New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG

November 2008 | 1

11 novembre 2008 Designator | author 1

New Generation SRI: Making financial sense of ESG

Stewart ArmerCIO of Sustainable and Responsible Investment

Fortis Investments

| November 2008 | 2

Overview

Perverse outcomes: The climate change case

Making financial sense of ESG:Introducing the time dimensionMapping the internalisation processCompany responseWho pays the price?Market mispricing of sustainability risk & opportunities

Back testing for perverse outcomes

5 key insights

November 2008 | 3

Perverse outcomes

Fortis Investments

| November 2008 | 4

Perverse outcomes – the climate change casePhase I – Polluters Profit

0.0 €

5.0 €

10.0 €

15.0 €

20.0 €

25.0 €

30.0 €

35.0 €

janv.-05 mai-05 sept.-05 janv.-06 m ai-06 sept.-06 janv.-07 mai-07 sept.-07 janv.-08 mai-08 sept.-08

EU ETS Y07 EU ETS Y08

Fortis Investments

| November 2008 | 5

Perverse outcomes – the climate change casePolluters who should pay don’t pay

Fortis Investments

| November 2008 | 6

Global Perverse outcomes – the climate change caseFood for biofuels (feedstock price evolution)

0

2 00

4 00

6 00

8 00

10 00

12 00

14 00

16 00

18 00

Jan -0 4 M a y-0 4 Sep -0 4 Ja n-0 5 M a y-0 5 Sep -0 5 Ja n-0 6 M a y-0 6 Sep -0 6 Ja n-0 7 M a y- 07 Sep -0 7 Ja n-0 8 M ay-0 8

Fort

is In

vest

men

ts B

iofu

els

Inde

x

0

50

100

150

200

250

Com

mod

ity In

dex

FIM B IOF UEL IND EX C BOT C om m o dity In d ex

Sources: Bloomberg,Fortis Investments, période 01/01/2004 – 18/08/2008

Fortis Investments

| November 2008 | 7

Perverse outcomesSRI indexes: poor performance and exposure to CC

Dow Jones Sustainability Index / Focus on the Utilities sector

10 companies retained in DJSI Stoxx / Utilities– Centrica, E.ON, Endesa, Iberdrola, National

Grid, RWE, SVT, Union Fenosa, United Utilities, Veolia Environnement

27 companies in MSCI Europe Utilities Sector

10 companies retained in the DJSI Stoxx represent 50% of the direct GHG emissions of the MSCI Europe Utilities

DJSI Stoxx Utilities: 542 t.CO2/yMSCI Europe Utilities Sector: 1089 t. CO2/y

Average cost of CO2 emissions is higher in the DJSI compared to MSCI Europe Utilities Sector

DJSI Stoxx: EUR 1347 mn / co.MSCI Europe Utilities Sector: EUR 1043 mn / co.

November 2008 | 8

Integrating sustainability issues into finance

Fortis Investments

| November 2008 | 9

Integrating sustainability issues into finance From exclusion to integration

Exclusion Best-in-class Integration

Satisfy ethical clients

Avoid involvement in controversial activities

Not able to catch sustainability trends

Negative impact on expected return and on risk

Focus on reputation and risk

Practice driven concept

Cannot capture transition, change and technological innovations

Relatively small impact on risk (sector neutral) and return

Focus on sustainability drivers

Product driven concept

Able to capture transition, change and technological switch

Positive impact of risk/return profiles (diversification, exposure to new businesses)

Fortis Investments

| November 2008 | 10

ESGNot an investment framework

Environment:

Greenhouse Gases

Waste

Water Abstraction & Scarcity

Natural Resources Depletion

Polluting Emissions

Biodiversity

…

Social

Human Rights

Food Crisis

Toxicity

Health & Safety

Obesity

Nanotechnologies

…

Governance

Independence and Effectiveness of Board

Shareholder Rights

Compensation of Board Members

Audit Independence

Bribery & Corruption

…

Fortis Investments


Introducing the time dimension

Sources: Fortis Investments

Sustainability IssuesEMERGING MOMENTUM ESTABLISHED

Fortis Sustainability Radar™

Legislation in place

Voluntary Codes

Calls for tighter

legislation

Growing Political/ Media

Attention

Strong Scientific EvidenceSome

Scientific Evidence

Fortis Investments


Issue development




Gre

enho

use

Gas

es (E

)

Ele

ctro

Mag

netic

Fie

lds

(S)

Wat

er A

bst

ract

ion

(E)

Asb

esto

s (S

)

Nan

ote

chno

log

y (S

)

Lab

our

Rig

hts,

Hea

lth &

Saf

ety

(S)

Aud

it In

dep

end

ence

(G)

Fo

od

Cri

sis

(S)

Was

te (E

)

Ob

esity

(S)

Fortis Investments


The transition to sustainability



SUBSIDIES

Eg: Capital subsidies, grants or rebates, Feed-in tariff

FISCAL INCENTIVES

Eg: Tax credit, sales tax, energy tax, VAT reduction

PROCUREMENT DECISIONS

Eg: Public investment, loans, or financing, bidding

MANDATORY TARGETS

Eg:Tradable certificates

INCENTIVES

PENALTIES

CONSUMER CHOICE

MANDATORY STANDARDS

Time & political implication

Fortis Investments


How do companies respond?


PRODUCTSTRATEGIC

WORSTPRACTICES

BESTPRACTICES

Business Response


Companies who achieve competitive advantage through

better practices

Companies with a defensive or minimalist approach

Companies with products or services that solve the problem

Fortis Investments


How do companies respond?


PRODUCTSTRATEGIC

WORSTPRACTICES

BESTPRACTICES

Business Response


Companies who achieve competitive advantage through

better practices

Companies with a defensive or minimalist approach

Companies with products or services that solve the problem

Big-Cap Companies strategically transitioning to more sustainable

model

Fortis Investments


Investment Insight:Carbon redistribution / Who internalizes?


PRODUCT SUBSTITUTION

Potential replacement of existing products by less carbon-intensive products

BARRIERS TO ENTRY

Competitive situation on the current marketInvestments required by carbon constraint

PRICING / PURCHASING POWER

Capacity to pass carbon costs through to consumers/suppliers

CARBON EXPOSURE

ProductProduction process

KEY QUESTIONS

Fortis Investments


Sustainability insight:The right technological path (avoiding blind alleys)


PRODUCTSTRATEGIC

WORSTPRACTICES

BESTPRACTICES

Business Response


INVESTMENTOPPORTUNITY ZONE


Sustainable investor “backcasts” from future

Conventional investorConventional investor““forecastsforecasts”” from presentfrom present

Example: IKEA

Fortis Investments


Investment insightMarket mispricing of sustainability risks/opportunities


PARAMETERS ARE NOT CLEAR –

TOO EARLY

PRODUCTSTRATEGIC

WORSTPRACTICES

BESTPRACTICES

Business Response


PARAMETERS ARE VERY CLEAR –

TOO LATE

SustainableWinners

UnsustainableLosers

INVESTMENTOPPORTUNITY ZONE


Fortis Investments


Back-testing for perverse outcomesPhase I – polluters profit

Investors need to focus on what policy makers “really” want

0.0 €

5.0 €

10.0 €

15.0 €

20.0 €

25.0 €

30.0 €

35.0 €

janv.-05 mai-05 sept.-05 janv.-06 mai-06 sept.-06 janv.-07 mai-07 sept.-07 janv.-08 mai-08 sept.-08

EU ETS Y07 EU ETS Y08

Fortis Investments


Back-testing for perverse outcomesPolluters who should pay don’t pay

Investors need to ask “who

internalises”

PRODUCT SUBSTITUTION

Potential replacement of existing products by less carbon-intensive products

BARRIERS TO ENTRY

Competitive situation on the current marketInvestments required by carbon constraint

PRICING / PURCHASING POWER

Capacity to pass carbon costs through to consumers/suppliers

CARBON EXPOSURE

ProductProduction process

KEY QUESTIONS

Fortis Investments


Back-testing for perverse outcomesFood for biofuels

Investors need to “backcast”

0

200

400

600

800

1000

1200

1400

1600

1800

Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08

Fort

is In

vest

men

ts B

iofu

els

Inde

x

0

50

100

150

200

250

Com

mod

ity In

dex

FIM BIOFUEL INDEX CBOT Commodity Index

Fortis Investments


Back-testing for perverse outcomesTraditional SRI frameworks are carbon intensive

SRI frameworks need to fully integrate the clean

tech opportunity

Fortis Investments


5 Key Insights

Polluters will not always pay – investors need to know who are the winners and losersESG factors are not by themselves a sustainability or investment frameworkTraditional SRI indexes are carbon intensivePerverse outcomes likely until sustainability built into policy making - the “time dimension”

is criticalInvestors need to capture the clean-tech opportunity

A strategic sustainability-based approach helps us avoid technological “blind alleys”and avoid “perverse outcomes”!

Fortis Investments


Mapping the SRI Market

TRADITIONALBEST-IN-CLASS

(Non-integrated approach creates trade-off between strength of financial and

sustainability process).

RISK FOCUS

ENVIRONMENTALTHEMATIC

(no sustainability screening)

OPPORTUNITY FOCUS

ETHICALEXCLUSIONS

(Non-integrated approach, lack of sustainable product dimension removes

alpha drivers)

RISK FOCUS

STRONG

WEAK STRONGSustainability Process

FinancialProcess

INTEGRATED“NEW GENERATION” SRI

(Sustainability and financial analysis integrated in one strong, coherent process)

RISK and OPPORTUNITY FOCUS

Fortis Investments


Investors and distribution partners should ensure that they are fully informed about the sub-funds, classes and sub-classes of shares that are authorised to be marketed in their country of residence and the constraints applicable in each of thesecountries.

This document has been prepared solely for informational purposes and does not constitute 1) an offer to buy or sell or a solicitation of an offer to buy or sell any security or financial instrument mentioned in this document or 2) any investment advice. Any decision to invest in the securities described herein should be made after reviewing the most recent version of the prospectus, which can be obtained free of charge from Fortis Investments*. Moreover, prospective investors should conduct such investigations as the investor deems necessary and should seek their own legal, accounting and tax advice in order to make an independent determination of the suitability and consequences of an investment in the securities. The opinions contained herein are subject to change without notice.Investors should ensure themselves that they read the last available version of this document.Past performance or achievements are not indicative of current or future performance. The performance data do not take account of the commissions and costs incurred on the issue and redemption of units.For more information, please contact [email protected] Investments is the trade name for all entities within the group of Fortis Investment Management. This document has been issued by Fortis Investment Management Belgium N.V./S.A. (address : Avenue de l’Astronomie 14, 1210 Brussels, Belgium, RPM/RPR 0882 221 433).

Disclaimer

Economy & Finance

New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG