Sustainability Indexes & Exchanges Trends, Outlook & Value add for Investors

Transcription

1 May 2013 Sustainability Indexes & Exchanges Trends, Outlook & Value add for Investors Quadia SA Impact Finance 34 Rue de Candolle CH Geneva T F

2 TRENDS, OUTLOOK, INVESTMENT VALUE

3 1. Sustainability Indexes - Two decades of history Launch of the Dow Jones STOXX Sustainability Index Launch of the Dow Jones Sustainability Index (DJSI) Global Index Launch of the Dow Jones (N.America Sustainability Index North Regional Index) America Launch of the Dow Jones Sustainability Index Asia Pacific, and Korea (Asia Regional Index) Domini Social Index Calvert Social Index JSE SRI Index (US-based Company Index) (S. Africa National Index) Launch of the Ethibel Sustainabiolity Index, and ASPI S&P ESG India (India National Index) First Chinese Sustainability Index (China National Index) S&P EGX ESG Global Index Bovespa Corporate Sustainability Index (Brazil National Index) Source: Sustainable Asset Management 2011

4 Sustainability Indexes Trends & Outlook Increased visibility of sustainability indexes thanks to the fact that the 3 major indexes providers (DJ Indexes, FTSE, MSCI- Barra, S&P)all have sustainability indexes Bloomberg and Thomson Reuters both providing ESG data will make informawon available to investors driving further the momentum CreaWon of more regional and country indexes. Boom since 2010 CreaWon of customized sustainability (themawc) indexes, pushed by the signatories of the UN PRI, and the need to have customized benchmark from which investors measure performance and guarantee transparency InnovaWon on structuring 4

5 Sustainability Indexes Value Add for Investors SoluWon for understanding the business case and materiality of sustainability issues for investors (few swll understand) On the other hand risk adverse inswtuwonal investors are asking for alpha, closer to the benchmark Change in approach of investors investor needs more advisory; soluwons 5

6 Sustainability Indexes - Participation Trend Participation of Companies in DJSI has been Constantly Increasing Over the Years 6 6

7 Sustainability Indexes - Alpha from Sustainability Scope: Time frame: Geography: Sustainability metric: Statistical method: Restrictions: Description DJSI Participants (8 years) Developed markets SAM Sustainability score Portfolio back-testing Size, sector, region, neutrality SAM s sustainability data has predictive power for stock-selection, reflected in the positive information ratio (0.5) of the portfolio consisting of sustainability leaders Added value is generated by selecting sustainability leaders and avoiding sustainability laggards Value creation is consistent and stable for the entire time period 7 7

8 2. Sustainable Stock Exchanges - A short history Several stock exchanges many in emerging markets are adopwng proacwve commercial strategies in response to growing investor interest in ESG issues and global sustainable development challenges. Many exchanges have taken iniaaaves to raise issuing companies awareness and to promote or require befer transparency and disclosure on ESG- related performance or risk factors - World FederaWon of Exchanges (WFE) 2009 C.Hicks

9 Sustainable Stock Exchanges A short history 5-6 countries iniwal advocates (France, S. Africa, Brazil, Norway, India, Denmark) signed up at Rio to think about how to promote sustainability criteria at exchanges in liswng rules (Bovespa, JSE, Bombay, Mumbai, Istanbul, Nasdaq, India MSX, NYSE) Just 2 exchanges have migrated sustainability index criteria to liswng rules with varying degrees of enforcement UNCTAD guidance for liswng authoriwes & finance ministers 9

10 Sustainable Stock Exchanges Initiative Investor WG Modeling how ESG affects cash flows for more accurate valuawon & investment decisions Modeling where there are sustainability leaders there is also lower cost of capital Developing concern over lack of liquidity & quality of listed companies Developed concern about consequences of SOX 10

11 3. Social Stock Exchange An even shorter history Expected launch end of 2013 with 20 SME listed companies that meet SSE criteria fills gap of global exchanges focused on market cap for eligibility Aims to encourage social purpose businesses to consider the public capital markets as an avenue for raising finance and to simultaneously join the SSE to showcase themselves to impact investors once they have chosen a recognized stock exchange on which to list. 11

12 WHAT S INSIDE CRITERIA & INDICATORS

13 Methodology Draw clear links between management of ESG issues and financial performance and strategy Standardise the disclosure of quanwtawve ESG data make data comparable (to compewtors) for investors Formalise a communicawon process for qualitawve ESG data go beyond the queswonnaire and be bold with investors about the material importance of ESG issues and corporate sustainability Source: WBCSD/UNEP FI Translating ESG into Sustainable Business Value 13

14 International Sustainability Indicators Environmental Performance Management Resource Use & Efficiency - incl. Water - Biodiversity Climate Change Supply Chain, Sourcing, Waste Employees, Labour Rights Human Rights Commitment to assess environmental impacts of company operations EMS Policy Usage of resources (incl. biodiversity & water) - Policy, usage data, targets, improvements Climate strategy & risk exposure, energy efficiency & CO2 use, targets, improvements, innovation Supplier code of conduct, Life-cycle analysis, consumer issues, quantitative waste management, traceability of sources and waste Endorse Intl Agreements(signatory), auditing, reporting on breeches - hours of training on labour rights and human rights, skills mapping & skills of the future Health & Safety Community Development & Stakeholder Engagement Management Accountabilities, Financials Corporate Governance Reporting, Transparency & Assurance Policy, training, quantitative data, monitoring, assurance, improvements, innovation KPIs? Social impact & development (jobs, education, infrastructure, taxes), Engagement policies & procedures, CEO commitment & advocacy for sustainability, work against corruption/illegal, management policies, procedures, KPIs Governance structure, board, shares, ethics Annual report, sustainability report, integrated reporting, internalising externalities, auditing, assurance C.Hicks Source: UN Global Compact, Global Reporting Initiative (GRI), OECD, WBCSD, UNEP FI, DJSI, Equator Principles, ISO 26000

15 International Sustainability Index Criteria E Environmental Performance Management Resource Use & Efficiency - incl. Water - Biodiversity Supply Chain, Sourcing, Waste Health & Safety Community Development & Stakeholder Engagement Management & Accountabilities S Policy Strategy & Measurement Reporting Improvements Climate Change Corporate Governance G Employees, Labour Rights Human Rights Reporting, Transparency & Assurance Source: DJSI, FTSE4Good, JSESRI, BOVESPA, DJSI Korea C.Hicks

16 Emerging Market Sustainability Index Criteria Policy Strategy & Measurement Reporting Improvements S. Africa Specific Indicators Brazil Specific Indicators (Bovespa): Forest protection, Product safety & consumption Source: JSESRI, S.Africa, Bovespa Brazil, DJSI Korea Index C.Hicks

17 ISESI Criteria E The Role of Business in Turkish Society Environmental Performance Management Resource Management & Efficiency - incl. Water - Biodiversity-Climate Supply Chain, Sourcing, Waste Health & Safety Community Development & Stakeholder Engagement Management & Accountabilities Corporate Governance S G Criteria Policy Strategy & Measurement Stretch Goal Reporting Improvements Source: ISESI Company Workshops 2010 Employees, Labour Rights Human Rights Reporting & Transparency C.Hicks 2010 Source: UN Global Compact, Global Reporting Initiative (GRI), OECD, WBCSD, UNEP FI, DJSI, Equator Principles, ISO

18 DJSI Selection Dow Jones Global Total Stock Market Index 2,500 largest companies 58 DJSI sectors 57 countries Component Selection Top 10% of companies in terms of sustainability in each DJSI sector 15% target market cap coverage in each supersector DJSI World 318 Components 57 DJSI sectors 27 countries Review 2010: 48 ADD / 46 DEL 18 18

19 CONCLUSIONS

20 Conclusions Sustainability Indexes Longest history most investment products best place for investors to get quick look on sustainability leaders amongst listed corporawons Mostly large cap with excepwons in EM InnovaWon in criteria & indicators as well as structuring (weighwng & tracking) Most movement in EM nawonal indexes increasing opwons for ESG investors Sustainable Stock Exchanges EvoluWon of adaptawon of ESG index criteria for liswng rules At thinking stage vs. implementawon / enforcement UNCTAD pushing with guidance for exchanges & finance ministries Social Stock Exchange Imminent, not yet launched Fills a gap vs. global indexes, focus on picking sustainability leaders amongst small med caps with an ESF mission, across exchanges 20

21 Contact Quadia SA Impact Finance 34 Rue de Candolle CH-1205 Geneva T F contact@quadia.ch Cheryl Hicks hicks@quadia.ch Guillaume Taylor taylor@quadia.ch Quadia is a regulated member of VSV-ASG, the Swiss Association of Asset Managers, a self regulatory body supervised by FINMA, the Swiss Financial Market Supervisory Authority.