mpc/presentations/rin.ppt sustainable & responsible investment université paris-dauphine...

Mpc/presentations/RIN.ppt

Sustainable & Responsible Investment

Université Paris-Dauphine

SESSION 2

Marion de MarcillacHead of Research

EUROSIF

January – March 2010Paris

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Session 2 - Agenda

• Session 1 Recap

• ESG Criteria, Corporate governance & SRI

• SRI Strategies & emerging trends

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WHAT KIND OF SUMS ARE WE TALKING ABOUT?

• In 2008, Eurosif has estimated the European market to be at EUR 2.7 trillion.

Sustainable & Responsible Investment

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• A PLACE WHERE FINANCING IS PROVIDED BY INVESTORS TO COMPANIES OR GOVERNMENTS - WHERE COMPANIES & GOVERNMENTS FIND MONEY TO FINANCE THEIR PROJECTS

• What are: Equity, Bonds, Mutual Funds.

• WHAT IS RISK?

• What are investors? Retail / Institutional investors.

• What are intermediaries?

What are financial markets?

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KEY PRINCIPLES• Values advocated in line with their time

• From the start, profitability remains a central issue• Public awareness of SEE issues• New players, New products, new Laws

History of SRI

•RELIGIOUS•RELIGIOUS •ACTIVISTS•ACTIVISTS •MAINSTREAM•MAINSTREAM

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Over time, many people have come to realise that how they invest their money has consequences beyond

profit. Financial investment has become POLITICAL.

History of SRI

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Session 2 - Agenda

• Session 1 recap



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• Moral dimension: immediate.

“ How do I see the world?”

-> from alcohol to human rights

ESG Criteria: Moral Dimension

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• Sustainable dimension: Long-term questions:

“What world do I want for my children?”• Bruntlandt Definition

-> Environment, education, human resources, etc.

-> Idea that long term matters also impact the companies themselves

ESG Criteria: Sustainable Questions

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“...Individual companies also provoke debate inside the industry. Hawken faults

SRI funds that hold McDonald's because of the fast-food chain's "atrocious

labor record" and its marketing of unhealthy food to kids. But SRI fund

managers praise McDonald's for its exemplary environmental practices,

willingness to offer healthy food choices, and workplace diversity.”

Is agreement possible ?

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• Environmental, Social, …Governance?

• Inherent part of SRI because...

Why Corporate Governance?

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• Renewed awareness due to recent scandals: Enron, Parmalat...

• Corporate Governance is the vehicle of shareholders’ rights.

• CG covers the accountability and control mechanisms that govern the relationships among shareholders, management and stakeholders of a company.

• Creating accountable process, rather than setting standards

What is Corporate Governance?

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• Board Composition

• Board remuneration

• Shareholders’ right to information

• Shareholders’ right to file resolution

• Shareholders’ voting rights

• Control mechanisms

Ok, but what is corporate governance?

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As an investor, it defines your rights as an OWNER.

• Greater accountability = Long Term development

Risk prevention = stakeholder protection

• Enabler of SRI policy: disclosure, filing resolutions, voting = allow engagement & Voting.

• CG and Environmental & social are non-material risks associated in the mind of many analysts

So, why does it matter to SRI?

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• ESG issues

• Fall out of the realm of traditional financial analysis

• Non financial (but financial)

• Are long term issues

Extra financial issues

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• Identify it as a “No-go”?• Identify it as a risk or opportunity?• Measure it?• If risk: know alternatives ?• What to tell companies?

What to do with ESG issues?

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Agenda

SESSION 2:

• Session 1 recap



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• Many strategies are available

• Each strategy has benefits and limitations

• Not mutually exclusive

SRI Strategies

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Available strategies

Negative screeningNegative screening

Positive screeningPositive screening VotingVoting

EngagementEngagement

Combined strategiesCombined strategies

IntegrationIntegration

PRE INVESTMENTPRE INVESTMENT INVESTMENTINVESTMENT DIVESTMENTDIVESTMENT

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• Also called Exclusion

• Barring investment in companies, sectors, countries

based on ESG criteria

• “Historical” form of SRI : ‘Sin stock’, Anti-apartheid Campaign

Negative screening: what is it?

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• Eliminate a very specific risk• Make an ethical statement• Effective communication (good marketing)

• May increase risk and reduce diversification of portfolios

Negative screening: why do it?

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• Select investment universe• Select screen• Select tolerance level of screen (ex: share of company’s

activity)

Ex1: retail and alcohol

• Apply screen to investment universe• Use traditional financial analysis to create portfolio

Negative screening: how do you do it?

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• Some investors use “Ethics Committees”• These apply their judgement on a case by case basis• Meet every year or more regularly and review contents of

portfolio• Example: Norwegian Government Pension Fund Global

Negative screening: how do you do it (2)?

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• Standard practice for retail in US (from tobacco to elaborate screens)

• Exists in Europe• Retail, Religious products• Norms-based screening in Scandinavia • Dutch pension funds • Most institutional investors avoid negative screening unless

they have a consensus or historical reason to do so

Negative screening: who does it?

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Insight: European Ethical Fund (from quarterly report):

“ your money will be invested in a well-balanced spread of European and UK companies, which after being analyzed using EIRIS screens are deemed to be ethical in their practices. These criteria include: gambling, human rights, animal abuse and damage to the environment.”

Negative screening: Product examples

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The FTSE ISS Corporate Governance series.

Joint FTSE and ISS project ("FTSE ISS Corporate Governance Index Series")

• "to exclude the highest risk companies in each separate market".

• Membership will depend on a corporate governance rating which will be

calculated by ISS

• The 20% of companies with the lowest rating in each of 18 "supersectors" will

be excluded

Negative screening: Product examples

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• Norway’s Government Pension Fund Global• Manages EURO 250,000,000,000• Has exclusion criteria, including “contribution to manufacture of nuclear

weapons”• In 2005, Council on Ethics decided to exclude 7 companies:

BAE Systems, Boeing, Finmeccanica, Honeywell, Northrop Gruman, Safran SA, United Technologies

• Ten other companies blacklisted in 2005 for producing cluster bombs• 2006: Walmart.• September 2008: Rio Tinto

Negative screening: Council on Ethics examples

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US Mutual Fund Screen Types ($ Billions)

10.3

11.2

14.1

16.6

22

23.8

28.8

28.9

31.1

93.4

124

0 20 40 60 80 100 120 140 160

Community Impact

Human Rights

Other*

Products/Services

Equal Employment Opportunity

Defense/Weapons

Gambling

Environment

Labor Relations

Alcohol

Tobacco

Total Assets (billions)

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European Simple Exclusions breakdown ($ Billions, 2005)

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• “Positive screening is the selection, within a given investment

universe, of stocks of companies that perform best again a defined set of

sustainability or CG/SEE criteria.”

• Multiple criteria usually lead to one company rating

• Most popular form is Best-in-class: maintain sector balance

• Pioneer screening: best of the best /theme funds

• Importance of sustainability and triple bottom-line

• Increasingly applies to bonds

Positive screening: what is it?

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• Very popular in Continental Europe

• Extremely popular in France (Here, SRI = best-in-class)

• Systematic “360°” approach

• Criteria apply to largest number of companies

• Clarity = accountable

• Risk: exposure if investment universe is small

Positive screening: why do it?

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• Social

• Environment

• Consumers/Suppliers

• Governance

• Community Involvement

• Human Rights

Positive screening: Criteria?

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1. Select Investment Universe (large cap Index)

2. Apply ESG screen. Retain top X%

3. Apply traditional financial analysis

4. Adjust sector weights to reproduce original index

5. Best-in-class SRI portfolio!

NOTE: steps 2 and 3 can be inverted

Positive screening: how do you do it?

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• Some pension funds run test portfolios (Netherlands)

• Epargne salariale (Label CIES) in France

• Large retail offer in continental Europe

• Almost non-existant in the US

Positive screening: who does it?

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HSBC AM Valeurs Responsables

"Géré par HSBC Asset Management (Europe)SA, c’est un fonds actions investi dans des grandes valeurs européennes reconnues socialement responsables. L’univers d’investissement est défini au travers de deux filtres: quantitatif, avec un biais social et environnemental, puis qualitatif. La constitution de cet univers repose sur les données Vigeo et les recommandations de notre analyste ISR. Le choix des valeurs est effectué

par le gérant en fonction de ses anticipations".

Positive screening: Product examples HSBC

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37


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• Axa-IM: accent on internal team• Product designed for Epargne Salariale• « Offre Labellisée »

Positive screening: Product examples AXA

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• “Influencing corporate policy by virtue of the position as investor and the associated rights”

• Link to Corporate Governance: Rights of owners/investors• Right to vote / right to ask questions / right to propose

resolutions at AGM• Also called ACTIVE SHARE OWNERSHIP• Sometimes called shareholder activism

Engagement: what is it?

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• TWO POTENTIALS OBJECTIVES:• Engagement for the purpose of analysis• Engagement for the purpose of influencing companies

• THREE LEVELS• general dialogue• proactive stance regarding an issue (identified by

investor)• reactive dialogue: crisis management

Engagement: why do it?

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• What do I do once I own the stock?• What do I do if I cannot avoid investing in stock?• Engagement does not affect stock selection• It keeps all investment options open (fiduciary duty)


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• A tradition of engagement in Corporate Governance• A variety of means of dialogue (meetings, letters)• Dialogue with companies = access to special information• Strongly encouraged by some Post Enron regulations (UK, NL)

• Downside: intrinsically limited by human factors. • Covers less issues and less companies

(Cannot dialogue with every company in a portfolio on every topic)• Poor transparency


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Private methods:• routine meetings between investor and management• writing letters• Arranging special meetings• sharing concerns with other shareholders• Building alliances with like-minded investors

Public mechanisms:• Attendance at Annual General Meetings• Filing shareholder resolutions• Exercising voting rights• Issuing press briefings

Engagement: how do you do it?

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• Mostly institutional

• Very popular among British pension funds (Hermes)

• Increasingly part of other funds strategies

• Very popular in US, where social dialogue is poorer than in Europe

• Can be practiced directly by Shareholder

Engagement: who does it?

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Engagement in Europe

State of Local Activism Country

Established market culture for institutional investors and many fund managers

UK, Irland.

Driven by a limited number of activist players

Denmark, Netherlands, Sweden and Switzeralnd (PF or Inst. Inv.)

Austria, France, Germany, Italy (research organisations, fund managers)

Greece (institutional investors)

Driven by strong small shareholder associations

Denmark, France, Germany, Netherlands

Rather non existant Other countries

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“reo® is applied to all equity portfolios managed by F&C, as well as to the portfolios of several F&C clients whose funds are managed either in-house or by third parties.

The companies held in F&C and external client portfolios are reviewed to assess the most significant concerns related to corporate governance, social, environmental and ethical (SEE) practices. Individual companies are then prioritized for inclusion in one of the thematic engagement programmes - such as executive remuneration policy, climate change or corruption - or for one-to-one relationships.”

Engagement: product example REO (F&C)

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“Each year, in consultation with our fund managers, external experts and clients, we prioritise key governance, social and environmental issues on which we wish to engage companies. We are currently pursuing the following issues:”

Governance

· Corporate Governance & Voting · Transparency & Performance · Bribery & Corruption

Environment· Biodiversity · Environmental Management & Climate Change

Social

· Human Rights · Labour Standards


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Reactive engagement

“In addition to the above activities, which are planned and executed over several years, F&C closely monitors emerging issues and responds immediately when incidents are deemed to pose a threat to its portfolios or raise concerns that are relevant to the companies it holds. Such 'reactive' engagement is regularly featured in our quarterly reo® reports. A list of recent examples is below”

· BP - Health & Safety

· Statoil - Bribery & Corruption

· Glaxo Smithkline - Executive Pay

· Telecom Italia - Merger with Olivetti

· HSBC - Household International and Irresponsible Lending Practices


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Priority sectors

In addition to the thematic areas outlined above, which cut across several industrial sectors and geographical regions, we also focus activity on selected key sectors where emerging governance or other issues pose a significant concern. Current projects include:

· Information and Communication Technology (ICT)

· Banking

· Pharmaceuticals


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Engagement topics from Insight

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Exemple: Calvert ($13 milliards)

Contexte: • Un des premiers fonds de pension à s’être engagé sur les

considérations ESG.

Principes d’engagement: • Chaque année, Calvert se concentre sur quelques problématiques

Fonctionnement:• Calvert utilise les méthodes suivantes: dialogue direct, soumission

de résolutions aux AG, coalitions (Carbon Disclosure Project), lobbying.

• Certaines résolutions sont retirées, à la suite de négociations avec l’entreprise.

Exemple de résultats:

• Gap & les conditions de travail des fournisseurs.

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• An opportunity given at an Annual General Meeting• It’s becoming a duty in light of many recent scandals• Often part of an engagement strategy, but can be

(and is often) practiced on its own• Mostly applies to Corporate Governance, but ESG activists

have ways

Voting: what is it?

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• Key means of expression for shareholder• Media coverage of crises can highlight issues at companies

• Problem: votes often non-binding for management = indicative

• Voting alone is not a very activist stance• Every shareholder does not have a voting right!

(one share one vote one dividend principle)

Voting: why do it?

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• Need Voting policy

• Use of advisory services (Riskmetrixs, etc)

• Need presence or representation at AGM

Voting: how do you do it?

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• An increasing number of institutional investors

• Small investor defense groups

• Union policies for pension funds

• Asset Managers increasingly publish voting policies and

records (regulatory pressure)

Voting: who does it?

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• Leverage the potential of each of the previous strategies

• Use all available means:

• Negative screening for sectors that investor refuses to support

• Best-in-class to ensure criteria application over all investments

• Engagement to tackle specific issues and get to know companies

• Tackle both bonds and shares

Combining strategies: what is it?

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• Combinations are becoming more popular

• ESG indexes mix negative and positive screens (FTSE4Good,

DJSI)

• Voting as an add-on to engagement or to all other strategies

• ALL-IN-ONE (see case study)

Combining strategies: who does it

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• Ethos foundation caters to Swiss pension market• Manages seven portfolios• Uses rating agencies, Asset Manager and Inside team for Engagement

• 4 mixed negative screening/best in class/engagement share portfolios• 1 CG oriented engagement portfolio (Swiss shares)• 2 screened bond portfolios

Ethical exclusions, Sustainable best in class, Engagement and vote on Corporate Governance

www.ethosfund.ch

Combining strategies: ETHOS foundation

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• Pooling resources: lower cost

• Pooling resources: more shareholder power

• Learn together

• Very common on Corporate Governance

• Unions are taking the lead (UK, International)

Emerging trends: Collaborative engagement

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• ICGN, ISC, GIGN on CG

• IIGCC,Carbon Disclosure Project

• Rio Tinto Union Campaign on Minimal Labour Standards

• PRI engagement platform

Emerging trends: Collaborative Engagement

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• A growing number of Asset managers integrate ESG risk or opportunity into their fundamental analysis. Profit rather than sustainability

• Helps coping with increasing regulatory pressure

• Morley, Henderson, Allianz Dresdner AM are leaders.

• Maybe quantitative or qualitative, normative rather than screening

• May feed back into engagement process

Emerging trends: integration

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CONCLUSIONS• There are different available tools• There is a myriad of very specific products • There are numerous country specificities• Markets are growing• Those tools can always be sharpened• The doors are open to new ways

Strategies - Conclusions

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SRI Strategy Evolution

Screening and best of class approach

Socially responsible funds :USA, Canada, UK, Switzerland,

Northern Europe

Sustainable Development Funds :France & Belgium

Best of class approach

Environmental Funds :Germany, Northern Europe, Switzerland

Environmental criterias

1928 1980 20081970

Screening criterias

Ethical Funds :USA Europe

1990

EngagementEngagement Overlay:UK, NL, BE

IntegrationIntegration:UK, NL, FR

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6 groups – An investor has 10 million euros to invest in “SRI” and ask you to propose a fund of SRI funds.

15-20 min presentation by group as if you were “pitching” in front of the investor- Presentation of the fund of SRI funds (at least 4 funds)- Description in term of SRI strategies used, asset classes, geography, track

record, etc- Justify your choice (what is your rationale?)(you will need to make up the profile of the investor and his/her expectations)

Source of information: novethic.fr, jepargne-utile.com, eurosif (SRI funds service + transparency guidelines), eiris green & ethical fund directory)

+ individual written assignment (2 questions – 1 page long total):“Quelle(s) leçon(s) tiez-vous de l’exercice de construction d’un fonds de fonds ISR?”“Investiriez-vous dans un fonds ISR? Argumentez”

Evaluation

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Contact Details

Eurosif

La Ruche – 84 quai de Jammapes

75010 Paris FR

Main 33 (0) 1 40 20 43 38

[email protected]

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