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Sustainability Research as Added Value for Investors

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  • 1. ESG IntegrationShorex Wealth Management ForumGeneva, December 6th, 2012Marc-Olivier Buffle, PhD
  • 2. SAM at a Glance Investment boutique focused exclusively on Sustainability Investing since 1995 Develop and manage investment solutions for institutionals, as well as retail funds EUR 9.2 billion total assets (30.09.2012) Joint venture with S&P Dow Jones to power the DJSI (since 1999) Unique access to companies. In 2012 > 30% of the total world capitalization responded to SAM sustainability questionnaire Member of Robeco, with approximately 100 employees in Zurich, Switzerland Servicing a global and diversified client base1
  • 3. SAM Investment Philosophy SAM fundamental investment philosophy is based on the premise that overarching sustainability megatrends such as demographic change, resource scarcity, pollution, and climate change shape the competitive landscape in which companies operate by introducing long-term sustainability risks and opportunities. The impact of sustainability megatrends -term business and financial outlook is under-researched, leading to market inefficiencies, which give SAM a competitive edge over mainstream asset managers who do not consider these sustainability factors.2
  • 4. Global Trends and Public Awareness The Economist, 26. November 2010 Time, January 2011 Michelle Obama - Newsweek, 22. March 2010 National Geographic, April 2010 Newsweek, 06. June 2011 -Kofi Annan, Former Secretary General of the UN3
  • 5. Global Risks Landscape4
  • 6. From Global Trends & Risks to Opportunities Demographics, Resource Scarcity, Pollution, Climate Change, Scarcity of Arable Land New Energy & Water Resources Materials & Climate Change Health & Wellness Agribusiness Efficiency Resource Efficiency Solutions Clusters Clusters Clusters Clusters Clusters Cluster Production Factors Wind Distribution & Basic Materials Transportation Nutrition Producers Solar Management Innovative Materials & Reconstruction Health Care Processing/Logistics Natural Gas Advanced Treatment Technology Building Infrastructure Personal Care Packaged Food & Power Infrastructure Efficiency & Metering Material Efficiency Agriculture Activity Beverages Storage Recycling & Waste Management Investment Opportunities5 Source: SAM Research
  • 7. Recognition of Sustainability as Strategically Significant by FirmsPoll among 3000 Executives 70% Investors?6 Source: MIT SLOAN Management Review, Winter 2012
  • 8. Holcim Experience with Corporate Sustainability Integration into Compliance Reputation Risk Mitigation Business TIME & COMPETITIVE ADVANTAGE Identifying and Brand differentiation, new Societal license avoiding risk, markets, products & Regulatory to operate, identifying services, outperforming compliance, legal recognition by opportunities, competitors, maximizing license to operate regulators providing societal societal and shareholder value value7 Source: Adapted from Holcim Group Support, 2012
  • 9. SAM Definition of Corporate Sustainability A company s capacity to prosper in a competitive and ever faster changing global business environment by managing and anticipating current and future economic, environmental and social risks and opportunities8
  • 10. SAM Corporate Sustainability AssessmentAssessment: ~3000 Companies annually (58 sectors) > 30 trillion $ total MCap 3 dimensions / 20 criteria / 130 questions > 1000 data points/firm Environmental Dimension Social Dimension Climate Strategy Talent Attraction & Retention Water related Risks Human Capital Development Environmental Management System Occupational Health & Safety Environmental Performance Stakeholder Engagement Product Stewardship Human Rights ,,, E S E (G) Economic Dimension Corporate Governance Code of Conduct, Compliance Risk & Crisis Management Customer Relationship Management Innovation Management9
  • 11. Integration of Intangible Criteria into Valuation Economic Criteria Revenues - Corporate governance Earnings - Risk & crisis management - CRM - ... Costs Return on Invested Capital Financial Valuation Invested Environmental Criteria Investments Capital - Operational eco-efficiency - Climate strategy - Product stewardship - ... Capital Structure Weighted Ave. Social Criteria Risk premium Cost of Capital - Human capital development - Stakeholder engagement - Supply chain management - .... Liabilities10
  • 12. SAM Research Capabilities SAM Indexes Corporate Methodology Sustainability Cooperation with S&P Dow Jones Development Assessment Indexes SAM Asset Management Theme Equity Strategies Core Equity Strategies Clean Tech Private Equity SAM Research SAM Sustainability Services Fundamental Company Benchmarking Industry and Industry Expertise Company Analysis Sector Studies Sustainability Expertise and Modeling SAM Publications Financial Expertise Sector Studies Sustainability Studies Robeco Robeco Products Sustainability 3rd Party Cooperation Investment Research Cooperation Foresight Recommendations & Product Cooperation Insight11
  • 13. What Is ESG / Sustainability Investing? the Elephant in the Room It raises alpha! It shuns vice! It It has impact! creates returns! It lowers It reduces communicates! volatility risks!12
  • 14. Defining Objectives & Core Beliefs: Sustainability Investing Framework Investment Policy Risk Management & Reporting A) Financial B) Communication Alpha Fulfill fiduciary duty Lower volatility Produce ESG report Asset Allocation Less drawdown Meet UNPRI Better return/risk profile Assume responsibility as shareholder C) Ethical D) Impact Avoid controversial industries Promote Sustainability Themes Quantify/demonstrate ESG impact Avoid negative headlines Create socio-economic impact Avoid reputational risk Proxy voting Dialogue and Engagement Manager Procurement & Monitoring13
  • 15. Sustainability Investing Solution Set Reporting & Communication Risk Management Active Ownership Equity Real Assets Themes Real Estate Timber / Forestry ESG Integration Indexes Low Vol / Beta Commodities Emerging Markets Fundamental & Quantitative Hedge Funds Equity & Credit Fixed Income Sovereign Private Equity Credit Clean Tech / Growth Emerging Markets Infrastructure Asset Allocation & Manager Procurement Investment Policy Governance14
  • 16. A) Financial Perspective: Sustainability Research as Added Value for Investors SAM sustainability data is likely to have predictive power for stock-selection, reflected in the positive information ratio (0.5) of the portfolio consisting of sustainability leaders Added value is generated by selecting sustainability leaders and avoiding sustainability laggards Value creation tends to be consistent and stable for the entire time period Source: SAM15 The graph does not represent returns of an actual portfolio. It depicts returns of sustainability investments as rated by SAM. Results are shown gross of fees. Results would be reduced by application of fees and expenses incurred in the management of the account. Returns shown do not represent the results of actual trading but were achieved by retroactive application f a model with the benefit of hindsight. If the strategy had been in existence during this time periods, actual results could have been different, and potentially lower than the hypothetical results that are presented.
  • 17. A) Financial Perspective: Out-performance of Sustainability Leaders (Harvard) Evolution of the stock price performance of $1 invested in Evolution of $1 of assets invested in the 90 component Low the 90 component Market Capitalization-weighted portfolios and High- Sustainability portfolios based on Return-on-Assets Leading Sustainability Companies out-performed significantly over the long term Sustainability Leaders out-performed on ROE and ROA during the time period Low sustainability: adopted sustainability more recently High sustainability: adopted sustainability policies early on (i.e. in the early 1990s when CSR was still at nascent stage) VW = value-weighted (Market Capitalization Weighted) EW = equal-weighted Source: Eccles, R. J., Ioannou, I., and Serafeim, G. 2011 The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance. Harvard16 Business School Working Paper. Past Performance is not an indication of future results. The graph does not represent returns of an actual portfolio. It depicts returns of sustainability investments as rated by SAM. Results are shown gross of fees. Results would be reduced by application of fees and expenses incurred in the management of the account. Securities are chosen based on sustainability assessment questionnaires submitted by the issuers.
  • 18. B) Communication Perspective: External Reporting and/or Internal Monitoring CalPERS first stand alone Sustainable Sustainability is Essential is one of PPGM s Investment Report in 2012 investment beliefs. PGGM publishes a RI AR Its RI Policy is based on six pillars:17
  • 19. C) Ethical Perspective: Defining an Exclusion Approach Avoiding or selecting companies or sectors that engage in a variety of activities, such as: Socially Constructive Labor welfare and rights Socially Destructive Diversity and inclusion Weapons Risk Management Tobacco Pornography Environmentally Constructive Alcohol Supply clean/potable water Sustainable global food supply Environmentally Destructive Sustainable energy supply Oil extraction Mining Economic Impact Corporate Citizenship & Economically Destructive philanthropy Gambling Transparency Stakeholder engagement Avoiding companies with single negative incidents in the area of E, S or G Avoiding companies that refuse to enter into engagement discussions with shareholders18