Performance Perspectives on ESG Investment Strategies

Transcription

1 Performance Perspectives on ESG Investment Strategies Laurie Hesketh, CIPM, PMP (Director, Meradia Group)

2 Since 1997, Meradia is a specialized consulting firm focused on transformational change initiatives impacting Investment Accounting, Performance and Client Reporting teams. We provide unbiased advice for business and technology projects and the practical ability to implement ideas and concepts. Click We to deliver edit Master a unique subtitle style combination of technical expertise and an understanding of our clients organizations to strategize, implement and lead change initiatives. By drawing on years of successful professional experience, our solutions repeatedly surpass our clients expectations. 3/15/2016 2

3 What is ESG? Environmental Social Governance Climate change Water Pollution Air pollution Water scarcity Deforestation Employee engagement Gender and diversity Executive Pay Board Compensation Labor relations Audit Committee structure Human rights Bribery or corruption policy Customer satisfaction Political contributions 3/15/2016 3

4 Investing for Impact, Variations on a Theme Impact Investing Portfolios designed to tilt the scales towards a desired outcome Returns expectations below market or return of capital Impact First Thematic Particular focus on one or more impact themes Returns expectations at or below market Sustainable Proactive investment in innovative businesses with scalable solutions for greater good Small-cap, market or above market return expectations ESG Integration Integration of ESG factors into traditional portfolio management; best of breed across sectors Large cap, market or above market return expectations Finance First 3/15/2016 4

5 Impact Investing is Growing 70% % Who Own of Are Interested in Social Impact Investments According to UN Principles for Responsible Investment (unpri.org) global assets under management reached $59 Trillion. 60% 50% 40% 30% 20% 10% 0% Millenials Gen X Baby Boomers Mature Interested In Currently Own Source: US Trust 2015 Insights and Wealth and Worth Survey 3/15/2016 5

6 Returns (not Necessarily) Sacrificed? 2 Schools of Thought Considering ESG factors adds to risk-adjusted return Good social, environmental and governance practices = good long term investments as securities that do well on ESG screens tend to be better managed. OR ESG detracts from returns or trends are inconclusive Returns more closely linked to rise and fall of oil as shorting energy in years where oil has been doing poorly is good for ESG strategies but when oil makes a comeback? 3/15/2016 6

7 Core Characteristics of Impact (ESG) Investing 1. Intentionality Investment with return expectations Impact measurement Proof of Impact lies in our ability to measure it, and although in its infancy, measuring is a must for dedicated impact investors like us. The methods are imperfect, complex, and diverse. The numbers don t provide instant impact gratification. But data has meaning and an important story to tell. Lisa Kleissner, President and Co-Founder, KL Felicitas Foundation 3/15/ Sources: Global Impact Investing Network (GIIN), Investing for Impact: Practical Tools, Lessons and Results, Nov 2015, KL Felicitas Foundation

8 Typical Performance Reporting Portfolio Objectives Top Ten Holdings GICS Sectors Standard Portfolio Characteristics, Risk Stats Returns History 3/15/2016 8

9 Sample from a Client Pitch Deck Investment firms are showing ESG specific attributes in pitch books and other 1:1 client materials, if not on client reports. 3/15/2016 9

10 Barriers to Better Measurement and Reporting for ESG and Social Impact Strategies Barrier 4 Investment in Systems Barrier 3 Immaturity of Inputs Barrier 2 Standards, Comparability Barrier 1 Convention 3/15/

11 Possible Inputs to ESG / Impact Decomposition ESG issuer level factors ESG fund ratings Classification: Introducing SICS Impact style analysis 3/15/

12 ESG Factors & Ratings ESG Factor Screening, Tilts Sustainalytics 120 research analysts, coverage for 4,500 companies worldwide, integrated into Morningstar Fund Ratings released last week MSCI 140 analysts, 37 Key ESG Issues, integrated into FactSet and Barra Thomson Reuters 120 analysts, covering 4,600 companies worldwide on ESG, 226 KPIs FSTE 350 Indicators RobecoSAM SmartESG applies sector specific scores and weights to ESG factors, used in DJ/S&P indexes GMI Ratings Covers 5,500 global companies on ESG factors, includes Trucost environmental specialty ratings (integrated into Fidelity Research) Impact B Analytics Self reporting by companies looking to become B certified combined with documentation and audit intended to measure true 3/15/

13 MSCI ESG Key Issue Hierarchy Click to edit Opportunities in Clean Tech title style Environmental Opportunities Click to edit Opportunities Master in subtitle Green Building style Source: MSCI ESG Ratings Methodology, May 2015 Pillars 10 Themes 37 Key ESG Issues Environment Social Governance Climate Change Natural Resources Pollution & Waste Human Capital Product Liability Stakeholder Opposition Social Opportunities Corporate Governance Corporate Behavior Carbon Emissions Energy Efficiency Product Carbon Footprint Water Stress Biodiversity & Land Use Toxic Emissions & Waste Packaging Material & Waste Labor Management Health & Safely Product Safety and Quality Chemical Safety Financial Product Safety Controversial Sourcing Access to Communications Access to Finance Board Pay Business Ethics Anti-Competitive Practices 3/15/ Financing Environmental Impact Climate Change Vulnerability Raw Material Sourcing Electronic Waste Opportunities in Renewable Energy Human Capital Development Supply Chain Labor Standards Privacy& Data Security Responsible Investment Health & Demographic Risk Access to Health Care Opportunities in Nutrition & Health Ownership Accounting Corruption & Instability Financial System Instability

14 Choices for Fund Ratings Uses B-Analyticssecurity level data (90%) + Fund Manager Assessment (10%) to compute fund ratings (requires at least 80% of firms in the portfolio to have completed the B-Analytics assessment and audit. Launched last week, Morningstar uses Sustainalytics security level ratings to deliver: Portfolio ESG Score Portfolio Controversy Score Portfolio Sustainability Score Impact First Finance First 3/15/

15 ESG Rating Challenges Underlying ESG attributes Immature Inconsistent Largely un-audited (unless material) Difficult to compare firm to firm Portfolio Managers Multiple sources Combine ESG inputs with traditional research 3/15/

16 SASB and SICS (Sustainability Accounting Standards Board and Sustainable Industry Classification System) Categorizes industries based on resource intensity and sustainability innovation potential. 3/15/ Source: Sustainability Accounting Standards Board

17 GICS vs SICS GICS industry / sector breakdowns were not designed to create impact transparency. 3/15/ Sources: Yahoo Finance, Sustainable Accounting Standards Board,

18 Example of a Custom Asset Class and Impact Breakdown Sources: SonenCapital, Evolution of an Impact Portfolioin collaboration with KL Felicitas Foundation 3/15/

19 ESG Style Analysis 3/15/ Security Factors Sources: Trucost GMI MSCI

20 LH1 ESG Benchmarks ESG Factor Screening, Tilts MSCI Based on MSCI ESG; Global Sustainability, SRI, KLD 400 Social, ACWI ex Controversial Weapons, Global Environment / Climate S&P / Dow Jones Based on RobecoSAM Ratings; Clean / Alternative Energy, Green Investing, Green Bonds FTSE / Russell FTSE4Good Indexes include Environmental Leaders Europe, Global Minimum Variance, Bursa Malaysia Thomson Reuters Top companies in each sector to support best of breed ESG Integration; Thomson s Asset4 ratings; US and Global Large Cap STOXX Based on Sustainalytics ratings; Environmental Leaders, Global ESG Social Leaders, ESG Governance Leaders Thematic ET Index Carbon Specific, uses SICS(Industry / Sector breakdowns) Impact Cambridge Associates Tracks ~50 specialized, private funds 3/15/ Note: many use general market indexes (e.g. S&P 500)

21 Slide 20 LH1 Laurie Hesketh, 3/9/2016

22 Conclusions Carefully evaluate inputs; all are immature Expect standards to evolve quickly and issuer attributes (aka ESG factors) to improve Evaluate portfolio level ESG / impact scores and look for competing products to do the same Advocate for alternate industry classifications for relevant ESG or impact strategies especially Green, mid to small cap strategies to make material sectors visible 3/15/