Shawn Cohen Director, Relationship Management MFS Investment Management Canada PROFIT vs. ALTRUISM Integrating ESG Strategies in DC Plans FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY 32057.4 32461.1 ESG INVESTING DEBUNKING THE MYTH! Source: Pensions & Investments Online from Roger Schillerstrom, January 22, 2013. 2
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE (ESG INVESTING) ESG Investing: Related Terminology: SRI (Socially Responsible Investment), Values-based Investing, Sustainable Investing, Ethical Investing, Mission-driven investing Factors: abortion providers, adult entertainment, alcohol, animal welfare, environment, firearms, gambling, genetic engineering, human rights, military weapons, stem cells tobacco etc. Exclusion vs. Inclusion 3 ESG ISSUES IN CAPITAL ACCUMULATION PLANS COMMON CONCERNS ESG funds generally underperform? One size does not fit all! Difficult to implement within context of a CAP Platform An extra investment option? Balanced product vs. single equity or fixed income product? More education required for plan members! 4
ALTERNATIVE INVESTMENT APPROACHES Traditional Investment Approach: No ESG consideration ESG Aware Investment Approach: Dedicated ESG/SRI portfolio Integrated Investment Approach: ESG integration into the research process Constraints: None Goal: Maximize investment performance Constraints: Invest within a screened universe (Tobacco, Firearms, Sudan, etc..) Goal: Satisfy stakeholders while not hurting performance Constraints: None, but integrate material ESG factors into the research process Goal: Maximize long term investment performance 5 PROFIT/ALTRUISM TRADEOFF Likely accurate when: Negative externalities are not actively mitigated Actors (management, investors) are focused solely on the short-term may be true in the short-term, but not in the long-term 6
THE BUSINESS CASE FOR ESG INTEGRATION: Unreliable short-term gains Many companies still aiming for this outcome but increasing involvement by governments and stakeholders results in this outcome. System Dynamics: Capability trap Short-term management decisions can steal long term capabilities from a firm Case study: Canadian mining company Has faced many stakeholders and environmental concerns; Chilean mine shut down Did short-term focus impede firm's ability to develop good processes? Lack of investment in ESG factors can lead to unreliable short-term gains 7 THE BUSINESS CASE FOR ESG INTEGRATION: Case studies Economics: Positive externalities Case study: Energy Efficiency Improving energy (or water/waste) efficiency reduces costs and helps the environment Carbon intensity data is available but rarely used by investors Provides a vital management quality and cost efficiency signal Operations Management Case study: Multinational wholesale consumer retailer 4,000 SKUs: Enables more accurate stocking/pricing and purchasing efficiencies Operational practices enable increased employee pay: reinforces operations strategy, reduces costs (e.g. employee training, shrink), & improves customer satisfaction The result: Consistent traffic growth and a cult-like customer; a virtuous cycle 8
THE BUSINESS CASE FOR ESG INTEGRATION: Long-term competitive advantages but thoughtful R&D investments, positive externalities, and good operations can create win win outcomes. Many analysts and company managers only consider this lower line and assume positive externalities or higher wages move a company to point B Investment in ESG practices can create durable, long-term advantages 9 A NEW PROFIT VS. ALTRUISM MODEL A long-term, integrated approach is a robust ESG strategy for asset owners 10
A NEW MODEL: INTEGRATED INVESTOR Understand how managers consider ESG factors in the investment process If still believe there is interest in negative screen product (specific factors excluded)*: 1. Gauge participant interest in an SRI option 2. Increase your knowledge 3. Check with your consultant/plan administrator 4. Make the case: address performance and fiduciary concerns 5. Choose a fund (and monitor performance) 6. Educate participants Outline ESG considerations in your Investment Policy 11 SUMMARY Profit maximization and social value are not mutually exclusive if: You have a long-term horizon that allows you to capture inter-temporal gains that other investors commonly miss You can actively pick among potential winners and losers You understand ESG risks & opportunities and recognize when the concept of shared value may result in increased financial value for a given firm You can achieve both of your goals: risk/return maximization and improved alignment with the interests of your stakeholders 12
APPENDIX ESG INTEGRATION: INDUSTRY TRENDS (CONT.) Increasingly punitive market reactions to negative ESG events Source: MSCI 14
THE BUSINESS CASE FOR ESG INTEGRATION: Academic research based on empirical data "Impact of corporate sustainability on organizational processes & performance" Eccles (Harvard Business School), Ioannou (London Business School), and Serafeim (Harvard Business School) Paired up 180 US companies and reviewed performance over ~20 years All pairings were part of the same industry Parings included one "high sustainability" and one "low sustainability" company High sustainability firms had detailed environmental and social policies; low had adopted few policies High sustainability companies outperformed low sustainability firms over the long-term both in terms of accounting performance & stock performance 15 THE BUSINESS CASE FOR ESG INTEGRATION: Engaged workers and higher multiples Source: UBS: Human Capital "Staples Retail: Invest in employees to drive growth" by Hubert Jeaneau, CFA and Jason DeRise, CFA 16
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