the cost of ignoring esg issues - bcisconference

THE COST OF I GNORING ESG I SSUES

What is the rand equivalent of 233 Boeing 737 jets? Or 290,000 Porsche 911 sportscars….

Source: AWC

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This is the value destroyed when Steinhoff collapsed…

0

10

20

30

40

50

60

70

Steinhoff Share Price (R's)

-98% decline in share price, R350bn of value lost…

Source: AWC Calculations

2


The market capitalization decline in British American Tobacco….


The value of the decline in MTN after Nigerian licensing fiasco…

10 000 Clifton mansions: 2.5m Rolex watches:

Or 6m Apple iPads, one for every schoolchild in SA

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THE COST OF I GNORING ESG I SSUES CAN BE MASSIVE…

Va l ue dest roy ed: R 7 5 0 bn i n v a l ue l ost i n on l y 5 s ha r es . . .

-120%

-100%

-80%

-60%

-40%

-20%

0%

-350

-300

-250

-200

-150

-100

-50

0Steinhoff British American Tobacco MTN Resilient Group EOH Holdings

ZAR Bns Percentage Drawdown


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C a p p e d S W I X P e r f o r m a n c e r e l a t i v e t o a b e n c h m a r k e x c l u d i n g f i v e c o m p a n i e s w i t h c r i t i c a l E S G i s s u e s :

S t e i n h o f f , B r i t i s h A m e r i c a n T o b a c c o , E O H , M T N , R e s i l i e n t

88

93

98

103

108

113

Capped SWIX Capped SWIX excl-ESG Critical

5.2%


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G E N E R AT I N G A P L H A T H R O U G H R E S P O N S I B L E I N V E S T I N G

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ALL WEATHER CAPITAL ARE LEADERS I N RESPONSIBLE I NVESTING I N SOUTH AFRICA

Award winning Black controlled asset manager

%70% of

the professional staff and directors

are black

Multi-decade fund management

experience

Approx R10bn AUM with

prestigious clients

Systematic stock selection and

portfolio construction process

Signatory to the UNPRI.

ESG incorporated into the process. Dedicated

ESG Analyst

5 years of outperformance

against benchmark

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AWC SWIX EQUITY STRATEGY PERFORMANCE

A l l W e a t h e r C a p i t a l S W I X E q u i t y S t r a t e g y ’ s C o n s i s t e n t O u t p e r f o r m a n c e o f t h e B e n c h m a r k


BENCHMARK ALPHAAWC EQUITY STRATEGY

1 Month (April 19) 5.99% 5.72% +0.27%

3 Year Return 18.90% 15.79% +3.11%

Since inception 43.20% 30.21% +12.99%

Annualized since inception 7.45% 5.42% +2.02%

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A l l W e a t h e r C a p i t a l S W I X E q u i t y S t r a t e g y ’ s C o n s i s t e n t O u t p e r f o r m a n c e o f t h e B e n c h m a r k

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90

100

110

120

130

140

150

All Weather Swix Strategy vs Swix Benchmark

All Weather SWIX Equity Strategy SWIX Equity Benchmark

WHAT MAKES ALL WEATHER’S I NVESTMENT PROCESS UNI QUE?

Low risk systematic process (compound gains, not losses)

Incorporates an ESG review of each company

An activist mentality that challenges company management

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COMPOUNDING I NCREMENTAL GAINS AND AVOIDING DI SASTROUS LOSSES

1.01365 = 37.8

0.99365 = 0.03

Compounding gains or compounding losses leads to a very different outcome…


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A BRI EF H I STORY OF ESG

Started as “values” based investing (exclusionary mindset: alcohol, tobacco, gaming)

ESG Integration into the entire investment process

Impact Investing: having financial and non financial goals

I N V ESTORS & S U S TAI NAB I L I T Y…

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HOW DOES HAVING A RESPONSIBLE OR SUSTAINABLE PHI LOSOPHY I N YOUR PROCESS ADD VALUE?

Environment

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Social

Governance

ADDRESSING ESG R I SKS

A r e t h e r e i d e n t i f i a b l e E S G r i s k s ?

E n v i r o n m e n t S o c i a l G o v e r n a n c e

Resilient GroupEOH Holdings

MTN Steinhoff

British American TobaccoLonmin

Gold Miners (Silicosis)

SasolExxaro

ArcelorMittal

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A r e t h e r i s k s i d e n t i f i e d r e f l e c t e d i n t h e s h a r e p r i c e ?

PLUS THERE I S A LEGAL REQUI REMENT TO EVALUATE ESG R I SKS BEFORE I NVESTING…

Preamble to Reg. 28:

“A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. The concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.”

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ENVIRONMENTAL I SSUE: ATMOSPHERIC CO2 VS . SURFACE TEMPERATURE

Source: AWC

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ENVIRONMENTAL I SSUES: THE I NCREASING COST OF ENVIRONMENTAL DI SASTERS CAUSED BY CL IMATE CHANGE

Source: WSJ, 02 May 2019

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SOCIAL I SSUES: LONMIN LABOUR DI SPUTE AND THE SUBSEQUENT MARI KANA MASSACRE

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450

500

550

600

650

700

750

800

850

900

Lonmin Share Price (R's)

LONMIN SHARE PRI CE BEFORE AND AFTER MARIKANA

The stakeholder problems at Lonmin mines pre-dated the

incident in August 2012…

Marikana Massacre


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GOVERNANCE I SSUES: BARCLAYS L I BOR

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GOVERNANCE I SSUES: MULTIPLE RED FLAGS AT STE INHOFF HENCE ALL WEATHER HAD ZERO EXPOSURE

Multiple unnecessary poor acquisitions

Disposals of underperforming assets and accounting as discontinued operations

Poor cash flows resulting in a need for…

Multiple capital raisings in ZAR, EUR and USD

High levels of debt in numerous currencies

Unnecessary and unexplained changes in year end

Tax rate less than 50% of the statutory rate

Transfer of main listing from JSE to Frankfurt

Poor operational decisions by management

The IPO of SA assets (STAR) where SNH retained 75% seemed to us to be a capital raise in disguise

Excessively influential CEO with aggressive and opulent lifestyle

Lack of independent Board

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EVALUATION OF SA F I NANCIALS: ESG I SSUES

Best performing ESG issuesBig 4 Banks (FSR, NED, SBK, ABG)• Social case (FSR, NED, SBK)• Governance of remuneration (FSR, NED)• Responsible lending/investment (NED, SBK)

HNWI wealth managers (INL, LBH)• Exec rem (LBH)• Responsible lending/investment (INL)• Customer treatment (LBH)

Unsecured lending (CPI)• Social case • Product suitability and treatment of customers• Access to products

Insurers (DSY, SLM, SNT, OMU, LBH, MMI)• Social case (DSY, SNT)• Product suitability and treatment of customers (DSY, SNT)• External society/environmental risks (SNT• IT Governance and data security• Responsible investing (OMU, MMI)

SOE’s (Banks, Utilities, Services)• To be assessed (Nov/Dec 2018)

Worst performing ESG issuesBig 4 Banks (FSR, NED, SBK, ABG)• Talent (FSR) • Board (NED, FSR, ABG (especially remuneration))• Theft, fraud corruption (NED)• TCF (FSR, SBK, ABG (especially consumer financial health)• Data protection (FSR, NED, SBK, ABG)

HNWI wealth managers (INL, LBH)• Board (INL,• Conflict of interest (INL)• IT governance (LBH on auto-pilot)

Unsecured lending (CPI)• Board governance

Insurers (DSY, SLM, SNT, OMU, LBH, MMI)• Governance (DSY, SLM)• Product suitability & customer treatment (SLM, OMU, MMI)• Employee engagement (DSY)• Society (DSY)

SOE’s (Banks, Utilities, Services)• To be assessed (Nov/Dec 2018)

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EVALUATION OF SA RETAILERS: ESG I SSUESBest performing ESG issues

FMCG retailers (largely cash) (SHP, PIK, SPP, MSM)

• Moral DNA (SHP, SPP)

• Industry equity - Supply chain responsibility (SHP)

Clothing/credit retailers (TFG, WHL, MRP, TRU)

• Board governance (TFG)

• Product suitability (affordability regs) (TFG, TRU)

• Fair labour & talent (MRP)

• Industry equity - Supply chain responsibility (MRP)

General retail (SNH)

Worst performing ESG issuesFMCG retailers (largely cash) (SHP, PIK, SPP, MSM)

• Board governance compliance (SHP, SPP, MSM)

• Succession & executive remuneration (SHP)

• Fair labour (SHP, PIK)

• Product suitability (obesity epidemic)(SHP, PIK, SPP, MSM)

• Treatment of customer (PIK, SPP, WHL)

• Moral DNA (PIK, WHL both tend to hypocrisy)

Clothing/credit retailers (TFG, WHL, MRP, TRU)• Board governance (MRP)• Treatment of customers (TRU, MSM)• Fair labour & talent (TFG, MSM)• Industry equity - Supply chain responsibility (TFG, TRU)

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EVALUATION OF SA MINING AND I NDUSTRIAL : ESG I SSUESBest performing ESG issues

Precious metals (LON, GFI, ANG, AMS, HAR, SGL, RBP, NHM, IMP)• Fair labour, health and safety• Community relations and Local industry development• Energy

Food (AVI, OCE, RCL, TBS, TON, PFG, RFG)• Bio-impact (fishing industry only, re resource management)

Hospitals (NTC, MDC, LHC)• Treatment of customers • Talent (LHC and NTC)

Pharmaceutical manufacturers (APN, AIP, ASC, NVO)• Product responsibility (NVO)

Pharmaceutical retailers (CLS, DCP)• Talent (DCP)

Worst performing ESG issuesPrecious metals (LON, GFI, ANG, AMS, HAR, SGL, RBP, NHM, IMP)• Governance

Food (AVI, OCE, RCL, TBS, TON, PFG, RFG)• Anti-competitive behaviour• Product responsibility (health impact)• Supply chain responsibility (social & environmental)

Hospitals (NTC, MDC, LHC)• Talent (MDC)

Pharmaceutical manufacturers (APN, AIP, ASC, NVO)• Product responsibility (except NVO)• Access to products (especially APN)• Anti-competitive behaviour (especially APN)

Pharmaceutical retailers (CLS, DCP)• Product suitability (CLS)• Treatment of customers (CLS)

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AWC ’S FOUR- STEP ESG PROCESS

IDENTIFY:

We identify the ESG risks within each sector and company through

research and staying up to

date with current affairs

and society trends.

INCORPORATE:

We incorporate our findings into our investment

processes by factoring in the

necessary discounts into

company valuations.

ENGAGE:

We engage with management

on ESG matters and assess their

responses to them and how they intend to

mitigate the risks identified.

INFLUENCE:

We follow up with management to

measure progress and escalate where

management responses are not

satisfactory or when they fail to

follow through with initial

mitigation strategy.

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I MPACT I NVESTING – USE YOUR SAVINGS TO EFFECT POSI T IVE CHANGE…

Impact investing: “effecting changes in company behavior”.

We aim to be agents to change and to give shareholders, whom are members of the funds we manage, a meaningful voice.

We will engage with both companies where we are invested as well as companies where we are not invested where ESG issues are identified.

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I MPACT I NVESTING BY ALL WEATHER CAPITAL

Source: Business Day

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Opposing the Naspers involvement with Gupta’s29 November 2017 by Shane Watkins

ALL WEATHER CAPITAL : “HAVING AN I MPACT WI TH YOUR MONEY ”

Consistent 5 year outperformance driven by:

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Having an Impact : Using your money to reflect your beliefs about what is good for our society and the world we all live in

Environmental, Social and Governance assessment embedded in our process so we avoid the landmines

Low risk philosophy (compound small gains, not losses)

DI SCLAIMER

All Weather Capital (Pty) Ltd (“All Weather”) is a registered Investment Manager of the All Weather BCI Equity Fund, approved in terms of the Collective Investments Schemes Control Act, No 45 of 2002. Collective

Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance.

The Manager does not guarantee the capital or the return of a portfolio. Collective Investments are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum

commissions is available on request. All Weather reserves the right to close and reopen certain portfolios from time to time in order to manage them more efficiently. Additional information, including application

forms, annual or quarterly reports can be obtained from All Weather, free of charge. Performance fees are calculated and accrued on a daily basis based upon the daily outperformance, in excess of the benchmark,

multiplied by the share rate and paid over to the manager monthly. Performance figures quoted are internally generated, as at the date of this report for a lump sum investment, using NAV-NAV with income

reinvested and do not take any upfront manager’s charge into account. Income distributions are declared on the ex-dividend date. Actual investment performance will differ based on the initial fees charge applicable,

the actual investment date, the date of reinvestment and dividend withholding tax. Investments in foreign securities may include additional risks such as potential constraints on liquidity and repatriation of funds,

macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information. All Weather retains full legal responsibility for the third party

named portfolio. Although reasonable steps have been taken to ensure the validity and accuracy of the information in this document, All Weather does not accept any responsibility for any claim, damages, loss or

expense, however it arises, out of or in connection with the information in this document, whether by a client, investor or intermediary. This document should not be seen as an offer to purchase any specific product

and is not to be construed as advice or guidance in any form whatsoever. Investors are encouraged to obtain independent professional investment and taxation advice before investing with or in any of All Weather

/the Investment Manager’s products.

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the cost of ignoring esg issues - bcisconference

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