Integrating Sustainability Into Your Company's Investment Strategy (with service providers bonus guide)

Transcription

1 Integrating Sustainability Into Your Company's Investment Strategy (with service providers bonus guide) Sustainability Management Solutions

2 About Sustrana Sustrana is a strategic sustainability management company. We help businesses understand, assess, and make sustainable choices that enhance long-term company value. We provide consulting services and technology solutions that enable companies to minimize risk, maximize economic, social and environmental opportunities, and generate innovative ideas. To find out more about Sustrana please visit our website at sustrana.com. For questions about the topics presented in this paper, please contact: Jennifer K. Anderson, MPH, SCSP janderson@sustrana.com or Nancy S. Cleveland, JD, LEED AP ncleveland@sustrana.com Special thanks to Max A. Pinnola for his contribution to this paper Sustrana. All rights reserved. This document is for general information purposes only and should not be used as a substitute for consultation with professional advisors. PAGE 2 SUSTRANA.COM

3 Integrating Sustainability Into Your Company's Investment Strategy Sustainable investment is designed to mitigate future risk within portfolios by considering factors such as how innovative and forward thinking companies are in assessing and responding to issues like resource scarcity, energy pricing, waste generation, public health concerns, and demographic shifts. We are starting to see some rumbles of change in the historically conservatively oriented investment and asset management sectors. Investment portfolio managers are increasingly becoming attuned to how sustainability especially Environmental, Social, and Governance (ESG) factors can impact the assets in their portfolio and investment returns, especially in the long term. Simultaneously (and not all together unrelated), certain stakeholders are paying more attention to whether or not companies are putting their investment money where their mouths are with respect to sustainability. These two trends are converging and leading to the beginnings of a mini sustainable investment revolution. Let s start with some basic terminology. Several terms relating to inherently different investment strategies are often used interchangeably, making it confusing for those in the field and the public. Sustainable investment is not the same as what most refer to as Socially Responsible Investing, or SRI. Most often, SRI refers to the application of a filter to a portfolio to screen out companies based on perceived negative social impacts. Or, SRI can also refer to the use of positive screens to focus on companies that are perceived as having a positive impact in one area or another. Similarly, sustainable investment is not synonymous with impact investing, which typically refers to strategic, typically early stage, investments in organizations focused on creating social change via their products or services. Both of these approaches, SRI and impact investing, are investment strategies that are based on the values, preferences, and/or desired impact of the person or organization for whom the portfolio was designed. While they certainly can perform as well as, or better than, a similarly structured portfolio that is built without a values overlay, financial performance or risk minimization mandates are not the primary drivers. What we are referring to is a newly evolving investment approach whereby investment managers attempt to assess and manage future risk in a portfolio using monitoring and screening tools and techniques based on sustainability factors. As the market s understanding of how sustainability factors can impact company value has evolved, practices have progressed to a performance driven approach that focuses on investing in (or divesting from) companies based on how effectively these organizations are managing sustainability-related risks and opportunities. This approach is designed to mitigate future risk within portfolios by considering factors such as how innovative and forward thinking companies are in assessing and responding to issues like resource scarcity, energy pricing, waste generation, public health concerns, and demographic shifts. In addition to using sustainability screening for managing risk in a portfolio, investors are also increasingly seeking to understand how well positioned companies are to take advantage of changing social and environmental trends the opportunity side of the equation. While the research is still nascent and inconsistent, a growing body of studies by investment companies and academics are demonstrating that the companies that manage both sustainability risks and opportunities at a strategic level are realizing better stock performance over the long term. 1 Investment managers who employ sustainability screening tools to identify these companies are seeking to capitalize on this outperformance, or alpha. One of the primary challenges in demonstrating PAGE 3

4 value of this sustainability or ESG screening in investment portfolios, however, is the inherent conflict that can be found among the three categories for the same company. For example, it might be said that because of all that Coke is doing regarding providing access to clean water globally, they score high on E, but given the impact of their sodas on the obesity epidemic, they score low on S. In these cases, without a values overlay, it is difficult to ascertain which factor will influence performance the most. Another significant challenge to portfolio managers seeking to identify sustainability risk or opportunity is the availability of information. To include sustainability factors into their investment analysis, portfolio managers need reliable, objective data on ESG management activity that is comparable across companies. Responding to this demand, a growing number of companies are providing tools and customized services to help investment managers analyze ESG factors. Supporting this product growth is a growing number of organizations, such as CDP and Ceres, that are using investor pressure to encourage companies to be more transparent and to report within certain systems that support comparability. Sustrana s Perspective As your organization begins to move from the tactical to a more strategic approach to sustainability, investment management is an area that should be considered. Especially in the financial sector, not aligning your company s investment, lending, or underwriting filters with your social and environmental policies can raise a red flag and lead to challenges to your reputation. The review or screening process does not need to be overly burdensome and it can be an evolution. Numerous free and paid resources are available that can you can use to screen for sustainability risks and opportunities. For example, CDP reports are a great free resource to see how well companies you are invested in are managing climate change related risks and opportunities. Also, many portfolio managers have access to Bloomberg terminal screens that contain a significant amount of detail on sustainability factors. We hope you find the following Bonus Guide useful as you consider applying sustainability factors to your investment strategy. To include sustainability factors into their investment analysis, portfolio managers need reliable, objective data on ESG management activity that is comparable across companies. PAGE 4 SUSTRANA.COM

5 Service Providers Bonus Guide The following table provides further detail on some of the service providers who are specifically oriented to evaluating ESG factors in investments. They are divided into three categories: ESG Screening Tools, ESG Screening Service Providers, and Other Organizations Influencing ESG Screening in Investments. ESG Screening Tools To make screening easier for investors, there are a number of tools that have been developed for ESG screening in investments. Some of these tools are summarized below. PROVIDER TOOL NAME BRIEF DESCRIPTION SOURCE MSCI Intangible Value Assessment (IVA) ESG Impact Monitor ESG Indices MSCI/ISS STATS MSCI Intangible Value Assessment (IVA) - IVA company and sector profiles help investors explore the materiality of ESG risks and opportunities. MSCI ESG Impact Monitor - MSCI ESG Impact Monitor is a screening tool to evaluate corporate compliance with international standards for Human Rights, Labor Rights, Anti-Corruption, and the Environment, as defined by the UN Global Compact. MSCI ESG Indices MSCI indices allow clients to benchmark ESG investment performance, issue index-based ESG investment products, as well as to manage, measure, and report on their compliance with ESG mandates. MSCI ESG indices are grouped into categories such as MSCI Global Sustainability indices; MSCI SRI Indices; and MSCI Environmental Indices. MSCI/ISS provides Industry Reports, Analysis, and Factsheets. STATS Allows the user to review the statistical trends data from nearly 20 years of ESG research. msci.com/ products/esg/unpri_ signatories/integration_ tools.html issgovernance.com/esg For indices: msci.com/products/ indices/esg/ BLOOMBERG BLOOMBERG ESG Bloomberg Environmental, Social and Governance (ESG) products are designed to enable investors to understand the risks and opportunities associated with potential investments or counterparties across a range of asset classes. Currently Bloomberg provides data on more than 120 indicators for approximately 5,000 publicly listed companies globally, and according to their site, is continually increasing coverage. Bloomberg also provides sustainability news, research, indices, funds, energy & emissions data, legal & regulatory as well as portfolio optimization tools such as screening and scoring. bloomberg. com/professional/ markets/equities/ THOMPSON REUTERS ASSET 4 ASSET4 provides environmental, social and governance (ESG) information based on 250+ key performance indicators (KPIs) and 750+ individual data points along with their original data sources. Services include negative screening, best-in-class analysis, and compliance and risk monitoring, engagement and integration. ASSET4 covers 3400 listed companies including the S&P 500, Russell 1000, MSCI Europe, FTSE 250, ASX 300, the MSCI World Index and the 250 MSCI emerging markets companies. They use only publicly available information analysts review company reports and other public sources and use this information to create comparable and consistent units that enable assessment of different entities. im.thomsonreuters. com/solutions/content/ asset4-esg/ PAGE 5

6 Style Research specializes in global investment research and portfolio analysis applications for professional investment institutions worldwide. Its products and services include: STYLE RESEARCH PORTFOLIO ANALYZER FUND ANALYZER MARKETS ANALYZER ESG RISK ANALYSIS The Style Research Portfolio Analyzer appraises aspects of Style, Risk, and Performance for individual portfolios and funds of funds, including the ESG aspects. The Style Research Funds Analyzer is a Funds Competitor Evaluation Platform for mutual funds. Users can compare the ESG positions of specific funds compared to their peer group. The Style Research Markets Analyzer is an internet-based equity research facility to specify, run and statistically verify Style-based and factor-based research inquiries. This service includes ESG factors allowing researchers to test the relevance of these measures within a wide range of investment processes. styleresearch.com/en/ styleresearch.com/en/ index.php/products/ styleresearch.com/en/ index.php/resources/ brochures/ These applications incorporate data provided by Trucost PLC, RiskMetrics, and GMI. GMI RATING GMI RATINGS GMI ANALYST GMI Ratings was formed in 2010 through a merger of The Corporate Library, Governance Metrics International and Audit Integrity. GMI Ratings Environmental, Social and Governance (ESG) ratings evaluate the sustainable investment value of public corporations. GMI publishes its proprietary ESG Ratings on approximately 6,000 companies worldwide, including over 600 companies based in emerging markets. Ratings are based on 150 risk factors (ESG KeyMetrics ) organized into six categories. GMI s Ratings are expressed in two forms: as percentile scores ranging from 1 to 100, and as a letter grade ( A to F ) based on the percentile scores The ratings incorporate input from institutional investors, auditors, insurers, corporate consultants and decision-makers. GMI Analyst is GMI s integrated research platform that provides access to Trucost environmental performance data on corporate environmental impacts, including greenhouse gases (GHGs), water, waste, pollutants and natural resource dependency. com/home/ com/home/about/inbrief-esg-analytics/ Socially Responsible Investment screens have been added to GMI s suite of products in the Fall of 2013 through a partnership with Ethix SRI Advisors. PAGE 6 SUSTRANA.COM

7 ESG Screening Service Providers In addition to the tools listed above, there are a growing number of companies that provide ESG related risk/ opportunity management services for institutional investors. Some such organizations are summarized below. In some cases (as noted) these firms support the work of organizations that rank companies based on sustainability factors (Newsweek) or create ESG-related indices (FTSE4Good and DJSI). PROVIDER TOOL NAME Service Name SOURCE Goldman Sachs GS SUSTAIN - The GS SUSTAIN framework is designed for large institutional or private investors. It examines structural trends that impact major global industries and aims to identify well-managed, strategically well- positioned and highly cash-generative businesses able to benefit from those trends." It is designed to measure key performance indicators across companies to identify those that lead in a sustainable way. Primary elements include: Cash returns: Proprietary measure of the cash flow companies generate relative to the capital invested in their business Industry positioning: Objective measures of the strategic strength of companies business models Management quality: Quantifiable analysis of the effectiveness with which companies recognize, address and manage the key ESG issues facing their industry goldmansachs.com/ our-thinking/archive/gssustain-2011/ RepRisk RepRisk RepRisk is a Swiss ESG Reputation Risk ratings firm. RepRisk has analyzed and rated 40,000+ firms on their ESG reputational risks. RepRisk's ESG reputation risk ratings only use independent information, and are updated daily, and can be accessed on an daily, weekly or monthly basis, a differentiator from many ESG rating systems that use annual CSR/EHS reports as their major source of annual ratings of companies. RepRisk s comprehensive database on ESG risks is designed to be used for risk management and due diligence by investment professionals, risk managers, supply chain managers, public policy and communications teams, and compliance functions, in order to manage and mitigate ESG risks in day-to-day business. RepRisk s database covers both listed and non-listed companies in both developed and emerging markets. products/web-basedtool/ RepRisk business intelligence can be accessed through RepRisk products, in particular the RepRisk Web-based Tool and Data Feeds and can be tailored specific needs. SUSTAIN- ALYTICS Sustainalytics Sustainalytics is an investment research firm specializing in ESG research and analysis. Sustainalytics has been named best research firm in the Independent Research in Responsible Investment (IRRI) Survey. In 2012 Newsweek collaborated with Sustainanalytics and TruCost to provide research for its 2012 rankings. 2 sustainalytics.com PAGE 7

8 EIRIS EIRIS EIRIS is an independent, not-for-profit organization that provides of ESG research for investors. Its mission is to empower responsible investors with independent assessments of companies ESG performance and advice on integrating them with investment decisions. EIRIS provides these services to more than 200 asset owners, asset managers, banks, stockbrokers and governments across Europe, North America, Australia, and Asia use EIRIS s responsible investment services. Major index providers around the world, including the Johannesburg Stock Exchange and Mexican Stock Exchange Investors, use EIRIS s research. Until September 30, 2013, EIRIS was the main research partner for the FTSE4Good index. 3 eiris.org FTSE4Good ESG Ratings are designed to measure the ESG risk and performance of companies worldwide. ESG risk and performance data is provided on over 2,400 public companies. FTSE4Good ESG Ratings are generated by independent research, provided across three risk pillars, six risk themes, and at an overall level. These include: FTSE4Good ESG Ratings Environmental (Climate Change, Environmental Management) Social (Human & Labor Rights, Supply Chain Labor Standards) Governance (Countering Bribery, Corporate Governance) Purchasers of the FTSE4Good index are able to see which companies have passed the FTSE4Good index s inclusion criteria. Purchasers of the ratings see the underlying ESG risk and performance measures online via FTSE Analytics. PAGE 8 SUSTRANA.COM

9 ROBECOSAM Corporate Sustainability Assessment (CSA) RobecoSAM offers clients a range of sustainability iinvesting solutions including indices, actively managed diversified and thematic equities, private equity, active ownership and corporate sustainability benchmarking services. It serves institutional investors and private investors across a broad range of asset classes. Since 1999, RobecoSAM has been conducting the annual Corporate Sustainability Assessment (CSA), which serves as the framework for measuring corporate sustainability performance and forms the research backbone for the construction of the Dow Jones Sustainability Indices (DJSI). The world s largest 2,500 publicly traded companies are invited to participate in RobecoSAM s CSA for possible inclusion in DJSI World. The DJSI World identifies sustainability leaders across all industries enabling investors to track their performance and integrate sustainability considerations into their portfolios. Companies are evaluated based on a range of financially relevant sustainability criteria. Fifty-nine industries are analyzed using industry-specific questionnaires. Companies receive a Total Sustainability Score between and are ranked against other companies in their industry. The top 10% of companies within each industry are selected for inclusion in the DJSI World. Note: SAM was acquired by Robeco Group in In 2013, SAM was renamed RobecoSAM as part of Robeco's strategy to further align its group-wide sustainability investing activities. robecosam. com/en/about-us/ about-robecosam.js robecosam. com/images/ CSA_methodology_ Brochure_e.pdf IW FINANCIAL IW Financial IW Financial provides ESG research, consulting, and portfolio management solutions for asset management firms, managed accounts sponsors, institutional investors, plan sponsors, and investment advisors. IW Financial helps industry professionals to incorporate ESG factors into investment platforms, products, and portfolios. com BRECKIN- RIDGE CAPITAL Breckinridge Capital Breckinridge Capital Advisors is an investment advisor specializing in the management of high-grade fixed-income strategies. Breckinridge Breckinridge believes sustainability is a natural match for high-grade fixed income because it offers a long-term perspective, which is aligned with a fixed income investors long-term goals, and seeks to maximize risk-adjusted returns. The firm offers both tax-efficient and taxable sustainable fixed income strategies that employ fully integrated bottom-up fundamental credit and ESG research. Breckinridge has developed formal frameworks for analyzing sustainability using rigorous processes, a seasoned investment team and proprietary technology. Their strategies invest in corporate, municipal, supranational and agency issuers with best-in-class ESG characteristics and bonds that fund essential environmental, social or economic development projects. breckinridge.com/ strategies/sustainable/ index.html breckinridge.com/ strategies/sustainable/ brochure/ PAGE 9

10 HIP INVESTOR HIP Investor HIP offers investment management services and customized investment advice to individual and institutional clients. HIP s investment process is focused on the opportunity side of the equation, going beyond traditional financial valuation with quantifiable measures of human impact that can drive higher shareholder value. HIP s comprehensive framework shows how a company s long-term, comprehensive approach can include all stakeholders, across customers, employees and suppliers as well as the environment. about-us/investmentphilosoph/ MAPLECROFT Maplecroft Maplecroft offers a range of analysis, research and consulting services to help financial services firms understand the fast-changing geo-political environment in order to minimize their global risk exposure and identify investment opportunities. Their products and services have been developed to enable organizations to identify current and future political, social, environmental and reputational threats affecting countries and companies at national and subnational levels. Maplecroft s products and services for the financial sector include 200 risk indices and interactive maps; country risk reports; commodity and sector specific reports; company risk reports; ESG risk ratings; due diligence services; investment decision making; and asset screening tools and risk calculators to assess ESG, sovereign and supply chain risks. am/ com/sectors/financial_ services/ PAGE 10 SUSTRANA.COM

11 Other Organizations Influencing ESG Screening in Investments In addition to the tools and service providers listed above, there are a growing number of organizations that are influencing ESG screening in investments through their expertise and partner networks. Some of these organizations are summarized below. ORGANIZATION TOOL NAME Service Name SOURCE Ceres advocates for sustainability leadership by mobilizing a network of investors, companies and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions. CERES Blueprint for Sustainable Investing Investor Network on Climate Risk (INCR) The 21st Century Investor: Ceres Blueprint for Sustainable Investing The Blueprint for Sustainable investing is a guide published by Ceres for institutional asset owners and their investment managers who need to understand and manage the growing risks posed by climate change, resource scarcity, population growth, human and labor rights, energy demand and access to water risks that will challenge businesses and affect investment returns in the years and decades to come. Investor Network on Climate Risk (INCR) connects institutional investors with each other and with investment leaders globally, and provides opportunities for collaboration and leadership. INCR members engage on issues including policy, SEC disclosure, water risk, investment consultants, integrated reporting, stock exchanges, and corporate engagement through working groups. INCR members have full access to Ceres staff experts and cutting edge ESG information and strategies on the oil and gas, electric power, insurance, transportation and water industries. Through specialized reports, INCR members get a first-look at the latest sustainability trends, risks, solutions, and leading best practices. ceres. org/about-us/whowe-are ceres. org/investornetwork/ceres%20 Blueprint%20for%20 Sustainable%20 Investing ceres. org/investornetwork/incr CDP CDP is an international, not-for-profit organization that provides a global system for companies and cities to measure, disclose, manage, and share vital environmental information, particularly focused on climate change and carbon emissions. CDP requests standardized climate change, water, and forest information from some of the world s largest listed companies through annual questionnaires sent on behalf of institutional investors that endorse them as CDP signatories. These shareholder requests for information encourage companies to account for and be transparent about environmental risk. This includes evidence and insight into companies greenhouse gas emissions, water usage, and strategies for managing climate change, water, and deforestation risks. CDP s system enables companies around the world to measure, disclose, manage, and share climate change, forest, and water information. CDP investor initiatives are were backed in 2013 by more than 722 institutional investors representing an excess of US$87 trillion in assets. CDP now holds the largest collection globally of primary climate change, water, and forest-risk information. cdproject.net/ en-us/pages/ HomePage.aspx cdproject.net/en- US/WhatWeDo/ Pages/investors. aspx blueprint.tv/cdp/ webtv/#/businessand-government/ cdp-catalyzingchange PAGE 11

12 ICCR ICCR s mission is to build a more just and sustainable world by integrating social values into investor actions. ICCR has over 40 years of experience in shareholder advocacy and corporate engagement. ICCR Members actively engage companies on what they view to be the most intractable environmental, social, and governance issues impacting today s people and planet. Their membership self-organizes and coordinates their work on dozens of issues The following nine issue areas have been designated as priorities by the membership: Water; Food; Social sustainability; Human trafficking; Environmental health; Global health; Domestic health; Financial practice and risk; and Supply Chain Monitoring. iccr. org/about/ iccr. org/issues/ COUNCIL OF INSTITUTIONAL INVESTORS (CII) Founded in 1985, the Council of Institutional Investors (CII) is a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion and members include 125 public, union and corporate employee benefit plans, endowments and foundations. CII advocates for strong governance standards at public companies and strong shareholder rights. Members use their proxy votes, shareowner resolutions, pressure on regulators, discussions with companies and litigation where necessary to effect change. cii.org/ about_u Endnotes i. Harvard Business School. (2012). The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance. Boston, MA: Eccles, R.G., Ioannou, I., Serafiem, G., hbs. edu/faculty/publication%20files/12-035_a3c1f5d8-452d-4b48-9a cc2.pdf (accessed 01/20/2014); Sustainable Insight Capital Management and CDP (2013) Linking Climate Engagement to Financial Performance: An Investor s Perspective. New York, NY: Kahn, B.M., Fox, M., net/cdpresults/linking-climate-engagement-to-financial-performance.pdf (accessed 01/20/2014). ii. Sustainalytics. (2012). Newsweek to Release Fourth Annual Green Rankings in October. sustainalytics.com/newsweek-release-fourth-annual-green-rankings-october (accessed 01/20/2014) iii. The Foundation for Secure Markets. (2013). FTSE4Good Semi-Annual September 2013 Review. mondovisione.com/media-and-resources/news/ftse4good-semi-annual-september review/ (accessed 01/20/2014) PAGE 12 SUSTRANA.COM