www.innovestgroup.com Shareholder Value Workshop Saratoga, June 22, 2005 Hewson Baltzell President 4 Times Square, 3rd Flo...
Outline <ul><li>Innovest Overview </li></ul><ul><li>Innovest Client Research Portal </li></ul><ul><li>United Nations Globa...
What We Do <ul><li>Innovest is an independent sub advisory investment research firm which analyzes the effect of intangibl...
Company Overview <ul><li>Background </li></ul><ul><li>Specialist investment research provider,focusing on non-traditional ...
 
What We Do
What We Do
 
 
 
 
<ul><ul><li>“ Fiduciary Duty” </li></ul></ul><ul><ul><li>Pension fund consultants as “gate keepers’ </li></ul></ul><ul><ul...
That was then… New Views of Fiduciary Requirements: <ul><li>Environmental and social factors were believed to lie OUTSIDE ...
New Views of Fiduciary Requirements: Fiduciary Duty Irony – if Saratoga were located in Surrey instead of New York, it wou...
Pension fund consultants  as “gate keepers’ <ul><li>Pension fund managers and directors often rely heavily on consultants ...
Relationship between “mission” and “investments” <ul><li>Disconnect – Very few pension funds actually use sustainability r...
Relationship between “mission” and “investments” <ul><li>Carbon Disclosure Project – Pension Fund Signatories </li></ul><u...
CDP Signatories ABP Allianz / Dresdner AXA BP Investment Management BNP Paribas Connecticut Retirement Plans and Trust Fun...
Relationship between “mission” and “investments” <ul><li>Examples of walking the talk </li></ul><ul><ul><li>ABP – Loyalis ...
<ul><li>Financial Institutions </li></ul><ul><li>ABN-AMRO Bank </li></ul><ul><li>ABN-AMRO Asset Management </li></ul><ul><...
Other Research of Interest - Erasmus et al <ul><li>The Eco-Efficiency Premium in the U.S. Equity Market  </li></ul><ul><li...
<ul><li>Selected stocks within each industry with the highest return potential while satisfying all the investment constra...
<ul><li>Environmental alpha has power as a stand-alone factor to determine future stock returns over the testing period (D...
Other Research of Interest - SSGA  Incorporating environmental with financial inputs yields impressive results Performance...
Other Research of Interest – Columbia   <ul><li>Economic Benefits of Certification Programs  </li></ul><ul><li>Study by Ce...
Other Research of Interest – Hedge Fund   <ul><li>Development of a hedge fund strategy incorporating environmental conside...
Other Research of Interest – Global 100   <ul><li>The Stock Market Value of Sustainability  </li></ul><ul><li>Study by Dan...
Other Research of Interest - Erasmus et al <ul><li>The Economic Value of Corporate Eco-Efficiency  </li></ul><ul><li>Study...
Innovest Sector Reports
Innovest Sector Reports
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CONFIDENTIAL Innovest Strategic Value Advisors. Inc. Uncovering ...

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  • The high level of interest by institutional investors coupled with the compelling quantitative studies led us to conduct some research of our own. We chose to do a simulation and incorporate environmental rankings in the stock selection process of our active quantitative strategy in order to gauge the impact on Performance of emphasizing those companies with better environmental records. We incorporated a number of constraints to avoid market cap, beta or style biases that can occur when constructing portfolios with environmental criteria. However, it is important to note that we did not eliminate any companies from consideration. Rather we used the information to weight more heavily the companies With above average environmental characteristics.
  • This performance information cannot be shown without the accompanying notes found on the last slide of this presentation.
  • In building the portfolio, we adhere to clear risk control guidelines to ensure we stay within our tracking error target of no more than 4%-6% and to assure sufficient diversification across sectors, industries and stocks. [If appropriate to the prospect, mention screens for tobacco companies, etc., as part of the portfolio construction process.] Of course, one of the most important forms of risk control is a strong sell discipline…
  • CONFIDENTIAL Innovest Strategic Value Advisors. Inc. Uncovering ...

    1. 1. www.innovestgroup.com Shareholder Value Workshop Saratoga, June 22, 2005 Hewson Baltzell President 4 Times Square, 3rd Floor New York, NY 10029 United States Tel: 212-421-2000 Fax: 212-421-9663 [email_address]
    2. 2. Outline <ul><li>Innovest Overview </li></ul><ul><li>Innovest Client Research Portal </li></ul><ul><li>United Nations Global Compact Plus </li></ul><ul><ul><li>Review of 2500 companies </li></ul></ul><ul><ul><li>Country screens </li></ul></ul><ul><li>Update on Pension Fund Activity </li></ul><ul><li>Examples of How Institutions are Using Research </li></ul><ul><li>Other Research of Interest </li></ul>
    3. 3. What We Do <ul><li>Innovest is an independent sub advisory investment research firm which analyzes the effect of intangible value factors on corporate performance </li></ul><ul><li>We rate companies on these issues from AAA (top) to CCC (Bottom) </li></ul><ul><li>Innovest’s perspective: AAA companies are those which supply the goods and services which we demand, with the lowest environmental impact relative to their peers and in a socially equitable manner. </li></ul><ul><li>Our goal: Change the DNA of Wall Street to incorporate environmental and sustainability issues </li></ul>
    4. 4. Company Overview <ul><li>Background </li></ul><ul><li>Specialist investment research provider,focusing on non-traditional drivers of investment risk and returns. Leading indicators of financial performance – and overall management quality – include companies’ environmental, social, and governance performance, all factors of growing importance. </li></ul><ul><li>Coverage universe of over 2100 global companies in over 60 sectors </li></ul><ul><li>Founded in 1995 and has since grown to approximately 50 professionals </li></ul><ul><li>Offices in London, New York, Toronto, Paris, Melbourne, clients in 20 countries </li></ul><ul><li>Chairman Emeritus was former Chief Investment Officer of TIAA-CREF, one of the largest pension funds in North America </li></ul><ul><li>Strategic investors include ABP, largest pension fund in Europe </li></ul><ul><li>Serves both mainstream and SRI investment clients </li></ul><ul><li>$1.1 billion under structured sub-advisory mandates </li></ul>
    5. 6. What We Do
    6. 7. What We Do
    7. 12. <ul><ul><li>“ Fiduciary Duty” </li></ul></ul><ul><ul><li>Pension fund consultants as “gate keepers’ </li></ul></ul><ul><ul><li>Relationship between “mission” and “investments” </li></ul></ul>Financial Sector Drivers for the Evolution of U.S. Environmental Laws and Practice Emerging Solutions Challenges <ul><ul><li>Broader array of risk </li></ul></ul><ul><ul><li>Examples </li></ul></ul><ul><ul><li>Walking the Talk </li></ul></ul>Pension Fund Investment Strategy
    8. 13. That was then… New Views of Fiduciary Requirements: <ul><li>Environmental and social factors were believed to lie OUTSIDE the purview of fiduciaries’ proper focus on purely financial risk and return. </li></ul><ul><li>Growing body of academic and practical evidence that paying – and not paying – attention to these factors does impact returns. </li></ul><ul><li>European and Australian pension legislation now mandates addressing environmental and social factors; rest of world cannot lag behind for long in a globalized investment climate. </li></ul><ul><li>Social/environmental/governance risks ARE, increasingly, financial and competitive risks. Therefore, today’s prudent fiduciaries MUST concern themselves with companies’ social/environmental performance and strategic positioning. </li></ul>But… This is now… Fiduciary Duty
    9. 14. New Views of Fiduciary Requirements: Fiduciary Duty Irony – if Saratoga were located in Surrey instead of New York, it would be a legal requirement for public pension funds to disclose what type of environmental social and ethical research is used in the investment management process Mainstream investors/consultants continue to say, “No Evidence” I refer the jury to: Exhibit A – Journal of Asset Management, Vol 5, No 4 (Gluck et al) Exhibit B – Financial Analysts Journal, Vol 61, No 2 (Derwent et al) And many other studies
    10. 15. Pension fund consultants as “gate keepers’ <ul><li>Pension fund managers and directors often rely heavily on consultants to create their portfolios </li></ul><ul><li>Pension fund consultants are risk averse – there is no upside for them to try something new with client portfolios </li></ul><ul><li>As a result, they will almost always recommend against any use of environmental and sustainability research </li></ul><ul><li>Only great resolve on the part of pension fund staff and directors can overcome this – “who’s in charge, anyway?” </li></ul><ul><li>Beneficiaries can also play a role – “whose money is it, anyway?” </li></ul><ul><li>When forced by clients, consultants do help make RFPs, though some are too restrictive, thus thwarting innovation </li></ul>
    11. 16. Relationship between “mission” and “investments” <ul><li>Disconnect – Very few pension funds actually use sustainability research in their investment process, even when their organization’s mission would indicate they should </li></ul><ul><ul><li>United Nations </li></ul></ul><ul><ul><li>World Bank </li></ul></ul><ul><ul><li>Most states </li></ul></ul><ul><ul><li>Most companies </li></ul></ul><ul><ul><li>Most NGOs </li></ul></ul><ul><li>Nevertheless, many efforts in corporate activism </li></ul><ul><ul><li>Carbon Disclosure Project - signatories represent over $22 trillion in assets under management </li></ul></ul><ul><ul><li>Investor Network on Climate Risk (INCR) – members include many US state treasurers </li></ul></ul><ul><ul><li>Institutional Investor Group on Climate Change (IIGCC) – the UK-based counterpart of the INCR </li></ul></ul><ul><ul><li>Many shareholder resolutions and proxy voting efforts </li></ul></ul>
    12. 17. Relationship between “mission” and “investments” <ul><li>Carbon Disclosure Project – Pension Fund Signatories </li></ul><ul><ul><li>Over 150 signatories </li></ul></ul><ul><ul><li>Over 30 of which are pension funds e.g. CalPERS, CalSTRS, etc. or state officials such as treasurers </li></ul></ul><ul><ul><li>Over $22 trillion of assets under management </li></ul></ul>
    13. 18. CDP Signatories ABP Allianz / Dresdner AXA BP Investment Management BNP Paribas Connecticut Retirement Plans and Trust Funds Credit Suisse Group Development Bank of Japan Deutsche Asset Management HSBC Holdings Legal & General Merrill Lynch Investment Managers Munich Re Neuberger Berman Ontario Teachers Pension Fund Rabobank Societe Generale Asset Management Storebrand Swiss Re Asset Management State Street Global Advisors Treasurer, State of Maine UBS Global Asset Management University Superannuation Scheme Wells Fargo A Sampling of the Signatories
    14. 19. Relationship between “mission” and “investments” <ul><li>Examples of walking the talk </li></ul><ul><ul><li>ABP – Loyalis Fund, investment in Innovest, lead investor in Emerging Markets Sustainability Fund (Rexiter/Innovest) </li></ul></ul><ul><ul><li>Environment Agency of England & Wales (SSgA/Innovest) </li></ul></ul><ul><ul><li>BP Pension (uses Innovest research in pension investments) </li></ul></ul><ul><ul><li>British Telecom Pension (owns asset manager Hermes, active in this field and user if Innovest research) </li></ul></ul><ul><ul><li>CalPERS – recent Request For Proposal for $500m Environmental Equity Management both US and Global; $200m environmentally focused private equity fund in development </li></ul></ul><ul><ul><li>CalSTRS – recent Request For Proposal for $3b Emerging Markets with explicit requirements related to environmental and social issues; $250m environmentally focused private equity fund in development </li></ul></ul><ul><ul><li>State of Vermont - recent small Request For Proposal for Environmental Equity Management </li></ul></ul>
    15. 20. <ul><li>Financial Institutions </li></ul><ul><li>ABN-AMRO Bank </li></ul><ul><li>ABN-AMRO Asset Management </li></ul><ul><li>ABP Investments </li></ul><ul><li>Aeltus Investment Management (ING) </li></ul><ul><li>Bank Sarasin </li></ul><ul><li>BNP Paribas </li></ul><ul><li>BP Pension </li></ul><ul><li>Brown Brothers Harriman </li></ul><ul><li>Contra Costa County Employees’ Retirement Association </li></ul><ul><li>Credit Lyonnais </li></ul><ul><li>Daiwa Securities </li></ul><ul><li>Dreyfus Investment Advisors </li></ul><ul><li>Friends, Ivory & Sime </li></ul><ul><li>Frontier Capital Management </li></ul><ul><li>Glenmede Trust </li></ul><ul><li>Hermes (British Telecom Pension) </li></ul><ul><li>John A. Levin & Co. </li></ul><ul><li>Legg Mason Funds Management </li></ul><ul><li>Lombard Odier & Cie </li></ul><ul><li>Mellon Capital Management </li></ul><ul><li>Mellon Equity </li></ul><ul><li>Neuberger Berman </li></ul><ul><li>New Zealand Superannuation Fund </li></ul><ul><li>Rockefeller & Co. </li></ul><ul><li>Schroders Investment Management </li></ul><ul><li>Societe Generale </li></ul><ul><li>SNS Asset Management </li></ul><ul><li>Swiss RE Asset Management </li></ul><ul><li>State Street Global Advisors </li></ul><ul><li>T. Rowe Price </li></ul><ul><li>UBS Investment Bank </li></ul><ul><li>Wellington Management </li></ul><ul><li>World Bank </li></ul><ul><li>Zurich Scudder </li></ul>Partial Client List Innovest investment research has been used by:
    16. 21. Other Research of Interest - Erasmus et al <ul><li>The Eco-Efficiency Premium in the U.S. Equity Market </li></ul><ul><li>Study by Erasmus University and Maastricht University, The Netherlands, October 2003 </li></ul><ul><li>Constructed 2 portfolios, one consisting of high-ranked companies and the other of low-ranked companies (U.S. companies only) </li></ul><ul><li>Used a best-in-class approach on a sector by sector basis and remained sector-neutral overall </li></ul><ul><li>Ran portfolios from May 1997 to December 2002 </li></ul><ul><li>Results: </li></ul><ul><ul><li>Best-in-class portfolio had annual return of 5.76% </li></ul></ul><ul><ul><li>Worst-in-class portfolio had annual return of 0.84% </li></ul></ul><ul><ul><li>Cumulative differential over the test period was about 30% </li></ul></ul><ul><li>Conclusion: Eco-efficient companies as a group are already being rewarded in the marketplace </li></ul>
    17. 22. <ul><li>Selected stocks within each industry with the highest return potential while satisfying all the investment constraints </li></ul><ul><li>No companies were excluded from the eligible universe </li></ul><ul><li>Stringent risk controls </li></ul><ul><ul><li>Neutral to market, value/growth, and large/small biases </li></ul></ul><ul><ul><li>Maximum active security weight +/- 2.0% </li></ul></ul><ul><ul><li>Maximum tracking error 5.0% </li></ul></ul><ul><ul><li>Active Industry weights +/- 3.0% </li></ul></ul><ul><li>Investable universe: Russell 1000 </li></ul><ul><li>Benchmark: S&P 500 Index </li></ul><ul><li>Turnover of less than 100% per annual (one-way) </li></ul><ul><li>Transaction cost assumed to be 2% per year </li></ul><ul><li>Testing period: January 1998 to February 2004 </li></ul>Other Research of Interest - SSGA Simulation conducted using SSgA Active Quantitative strategy in combination with Innovest Environmental Research
    18. 23. <ul><li>Environmental alpha has power as a stand-alone factor to determine future stock returns over the testing period (December 1998 to February 2004) </li></ul><ul><li>Over the simulation period: </li></ul><ul><ul><li>Average Innovest rating of S&P 500 Index was BB while average rating of US Core Environmental Strategy was AA </li></ul></ul><ul><ul><li>US Core Environmental portfolio produced an annual excess return of 6.82% (IR=1.35%), over the benchmark (S&P 500 Index), net of transaction costs </li></ul></ul><ul><ul><li>Environmental inputs added 1.88% annually and 12.4% cumulatively over the study period relative to the “baseline” portfolio without Innovest data </li></ul></ul>Other Research of Interest - SSGA
    19. 24. Other Research of Interest - SSGA Incorporating environmental with financial inputs yields impressive results Performance Comp Annual Cum Annual Tracking Info Annual Monthly Hit Annual Hit Results Return Return Ex Return Ex Return Error Ratio Turnover Ratio Ratio US Core Env. 41.52% 1.72% 40.82% 6.82% 5.04% 1.35 102% 64.52% 80.00% S&P 500 Index 0.70 0.13 The performance shown does not represent actual performance, but is hypothetical performance created through a back-test. The results shown do not represent the results of actual trading but were achieved by means of the retroactive application of a hypothetical model that was designed with the benefit of hindsight. These hypothetical results should not be considered indicative of the skill of the adviser. Historic performance is not necessarily indicative of future performance, which could differ substantially. The performance figures are reported on a gross basis, but net of transaction and custody charges. Additional fees, such as the advisory fee, would reduce the return. For example, if an annualized gross return of 10% was achieved over a 5-year period and a management fee of 1% per year was charged and deducted annually, then the resulting return would be reduced from 61% to 54%. The performance includes the reinvestment of dividends and other corporate earnings and is calculated in U. S. dollars. The S&P 500 is an unmanaged index of common stocks which assumes the reinvestment of dividends and distributions. It does not include any management fees or expenses. One cannot invest directly in an index. The trademark is property of Standard and Poor’s. 1999 2000 2001 2002 2003 2004 (2 mos)
    20. 25. Other Research of Interest – Columbia <ul><li>Economic Benefits of Certification Programs </li></ul><ul><li>Study by Center for Environmental Research & Conservation at Columbia </li></ul><ul><li>Among other subjects, investigated financial market reactions to sustainability performance, including fixed income markets (for which Innovest ratings were used) </li></ul><ul><li>Conclusion: </li></ul><ul><ul><li>Companies in industries rated by Innovest as having as least environmental impact had on average a 50 basis points lower spread over Treasuries than companies in the industries with the highest environmental impact. </li></ul></ul><ul><ul><li>Companies rated in the top half in their industry had on average a 34 basis points lower spread over Treasuries than companies rated in the bottom half of that industry (of those companies and industries for which data was available and gathered). </li></ul></ul><ul><ul><li>A portfolio of corporate bonds of companies rated highest by Innovest in each of the industries analyzed has a spread over Treasuries of 40 basis points lower than a similar portfolio of corporate bonds of companies rated lowest in each of the industries analyzed. </li></ul></ul><ul><ul><li>There was no correlation between the Innovest company score and the bond rating (pearson correlation coefficient = 0.093). </li></ul></ul>
    21. 26. Other Research of Interest – Hedge Fund <ul><li>Development of a hedge fund strategy incorporating environmental considerations: a hedge fund client has been running a wide variety of tests on various potential strategies combining Innovest ratings with financial measures and hedging techniques. </li></ul><ul><li>Innovest AAA-CCC Environmental Risk Rating: </li></ul><ul><ul><li>Long AAA-BBB, Short BB-CCC </li></ul></ul><ul><ul><li>Industry group weighting factor </li></ul></ul><ul><li>Various Financial models </li></ul><ul><li>Active hedging using Technical Analysis and Risk Management Techniques: </li></ul><ul><ul><li>Combined classical and proprietary technical analysis </li></ul></ul><ul><ul><li>Option overlay strategies </li></ul></ul><ul><ul><li>% Long exposure weighting </li></ul></ul><ul><li>Conclusion: </li></ul><ul><ul><li>Over 7 year test period, hedge strategy including Innovest ratings yielded 22% annual return vs. 15% annual return for strategy not including Innovest ratings </li></ul></ul>
    22. 27. Other Research of Interest – Global 100 <ul><li>The Stock Market Value of Sustainability </li></ul><ul><li>Study by Daniel A. Potash, Power Project Financing LLC </li></ul><ul><li>Investigated Price/Earnings ratios as a measure of company value </li></ul><ul><li>Tested Innovest’s Global 100 (as presented at World Economic Forum) against comparable companies not on this list </li></ul><ul><li>Conclusion: </li></ul><ul><ul><li>“ The stock market may give better share price valuation in terms of P/E to companies that are perceived of as sustainable versus comparison companies not so designated. “ </li></ul></ul><ul><ul><li>Companies in the Global 100 had P/E ratios 15% higher than their peers; this would translate into “billions of dollars of stock market increased value for most large companies traded on major exchanges”. </li></ul></ul>
    23. 28. Other Research of Interest - Erasmus et al <ul><li>The Economic Value of Corporate Eco-Efficiency </li></ul><ul><li>Study by Erasmus University and Maastricht University, The Netherlands, April 2005 </li></ul><ul><li>Investigated relationship of eco-efficiency as determined by Innovest and firm value as measured by Tobin’s Q </li></ul><ul><li>Ran tests quarterly from 1997 to 2002 </li></ul><ul><li>Results: </li></ul><ul><ul><li>The least eco-efficient companies had values that were significantly lower compared to those of the remainder of the sample </li></ul></ul><ul><ul><li>Environmental winner companies initially did not trade at a premium relative to losers, but that the premium increased strongly over time </li></ul></ul><ul><ul><li>“… the least eco-efficient firms display significant operational underperformance. Our findings, thus, strongly reject the notion expressed by CSR skeptics that the benefits of adopting a strong environmental policy are unlikely to outweigh the costs .” </li></ul></ul><ul><li>Conclusion: “Investors may interpret our results as evidence that corporate environmental performance is a potential source of information that facilitates them in generating superior excess returns.” </li></ul>
    24. 29. Innovest Sector Reports
    25. 30. Innovest Sector Reports

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