** remove from final presentation ** broken models? economics and ecosystem services a collaborative...
TRANSCRIPT
Broken Models? Economics and Ecosystem ServicesA collaborative research project between
Rick Stathers
Head of Responsible Investment
Schroders
May 2013
Neil Brown
Investment Manager
Alliance Trust Investment
Ashim Paun
ESG Investment Analyst
Newton Investment Management
2Broken Models| May 2013
Background to Responsible Investment
Integration of ESG
Broken Models
Contents
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3Broken Models| May 2013
A Brief History of ESG…
1600s 1920s 1950s and 1960s
1960s 1970s 1970s and 1980s
2000s 2006
Quakers: Methodist Church:
Shariah: Baptist Church, Sweden
PAX World Fund (US)
Europe and US
Europe UN Principles of Responsible Investment
War or slave trade
Gambling or alcohol
Alcohol, gambling, tobacco, defense, financials, pornography
First public fund excluding alcohol, tobacco, weapons
Excluded stocks related to Vietnam war
Anti-apartheid screens
National legislation in various countries implementing SRI
Key driver – ESG arrives
Traditional exclusionary SRI approach ESG appears ESG embraced
4Broken Models | May 2013
Launched in 2006
Set of 6 Principles covering:
Integration of ESG analysis intoinvestment process(e.g. idea generation, portfolio construction)
Promoting ESG disclosure amongst entities invested in
Reporting on progress towards implementing these principles(see appendix for full list of principles and Schroders compliance with them)
US$31tr AUM signed up
1,111 signatories (Schroders signed in 2007)April 2006
April 2007
April 2008
April 2009
April 2010
April 2011
April 2012
0
200
400
600
800
1,000
1,200
0
5
10
15
20
25
30
35
No. Assets under Management (US$ trillion) – RHS
Drivers behind RI Client Demand – UN Principles of Responsible Investment
Source: Annual Report of the PRI initiative 2012, UNPRI
5Broken Models| May 2013
Impacts of different RI strategies on portfolio diversification
Source: Socially Responsible Investment, A Global Revolution by Russell Sparks, Schroders 2008
Screening
Thematic Investments
ESG Integration
&
Engagement
High
HighLow
Degree of ESG
Integration
Degree of portfolio diversification
6Broken Models | May 2013
IntegrationLinking ESG issues to valuation
Source: Annual Report of the PRI initiative 2012, UNPRI
• MATERIAL ESG ISSUES
• Demand for efficient products – SALES
• Taxes reduce demand – SALES
• Droughts raise costs of raw materials – COGS
• Marketing spend needed to re brand – SG&A
• New technology needed to compete – R&D
7Broken Models| May 2013
Integrating ESG analysis into equity analysis The 5 stages of stock review
8Broken Models| May 2013
Ecosystem service questions for economists
How do you incorporate a consideration of ecosystem services into your economic models?
What impact do you estimate the current change in these ecosystem services is having on global economic performance, in terms of output, inflation and other metrics?
If you incorporate ecosystem services into your models, what is the valuation methodology you use where there is currently no market value for specific environmental goods or services?
If you have incorporated a consideration of the change in ecosystem services into your models, what are the results for your short and long-term (40 year) models?
What are your expectations of the economic response to ecosystem service changes in terms of market volatility, policy shifts and technological innovation?
If you have not addressed these factors in your models, please could you explain why not?
9Broken Models| May 2013
Ecosystem service- economist surveyResponses 2011
“this subject is too big for us to even contemplate”
“economic growth in the emerging markets will be inflationary on commodity prices, but externalities are typically underweighted”
“these factors are already integrated into our outlook”
10Broken Models| May 2013
Ecosystem service – economist surveyResponses 2012
All acknowledged ecosystem service change would have economic impact
Reluctance to put price on ecosystem services
Preferred to focus on adaptation costs than mitigation
All acknowledged limitations of GDP
Need for more data
Client demands are generally too short term