For more information contact: emailus@marcusevans.com Dr. James Gifford, who is the PRI Executive Director gave his presentation titled "Bridging the Gaps: ESG Integration Across the Whole Pension Portfolio" at the European Pensions & Investments Summit on 16, May 2012. Join the 2015 Summit along with leading regional pension investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today. For more information contact: emailus@marcusevans.com

1. Bridging the Gaps: ESG integration across
the whole pension portfolio
Dr. James Gifford, PRI Executive Director
16 May 2012

2. About responsible investment
What is responsible investment?
• Integration of environmental, social and governance (ESG) factors into investment
processes
• Shareholder dialogue with companies
• Engagement with policy makers
• Investing in the green economy, microfinance, impact investing
• Various forms of portfolio screens
• Not undermining the system
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3. About responsible investment
Why?
• Protect and enhance investment returns
• Risk management, help identify ‘red flags’ and ‘black swans’
• Climate change & corporate governance are material financial issues
• Stewardship is necessary to make the agency chain work
• Greater pressure and focus from clients, beneficiaries, stakeholders, regulators
• Protect your reputation
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4. Some academic findings
• Companies with high ESG scores are found to have less company specific risk
(Boutin-Dufresne and Savaria, 2004; Lee and Faff, 2009; Bauer, Derwall and Hann,
2009).
• Corporations with better employee relations or proactive environmental management
practices are found to have lower cost of debt and higher credit ratings (Bauer et al.,
2009; Bauer and Hann, 2011).
• ESG criteria are found to provide an insurance like protection for firms in legitimacy
crisis (Godfrey, Merrill and Hansen, 2009).
• Shareholder engagement on corporate governance and strategy can deliver abnormal
returns (Becht et al., 2008)
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5. Principles for Responsible Investment
What is the PRI?
• The PRI is a partnership between the UN and investors that promotes responsible
investment within all areas of investment
• A framework of six principles which guide ESG integration
• Grounded in fiduciary duty
• Voluntary and aspirational
• Shared learning, implementation support and engagement
• A forum for discussion and action
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6. The PRI Initiative
The PRI is not:
About sacrificing returns to save the world
About philanthropy
About exclusion of “unethical” stocks from portfolios
A prescriptive/compliance-based standard
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7. The PRI Initiative
From niche to mainstream
Over 1000 signatories with greater than USD $30 trillion AUM
1200 35
1000 30
25
800
20
600
15
400
10
200 5
0 0
Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Number of signatories Assets under management (US$ trillion)
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8. The PRI Initiative
The six Principles
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9. Implementation support: ESG integration across
the whole pension portfolio
Fixed income Listed equity Property Private equity Infrastructure
Inclusive Investing Small
Commodities Hedge funds
finance with impact investors
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10. Fixed Income
Corporate and Sovereign Fixed Income work streams
Challenges to confront:
• How does analysis of ESG issues reduce default risk?
• How do you engage when you don’t have voting rights?
• Can ESG issues impact the creditworthiness of countries?
• Should ratings agencies do more to integrate ESG risks?
• Can ESG analysis improve understanding of risks associated with fixed income
derivatives?
Asset Owner sovereign fixed income assets subject to ESG integration has risen from
38% in 2010 to 50% in 2011.
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11. Fixed Income
Corporate bonds
• Assess company's management of ESG risk – focus on downside or risks of default,
and integrating into investment decisions
• Consider the extent credit ratings reflect ESG risks
• Monitor issuers for ESG risks and raise them
• Screen issuers based on ESG / ethical criteria
• Look at new areas such as environmental bonds
Sovereign Bonds: Assessing country risk from an ESG perspective:
• Natural capital, human rights and how it is changing
• Commitment to standards – ILO, the EITI, World Bank
• Emissions profile in light of a price on carbon
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12. Listed Equity
Responsible investment in passive management
• Exercising ownership rights in pooled passive funds –
Environment Agency Pension Fund
• ESG criteria for RFPs and mandates – FRR, HESTA
• Appointing a specialist engagement and voting overlay
provider – National Reserve Pension Fund of Ireland
• Use of enhanced passive investments – VicSuper
• Tilted indices – Northern Trust Global Investments
• Implementing an international voting strategy – LGIM
• Active dialogue with passive managers – Lothian
Pension Fund
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13. Listed Equity
Active ownership through the Energy
PRI Engagement Clearinghouse efficiency
Examples of ongoing collaborative Board
diversity
shareholder dialogue coordinated by the PRI:
• Annual collaborative engagement with UN
Global Compact companies on disclosure
Executive
• Anticorruption practices
pay/bonu Carbon
• Emission reductions targets s emissions
• Pilot project to implement the UNGC/PRI
guidance on responsible business in high
risk and conflict-affected countries
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14. Property
Property working group
• Links between environmental performance of
buildings and financial performance of
investments
• Strategic allocation: regional diversity of
impacts due to environmental, demographic
and consumer trends
• Stock selection: energy efficiency, tenant
engagement or labour strategies Ongoing
dialogue with investees: significant influence as
a direct investor
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15. Property
2011 Property Report on Progress
• Property popular among PRI signatories with 40% investing in non-listed real estate
and 23% investing in listed real estate.
• Non-listed real estate has shown the most improvement – compared to other asset
classes in the area of translating RI policy into practice – increase from 28% in 2010
to 36% in 2011.
• In non-listed real estate 42% of signatories who integrate use ESG research and 38%
apply it to portfolio construction.
• Requests for ESG disclosure are becoming more common within both listed and non-
listed real estate. In 2011, 55% of survey respondents made standardised and/or
systematic requests for ESG disclosure in non-listed real estate, up from 45% in
2010. For listed real estate this figure was 46%, up from 39% in 2010.
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16. Private Equity
GP Support, PE in Emerging Markets, Exits Research
• PE is well-suited to active ownership and consideration of ESG issues
• Dialogue between GPs and LPs is growing
• LPs consider ESG in mandates with intermediaries, internal due diligence and fund
selection process
• GPs take into account ESG risks and opportunities when making decisions on
investment in portfolio companies
• Rise from 69% to 84% among PRI Investment Managers integrating ESG into
private equity
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17. Private Equity
Responsible Investment In Private Equity: A Guide For Limited Partners
Guide outlines how LPs, GPs and portfolio companies each have a role in promoting
better and more consistent integration of ESG factors into private equity investment
decisions.
Substantive guidance for how an LP might integrate ESG considerations into:
• investment policy and investment decisions
• ownership activities, i.e. monitoring and engagement
• the disclosures sought from a GP and underlying portfolio companies
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18. Infrastructure
Infrastructure Best Practice and Case Studies working groups
• Investments (and ESG) risks include environment (carbon risk), labour relations,
leverage, regulation, demand risk, sovereign risk and capital growth
• ESG issues are part of long term risk management but if well managed ESG can be a
source of value creation
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19. Infrastructure
Responsible investment in infrastructure:
A compendium of case studies
• ESG and the long-term ownership of
infrastructure assets – AustralianSuper
• Formulating an ESG policy and integrating it into
the due diligence process – IFM
• Developing an infrastructure ESG toolbox - AMP
Capital Investors
• Developing a process to integrate ESG in
investment-decisions - PGGM Investments
• ESG training for direct infrastructure investment
teams - Colonial First State
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20. Commodities
• The relevance of responsible investment policies to the commodities asset class is a
widely discussed topic.
• Academic and practitioner debate regarding responsible investment in commodities is
ongoing.
• A wide range of ESG issues involved in the production and trade of commodities, e.g.
local pollution and human rights issues
• Investor concern about speculative trading of soft commodity derivatives
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21. Hedge Funds
Hedge Funds working group
• Responsible investment in hedge funds is only just emerging as a practice
• Engagement from asset owners and fund of hedge funds is critical to encourage single
hedge fund managers to consider ESG issues in investment process
• Challenges for RIs to consider: fund governance, transparency, derivatives, short
selling and leveraging
• RI helps mitigate some of these risks, support sustainability, build trust and integrity in
the industry and align interests between AOs and hedge fund managers
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22. Hedge Funds
Responsible investment and hedge funds discussion paper
Questions:
• How can investing in hedge funds be used to implement an overall RI strategy?
• How does a hedge fund fit into the context of a universal owner?
• How can signatories collectively apply the six PRI Principles to bring further
developments for RI in the hedge fund context?
• What is the fiduciary duty of a hedge fund manager and how can this be aligned with
the fiduciary duty of the asset owner?
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23. Principles for Investors in Inclusive Finance
• Investor-led response to industry challenges such as loan defaults and over-
indebtedness.
• Framework for responsible investment in inclusive finance, intended to protect long-
term returns and the reputation of this young industry.
• Principles launched in January 2011
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24. Principles for Investors in Inclusive Finance
Principles for Investors in Inclusive Finance case studies
Principles:
1. Range of services responsAbility
2. Client protection Oikocredit International & SNS Impact investing
3. Fair treatment Grassroots Capital Management
4. Responsible investment Finance in Motion
5. Transparency Incofin
6. Balanced returns Orchard
7. Standards Triodos Investment Management
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25. Small and resource constrained signatories
Asset Owner Toolkit: how to integrate ESG criteria in manager
selection, agreements and monitoring
• At the head of the investment chain, asset owners have a key role in promoting RI.
• This toolkit offers asset owners on how to drive the RI agenda forward by Integrating
ESG analysis in the manager selection, agreement and monitoring processes.
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26. Small and resource constrained signatories
Asset Owner Toolkit
• How FRR (France) incorporates RI/ESG-related issues into their process for selecting
both passive and active mainstream equity managers.
• How StatewideSuper (Australia) worked with consultants to help them assess the ESG
capacity of potential IMs
• Questions to assess a fund manager’s ESG management systems form the CDC
toolkit (UK)
• How ChristianSuper (Australia) include ESG criteria in the IM selection and monitoring
process.
• Five questions that AOs can ask of IMs during the due diligence process from Dr.
Andreas Hoepner of St Andrews
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27. Implementation Support
Upcoming research and tools:
• Implementation Support tool for GPs: Due diligence questions
• Fixed Income: The business case for RI in FI Corporates and Sovereigns
• Case study compendium on how signatories are supporting the green economy
• Case study compendium on how signatories are managing ESG issues associated
with investment in farmland
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28. Questions and Answers
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29. www.unpri.org
e: info@unpri.org
t: +44 (0) 207 749 1940