update on esg reporting initiatives: trends & opportunities fis … · 12/10/2012 · •...

Diane Bratcher US Network Manager

Update on ESG Reporting Initiatives: Trends & Opportunities FIS 2012 Santa Monica 23 October 2012

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‘As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries.

In this fiduciary role, we believe that environmental, social, and corporate governance

(ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset

classes and through time). We also recognize that applying these Principles may better align investors with broader objectives of society.’

- Preamble to the Principles for Responsible Investment

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The six Principles

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The PRI is…

Asset owners and investment managers, who believe ESG factors affect risk and returns, especially in the long run; Signatories who believe ESG factors should be used in investment policies and decision making; A forum for thought and practice leadership on ESG values and sustainable investing; A global network for collaboration and developing best practices for investing & risk management;

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The PRI Is… • An organization providing education and

implementation support on sustainable and ESG investing;

• A clearinghouse for Signatory collaboration on ESG engagements with corporations and industries;

• A framework for Signatories to report on their ESG investing practices, evaluate progress, compare themselves to peers.

ESG issues include:

Environment Social Governance Climate change strategy Stakeholder relations Board structure

Environmental policy Supply chain management Director independence

Environmental practice Health and safety policy Executive compensation

Pollution management Community impact assessment Shareholder rights

Water supply management

Product safety management Audit quality

Waste management Working conditions Accounting management

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From Niche to Mainstream 1,103 signatories with USD $32 trillion AUM

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0

5

10

15

20

25

30

35

0

200

400

600

800

1000

1200

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

Number of signatories Assets under management (US$ trillion)

28%

53%

19%

Asset ownerInvestment managerService provider

4% 6%

46%

6% 1%

19%

17%

Africa AsiaEurope Latin AmericaMiddle East Multiple regionsNorth America Oceania

Region (by number)

Our Signatories Type (by number)

Presenter

Presentation Notes

Graph requires updating

• “Clients asked us to sign” top reason investment managers sign on

• 56% of consultants reported increasing client interest in ESG investing (P&I/USSIF)

• Increasing ESG/RI/transparency mandates, laws, regulations and policies around the world:

▪ UK ▪ Netherlands ▪ Denmark ▪ Germany ▪ Norway ▪ France ▪ Australia ▪ EU ▪ Finland ▪ Brazil ▪ California ▪ SEC

• Growing interest in integrating ESG values into investment policy and decision making among institutional investors, high net worth individuals

Signatory Growth

Presenter

Presentation Notes

http://www.responsible-investor.com/home/article/eurosif_corporates/ http://www.responsible-investor.com/home/article/poland_ri/ http://www.responsible-investor.com/home/article/ri_briefing_august_10/ http://www.responsible-investor.com/home/article/uks_nest_begins_search_for_sharia/ http://www.responsible-investor.com/home/article/calpers_puts_100m_into_new_esg/ http://www.responsible-investor.com/home/article/merseyside_puts_esg_at_heart/ http://www.responsible-investor.com/home/article/frances_29bn_frr_goes_carbon_neutral_with_hydropower_offsets_tenders_5bn_bo/

PRI Signatories

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Presenter

Presentation Notes

Note – figure for including ESG in IMAs is up from 28% in previous year. Incentives = linking fees to ESG in some way (we don’t have detail or examples on this)

Reporting framework

Assessment

• Benchmark • Reporting tool • Report on

Progress

Survey

• Asset class • Six Principles • Comprehensive • Mandatory

RI activities

• Engagement • Collaboration • Integration • Policy & strategy

• RI policy 94% have policy, up from 67% (IMs) and 83% (AOs)

• Integration Global growth 4% - 7% of total AUM

• Active ownership 338 engagements; 63% use Clearinghouse, up from 39%

• ESG reporting “moderate to large” demand for corporate reporting

• Transparency 93% disclose, up from 67% (IMs) and 88% (AOs)

5 years – Signatory progress

Approaches to Integration of ESG Factors

• CalPERS – Total Fund Process: Priorities,Performance and Procurement – see Mercer’s consultation report, August 2011

ESG Board Workshop, “Responsible Investment’s Next Decade: Developing CalPERS Total Fund Process for ESG Integration.”


• Mercer investment manager ratings – based on integration of ESG issues – across all asset classes and geographies – provides the ESG ratings alongside traditional alpha

ratings

• “Responsible Investment’s Second Decade: Summary Report of the State of ESG Integration, Policy and Reporting,” – for CalPERS October 2010 Global Peer ESG Exchange


• MSCI ESG Indices – Best in Class – Socially Responsible – Environmental – Ex Controversial Weapons – Custom

• Benchmarking • Enables index-based ESG investment products • Manage-measure-report on compliance

Interesting Discussion Papers

• “Pension Funds, Sovereign-wealth Funds and Intergenerational Justice” Sept 2012 from the Norges Handelshøyskole (Norwegian School of Economics) – discusses sustainable investing and long term

time horizons to align funds with interests of future generations

Key Research and Thinking • The Initiative for Responsible Investment

– project of the Hauser Center for Nonprofit Corporations at Harvard University

– Bob Eccles, Steve Lydenberg, David Wood, Jay Youngdahl, et. al.

• “On Materiality and Sustainability: The Value of Disclosure in the Capital Markets,” – Steve Lydenberg for Sustainability Accounting

Standards Board (SASB). • From Transparency to Performance:

Industry-Based Sustainability Reporting on Key Issues June 2010.

Fiduciary Duty

• Jay Youngdahl – written extensively – “The Time Has Come for a Sustainable

Theory of Fiduciary Duty in Investment,” 29 Hofstra Lab. & Emp. L. J. 115 (2011-2012) The; Youngdahl, Jay

Modern Portfolio Theory Challenged

• Basis for portfolio construction • Events -- 2008 markets collapse • New theories challenge Efficient Market

Hypothesis – Behavioral finance – Principal – agent relationship

• “Unlocking the Economy of the Mind,” Institutional Investor, 27 September 2012 discusses the conflict between classical and behavioral finance

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Protect, enhance investments

Academic evidence •David Baron et al., Stanford “The Economics and Politics of Corporate Social Performance”

•Glen Dowell et al., Cornell “Do corporate environmental standards create or destroy market value”

•Robert Eccles et al., “One Report: Better Strategy through Integrated Reporting”

•Alex Edmans, Wharton, “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices”

Presenter

Presentation Notes

Baron: provides empirical evidence on the relations among CFP, corporate social performance (CSP), and social pressure based on a theory of the underlying economics and politics of CSP. The theory and empirical analysis view CFP and CSP as jointly determined by firms operating in three markets: a product market, a capital market, and a market for social pressure as generated by government, NGOs, and social activists. The theory provides the empirical specification and is also used as a framework to interpret the estimates as an equilibrium in the three markets. Dowell: Contrary to the supposition that pursuing lower environmental standards would be profitable for multinational firms, firms choosing to employ their own strict global environmental standard abroad were found to have an individual value of approximately $10.4 billion higher than those using less stringent U.S. standards. The authors write, “This paper refutes the idea that adoption of global environmental standards by multinational enterprises constitutes a liability that depresses market value. On the contrary, the evidence from our analysis indicates that positive market valuation is associated with the adoption of a single stringent environmental standard around the world.” Orlitzky: findings suggest that corporate virtue in the form of social responsibility and, to a lesser extent, environmental responsibility is likely to pay off, although the operationalizations of CSP and CFP also moderate the positive association. For example, CSP appears to be more highly correlated with accounting-based measures of CFP than with market-based indicators, and CSP reputation indices are more highly correlated with CFP than are other indicators of CSP. Edmans analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the "100 Best Companies to Work For in America" earned an annual four-factor alpha of 3.5% from 1984-2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing ("SRI") screens may improve investment returns.

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Consider Signing

• Responsible investment is growing rapidly as a mainstream trend around the world

• Driven by strategic trends in investment, the economy and society

• Thought leadership • Enhance risk management and identify new

opportunity, within fiduciary obligations • Trends towards regulatory support for

responsible investment • Visit www.unpri.org

update on esg reporting initiatives: trends & opportunities fis … · 12/10/2012 · •...

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