Bridging the Gaps: ESG integration acrossthe whole pension portfolioDr. James Gifford, PRI Executive Director16 May 2012
About responsible investment    What is responsible investment?    •   Integration of environmental, social and governance...
About responsible investment    Why?    •   Protect and enhance investment returns    •   Risk management, help identify ‘...
Some academic findings    •   Companies with high ESG scores are found to have less company specific risk        (Boutin-D...
Principles for Responsible Investment    What is the PRI?    •   The PRI is a partnership between the UN and investors tha...
The PRI Initiative    The PRI is not:       About sacrificing returns to save the world       About philanthropy       Abo...
The PRI Initiative    From niche to mainstream    Over 1000 signatories with greater than USD $30 trillion AUM     1200   ...
The PRI Initiative    The six Principles7
Implementation support: ESG integration across    the whole pension portfolio    Fixed income   Listed equity   Property  ...
Fixed Income    Corporate and Sovereign Fixed Income work streams    Challenges to confront:    •   How does analysis of E...
Fixed Income     Corporate bonds     •   Assess companys management of ESG risk – focus on downside or risks of default,  ...
Listed Equity     Responsible investment in passive management     •   Exercising ownership rights in pooled passive funds...
Listed Equity     Active ownership through the                                Energy     PRI Engagement Clearinghouse     ...
Property     Property working group     •   Links between environmental performance of         buildings and financial per...
Property     2011 Property Report on Progress     •   Property popular among PRI signatories with 40% investing in non-lis...
Private Equity     GP Support, PE in Emerging Markets, Exits Research     •   PE is well-suited to active ownership and co...
Private Equity     Responsible Investment In Private Equity: A Guide For Limited Partners     Guide outlines how LPs, GPs ...
Infrastructure     Infrastructure Best Practice and Case Studies working groups     •   Investments (and ESG) risks includ...
Infrastructure     Responsible investment in infrastructure:     A compendium of case studies     •   ESG and the long-ter...
Commodities     •   The relevance of responsible investment policies to the commodities asset class is a         widely di...
Hedge Funds     Hedge Funds working group     •   Responsible investment in hedge funds is only just emerging as a practic...
Hedge Funds     Responsible investment and hedge funds discussion paper     Questions:     •   How can investing in hedge ...
Principles for Investors in Inclusive Finance     •   Investor-led response to industry challenges such as loan defaults a...
Principles for Investors in Inclusive Finance     Principles for Investors in Inclusive Finance case studies     Principle...
Small and resource constrained signatories     Asset Owner Toolkit: how to integrate ESG criteria in manager     selection...
Small and resource constrained signatories     Asset Owner Toolkit     •   How FRR (France) incorporates RI/ESG-related is...
Implementation Support     Upcoming research and tools:       • Implementation Support tool for GPs: Due diligence questio...
Questions and Answers27
www.unpri.orge: info@unpri.orgt: +44 (0) 207 749 1940
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Bridging the Gaps: ESG Integration Across the Whole Pension Portfolio - Presentation by Dr. James Gifford at the European Pensions & Investments Summit

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For more information contact: emailus@marcusevans.com

Dr. James Gifford, who is the PRI Executive Director gave his presentation titled "Bridging the Gaps: ESG Integration Across the Whole Pension Portfolio" at the European Pensions & Investments Summit on 16, May 2012.

Join the 2015 Summit along with leading regional pension investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today.

For more information contact: emailus@marcusevans.com

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Bridging the Gaps: ESG Integration Across the Whole Pension Portfolio - Presentation by Dr. James Gifford at the European Pensions & Investments Summit

  1. 1. Bridging the Gaps: ESG integration acrossthe whole pension portfolioDr. James Gifford, PRI Executive Director16 May 2012
  2. 2. About responsible investment What is responsible investment? • Integration of environmental, social and governance (ESG) factors into investment processes • 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. 3. About responsible investment Why? • 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. 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 management practices 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 legitimacy crisis (Godfrey, Merrill and Hansen, 2009). • Shareholder engagement on corporate governance and strategy can deliver abnormal returns (Becht et al., 2008)3
  5. 5. Principles for Responsible Investment What is the PRI? • The PRI is a partnership between the UN and investors that promotes responsible investment 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. 6. The PRI Initiative The 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. 7. The PRI Initiative From niche to mainstream Over 1000 signatories with greater than USD $30 trillion AUM 1200 35 1000 30 25 800 20 600 15 400 10 200 5 0 0 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Number of signatories Assets under management (US$ trillion)6
  8. 8. The PRI Initiative The six Principles7
  9. 9. Implementation support: ESG integration across the whole pension portfolio Fixed income Listed equity Property Private equity Infrastructure Inclusive Investing Small Commodities Hedge funds finance with impact investors8
  10. 10. Fixed Income Corporate and Sovereign Fixed Income work streams Challenges to confront: • How does analysis of ESG issues reduce default risk? • How do you engage when you don’t 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 income derivatives? Asset Owner sovereign fixed income assets subject to ESG integration has risen from 38% in 2010 to 50% in 2011.9
  11. 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. 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. 13. Listed Equity Active ownership through the Energy PRI Engagement Clearinghouse efficiency Examples of ongoing collaborative Board diversity shareholder dialogue coordinated by the PRI: • Annual collaborative engagement with UN Global Compact companies on disclosure Executive • Anticorruption practices pay/bonu Carbon • Emission reductions targets s emissions • Pilot project to implement the UNGC/PRI guidance on responsible business in high risk and conflict-affected countries12
  14. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 treatment Grassroots Capital Management 4. Responsible investment Finance in Motion 5. Transparency Incofin 6. Balanced returns Orchard 7. Standards Triodos Investment Management23
  25. 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. 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 manager’s 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. 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. 28. Questions and Answers27
  29. 29. www.unpri.orge: info@unpri.orgt: +44 (0) 207 749 1940

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