Responsible Investment and Active Share Ownership

December 7th, 2006

Matt Christensen

Eurosif

Agenda

  Eurosif and Responsible Investment

  Active Share Ownership

Eurosif Member Affiliates, 2006

Eurosif Activities

EventsEventsResearchResearch InitiativesInitiatives

2004

2005

• EU Insider• Pension Fund Toolkit

• Transparency Guidelines

• Briefing Events

• Sector Reports • Pension Fund Collaboration

LobbyingLobbying

• Transparency Directive

• Corporate Governance Annual Statement

2006 • Eastern Europe Summit

• Active Share Ownership

• SRI Study

• Le Monde newspaper partnership

• Cross Border Voting Rights

Responsible Investment Market is Growing

Now represents as much as 10% of worldwide equity investing

2006

64%

35%

1%$3.6 trillion

Global SRI Market

Source:Eurosif research

North AmericaEuropeAUS/Asia

2003

84%

16%

$2.6 trillion

Responsible Investment Evolution: Growth of ‘ESG’ as focus area

Screening and best of class approach

Socially responsible funds :USA, Canada, UK, Switzerland,

Northern Europe

Sustainable Development Funds :France & Belgium

Best of class approach

Environmental Funds :Germany, Northern Europe, Switzerland

Environmental criterias

1928 1980 20061970

Screening criterias

Ethical Funds :USA Europe

1990

EngagementEngagement Overlay:UK, NL, BE

IntegrationIntegration:UK, NL, FREnvironmental

SocialGovernance

SocialEnvironmentalEthical

European Responsible Investment Strategies by Value

Source: Eurosif SRI Study, 2006

€ bn

Broad SRI is dominated by the Engagement and Integration strategies

Linkage between Responsible Investment and Corporate Governance

  Risk management compliments focus on corporate control

• Responsible investment is a means to assess risks that might not traditionally be covered or integrated using traditional financial metrics

• Corporate governance defines the rights as an owner, covering the control mechanisms that govern the relationships among shareholders, management and stakeholders of a company.

  Corporate governance can be an enabler of Responsible Investment policy

• Disclosure, filing resolutions, and voting allows for engagement & voting.

• Responsible investors share similar interests as those concerned by corporate governance issues (eg – directive on cross border shareholders rights)

Agenda

  Eurosif and Responsible Investment

  Active Share Ownership

Why the Need for an Active Share Ownership Handbook?

  Investors increasingly want to act as active owners

• Rise of pension funds as significant actors in financial markets

• Internationalisation of pension fund portfolios

• Pressures to act as stewards on behalf of beneficiaries

  Key challenges investors face in becoming active owners

• Diverse national rules and regulations

• Difficulty in exercising their rights to vote on shares across borders

  Responsible Investing linkage to the 1 Share 1 Vote debate

• Potential for ‘1 share 1 vote’ to be more democratic, enabling more investors to voice their ESG concerns

What is Active Share Ownership?

  Active share ownership

• Involves steps that shareholders take when they own or hold stock in a company as opposed to when they buy or sell it

  Eurosif’s working definition of active share ownership

• Shareholders make use of their rights in order to monitor, and sometimes influence, how the companies where they invest manage ESG issues

 

  The concept relies on three fundamental components

• The search for long-term profitability

• The long-term influence of extra-financial factors, such as ESG issues

• The use of shareholders’ rights, such as the right to vote and the right to ask questions

Common Activities of Active Share Owners

Voting

Dialogue with Management

External Communications

Shareholder Resolutions

Communication with Regulators

Collaboration and Coalitions

Why Active Share Ownership will Grow: A Renewed Look at Fiduciary Duty

  What investors are legally allowed to do is evolving

• Research carried out by UNEP FI with Freshfields suggests that taking ESG issues into consideration is consistent with fiduciary duty when it impacts profitability, and is further relevant when there is a consensus to do so by participants/members/stakeholders

  Initial conclusions on fiduciary duty

• Attitudes can be conservative but are changing

• Growing consensus that investors have to effectively manage their risks, which includes ESG risks

Why Active Share Ownership will Grow: Legislation Demanding more Disclosure Related to ESG issues

European SRI disclosure regulations

  Highly developed culture of social welfare

  Recent Pensions reforms in place

  AP Fonden offers member choice in DC/super type arrangements

  SRI principles seen as central to strategy

  Recent activity of AP7 Fund in human rights

“Investment activities shall take environmental and ethical

considerations into account without lowering the overall objective of a

high return “

Swedish National Pension Funds Government bill

The Swedish example

Why Active Share Ownership will Grow: Endorsement from Multi-lateral Institutions

  Global Compact and UNEP FI Principles for Responsible Investment (PRI)

1. We will incorporate ESG issues into investment analysis and decision-making processes.

2. We will be active owners and incorporate ESG issues into our ownership policies and practices.

3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.

4. We will promote acceptance and implementation of the Principles within the investment industry.

5. We will work together to enhance our effectiveness in implementing the Principles.

6. We will each report on our activities and progress towards implementing the Principles.

  Evolution of the PRI

• Over 50 investors have signed, representing USD 2 trillion

• Implementation programme being put in place now

Why Active Share Ownership will Grow: Pension Fund Collaboration on ESG Issues

  Growing trend for pension funds to collaborate on shareholder activism

• Issues: IIGCC for Climate Change

• Themes: EAI for Sale-Side Analysts

• Sectors: Pharma Futures for Pharmaceutical Sector

• Multilateral: UNEP PRI

  Reasons investors collaborate

• Pooling resources: lower cost

• Pooling resources: greater shareholder power

• Learn together

• Crosses borders and issues

Why Active Share Ownership will Grow: High Returns Through Incorporation of ESG issues

  Sustainability Performance for the Long Term can Yield Excellent Returns

  Calpers’ returns by asset class: 2004 2003

• US equities: 20.8% 31%

• International equities: 30.9% 38.8%

• Hedge funds: 9.8% 16.7%

• Corporate governance: 53.5% 39.3%

• International fixed income: 8% 19.8%

• US fixed income: 1.4% 9.5%

• Alternative (private equity): 12.7% 1.8%

• Real estate: 12% 8.5%

• Housing/timber: 23.5% 20.4%

Contact Details

Matt Christensen

Eurosif

Executive Director

11 Avenue de l'Opera

75001 Paris FR

Main 33 (0) 1 40 20 43 38

mattc@eurosif.org