Sustainable, Responsible and Impact Investing (SRI) PRESENTATION TO: October 22, 2015 Presenter: Gary Ometer, CPA, CGMA, Chief Financial Officer,
Responsible Investing History VGFOA - SRI 2
Terms Related to Responsible Investing osocially Responsible Investing (SRI) oenvironmental, Social, and Governance (ESG) oimpact Investing odivestment oresponsible Investment (RI) Slides 35 and 36 for complete definitions. VGFOA - SRI 3
Defining Terms Related to Responsible Investing (cont.) *There is not always a clear delineation of these approaches VGFOA - SRI 4
Responsible Investment Evolution Increased public interest More solutions available Evidence of materiality Responsible Investment Active shareholders and investors Corporate leadership examples VGFOA - SRI 5
Defining Terms Related to Responsible Investing (cont.) Sustainable, responsible and impact investing (SRI): is an investment discipline that considers environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact. VGFOA - SRI 6
The Forum for Sustainable & Responsible Investment VGFOA - SRI 7
What the US(SIF Trends Report Measures o 2014 Trends Report is a snapshot of US-domiciled assets engaged in SRI strategies at year-end 2013. o Two SRI strategies measured: ESG incorporation: consideration of environmental, social (including community) and corporate governance (ESG) factors in investment analysis and portfolio selection Filing of shareholder resolutions on ESG issues o Additionally, questions about: Why and how investor incorporates ESG Whether investor engages in dialogue with companies on ESG issues o US SIF Foundation has measured involvement in SRI strategies since 1995 VGFOA - SRI 8
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Why Practice SRI? The leading reasons cited by money managers and institutional asset owners surveyed by US SIF Foundation in 2014: VGFOA - SRI 13
ESG Incorporation: $6.2 Trillion o Sustainability in its simplest form is the ability to continue. There are both risks and opportunities ahead. The ESG framework we're adopting will help us make better investment decisions for the long term. Anne Simpson, Senior Portfolio Manager, Investments and Director of Global Governance, California Public Employees Retirement System (CalPERS) o The premise underlying sustainable investing is elegant in its simplicity: companies that do a better job of integrating environmental, social and governance (ESG) standards into their business models are better positioned than their less-enlightened competitors to provide investment performance over the long term. Joe Keefe, President & CEO, Pax World Management VGFOA - SRI 14
Defining ESG Factors Examples of environmental, social and governance factors o Some ESG factors are already widely considered Environmental Climate change Energy & material efficiency Waste management Air quality / pollution Water use & management Chemicals Land use management Social Stakeholder relations Labor relations Working conditions Health and safety Supply chain management Product safety Treatment of customers Corporate Governance Board composition Remuneration / Exec compensation Shareowner rights Accounting & audit quality Transparency VGFOA - SRI 15
Defining ESG Factors How can ESG factors affect the performance of corporations? Source: CSR Europe, Valuing non-financial performance: A European framework for company and investor dialogue VGFOA - SRI 16
Focus On Climate Change Growing campaign for fossil fuel divestment VGFOA - SRI 17
Corporate performance and women s representation on boards Women Board Directors (WBD) Align With Strong Performance at Fortune 500 Companies 1 Financial measures excel where women serve 2 Source: Catalyst 2007 The Bottom Line: Corporate performance and women s representation on boards - see related footnotes VGFOA - SRI 18
Why Responsible Investment? Financial drivers Why now? o Assess environmental, social and governance (ESG) considerations to optimize risk-adjusted returns o Influence corporate behavior to enhance longterm outcomes o Contribute to the integrity of financial markets Non-financial drivers o Reflect long-term investment horizon o Reflect concerns and values of stakeholders o Manage reputation, business risk VGFOA - SRI 19
Beliefs Underpinning the Growth of Responsible Investing o ESG risks are material to financial performance - Energy & material use, climate change, governance, human capital - ESG integration consistent with fiduciary duty; good risk management o ESG issues create opportunities - Products & services e.g. helping customers to reduce energy use - Investment opportunities e.g. environmental markets o Active ownership protects investments - Proxy voting & corporate engagement preserve and enhance shareholder value o Good ESG practices are a component of risk management - Mitigate reputational risks / proactively address stakeholder concerns - Employees and customers react well when mission and reputation are positive and consistent o RI policies are part of good governance structures - Comply with legislated disclosure requirements (where applicable) - Principles can help to manage short and long term risks - Consistent with transparency and accountability VGFOA - SRI 20
Company / Security-Level Impact Investment Case for Responsible Investment VGFOA - SRI 21
Company / Security-Level Impact Investment Case for Responsible Investment o DB Advisors reviewed more than 100 academic studies of responsible investing around the world - Findings found that 100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity - 89% of the studies we examined show that companies with high ratings for ESG factors exhibit market-based outperformance Firms with strong ESG performance may now be enjoying both financial outperformance (particularly market-based) and a lower risk as measured by the cost of equity and/or debt (both loans and bonds) capital in the short run o Builds on prior materiality reports and reviews of academic literature undertaken by Mercer and UNEP FI o To clarify there is a compelling investment case for RI/ESG considerations Source: DB Advisors http://www.dbcca.com/dbcca/en/_media/sustainable_investing_2012.pdf VGFOA - SRI 22
UN PRI The United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international network of investors working together to put the six Principles for Responsible Investment into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices. VGFOA - SRI 23
UN PRI The Six Principles Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. Principle 4: We will promote acceptance and implementation of the Principles within the investment industry. Principle 5: We will work together to enhance our effectiveness in implementing the Principles. Principle 6: We will each report on our activities and progress towards implementing the Principles. VGFOA - SRI 24
Responsible Investing Is No Longer Niche Global Principles for Responsible Investment (PRI) Signatories VGFOA - SRI 25
ESG Incorporation by Money Managers & CLLs VGFOA - SRI 26
ESG Incorporation by Investment Vehicles VGFOA - SRI 27
Leading ESG Criteria, by Assets, for Investment Vehicles VGFOA - SRI 28
Number of Shareholder Proponents 2012-14, by Investor Type VGFOA - SRI 29
Leading Categories of Environmental & Social Shareholder Proposals, 2012-14 VGFOA - SRI 30
Key Governance Issues in Shareholder Proposals, 2012-14 oboard declassification: average votes in support over 80% omajority vote requirement for director elections: average votes in support over 58% oceo/chair separation: average votes in support over 31% VGFOA - SRI 31
Shareholder Advocacy Success Stories o 25 percent of S&P 500 companies have independent board chair, up from 10 percent in 2006. o 84 percent of S&P 500 firms have adopted majority voting provisions, up from 56 percent in 2008. o 70 percent of top 195 firms of S&P 500 restrict or disclose their direct political spending, 57 percent their payments to trade associations. o Many successful withdrawal negotiations on fair employment, environmental and sustainability issues. VGFOA - SRI 32
Defining Terms Related to Responsible Investing o Socially Responsible Investing (SRI): describes an investment approach where certain sectors or business activities are excluded from the portfolio through negative screening for moral or ethical reasons. o Environmental, Social, and Governance (ESG): is the term that has emerged globally to describe an investment practice that integrates the three ESG factors that can affect companies and investors financially in the short or long term and which have traditionally been under-utilized by financial analysts and investment managers in the investment decision-making process. VGFOA - SRI 33
Defining Terms Related to Responsible Investing (cont.) o Impact Investing: investing in projects, companies, funds or organizations with the express goal of generating and measuring mission-related social, environmental or economic change alongside financial return. o Divestment: a type of exclusionary screening strategy through which investors actively exclude companies involved in some activity, country or industry from their investment portfolios (e.g., fossil fuel, nuclear, political). o Responsible Investment (RI) describes any investment approach and style that integrates ESG factors into the investment decision making process and ownership practices (voting, shareholder activism and engagement) with the aim of achieving optimal risk-adjusted returns. *There is not always a clear delineation of these approaches VGFOA - SRI 34
Thank You VGFOA - SRI 35