- 1. Bridging the Gaps: ESG integration acrossthe whole pension
portfolioDr. James Gifford, PRI Executive Director16 May 2012
2. About responsible investmentWhat is responsible investment?
Integration of environmental, social and governance (ESG) factors
into investmentprocesses Shareholder dialogue with companies
Engagement with policy makers Investing in the green economy,
microfinance, impact investing Various forms of portfolio screens
Not undermining the system1 3. About responsible investmentWhy?
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
reputation2 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 managementpractices 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 legitimacycrisis (Godfrey, Merrill and
Hansen, 2009). Shareholder engagement on corporate governance and
strategy can deliver abnormalreturns (Becht et al., 2008)3 5.
Principles for Responsible InvestmentWhat is the PRI? The PRI is a
partnership between the UN and investors that promotes
responsibleinvestment 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 action4 6. The
PRI InitiativeThe PRI is not: About sacrificing returns to save the
world About philanthropy About exclusion of unethical stocks from
portfolios A prescriptive/compliance-based standard5 7. The PRI
InitiativeFrom niche to mainstreamOver 1000 signatories with
greater than USD $30 trillion AUM 120035 100030 25800 20600 15400
102005 0 0Apr-06 Apr-07Apr-08 Apr-09 Apr-10Apr-11Apr-12 Number of
signatoriesAssets under management (US$ trillion)6 8. The PRI
InitiativeThe six Principles7 9. Implementation support: ESG
integration acrossthe whole pension portfolioFixed income Listed
equity PropertyPrivate equity Infrastructure InclusiveInvesting
SmallCommoditiesHedge fundsfinancewith impactinvestors8 10. Fixed
IncomeCorporate and Sovereign Fixed Income work streamsChallenges
to confront: How does analysis of ESG issues reduce default risk?
How do you engage when you dont 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
incomederivatives?Asset Owner sovereign fixed income assets subject
to ESG integration has risen from38% in 2010 to 50% in 2011.9 11.
Fixed Income Corporate bonds Assess companys 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 carbon10 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 Fund11 13. Listed Equity Active ownership
through theEnergy PRI Engagement Clearinghouse efficiency Examples
of ongoing collaborative Boarddiversity shareholder dialogue
coordinated by the PRI: Annual collaborative engagement with UN
Global Compact companies on disclosureExecutive Anticorruption
practicespay/bonuCarbon Emission reductions targetssemissions Pilot
project to implement the UNGC/PRI guidance on responsible business
in high risk and conflict-affected countries12 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 investor13 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 equity15 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 companies16 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 creation17 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 State18 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
derivatives19 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 managers20 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 201122 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 treatmentGrassroots Capital Management
4. Responsible investmentFinance in Motion 5. TransparencyIncofin
6. Balanced returnsOrchard 7. Standards Triodos Investment
Management23 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 managers 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 Andrews25 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
farmland26 28. Questions and Answers27 29. www.unpri.orge:
[email protected]: +44 (0) 207 749 1940
