Upload
others
View
21
Download
0
Embed Size (px)
Citation preview
Sagarika Chatterjee, General Manager, PRI
ESG integration by asset managers - a PRI perspective
BC Pension Forum
Vancouver, 28th February 2014
THE SIX PRINCIPLES
Signatories commit to the following:
WHAT IS ESG INCORPORATION?
Environmental, Social and Governance (ESG) factors:
Climate change, water, UN human rights conventions, remuneration
How can ESG factors be incorporated into investment analysis and decision-making?
Screening, thematic, integration or combination
Integration = inclusion of ESG factors into valuation
ESG INTEGRATION IN PRACTICE
Integrated Analysis: How Investors are addressing Environmental, Social and Governance factors in fundamental equity valuation, PRI, 2013
Integrated fundamental analysis: a method of integrating ESG factors into investment decisions
A standard research structure can be used:
EXAMPLE: ECONOMIC ANALYSIS
Newton Investment Management: water constraints in China
Key take aways:
Risks are more immediate than opportunities, particularly in water intensive sectors such as agriculture, textiles and power generation.
2012 CDP Global Water Report reveals 53% of 185 Global 500 companies (38% in 2011) experiencing negative impacts from water-related challenges including water scarcity, flooding, rising compliance costs, regulatory uncertainty and poor water quality in the past five years.
Structural steps towards sustainable economic growth may lead to costs for companies in the short term.
However sustainable governance structures support long-term investment opportunities and advantages for companies that already manage ESG factors well.
EXAMPLE: VALUATION TOOL
Citi: Adjusting the discount rate for mining stocks
Key takeaways:
Citi’s Sustainable Mining Index identified companies best positioned to create long-term shareholder value given their current sustainability profile.
Five indicators of sustainability used to adjust mining company discount rates. These indicators were mine development, country exposure, commodities extracted, the ability to control HSEE in operations and sustainability governance.
For example, Citi regarded a company’s ability to manage ESG risks as fundamental to developing mining projects on time and to budget and therefore to future earnings capacity.
Mining company WACCs were adjusted for sustainability risk and target prices revised accordingly.
SIMPLE WAYS TO ENCOURAGE YOUR INVESTMENT
MANAGERS TO INTEGRATE ESG
Ask questions in performance review meetings:
What ESG topics are on your radar in 2014?
Can you explain how ESG analysis is integrated into investment decisions?
Be clear you want more than “lip service:”
Ask for specific company examples from the last 12 months
Compare manager responses and highlight good practice
Understanding why a fund manager considered and assessed a specific ESG factor as “immaterial” provides deeper insight into the quality of analysis underway and how your portfolio is being managed
HOW COULD YOU WORK WITH YOUR MANAGERS TO
ENCOURAGE ESG INTEGRATION?
What is the context for you?
What is the funding position? Where are ESG risks and opportunities for integration?
Consider fund time horizon, ESG risk profile and time horizon, number of fund managers and resourcing
Where are you today?
Benchmark your managers, investment committee review
Develop a responsible investment policy covering ESG integration:
Implement in manager appointment, mandates and monitoring
Communicate annually on ESG integration:
Acknowledge imperfections and solicit stakeholder feedback
Input from fund managers including plans for improvements
HOW COULD PRI ASSIST YOUR MANAGERS IN ESG
INTEGRATION?
Networking with global and regional investors on good practice developments
Dedicated PRI Implementation Support Team working across asset classes
Dedicated Investor Engagement Programmes to mitigate ESG risks
Mandatory public report and confidential assessment of practices
RESPONSIBLE INVESTMENT TRANSPARENCY REPORT
RESPONSIBLE INVESTMENT ASSESSMENT REPORT
ASSESSMENT REPORT PEER COMPARISON
SUMMARY
Why ESG integration?
Understand and mitigate ESG risks that could affect investor value
How?
ESG factors can be assessed through standard models of business valuation
Asset owners are in a unique position to encourage fund managers to take account of ESG factors
Appendix
5 February 2014
FURTHER QUESTIONS ON ESG INTEGRATION FOR
YOUR MANAGERS
How do you consider ESG factors in your analysis of a country’s economic growth and macro themes that may impact a country such as resource security?
Do you assess how ESG factors affect industries, for example, through changing consumer preferences or regulatory change such as environmental legislation?
How do you assess a company’s ability to identify and manage ESG-related risks and opportunities?
How do you integrate ESG factors into the financial valuation of an investment?
How do you approach the analysis of investment risks that may have a low probability but a severe impact?
How would you respond if you identified under-managed ESG risks within the investment?
RESPONSIBLE INVESTMENT MARKET
Useful sources on the size and nature of the responsible investment market:
5 February 2014
PRI integrated analysis publication: http://www.unpri.org/viewer/?file=wp-content/uploads/Integrated_Analysis_2013.pdf
Definition of responsible investment: http://www.unpri.org/viewer/?file=wp-content/uploads/1.Whatisresponsibleinvestment.pdf
List of all PRI signatories: http://www.unpri.org/signatories
Report on how European asset owners’ responsible investment strategies: http://www.novethic.com/novethic/french-sri/investment-ethics/sri-indices.jsp
Ethical exclusions: http://www.yourethicalmoney.org/investments/
ACADEMIC RESEARCH ON ESG AND RISK
5 February 2014
Companies with high ESG scores are found to have less company specific risk (Bouslah et al., 2012; Boutin-Dufresne and Savaria, 2004; Lee and Faff, 2009; Bauer, Derwall and Hann, 2009; Oikonomou et al., 2012)
Corporations with better ESG ratings are found to have lower cost of debt and higher credit ratings (Bauer et al., 2009; Bauer and Hann, 2011; Oikonomou et al. 2011)
ESG criteria are found to provide an insurance like protection for firms in legitimacy crisis (Godfrey, Merrill and Hansen, 2009)
ESG criteria can help to improve portfolio diversification and reduce worst case risk (Hoepner, 2010; Hoepner et al., 2013)
SPEAKER BIOGRAPHY
Sagarika Chatterjee, General Manager, PRI
Sagarika joined PRI in 2013 and focuses on supporting investor implementation of the Principles
for Responsible Investment. Prior to this, she worked for 11 years on F&C Investments'
Governance & Sustainable Investment Team, where she helped build a market-leading investor
engagement service, headed research for sustainability funds and worked with fund managers
on integration of corporate governance and sustainability issues into investment analysis. She
previously held a commercial role at Kingfisher plc, sourcing timber from sustainably-managed
forests. Sagarika serves in a personal capacity on the Investment Sub-Committee of the Joseph
Rowntree Foundation. She holds an MSc in Development Studies from the University of
London, a Diploma in Management Studies from the University of Oxford and a BA in Social and
Political Sciences from the University of Cambridge.
5 February 2014