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RESPONSIBLEINVESTMENTBRIEFING2015
RI&FIXEDINCOMEAdamKirkman,AMPCapital
MichaelSalvaIco,MSCIESG
©2015MSCIInc.Allrightsreserved.Pleaserefertothedisclaimerattheendofthisdocument.
RESPONSIBLEINVESTINGANDFIXEDINCOME
MichaelSalvaIco
ClientCoverage
+61290339303
November2015
THEWORLDISCHANGING
LIMITSURPRISESFROMIDIOSYNCRATICEVENTRISKS
LIMITEXPOSURETOSYSTEMATICRISKFACTORS
FRAUD STRIKES ACCIDENTS SHUTDOWNS
WEATHER PATTERNS
WATER SCARCITY
DATA SECURITY
SKILLS SHORTAGES
MoredataandcontextcanleadtobeYerinvestmentdecisions
3
REPUTATIONALRISKANDMATERIALRISK
4
FinancialReturns
ValuesAlignment
FinancialReturns
ESGFactors
ExcludecompaniesexposedtoparIcularthemesorissues(e.g.,exControversial
Weapons,exFossilFuelsorHumanRights)
AchieveparIcularESGobjecIveswithrisk-returnobjecIve
ScreeningIntendedtoalignaporEoliowithasetofethicalorpoliIcalvalueswithout
regardtothefinancialimpact
IntegraIonIntendedtoincorporateESGFactorswhilealigningwiththemarketin
tradiIonalassetallocaIonapproaches
TRENDS:CLIENTDEMAND
• AccordingtoUSSIF,clientdemandistheNumber1reasonforincorporaIngESGCriteriaintoinvestmentvehicles.AssetMangersarefocusedonbuildingESGtargetdateandotherDCinvestmentplanopIonstailoredtomeettheneedsofMillennials¹
80% 77% 76% 73% 69%62%
28%
0%
20%
40%
60%
80%
100%
ClientDemand Mission Returns RiskManagement SocialBenefit FiduciaryDuty RegulatoryCompliance
ReasonsforIncorporaIngESGCriteriaintoInvestments
1.Source:USSIFReport2014,Fig2.12 5
TRENDS:ESGINTEGRATION
ShiQingawayfromanemphasisonnegaIvescreeningtobroadESGassetallocaIonframeworks
6
ESGINVESTMENTSIGNALS
7
COMPANYEXAMPLES:VOLKSWAGEN
8
Stakeholderscouldhaveiden<fiedproblemswiththecompanylongbeforethescandalbroke,accordingtoHowardSherman,headofcorporategovernancebusinessdevelopmentatMSCI.
“WehavehadconcernsaboutVWforsome4me,”MrShermansaid.“[It’sMSCI]corporategovernancescore..waslowerthan72percentofcompaniesglobally.”
...[and]hasbeenfallingsince2014dueto“managementandboardturmoil”.
BBB
2012
CCC
2013
CCC
2014
CCC
12-15%DropinProducIon
UnsafeWorkingCondiIons
HARMONYGOLD
9
BARRICKGOLD:LossofLicencetoOperate;USD3.7bnspent;USD6bnlawsuitpending
2010
A
2011
BBB
March2012
BB
March2013
B
March2014
B 10
RESEARCHCONCLUSIONS
HighercostofcapitalforpoorESGperformers,includingloandebt,bonddebt,andcostofequity.Source:Chava,2011;20+studies,bothacademicandindustry
HighervolaIlityforpoorESGperformersandakerESGeventssuchasspills,laborstrikes,andfraud.Sources:Lansilah<,2012;CreditSuisse;DeutscheBank;MSCIESGResearch,etal.
AccounIngirregulariIesandperformancelinkedtoESGandbroadgovernancefactors.Sources:Huang,2010;BhagatandBolton,2008;Cremersetal.,2005;DeutscheBank,2012;ISS,2011;etal.
11
ESGEVENTCREDITRISK–HISTORICALEXAMPLES
12
100
150
200
250
300
350
400
450
500
Jan-2011 Jul-2011 Jan-2012 Jul-2012
bp Qantas
100
150
200
250
300
350
400
450
500
550
Jan-2011 Jul-2011 Jan-2012 Jul-2012
bp BofA
0
100
200
300
400
500
600
700
Jan-2010 Jul-2010 Jan-2011 Jul-2011 Jan-2012 Jul-2012
bp Transocean
May2010
BBB
May2011
BB
Dec200
8
BB
Oct2010
B
Dec201
1
CCC
Apr2008
BB
Jan2
009
CCC
§ DeepwaterHorizonexplosioninApr2010
§ SignificantliabiliIesarisingfrominsuranceclaims,lawsuits,disrupIons
§ LabordisputegroundsfleetinAug2011
§ EsImatedcostofdisputes=$194million,contributesto$244millionfull-yearloss
§ AIGandFHFAlawsuitsinAug2011forallegedmortgagesecuriIesfraud
ENVIRONMENTAL SOCIAL GOVERNANCE
§ Creditdefaultswapspreadson5yrseniorunsecureddebt;MSCIIVARaIngs;Source:MSCI,Factset
ESGRESEARCHANDTOOLS
13
MSCIBARCLAYSFIXEDINCOMEINDEXES
• OverweightsESGhigh-rated/posiIvemomentumissuersandunderweightslow-rated/negaIvemomentum
• FactorIltsbasedonthe7ESGleYerraIngsandraIngsmomentumoverpastyear
• CanbecombinedwithotherscreensbasedonBISRorraIngs
• AppliesminimumESGraIngthreshold
• ≥BBBforheadlineindex
• Unratedissuersareexcluded
• Sectordrikallowedwithincorporateindicesorcanbepreserved(weightsnormalizedtoparentindex)
• AppliesnegaIvescreensforissuessuchasalcohol,tobacco,gambling,weapons,firearms,GMOs,etc.
• UsessameSRIdefiniIonasMSCISRIequityindices
• ExcludesImpactMonitor“Red”
• IndexFamilies
• ExControversialWeapons
• ReligiousScreens• ExSancIonedCountries• ExPredatoryLending
ESGIndexFamily
ESGSociallyResponsible ESGSustainability ESGWeighted
Credit/Corporate Credit/Corporate
Aggregate
Credit/Corporate
Gov’t-Related/Treasuries
Aggregate
14
BROADESGRATINGSCOVERAGEOFFIXEDINCOMEISSUERS
BarclaysGlobalAggregate
>85%MVApproach:IVAorGov’t
Government-Related
Approach:IVA(naIonalO&G,uIliIes,banks,infrastructure)orGov’t(others)
AgenciesApproach:IVA
NonListed
Approach:IVA(uIliIes,infrastructure)orGov’t(states,provinces)
LocalAuthoriIes
Approach:IVA(mulIlateralbanks)orGov’t(adminbodies)
SupranaIonals>90%MVApproach:IVACoveredBonds
Approach:IVACoveredBondsonlySecuriIzed
>99%MVApproach:Gov’t(>130countries)
Treasuries>90%MVglobal+USD,EUR,GBPApproach:IVA
Corporates(Investment
Grade)
Approach:IVAParent-subsidiarymapping
Listed
>99%MVApproach:Gov’t(>130countries)
Sovereign
Noplanstorate;canmaptoissuerABS
Noplanstorate;canmaptoissuerMBS
CorporateRaIngModel(IVA)
KEY:
Sovereign/GovernmentRaIng
Model
OutofScope
Mixed(CorporateorSovereign)
15
KEYDIFFERENCES–ESGINFIXEDINCOMEVS.EQUITY
16
• Investmentgradecorporatebonds–sectorbreakdown:
22.0%
39.6%3.2%
7.9%
9.9%
11.9%
12.7%
8.8%
6.9%
8.0%
3.9%
7.7%
10.4%
6.9%
5.0%
4.3%
13.6%
4.0%12.7%
1.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MSCIACWI BarclaysCorporate
HealthCare
IT
Materials
Industrials
Telecom
Energy
ConsumerDiscreIonary
ConsumerStaples
UIliIes
Financials
MSCIESGGOVERNMENTRATINGS
17
NATURALRESOURCES
ENVIRONMENTALVULNERABILITY
HUMANCAPITAL
SOCIO-ECONOMICENVIRONMENT
FINANCIALGOVERNANCE
Exclusions
Indexes(EM,DM,Equity,FI)
Riskmonitoring
ESGintegraIonforsovereignandgovernmentbonds
Understandcountryrisk
MSCIESGSCREENINGTOOLS
POLITICALGOVERNANCE
ESGSOVEREIGNRESEARCH–KEYTHEMES
EnergyResourceDepleIonResourceDepleIon
as%ofEconomicGrowth
ReinvestmentinHumanCapitalandInfrastructure
MostImprovedAccesstoBasicSocialServices
PrecursorsofConflictCivilLiberIesandPoliIcalFreedom
vs.Unemployment
OilThirst&PoliIcalInstabilityEuropeanOilandGasImportsbyCountry/PoliIcalRisk
18
CONVERGENCE–ESGANDCREDITRATINGS
ESGRaIng(MSCI)
CreditRaIng(Moody’s)
EMCreditUpgrades
EMCreditDowngrades
EurozoneCreditDowngrades
19
GREENBONDS–GROWTHOFMARKET
20 Source:MSCIESGResearch,Barclays.IndexIncep<onis12/31/2013,priorvalueses<matedbyMSCIESGResearch.
0
10,000
20,000
30,000
40,000
50,000
01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 01/2015
BarclaysMSCIGlobalGreenBondIndexAmountOutstanding(USDmm)
BarclaysMSCIGreenBondIndex
Launched
FirstsizableCorporateUseofProceedsbonds
Firstlabeledgreenbondsissued(EIB,IBRD)
StateStreetlaunchesfirstindex-linked
GreenBondFund
GlobalGreenBondIndex
CorporateGreenBondIndex
MSCIESGRATINGSPROCESS,DATASOURCES,ANDOUTPUTS
UnderlyingESGdataissourcedfrom:• 100+specializeddatasets(government,NGO,andproprietarymodels,etc);• Companydisclosure(10-K,sustainabilityreport,proxyreport,etc);• 5000+mediasources(globalandlocalnewssources,government,NGO,etc).
Dataspecialists,systema4cqualitycontrolprocesses,andcorporateverifica4onprocessensurequalityandcomparabilityofunderlyingmetrics.
KeyIssuesarescored(0-10)usingarules-basedscoringmodel.SystemaIcandongoingmonitoringofcontroversiesandevents.
Data MetricsEvaluaIon&Monitoring
KeyIssuescoresandweightscombinetoanoverallESGra4ng(AAA-CCC)relaIvetoindustrypeers;RaIngsaresubjecttoindustry-andmarket-leadrealitycheck,andformalcommiYeereview.
OurresearchteamprovidesdeeperinsighttoexplainmaterialESGrisksthrough:• Companyreports• Industryreports• Thema4creports• Analystcalls
RaIng Insight
21
IMPACTMONITORREPORTS
22
ImpactMonitorControversyAssessment:measurecompanyperformancerelaIvetoglobalESG-relatednormsandconvenIonsImpact:AnalysescompanyESGControversiesandtheirimpactDetailedanalysis:reportsandscoresof31indicatorsgroupedbyfivekeyissues
§ HumanRightsandCommunity§ LabourRightsandSupplyChain§ Governance§ Environment§ Customers
EasyidenIficaIon:Red,YellowandGreenflags,supportedbywriYenanalysisandstatusofeachcontroversy
RESEARCH:BUSINESSINVOLVEMENTSCREENING(BISR)
23
BISRBusinessInvolvement:assessmentofcompanyacIvityandrevenueexposureto150factors,suchastobacco,weapons,etc.Manageexposures:usingthirdpartyassessmentofESGstandardsandrestricIonsprovidingareliableandefficientmeansofidenIfyingrisks.Comply:withriskmandatesknowingMSCIbroadcoverageofcompaniesincludesalllistedequiIesandsomenon-listedinsomefactorsandcanincludecustomcoveragewhererequired
§ UnderstandandmanageaccounIngrisk
§ IdenIfypotenIalaccounIngirregulariIes
ACCOUNTINGGOVERNANCERISK(AGR)
24
IdenIfyPotenIalFraudandAvoidStockDrops
• AGRisdesignedtoidenIfyextremevaluesinaccounIngandnon-accounIngmetricsthatmaybeindicatorsofopaqueandpotenIallymisleadingfinancialreporIng
AssessRiskswithCustomizedApps
• IdenIfycompaniesatriskforsecuriIesclassacIonliIgaIonusingAGR’sLiIgaIonRiskModelandcompaniesinseverefinancialdistressusingAGR’sFinancialDistressModel
ABOUTMSCIESGRESEARCH
Over125assetownerswith$4.4trillioninassetsdependonMSCIESGResearchOver900clientsglobally,with$15trillioninAUM
Boston
NewYork
Toronto
SanFrancisco
CapeTown
Tokyo
Beijing
Sydney
MumbaiManila
London
Paris
Geneva
Monterrey
RockvilleAnnArbor
Frankfurt
ü Over 200 Global Staff ü 140+ Full-time Research Staff ü ESG Research Produced Entirely In-house
ü Full Analysis on over 5,700 Global Companies
25
CONTACTUS
26
AMERICAS +12128045299
EUROPE,MIDDLEEAST&AFRICA +442076182510
ASIAPACIFIC +61290339339
msci.com/[email protected]
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