The Evolution of Sustainable Investing. and the Benefits for Catholic Investors

Transcription

1 The Evolution of Sustainable Investing and the Benefits for Catholic Investors

2 2 Presenters Nick Karabinis Associate Director of Investment Research Gallagher Retirement Plan Consulting CFA Charterholder Thom Duffy VP, Investment Strategy Knights of Columbus Asset Advisors Archdiocese of Washington CFO,

3 The Evolution of ESG and SRI 3

4 4 Sustainable Investing: Timeline & Recent History 1960s: Social movements of the 1960s (i.e. anti-war, women s rights, civil rights, etc.) lay the groundwork for socially responsible (SRI) or sustainable investing interest 1980s: Standardization of SRI/sustainable investing through avoidance or negative screens; values-based investing spreads; shareholder activism grows; success of anti-apartheid divestment campaign 2000s: Growth of positive screening approaches, creation of U.N. Principals of Responsible Investment, emergence of impact investing, increasing institutional investor presence (e.g. pension funds, sovereign wealth funds, etc.); revision of USCCB investment guidelines 1970s: Establishment of SRI/sustainable investing progresses as social activism moves into labor, environmental and consumer protection issues; concept of corporate social responsibility takes root; Pax launches 1 st mutual fund based on social and ethical investing principals 1990s: SRI/sustainable investing growth in the public markets takes hold; creation of USCCB investment guidelines; bestin-class sustainable investing takes root; emerging academic studies on performance and negative screening 2010s: Adoption of environmental, social and governance (ESG) issues for analysis, rise of ESG data providers; advancement of corporate disclosures on ESG issues, sustainable investing product evolution, etc.

5 5 Growth of Sustainable Investing As interest in sustainable investing has grown, so have assets. Globally, ~$23 trillion in 2016, representing 26% of all professionally managed investments. 1 An increase of 25% since Within the U.S., sustainable investments have increased from $1.4 trillion to $8.7 trillion from Largest category: negative/exclusionary screening investment strategies ($15 trillion). 1 Smallest category: impact investing ($102 billion). 1 Fastest growing category: impact investing (385% yearover-year growth in 2016). 1 SOURCE: GSI-alliance.org 1. Global Sustainable Investment Alliance Global Sustainable Investment Review. (2017) 2. US SIF Foundation. Biennial Report on US Sustainable, Responsible & Impact Investing Trends. (2017) SOURCE: USSIF.org

6 6 Sustainable Investing Approaches Sustainable Investing space has evolved as practitioners have altered their investing processes to meet emerging investor demand while adapting their approach as environmental, social and governance (ESG) data has become more-widely available. Broadly speaking, the evolution of the investment approaches to sustainable investing can be broadly summarized in three phases: Version 1.0 Pure exclusionary or negative criteria screening (e.g. tobacco) Version 2.0 Inclusion of positive screening, comprising ideas such as workplace diversity, environmental policies, safe & healthy workplaces, etc. Version 3.0 The systematic inclusion of ESG data into financial analysis and broadening scope and purpose of sustainable investments. The development of dedicated ESG analysts/teams and more proactive engagement and advocacy with portfolio companies. The emergence of impact investing, which integrates ESG analysis but goes beyond it by making investments with the intention of generating a measureable, beneficial social/environmental impact alongside (or in place of) a financial return.

7 7 Motivation & Demand for Sustainable Investments Whether driven by faith, environment or any other social or cultural beliefs/concerns, its not difficult to understand the desire to align one s deeply-held values with their investments. More recently, the current U.S. administration s reversal on global and domestic climate initiatives has provided added impetus for companies and investors to step up their efforts on climate change. Mounting evidence of human impact on the environment has compelled investors to consider these long-term risk factors on one s investment and cost on society as a result. Millennials driving broad demand and further product development within the sustainable investing space. SOURCE: CFA Institute 2017 ESG Survey

8 8 Misinformation around Sustainable Investing Over the years, misinformation spread over the use of sustainable investing themes and potential drawbacks to its utilization. 1. Misconception: All sustainable investing methods will invariably lead to relative underperformance versus relevant asset class benchmarks or peers. As more academic studies were conducted over the past 20 years, this assumption has been proven false. For instance, according to meta-analysis of 2,000 studies from , 90% found a nonnegative ESG corporate financial performance relationship Misconception: Sustainable investing is assumed to be not consistent with a one s fiduciary responsibility This fallacy was put to rest in 2015 when US Dept. of Labor (DOL) rescinded its previous 2008 bulletin that discouraged plans covered by ERISA from considering ESG factors in the investments offered to plan participants. 3. Friede, Gunnar and Busch. ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies. Journal of Sustainable Finance & Investment, Vol 5, Issue 4, p , (Oct. 2015)

9 9 Future Trends in Sustainable Investing The future of sustainable investing will likely concentrate on some following themes/trends: ESG incorporation in the overall investment process Greater investor openness to the incorporation of ESG data in the investment process Big Data and ESG data standardization Democratization of impact investing Movement beyond the venture capital model and accredited investors Product development: target-date, fixed income, impact investing; faith-based ETFs, etc. From a faith-based perspective, developing trends within the broad sustainable/socially-responsible investing space include: Greater focus on shareholder activism by faith-based investors with a growing emphasis on climate issues. Organizations like the Interfaith Center on Corporate Responsibility are using their influence to press companies on ESG issues. Product development: faith-based & ESG-oriented target date funds and the rise of low cost, faith-based ETFs

10 10 Summary Unites States Conference of Catholic Bishops (USCCB) Socially Responsible Investment Guidelines The USCCB has not reviewed, approved, or opined on this presentation

11 11 USCCB Investment Policies Zero tolerance for companies that: Directly participate in or support abortion Engage in scientific research on human fetuses or embryos that 1) ends pre-natal human life, 2) uses tissues from abortion, or 3) violates the dignity of a human person Manufacture contraceptives

12 12 USCCB Investment Policies Zero tolerance for companies that: Have policies that discriminate against historically disadvantaged ethnicities and races Have policies that discriminate against women Are directly involved in the manufacture, sale, or use of anti-personnel landmines

13 13 USCCB Investment Policies Materiality tests for companies that: Derive a significant portion of revenue from sale of contraceptives Have as their purpose to appeal to a prurient interest in sex Primarily engage in military weapons manufacturing or weapons inconsistent with Catholic teaching on war (biological, chemical, first-strike nuclear, etc.)

14 14 USCCB Investment Policies Promoting and supporting shareholder resolutions for policies of divestment as well as: Preserving and protecting human rights Affordable access to pharmaceutical Avoiding the use of sweatshops

15 15 USCCB Investment Policies Promoting and supporting shareholder resolutions for policies of divestment as well as: Affordable Housing / Banking Preserving and protecting the environment Encouraging corporate transparency regarding social, environmental and financial performance

16 16 Other USCCB Policy Guidance Will not deposit funds in a bank that receives less than a Satisfactory Rating under the Community Reinvestment Act Significant investments in certain areas might cause confusion or scandal (e.g., heavy investment in conventional military weapons producers, gambling stocks, etc.) The document is mute on alcohol, civilian fire arms, fossil fuels, and tobacco In these cases, prudence is the guiding principle

17 17 Risk Mitigation If the public compared your diocesan investment holdings to the USCCB Catholic Guidelines, what would they say? What would the impact be on the (Arch)Bishop, the Finance Council, the donors, the ministries, the staff, and the faithful of your diocese? Is there any investment return large enough to risk the good name of the Church?

18 18 Possible Responses Mikhail Gorbachev Gen. Colin Powell

19 Target Date Portfolios Historical Perspective 19

20 Target Date Portfolios A Case Study 20

21 21 Catholic Retirement Plan Challenges Employees who cannot afford to retire, do not retire willingly. Employees who want to retire but cannot may have higher: Salaries Healthcare expenses Absenteeism Legal risks

22 22 Catholic Retirement Plan Options Premise Diocesan bishops and staff care about the USCCB Guidelines, so we must put Catholic compliant investments on the retirement plan menu. Provide stock and bond funds to permit sufficient diversification to meet the needs of investors at different stages of their career. Watch as employees follow their bishop and their faith to invest in Catholic compliant investments.

23 23 Catholic Retirement Plan Options Results No change in total employee participation rates No change to average contribution percentage Limited to insignificant participation in Catholic funds

24 24 Catholic Retirement Plan Options Learnings The vast majority of employers and employees liked the idea of Catholic investing particularly if the returns were in line with non-compliant options; BUT It was not fair or reasonable to ask Catholic ministry and school employees to decipher A proper allocation for their current life stage when and how to reallocate their portfolios over time

25 25 The Solution Target Date Model Portfolios Catholic 2050 Catholic 2040 Catholic 2030 Bond Allocation Catholic 2020 Catholic 2010 Equity Allocation

26 26 Automatic Rebalancing Over Time Target Retirement Year Short Investment Grade Bonds 3.0% 3.6% 4.6% 6.5% 9.0% 13.0% 18.0% 29.0% 44.0% Core Investment Grade Bonds 12.0% 14.4% 18.4% 23.0% 28.0% 33.0% 38.0% 35.5% 28.0% Total Bond Allocation 15.0% 18.0% 23.0% 29.5% 37.0% 46.0% 56.0% 64.5% 72.0% Large Cap Growth 27.0% 26.4% 25.4% 23.5% 21.0% 17.6% 13.6% 10.8% 8.8% Large Cap Value 27.0% 26.4% 25.4% 23.5% 21.0% 17.6% 13.6% 10.8% 8.8% Small Cap Core 15.0% 14.1% 12.6% 11.4% 10.4% 9.4% 8.4% 6.8% 4.8% International Equity 16.0% 15.1% 13.6% 12.1% 10.6% 9.4% 8.4% 7.1% 5.6% Total Equity Allocation 85.0% 82.0% 77.0% 70.5% 63.0% 54.0% 44.0% 35.5% 28.0% Representative Expense 0.89% 0.88% 0.85% 0.82% 0.79% 0.75% 0.71% 0.67% 0.63%

27 27 Representative Diocese Target Date Requirements Fully compliant with the USCCB guidelines on Catholic SRI Use leading investment strategies and tactics to pursue strong risk adjusted returns given an investor s time horizon Automatically rebalance portfolio allocations on behalf of investors Competitive total expenses

28 28 Case Study: Representative Diocesan 403(b) Eligible employees are auto-enrolled in the default option at time of hire at 4% of salary unless they opt-out 50% of employees contributions are matched by the Diocese up to 4% of salary The default option was recently changed from a non-catholic compliant target date option to a Catholic compliant target date solution Participation rates are 73%

29 29 Case Study: Representative Diocesan 403(b) Pre Catholic Target Date 52% of assets were in Non- Compliant Target Date options (59% of participants) 20% of assets were in Catholic compliant options 990 participants in Target Date funds Post Catholic Target Date 15% of assets were in Non- Compliant Target Date options (12% of participants) 57% of assets were in Catholic compliant options 1,200 participants in Target Date funds

30 30 Conclusion Target Date solutions area generally preferred by DC retirement plan participants Employees of Catholic organizations generally prefer Catholic investment options especially when there is no loss in total return potential Catholic Target Date options protect the integrity and good name of the Church

31 31 Catholic Retirement Plan Recommendations Include Catholic compliant options in any Catholic organization s defined contribution (DC) retirement plan Protect your long term finances Offer a match on employee contributions Offer auto-enrollment to all eligible participants Make Catholic Target Date options the default option

32 Thank You! 32