karina litvack - human habitat 2012
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www.fandc.com
Sustainable Investment: How active shareholders drive positive change Karina Litvack, Director, Head of Governance & Sustainable Investment
Lisbon, 7th May 2012
Agenda
F & C’s Approach to Responsible Investment
Market Drivers of Responsible Investment
What are the Hot Issues?
Case Studies
Q & A
3
F&C Investments – responsible investment overview
European asset manager with €120bn* under management
London-based Listed on London Stock
Exchange 28-year track record in ethical
and sustainable investment funds
3 *€120.1 bn as at 31.12..2011. ***Strategic partners
Overview Leading European Fund Manager
3 3
F & C’s Ethically-Screened Funds
Growing consensus that best long-term performance will come from companies that take seriously their wider environmental, social & governance responsibilities
High energy prices & awareness of climate change have spurred investor interest in clean energy & related investments
Need to meet ethical considerations that are becoming increasingly important in the minds of investors
“You cannot escape the responsibility of tomorrow by evading it today”
Abraham Lincoln
Occupy percolates up to investment world
New York
London Lisbon
5
Market Drivers Behind Responsible Investment
Systemic concerns
Investment drivers Corporate scandals and crises: downside protection Reducing risks, Spotting opportunities
Regulations & Codes: From divestment to active investment Pensions laws and codes
Corporate leadership: will investors follow?
Stock Exchanges: JSE, Novo Mercado, Borsa Italiana Star Index
Sell-side research: Integration of ESG into investment analysis
Changing Definition of Fiduciary Duty
“Where fiduciary duties apply, there is no general requirement in law for investment decision-makers to invest according to ESG considerations, but ESG considerations are relevant considerations that must be taken into account in the process of investment decision-making.
The weight to be given to ESG considerations, however, is for the investment decision-maker empowered to make discretionary investment decisions in the interests of all beneficiaries.
It is not a breach of fiduciary duties per se to have regard to ESG considerations while pursuing the purposes of the trust. Rather, in our opinion, it may be a breach of fiduciary duties to fail to take account of ESG considerations that are relevant and to give them appropriate weight.”
Freshfield Bruckhaus Deringer, October 2005
A Philosophy: Shareholder Engagement
reo®: Responsible Engagement Overlay Responsible
Uses shareholder influence to encourage adoption of best practices Focuses on risk reduction and long-term shareholder value
Engagement Recognises common interests of company & shareholder Builds on constructive dialogue with companies
Overlay Does not screen out companies = no impact on portfolio construction Investment decisions driven by financial considerations
Applies to all of F&C’s equity holdings + third-party funds
9
Where do investors engage?
Environment
Environmental management Environmental standards Supply chain environmental
standards Pollution control
Waste & recycling Product opportunities
Ecosystem services Biodiversity management
Water Access to land
Climate change Emissions management &
reporting Climate change strategy Access to land
Biofuels 9
Social
Human rights Security Privacy & free expression
Community relations Weak governance zones
Labour standards Health & safety
ILO core conventions Diversity
Supply chain labour standards
Public health Nutrition
Access to medicines Product safety HIV/AIDS
Governance
Corporate Governance Remuneration Board structure
Shareholder rights Audit & control
Sustainability Management Disclosure & reporting
Governance of sustainability issues
UNGC compliance Stakeholder engagement
Business Ethics Bribery & corruption
Political influence Whistleblowing systems Responsible marketing
9
Case Study: Tackling the Credit Crunch
Engaging with banks
Banking sector has experienced a series of seismic shocks
Issue: Inadequate oversight of risk and link to pay Lack of transparency and accountable practices Disregard for systemic impacts
Action: Engage with banks – 4 key themes: Disposal of toxic assets and recapitalisation Reform of incentive structures to ensure pay-for-performance and appropriate risk-taking More robust boards that hold executives to account Cultural reform - Lobbying
Using voting rights to challenge poor practices Tackling systemic factors: Dialogue and engagement with regulators
Regulation that sets good governance standards and encourages greater transparency without inhibiting competition.
11
Aligning bank remuneration with risk
Excessive focus on Return on Equity for banks F&C pioneered Credit Quality Underpin as precondition for bonus awards Engaged over 50 banks globally To date: RBS and Barclays accept idea See F&C Viewpoint
Credit quality as a bonus underpin
“There is an underpin whereby awards will only vest if the Remuneration Committee is satisfied that risk management during the performance period has been effective and that financial and non-financial performance has been satisfactory”
“The Remuneration Committee has the discretion to reduce the vesting of deferred incentives and long term incentive awards (to nil if appropriate) if, in its sole opinion, the financial health of the Group has significantly deteriorated”
11
BP Golf of Mexico
12
Fukushima
13
Tokyo Electric Power Company - TEPCO
TEPCO and the Fukushima nuclear accident
Background In March 2011, Japan suffered a major earthquake and tsunami Fukushima nuclear power plant suffers a catastrophic safety
failure Safety failure leads to plant shutdown and subsequent rolling
power outages
14
Market Reaction Share price has fallen 80% since the earthquake TEPCO’s credit rating is downgraded by Moody’s from A1 to Baa1 and
remains under review TEPCO’s credit default swaps peaked at 400bps over risk-free, in line
with sub-investment grade risk, compared to 8bps pre-disaster
TEPCO
F&C Acts Meeting with TEPCO at Tokyo offices to discuss ESG strategy, practices
and reporting Recommendations to:
Improve independent oversight of the company through appointment of outside board directors
Enhance safety and reporting systems at key nuclear facilities Implement comprehensive climate change policy to include emissions targets,
renewable energy goals Encourage responsible consumer behaviour towards energy use
F&C leading collective engagement on behalf of UK investors to: Urge management strategies to lead business out of the crisis
Safety review and post-mortem will shape F&C’s ongoing engagement
15
ESG risks and Credit risk: BP and TEPCO
Impact of Macondo oil spill on BP’s cost of credit Impact of nuclear blast on
Tepco’s cost of credit
Source: Bloomberg.
ESG risk hits investors in the wallet
Technology and media industries
17
Since 2004, active involvement in Global e-Sustainability Initiative (GeSI) and Electronics Industry Citizenship Coalition (EICC).
EICC: de facto standard for technology hardware companies to improve labour and environmental standards in electronics factories
From an initial group of three US computer companies, now over 40 global companies throughout value chain.
Major criticism of factory labour standards of Apple’s popular iPhone and iPod
F&C engaged Apple and Foxconn, its outsourced manufacturer Encouraged both to join the EICC, implement policies and publish
factory audits. Dell introduced a comprehensive take-back programme for its
obsolete products as early as 2004.
Deforestation & Climate Protection
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Forest protection essential to safeguard rainfall and avoid soil erosion Poor government enforcement and company practices High-profile scandal linking Unilever to rainforest destruction
F&C Acts Site visits: Indonesian palm oil plantation Pressed Unilever, Golden Agri and 12 companies to curb deforestation Collaborative engagement : Forest Footprint Disclosure Project, government action
Results & Next steps Golden Agri undertaken remedial action Unilever will halve environmental footprint of its products by 2020 Consumer Goods Forum goal: zero net deforestation by 2020 78 participants in a new Forest Footprint Disclosure Project Government support for forest protection at Cancun
Market failure: “Universal investor” factors
Food & beverage companies: Incl. Access to Nutrition Index (ATNI)
Retailers and restaurants
Large employers on employee general health
Investor engagement:
The challenge: Diabetes an escalating social and economic burden
19
2007 2011 2030
15
47
China to see 80% increase in diabetes cases by 2030
Cost to health
service
($ billion)
Years
26
Global Engagement: Examples of Milestones
Russia: Novatek increased the number of independent board directors
UK: HSBC Improved board independence enhancing oversight of group risk management
US: Hewlett-Packard Supported US laws to improve shareholder influence over executive compensation
France: Danone implemented a strict policy not to market to children
Korea: Shihan Financial improved shareholder rights
India: TATA Consultancy developed capacity to lead clients in sustainability strategies
Australia: Arrow Energy committed to comprehensive biodiversity management throughout its supply chain
US: Pfizer raised animal welfare standards throughout its supply chain
Brazil: BM&F Bovespa protected the rights of minority shareholders in the Brazil Stock Exchange
UK: Petrofac actively addressed humanitarian and human rights issues in Sudan
UK: Standard Chartered incorporated climate risk into its lending criteria
NL: Heineken committed to new ideas for limiting water usage in breweries
US: Motorola introduced more energy efficient batteries into its mobile phones
Italy: Bulgari Pledged to responsible jewelry sourcing, addressing human rights concerns over conflict diamonds and Burmese gems
Japan: Mitsubishi leveraged suppliers to improve labour standards
Mexico: Alsea integrated environmental impact targets into company performance goals
Germany: Adidas joined SEDEX, an initiative to promote labor standards
China: China Telecom took active steps to eliminate corruption by enhancing employee conduct standards
Thematic investment approach
21
Mitigation
Adaptation
Supporting services
Alternative energy
Solar, wind, geothermal…
Energy efficiency
Insulation, energy demand management…
Sustainable mobility
Alternative fuels, efficient cars…
Waste
Recycling, landfill, gas capture…
Advanced materials
Bioplastics, silicon…
Forestry & agriculture
Forestry projects…
Desalination, water purity testing…
Water
New crop varieties, catastrophe insurance…
Acclimatisation
Consultancy, carbon trading...
Supporting services
Investment themes
Theme: Energy efficiency Huge untapped scope for energy efficiency
improvements Doubling the rate of energy efficiency
improvement worldwide could save energy equivalent to 2,000 coal-fired plants by 2030 – and save consumers $500bn/yr
Governments are becoming increasingly bold in their approach, using regulation to set minimum standards in buildings and products (e.g. EU action on the old-style lightbulb)
Improvements to electricity distribution systems also critical – over $90bn of fiscal stimulus money directed towards investments in grids
22
Mitigation: Energy Efficiency and Informatica
Climate Change Rationale Running servers at higher utilization
rates means less total energy usage, which results in lower carbon emissions. Cloud data centres are also more energy-efficient compared with more decentralised systems.
Large UK companies that use cloud computing could reduce CO2 emissions associated with their IT estate by 50% compared to predicted levels without the adoption of this technology. This would be equivalent to the annual emissions of over 4 million passenger vehicles, and that’s the potential for UK companies alone. 1
Data is power hungry: the average data centre consumes as much energy as 25,000 households. 2
Investment Rationale Unique position in the data
integration market driving a major secular growth opportunity. Plays into the mega trends of cloud computing, social and mobile computing.
Embedded deeply within customer IT systems
High and resilient returns, even expanding margin through the last recession
23 1Source: Carbon Disclosure Project 2 Source: McKinsey Analysis
Waste
3.6% of global greenhouse gas emissions come from waste: largely gases from landfill sites
Recycling also offers significant energy savings compared with producing goods from new
The sector is already subject to heavy regulation (eg EU Landfill Directive). Climate change concerns are adding to the pressures
Growth opportunities include recycling and waste-to-energy projects
24
Q&A
Your Questions?
26
F&C Offices United Kingdom F&C Management Limited Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) 20 7628 8000 Fax: +44 (0) 20 7770 5487 Website: www.fandc.com Authorised and regulated in the UK by the Financial Services Authority.
United Kingdom F&C Management Limited 80 George Street Edinburgh EH2 3BU Scotland Tel: +44 (0) 20 7628 8000
Authorised and regulated in the UK by the Financial Services Authority.
United Kingdom F&C Management Limited Park Lodge London Road Dorking Surrey RH4 1QP Tel: +44 (0) 20 7628 8000
Authorised and regulated in the UK by the Financial Services Authority.
United Kingdom F&C REIT Property Asset Management Plc 5 Wigmore Street London W1U 1PB Tel: +44 (0) 20 7499 2244
F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority
United Kingdom Thames River Capital LLP 51 Berkeley Square London W1J 5BB Tel: +44 (0) 20 7360 1200
The Funds business of the F&C Group. Authorised and regulated in the UK by the Financial Services Authority .
Netherlands F&C Netherlands B.V. Jachthavenweg 109 e 1081 KJ Amsterdam Netherlands Tel: +31 (0) 20 582 3000
Regulated in the Netherlands by the Autoriteit-FM.
Portugal F&C Portugal, Gestão de Patrimónios, S.A. Rua de Campolide,372 1st floor 1070-040 Lisboa Portugal Tel: +351 (0) 21 003 3200 Regulated in Portugal by the CMVM and the Bank of Portugal.
Germany F&C Management Limited Oeder Weg 113 60318 Frankfurt Germany Tel: +49 (0) 69 597 99 080
Authorised and regulated in the UK by the Financial Services Authority
Ireland F&C Ireland Limited Block 5 Harcourt Centre Harcourt Road Dublin 2 Tel: +353 (0) 1 436 4000
F&C Ireland is regulated by the Central Bank of Ireland
United States F&C Management Limited 265 Franklin Street 16th Floor Boston MA 02110 USA Tel: +1 (0) 617 426 9050
Authorised and regulated in the UK by the Financial Services Authority
Hong Kong F&C Management Limited 66th Floor, Suite 01 The Center 99 Queen’s Road Central Hong Kong Tel: +852 3965 3160
Authorised and regulated in the UK by the Financial Services Authority.
India F&C REIT Property Management India 91 Maker Chambers VI Nariman Point Mumbai 400 021 India Tel: +91 (0) 22 2282 9430 F&C REIT India Private Limited is a wholly owned subsidiary of F&C REIT Property Asset Management LLP. Part of the F&C Asset Management Plc Group
Germany F&C REIT Property Asset Management GmbH & Co. KG Oberanger 34-36 80331 München Germany Tel: +49 (0) 89 61 46 51 0 F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority
Past performance should not be seen as an indication of future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time. F&C Group Companies may from time to time deal in investments mentioned herein on behalf of their clients. The source of information in all graphs is F&C unless otherwise stated. F&C Management Limited is authorised and regulated by the Financial Services Authority (FSA) FRN:119230. Limited by shares. Registered in England and Wales, No. 517895. Registered address and Head Office: Exchange House, Primrose Street, London, EC2A 2NY, United Kingdom. F&C Asset Management plc is the listed holding company of the F&C group. F&C Management Limited is a member of the F&C Group of companies and a subsidiary of F&C Asset Management plc. F&C, the F&C logo, REO and the ‘reo’ logo are registered trade marks of F&C Asset Management plc. F&C INVESTMENTS and the F&C INVESTMENTS logo are trade marks of F&C Management Limited. © Copyright F&C Management Limited 2011. All Rights Reserved. Neither this document nor any part of it may be reproduced by any party whether by photocopying or storing in any medium by electronic means or otherwise without the prior approval of F&C Management Limited. CN:
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