Bridging the Gaps: ESG Integration Across the Whole Pension Portfolio - Presentation by Dr. James Gifford at the European Pensions & Investments Summit
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.
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Bridging the Gaps: ESG Integration Across the Whole Pension Portfolio - Presentation by Dr. James Gifford at the European Pensions & Investments Summit
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
1
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)
3
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
4
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)
6
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
8
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
11
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
12
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
13
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.
14
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
15
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
16
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
18
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
19
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
20
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?
21
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
22
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
23
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.
24
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
25
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
26