How retirement funds benefit from asset managers who are UN PRI signatories a case study

Transcription

1 How retirement funds benefit from asset managers who are UN PRI signatories a case study

2 Jacob Nordby Christensen, RI Director June 2012

3 Agenda UN PRI the six principles Poll Questions What to expect from responsible investing? How to work with responsible investing? Q&A

4 The UN Principles for Responsible Investment Where consistent with our fiduciary responsibilities, we commit to the following: 1. Incorporate ESG (Environmental Social Governance) issues into investment analysis and decision-making processes 2. Be active owners and incorporate ESG issues into our ownership policies and practices 3. Seek appropriate disclosure on ESG issues by the entities in which we invest 4. Promote acceptance and implementation of the Principles within the investment industry 5. Work together to enhance our effectiveness in implementing the Principles 6. Each report on our activities and progress towards implementing the Principles

5 10 Is responsible investing the same as ethical investing? 1. Yes 2. No 42% 58% Vote Now

6 What to expect from responsible investing? Is responsible investing the same as ethical investing? The Ethical Investor Invests according to values Employs negative screening! or Positive selection! End result: reduced universe!

7 What to expect from responsible investing? Is responsible investing the same as ethical investing? The Ethical Investor Invests according to values Employs negative screening! or Positive selection! End result: reduced universe!

8 What to expect from responsible investing? Is responsible investing the same as ethical investing? The Responsible Investor Invests within fiduciary duty Invests according to value Incorporate ESG in investment decision Integration: yes exclusion: no

9 What to expect from responsible investing? Is responsible investing the same as ethical investing? The Responsible Investor Invests within fiduciary duty Invests according to value Incorporate ESG in investment decision Integration: yes exclusion: no

10 10 Does Responsible Investing come with a cost to the investment return? 1. Yes 2. No 46% 54% Vote Now

11 What to expect from responsible investing? Does responsible investing come with a cost to the investment return?

12 What to expect from responsible investing? Does responsible investing come with a cost to the investment return?

13 What to expect from responsible investing? Does responsible investing come with a cost to the investment return?

14 What to expect from responsible investing? Does responsible investing come with a cost to the investment return? Negative Event Risk

15 What to expect from responsible investing? Does responsible investing come with a cost to the investment return? Negative Event Risk

16 10 Is the main objective with responsible investing to control reputational risk? 1. Yes 2. No 29% 71% Vote Now

17 How to work with responsible investing? Is the main objective with responsible investing to control reputational risk?

18 Ethical Investments in Sparinvest What does the PRI say?

19 Ethical Investments in Sparinvest What does the PRI say? When selecting an Asset Manager the Asset Owner should: Assess whether RI is widely understood in the AM s organisation! (or is it left to specialists) Assess whether RI is integrated systematically in the investment processes (or is it done on an ad hoc basis) Assess whether all investment professionals have access to ESG related research (or is it only the ESG Specialists)

20 Ethical Investments in Sparinvest What does the PRI say? When selecting an Asset Manager the Asset Owner should: Assess whether RI is widely understood in the AM s organisation! (or is it left to specialists) Assess whether RI is integrated systematically in the investment processes (or is it done on an ad hoc basis) Assess whether all investment professionals have access to ESG related research (or is it only the ESG Specialists)

21 Responsible Investment in Sparinvest

22 ESG Integration in the Investment Process

23 ESG Integration in the Investment Process ESG Scores for sectors in Global Value Energy Materials Industrials Consumer Disc. Consumer Staples Health Care Financials Information Tech. Telecom Group Measure Fund Avg BM Median Fund Avg BM Median Fund Avg BM Median Fund Avg BM Median Fund Avg BM Median Fund Avg BM Median Fund Avg BM Median Fund Avg BM Median Fund Avg BM Median E CO2 Intensity per EBITDA Water Intensity per EBITDA Energy Intensity per EBITDA Social Revenue (EUR) per employee EBITDA (EUR) per employee Accidents per 1000 employees , , Governance CEO Duality 44% 43% 18% 29% 20% 40% 56% 43% 40% 39% 100% 43% 36% 33% 22% 36% 0% 42% Poison Pill 22% 18% 15% 24% 12% 20% 25% 21% 0% 24% 50% 23% 8% 19% 44% 22% 0% 24% Independant Directors (%) 65% 80% 63% 75% 51% 60% 50% 67% 61% 70% 25% 80% 48% 73% 62% 75% 17% 79% Policies Energy Efficiency Policy 67% 54% 100% 83% 90% 74% 81% 68% 100% 77% 100% 58% 64% 56% 100% 61% 100% 85% Emission Reduction 78% 60% 91% 81% 90% 75% 85% 61% 100% 78% 100% 58% 55% 53% 78% 57% 100% 92% Waste Reduction 44% 44% 100% 79% 80% 68% 78% 61% 100% 76% 100% 54% 55% 47% 100% 56% 100% 71% UN Global Compact Signatory 33% 19% 18% 30% 60% 27% 30% 17% 0% 34% 100% 22% 45% 22% 33% 23% 0% 28% Equal Opportunity Policy 67% 51% 73% 68% 80% 65% 59% 56% 80% 68% 100% 54% 55% 48% 78% 51% 100% 81% Human Rights Policy 44% 40% 55% 59% 50% 50% 67% 36% 50% 51% 100% 36% 45% 31% 67% 42% 100% 44% GRI Compliance 44% 40% 45% 58% 80% 44% 52% 36% 40% 53% 100% 39% 45% 34% 44% 39% 100% 67% Number of Companies Energy Materials Industrials Consumer Disc. Consumer Staples Health Car Financials Information Tech. Telecom E 2,3 2,7 3,0 3,0 1,0 1,0 3,0 1,0 Social 1,0 2,5 1,0 1,5 1,5 1,0 2,0 2,0 1,0 Governance 2,7 1,7 1,7 3,0 2,3 3,0 2,3 2,3 1,7 Policies 1,0 1,9 1,3 1,0 1,9 1,0 1,0 1,0 1,3 Overall 1,8 2,2 1,7 2,1 1,7 1,5 1,8 2,1 1,2

24 ESG in the Investment Process Hercules Hercules Offshore Inc. (HERO US) Hercules Offshore is a leading global provider of offshore contract drilling. The fleet of jackup rigs is the fourth largest in the world and the largest in the U.S. Gulf of Mexico. Sparinvest invested in the company October 2010 Investment analysis identified some issues: The company has been subpoenaed by the Securities and Exchange Commission regarding an investigation into possible violations of the securities law, including possible violations of the Foreign Corrupt Practices Act. The company has a very old fleet. Most of the jack-ups are from the 1980 s. The Jack Ups have expected lifetime of Max. 30 years. Hence a large part of the fleet NEEDS updates which are costly. IF NOT updated accidents will occur. Due to these issues Sparinvest divested the company in June 2011 Hercules was replaced by Norwegian Aker Drilling, also a provider of offshore contract drilling. Aker Drilling has state off the art equipment Aker Drilling operates under Norwegian regulatory requirements

25 ESG in the Investment Process Chaoda Chaoda Modern Agriculture (682 HK) Chaoda is the largest vegetable producer in China with a large (and rapidly expanding) production base, based on thousands of small scale farms. Case made in April 2011 Investment analysis identified some red lights During the case analysis it came to Sparinvest s attention that the big-four audit firm PricewaterhouseCoopers wouldn t sign the 2002 annual results and consequently resigned. Furthermore Baker Tilly Hong Kong and CCIF CPA resigned as the company's joint auditors in 2007 The CEO owns 95% of a company which supplies 40% of Chaoda s fertilizers. Due to these red lights we decided not to buy even though the company looked cheap on earnings. In May 2011 an article in Next Magazine came out saying that Chaoda has been overstating land holdings. Shares fell 76% In September 2011 Chaoda faced lawsuit from HK Market Misconduct Tribunal. Trading SUSPENDED on September and continues to be.

26 Active Ownership an instrument to mitigate ESG risk Proxy Voting Portfolio Managers vote on a case by case basis Company Dialogue Portfolio Managers engage in dialogue with portfolio holdings on ESG risks Collaborative Dialogue Sparinvest and a group of investors engage with companies on principal ESG issues

27 Example 1: Proxy Voting Grammer AG Issue The board of Grammer AG asked the Annual General Assembly for an authorization that would allow the management to issue new shares in exclusion of pre-emptive rights for up to 50 percent of share capital. Risk Control issue/anti take over defense measure No minority shareholder right protection Excessive dilution risk Dialogue 16/05/11 Letter sent to Grammer s management explaining Spainvests decicion to vote against the item on the agenda 17/05/11 Call with Grammer s Vice President Investor Relation where Sparinvest provided further background to our concerns and views exchanged. 18/05/11 Board resolution from Grammer issued Status/Outcome The board resolution limited the authorisation to issue new shares with pre-emptive rights to 30% The board resolution limited the authorisation to issue new shares without pre-emptive rights to 20% and only in case of take over of a company

28 Example 2: Company Dialogue with Japanese portfolio holding Issue The Japanese company is a conglomerate with various business segments (e.g. paper, textiles and auto parts). Supply chain management, energy use and addressing water scarcity is typically serious issues for companies within the above segments. Risk Lacking good information on the company s performance on addressing ESG issues may make Sparinvests portfolio management team miss out on serious ESG risks. Dialogue Nov. 2010: Respectful dialogue initiated with the company, explaining Sparinvest s status of being UNPRI signatory and Sparinvests Policy for Active Ownership Spring 2011: Dialogue process postponed due to tsunami and earth quake in Japan Nov. 2011: Dialogue resumed and suggestion for company to consider becoming signatory to UN Global Compact Jan. 2012: Dialogue continued focused on the company becoming UN Global Compact signatory Status/Outcome Company has disclosed a corporate code of conduct, a human rights charter, an environment charter and a product safety charter The company has stated to Sparinvest that it s studying UNGC and considering to recommend becoming a signatory to the Board of Directors soon

29 Example 3: Collaborative lead regarding corruption Issue Sparinvest has joined a group of investors in an initiative to have appropriate anticorruption measures in a list of companies operating in particular high risk industries and/or countries. Sparinvest has taken the lead in the dialogue with a portfolio holding on the list Risk Absence of a robust programme of managing corruption risk has the potential to create financial, operational and reputational risks. Legal enforcement of corruption continues to build globally, increasing the potential liability of companies as well as investors Dialogue Status/Outcome Apr. 2010: First letter sent to the company by the group of investors asking for the company to disclose on it s anti-corruption programme Aug. 2010: Second letter sent to the company by the group of investors restating the request of company disclosure of it s anti-corruption programme Apr. 2012: Third letter sent to the company by the group due to the lack of response by the company to the initial two letters May 2012: Sparinvest contacts the company to investigate the no response policy Jun. 2012: Sparinvest meets with company head of IR, new meeting to address anticorruption program set up in July Progress has been made, as the company are now responding to the requests Company claims to have a robust anti-corruption programme Sparinvest will investigate the nature of the programme and the materiality of the procedures supporting it

30 Ethical Investments in Sparinvest Q&A Q1 - Is responsible investing the same as ethical investing? Q2 - Does Responsible Investing come with a cost to the investment return? Q3 Is the main objective with responsible investing to control reputational risk?

31 Ethical Investments in Sparinvest Q&A Q1 - Is responsible investing the same as ethical investing? Q2 - Does Responsible Investing come with a cost to the investment return? Q3 Is the main objective with responsible investing to control reputational risk? No!

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