Graham Sinclair-Best-practice-in-Emerging-Markets-Harvard-Law-School-1MAY2013

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By invitation, panel presentation for Session #6: Doing Well...Good...and Right: Standards and Practices for Pension Fund Investment in Emerging Markets...and Other Countries

ELEVENTH ANNUAL PENSIONS AND CAPITAL STEWARDSHIP CONFERENCE, MAY 1 –MAY 3, 2013
Pensions and Capital Stewardship Project, Labor and Worklife Program, Harvard Law School, Cambridge, Massachusetts

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Graham Sinclair-Best-practice-in-Emerging-Markets-Harvard-Law-School-1MAY2013

  1. 1. !1 Session #6 Best Practices for Pension Fund Investment in Emerging Markets Making long term investment decisions for sustainable growth in global markets in the context of the increasing importance of environmental, social and corporate governance (ESG) factors. Graham Sinclair Principal, SinCo @esgarchitect graham.sinclair@sincosinco.com +1.484.802.9908 www.sincosinco.com @SinCoESG info@sincosinco.com
  2. 2. !2@SinCoESG I sincosinco.com I info@sincosinco.com Key messages • GROWTH MARKETS. The business case for investing in global emerging markets. Accessing growth via global majors versus local majors, investments accessible in local or foreign jurisdictions. • INVESTOR INITIATIVES. Emergence of voluntary investor initiatives as hybrid between hard rules (direct laws and regulations) and soft rules (moral suasion, stakeholder pressure). • COLLABORATIVE. Pension fund investment happens within a broader investment ecosystem. To increase pipeline of investment opportunities, to increase precision of due diligence, to spread risks in the deal, pension funds are co-investing leveraging DFI capital. • GROW CREDIBILITY. Building credibility and authenticity. Growth markets have high relational component, making trust earned through relationships critical to investment confidence and conviction.
  3. 3. What do investors want? !3@SinCoESG I sincosinco.com I info@sincosinco.com
  4. 4. What do people of the world want? !4@SinCoESG I sincosinco.com I info@sincosinco.com
  5. 5. 5
  6. 6. !6@SinCoESG I sincosinco.com I info@sincosinco.com Making the case for sustainability 1/2 1. BETTER DECISIONS. Make better investment decisions, reduce risk, better opportunities. May increase investment performance. ESG performance studies reflect sustainability may increase returns. MSCI ESG tilts in listed equity perform best for buying ESG "improvers" and shorting "laggards" *2008-12. Rational from leading/lagging institutional investors in Shuffling Feet, SinCo for WWF, May 2013. 2. DIRECT BOTTOM LINE BENEFITS. Companies operate more efficiency, contribute to bottom line. 67% return from listed equity portfolio based on the Carbon Disclosure Leadership Index since 2006. 31% return by CDP Leadership Index's Global 500 peers 2006-2012. Eccles, Robert G., and George Serafeim. "The Performance Frontier: Innovating for a Sustainable Strategy." Harvard Business Review (May, 2013). 3. COMPETITION FOR TALENT. Hire better people, millennials greater interest in sustainability. 1. J.E. Hunter, F.L. Schmidt and M.K. Judiesch, “Individual Differences in Output Variability as a Function of Job Complexity,” Journal of Applied Psychology 75, no. 1 (1990): 28–42.
  7. 7. !7@SinCoESG I sincosinco.com I info@sincosinco.com Making the case for sustainability 2/2 4. INCREASE ON DEMAND SIDE FROM INSTITUTIONAL INVESTORS. Long term horizon being tested. Integrating ESG factors has become part of institutional investor due diligence, systemic view. "It is in non-financial data that much of the information needed to formulate sound judgments resides" (Funston & Wagner, 2010). 5. CONTEMPORARY INTERPRETATION OF FIDUCIARY DUTIES. Changing realities of role of fiduciary in professional investment management, shaping of rules and regulations for investment and doing business, and expectations of ESG factors. 6. INVESTOR LICENSE TO OPERATE. Investor response to stakeholder expectations and monitoring of financial system. demonstrating strong business and investment behavior reduces barriers to accessing investment opportunities and regulatory hurdles to doing businesses, especially in infrastructure deals. [Esty, Benjamin C., Carin-Isabel Knoop, and Aldo Sesia. "Equator Principles, The: An Industry Approach to Managing Environmental and Social Risks." Harvard Business School Case 205-114, January 2007.] 7. ETHICAL REASONS. Be on the right side of history, right thing to do.
  8. 8. Frameworks for ESG Lessons from LA - the rules of the game for investing in emerging markets. !8@SinCoESG I sincosinco.com I info@sincosinco.com PHOTOCREDIT: Reuters/Getty Images 2013
  9. 9. !9@SinCoESG I sincosinco.com I info@sincosinco.com Prudential investment regulations New global best practice • INVESTMENT PHILOSOPHY. ESG issues are in every investment decision. But only some investment professionals proactively manage ESG for increased opportunity set and reduced risks exposure. • REGULATION. New rules for investment management in South Africa. Regulation 28 of Pension Funds Act 24/1956 effective 1 January 2012. • PREAMBLE "A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment."
  10. 10. Initiatives driving more proactive ESG !10@SinCoESG I sincosinco.com I info@sincosinco.com
  11. 11. !11@SinCoESG I sincosinco.com I info@sincosinco.com Ruggie Principles New global best practice • Guiding Principles "Ruggie Principles" are "not intended as a tool kit, simply to be taken off the shelf and plugged in. While the Principles themselves are universally applicable, the means by which they are realized will reflect the fact that we live in a world of 192 United Nations Member States, 80,000 transnational enterprises, 10 times as many subsidiaries and countless millions of national firms, most of which are small and medium- sized enterprises. When it comes to means for implementation, therefore, one size does not fit all." [SOURCE: Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework: p.5] • "23. In all contexts, business enterprises should: • (a) Comply with all applicable laws and respect internationally recognized human rights, wherever they operate; • (b) Seek ways to honour the principles of internationally recognized human rights when faced with conflicting requirements; • (c) Treat the risk of causing or contributing to gross human rights abuses as a legal compliance issue wherever they operate. [SOURCE: Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework:p.21] • ESG EM Coverage by MSCI: 822 Securities across 21 countries, EM FF Adjusted Market Cap: US$ 3 829 085 mln. FM FF Adjusted Market Cap: US$ 117 137 mln
  12. 12. !12@SinCoESG I sincosinco.com I info@sincosinco.com Contemporary ESG issues for global mining 1. LICENSE TO OPERATE. Social licenses to operate, obtained through community engagement and sustainability management, are ever more essential to mining companies’ ability to run a successful mine. 2. NO EASY OPERATIONS. The industry is faced with many tough decisions. Management at many companies must choose between layoffs or profits. Others are forced to choose between ramping up production of low grade mines – the result could mean higher carbon emissions, wastes, and costs - or move operations deeper into regions with high uncertainty due to risks of corruption, social changes, or sensitive environments that can block projects from going forward. 3. DE FACTO REGULATIONS. The increasingly scarce high grade projects are also often in regions where safety and environmental standards need to be drastically upgraded to meet international standards. Poor social and environmental performances also significantly raise risks of resource nationalization and higher payment demands. 4. CAN ROBOTS MINE? Labor cost inflation reaches double digits for many companies and diminishes long term confidence that high margin mines in areas of unrest will remain strong investments. Mining companies face additional risks of cost hikes through increased regulatory pressure, expanding carbon regulations, and higher costs for energy and supplies SOURCE: MSCI ESG Mining Sector report, February 2013; Old Mutual Investment Group South Africa, 2013.
  13. 13. Investment in Zimbabwe? From why to how !13@SinCoESG I sincosinco.com I info@sincosinco.com PHOTOCREDIT: ZCC, 2011
  14. 14. * of total number of listed companies in country Total Companies Covered by Country 4036322824201612840 United States 3,369 (26.1%*) Canada 292 (6.6%*) Japan 1,779 (47.8%*) UK 341 (17.9%*) Australia 308 (15.5%*) Brazil 121 (28.4%*) China 1,081 (32.8%*) Mexico 41 (28.5%*) Russia 48 (3.8%*) South Africa 114 (28.2%*) Chile 23 (10.1%*) Italy 59 (19.0%*)Spain 50 (24.9%*) France 111 (8.9%*) Germany 109 (8.0%*) India 690 (17.1%*) Sweden 68 (12.6%*) Malaysia 69 (7.1%*) New Zealand 16 (10.9%*) S. Korea 244 (12.4%*) 03/27/2013Data as of + Increasing quantity and quality of ESG ratings coverage But differentiated ratings for E vs S vs G , country averages aggregate leaders/laggards. !14 SOURCE: Total companies ESG coverage = 10,315. E=4,328/S=5,431/G=10,296. Bloomberg ESG, by permission, April 2013.
  15. 15. //ESGonBloomberg PEER ANALYSIS !15 Investors can compare a company against its peers on “Efficiency”. For example, GHG emission per sales rather than absolute emissions. All rights reserved. Bloomberg Professional Service
  16. 16. !16@SinCoESG I sincosinco.com I info@sincosinco.com Investing beyond regulations PROPARCO 2012 report on Private Equity investments in real economy. "Committed to promoting the highest environmental and social standards". EUR2.6bn, up 24% vs 2010. 1. People connected to telcoms 2. Jobs created 3. Pollution behaviour and reductions in greenhouse gases 4. Increased taxes paid 5. Access to finance 6. Projects improving environment and society 7. Shipping tons
  17. 17. !17@SinCoESG I sincosinco.com I info@sincosinco.com Key messages • GROWTH MARKETS. The business case for investing in global emerging markets. Accessing growth via global majors versus local majors, investments accessible in local or foreign jurisdictions. • INVESTOR INITIATIVES. Emergence of voluntary investor initiatives as hybrid between hard rules (direct laws and regulations) and soft rules (moral suasion, stakeholder pressure). • COLLABORATIVE. Pension fund investment happens within a broader investment ecosystem. To increase pipeline of investment opportunities, to increase precision of due diligence, to spread risks in the deal, pension funds are co-investing leveraging DFI capital. • GROW CREDIBILITY. Building credibility and authenticity. Growth markets have high relational component, making trust earned through relationships critical to investment confidence and conviction.
  18. 18. sustainable investment consulting !18 • SinCo - sustainable investment consulting - is a specialist sustainable investment advisory boutique. We have no other focus, we have no conflicts of interest. We build investment conviction and competence using ESG factors in investment systems. • SinCo has a track record of building hard answers to tough questions in sustainable investment. Our clients are institutional investors, UN agencies and international NGOs, and stock exchanges. • SinCo projects have included designing sustainability indexes, expanding portfolio research on ESG factors, and designing ESG architecture across asset classes. www.sincosinco.com @SinCoESG info@sincosinco.com
  19. 19. sustainable investment consulting !19 DISCLAIMER This ESG research by SinCo includes funds, firms and initiatives that may be clients of SinCo, or the parent of, or affiliated with, a client of SinCo. SinCo ESG research reports, articles and profiles have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While we have exercised due care in compiling the information, we make no warranty, express or implied, regarding the accuracy, completeness or usefulness of the information and assume no liability with respect to the consequences of relying on the information for investment or other purposes. In particular, SinCo ESG research is not intended to constitute an offer, solicitation or advice to buy or sell securities. Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall SinCo have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited. www.sincosinco.com @SinCoESG info@sincosinco.com
  20. 20. About AfricaSIF.org Africa Sustainable Investment Forum is an independent, Pan-African, not- for-profit network, knowledgebase and advocate promoting investment in sustainable development across the continent. Launched in June 2010, the AfricaSIF.org Project is run by volunteers building a network of institutions and individuals promoting sustainable investment in Africa by investors in public, private and philanthropy sectors across asset classes, countries and stakeholders from our platform at www.africasif.org. !20

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