SPARK15: The Investor's Perspective of Sustainability

The Investor’s Perspective of Sustainability

Chris HaglerSoutheast Practice Leader, Climate Change & Sustainability Services

Ernst & Young

SPARK15 Conference

The investor perspective

November 10, 2015

Page 3 The investor perspective │ Spark15, November 2015

Disclaimer

► This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

► The views expressed by panelists are not necessarily those of Ernst & Young LLP.


How companies are reacting2.

Why investors care and how we know they do

Emerging standards3.

4.

What’s next?5.

What’s in store

1.

So what?

Page 5 The investor perspective │ Spark15, November 2015Page 5 The investor perspective │ Spark15, November 2015

1.Why investors care and how we know they do


The drivers of market value have changedInvestors care about what drives market value

► Innovation and intellectual capital

► Human capital► Risk management► Brand management► Carbon exposure, etc.

Market value 100%

Book value in % of market value

Physical and financial assetsOther factors

Source: Intangible Asset Market Value Study,” Ocean Tomo, 2015.*January 1, 2015

Ocean Tomo study – components of S&P 500 market value

1975 1985 1995 2005 2015*0%

20%

40%

60%

80%

100%


Support for shareholder E+S proposals by threshold in the past six years2008 2009 2010 2011 2012 2013

> 30% support 15% 18% 27% 31% 23% 30%

> 20% support 30% 38% 44% 52% 45% 54%

> 10% support 40% 48% 52% 59% 62% 65%

Increasing shareholder proposals focusing on ESG – many focused on transparency

► Proposals focusing on environmental and social (E+S) topics account for 60% of shareholder proposals submitted as a broad category compared to 45% in 2013.1

► A growing number of these proposals are reaching the threshold level of 30% support, the level at which many boards take note.

Source: Taking flight: environmental sustainability proposals gain more attention, Ernst & Young LLP, 2013. 1Other major proposal categories are board-focused, compensation and anti-takeover/strategic proposals.

2014 top E+S proposal topic areas


Question

56?


The number of companies that file an integrated report

A reasonable water use ratio for a packaging companyThe number of countries whose governments or exchanges require or highly recommend sustainability reportingThe percentage of water to bourbon in a mint julep

Answer

56 is …

H2O


Stock exchanges, as representatives of investors, are driving increased transparencyThe governments or stock exchanges of 56 countries have required or encouraged some level of sustainability reporting:

Australia France Malaysia South AfricaArgentina Germany Malta South KoreaAustria Greece Mexico SpainBangladesh Hong Kong Netherlands SwedenBelgium Hungary Nigeria SwitzerlandBrazil Iceland Norway TaiwanBulgaria India Pakistan ThailandCanada Indonesia Philippines TurkeyChina Ireland Poland UKCroatia Italy Portugal USCzech Republic Ivory Coast Republic of Cyprus ZimbabweDenmark Japan RomaniaEcuador Latvia RussiaEstonia Lithuania SingaporeFinland Luxembourg Slovakia

Source: “Corporate social responsibility disclosure efforts by national governments and stock exchanges,” Harvard Kennedy School’s Hauser Institute for Civil Society, http://hausercenter.org/iri/wp-content/uploads/2015/04/CSR-3-27-15.pdf, March 2015; “Sustainability reporting policies worldwide — today’s best practice, tomorrow’s trends,” Global Reporting Initiative, https://www.globalreporting.org/resourcelibrary/carrots-and-sticks.pdf, 2013.


Stock exchanges are encouraging or requiring ESG disclosure: INCR proposal

► Governance and ethical oversight► Environmental impact► Government relations and political

involvement► Climate change► Diversity► Employee relations► Human rights► Product and service impact and integrity► Supply chain and subcontracting► Communities and community relations

► ESG materiality assessment in financial disclosure

► ESG issues disclosure ► ESG disclosure index link to Global

Reporting Initiative (GRI)► Exchange monitoring of overall level of

disclosure and quality

The Investor Network on Climate Risk (INCR) recommended a listing standard on corporate sustainability disclosure to include:

Source: “Investor Network on Climate Risk,” INCR, http://www.ceres.org/investor-network/incr/incr, accessed 2015.


Question

61?


Answer

61 is …

The number of NGOs that are focused on carbon reduction

The current temperature outside

The % of investors that consider sustainability information relevant to all sectors

The % of companies that say that their shareholders are the primary audience for their sustainability report


Increasing interest from investors on all fronts

Percentage of respondents who …

Consider corporate social responsibility or sustainability reports essential or important when making investment decisions

Believe companies are motivated to report nonfinancialinformation to demonstrate management risk

Consider mandatory board oversight of nonfinancialperformance reporting essential or important

Consider nonfinancial data relevant to all sectors

Use a structured, methodical evaluation of environmental andsocial impact information

Consider integrated reports essential or important whenmaking investment decisions

2015 2014 2015 2014

Source: “Non-Financial Performance Reporting and Investment Decision Making,” prepared for EY by Institutional Investor Research, 10 February 2015. For more information see EY.com’s Climate Change and Sustainability Services page.


Number of customers using ESG data76% increase from 2013 to 2014

Investors are pulling information from Bloomberg when making decisions

“Bloomberg collects ESG data from published company material and integrates it into the Equities, Bloomberg Industries and Fixed Income platforms. Bloomberg covers more than 10,000 companies with ESG data and more than 16,000 companies with executive compensation data in 52 countries. ESG data is fully integrated with all of Bloomberg’s analytics.”

“Customers using ESG data increased 76% in 2014,” Bloomberg, http://www.bloomberg.com/bcause/customers-using-esg-data-increased-76-in-2014, accessed 2015.

20127,779

20115,747

20104,704

20092,415Unique users

20139,669

ESG data distribution – user type

201417,010

32%26%5%

4%4%

4%2% 2% 2%AnalystPortfolio ManagerInvestor Rela-tionsTraderRisk/Mid/Back OfficeSalesperson

Portfolio manager

Analyst

Trader

Investor relations

Risk/mid/back office

Salesperson


Investors are including a more complete understanding of performance

How do you and your investment team evaluate nonfinancial disclosures that relate to the environmental and social aspects of a company’s performance?


We usually conduct a structured, methodical evaluation of environmental and social impact statements and disclosures.

We usually rely on guidelines or information from third parties, such as the UN Principles for Responsible Investments or other relevant guidelines.

We usually evaluate environmental and social impact statements informally.

We conduct little or no review.

37.0%

19.6%

15.6%

12.9%

26.5%

31.9%

20.9%

35.6%

2014 2015


Investment decisions change with a more complete picture of performance

— Analyst with $425 billion asset management firm

How would the following disclosures about a prospective investment affect your investment decision?

Reconsider investment

Rule out investment immediately

No change in investment plan


Risks in supplychain not addressed

Risk or history ofpoor environmentalperformance

Human rights riskfrom operations

Risk from resourcescarcity – e.g., water

No link to financialperformance

Risk fromclimate change

2015 2015

9.1%

15.4%

72.6%

12.0%

9.1%

75.6%

15.3%

19.1%

63.2%

17.7%

13.5%

68.6%

17.9%

15.5%

57.0%

27.5%

8.7%

61.5%

29.8%


Investors vote with their dollarsSustainable, responsible and impact investing trends

$1.72 trillion in US-domiciled assets at the start of 2014 held by 202 institutional investors or money managers that filed shareholder resolutions on ESG issues from 2012 through 2014

2012 2014$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00

$3.74

$6.57

76% increase

After eliminating double-counting for assets involved in both strategies, the overall total of socially responsible investment (SRI) assets was $6.57 trillion.

$6.20 trillion in US-domiciled assets as of January 1, 2014, held by 480 institutional investors, 308 money managers and 880 community investment institutions

Source: "The Report on US Sustainable, Responsible and Impact Investing Trends," Forum for Sustainable and Responsible Investment (US SIF), http://www.ussif.org/blog_home.asp?Display=55, 2014.

Trilli

ons

Page 19 The investor perspective │ Spark15, November 2015Page 19 The investor perspective │ Spark15, November 2015

2.How companies are reacting Investors’ desire for more transparency


A wide variety of stakeholders are asking for increased transparency

SRI

groups

Certifications

GRI

Carbon

Disclosure

Project

(CDP)

Expectations

for more

sustainable

products

SEC –

disclosure

guidance

FTC – green

guides

Corporate

initiatives

Human Rights

Watch

EPA – GHG

reporting

Government

NGOs

Investors

Recruiting

and retention

Industry

associations

(ACC, NAIC,

ICMM, AAFA)

Employee

engagement

programs

EmployeesSupply

chain and

industry

Customers

Communities

Permitting or

expansion

challenges

“License to

operate”

Shareholder

resolutions

Customer

surveys/

questionnaires

Increasing number of

climate change and

sustainability lawsuits

International Integrated Reporting Council (IIRC)

and Sustainability Accounting Standards

Board (SASB)


Question

15 ?


The age of my youngest child

The number of NGOs that are focused on carbon

The current temperature outside

The % of companies that say that their shareholders are the primary audience for their sustainability report

Answer

15 is …


SuppliersAnalysts

PolicymakersNGOs

ShareholdersEmployeesCustomers

3%6%7%7%

15%22%

37%

Who do you perceive to be the most important audiences for your sustainability report?Rank the top three stakeholder groups in order of importance in driving your sustainability initiatives:(weighted average)

Source: Six trends in corporate sustainability, EY, 2013.

Page 24 The investor perspective │ Spark15, November 2015Page 24Page 24 The investor perspective │ Spark15, November 2015

3. Emerging standards


Legend

Sustainability reporting standards and frameworksKey differences: geography • stakeholders • scope

GRI: Global Reporting Initiative

SASB: Sustainability Accounting Standards Board

IIRC: International Integrated Reporting Council

CDP: formerly Carbon Disclosure Project

Emerging standards

Global reporting standard designed to provide organizations guidance on reporting non-financial information to a broad group of stakeholders

Sector- and industry-specific sustainability disclosure standards for reporting material non-financial information, encouraging disclosure in 10K filings with the Securities and Exchange Commission (SEC)

A reporting standard designed to demonstrate the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates

Investor and customer requests drive reporting on climate, water, supply chain and forest

Global

US

Stakeholders

NGOsSuppliers

Regu

lato

rs

Local

community

Employees

Managem

ent

Inve

stor

s

Customers


Materiality is the common thread among reporting frameworks

Framework DefinitionSASB SASB adheres to the US Supreme Court

definition of materiality, defined as “presented a substantial likelihood that the disclosure of the omitted fact would have been viewed as having significantly altered the ‘total mix’ of information made available.”

GRI G4 Aspects that reflect the organization’s significant economic, environmental, or social impacts [in terms of whether they positively or negatively influence the organization’s ability to deliver its vision and strategy], and substantially influence the assessments and decisions of stakeholders.

IIRC Aspects that are material to assessing the organization’s ability to create value [for the providers of financial capital] in the short, medium and long term.


Company-wide materiality matrixExample 1:

Management would determine line placement in the materiality matrix.

Likeliness to occur Low

Medium

High

Magnitude of effectLow

Medium

Low High

Low

High

Financial per-formance

Innovation

Materials and scarcity of resources

Energy consumption

Water consumption

Biodiversity

Emissions and ef -fluents

Diversity and in-clusion Labor relations

Health and safety

Training and de-velopment

Employee turnover

Human rights

Customer health and safety

Strategic giving

Local development (poverty reduction)

Product safety

Product labeling and packaging

Product/service transport

Brand loyalty

Governance and ethics

Environmental compliance

Impact on organization

Influ

ence

on

stak

ehol

ders

’ ass

essm

ents

and

de

cisi

ons


Company-wide materiality matrix

Impact on organization

Influ

ence

of s

take

hold

ers’

asse

ssm

ents

and

dec

ision

s

Magnitude of effectLow

Medium

High

Diversity and inclusion

Water consumption

Governance

Financial performance

Brand loyalty

Environmental compliance

Human rights

Product safety

Customer health and safetyTransportation

Product and packaging labeling

Strategic givingLocal development

Biodiversity Employee turnover Training

Health and safety

Energy consumptionMaterials and scarcity of resourcesEmissions

Example 2:

Likeliness to occur Low

Medium

High

Management would determine the grids in the materiality matrix.


Question

72 ?


A reasonable number of lost days for a manufacturing company

My age in dog years

The percentage of global 50 that has a focus on water reduction and replenishment

The percentage of S&P 500 companies that published a sustainability report in 2013

Answer

72 is …


Current reporting trends

“Trends in External Assurance of Sustainability Reports: Update on the USA,” GRI, July 2014.

90% of the world’s largest 250 companies issued a corporate responsibility report

82% of which refer to the GRI guidelines10% of the world’s largest 250 companies did not issue a report

0% 20% 40% 60% 80% 100%

S&P 500 companies that published a sustainability report

2011

2013

US-based companies that published a third-party assured, GRI-based sustainability report

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2013

2011

Page 32 The investor perspective │ Spark15, November 2015Page 32 The investor perspective │ Spark15 November 2015

4. So what?


Why this matters to you? The whole picture

Page 34 The investor perspective │ Spark15, November 2015Page 34Page 34 The investor perspective │ Spark15, November 2015

5. What’s next?


Where we see this going

Need for transparency on ESG issues will only increase

More demand from global stock exchanges, investors and regulators

Better understanding of how environmental and social issues impact the economic performance of an organization and how they intersect

More use of non-financial information in business and investment decision-making

– Head of sustainability research at a UK asset management firm, EY’s Tomorrow’s Investment Rules 2.0 report


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Chris HaglerSoutheast Region Leader, Climate Change and Sustainability Services

Atlanta, GA+1 404 817 [email protected]

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SPARK15: The Investor's Perspective of Sustainability