TBLI Bangkok – May 30, 2008
Afshin Mehrpouya
New York
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Innovest UncoveringHidden Value forStrategic Investors
The Environmental, Social and Governance (ESG) Implications of Sovereign Wealth Funds (SWF) in the
Capitals Markets and
Innovest’s Risk Analysis Approach to SWFs
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Innovest is an investment research and advisory firm which focuses on “non-traditional,”
drivers of investment risk and returns, including companies’ performance on
environmental, social, and strategic governance (ESG) issues.
Core products
Company profiles and ratings
Sector reports
Carbon Beta™ Impact Analysis
Global Compact Screen
Carbon Audits
Sustainability Audits
Research coverage:
- 2300 companies globally
- 70 MSCI industry sectors
Headquartered in New York with 7 offices in 6 countries in 4 continents.
8 out of the top 25 global asset managers in the world use Innovest research.
70 clients globally including: UBS, HSBC, SSgA, ING, ABP, BNP Paribas, CalPERS
Ranked # 1 independent research provider by 2006 & 2007 Thomson Extel Survey
Introduction to Innovest
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Sovereign Wealth Funds – A perspective
SWFs are large pools of capital controlled by a government and invested in private markets (abroad?), against which the government has no external liability
What are they?
Different from:
•Pension funds
•Government owned and/or managed companies
•Central Banks / Foreign Reserves
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S
Then, why are they in the spotlight?
– Commodity price boom
– Credit crisis
– Increased risk appetite of national governments
– A few highly publicized exposures
– Weaker US Dollar
– SWF move from diversified small shares, to large transactions
Sovereign Wealth Funds – A perspective
Are they a new phenomenon?
Source: Various - SWF websites, IMF, etc. – upper estimation limits in all cases
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Government surplus from commodities ( e.g. Kuwait Investment Authority, Abu Dhabi Investment Authority, Chilean Sovereign Wealth Fund)
Non-commodity surpluses [e.g. CIC (China), GIC & Temasek (Singapore)]– Usually aimed at exchange rate or inflation control
– Usually a debt in local currency from central bank to the fund
Other sources of government surplus
– Privatization (Australian Sovereign Wealth Fund)
– Superannuation support (New Zealand Superannuation Fund)
Sources of capital
Sovereign Wealth Funds – Risk and Opportunities
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Some of the larger transactions:
Sovereign Wealth Funds – A Perspective
Source: Various; SWF websites and news sources
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How large are they?
Sovereign Wealth Funds – A perspective
Source: Morgan Stanley; Sovereign Wealth Funds: A Growing Global Force in Corporate Finance
USD 12 trillion by 2012, given the historical levels of foreign reserve growth and launch of new SWFsSource: IMF Global Financial Stability Report
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Intergenerational Savings (e.g. Norwegian Government Pension Fund, Kuwait Investment Authority, etc.)
– Long term
– Strict government withdrawal covenants
– Lower return pressure Oil Stabilization Fund (e.g. Russian Oil Stabilization Fund)
– Short to medium term
– Low risk tolerance
– Need higher liquidity Reserve Investment Entities [e.g. China (CIC), Singapore (Temasek, GIC), etc]
– Mostly non-commodity surpluses
– Need higher returns
– Higher risk tolerance Development funds (e.g. Nordic Development Fund, European Development Fund, etc.)
– Goal oriented
– Not return focused
– Small relative size
Fund Mission
Sovereign Wealth Funds – A Perspective
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I
Categories and risk appetites
Sovereign Wealth Funds – A Perspective
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We believe SWFs can be significant source of extra-financial opportunity and risk primarily to the community of their investees and co-investors, and ESG
research can offer them significant benefits.
Why is Innovest concerned?
Sovereign Wealth Funds – A Perspective
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Mission Quality of management Long term vs. short term Active vs. passive Economic vs. strategic mandate Return requirements National values
Factors defining behaviour
Sovereign Wealth Funds – Risk and Opportunities
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Oil stabilization funds
– Hedging against oil risks through investing in Clean Energy All long term funds
– Long term perspective resulting in higher regard for environmental, social and governance (ESG) performance of portfolio
• Norwegian GPF, NZ SWF
– Commitment to engagement aiming at improving environmental and social performance based on diffusion of national values
• Norwegian GPF, NZ SWF
– Privileged access of the investee to additional liquidity
Key opportunities
Sovereign Wealth Funds – Risk and Opportunities
Norwegian Government Pension FundThe overarching objective of the active
ownership effort is to safeguard the financialinterests of the Pension Fund. The ethical
guidelines are premised on favorable returns over time being dependent on sustainable development, in the financial, ecologic and
social sense.
Source: NPF Report to Storting 2008
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All non-transparent funds
– Influence aiming at non-economic gains
• Conflicts with the economic objectives of co-investors and the investee
Passive SWF Investors
– Dilution of shareholder voting power
Stabilization and local currency debt funds
– Possibility of short to mid-term sovereign wealth investments
• Instability in the target firm and/or capital markets
All SWFs
– Lack of sufficient outsourcing management or internal management skills
• Unpredictable fund behavior both on portfolio adjustments and engagement
Sovereign Wealth Funds – Risk and Opportunities
Key Risks
CIC has invested USD 5 billion in Morgan Stanley and 3 billion in Blackstone without demanding any
managerial role and claiming passivity.
Furthermore it declined the offer of a board seat offered by UBS, though it may exercise its voting
stake in some cases
Source: Financial Times
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Sovereign Wealth Funds – Risk and Opportunities
Best practices: Norwegian Government Pension Fund - Global
Capital Markets
Source: Petroleum
Stated type: Trans-generational saving
Size: USD 328 billionSource: Norwegian Ministry of finance
Norwegian Ministry of
Finance
Active and Long
Negative Screening based on national values
ESG engagement
Discloses Portfolio
‘The fiscal rule’ for withdrawal
which is mostly limited to fund
returns
Norges Bank
Portfolio highly diversified;
maximum ownership threshold set to 10% ( increased from 5% in 2008)
Design of index
portfolio
And Guidelines
Outsourcing of
Management Quarterly public reports
Annual public reports
Storting
(Parliament) SWFOil revenues
Council of Ethics
Guidelines and Supervision
Key areas for improvement:
No proxy voting disclosure
Lack of independent executive board for the fund exposes it to short term political volatility
Guidelines Recommendations
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Investment Guidelines (including Negative Screening)
Sovereign Wealth Funds – Risk and Opportunities
Best practices: Kuwait Investment Authority
Capital Markets
Source: Oil
Stated type: Trans-generational saving
Size: USD 213 billionSource: IMF
Board of Directors (Kuwaitian Ministry of Finance)
No withdrawal right without parliamentary
ratification
SWF
Internal Audit
National Assembly
Reports
Annual Closed doors
presentation of full activity
External Asset Managers
Daily / Monthly / Quarterly
private reportsExternal Audit
Executive Committee
Assist in Strategic goals and Objectives
10% of Annual Oil Revenue
Active and Long Term
Commercially driven
Investments (stated)
Key disclosure gaps:
No portfolio disclosure
No investment process disclosure
No ceiling on percentage of shares
Lack of transparency on external managers and quality process
No Proxy voting disclosure
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Sovereign Wealth Funds – Risk and Opportunities
Innovest’s SWF opportunities and risks analysis platform
Investment time horizon
Stated Investments horizon / type of reporting in national accounts
Scale of influence on the investee
Passive or active
Frequency of portfolio adjustments Percentage of shares
Regulations for withdrawal of money from the fund Voting rights
Economic mandate
Stated mandate Seats on the board
Transparency of the investment process Type of government
Independence of Board of Governors
SkillsInternal & external management teams and control processes
Type of legal entity
Environmental and Social Opportunities
Specific E&S investments Mandate
Degree and type of dependency on external entities
E&S Engagement practices
Proxy voting analysis
Ethical risks Mitigation
Code of ethics
Portfolio transparencyEthics governance platform
Portfolio deviations from market (the visible portion)
Portfolio analysis for inter-investee conflict of interests (the visible portion)
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SWF comprehensive report
– Comparative opportunities / risks analysis
– Analysis of best practices
SWF profiles and ratings
– Detailed factor analysis
– Relative rating
– Outlook
Sovereign Wealth Funds – Risk and Opportunities
Innovest’s SWF opportunities and risk analysis products
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Afshin Mehrpouya
Senior Analyst - FranceInnovest Strategic Value Advisors
Tel: +33 (0)1 44 54 04 [email protected]
www.innovestgroup.com
Thank you.
Perrine Dutronc
Managing Director - FranceInnovest Strategic Value Advisors
Tel: +33 (0)1 44 54 04 [email protected]
Bill Hartnett
Managing Director - Asia PacificInnovest Strategic Value Advisors
T: +61 2 9940 [email protected]