ESG INTEGRATION: FOCUS ON ENVIRONMENTAL RISK AND OPPORTUNITY LENORA SUKI SUSTAINABLE BUSINESS AND FINANCE
ESG INTEGRATION: FOCUS ON ENVIRONMENTAL RISK AND OPPORTUNITY AGENDA WHERE INVESTORS SHOULD FOCUS NOW AND IN THE FUTURE Sustainable and responsible investment today ESG analysis and integration in the investment process Industry specific analysis of risk and opportunity Use of company data and scores Performance and investment insights The next frontiers
SUSTAINABLE AND RESPONSIBLE INVESTMENT TODAY >>>>>>>>>>>>>
SUSTAINABLE INVESTMENT EMBRACES A BROAD RANGE OF APPROACHES WIDESPREAD MOVEMENT ACROSS ASSET CLASSES TO CONSIDER NON-TRADITIONAL FACTORS AND ANALYSES IN INVESTMENT PROCESS Source: Sonen Capital
Source: Bloomberg Media, Morgan Stanley Institute for Sustainable Investing THE MAJORITY OF ASSET OWNERS EXPECT AN INCREASE IN SUSTAINABLE INVESTING PRINCIPLES DU - 11% 27% NY 73%
ASSETS COMMITTED TO RESPONSIBLE INVESTMENTS ARE GROWING GLOBALLY PRINCIPLES FOR RESPONSIBLE INVESTMENT: 10 YEAR GROWTH DU - 11% 27% NY 73% Source: Principles for Responsible Investment
SUSTAINABLE INVESTING IS A GLOBAL, RAPID GROWTH SEGMENT OF INVESTMENT INDUSTRY SRI Assets (bn) SRI / Total AUM SRI Assets (bn) SRI / Total AUM Growth of SRI Assets 2012 2014 Europe $8,758 49.0% $13,608 58.8% 55% Canada $589 20.2% $945 31.3% 60% US $3,740 11.2% $6,572 17.9% 76% Australia $134 12.5% $180 16.6% 34% Asia $40 0.6% $53 0.8% 32% Global - 21.5% - 30.2% - Total $13,261 100% $21,358 100% 61% Source: GSIA 2014 Global Sustainable Investment Review
INVESTORS FOCUSED ON MARKET COMPARABLE RETURNS NO TRADEOFF OF RETURN FOR IMPACT SUSTAINABLE VS. TRADITIONAL RISK VS. RETURN (7 YR TRAILING) Source: Morgan Stanley: Sustainable Reality
FOCUSING ON MATERIAL ESG FACTORS LEADS TO OUTPERFORMANCE Source: Corporate Sustainability: First Evidence on Materiality by Mozaffar Khan, George Serafeim, and Aaron Yoon
PRESSURES FROM LAWMAKERS, INVESTORS, ECONOMICS AND PUBLIC Legislative/Regulatory Regulatory mandates Pushing on materiality Disclosure reform Exchange listing requirements Investors Shareholder resolutions Questionnaire overload Calls for divestment Rejection of boilerplate Economics Resource constraints Climate change Intangibles and valuation Public/stakeholders Campaigns and protests NGO oversight Political spillover
THE MOVEMENT FOR DECARBONIZATION AND DISCLOSURE ACROSS STAKEHOLDERS IS GROWING $3 tn target by COP21 $8 tn in assets to disclose footprints $100 bn target by COP21 PDC oversees $230 bn in AUM $24 tn in AUM calling for an agreement on climate change $22 tn investor group engaging with over 1,300 companies 154 companies with $4 tn in revenues pledge environmental goals
PRODUCTS AND INITIATIVES PROLIFERATING ACROSS ASSET CLASSES AND ORGANIZATIONS THE RANGE OF INSTITUTIONS INTEGRATING ESG INTO THEIR BUSINESS ILLUSTRATES UPTAKE: Mutual Funds (Equity and Fixed Income) Exchange Traded Product Sell-Side Research Stock Exchanges Index Products Private Equity
PRODUCT IS GROWING BUT MOSTLY FOCUSED ON PUBLIC EQUITIES, STILL NEED CROSS ASSET CLASS Funds With Sustainable Investment Strategies DU - 11% 27% NY 73%
ESG ANALYSIS AND INTEGRATION IN THE INVESTMENT PROCESS >>>>>>>>>>>>>
BLOOMBERG IS ACCELERATING CHANGE, INNOVATION AND TRANSPARENCY DU - 11% 27% NY 73%
INTANGIBLES MAKE UP THE HIGHEST PROPORTION OF CORPORATE VALUE INTANGIBLES INCLUDE PHYSICAL, HUMAN AND SOCIAL CAPITAL REPUTATION, BRAND VALUE, CORPORATE CULTURE, INNOVATION CAPACITY 68% 80% 84% 17% 32% Source: Ocean Tomo LLC, Jan 2015
WHY? ESG HIGHLIGHTS INTANGIBLES, LESS TRANSPARENT INFO ABOUT MANAGEMENT WHAT ROLE DOES ESG ANALYSIS PLAY IN INVESTMENT DECISIONS? 23% NY 73% 20% DU - 11% 27% Identify risks and opportunities Focus dialogue with company management 14% 13% 13% 10% 6% 0% 0% 0% To identify ESG risks and opportunities Engagementto focus our dialogue with company management teams Negative screening To comply with PRI or other external mandates To identify companies for further scrutiny Positive screening SOURCE: INTEGRITY RESEARCH ASSOCIATES, ESG RESEARCH SURVEY RESULTS, MARCH 2012 Stock selection within broader portfolios Product development (e.g. specialist portfolios of thematic universes of stocks) To run best in class portfolios Other
ENVIRONMENTAL FACTOR ANALYSIS EVOLVING FROM BASIC, BACKWARD-LOOKING TO MORE COMPLEX, FORWARD-LOOKING FIRST FOCUS ON EMISSIONS, ENERGY, WATER AND WASTE MOVING INTO GOVERNANCE, ANALYTICS AND OTHER BUSINESS FACTORS Backward looking basic data (company, industry and country level) No benchmarking against climate goals No connections with systems view or goals Forward-looking data on capex, embedded emissions, etc. Plant and project level real assets information to roll up to owners Cross asset class environmental evaluation (e.g. carbon footprint vs. goals) Decarbonization pathway models aligned between govts and corps High frequency info on progress to targets Portfolio optimization to identify most efficient decarbonization pathway Advanced analyses value at risk, scenario and stress testing Linkages across ESG factors beyond E
INDUSTRY SPECIFIC ANALYSIS OF RISK AND OPPORTUNITY >>>>>>>>>>>>>
DERIVING ESG INSIGHTS FOR THE INVESTMENT PROCESS REQUIRES KNOWING WHERE TO FOCUS ESG <GO> & BLOOMBERG INTELLIGENCE SHOW MOST RELEVANT FIELDS AND MEDIAN PERFORMANCE BY INDUSTRY UTILITIES FOCUS ON EMISSIONS, FEEDSTOCK FUELS AND WATER INTENSITY AND RECYCLING Source: Bloomberg
CONTEXT - NOT JUST DATA - IS NECESSARY TO UNDERSTAND INDUSTRY TRANSFORMATION DU - 11% 27% NY 73% BI <GO> BI ESG <GO> INDUSTRY PRIMERS AND RESEARCH» Outline of fundamental factors and risks» Focus on changing fundamentals, regulatory risks» Role of innovation in meeting demand Source: Bloomberg
CONTEXT - NOT JUST DATA - IS NECESSARY TO UNDERSTAND INDUSTRY TRANSFORMATION BNEF <GO> NY 73% DU - 11% 27% INDUSTRY AND TECHNOLOGY INSIGHTS» Deep global coverage of companies and projects at the heart of the low carbon economy transition Source: Bloomberg
PERFORMANCE EVALUATION AND INVESTMENT INSIGHTS >>>>>>>>>>>>>
COMPANY PERFORMANCE IS SHIFTING IN RESPONSE TO CHALLENGES DU - 11% 27% NY 73% FA ESG <GO> ESG DATA ON BLOOMBERG» Fully integrated into financial analysis Source: Bloomberg
PEER COMPARISONS CLARIFY STRONG/WEAK AREAS OF PERFORMANCE DU - 11% 27% ESG FACTORS IN INDUSTRY ANALYSIS» Companies assessed relative to peers RV <GO> NY 73% COMPANY ENGAGEMENT BASED ON STRENGTHS AND WEAKNESSES XLTP XSCR <GO> Source: Bloomberg
PORTFOLIO CARBON FOOTPRINT TOOL DRAWS ON REPORTED CARBON DATA Source: Bloomberg
GREEN/SOCIAL BONDS AIM AT IMPACT INVESTMENT BUT CREDIT MARKET INTEGRATION LAGGING DU - 11% 27% NY 73% Source: Bloomberg LEAG NEW<GO>
THE NEXT FRONTIERS >>>>>>>>>>>>>
SUSTAINABLE ACCOUNTING STANDARDS BOARD TO UNLOCK MATERIALITY» SASB s mission is to develop and disseminate sustainability accounting standards that help public corporations disclose material, decision-useful information to investors through a rigorous process that includes evidence-based research and broad, balanced stakeholder participation.» 80 industries and over 200 sustainability issues» Documentation of materiality by regularly scan of 10,000+ source docs per sector» Financial analyses and valuation models, cost-benefit analysis, technical protocols» Engagement, advisory groups, public comment response and education» Streamlining and alignment of reporting efforts Participation with the Corporate Reporting Dialogue (IIRC) Source: SASB
Source: SASB
MATERIAL ENVIRONMENTAL FACTORS EMERGE IN MANY TOPICS. REPORTING EXPECTATIONS WILL FOLLOW. Source: SASB
What is the FSB Task Force? Established by the Financial Stability Board on 4 December 2015 The first global, industry-led initiative developing recommendations for voluntary climate-related financial disclosures for companies Chaired by Michael R. Bloomberg 9
TASK FORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES WILL HAVE IMPORTANT IMPLICATIONS Key Themes Components of Disclosures Survey Response The majority of respondents agreed on: Forward-looking disclosure (short, medium and long-term) Ability to set/achieve targets, with strategies for achievement Align with material risks Sector-specification vs. Aggregation Respondents differed on sector-specific disclosures vs disclosures aggregated across sectors, including: 31% prefer sector-specific disclosures to be the priority 31% prefer both sector-specific and aggregated disclosures 16% prefer aggregated disclosures 22% provided alternative commentary Transition Risk The majority of respondents agreed with definition of risks associated with the transition to low-carbon economy Many respondents offered additional thoughts on transition risk Scenario Analysis 96% of respondents see scenario analysis as key to disclosure 17 * The majority of respondents to the public consultation represented users of financial disclosures from across the investment value chain. Source: TCFD
INVESTORS LOOKING FOR MORE GRANULAR INFORMATION ABOUT RISKS AND OPPORTUNITIES BMAP<GO> GEOLOCATION AND DATA LAYERS DU - 11% 27% NY 73% SPLC<GO> SUPPLY CHAINS IN GREATER DETAIL Source: Bloomberg NEFQ<GO> LOW CARBON SOLUTIONS ACROSS ASSET CLASSES
CLOSING THOUGHTS ESG information is becoming mainstream for investors Investors are finding value in ESG information as the demand for sustainable and responsible investment products grows. ESG performance contributes intangible company value Many ESG factors may have financial implications, but most are difficult to quantify. The investment industry is working to link valuation to ESG factors. ESG factors have to be understood at the level of the industry New initiatives and mainstream investor adoption is driving a focus on what is relevant depending on business fundamentals. Environmental insights and impacts are at peer, portfolio, systems level Whatever the sustainability evaluation, these factors must be understood across asset classes at multiple levels, especially relative to global goals. The future will see unprecedented transparency and analytical sophistication Investors are becoming more sophisticated and more demanding of the type, quality and granularity of information on environmental risks and opportunities.