ESG Investing: Buzzwords or Better Investment? Docs/Annual...2018. Up 510%from 2015 10 x Relative size of the China carbon trading market vs. the California carbon trading market 92%

National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems

ESG Investing: Buzzwords or Better Investment?Mark W. McDivitt | State Street | Managing Director | Head of ESG SolutionsJulian A. Lyne | Newton Investment Management | Chief Commercial Officer

NCPERS 2018 Annual Conference & ExhibitionMay 13 – 16New York, NY

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NCPERSESG DISCUSSION

Mark W. McDivitt

National Conference on Public Employee Retirement Systems

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OutlineDefining ESG – Why now? Page 3‐9

State Street’s ESG Solutions Page 10‐11

The Data Challenge Page 12‐13

ESG & Acronyms of Note Page 14‐15


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Environmental Does the company have a positive or negative impact on resources?

Social How does the company treat its employees, customers, and community?

Governance Is the company’s leadership structured to facilitate accountability and independence?

ESG DefinedEnvironmental, Social & Governance factors that may impact the risk & return of portfolios.


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The Evolution of TransparencyThe root of firm valuation is the accurate disclosure of relevant information

1887 1934 1973 2011

AICPAAmerican Institute of CPAs

(Accountants)

SECInvestor Disclosure

FASBAccounting Disclosure(Financial Factors)

SASBSustainability Accounting

Standards(Non‐Financial Factors)

S&P 500 Companies 80% tangible

20% intangible assets1

S&P 500 Companies 20% tangible

80% intangible assets1


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Deman

d Drivers

Defense Risk Mitigation

More Data Means More Transparency

Offense Alpha Generation

Experiencing Exponential Growth

Do Well/Do GoodBrand Enhancement

Cultural Shift

ESG has passed the tipping point

1,900 UNPRI Signatories1

$70+ Trillion

ESGDrivenStrategies1

$30Trillion

Low Carbon Funding2

$16 Trillion

Source information on slide 32


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ESG DefenseImpact on the risk & return of portfolios

Factor Company Event Impact

EnvironmentalPeabody Energy

Exxon MobilBP

Publicly rejects climate science & action; funded groups that cast doubt

on manmade climate change & opposed environmental regulations 1

99% drop in share price from 2011‐20162

and Chapter 11 filing in 20163

Social Valeant Pharmaceuticals

Wells FargoFacebook

Increased price of prescription drugs by over 500%; received subpoenas

from federal prosecutors over pricing strategy 4

80% drop in stock price over the last year5 and Board voted to remove

CEO6

Governance Volkswagen

TheranosFiat

Intentionally programmed “clean diesel” vehicles to deceive EPA

emissions tests7

50% drop in share price between March & September 20158 and Forced

resignation of CEO9


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Washington, DC60+ institutional investors and

multiple state treasurers urge SEC to require company ESG risk

disclosure. DoL affirms plan sponsors have fiduciary duty to consider ESG

Paris, FranceGov’t passes Article 173 introducing mandatory climate change‐related reporting for institutional

investors

Ontario, CanadaParliament requires all DB pension plans to

disclose if investment policies and procedures incorporate ESG factors

European UnionEuropean Parliament

directive mandates large publicly‐held entities to

issue sustainability information

Buenos Aires, Argentina

Brazil

India

Malaysia

Oslo, Norway

Seychelles

Johannesburg, South Africa

Sri Lanka

Thailand

Sacramento, CACalPERS announces it factors managers use of ESG in their process into its hiring decisions

Hong Kong

Cape Town, South AfricaLegally‐codified mandate for

sustainability reporting to help drive shareholder value

London, EnglandUK’s largest pension funds join forces to publish reporting guide to ensure asset managers deliver on the responsible

investment assurances

Sydney, AUASX issues ESG Reporting Guide for companies to

disclose ESG sustainability risks

Chile and Spain introducedinitiatives supporting the adoption of sustainability

reporting based on use of the GRI Standards

Zimbabwe, Africa

Toronto Canada

Stock exchange requires or supports listing company ESG

reporting

ESG Defense – Seeking ESG Information and AnalyticsRegulators, Investment Committees and State Street Clients


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Why – ESG Demand DriversStatistics of note

GENERATIONS8% 31% 59% 2%

BABY BOOMERGEN X

GEN Y/MILLENIALSiGEN/GEN Z

Based on State Street Employees

$70+ T 1,900+ UNPRI Signatories from over 50 countries

$16 TTo be invested in clean tech development to meet Paris COP21 2° Climate Agreement

$250 BGlobal green bond issuance is set to grow by 60% in 2018. Up 510% from 2015

10 xRelative size of the China carbon trading market vs. the California carbon trading market

92%Investors who want companies to identify and report on material ESG issues (CAR Research)

$30 TMillennial earnings & inheritance over the next 2-3 decades


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Over the past 5 years, the S&P 500 divested of fossil fuels would have outperformed the market by a cumulative 6.8%

10-Year Performance of the Fossil Free Indexes (white) vs. the S&P 500 (green) (as of October 2017) Source: Thomson Reuters Eikon™

ESG OffenseInvesting with an ESG lens can outperform traditional strategies utilizing only financial factors


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Do Well/Do Good

LEED Certified offices: One Lincoln, John Adams & Channel Center Offsets 100% SCOPE 3 carbon emissions from global business travel Supports:

– Massachusetts Maritime Academy wind facility in Buzzards Bay – Crow Lake Wind, South Dakota

EPA Green Power Partner Leader Branding Recognition – Achieving State Street’s stated internal goal of supporting:

– Carbon offset projects with compelling grassroots/human interest element

– Promotes local CleanTech economic activity

2016 Environmental Attribute Purchase & CleanTech Sponsorship

100%State Street’s North

American electric load for 2016 was derived from

renewable energy


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Do Well/Do GoodState Street’s Carbon Offset Projects → Geographic Loca ons

2011: China Run‐of‐river hydroelectric project

2012: Brazil Hydroelectric project 2013: South Korea Waste heat recovery project

2014: Indonesia REDD Biodiversity project

2015: Poland Wind Project

2016: Uganda Cook Stove Project

2017: Kenya Cook Stove Project


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ESG Data GenerationHumans vs Machines

The answer: use Both

Human Driven Machine Driven

Analysts’ deep dive into:• Balance sheet• Regulatory filings• Business model & supply chain

CPUs deep dive into:• Curated news media• NGO reports• Supply chain

PROS:• Comprehensive• Interpretable• Typically longer history

PROS:• High frequency (daily)• Smaller staff• Repeatable

CONS:• Labor‐intensive / low frequency• Analyst bias

CONS:• Often sentiment‐driven• Few hard metrics


14*Screenshots for illustrative purposes. No live client data being used.

• An analytics platform designed to identify and assess the non‐financial or ESG‐related risks embedded in a client portfolio

• An interactive web‐based tool that allows the client to view their portfolio from a sector or regional perspective

• Drilldown capability to the company level to give the client decision support for taking action on asset allocation

• Not intended to be redundant with existing tools

ESGXSM Proprietary Analytics Tool


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Acronyms of NoteCDP – (formerly) Carbon Disclosure Project

CERES – Coalition for Environmentally Responsible Economies

COP21 – Conference of the Parties (aka Paris Climate Agreement)

EA – Environmental Attribute

EUA – European Union Allowance

ESG – Environmental, Social, & Governance

GRI – Global Reporting Initiative

ICGN – International Corporate Governance Network

OCIO – Outsourced Chief Investment OfficerREC – Renewable Energy Credit

SASB – Sustainability Accounting Standards Board

SRI – Sustainable and Responsible Investing

TCFD – Task Force on Climate‐Related Financial Disclosures

UNFCCC – United Nations Framework Convention on Climate Change

UNGC – United Nations Global Compact

UNPRI – United Nations Principles for Responsible Investment

UNSDG – United Nations Sustainable Development Goals

US SIF – United States Sustainable Investment Forum

VCU – Voluntary Carbon Unit

30% Club – UK Campaign with goal of achieving a minimum of 30% women on FTSE‐100 boards


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State Street ESG Affiliations• Boston Women's Compact

• Business in the Community

• CSR Asia Limited /Europe

• Boston College Center for Corporate Citizenship

• Business for Social Responsibility

• Carbon Disclosure Project (CDP)

• CECP‐ SII

• Ceres

• ESG Research Australia

• Global Reporting Initiative (GRI)

• Green Power Partner

• Greentown Labs

• ICI Global International Integrating Reporting Council

• Investor Network on Climate Risk

• Principles of Responsible Investment (PRI)

• Sustainability Accounting Standards Board (SASB) Alliance Member

• TCFD

• The Coalition for Inclusive Capitalism

• United Nations Environment Programme Finance Initiative (UNEPFI)

• United Nations Global Compact (UNGC)

• World Business Council for Sustainable Development (WBCSD)


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Mark W. McDivittManaging Director Head of ESG SolutionsState Street Corporation

Mark McDivitt heads up State Street’s ESG Solutions business focused on new product development and thought leadership. He plays an active role on State Street’s Executive Corporate Responsibility Committee constructing environmental attribute portfolios to address State Street’s annual sustainability objectives. Mark is also on the advisory board of CECP’s Strategic Investor Initiative, Greentown Labs Cleantech Incubator and a First Mover Fellow at the Aspen Institute’s Business & Society Program. Prior his role leading ESG Solutions, he ran FX Hedge Fund Sales.

Before joining State Street in 2010, Mark was Founder and President of CarbonCCY Management executing environmental attributes on behalf of renewable energy infrastructure companies.

Mark began his career with Fuji Bank in Tokyo, trading interest rate swaps followed by fifteen years with Morgan Stanley and Deutsche Bank in Tokyo, Singapore and London in the capacity of Head of Hedge Fund Sales. In addition, he held an eight year term with AIG and CS in Hedge Fund FX & Derivative Sales.

Mark graduated Magna Cum Laude with a Bachelor of Arts degree in Economics from St. Lawrence University, is a graduate of International Christian University in Tokyo, Japan and is a retired Captain of the United States Army Reserves

National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems

Disclaimers and Important Risk Information State Street Global Exchange℠ is a trademark of State Street Corporation (incorporated in Massachusetts) and is registered or has registrations pending in multiple jurisdictions. This document and information herein (together, the “Content”) is subject to change without notice based on market and other conditions and may not reflect the views of State Street Corporation and its subsidiaries and affiliates (“State Street”). The Content provided is for informational, illustrative and/or marketing purposes only; it does not take into account any client or prospects particular investment or other financial objectives or strategies, nor any client’s legal, regulatory, tax or accounting status, nor does it purport to be comprehensive or intended to replace the exercise of a client or prospects own careful independent review regarding any corresponding investment or other financial decision. The Content does not constitute investment, legal, regulatory, tax or accounting advice and is not a solicitation to buy or sell securities, nor is it intended to constitute any binding contractual arrangement or commitment by State Street of any kind. The Content provided was prepared and obtained from sources believed to be reliable at the time of preparation, however it is provided “as‐is” and State Street makes no guarantee, representation, or warranty of any kind including, without limitation, as to its accuracy, suitability, timeliness, merchantability, fitness for a particular purpose, non‐infringement of third‐party rights, or otherwise. State Street disclaims all liability, whether arising in contract, tort or otherwise, for any claims, losses, liabilities, damages (including direct, indirect, special or consequential), expenses or costs arising from or connected with the Content. The Content is not intended for retail clients or for distribution to, and may not be relied upon by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to applicable law or regulation. The Content provided may contain certain statements that could be deemed forward‐looking statements; any such statements or forecasted information are not guarantees or reliable indicators for future performance and actual results or developments may differ materially from those depicted or projected. Past performance is no guarantee of future results. No permission is granted to reprint, sell, copy, distribute, or modify the Content in any form or by any means without the prior written consent of State Street.

© 2018 State Street Corporation, All rights reserved.

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ESG INVESTING: BUZZWORDS OR BETTER INVESTMENT?Julian A. Lyne


Environmental, Social and Governance at Newton is founded in risk adjusted return…it’s all about better investment decision making

Newton’s focus in ESG research is on materialityESG = Environmental, Social and Governance

ESG1 issues can have a material impact on company value

Ensures that companies protect the interests of investors across the capital structure

Protects against reputational loss for Newton and its clients


• Newton’s long‐term investment belief is that responsibly managed companies are best placed to achieve sustainable competitive advantage and provide strong long‐term investment opportunities

Newton’s multi‐decade pedigree in responsible investing

5.Transparent client reporting

4.Involvement in policy & regulation

3.Active proxy voting

2.Engagement and active stewardship

1.Integrated ESG Research


Types of responsible investment approaches in the market

EXCLUSIONS AND SCREENING

‘TRADITIONAL SRI’

INTEGRATED ESG‘ACTIVE OWNERSHIP’ SUSTAINABILITY

Belief and/or faith‐based

Excludes investments – usually by sector alcohol, gaming, tobacco, etc.

Or underweights quantitatively based on low ESG scores

Investment‐based

An approach that incorporates material relevant ESG issues in the investment process

Looks for ESG insight as a source of social change and risk/reward

Actively engages with investments to promote good behaviour

Investment/impact‐based

Investing in ‘sustainable’ businesses that have both:

– durable financial and competitive positions, and

– manage positively the material ESG impacts of their operations

IMPACT INVESTING

Impact‐based

Investing to generate a measureable social or environmental impact:

– typically aligned with certain themes e.g. gender diversity, climate change etc.

– social entrepreneurship: investment undertaken with positive social change as a goal


Why are we here today talking about ESG . . .


Source: 2016 Global Sustainable Investment Review (http://www.gsi‐alliance.org/wp‐content/uploads/2017/03/GSIR_Review2016.F.pdf)

12,046

7,527

5,919

4,385

890

138

101

15,023

10,369

8,365

6,210

1,030

331

248

Negative/exclusionary screening

ESG integration

Corporate engagement and shareholder action

Norms‐based screening

Positive/best‐in‐class screening

Sustainability themed investing

Impact/community investing

2014 2016

($M)

Growth of ESG Strategies Globally from 2014 ‐ 2016

The ESG marketGlobal Sustainable Investment Review Findings


The ESG marketGlobal Sustainable Investment Review Findings

Source: 2016 Global Sustainable Investment Review (http://www.gsi‐alliance.org/wp‐content/uploads/2017/03/GSIR_Review2016.F.pdf)


There are plenty of choices for potential investors. . . SUSTAINABLE FUNDS SRI GREEN BOND FUNDS HEATH FUNDS

CLIMATE FUNDS ESG INDEX FUNDS WATER FUNDS AGRICULTURE FUNDS

SOCIAL IMPACT FUNDS TIMBER OVERLAY STRATEGIES INTEGRATED ESG

OVERLAY STRATEGIES LOW CARBON WIND FUNDS SMART BETA


What are clients looking for?

Source: Alex Bernhardt, Mercer October 2017

ALIGNMENT WITH ENVIRONMENTAL OR

SOCIAL GOALS(e.g. Environmental Foundation and

Climate Change)

BELIEF IN ESG OUTPERFORMANCE

(e.g. Any PRI Signatory)

MEMBER ORBENEFICIARY

INTEREST(e.g. Health Insurer and Tobacco)

REPUTATIONAL OR REGULATORY RISK

MANAGEMENT(e.g. Public Pension and Thermal Coal)

RESPONSIBLE INVESTMENT

MOTIVATIONS


Outcome maps

Source: Christian McCormick, Allianz Global Investors, September 2017


A Tale of Values‐Driven and Profit‐Seeking Social Investors: Journal of Banking and Finance vol 35, 2011 (Derwall, Koedijk & Ter Horst) Performance very much depends on the type of SI strategy. They distinguish ethical or values oriented strategies, which tend to underperform, and profit‐oriented SI strategies. The latter use ESG information for better decision making, and in fact outperform mainstream strategies.

The Economic Value of Corporate Eco‐Efficiency: Kellogg School of Business 2010 (Guenster, Derwall, Bauer & Koedjik) Results suggest that the market's valuation of environmental performance has been time variant, which may indicate that the market incorporates environmental information with a drift. Our results have implications for company managers, who evidently do not have to overcome a trade‐off between eco‐efficiency and financial performance, and for investors, who can exploit environmental information for investment decisions.

Corporate Sustainability: First Evidence on Materiality Harvard Business School Working Paper, 2015 (Khan, Serafeim & Yoon) Firms making investments and improving their performance on environmental, social, and governance (ESG) issues exhibit better stock market performance and profitability in the future. For companies, this suggests that their efforts to do good are rewarded. For investors, this suggests that there is substantial value from analyzing non‐financial data and incorporating it into their decisions Not all such initiatives are equally beneficial. Companies should stick to social and environmental issues that are strategically important for their business if they want such efforts to contribute to the valuation.

A sample of the supporting academic research


Studies by Dimson (Cambridge), Karakaş (Cambridge), and Li (LSE)

• US study 1999‐2009:

• 2,152 engagement sequences

• 613 public firms

• Global study 1999‐2016:

• 25,000 engagements

• 5,000 firms

• 55 countries

Active Ownership


Source: Dimson, Karakaş and Li, Figure 1

Cumulative abnormal return (%)

US Study: Active Ownership and Impact

- 1

0

1

2

3

4

5

6

7

- 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Event window (in months)

All engagements Successful engagements Unsuccessful engagements


Impact: Successful engagements show positive abnormal returns Unsuccessful engagements not penalized. Abnormal returns higher, when “block premium” is higher

Targeting: firms more likely to be engaged if

– they are larger,– have more socially conscious institutional investors, and– lower insider shareholdings exist

Success: Engagement success more likely, if engaged firms are larger

Global Study: Main Findings (so far)25,543 engagements in 55 countries by asset manager (1999‐2016)


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Accelerating thematic trendSource: Shutterstock.

ELECTRIC VEHICLES

Case study EV’s: Sustainability can create opportunities


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Case study: ESG1 risks in lithium‐ion batteries

How material are the risks?Note: 1 Environmental, Social and Governance.


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ESG1 in active management

Sustained engagement for changeNote: 1 Environmental, Social and Governance.

Asian storage battery manufacturing company

Feb 2016

Mar2016

May2016

Aug2016

Sep2016

Nov2016

Dec2016

Jan2017

Feb2017

Mar2017

Apr2017

May2017

June2017

ESG Review conducted-MEDIUM score

BUY recommendation following positive meeting with company executives

Internal EV investment case discussed

THAAD decision impacts Chinese EV regulation

SDI shares down 12%

Q3 Results and SDI share buy-back

SDI shares rally

Samsung Electronic recalls Galaxy Note 7 due to battery problems

Samsung SDI shares down 12%

BUY recommendation following announcement that VW searching for battery partners

ESG tour in South Korea highlights governance, battery safety & child labour in cobalt mining concerns

Samsung Electronic’sVice Chair arrested under fraud allegations

New SDI CEO appointed Newton emails SDI to discuss ESG concerns

Newton speaks to Apple regarding supply chain concerns

China blocks foreign battery manufacturers from entering market

Samsung Electronic investigation into battery explosions highlights SDI and ATL battery failures were due to difficult design spec

Request investor documents translated into English

Newton co-signs letter to Samsung Electronic calling for governance reform

Newton discusses concerns around child labour in cobalt supply chain with Samsung SDI

Samsung SDI releases cobalt progress report

Oct2017

Newton speaks to Chinese Chamber of Commerce for Metals, Minerals & Chemicals (CCCMC) regarding work with companies and miners, and the Responsible Cobalt Initiative

Nov2017

Jan2018

Newton joins international investor collaboration to increase pressure on companies to take action

Newton attends Responsible Cobalt Initiative in Geneva to publicly support initiative

The securities mentioned are only for illustrating the investment process of Newton Investment Management. These opinions should not be construed as investment or any other advice and are subject to change. This slide is for information purposes only and does not constitute an offer or solicitation to invest.


1 ESG demand has been increasing and is likely to continue its trend

2 Pure negative screening still prevails for now (societal benefits over financial performance) in terms of assets under management

3 Integrated ESG has been growing most rapidly – middle ground between pure negative screening and impact investing

4 Sustainability – the natural extension to integrated ESG, that balances financial performance and impact, will likely increase in popularity in our opinion

5 Whilst not all asset owners have ‘profit’ as their sole motive, delivering to clients objectives will be key

Bringing it all together. . . .

One last thing . . .


Questions for investors to ask their investment managersAvoiding the ‘greenwash’

How is the resource structured and what expertise do the staff have?

What is the process for integrating ESG into investment decisions?

What codes of practice has the investment manager signed?

Does the investment manager exercise its voting rights globally?

Has the investment manager signed up to the UN PRI?

What ESG reporting is available for clients?

Where does this resource sit within the investment structure?

What dedicated resource exists to assess ESG issues?


Julian Lyne Chief commercial officer – Newton Investments Julian is a member of Newton’s executive management committee with responsibility for all aspects of global distribution, product development, client relationship management and marketing. He initially joined Newton in 2014 to lead the global consultant relations and UK institutional business development team. Prior to joining Newton, Julian was head of institutional business at F&C. Throughout his career he has held various roles covering client and consultant relations across both DC and DB arrangements.Julian has been actively engaging with both pension and E&F clients on ESG matters for over 20 years, and is heavily involved in formulating and delivering Newton's product development and marketing positioning in this area.3 years at Newton24 years' investment [email protected]


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Important informationFor professional investors onlyThis is a financial promotion. Issued in the UK by Newton Investment Management Limited.Portfolio holdings are subject to change at any time without notice and should not be construed as investment recommendations.Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector.Where an index is used as a comparative index, this strategy does not aim to replicate either the composition or the performance of the comparative index.The value of overseas securities will be influenced by fluctuations in exchange rates.A concentrated portfolio does not have the diversity of investment that is generally expected. This means that each stock within the portfolio may have a more significant effect on its performance.Assets under management include assets managed by Newton Investment Management Ltd and Newton Investment Management (North America) Limited. In addition, AUM for Newton may include assets managed by Newton’s officers as employees of The Bank of New York Mellon and assets of wrap fee account(s) for which Newton Investment Management (North America) Limited provides sub‐advisory services to the primary manager of the wrap program. Newton Investment Management (North America) Limited and Newton Investment Management Limited are authorised and regulated by the Financial Conduct Authority in the UK, and Newton Investment Management (North America) Limited is registered as an investment adviser with the SEC.

The enclosed material is confidential and may not be reproduced or redistributed without the prior written consent of Newton Investment Management Limited. Nothing herein constitutes an offer to sell, or solicitation of an offer to purchase, any securities. ‘Newton’ refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited and Newton Investment Management (North America) LLC. NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. Except for Newton Investment Management (North America) LLC and Newton Investment Management (North America) Limited, none of the other Newton companies offer services in the US.These opinions should not be construed as investment or any other advice and are subject to change. This document is for information purposes only.Newton claims compliance with the Global Investment Performance Standards (GIPS®). To receive a list of composite descriptions of Newton and/or a compliant presentation, contact the RFP Team at Newton‐RFP‐[email protected] or write to Newton Investment Management Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA, Tel: 020 7163 9000.

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Documents

ESG Investing: Buzzwords or Better Investment? Docs/Annual...2018. Up 510%from 2015 10 x Relative size of the China carbon trading market vs. the California carbon trading market 92%