Update on ESG Reporting Initiatives: Trends & Opportunities. FIS 2012 Santa Monica 23 October Diane Bratcher US Network Manager

Transcription

1 Update on ESG Reporting Initiatives: Trends & Opportunities FIS 2012 Santa Monica 23 October 2012 Diane Bratcher US Network Manager

2 As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognize that applying these Principles may better align investors with broader objectives of society. - Preamble to the Principles for Responsible Investment 1

3 2 The six Principles

4 The PRI is Asset owners and investment managers, who believe ESG factors affect risk and returns, especially in the long run; Signatories who believe ESG factors should be used in investment policies and decision making; A forum for thought and practice leadership on ESG values and sustainable investing; A global network for collaboration and developing best practices for investing & risk management; 3

5 The PRI Is An organization providing education and implementation support on sustainable and ESG investing; A clearinghouse for Signatory collaboration on ESG engagements with corporations and industries; A framework for Signatories to report on their ESG investing practices, evaluate progress, compare themselves to peers. 4

6 ESG issues include: Environment Social Governance Climate change strategy Stakeholder relations Board structure Environmental policy Supply chain management Director independence Environmental practice Health and safety policy Executive compensation Pollution management Water supply management Community impact assessment Product safety management Shareholder rights Audit quality Waste management Working conditions Accounting management

7 From Niche to Mainstream 1,103 signatories with USD $32 trillion AUM Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr Number of signatories Assets under management (US$ trillion) 6

8 Our Signatories Type (by number) Region (by number) 4% 6% 19% 53% 28% Asset owner Investment manager Service provider 17% 19% 1% 6% Africa Europe Middle East North America 46% Asia Latin America Multiple regions Oceania

9 Signatory Growth Clients asked us to sign top reason investment managers sign on 56% of consultants reported increasing client interest in ESG investing (P&I/USSIF) Increasing ESG/RI/transparency mandates, laws, regulations and policies around the world: UK Netherlands Denmark Germany Norway France Australia EU Finland Brazil California SEC Growing interest in integrating ESG values into investment policy and decision making among institutional investors, high net worth individuals

10 9 PRI Signatories

11 Reporting framework RI activities Survey Assessment Engagement Collaboration Integration Policy & strategy Asset class Six Principles Comprehensive Mandatory Benchmark Reporting tool Report on Progress

12 5 years Signatory progress RI policy 94% have policy, up from 67% (IMs) and 83% (AOs) Integration Global growth 4% - 7% of total AUM Active ownership 338 engagements; 63% use Clearinghouse, up from 39% ESG reporting moderate to large demand for corporate reporting Transparency 93% disclose, up from 67% (IMs) and 88% (AOs)

13 Approaches to Integration of ESG Factors CalPERS Total Fund Process: Priorities,Performance and Procurement see Mercer s consultation report, August 2011 ESG Board Workshop, Responsible Investment s Next Decade: Developing CalPERS Total Fund Process for ESG Integration.

14 Approaches to Integration of ESG Factors Mercer investment manager ratings based on integration of ESG issues across all asset classes and geographies provides the ESG ratings alongside traditional alpha ratings Responsible Investment s Second Decade: Summary Report of the State of ESG Integration, Policy and Reporting, for CalPERS October 2010 Global Peer ESG Exchange

15 Approaches to Integration of ESG Factors MSCI ESG Indices Best in Class Socially Responsible Environmental Ex Controversial Weapons Custom Benchmarking Enables index-based ESG investment products Manage-measure-report on compliance

16 Interesting Discussion Papers Pension Funds, Sovereign-wealth Funds and Intergenerational Justice Sept 2012 from the Norges Handelshøyskole (Norwegian School of Economics) discusses sustainable investing and long term time horizons to align funds with interests of future generations

17 Key Research and Thinking The Initiative for Responsible Investment project of the Hauser Center for Nonprofit Corporations at Harvard University Bob Eccles, Steve Lydenberg, David Wood, Jay Youngdahl, et. al. On Materiality and Sustainability: The Value of Disclosure in the Capital Markets, Steve Lydenberg for Sustainability Accounting Standards Board (SASB). From Transparency to Performance: Industry-Based Sustainability Reporting on Key Issues June 2010.

18 Fiduciary Duty Jay Youngdahl written extensively The Time Has Come for a Sustainable Theory of Fiduciary Duty in Investment, 29 Hofstra Lab. & Emp. L. J. 115 ( ) The; Youngdahl, Jay

19 Modern Portfolio Theory Challenged Basis for portfolio construction Events markets collapse New theories challenge Efficient Market Hypothesis Behavioral finance Principal agent relationship Unlocking the Economy of the Mind, Institutional Investor, 27 September 2012 discusses the conflict between classical and behavioral finance

20 Protect, enhance investments Academic evidence David Baron et al., Stanford The Economics and Politics of Corporate Social Performance Glen Dowell et al., Cornell Do corporate environmental standards create or destroy market value Robert Eccles et al., One Report: Better Strategy through Integrated Reporting Alex Edmans, Wharton, Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices 19

21 Consider Signing Responsible investment is growing rapidly as a mainstream trend around the world Driven by strategic trends in investment, the economy and society Thought leadership Enhance risk management and identify new opportunity, within fiduciary obligations Trends towards regulatory support for responsible investment Visit 20