24 April 2014

Accentuate the Positive(s)

Presented by Neville White – Head of SRI Policy & Research

Ecclesiastical Investment Management Ltd.

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Ecclesiastical Investment Management Ltd

Part of the Ecclesiastical Insurance Group founded 1887

Owned by All churches Trust – all distributable profits to good causes

Top 10 UK donor – strategic plan to donate £50m over three years

Ecclesiastical launched its first SRI UK retail fund in 1988

Suite of six ethical retail and charity funds – across geographies and asset classes

Total Assets Under Management £2.25bn*

Award winning, experienced team with a strong retail proposition

*Source: Ecclesiastical as at 31/12/13

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Investing Positively

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The Many Models of SRI

• SRI is an umbrella term which encompasses many approaches including ethical, responsible, sustainable, and environmental, social and governance (ESG)

SRI FUNDS

TRADITIONAL ETHICAL(FAITH BASED) FUNDS

ESG FUNDSBEST IN CLASS

THEME FUNDS(CLIMATE CHANGE)

ENVIRONMENTAL FUNDS

Positive criteria emerge after 2000 following changes to UK pensions legislation

Negative criteria ‘ethical’ adopted by faith investors applying a moral dimension to investing

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• Applying negative criteria is (relatively) straightforward

• Identifies moral imperatives, but adds little value to process

• Does not allow investor to work for change

• Does not allow engagement to raise business standards

• What would a sustainable tobacco company look like?

Applying Positive Criteria to a Portfolio

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• Holistic, integrated investment methodology

• Represents a ‘complete’ active strategy

• Material ESG risks should be seen as core management issues

• Adds value

• Reduces long-term risk

• Supports long-term investment horizons

• Provides engagement platform for change

• Dovetails with wider UK Stewardship Code responsibilities

Advantages of Applying Positive Criteria to a Portfolio

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Our SRI Process – an Integrated Approach

Negative Screen

Positive Screen

Engagement

Decision

Monitor & Review

Negative Screen

10% Threshold:

Alcohol Production Gambling Operations Pornographic or Violent

Material Strategic Armaments Tobacco Production

Other Factors:

Animal Testing (cosmetics) Intensive Farming

Positive Screen

Business Practices Community Relations Corporate Governance Human Rights Labour Relations Environmental Management Healthcare Education Urban Regeneration

Positive criteria may serve as a brake on investment; e.g. no oil or mining

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Our Nine Positive Investment Pillars

Positive Screen

Business Practices Community Relations Corporate Governance Human Rights Labour Relations Environmental Management Healthcare Education Urban Regeneration

• Each stock is monitored and assessed against the nine positive criteria

• Essentially we are looking for each stock to earn its place in the portfolios

• The investment case and the sustainability case are given equal weight

• Six areas of business behaviour (risk)

• Three sustainable sectors

• Identifies engagement need

• BUT how do you assess the environmental, social and governance positives?

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Evaluating Environmental, Social and Governance (ESG) Positives

Environmental Social/Governance Air & Water Pollution Access to Medicine

Biodiversity Affordable Healthcare

Ozone-Depleting Chemicals Equal Opportunities

Pesticides Bribery & Corruption

Climate Change Health & Safety

Resource Productivity Human Rights

Environmental Management Child Labour

Energy Labour Standards

Transport Supply Chain Management

Tropical Hardwood Community Giving

Nuclear Power Community Initiatives

Mining & Quarrying Corporate Governance

Waste & Toxic Chemical Management Diversity

Water Management Executive Remuneration

• Unlike negative criteria, positives can be subjective and challenging

• Materiality, and risk weighted factors of primary importance

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Research, Research, Research

• EIM employs Sustainalytics as its principal ESG data research provider

• One of several distinctive ESG providers that analyse ESG risk (EIRIS; MSCI etc.)

• Quantitative and qualitative data; controversies monitor; peer group ranking; ESG ratings

• Provides first stage ‘data dump; and materiality analysis

• Secondary research conducted in house including engagement

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Investing in Bullion – is it Ethical?

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Investing in Bullion – is it ethical?

• Mining and extractives avoided as part of failing positive criteria tests

• Fund managers had appetite to invest in an ETF bullion fund for diversification reasons

• Ethically, bullion could be viewed as ‘benign’ i.e. a store of value

• But we asked – where does the gold come from and is it ethical?

c40% of supply is recycled

c15% is artisanal or illegal

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The rise and rise of Gold ETFs

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Gold - Utility

• Whilst gold does have multiple applications its principle utility is investment

• Gold is effectively a ‘parallel’ currency and highly portable

• Gold is unique in that it is extracted principally as a “store of value”

• Held as bullion in State and national reserves and as private wealth

• Half of all gold entering the supply chain is directed at the jewellery industry

• Only 10% is used for industrial and electronic purposes

• Ethical utility given health, safety, conflict and environmental impact is low

• Precious metal mining (gold and coltan principally) is fuelling conflict

• Traceability challenges fuel phenomenon of “dirty gold”

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Gold - Traceability

• Gold supply chain is not linear

• “Scrap gold” may be recycled, pre-owned, laundered

• Gold can be owned by many participants within the supply chain

• “Dirty gold” has become an industry issue owing to traceability concerns

• Mine supply is broadly traceable apart from unregulated artisanal mines (15%)

• Integration of mining and refining provides some assurance

• Industry is beginning to coalesce around reputation and “conflict free” gold

• Chain of custody is vital – i.e. integrity of inventory, bar serial numbers

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Gold – Ethical Issues

• Gold is a primary conflict mineral particularly in Democratic Republic of Congo

• 2007 Uganda produced $500 worth of gold, but exported $75m mostly from DRC

• Specific ethical challenges associated with gold are –

- human rights issues in high impact emerging markets – Congo, Burkina Faso, Mali etc (up to 15m enslaved)

- toxicity: gold is benign but requires cyanide in refining; tailings require intense management

- corruption – the industry is open to bribery, theft and forcible sequestration risk in theatres of conflict

- gold produces more waste per ounce mined than any other metal e.g.

• at state of the art Newmont Mine in Indonesia one ounce of gold is recovered from 250 tonnes of rock

• one ring generates 20 tonnes of mineral waste

• smelters add 142 million tonnes of sulphur dioxide to the atmosphere every year – 13% of global emissions

- the disparity between environmental impact and the amount recovered is at its starkest with gold

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Gold – Accentuating the Positive

• We engaged intensively with the World Gold Council

• The only investor to engage with the WGC on conflict free gold

• Industry increasing its efforts around eliminating the worst practices

• Kimberley rejected as a model as gold is not easily identifiable

• Industry started from scratch on a new verification and accreditation standard

• Conflict Assessment

• Company Assessment

• Commodity Assessment

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Gold – Accentuating the Positive

• EIM led investor engagement with WGC on global conflict-gold standard

• Held two seminars for investors in London to outline the Standard

• Offered advise on draft Standard

• Remained an informed and engaged investor throughout process

• Concluded Gold ETF could be held given the contribution of engaging

• Engagement and informed contribution significantly added value to our investment

• And all because we asked….

Is holding gold in an ETF bullion fund ethical?

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Questions and Answers

Thank You!