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ESG INTEGRATION: FOCUS ON ENVIRONMENTAL RISK AND OPPORTUNITY
LENORA SUKI
SUSTAINABLE BUSINESS AND FINANCE
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WHERE INVESTORS SHOULD FOCUS NOW AND IN THE FUTURE
ESG INTEGRATION: FOCUS ON ENVIRONMENTAL RISK AND
OPPORTUNITY AGENDA
• Sustainable and responsible investment today
• ESG analysis and integration in the investment process
• Industry specific analysis of risk and opportunity
• Use of company data and scores
• Performance and investment insights
• The next frontiers
>>>>>>>>>>>>>>
SUSTAINABLE AND RESPONSIBLE INVESTMENT TODAY
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WIDESPREAD MOVEMENT ACROSS ASSET CLASSES TO CONSIDER
NON-TRADITIONAL FACTORS AND ANALYSES IN INVESTMENT PROCESS
SUSTAINABLE INVESTMENT EMBRACES A BROAD RANGE OF APPROACHES
Source: Sonen Capital
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27%
NY – 73%
DU - 11%
THE MAJORITY OF ASSET OWNERS EXPECT AN
INCREASE IN SUSTAINABLE INVESTING PRINCIPLES
Source: Bloomberg Media, Morgan Stanley Institute for Sustainable Investing
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27%
NY – 73%
DU - 11%
ASSETS COMMITTED TO RESPONSIBLE INVESTMENTS ARE GROWING GLOBALLY
Source: Principles for Responsible Investment
PRINCIPLES FOR RESPONSIBLE INVESTMENT: 10 YEAR GROWTH
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SUSTAINABLE INVESTING IS A GLOBAL, RAPID GROWTH SEGMENT OF INVESTMENT INDUSTRY
Source: GSIA 2014 Global
Sustainable Investment Review
SRI Assets
(bn)
SRI /
Total AUM
SRI Assets
(bn)
SRI /
Total AUM
Growth of
SRI Assets
2012 2014
Europe $8,758 49.0% $13,608 58.8% 55%
Canada $589 20.2% $945 31.3% 60%
US $3,740 11.2% $6,572 17.9% 76%
Australia $134 12.5% $180 16.6% 34%
Asia $40 0.6% $53 0.8% 32%
Global - 21.5% - 30.2% -
Total $13,261 100% $21,358 100% 61%
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SUSTAINABLE VS. TRADITIONAL RISK VS. RETURN (7 YR TRAILING)
INVESTORS FOCUSED ON MARKET COMPARABLE RETURNS – NO TRADEOFF OF RETURN FOR IMPACT
Source: Morgan Stanley: Sustainable Reality
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FOCUSING ON MATERIAL ESG FACTORS LEADS TO OUTPERFORMANCE
Source: “Corporate Sustainability: First Evidence on Materiality” by Mozaffar Khan, George Serafeim, and Aaron Yoon
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PRESSURES FROM LAWMAKERS, INVESTORS, ECONOMICS AND PUBLIC
Legislative/Regulatory
• Regulatory mandates
• Pushing on materiality
• Disclosure reform
• Exchange listing requirements
Investors
• Shareholder resolutions
• Questionnaire overload
• Calls for divestment
• Rejection of boilerplate
Economics
• Resource constraints
• Climate change
• Intangibles and valuation
Public/stakeholders
• Campaigns and protests
• NGO oversight
• Political spillover
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$3 tn target by COP21
$8 tn in assets to disclose footprints
$100 bn target by COP21
PDC oversees $230 bn in AUM
THE MOVEMENT FOR DECARBONIZATION AND DISCLOSURE ACROSS STAKEHOLDERS IS GROWING
$24 tn in AUM calling for an agreement
on climate change
154 companies with $4 tn in revenues pledge
environmental goals
$22 tn investor group engaging with over
1,300 companies
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PRODUCTS AND INITIATIVES PROLIFERATING ACROSS
ASSET CLASSES AND ORGANIZATIONS
Mutual Funds (Equity and Fixed Income)
Sell-Side Research
Index Products
Exchange Traded Product
Stock Exchanges
Private Equity
THE RANGE OF INSTITUTIONS INTEGRATING ESG INTO THEIR
BUSINESS ILLUSTRATES UPTAKE:
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27%
NY – 73%
DU - 11%
PRODUCT IS GROWING BUT MOSTLY FOCUSED ON
PUBLIC EQUITIES, STILL NEED CROSS ASSET CLASS
Funds With Sustainable Investment Strategies
>>>>>>>>>>>>>>
ESG ANALYSIS AND INTEGRATION IN THE INVESTMENT PROCESS
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27%
NY – 73%
DU - 11%
BLOOMBERG IS ACCELERATING CHANGE, INNOVATION AND TRANSPARENCY
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INTANGIBLES INCLUDE PHYSICAL, HUMAN AND SOCIAL CAPITAL – REPUTATION,
BRAND VALUE, CORPORATE CULTURE, INNOVATION CAPACITY
INTANGIBLES MAKE UP THE HIGHEST PROPORTION OF CORPORATE VALUE
17% 32%
68% 80% 84%
Source: Ocean Tomo LLC, Jan 2015
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27%
NY – 73%
DU - 11%
WHY? ESG HIGHLIGHTS INTANGIBLES, LESS TRANSPARENT INFO ABOUT MANAGEMENT
23%
20%
14% 13% 13%
10%
6%
0% 0% 0%
To identifyESG risks
andopportunities
Engagement-to focus our
dialogue withcompany
managementteams
Negativescreening
To complywith PRI or
other externalmandates
To identifycompanies for
furtherscrutiny
Positivescreening
Stockselection
within broaderportfolios
Productdevelopment
(e.g.specialist
portfolios ofthematic
universes ofstocks)
To run best inclass
portfolios
Other
SOURCE: INTEGRITY RESEARCH ASSOCIATES, “ESG RESEARCH SURVEY RESULTS, MARCH 2012
Identify risks and opportunities
Focus dialogue with company management
WHAT ROLE DOES ESG ANALYSIS PLAY IN INVESTMENT DECISIONS?
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FIRST FOCUS ON EMISSIONS, ENERGY, WATER AND WASTE MOVING
INTO GOVERNANCE, ANALYTICS AND OTHER BUSINESS FACTORS
ENVIRONMENTAL FACTOR ANALYSIS EVOLVING FROM BASIC,
BACKWARD-LOOKING TO MORE COMPLEX, FORWARD-LOOKING
Backward looking basic data (company, industry and country level)
No benchmarking against climate goals
No connections with systems view or goals
Forward-looking data on capex, embedded emissions, etc.
Plant and project level real assets’ information to roll up to owners
Cross asset class environmental evaluation (e.g. carbon footprint vs. goals)
Decarbonization pathway models aligned between govts and corps
High frequency info on progress to targets
Portfolio optimization to identify most efficient decarbonization pathway
Advanced analyses – value at risk, scenario and stress testing
Linkages across ESG factors beyond E
>>>>>>>>>>>>>>
INDUSTRY SPECIFIC ANALYSIS OF RISK AND OPPORTUNITY
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ESG <GO> & BLOOMBERG INTELLIGENCE SHOW MOST RELEVANT FIELDS
AND MEDIAN PERFORMANCE BY INDUSTRY – UTILITIES FOCUS ON
EMISSIONS, FEEDSTOCK FUELS AND WATER INTENSITY AND RECYCLING
DERIVING ESG INSIGHTS FOR THE INVESTMENT PROCESS REQUIRES KNOWING WHERE TO FOCUS
Source: Bloomberg
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INDUSTRY PRIMERS AND RESEARCH » Outline of fundamental factors and risks
» Focus on changing fundamentals, regulatory risks
» Role of innovation in meeting demand
27%
NY – 73%
DU - 11%
BI <GO> BI ESG <GO>
Source: Bloomberg
CONTEXT - NOT JUST DATA - IS NECESSARY TO UNDERSTAND INDUSTRY TRANSFORMATION
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BNEF <GO>
27%
NY – 73%
DU - 11%
Source: Bloomberg
INDUSTRY AND
TECHNOLOGY
INSIGHTS
» Deep global coverage
of companies and
projects at the heart of
the low carbon
economy transition
CONTEXT - NOT JUST DATA - IS NECESSARY TO UNDERSTAND INDUSTRY TRANSFORMATION
>>>>>>>>>>>>>>
PERFORMANCE EVALUATION AND INVESTMENT INSIGHTS
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27%
NY – 73%
DU - 11%
FA ESG <GO>
Source: Bloomberg
ESG DATA ON BLOOMBERG
» Fully integrated into financial
analysis
COMPANY PERFORMANCE IS SHIFTING IN RESPONSE TO CHALLENGES
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27%
NY – 73%
DU - 11%
RV <GO>
ESG FACTORS IN INDUSTRY ANALYSIS
» Companies assessed relative to peers
Source: Bloomberg
PEER COMPARISONS CLARIFY STRONG/WEAK AREAS OF PERFORMANCE
XLTP XSCR <GO>
COMPANY ENGAGEMENT
BASED ON STRENGTHS
AND WEAKNESSES
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PORTFOLIO CARBON FOOTPRINT TOOL DRAWS ON REPORTED CARBON DATA
Source: Bloomberg
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27%
NY – 73%
DU - 11%
LEAG NEW<GO>
GREEN/SOCIAL BONDS AIM AT IMPACT INVESTMENT BUT CREDIT MARKET INTEGRATION LAGGING
Source: Bloomberg
>>>>>>>>>>>>>>
THE NEXT FRONTIERS
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Participation with the
Corporate Reporting Dialogue
(IIRC)
SUSTAINABLE ACCOUNTING STANDARDS BOARD
TO UNLOCK MATERIALITY
» SASB’s mission is to develop and disseminate sustainability accounting standards
that help public corporations disclose material, decision-useful information to
investors through a rigorous process that includes evidence-based research and
broad, balanced stakeholder participation.
» 80 industries and over 200 sustainability issues
» Documentation of materiality by regularly scan of 10,000+ source docs per sector
» Financial analyses and valuation models, cost-benefit analysis, technical protocols
» Engagement, advisory groups, public comment response and education
» Streamlining and alignment of reporting efforts
Source: SASB
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Source: SASB
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MATERIAL
ENVIRONMENTAL
FACTORS EMERGE IN
MANY TOPICS.
REPORTING
EXPECTATIONS WILL
FOLLOW.
Source: SASB
Established by the Financial Stability Board on 4 December 2015
The first global, industry-led initiative developing recommendations for
voluntary climate-related financial disclosures for companies
Chaired by Michael R. Bloomberg
What is the FSB Task Force?
9
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Key Themes Survey Response
Components of
Disclosures
The majority of respondents agreed on:
Forward-looking disclosure (short, medium and long-term)
Ability to set/achieve targets, with strategies for achievement
Align with material risks
Sector-specification
vs. Aggregation
Respondents differed on sector-specific disclosures vs disclosures
aggregated across sectors, including:
31% prefer sector-specific disclosures to be the priority
31% prefer both sector-specific and aggregated disclosures
16% prefer aggregated disclosures
22% provided alternative commentary
Transition Risk The majority of respondents agreed with definition of “risks
associated with the transition to low-carbon economy”
Many respondents offered additional thoughts on transition risk
Scenario Analysis 96% of respondents see scenario analysis as key to disclosure
* The majority of respondents to the public consultation represented users of financial
disclosures from across the investment value chain.
17
TASK FORCE ON CLIMATE RELATED FINANCIAL
DISCLOSURES WILL HAVE IMPORTANT IMPLICATIONS
Source: TCFD
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27%
NY – 73%
DU - 11%
BMAP<GO>
INVESTORS LOOKING FOR MORE GRANULAR INFORMATION ABOUT RISKS AND OPPORTUNITIES
Source: Bloomberg
GEOLOCATION AND
DATA LAYERS
SPLC<GO> SUPPLY CHAINS IN
GREATER DETAIL
NEFQ<GO> LOW CARBON SOLUTIONS
ACROSS ASSET CLASSES
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CLOSING THOUGHTS
ESG information is becoming mainstream for investors
Investors are finding value in ESG information as the demand for sustainable and
responsible investment products grows.
ESG performance contributes intangible company value
Many ESG factors may have financial implications, but most are difficult to quantify.
The investment industry is working to link valuation to ESG factors.
ESG factors have to be understood at the level of the industry
New initiatives and mainstream investor adoption is driving a focus on what is
relevant depending on business fundamentals.
Environmental insights and impacts are at peer, portfolio, systems level
Whatever the sustainability evaluation, these factors must be understood across
asset classes at multiple levels, especially relative to global goals.
The future will see unprecedented transparency and analytical sophistication
Investors are becoming more sophisticated and more demanding of the type,
quality and granularity of information on environmental risks and opportunities.