1 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  Importance of ESG in the Nordics §  Scope of study §  The interest in ESG §  Implementation of ESG

§  Arguments for and against ESG

§  ESG in external manager selection §  The role of external managers §  The cost of ESG §  The willingness to pay for ESG

§  A Danish study §  Management fees

§  ESG in RFPs §  Best practice in RFPs or lack hereof

§  Summation

ESG in Manager Selection Process Agenda

2 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  To uncover how European investors integrate ESG in their investment process and not least how this affects their choice of asset managers §  How do investors handle

ESG issues in the investment process?

§  36 Nordic institutional investors participated §  Response rate of 84% in the

Nordic countries

Kirstein’s pan-European ESG Investor Survey Purpose

Encompasses 81 European institutional investors: The Nordic region – Denmark, Finland, Iceland, Norway and Sweden The Benelux region – Belgium, Luxembourg and The Netherlands The rest – Austria, France, Germany, Switzerland and the United Kingdom

3 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

In  general Equity Fixed  income AlternativesDenmark 3.9 4.4 3.2 3.4Finland 3.4 3.6 2.7 2.4Norway 4.3 4.3 4.2 2.7Sweden 4.0 4.2 3.8 3.7Nordic 3.9 4.1 3.5 3.1

98%  Response  rate

§  The highest overall relevance of ESG is indicated by Norwegian investors, while the Nordic average is held back by the Finnish investors

§  High allocation to government and mortgage bonds can explain the relatively low interest in ESG on fixed income in Denmark and Finland

Relevance and importance of ESG Relevance of ESG issues

The table illustrates the relevance of ESG issues to the investors’ organization in general and on different asset classes.

4 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  The investors are driven by: §  A wish to comply with the

board’s as well as the clients’ opinions on ESG

§  The perception that ESG investments will improve the long-term investment results and at the same time reduce the risk in the portfolio

§  A belief that ESG will improve global sustainable development

Relevance and importance of ESG Arguments in favour of ESG

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Compliance  withpublic  opinion

Compliance  withclients'  opinion

Compliance  withboard's  opinion

Improve  shortterm  investment

result

Improve  long  terminvestment  result

Reduce  risk  inportfolio

Improve  globalsustainabledevelopment

The figure illustrates how important investors rate different arguments in favour of ESG.

5 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  The main arguments against ESG investments are the difficulties in interpreting what exactly ESG investments mean §  This also explains why lack of

experience is one of the main arguments against ESG

§  The cost of implementation is also an important argument against ESG investments

Relevance and importance of ESG Arguments against ESG

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Difficult  tointerpret

Reduce  short  termreturns

Reduce  long  termreturns

Increase  risk  inportfolio

Lack  of  properbenchmark

Costly  toimplement

Lack  of  experience

The figure illustrates how important investors rate different arguments against ESG.

6 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  Negative screening remains the most used ESG tool

§  Of the investors who apply positive screening, 30% also apply negative screening §  Few investors have indicated

that they solely apply positive screening

§  Active ownership is gaining ground and more than 60% of investors engage in active ownership §  UK investors are very active

when it comes to engagement and so are many of the Nordic investors

Implementation of ESG

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Negative  screening

Positive  screening

Active  ownership

Yes No

The figure illustrates which screening methods the investors employ.

Screening methods

7 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  ESG impacts the way many investors approach external managers

§  Some investors have indicated that even though ESG are of little interest in the selection process of asset managers currently it will play a role in the future

§  Some Danish investors expect ESG to be a part of the external managers’ strategy already

§  More than half of the investors leave part of their ESG decisions with their external managers §  This is in line with the fact

that many investors emphasize that managers need to be in compliance with their ESG policy, as decision-making power normally is left with the managers

External managers ESG’s impact on external management

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Nordic

Sweden

Norway

Finland

Denmark

Yes No 98%  Response  rate

The figure illustrates the impact ESG has on investors’ approach to external managers.

8 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  Compliance with ESG principles is very important

§  Most investors find that integration of ESG in the investment process is important

§  Dedicated ESG products are not seen as vital in relation to evaluating managers

The figure shows which factors the investors find important when they evaluate external managers on ESG. ‘Compliance with ESG principles’ is abbreviated from the original question which cover ‘Compliance with UNPRI/UN Global Compact or other Principles’.

External managers Evaluating managers – ESG factors

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Compliancewith  ESGprinciples

ESG-­‐relatednetwork

Monitoring  andreporting

Transparency Dedicatedproducts

Analyticalcompetencies

Integration  ininvestmentprocess

Track  record

86%  Response  rate

9 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  Investors still attach the highest relevance to performance and organization §  Is there a conflict between

ESG and returns?

§  Among the respondents, it is the largest investors that place highest relevance on managers’ awareness of ESG §  Higher than the relevance of

service

External managers Selection criteria – the relative picture

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1 2 3 4 5 6 7 8 9 10 11 12

Assets  below  EUR  10  bill. Assets  above  EUR  10  bill.

Perform

ance

Organization

Investment  team

Philosophy

Risk  managem

ent

Quality  of

research

Service

Reporting

Flexib

ility  and  

responsiv

eness

Staff

Sparring

Awareness  on  SR

I

The figure illustrates the relevance placed by the investors on the overall parameters as well as the detailed parameters, divided on investors with asset below EUR 10 billion and above EUR 10 billion. The scale is 1 – 5.

10 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  Many argue that there is no conflict §  ”ESG compliant companies will perform better in the long term”

§  Some studies seem to confirm this §  Mercer

§  10 out of 16 academic studies show a positive relation between ESG and performance

§  AP7 §  Covers 21 academic studies looking af E(nvironmental) and S(social) issues and

concludes that there is no correlation between ESG and performance

§  Thus being ESG compliant is easy and does not involve difficult choices! §  Do we agree?

§  Well, we seem to have our doubts §  Why should a smaller universe result in higher returns?

§  Other very simple comparisons seem to contradict the positive attitude §  Two good managers

§  And what is the economic effect of activism? §  Will we ever know? §  The direct impact is difficult enough to gauge

ESG and performance Is there a conflict between ESG and returns?

11 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

Ethical versus non-ethical funds Relative performance

85

90

95

100

105

BankInvest  Basis  Etik  (SRI)  compared  to  BankInvest  Basis Aberdeen  Ethical  World  compared  to  Aberdeen  Global

Accumulated  excess  return

12 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

Willingness to pay for ESG What do Danish pension funds say?

0%

5%

10%

15%

20%

25%

30%

35%

40%

Accept  any  givenconsequence

Accept  substantially  lowerreturn

Accept  marginally  lowerreturn

NOT  willing  to  acceptlower  return

Does  not  know/unsure

AP MP PJD Total

13 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  90% of investors are only willing to pay 0 – 5 basis points for customized ESG management

§  This indicates that investors demand additional services from the managers without necessarily being willing to pay

Willingness to pay for ESG Customized ESG management

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total  sample

UK

Germany

France

Benelux

Austria/Switzerland

Nordic

Sweden

Norway

Finland

Denmark

0  bp 0  -­‐  5  bp 5  -­‐  10  bp 10  -­‐  20  bp above  20  bp 60%  Response  rate

The figure illustrates the investors’ willingness to pay for extra customized ESG management offered by external managers.

14 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  What are the requirements in RFPs? §  So far there is little attention to ESG in RFPs

§  Few Nordic investors prioritize this

§  Best practice is (close to) none-existing §  The majority of managers answer with clichés or empty words

§  Examples: §  Please provide a description of your ESG guidelines:

§  “Optimizing the return of clients’ investments is XX’s primary objective. Ethical considerations are part of the investment decision making process along with other factors that can influence return”

§  “In matters of social responsibility XX follows national legislation and the guidelines set by the Danish Ministry of Foreign Affairs”

§  “For the time being we have opted for a solution whereby we will be looking at clients’ needs on an individual basis, and apply their ESG requirements accordingly. We do, however, co-operate closely with GES Investment Services which is Northern Europe’s leading research and service provider for Responsible Investments. GES is responsible for screening each buy and sell decision we make prior to its implementation”

ESG in external manager selection Evaluating managers – RFP’s

15 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  Why is there so little attention to ESG and the consequences hereof relative to risk management?

§  What should managers do in relation to RFPs? §  Be very specific in your answers §  Give examples of your approach to ESG, how does ESG affect your

investment process and your philosophy? §  Does ESG have a negative impact on portfolio construction and performance? §  It is fair to indicate that implementing ESG can have some negative consequences §  It is not credible only to explain the (potential) positive effect of ESG

ESG in external manager selection Evaluating managers – RFPs

16 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  High overall interest in ESG §  Compliance with board and clients. Improve global sustainable development §  Difficult to interpret

§  Understand the investor §  ESG impacts the way investors select and monitor external asset managers

§  Compliance with ESG principles and integration in investment process §  Selection criteria

§  Performance is the most important factor but ESG is gaining in importance §  The potential conflict between ESG and performance

§  Willingness to pay for ESG §  90% of investors are only willing to pay 0 – 5 basis points for customized ESG

management §  RFPs

§  You have the opportunity to influence ‘best practice’ and set the bar high

ESG in external manager selection Summation

17 Responsible Investor ESG in RFPs and the Asset Management Selection

Process

§  Nordic Investor Survey §  8th edition in 2013

§  Benelux Investor Survey §  3rd edition in 2013

§  Ambitions for the whole Europe §  DACH Investor Survey (Germany, Austria and Switzerland)

§  Pan-European Investor Survey §  ESG

§  Tailor made solutions for asset managers and investors

§  For more information please contact Head of Financial Market Research Jan Willers §  Email: jan.willers@kirsteinfinans.dk or visit www.kirsteinfinans.dk

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