower cost of capital. > Compelling evidence that strong ESG performance is correlated to strong financial performance. Summary of individual academic studies analysing ESG ratings and correlation with cost of capital or market/financial performance at the securities level (positive, neutral, mixed and negative) Cost of Capital Market-based Performance Account-based Performance Positive Neutral Mixed Negative Source: DBCCA analysis Note: Only includes individual academic studies looking at securities and funds (i.e. no literature reviews or meta-studies are included). 15

16 INTEGRATING ESG WHAT IMPACT HAS IT HAD ON THE MARKET? Source: AMP Capital 16

17 EXERCISE 10 MINUTES > If we revisit the list of 10 exclusions, how would you like to respond ideally? If you had your wish list it might be quite expansive. > How would you narrow it down to five? > Discuss within your group > Then share with the group how did you decide? 17

18 INVEST, DIVEST, ENGAGE HOW TO DECIDE? WHAT ARE THE INVESTMENT IMPLICATIONS? WHAT ARE YOU HOPING TO ACHIEVE? > Managing investment risk? What is your investment risk appetite? Is the decision to invest/divest/engage part of the investment risk decision? > Alignment of values? Are there things which are so fundamentally misaligned with the objectives/values of the organisation. For example: tobacco companies and cancer research Alcohol and gaming and provision of social welfare Sugar and obesity/diabetes research > Do you want to use your investment to facilitate change? > What can you compromise on? > Not mutually exclusive but worth being clear 18

19 EXAMPLE OF IMPLEMENTATION FOSSIL FUELS POLICY CONSIDERATIONS IN DECIDING WHAT TO DIVEST? WHAT ARE THE ISSUES? 1. Focus on the most greenhouse emission intensive 2. Focus on areas where is a viable alternative (and not exclude where there is unlikely ever to be an alternative, eg metallurgical coal, plastic and nitrogen fertiliser manufacture) 3. Focus on the value chain supporting/using the most emission intensive 4. Decrease the materiality threshold 5. Consider the implications for investment risk/return when considering expanding the scope 6. Recognise that divestment needs to be supplemented by a strong focus on engagement to enhance change 7. Specific allocation to Green Bonds to focus on the positive 19

20 RECAP WHAT IS THE ROLE OF YOUR INVESTMENTS, ENGAGEMENT AND TO INVEST OR DIVEST? > Have clear investment objectives > Consider investment philosophy within the context of the overall organisation s objectives eg. investment charter > It s not all about divestment! > Facilitating change through: Engagement Positive investment > Understand what you can compromise on tricky to get it all! > Choose and work with your managers who are aligned to your values and your investment philosophy > Make your MANAGERS accountable! 20

21 EXERCISE FIVE MINUTES DEVELOPING A RESPONSIBLE INVESTMENT STATEMENT Duty and care to local community so supporting activities/companies which are either directly or indirectly negatively impacting the community may not be aligned to this. We believe that environmental, social and governance (ESG) factors are material to long term returns. Our governing legislation also requires us to avoid prejudice to New Zealand s reputation in the world community. ESG considerations are therefore integrated into all aspects of the Fund s investment activities, from investment selection and due diligence to ownership activities such as monitoring our external investment managers, exercising our voting rights and engaging with companies to improve their ESG policies and practices. [The Guardians of the New Zealand Superannuation Fund] Because environmental, social, and corporate governance aspects of businesses practices offer clues about long-term returns and aid in minimizing risk, university endowments have an interest in taking these considerations into account when making long-term investment decisions. For Christian Super, being ethical means more than just integrity and honesty in how we deal with members and stakeholders. It also means developing an investment strategy that focuses on investments that support core Christian beliefs including the authority of God, respect for human life and the importance of caring for God s creation. As part of our responsible investment strategy we screen 100% of our investments to make sure that Christian Super does not invest in industries such as stem cell research and atomic or chemical weaponry and greatly limits exposure to such industries as gaming and tobacco. 21

22 LIVING THE BELIEFS > Clear statement of ESG investment beliefs, including the role of divestment and engagement (align your governance documents) > Include ESG as a criteria in manager selection > Ask your investment consultant how managers perform on ESG > Be intentional on how you ll monitor this, ESG risk of portfolio and engagement > Provide transparency on activities and your approach > Complement with strong governance (processes, skills and knowledge) > Report on progress on integration > Revisit beliefs every 3-5 years and ensure all stakeholders understand history and your journey ENSURE UNDERLYING MANAGERS ARE INTEGRATING ESG ISSUES INTO INVESTMENT DECISIONS IN A SYSTEMATIC WAY AND ARE VOTING 22

23 WHO CAN HELP YOU? An investment consultant with ESG expertise 23

24 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. 24