Sustainable, Responsible and
Impact Investing (SRI)
PRESENTATION TO:
October 22, 2015
Presenter:
Gary Ometer, CPA, CGMA, Chief Financial Officer,
Responsible Investing History
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Terms Related to Responsible Investing
oSocially Responsible Investing (SRI)
oEnvironmental, Social, and
Governance (ESG)
oImpact Investing
oDivestment
oResponsible Investment (RI)
Slides 35 and 36 for complete definitions.
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Defining Terms Related to Responsible Investing (cont.)
*There is not always a clear
delineation of these
approaches
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Responsible Investment Evolution
Increased
public
interest
More
solutions
available
Evidence of
materiality
Responsible
Investment
Active
shareholders
and investors
Corporate
leadership
examples
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Defining Terms Related to Responsible Investing (cont.)
Sustainable, responsible and impact
investing (SRI): is an investment
discipline that considers
environmental, social and
corporate governance criteria to
generate long-term competitive
financial returns and positive
societal impact.
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The Forum for Sustainable & Responsible Investment
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What the US(SIF Trends Report Measures
o
2014 Trends Report is a snapshot of US-domiciled assets engaged
in SRI strategies at year-end 2013.
o
Two SRI strategies measured:
– ESG incorporation: consideration of environmental, social
(including community) and corporate governance (ESG) factors
in investment analysis and portfolio selection
– Filing of shareholder resolutions on ESG issues
o
Additionally, questions about:
– Why and how investor incorporates ESG
– Whether investor engages in dialogue with companies on ESG
issues
o
US SIF Foundation has measured involvement in SRI strategies
since 1995
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Why Practice SRI?
The leading reasons cited by money managers and institutional
asset owners surveyed by US SIF Foundation in 2014:
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ESG Incorporation: $6.2 Trillion
o “Sustainability in its simplest form is the ability to
continue. There are both risks and opportunities ahead.
The ESG framework we're adopting will help us make
better investment decisions for the long term.”
—Anne Simpson, Senior Portfolio Manager, Investments and
Director of Global Governance, California Public Employees
Retirement System (CalPERS)
o “The premise underlying sustainable investing is elegant
in its simplicity: companies that do a better job of
integrating environmental, social and governance (ESG)
standards into their business models are better positioned
than their less-enlightened competitors to provide
investment performance over the long term.”
—Joe Keefe, President & CEO, Pax World Management
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Defining ESG Factors
Examples of environmental, social and governance factors
o Some ESG factors are already widely considered
Environmental
Social
• Climate change
• Energy & material
efficiency
• Waste management
• Air quality / pollution
• Water use &
management
• Chemicals
• Land use
management
•
•
•
•
•
Stakeholder relations
Labor relations
Working conditions
Health and safety
Supply chain
management
• Product safety
• Treatment of
customers
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Corporate
Governance
• Board composition
• Remuneration / Exec
compensation
• Shareowner rights
• Accounting & audit
quality
• Transparency
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Defining ESG Factors
How can ESG factors affect the performance of corporations?
Source: CSR Europe, “Valuing non-financial performance: A European framework for company and investor dialogue”
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Focus On Climate Change
Growing campaign for fossil fuel divestment
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Corporate performance and women’s representation on boards
Women Board Directors (WBD) Align With Strong
Performance at Fortune 500 Companies1
Financial measures excel where women serve2
•Source: Catalyst 2007 – The Bottom Line: Corporate performance and women’s representation on boards - see related footnotes
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Why Responsible Investment?
Why now?
Financial drivers
o Assess environmental, social and governance
(ESG) considerations to optimize risk-adjusted
returns
o Influence corporate behavior to enhance longterm outcomes
o Contribute to the integrity of financial markets
Non-financial drivers
o Reflect long-term investment horizon
o Reflect concerns and values of stakeholders
o Manage reputation, business risk
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Beliefs Underpinning the Growth of Responsible Investing
o ESG risks are material to financial performance
- Energy & material use, climate change, governance, human capital…
- ESG integration – consistent with fiduciary duty; good risk
management
o ESG issues create opportunities
- Products & services e.g. helping customers to reduce energy use
- Investment opportunities e.g. environmental markets
o Active ownership protects investments
- Proxy voting & corporate engagement preserve and enhance
shareholder value
o Good ESG practices are a component of risk management
- Mitigate reputational risks / proactively address stakeholder concerns
- Employees and customers react well when mission and reputation are
positive and consistent
o RI policies are part of good governance structures
- Comply with legislated disclosure requirements (where applicable)
- Principles can help to manage short and long term risks
- Consistent with transparency and accountability
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Company / Security-Level Impact
Investment Case for Responsible Investment
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Company / Security-Level Impact
Investment Case for Responsible Investment
o DB Advisors reviewed more than 100 academic studies of responsible investing around the
world
- Findings found that 100% of the academic studies agree that companies with high
ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and
bonds) and equity
- 89% of the studies we examined show that companies with high ratings for ESG factors
exhibit market-based outperformance
“Firms with strong ESG performance may now be
enjoying both financial outperformance (particularly
market-based) and a lower risk as measured by the cost
of equity and/or debt (both loans and bonds) capital in the
short run”
o Builds on prior materiality reports and reviews of academic literature undertaken by Mercer
and UNEP FI
o To clarify – there is a compelling investment case for RI/ESG considerations
Source: DB Advisors
http://www.dbcca.com/dbcca/EN/_media/Sustainable_Investing_2012.pdf
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UN PRI
The United Nations-supported Principles for
Responsible Investment (PRI) Initiative is an
international network of investors working
together to put the six Principles for
Responsible Investment into practice. Its goal
is to understand the implications of
sustainability for investors and support
signatories to incorporate these issues into
their investment decision making and
ownership practices.
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UN PRI – The Six Principles
Principle 1: We will incorporate ESG issues into investment analysis and
decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our
ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the
entities in which we invest.
Principle 4: We will promote acceptance and implementation of the
Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in
implementing the Principles.
Principle 6: We will each report on our activities and progress towards
implementing the Principles.
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Responsible Investing Is No Longer Niche
Global Principles for Responsible Investment (PRI) Signatories
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ESG Incorporation by Money Managers & CLLs
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ESG Incorporation by Investment Vehicles
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Leading ESG Criteria, by Assets, for Investment Vehicles
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Number of Shareholder Proponents 2012-14,
by Investor Type
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Leading Categories of Environmental & Social
Shareholder Proposals, 2012-14
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Key Governance Issues in
Shareholder Proposals, 2012-14
oBoard declassification: average
votes in support over 80%
oMajority vote requirement for
director elections: average votes in
support over 58%
oCEO/Chair separation: average
votes in support over 31%
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Shareholder Advocacy Success Stories
o 25 percent of S&P 500 companies have independent
board chair, up from 10 percent in 2006.
o 84 percent of S&P 500 firms have adopted majority
voting provisions, up from 56 percent in 2008.
o 70 percent of top 195 firms of S&P 500 restrict or
disclose their direct political spending, 57 percent
their payments to trade associations.
o Many successful withdrawal negotiations on fair
employment, environmental and sustainability
issues.
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Defining Terms Related to Responsible Investing
o Socially Responsible Investing (SRI): describes an
investment approach where certain sectors or
business activities are excluded from the
portfolio through negative screening for moral
or ethical reasons.
o Environmental, Social, and Governance (ESG): is
the term that has emerged globally to describe
an investment practice that integrates the three
ESG factors that can affect companies and
investors financially in the short or long term and
which have traditionally been under-utilized by
financial analysts and investment managers in the
investment decision-making process.
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Defining Terms Related to Responsible Investing (cont.)
o Impact Investing:
investing in projects, companies, funds
or organizations with the express goal of generating and
measuring mission-related social, environmental or economic
change alongside financial return.
o Divestment: a type of exclusionary screening strategy
through which investors actively exclude companies involved
in some activity, country or industry from their investment
portfolios (e.g., fossil fuel, nuclear, political).
o Responsible Investment (RI) describes any investment
approach and style that integrates ESG factors into the
investment decision making process and ownership practices
(voting, shareholder activism and engagement) with the aim
of achieving optimal risk-adjusted returns.
*There is not always a clear delineation of these approaches
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Thank You
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