ESG at Allianz Global Investors CIO NCPERS. June Robbie Miles, ACA, CFA - ESG Research. For Institutional use only

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1 ESG at Allianz Global Investors CIO NCPERS June 2018 Robbie Miles, ACA, CFA - ESG Research For Institutional use only

2 AllianzGI ESG Investment Strategies SRI Deliver sustainable financial outperformance over investment cycles by investing in issuers with positive ESG profile or dynamics Improve sustainability profile of issuers through engagement Proprietary best-in-class and best efforts SRI approach Impact Competitive Returns ESG Risk Management Generate positive social/environmental impact alongside financial returns. Impact analysis to identify opportunities to allocate capital where it can contribute to solving sustainability challenges. Integrated ESG Unconstrained management of ESG tail risks Company engagement to improve risk profile and enhance returns Fundamental analysts & PMs assess ESG risks and their impact on investment value Extra Financial Returns Sustainability Footprint Investment Stewardship: Company Engagement and Proxy Voting ESG = Environmental, Social, Governance. SRI = Sustainable and Responsible Investing. Source: Allianz Global Investors. For illustrative purposes only. 2

3 Adoption of ESG Callan Institutional Investor survey % of largest institutional investors have incorporated ESG factors into investment decisions. Overall, 37% of funds incorporate ESG in 2017, up from 22% in % of public funds indicated they incorporate ESG factors into the investment decision-making process, up from 25% in Breakdown by institution type and region: Reasons for including ESG 47%: must consider ESG factors as part of our fiduciary responsibility 42%: fund s IPS dictates that we consider ESG factors 32%: Expect to achieve higher returns AND improved risk profile ESG adoption is growing across the board Source: Callan Institute - ESG survey

4 Integrated ESG ESG Risk Analysis ESG tail risks identified through Intrinsic ESG research process Portfolio managers and fundamental analysts engaged in ESG review initiations, discussions and debate Proprietary ESG risk rating assigned by ESG Research Team (152 in 2017) Risk/Reward Analysis Disciplined approach to ESG risks review by investment teams No restrictions on investments - decisions based on risk/ reward analysis ESG risk analysis incorporated into risk/ return considerations Active Stewardship Use AllianzGI s influence to engage companies to generate alpha while achieving societal benefits Voting 100% of our proxies globally by applying Proxy Voting Policy. Aims to improve governance standards across all portfolios Evidence of ESG Integration Document ESG risk reviews, risk/reward considerations, company engagements and proxy voting discussions Full transparency internally and to clients demonstrating ESG Integration at work Successful ESG integration depends on firm-wide adoption by fundamental investors 4

5 Example: Altria (Philip Morris) Controversial sectors can still be owned the key is understanding the materiality of the risk The sample information above contains the current opinions and analyses of AllianzGI and its employees and such opinions and analyses are subject to change without notice. This document has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. 5

6 AllianzGI Engagement Activities in 2017 Signatory to Stewardship Codes in the UK, Japan, Hong Kong, and Italy 196 recorded engagements in 19 markets: 39% of issuer engagements led by fundamental analysts/ PMs 18% of engagements included non-esg issues Participate in collective engagement initiatives (e.g. SSE, CDP, Climate Action 100+) Founding member of the UK Investor Forum 7% 8% 2% 2% Corporate governance 5% 1% Operational performance 6% Business conduct/culture Envrionmental risks/impacts Tralsparency & Disclosure 50% Capital management Strategy/Business Model Audit & Accounting Social risks/impacts 9% Financial performance Risk management 10% 0% Engagement success is part of delivering investment performance 6

7 7 Proxy Voting AllianzGI s 2017 Global Proxy Voting Core element of fiduciary responsibilities - 100% voting coverage Active involvement from portfolio managers Full disclosures of votes cast online Voted at 7,961 shareholder meetings 32% Voted on 83,488 proposals 24% Votes against in the USA: 35% of total proposals; 45% of compensation proposals 68% 76% against management with at least one vote in favor of management against management in favor of management Active investment strategies benefit from active exercise of voting rights

8 Does ESG add value? Research from Bank of America Merrill Lynch BAML back-tested equity strategies from to asses the materiality of adding an ESG factor overlay (good ESG scores). Adding ESG increased value across the board: Dividend stocks: ESG added 3%/year. Growth stocks: ESG and strong earnings estimate revisions added 1.5%/year. Low forward P/E (value) stocks: 2%/year. Momentum: 1.7%/year. Quality: Screening for stocks based on both Quality and ESG would have led to higher returns vs. screening on Quality alone. Research from Harvard Business School Firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, while good performance on non-material issues neither adds nor takes away performance. HBS Paper Corporate Sustainability First Evidence of Materiality, March 2015 ESG boosts returns and lowers risk when materiality is considered Source: Bank of America Merrill Lynch broker note: ESG + Quant = alpha; activists could play matchmaker, 03/20/2018 8

9 Additional disclosure Investing involves risk. The value of an investment and the income from it may fall as well as rise, and investors may not get back the full amount invested. Past performance is not indicative of future results. This document is being provided for informational purposes only and should not be considered investment advice or recommendations of any particular security, strategy or investment product. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, Allianz Global Investors does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and Allianz Global Investors assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. 9

10 June 15, 2018 ESG: What are CIOs to Do? Alaina Anderson, CFA, Partner

11 Defining ESG How Funds Define ESG The literal definition of environmental, social, and governance 41% A specific factor or mission for the fund 6% A specific pillar (E, S, or G) 2% Other 1% Did not define 50% Source: Callan, 2017 ESG Survey. 2

12 ESG Deeply Enrooted in Our Investment Philosophy We believe that strong corporate performance is the foundation of superior long term investment returns. The essence of corporate success lies in building intrinsic strengths in the management of human capital, financial resources and stakeholder relationships, and delivering quality, innovation, service and value to customers. Companies that lead in these critical areas have produced better returns on capital, over a longer time horizon, with greater consistency and less risk. ESG Corporate Value Creation 3

13 Growth of Global Sustainable Investment Assets Global sustainable investment assets are continuing to increase, albeit at a slower pace than in previous years. At the start of 2016, global sustainable investment reached $22.89 trillion, compared with $18.28 trillion in 2014, an increase of 25 percent. Previously, global sustainable investment assets grew 61 percent from 2012 to Still, nearly all regions saw increases in their SRI assets relative to their total professionally managed assets, with the greatest rise seen in Australia and New Zealand (See Table 1). Source: The Global Sustainable Investment Alliance (GSIA), 2016 Global Sustainable Investment Review. GSIA uses an inclusive definition of sustainable investing, without drawing distinctions between this and related terms such as responsible investing and socially responsible investing. These are collectively referred to as sustainable investing or SRI. 4

14 ESG Adoption Rates in the U.S. by Fund Type Funds that are Incorporating ESG Factors into Investment Decisions Source: Callan, 2017 ESG Survey. 5

15 ESG Adoption Rates in the U.S. by Fund Size Funds that are Incorporating ESG Factors into Investment Decisions Source: Callan, 2017 ESG Survey. 6

16 William Blair ESG Evolution Continuous Improvement Over the past five years, we have continued to enhance our research process and tools, as well as improve our communication on ESG: Comprehensive review of data vendors leading to GMI Ratings subscription in 2012* Systematic integration of GMI/MSCI ESG research in William Blair s proprietary platform Routine back testing of ESG data/ratings* Promoting ESG integration and PRI, attending and speaking at industry conferences Enhanced Proxy Voting reporting Current Initiatives Engage with clients to inform our path forward Implement proprietary industry materiality framework Explore development of internal rating system Quant testing alternative ESG data sets (AI driven) Create sustainability themed proxy voting policy ESG R&D: investments in technology and human capital *GS Sustain, Asset 4, RepRisk, MSCI IVA, GMI Ratings, Didas, Sustainalytics, TruValue Labs 7

17 ESG Performance Studies In the world portfolio, the ESG momentum and tilt strategies outperformed the MSCI World Index by 16.8% and 11.2% in active cumulative returns respectively over a 10 year period (Figure 1). The ESG momentum strategy in particular showed a stronger alpha advantage with a higher active return on a cumulative and annualized basis given the same level of active risk. Source: UN PRI, MSCI. Past performance is not indicative of future returns. The MSCI World Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. A direct investment in an unmanaged index is not possible. The ESG Momentum strategy is optimized with assets that had improving year over year ESG scores, the ESG Tilt strategy is optimized with assets that had high absolute ESG scores. ESG data provided by MSCI ESG Research. 8

18 Important Disclosures Intended for informational purposes only. Investment returns and principal will fluctuate with market and economic conditions and you may have a gain or loss when you sell shares. Current performance may be lower or higher than thedataquoted. International investing involves special risk considerations, including currency fluctuations, lower liquidity, economic and political risk. Investing in emerging markets can increase these risks. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. This material contains the current opinion of the presenter but not necessarily those of William Blair and such opinions are subject to change without notice. William Blair is not responsible for the information or views communicated by representatives of other companies. This material is not indicative of the past or future performance of any William Blair product and should not be considered as investment advice or a recommendation by William Blair of any particular security, strategy or investment product. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice. This material is provided for information purposes only and is not intended as investment advice or a recommendation to buy or sell any particular security. Any discussion of particular topics is not meant to be comprehensive and may be subject to change. Data shown does not represent the performance or characteristics of any William Blair product or strategy. Any investment or strategy mentioned herein may not be suitable for every investor. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within William Blair. Information is current as of the date appearing in this material only and subject to change without notice. This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor s objectives, guidelines, and restrictions. Copyright 2018 William Blair. William Blair refers to William Blair Investment Management, L.L.C. William Blair is a registered trademark of William Blair & Company, L.L.C. 9