Title. Andreas Knörzer, Head Sustainable Investments Copenhagen, September 14 th 2016

Transcription

1 Title Andreas Knörzer, Head Sustainable Investments Copenhagen, September 14 th 2016 November

2 Delivering superior performance? It needs more than just financial ratios. 2

3 Wall Street neglects many risks of Main Street Some typical examples implications for investors Reputational damage Compensation liability Changes in the public acceptance of products or services Impact of environmental regulations Employee turnover Controversial production methods Potential problems in the supply chain Difficult aspects to incorporate in traditional financial analysis Potentially devastating impact on the company's stock prices Exposure to these threats is not being compensated by risk premium Insufficient corporate governance A sustainability approach helps to identify and understand those risks and to avoid unintended exposure 3

4 Corporate value is more than financial capital «Intangible assets are gaining in significance for corporate sustainability and competitiveness» Financial assets Stakeholders Legislators/politicians Local communities/ngos Client relationships/brand value Suppliers/partnerships Employees Conditions of employment Further education Motivation/R&D Health/safety Corporate governance Strategic competence/flexibility Monitoring of key figures Conventional business practice considerations Environment Reduction of environmental risks Intangible Assets Process efficiency Cost/risk reduction Ecological innovation Source: Vescore, according to Kiernan

5 Some examples for financially relevant sustainability issues Income statement Revenue Material costs Gross profit - Personnel expenses EBITDA Depreciation Provisions EBIT Interest Taxes Net profit Sustainable issues R&D expenditure/innovation Product quality/recalls Reputational risks Human rights violations Energy efficiency Greenhouse gases Raw materials Waste/emissions Water consumption Education and training Rate of absences/accidents Corruption Legal disputes Business/tax ethics Source: Vescore, according to Schnella (DVFA),

6 Environmental risks in the case of BP Event Accident on the Deepwater Horizon drilling platform on 20 April 2010 Eleven deaths, seawater polluted with 4.9m barrels of oil Financial consequences USD 26bn in known costs, further fines and punitive damages may be imposed BP has set aside USD 54bn in reserves (average net profit : USD 13bn) Already before the accident, BP had been assessed by our team as non-sustainable High environmental and safety risks in the oil and gas industry demand above-average exertions by companies BP's safety management and safety record have been and still are just average for the industry 6

7 BP share price development Source: Thomson Reuters Datastream 7

8 Social/quality risks in the case of General Motors Event By January 2014 GM recalls more than 20m vehicles, most of them related to a problem with the ignition switch (has been known since 2004) A number of traffic accidents with deaths and injuries was attributed to the problem Financial consequences High-level legal and political investigations, fines and civil lawsuits GM takes a provision of 2bn USD just in H1/2014 (about 1/3 of the 2013 net profit) Already before the accident, GM had been assessed by our team as non-sustainable GM's performance in relation to product development (fuel economy and emission control) as well as product quality has been and still is rated as below the industry average High environmental and safety risks in the car industry demand above-average exertions by companies 8

9 General Motors share price development Source: Thomson Reuters Datastream 9

10 But sustainability is more than just avoiding risks Water scarcity a serious global challenge Climate change Global warming causes changes in rainfall and evaporation patterns Urbanization Rural-urban migration requires development of drinking water supply and sewage systems Wastage Overutilization and contamination of natural water resources Consumption Population growth in combination with higher per capita water consumption due to rising standards of living Water supply Water demand 10

11 as new business opportunities arise from challenges that offers ample attractive investment opportunities Pure Technologies Develops inspection tools enabling quick detection of water leakage in pipelines Badger Meter Produces water meters to improved monitoring of water consumption Xylem Produces filters and disinfection plants for water treatment Geberit Is a leading provider of water-efficient sanitary facilities 11

12 Focused, consistent & competent Sustainability is an integral part of our investment process. 12

13 A detailed sustainability analysis is the starting point Investable: Companies distinguished by a clear comprehension that sustainable business policies is an essential ingredient to long-term competitiveness, as evidenced by products with high social acceptance low-conflict production methods emphasis on product quality and human capital efficient consumption of scarce resources solutions to mayor sustainability challenges Non-investable: Companies with serious exposure to hard to quantify risk by traditional financial analysis, such as Compensation claims Reputational damages Staff fluctuation Complications in the supply chain Regulatory requirements «Corporate Governance» Sustainability pool, i.e. companies that are rated sustainable and are generally suitable for investment. 13

14 Sustainability assessment at sector level Ecological footprint Resource consumption Energy Water Emissions CO 2 Waste Social footprint Labour conditions Occupational safety risks Employment risks Wage levels Child labour, forced labour Potential for social conflict Business concentration Corruption Production in countries tolerating human rights violations Corrective factors specific to each company * under consideration of special product mix or sub-sectors Sector-specific environmental and social opportunities and risks * from various data bases, e.g. Trucost, MSCI 14

15 Sustainability assessment at company level Sector-specific environmental and social opportunities and risks Environment Supply chain Production Products Social Suppliers Employees Society Customers Governance Strategy Management 15

16 Some examples: Amazon vs. Apple Different performances on environmental issues (data center energy management) Amazon: not sustainable Apple: sustainable Commitment to renewable energy Long-term commitment to power data centers with 100% renewable energy (but no deadline, no concrete short-term target) Short-term commitment to power data centers with 100% renewable energy Energy Efficiency & Mitigation No data are disclosed Massive investments to ensure that data centers are powered with renewable energy; strong advocacy from top management Outcomes Energy Transparency Some facilities are said to be carbon neutral, but no detailed information is given No information published; no response to CDP Since 2014, the energy used in data centers, offices and other facilities is 100% renewable Detailed information available about data centers; participation in the CDP Overall, Amazon demonstrates a very bad performance on ESG matters; while Apple has been significantly improving its sustainability over the past years (green energy and supply chain management). 16

17 Some examples: FedEx vs. UPS Different performances on social issues (employees) FedEx: not sustainable UPS: sustainable Social controversy Labour unions Drivers in the US are hired as independent contractors: poor protection of workers' rights and lawsuits launched against the company No information published regarding the freedom of association of employees, and strong reservations against unions No recent controversy Staff turnover About 39% (2014) About 8% (2014) About 75% of employees in the US are covered by labour agreements Lost time injury rate No information 1.82 / 200,000 hours (2014) Employee training 13 hours training per employee (2014) 32 hours training per employee (2014) While both companies show a good environmental performance, UPS is less exposed to controversies and has adopted better social policies towards employees that allow the investment. 17

18 But sustainable investments must be financially attractive, too Sustainability Pool Idea Pool Investment Universe Portfolio Equity universe Sustainability Research Quantitative Analysis Qualitative Analysis Portfolio Construction Risk screening through the Systematic identification of Selection of equities with Stock selection with assessment of multiple attractive companies in a attractive valuations via considerations for risk-/ sector-specific ESG given market environment fundamental analysis return profile and restriction components controlling 18

19 Decarbonisation a new mega trend! How could investors react? 19

20 Share prices Share price Index level Index level Investors could be hit hard 5-year-performance: global coal index DAXglobal Coal (TR) Index in USD % year-performance: global energy index MSCI Global Energy Producers Index in USD % «The stone age did not end for a lack of stones, and the oil age will end long before the world runs out of oil.» Ahmed Al Jamani (former oil minster of Saudi Arabia) 5 -year-performance: RWE 5-year-performance: E.ON Share price in EUR Share price in EUR % %

21 Strategy 1: Divestment Across-the-board exclusion of coal, oil & gas companies Sector Allocation in the MSCI World Index Financials Finance Consumer Consumer Discretionary Discr. Information Technology IT Health Health Care Industrials Industry Consumer Staples Energy Materials These sectors are excluded across-the-board (about 11% of the MSCI World) Telecommunication Utilities 0% 5% 10% 15% 20% 25% = Exclusion 21

22 Strategy 2: Reducing the CO 2 footprint Reduction target for the CO 2 footprint while minimising the tracking error Sector allocation in the MSCI World Index Financials Finance Consumer Consumer Discretionary Discr. Information Technology IT Health Health Care Industrials Industry Consumer Staples Energy Materials Telecommunication Utilities Underweight high-co 2 companies Overweight low-co 2 companies Drawbacks of the CO 2 footprint: Data quality: usually limitation to direct CO 2 emissions (Scope1 + Scope2) Business impact of CO 2 regulation is not identical to CO 2 emission intensity Opportunities of CO 2 regulation are not taken into account = Unterweighting = Overweighting 0% 5% 10% 15% 20% 25% 22

23 Impact of the energy transition Strategy 3: A comprehensive risk & opportunity assessment Systematically identifying winner and loser with the proprietary Vescore CO 2 -montior positive Assessment criteria: CO 2 dependency of the business model Climate change strategy of the management «Stranded Assets» in the energy sector negative CO 2 emissions high low Assessment criteria: = Investment universe = Excluded stocks CO 2 emissions per sales for the entire product lifecycle (incl. supply chain, production, electricity generation, product use) 23

24 Impact of the energy transition Emissions per sales (t/m. USD) delivers tailor made concepts meeting different investor needs CO 2 -Monitor CO 2 -Footprint positive MSCI ACWI Stringent alternative Less stringent alternative MSCI ACWI Low Carbon Target negative high CO 2 emissions low = Investment universe = Excluded stocks CO 2 Reduction vis a vis MSCI No. of stocks vis a vis MSCI -44% -62% -41% n/a -16% -71% n/a n/a 24

25 Sounds good. But what do the numbers say? 25

26 Academics are in favour of sustainability A meta study 1 - by Deutsche Bank in cooperation with University of Hamburg analysing 2'250 research papers published since 1970 shows a positive link of sustainability and financial performance. A Morgan Stanley analysis 2 of >13'000 US-funds and segregated accounts confirms a better performance of sustainable investments in absolute terms and on a risk-adjusted basis. 1 Deutsche Asset & Wealth Management, ESG & Corporate Financial Performance: Mapping the global landscape (12/2015) 2 Morgan Stanley Institute for Sustainable Investing, Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies (03/2015) 26

27 as well as our experience Annual adjusted outperformance of sustainable index components vs. MSCI World All Countries 4% 3% 2.7% 2% 1% 0.8% 2.0% 1.2% 1.0% 2.1% 1.6% Average +0.7% p.a. (Dec June 2016) 0% -1% -0.7% -0.6% -2% -3% -3.0% -4% SRI vs. BM Net returns in EUR, Source: FactSet, Vescore. As of

28 Important legal notice The content of this presentation is provided for information purposes only and does not constitute a request, an offer, an investment proposal or a recommendation to purchase or sell products, to execute other types of transactions, or to enter into legal transactions of any kind. Although Vescore Ltd. makes every effort to ensure that the information in this presentation is accurate and complete, no guarantee is offered or implied for its accuracy, reliability, up-to-dateness or completeness. Past performance is no indication of current or future results. Liability for damages of any kind arising from the use of this information is expressly excluded Vescore Ltd. 28