2012 Survey. Different Scenarios. With the support of

Transcription

1 2012 Survey ESG Strategies of Asset Owners Different Scenarios across Europe With the support of

2 Word from the sponsor Responsible investing in a changing world BNP Paribas Investment Partners is proud to participate for the third consecutive year in the Novethic survey on responsible investment policies and practices implemented by 115 leading European asset owners. Progress made over the years has been remarkable. The results of this new study clearly show that Environmental, Social and Governance issues continue to move forward and remain firmly anchored in investors' agendas, despite the crisis. Faced with these changes, BNP Paribas Investment Partners has remained firmly committed to responsible investment over the last ten years. We have implemented a set of ESG criteria based on companies adherence to UN Global Compact principles in our open-ended funds. These criteria, supplemented by strict standards for investments in controversial economic sectors, now form a single reference for all of our management teams. In addition to this approach, and for clients who want their savings to be more meaningful, we remain firmly convinced of the added value of SRI strategies focused on issuers and business sectors that are at the cutting edge of sustainable development. More than idealism or an act of faith, sustainable development and responsible investment have become a day-to-day fact of life for a growing number of institutional investors, as well as individuals. Solutions are rich and varied. It is our role to implement them, in what we do and who we are. Philippe Marchessaux Director and Chief Executive Officer BNP Paribas Investment Partners

3 Key points European investors are increasingly focusing on long-term risk management Although a contribution to sustainable development remains the main objective for the finance sector to integrate ESG criteria in investment, for the first time it is being challenged by a growing concern over long-term risk management where investors are broadening their fiduciary duty to include ESG issues facing the companies in which they invest. Responsible investment strategies have become more targeted for greater influence on companies Asset owners now tend to combine responsible investment approaches, in particular those associating both norm-based exclusions and shareholder engagement. This stems from the objective of having a direct influence on companies with poor ESG practices. The financial crisis has had a mixed impact on the development of ESG integration While half of the investors surveyed took advantage of the financial crisis to develop the integration of ESG criteria, it has primarily been within equity investment strategies. Only 15% of the investors surveyed have, for example, made advances in their methodology used to rate eurozone countries and their debt since the beginning of the crisis. Investors are expressing a need to formalise their responsible investment policy An increasing number of charters and policies have been published explaining how investors should take ESG criteria into account. Some are designed to meet public consumer expectations, but many result from voluntary initiatives such as the Principles for Responsible Investment (PRI). Within financial services groups these RI policies are being supervised at a high management level. The majority are managed either by an operating department with direct control over investments, or at a more strategic level, e.g. a body reporting to the board of directors. The majority of asset owners are using external resources to develop their ESG capabilities Investors use asset management services and extra-financial ratings agencies in developing their responsible investment approach. Their requirements vary from the increasingly systematic enforcement of corporate exclusion lists through to ESG reporting. Improvement in transparency for the incorporation of ESG criteria Nearly half of the sample of investors surveyed state that they publish ESG reporting. This is a positive sign of the development of ESG integration practices and the increasing awareness of the need for accountability in investment strategies, especially in Northern Europe.

4 Survey objectives and sample surveyed investors Novethic surveyed a representative sample of asset owners across 11 European countries regarding the integration of Environmental, Social and Governance (ESG) issues in their investment management. The survey was conducted between June and September 2012 via questionnaires sent by or telephone calls to managers in charge of the firm's investment policy. In each country, the investors targeted were representative of the national scope of asset owners and featured a high volume of assets under management. Emphasis was placed on the application of formal responsible investment policies, their implementation across each asset class and the resources allocated to responsible investment approaches. Novethic conducted the survey in eight countries: Belgium, Denmark, Finland, France, Luxembourg, Norway, Sweden and the United Kingdom. For the three other countries, the survey was carried out in partnership with: FNG in Germany Novaster in Spain Somo in the Netherlands. The survey is broken down into two sections. The first section presents the aggregate survey results and the second provides further details on these results for each country or region. Type of respondents The 115 European asset owners that answered the survey have more than 4,470 billion in assets. The majority are private or mutual insurance companies or corporate, private or public pension funds. The sample also includes banks, public financial institutions, religious organisations, NGOs and unions. Pension funds, both public and private, dominated the survey respondents in Northern Europe and the United Kingdom. In Spain and France, insurers represented more than half of the sample. 4% Not-for-profit sector (foundations, NGOs ) 4% Religious organisation 6% Public financial institution 6% Bank 10% Private pension fund 1% Unions 19% Mutual insurance companies 18% Corporate pension fund 15% Private insurance companies 17% Public pension fund 4 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

5 Asset classes The breakdown of asset classes in which the institutions invest reflects traditional allocations. Government and corporate bonds therefore account for the largest proportion of assets, with lesser investment in equities, emerging markets and private equity. Investment in commodities makes up the smallest proportion (37%). 93% 89% 86% 82% 82% 75% 70% 65% 37% 18% Government bonds Corporate bonds Equities Europe Equities Global Real estate Money market funds Equities Emerging markets Private equity Commodities Others Management methods Of the respondents, 70% manage at least a portion of their assets in-house and 76% delegate management to third parties. As a result, no dominant model emerged, but the management methods applied to each asset class were analysed in more depth. 22% In-house management 3% Others 47% Mix of both Bond management (especially government bonds) and, to a lesser extent, property assets are more frequently handled in-house than equities, notably for broad (world) or distant (emerging countries) universes. Slightly less than half of the sample (45%) state that they invest in ETFs. 29% Delegated management novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 5

6 Motivations Main incentives Over the past three years, long-term risk management has grown as a motivation for asset owners to integrate ESG criteria. Investors seem to be gradually assimilating the idea of the "materiality" of ESG issues, particularly over the long term, and are restricting responsible investment less and less to merely a means of protecting their reputation. The incorporation of ESG criteria is no longer necessarily associated with "ethical" investments but rather the need for a more thorough analysis of securities. However, the contribution of the financial sector to sustainable development remains the main objective of responsible investment policies. This notion is decidedly ambiguous, which explains the differences in practices among investors and especially from one country to another. For example, German and Spanish investors emphasise the emergence of a more sustainable business model, which they can associate with investing in the green economy, while in France, the Netherlands and the United Kingdom more importance is given to long-term risk management. 51% 46% 43% % 25% 19% 20% 19% 17% 15% 7% 9% Contribution to SD Long-term risk management Protection of reputation Financial performance 6 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

7 stakeholders request Nearly one third of the sample said they have never received a request from an outside party to implement a responsible investment policy. In general, requests from stakeholders rarely seem to be deciding factors that encourage investors to integrate ESG criteria. Specific requests from customers have been clearly identified as a driver by nearly half of the sample. Requests from regulators rank evenly with NGOs in second and third place. Significant disparities exist between countries on this point. In Scandinavian countries, 47% of respondents mention the influence of NGOs, while in Spain, virtually the same percentage (45%) refer to the influence of unions and nearly one-third that of regulators. Clients NGOs Regulator Shareholders or their representatives Unions Others 7% 7% 6% 17% 16% 48% Impact of the financial crisis 43% Opportunity to further integrate ESG criteria 10% Obstacle to integrating ESG criteria 47% The financial crisis had no impact European investors disagree on the impact of the financial crisis for promoting ESG. More than 40% believe that the crisis has offered the opportunity to advance their approach of integrating ESG criteria into investment management, while virtually half stated that it has had no impact. Only 10% feel that the difficulties resulting from the financial crisis constitute an obstacle to integrating ESG criteria. Eurozone crisis and ESG analysis of countries The eurozone crisis does not seem to have had any clear influence on the tools used for ESG ratings on countries. The crisis only prompted one-quarter of investors to review or plan to review their analysis of sovereign issuers. These relatively consistent results from country to country reflect the challenge investors face in linking their investments in sovereign bonds with ESG ratings. 15% Review of governments bonds' analysis 11% Planned Investors seem more interested in bond issues from local governments or para-public institutions that are earmarked by issuers for their ESG qualities. 74% No change Sample of respondents invested in government bonds novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 7

8 ESG integration policies Signing up to the Principles for Responsible Investment (PRI) Nearly half of the sample has signed up to the PRI, which attests to the importance of this initiative launched by the United Nations in The proportion has even reached 80% in Northern Europe. Only 7% of investors plan to sign up to the PRI in the next year, but in Germany, France or Spain where there are few signatories, the proportion stands at 20%. 43% Signatory to the PRI 50% Not signatory 7% Planned Formal responsible investment policy An increasing number of charters and policies laying down how ESG criteria should be integrated into investment strategies have been drawn up by global or local institutions. In 2011, 42% of investors stated that they had a formalised policy for integrating ESG criteria, and 18% were planning to do so the following year. In 2012, 61% of the sample claimed to have this type of charter, while 19% of respondents intend to define one in the coming year % No answer 20% No policy 36% No policy 42% Formalised policy 19% Planned 61% Formalised policy 18% Planned 8 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

9 Leading topics Responsible investment policies address a variety of issues but are generally based on the same framework of standards. International treaties on human rights and labour rights (ILO conventions) are applied, as well as the main conventions dealing with the environment and anti-corruption. An almost equally high number of investors use the Global Compact. Voting issues and engagement policies are also discussed in charters. Lastly, some investors integrate either norm-based or sector-based exclusions into their policy. 76% Sample of respondents with a formalised policy 29% 20% Controversial weapons Agricultural commodities Tax havens The survey shows that certain sensitive topics are not necessarily integrated into formalised RI policies. Only the ban on controversial weapons is widely addressed. This is logical, as it is illegal to invest in companies involved in the manufacture of anti-personnel mines and cluster bombs in several European countries (France, Belgium, Netherlands, etc.). However, less than one-third of the sample discusses investments in agricultural commodities. This asset class is less common but could spark controversy that could jeopardise investors' reputations. Only German investors share this opinion as a majority (71%). Finally, only 20% of European investors wanted a formal policy on tax havens. This subject is most sensitive in France, with 46% of investors stating that they are interested in the topic... novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 9

10 Organisation and resources Management of responsible investment approaches Responsible investment strategies are handled at a high management level. The head of investment manages the responsible investment approaches at nearly one-third of the firms surveyed. In 17% of cases, they are overseen directly by the board of directors or a committee that reports directly to the board. 7% SRI team or committee 6% External third party 10% Other 31% Chief Investment Officer 8% CSR Director 8% CSR Director 13% Assets managers 17% Board or affilliate committee In-house management: sources of ESG analysis Among the investors that manage their assets in-house, nearly half use extra-financial ratings agencies for ESG research, and half of those investors only use them as a basis for analysis. Nearly one-third of respondents have an in-house team of ESG analysts, but a slightly higher number refer to their financial analysts or managers (34%). There is little disparity among the different countries surveyed. That said, in Germany all investors use ratings agencies, while in Spain and the United Kingdom financial analysts and managers represent the main sources of extra-financial analysis. 45% 34% 30% 6% Extra-financial rating agencies Financial analysts or asset managers In-house ESG analysts Others 10 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

11 Delegated management: monitoring investment managers To ensure that their policy of responsible investment is implemented, asset owners that delegate their investment management gradually build a set of tools that they use in parallel to their asset managers. Compliance with an exclusion list is the most common approach. Nearly 30% of asset owners send investment managers questionnaires or devote a section within RFPs to ESG criteria. Being a signatory of the PRI (21%) seems to be a minimal prerequisite but virtually all investors add another request. Once management mandates are attributed, nearly 35% of investors require ESG reporting from their manager, while almost 30% perform an ex-post ESG assessment of their portfolios. Approaches vary considerably from country to country. Compliance with exclusion lists is the most widespread in Scandinavian countries, the Benelux countries and Germany. In Spain, requiring investment managers to sign up to the PRI is dominant, while in France and the United Kingdom ESG reporting on portfolio holdings is most often required. Compliance with a list of exclusions Request for ESG reporting Questionnaires or dedicated sections within RFPs Ex post ESG rating of the portfolios Request for signing up to the PRI Others 40% 34% 29% 28% 21% 16% Management fees Two-thirds of the sample do not feel that integrating ESG criteria should mean higher management fees. It is part of the service that is expected from asset managers in most countries, except Germany and France, where 39% and 35% of investors, respectively, believe that management fees could be raised to finance ESG integration. Conversely, in Northern Europe and the United Kingdom, virtually all respondents believe that it does not justify higher fees. 14% No opinion 25% Higher fees justified 61% Not justified novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 11

12 Implementation in investment management Use of ESG analysis Investors increasingly favour combined approaches to apply greater pressure to companies targeted for their poor ESG practices. Both the exclusion of companies guilty of serious violations of international standards, and shareholder engagement have increased sharply. In Scandinavian countries, 94% of asset owners mention either strategy as one of the ESG techniques they use. Best-in-class selection is another growing practice among asset owners. German investors predominantly use this type of approach, just ahead of the French. However, ESG integration has declined this year, with only 27% of the sample practising it, a 10-point decrease on This corroborates the idea that asset owners are seeking more concrete approaches to integrating ESG criteria into their investment policies rather than settling for broader techniques with benefits that are difficult to measure. It should be noted that 10% of the investors surveyed state that they apply none of these approaches. 57% 54% 46% 46% % 36% 37% 37% 24% 27% 9% 4% Norm-based exclusions Engagement Sector-based exclusions Best-in-class ESG Integration Others 12 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

13 Main exclusions The exclusion of controversial weapons is increasingly common but does not yet apply across the board. Anti-personnel mines and cluster bombs are excluded in some European countries due to regulatory restrictions, but the practice is spreading to other countries. Exclusions based on the main international standards such as human rights, working conditions, environmental issues or corruption are increasingly widespread, and are now practised by 57% of investors. However, the United Kingdom stands out, with just 18% excluding companies. Sector-based exclusions are relatively well-integrated. Nearly half of European asset owners exclude at least one business from their investment universe (other than controversial weapons). The most commonly banned sector is weapons (31%), in line with "ethical" strategies. This explains why pornography and gambling are more commonly excluded by investors than GMOs or nuclear power, which are considered environmental concerns. Controversial weapons Violations of human rights Breaches of employment rights Major environnemental damages Corruption Arms industry Pornography Tobacco Gambling Alcohol GMOs Nuclear industry 28% 27% 23% 17% 15% 13% 72% 53% 47% 45% 43% 31% Exclusions of controversial weapons Norm-based exclusions Sector-based exclusions Environmental exclusions novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 13

14 Implementation in investment management Implementation by asset class Corporate bonds and equities are the asset classes in which ESG integration was initially developed and remain the most widespread. That said, ESG integration is rapidly spreading to other asset classes, in particular government bonds, private equity and property assets. Applying ESG criteria to money market funds remains a "French paradox", convincing relatively few investors Europe-wide. 54% 20% 5% 12% Equities Corporate bonds 45% 17% 8% 18% Government bonds 31% 13% 15% 34% 32% 12% 6% 31% Real estate Private equity Money market funds 16% 8% 27% 9% 11% 5% 24% 40% Systematically Partly Planned No 8% 4% 3% 22% Commodities 6% 1% (0%) 11% Others ESG integration in ETFs Index management, which has grown significantly over the past few years, has not been overlooked by ESG strategies. Sixty-seven percent of investors state that they apply it as part of their responsible investment policy. 33% No Trends are not as clear in Spain and France, where less than half of investors claim to integrate ESG criteria into index management. 67% Yes Sample of respondents invested in ETFs 14 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

15 Green investment and climate change Only a third of respondents said they made green investments in business where dedicated environment activities make up a significant part of the business revenue. These investment volumes, when calculated, are very small. The two principal counties where investors do make such investments are the Netherlands (46%) and Germany (44%). 32% Yes 63% No 5% Planned Social investments 61% No 34% Yes 5% Planned The number of European institutional investors with dedicated investments in social themes is no higher. For the third of investors that do make social investments, the volumes involved are also very low. Survey responses are relatively homogenous, but it's worth pointing out that French investors, more than other country, show a penchant for social investing (40% say they do it already, while 20% say they are planning to do so). reporting The number of asset owners that publish reporting on how they take ESG criteria into account is growing. Nearly half claim to do so currently, either in their PRI reporting or their own annual report, and 12% plan to do so in the coming year. The existence of ESG reporting reflects the maturity of ESG integration in the investment landscape. Although responses are relatively consistent from country to country, more than 80% of Scandinavian investors state that they publish their reports, while in Spain only 11% do so. 37% 32% Yes, through Yes, through public reporting the PRI reporting 12% Planned 37% No novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 15

16 Belgium Luxembourg Key points Responsible investment assets are on the decline in Belgium as firms have folded as a result of the financial crisis. Asset owners nevertheless continue to integrate ESG criteria into the management of their investments. Investors in these countries are characterised by their combined use of best-in-class and normbased exclusions in their SRI management. 47% 50% % 40% Motivations 26% 20% 17% 21% 17% Again this year, contributing to sustainable development remains the main incentive for integrating ESG criteria for half of the respondents. This factor ranked equally with protecting reputation in 2011, which now comes in at the same level as long-term risk management. 6% 0% 0% Contribution to SD Long-term risk management Protection of reputation Financial performance 50% No policy 50% Formalised policy Formal policy Half the respondents have defined a framework for their responsible investment policy. The other half do not plan to do so. The exclusion of controversial weapons is dealt with in two cases, and only one institution addresses the issue of tax havens in its responsible investment strategy. 0% Planned 16 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

17 Belgium Luxembourg 50% 50% 33% 17% 17% 17% ESG strategies Belgian and Luxembourg asset owners equally apply best-in-class selection and norms-based exclusions. They focus on compliance with labour rights and the weapons sector. Although not as widespread, shareholder engagement is a significant approach. Best-in-class Norm-based exclusions Sector-basedEngagement exclusions ESG Integration Others Focus on two respondents The Fonds de compensation luxembourgeois, designed to ensure long-term public pension insurance in Luxembourg, implemented a responsible investment policy as a result of political pressure. Singled out by NGOs for its investments in controversial weapons businesses, the compensation fund was impelled to exclude from its investments manufacturers of cluster bombs and anti-personnel mines. The debate did not stop there. Luxembourg has signed a number of international conventions that apply within the country and constitute the framework for the fund's investment policy. An exclusion list was set out, which includes major firms in the mining, oil, banking and defence sectors. The European Investment Bank (EIB) is in charge of financing projects within Member States of the European Union. The EIB's priorities emphasise the need to finance projects that promote "economic and social cohesion, environmental viability" or that focus on climate change. The Bank refuses financing solutions for many controversial sectors (weapons, alcohol, tobacco, etc.) and pays close attention to compliance with human rights. In 2009, the "Bank of the EU" signed the Long-Term Investors' Club charter, which associates long-term investment with the integration of ESG criteria. The sample is comprised of six key players and represents more than 500 billion in assets. Luxembourg has only one signatory to the PRI, and Belgium none. Sample novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 17

18 France Key points French asset owners traditionally stand out for their clear preference for bestin-class selection. They now practise other techniques such as norm-based exclusions. However, French investors still seem rather disinclined to formalise their responsible investment policy. 67% 59% 30% 22% 42% 31% % 8% 15% Motivations In just one year, the motivations of French asset owners have changed significantly. Contributing to a more sustainable development model, predominant thus far, now only concerns 31% of them. Long-term risk management is currently their main motivation. Long-term risk management Contribution to SD Protection of reputation 3% 4% 0% Financial performance 23% Planned 27% No policy 50% Formalised policy Formal policy French respondents rank slightly below the European average for the sample (50% versus 61%). However, 23% of asset owners indicate that they would like to formalise a responsible investment policy within the next year. In these policies, many asset owners highlight compliance with the ten principles of the UN Global Compact or guidelines for voting at AGMs. 18 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

19 France Request for ESG reporting Ex post ESG rating of the portfolios Questionnaires or dedicated sections within RFPs Compliance with a list of exclusions Request for signing up to the PRI 50% 41% 32% 27% 23% Implementation in investment management Half of French asset owners require their fund managers to provide ESG reporting and 40% an ex-post ESG assessment. These two requirements illustrate their commitment to ensuring the incorporation of ESG criteria into the management of their assets. Others 5% Sample of respondents that delegate all or part of their management 54% 42% 42% 31% 27% ESG strategies Best-in-class remains the preferred approach for 54% of respondents, rising by 7 points since ESG integration and norm-based exclusions have also increased substantially: 42% of respondents state that they use each of these approaches, as against 31% in These figures show the willingness to combine best-in-class selection with other approaches. Best-in-class Norm-based exclusions ESG Integration Engagement Sector-based exclusions Reporting Nearly half of French investors provide no reporting on ESG criteria and differ from European practices on this point, especially if they have not signed up to the PRI. However, this is expected to change, as 19% of them plan on defining reporting within the next year. 26 asset owners, the majority of which are private or mutual insurance companies, representing 1,523 billion in assets. Respondents tend to manage all of their assets in-house. However, equities management is primarily delegated. Eight of them have signed up to the PRI. Sample novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 19

20 Germany Key points German investors are gradually discovering the variety of SRI techniques. Although ethical exclusions remain the top choice, best-in-class selection and shareholder engagement are developing. What is unique in Germany is that it is the only country where the majority of asset owners believe that the financial crisis has offered the opportunity to develop ESG integration. 68% 60% 67% Motivations 11% 20% 17% % 11% 11% 11% 9% 6% Contributing to sustainable development remains by far the leading motivation of German asset owners. They do so out of conviction for the religious institutions (congregations and banks) because they claim to receive no direct requests from their stakeholders to integrate ESG criteria. This is surprising, as media attention was given to controversies over some of their investments that were deemed unethical. The other asset owners state that they have ESG requests from their customers. Contribution to SD Long-term risk management Protection of reputation Financial performance 22% Planned 0% No policy Formal policy As a sign of the newfound interest of German asset owners, all respondents have formalised their responsible investment policy or plan to do so. These policies address the most sensitive issues. The entire sample tackles the question of controversial weapons and 71% discuss investments in agricultural commodities. 78% Formalised policy 20 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

21 In partnership with Germany Compliance with a list of exclusions Ex post ESG rating of the portfolios Request for ESG reporting Questionnaires or dedicated sections within RFPs Request for signing up to the PRI Others 0% 15% 15% 23% 23% Sample of respondents that delegate all or part of their management 69% Implementation in investment management Of the German asset managers surveyed, 40% delegate the management of at least a portion of their assets and first ask their managers to comply with an exclusion list. Some also require ex-post assessments of their portfolios. The same proportions are also interested in ESG reporting and dedicated questions within RFPs. However, German asset owners still have reservations about the PRI. None of them mention requiring asset managers to be signatories, which explains the low proportion of German investment managers that have signed up to the PRI compared with their European neighbours. 72% 67% 67% 50% 11% 6% ESG strategies Exclusions, both norms-based and sector-based, are the main approaches implemented. The high proportion of religious groups in the sample explains why Germany features the largest proportion in Europe of ethical exclusions, such as weapons, tobacco, alcohol, pornography, etc. They form an integral part of global ESG strategies as nearly all religious organisations and banks combine best-inclass selection and shareholder engagement with these exclusions. Norm-based exclusions Best-inclass Sector-based Engagement exclusions ESG Integration Others Reporting Forty percent of German asset owners state that they report on the integration of ESG criteria into their investment policy. 18 asset owners, half banks and private insurers, representing more than 750 billion in assets. This sample reflects what is unique about the German market, as nearly 40% of respondents are religious institutions. Delegated management is dominant. One-third of those surveyed have signed up to the PRI. Sample Panel novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 21

22 Netherlands Key points Dutch asset owners emphasise shareholder engagement and norms-based exclusions. As they are particularly sensitive about their reputation and motivated by long-term risk management, they have formalised their responsible investment strategies through specific policies that they make public. 34% 50% 46% Long-term risk management 18% 10% 31% Protection of reputation % 40% 23% Contribution to SD 10% 0% 0% Financial performance Motivations Long-term risk management remains the main incentive for integrating ESG criteria. The most notable change is the rise in the number of respondents that wish to protect their reputation. Dutch asset owners are regularly attacked by the media on the nature of their investments, more specifically on the agricultural commodities market. Of Dutch respondents, 77% state that they have received requests from customers to integrate ESG issues into their management. 15% Planned 5% No policy Formal policy With 77% of respondents having already formalised a responsible investment policy and 15% that would like to do so in the near future, the Netherlands is home to some of the highest ESG achievers in Europe. All Dutch respondents said they had a ban on investing in controversial weapons. 77% Formalised policy 22 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

23 In partnership with Netherlands Compliance with a list of exclusions Questionnaires or dedicated sections within RFPs Request for ESG reporting Ex post ESG rating of the portfolios Request for signing up to the PRI 17% 17% 42% 50% 67% Implementation in investment management As part of their delegated management, Dutch asset owners express their preferences upstream, either in their RFPs or in exclusion lists, or downstream with reporting requirements. However, being a signatory to the PRI features less important in their opinion. For assets managed in-house, the ESG analysis of issuers is attributed equally between extra-financial ratings agencies and extra-financial or financial analysts. Sample of respondents that delegate all or part of their management 92% 85% ESG strategies 38% 23% 15% The responsible investment practices of Dutch asset owners are in line with those of Scandinavian countries, except that shareholder engagement is highly prevalent, being implemented by virtually the entire sample. The proportion of norm-based exclusions is all the more remarkable as it does not cover the exclusion of controversial weapons, which is a practice of all respondents. Engagement Norm-based exclusions Best-in-class Sector-based exclusions ESG Integration Reporting Dutch investors are far ahead of their European peers, with two-thirds of them providing reporting and a further 23% planning to do so. 13 respondents, for the most part insurance companies and pension funds, which are required to outsource the management of their assets to a third-party. The sample represents 1,024 billion in assets, predominantly under delegated management mandates. Eight of them have signed up to the PRI. Sample novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 23

24 Northern Europe Denmark - Finland - Norway - Sweden Key points Asset owners in Scandinavian countries have long practised very formalised responsible investment, which is regularly challenged by civil society and the media. This explains the predominant motivation of reputational risk and tradition of ethical and norm-based exclusions, following the example of the Norwegian fund (the Government Pension Fund Global). Engagement is developing under the influence of the PRI, while exclusions from portfolios are gradually becoming a last resort % 35% 25% 29% 19% 32% 29% 42% 34% Motivations The incentives that motivate Scandinavian asset owners to integrate ESG criteria have changed considerably. Contributing to sustainable development is now the main objective, ahead of a tied ranking between long-term risk management and financial performance. Protecting reputation has become a secondary concern. 15% Contribution to SD 7% Long-term risk management Financial performance 6% Protection of reputation In Nordic countries, responsible investment policies feature the most dialogue with external stakeholders, with 76% of the investors surveyed attributing this to their customers' expectations and 47% to those of NGOs. 12% Planned 6% No policy Formal policy Responsible investment approaches are highly formalised: 82% of respondents have both signed up to the PRI and formalised their ESG policy, and these figures look set to rise. Furthermore, two-thirds of the sample is made up of PRI signatories that joined prior to % Formalised policy 24 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

25 Northern Europe Compliance with a list of exclusions Request for signing up to the PRI Request for ESG reporting Ex post ESG rating of the portfolios Questionnaires or dedicated sections within RFPs Others 55% 45% 36% 36% 36% 27% Implementation in investment management Scandinavian asset owners are among the most demanding with their investment managers. Along with the Germans and Dutch, they most frequently require their managers both to apply exclusion lists and sign up to the PRI. However, they virtually never associate the idea of higher management fees with responsible investment. Sample of respondents that delegate all or part of their management 94% ESG strategies 71% 65% 41% 18% Shareholder engagement is the approach that has developed the most in Northern Europe. Although norm-based and sector-based exclusions are implemented by two-thirds of the sample, with particular emphasis on the tobacco industry, virtually all investors state that they now practise shareholder engagement. Only half did so last year. This development is perfectly in line with the strategy adopted by the Norwegian fund, which recently refocused its pure exclusion approach towards a combination of engagement and exclusions. Engagement Sector-based exclusions Norm-based exclusions ESG Integration Best-in-class Reporting Scandinavian investors are by far the most transparent in Europe. Two to three times more Scandinavian firms publish PRI reporting along with a report on their integration of ESG issues compared with their European counterparts. The 17 respondents from the Nordic countries represent 450 billion in assets. Bonds and property assets are primarily managed in-house, while other asset classes, particularly equities, are equally divided between in-house and delegated management. Pension funds account for nearly three-quarters of the sample, with a relatively consistent breakdown between corporate, public and private funds. Sample novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 25

26 Spain Key points Responsible investment in Spain remains an emerging practice. Investors that have adopted the approach focus on exclusions, with few having formalised an SRI charter or set up an in-house team of extra-financial analysts. However, Spain has recently passed two laws requiring corporate and private pension funds to state whether or not they integrate ESG criteria into their investment process, which may change the situation. 74% 65% 67% 22% % Motivations The motivation to contribute to a more sustainable development model still comes in well ahead as the main objective of Spanish asset owners. However, a growing number of them consider ESG integration a way of protecting their reputation. The trend has reversed since 2011, as risk management no longer features as a deciding factor. 11% 11% 8% 11% 8% 5% Contribution to SD Protection of reputation Long-term risk management 0% Financial performance 45% No policy 33% Formalised policy 22% Planned Formal policy As an illustration of the gap between Spain and other European countries, only one-third of Spanish respondents have formalised a charter or policy setting out how they take ESG criteria into account. They have all included the exclusion of controversial weapons, and nearly 20% state that they have taken a stance against tax havens and investments in agricultural commodities. Unions lead the push towards adopting a responsible investment policy, with 44% of Spanish asset owners stating that they have received requests from them. 26 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

27 In partnership with Espagne Spain Request for signing up to the PRI Compliance with a list of exclusions Ex post ESG rating of the portfolios Questionnaires or dedicated sections within RFPs Request for ESG reporting 0% 13% 25% 25% 38% Implementation in investment management Asset owners that delegate a portion of their asset management maintain rather loose requirements. Only 13% of them ask about the integration of ESG criteria within RFPs. Investors that manage their assets in-house remain poorly organised: only 20% have set up an in-house ESG analysis team or used the services of a rating agency. Others 13% Sample of respondents that delegate all or part of their management 78% 72% 28% 28% ESG strategies Norm-based and sector-based exclusions are increasingly popular in Spain. Nearly 80% of respondents state that they have implemented norm-based exclusions (other than controversial weapons) or sector-based exclusions, compared with 29% and 40% respectively in Weapons, pornography and gambling are the top three business sectors excluded. Norm-based Sector-based exclusions exclusions Bestin-class Engagement 17% 11% ESG Integration Others Another change is that Spanish asset owners now give equal importance to the ESG selection strategies of issuers and shareholder engagement, which jumped 21 points in one year. Only 9% of investors stated that they used this approach in Reporting Responsible investment remains rather limited, with only 11% of respondents having implemented ESG reporting. The 18 Spanish respondents represent 66.8 billion in assets, predominantly managed in-house. Corporate pension funds are the main driving force for responsible investment in Spain, accounting for nearly all nine of the Spanish signatories to the PRI. Sample novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 27

28 United Kingdom Key points UK asset owners are set apart by their preference for shareholder engagement. The UK Stewardship Code, first published in 2010, encourages investors to disclose their shareholder engagement policy publicly and has since become a reference point. However, UK investors also stand out from their European peers in their low appetite for exclusions and rejection of best-in-class % Motivations 35% 26% 25% 36% 29% 17% 21% 18% 18% 18% The motivations of UK investors have continued to change this year. Their primary concern is currently long-term risk management, replacing financial performance as well as the motivation to bring about a more sustainable development model. In 2010, the majority of investors hoped to improve the financial performance of funds, but only 21% expressed this objective in 2011 and 18% in Long-term risk management Contribution to SD Financial performance 0% Protection of reputation 23% Planned 18% No policy 59% Formalised policy Formal policy With nearly 60% of asset owners that have already formalised an RI charter or policy, UK respondents fall into the European average. However, their guidelines are half as focused on agricultural commodities, tax havens or exclusions of controversial weapons as those of their European counterparts. A unique feature of the UK market is that RI policies essentially concern shareholder engagement. 28 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

29 Request for ESG reporting Questionnaires or dedicated sections within RFPs Request for signing up to the PRI Compliance with a list of exclusions Ex post ESG rating of the portfolios Autres 47% 29% 18% 18% 18% 35% Implementation in investment management Nearly half of UK asset owners ask their fund managers to provide ESG reporting. Far fewer (18%) require compliance with an exclusion list. These two trends are in line with the practice of dialogue that is unique to the UK market, with a high percentage answering "Other". Many asset owners describe, through this approach, less formal communication on ESG issues with their managers. United Kingdom Sample of respondents that delegate all or part of their management 65% ESG strategies 29% 24% 18% Shareholder engagement remains by far the SRI approach most commonly practised by asset owners in the United Kingdom. This year, slightly more apply exclusions to their management. Best-in-class trails behind even further, down 5 points on 2011 to stand at 6%. 6% 6% Engagement ESG Integration Sector-based exclusions Norm-based Best-in-class exclusions Others Reporting Nearly one-third of respondents state that they define and disclose ESG reporting based on the Principles for Responsible Investment. 17 respondents, primarily public or corporate pension funds, representing 144 billion in assets. These assets are mostly delegated to external managers. Eleven respondents have signed up to the PRI. Sample novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe 29

30 Panel of respondents Non-exhaustive list, with several respondents requesting anonymity. Belgium Luxembourg Banque Européenne d Investissement (BEI) Belfius Insurance Fonds de compensation du régime général de pension (FDC) France Agence Nationale pour les Chèques-Vacances (ANCV) Agrica Épargne - Groupe Agrica BNP Paribas Cardif Caisse de Prévoyance des agents de la Sécurité Sociale et Assimilés (CAPSSA) Caisse des Dépôts et Consignations (CDC) CFDT CNP Assurances Établissement de Retraite Additionnelle de la Fonction Publique (ERAFP) Fédérations AGIRC-ARRCO Fonds de Réserve pour les Retraites (FRR) Groupe Apicil Groupe AXA Groupe Macif Groupe Malakoff Médéric Ircantec MAIF Matmut Mutuelle de Poitiers Assurances Préfon PRO BTP Sogécap Union des Caisses de France (UCF) du réseau Congés Intempéries BTP Germany Bank fürkirche und Caritas eg Bank fürkirche und DiakonieeG BayerischeVersorgungskammer EvangelischeKreditgenossenschafteG GLS GemeinschaftsbankeG KfW Bankengruppe MEAG GmbH (Munich Re & ERGO) MetallRenteGmbH Missionszentrale der Franziskaner Netherlands AEGON APG ASR Nederland NV Delta Lloyd LoyalisVerzekeringen PensioenfondsVervoer PGGM Vermogensbeheer Rabobank Rabobank Pensioenfonds Stichting Philips Pensioenfonds TKP Investments Northern Europe: Denmark, Finland, Norway, Sweden AP1 AP4 AP6 Folketrygdfondet (Norwegian Government Pension Fund) Folksam Ilmarinen KLP Nordea PKA Sampension SvenskaKyrkan Svenska Lärarfonder Vækstfonden Varma Mutual Pension Insurance Company Spain CajaIngenieros Gestión, SGIIC, SAU Caser Pensiones Elkarkidetza Pentsioak Fondo de Pensiones de Empleados de Telefónica de España Fondo de Pensiones de los Empleados del Grupo Caja Madrid FondoRepsol II Grupohna Hazia Bbk EPSV Itzarri, EPSV Lagun-Aro, EPSV Montepio Loreto, MPS Plan de Pensiones Cajasol Empleados Premaat, MPS Previsión Social, Empleados del Grupo Endesa, Fondo de Pensiones Surne Vida Caixa, S.A. United Kingdom B&CE Benefit Schemes BBC Pension Scheme British Airways Pensions CDC Group Joseph Rowntree Charitable Trust Lankelly Chase Foundation London Pensions Fund Authority (LPFA) Lothian Pension Fund National Employment Savings Trust Corp Strathclyde Pension Fund Universities Superannuation Scheme (USS) 30 novethic 2012 / ESG Strategies of Asset Owners: Different Scenarios across Europe

31 Word from the sponsor Key points Survey objectives and sample Motivations ESG integration policies Organisation and resources Implementation in investment management Belgium - Luxembourg France Germany Netherlands Northern Europe: Denmark, Finland, Norway, Sweden Spain United Kingdom

32 ESG Strategies of Asset Owners Different Scenarios across Europe A survey conducted by Novethic's SRI research centre With the participation of Hugh Wheelan, Managing Editor, Novethic, part of Caisse des Dépôts, is a research centre in France on Socially Responsible Investment (SRI) and a sustainable development media expert. Set up in 2001, today Novethic is the exclusive source of statistical information on the French SRI market. The SRI research centre provides qualitative and quantitative analyses of the development of the integration of Environmental, Social and Governance (ESG) criteria into asset management and focuses thematic studies on the topic. Novethic 56, rue de Lille, Paris Tel : +33 (0) info@novethic.fr Novethic 2012 Total or partial reproduction is prohibited without the prior consent of Novethic. Using or citing the quantified data is allowed, provided that the source is indicated. graphic design: mathias bresson