Project Delphi - ESG "Super Factors", Metrics, KPIs and Validation with Investors
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Project Delphi ESG “Super Factors”, Metrics, KPIs and Validation with Investors (Investor section of Enterprise 2020 Collaborative Venture: “Valuing Non-Financial Performance”, (led by EABIS and CSR Europe) Which are the Environmental, Social and Governance (ESG) factors that the investment community considers most likely to add long-term enterprise value ? How do we measure these “super-factors” ? Would these super-factors and metrics satisfy the requirements of the largest European institutional investors ? What are ESG Factors ? ESG, short for environmental, social and governance issues, is an analytical framework which seeks to identify, describe and analyze the impact of factors within these areas for the purpose of investment valuation and decision-making. Often, the term ESG is applied interchangeably with the term 'non-financial' (or sometimes 'extra- financial'). Within the Delphi project we prefer ESG to non-financial. In our view, the financial/non- financial distinction is a reference to the early days of ESG understanding when it was deemed necessary to point out that ESG aspects, factors, drivers etc. exist may in fact have financial impacts; conventional investment analysis, however, generally did not (and largely still does not) take these factors into account. In the Delphi view, ESG factors should be placed in a context which considers ESG performance in monetary terms. Investors should seek to enhance and protect their investment objectives through robust processes which include the incorporation of ESG consideration in their analysis, when appropriate. Not only can ESG factors have an impact on the reputation of companies, they may represent significant operational risks and costs to business. Well-developed ESG management systems can also generate efficiencies and enhance productivity, both of which have an effect on shareholder value. Non-financial is no longer sufficiently precise. Project Delphi seeks convergence around the materiality and impact of ESG factors on investment and asset allocation decisions. There has been a great deal of research carried out into the financial impact of ESG factors, which has produced a large number of ESG factors that are deemed to be “material”. Project Delphi intends to bring these strands of research together to produce a short-list of the most important factors and how to measure them.
Project Delphi - ESG "Super Factors", Metrics, KPIs and Validation with Investors
1. Project Delphi ESG Super Factors, Metrics, KPIs and
Validation with Investors (Investor section of Enterprise 2020
Collaborative Venture: Valuing Non-Financial Performance, (led by
EABIS and CSR Europe) Which are the Environmental, Social and
Governance (ESG) factors that the investment community considers
most likely to add long-term enterprise value ? How do we measure
these super-factors ? Would these super-factors and metrics satisfy
the requirements of the largest European institutional investors ?
What are ESG Factors ? ESG, short for environmental, social and
governance issues, is an analytical framework which seeks to
identify, describe and analyze the impact of factors within these
areas for the purpose of investment valuation and decision-making.
Often, the term ESG is applied interchangeably with the term
'non-financial' (or sometimes 'extrafinancial'). Within the Delphi
project we prefer ESG to non-financial. In our view, the
financial/nonfinancial distinction is a reference to the early days
of ESG understanding when it was deemed necessary to point out that
ESG aspects, factors, drivers etc. exist may in fact have financial
impacts; conventional investment analysis, however, generally did
not (and largely still does not) take these factors into account.
In the Delphi view, ESG factors should be placed in a context which
considers ESG performance in monetary terms. Investors should seek
to enhance and protect their investment objectives through robust
processes which include the incorporation of ESG consideration in
their analysis, when appropriate. Not only can ESG factors have an
impact on the reputation of companies, they may represent
significant operational risks and costs to business. Well-developed
ESG management systems can also generate efficiencies and enhance
productivity, both of which have an effect on shareholder value.
Non-financial is no longer sufficiently precise. Project Delphi
seeks convergence around the materiality and impact of ESG factors
on investment and asset allocation decisions. There has been a
great deal of research carried out into the financial impact of ESG
factors, which has produced a large number of ESG factors that are
deemed to be material. Project Delphi intends to bring these
strands of research together to produce a short-list of the most
important factors and how to measure them.
2. 1. The Context of Project Delphi The Global ESG market
(assets managed according to ESG principles) is becoming
mainstream. Estimated at $11.4 trn today and forecast to rise to
$25 trn by 2015. (Eurosif) There is little consensus between
investors on ESG criteria, which makes it difficult to build
collective investment vehicles which cover the requirements of the
majority of investors. Intangibles (including ESGs) do account for
substantial value. o Which ones ? By how much? Industry Shift from
SRI to ESG - more than just negative screening Mission Statement of
Project Delphi: Enhance understanding of the impact of the most
important ESG factors (super-factors) on the creation of enterprise
value. Provide a credible methodology for the measurement of the
super-factors. Provide a platform for future models Recommendations
to regulators Provide agreed framework for the creation of
collective investment vehicles and/or the integration into
investment decision making. This framework will be validated by the
asset owners. Provide pointers to potential alpha creating and risk
mitigating drivers. Provide investor benchmark for corporates to be
able to assess the financial impact of their ESG activities.
Promote a common language for dialogue between companies and
investment professionals, recognizing that both parties need
information from each other. From values-based to value-creating
approaches Phase Goal Motivation Primary Techniques Management
Style First Generation Avoid investments in companies that are not
compatible with mission and goals Align investments with values or
mission Exclusionary screening Active or Passive Second Generation
Incorporate ESG factors into investment decisions Recognize
materiality of some ESG issues Improve standards of corporate
behavior Positive screening Best in class selection Engagement
Proxy voting Active or Passive Generate alpha Risk management Use
ESG data to identify companies that managers believe are expected
to outperform Mainly Active Third Generation ESG issues can be used
to seek enhanced performance and manage risk
3. 2. Objectives Project intended to bring together the strands
of research already carried out by asset managers and other market
participants, agree basis for measurement and obtain validation
from the large institutional investors. Consensus between selection
of capital market participants - short-list of material ESG
super-factors . Convergence on accepted methodologies for measuring
and reporting ESG activity by companies and investors. Validation
of materiality of "super-factors" and their metrics by large
European investors. 3. Methodology There are three work-streams to
the project: 1. A panel of +/- 12 of Europes largest asset managers
will agree on a short-list of material super-factors. (led by Chris
McKnett, Head of ESG, State Street Global Advisors) 2. A team from
EFFAS (European Federation of Financial Analysts Societies) will
define the agreed metrics. (led by Ralph Frank, MD of DVFA / EFFAS)
3. A panel of some of Europes largest institutional investors will
validate and amend the findings of the two previous work-streams.
(led by Frank Curtiss (head of Governance at Railpen Investments
& Chairman of ICGN Finance Committee) Overview of Project
Delphi Initial Straw-man hypothesis drawn from VNFP Laboratory
(including corporate and initial asset owner input) Asset Managers
EFFAS + others Short-list of Super-factors + relative importance
Metrics for the superfactors Dialogue with panel of investment
consultants Proposed Super-factors + metrics Validation by panel of
large Asset Owners + Wider survey of Asset Owners Recommended
Framework for ESG investment criteria, relative importance and
metrics to be included in VNFP Collaborative Venture report
4. Project Organisation: Sponsor: Rick Lacaille Global CIO,
State Street Global Advisors Steering Committee: Rick Lacaille,
Greg Ehret, Benot Fally, Mark Hooker, Ali Lowe, Mike Karpik,
Wolfgang Hoetzendorfer, Chris McKnett, Andrew Letts, Laura Aarnio,
Susanne van Dootingh, John Swannick (EABIS), Ralf Frank (DVFA),
Frank Curtiss (Railpen Investments & ICGN chairman), Paolo
Nazzaro (Telecom Italia), Erik-Jan stork (APG), Stefan Crets (CSR
Europe), Other Pension Fund CIO(s), Other Asset Managers,
Academic(s) Project Manager: Michael Polya, (SSgA) Project Team:
Workstream 1: Asset Managers Team leader: Chris McKnett (Head of
ESG, SSgA) Workstream 2: KPIs Team leader: Ralf Frank (MD DVFA,
EFFAS) Workstream 3: Asset Owners Team leader: Frank Curtiss
(Railpen & ICGN) Work-stream team leaders will be responsible
for recruiting their team members as they see fit. Timeline June
2011 March 2013
5. Contacts for Project Delphi: Michael Polya Project Manager
Ralf Frank DVFA John Swannick EABIS Frank Curtiss Railpen / ICGN
Chris McKnett Head of ESG, SSgA Delphi participants as of 14th
December 2011: State Street Global Advisors DVFA / EFFAS EABIS
Railpen Investments Axa IM SG Corp & Investment Bank Aberdeen
Asset Management F&C APG KLP, Norway Nestl Deutschland DNB
(Dutch Central bank) Towers Watson Hymans Robertson BofA Merrill
Lynch Hendersons Schroders Pension Protection Fund Cheuvreux KKR
Mercer Consultants SAM Research AG Storebrand PGGM (consultative
role) ECPI Group [email protected] tel: +32 2 663 2032
[email protected] tel: +49 69 26 48 48 0 [email protected] tel: +32
2 539 3702 [email protected] tel: +44 20 7220 5019
[email protected] tel: +1 617 664 8315