Managing ESG Risks in Portfolios


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Presentatie: Managing ESG Risks in Portfolios van Will Oulton. De presentatie is gegeven op 25 november 2010 op het Mercer Investment Consulting seminar.

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Managing ESG Risks in Portfolios

  1. 1. 25th November 2010Managing ESG Risks inPortfoliosWill Oulton,Head of RI - EMEA Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU
  2. 2. Agenda Introduction ESG Risks – Case Study, Oil & Gas ESG & Regulatory Risks - Stewardship Manager ESG Integration – Case Studies SummaryMercer 1
  3. 3. BP Strategy Presentation to Analysts March 2010 & SarasinMercer 2
  4. 4. Delivered strong financial results & SarasinMercer 3
  5. 5. And then disaster struck – 20th April 2010Mercer 4
  6. 6. Are analysts watching the “right” indicators... & SarasinMercer 5
  7. 7. Management quality is a key indicator & SarasinMercer 6
  8. 8. Cost pressures........deliver higher margins & SarasinMercer 7
  9. 9. Petrobras – P36 Platform – May 2000 “Petrobras has established new global benchmarks for the generation of exceptional shareholder wealth through an aggressive and innovative programme of cost cutting on its P36 production facility. Through an integrated network of facilitated workshops, the project successfully rejected the established constricting and negative influences of prescriptive engineering, onerous quality requirements, and outdated concepts of inspection and client control. The P36 platform shows the shape of things to come in unregulated global market economy of the 21st Century.” (Petrobras, P36 Inauguration)Mercer 8
  10. 10. 15 – 20th March 2001 Going..... Going..... Gone.....Mercer 9
  11. 11. Safety compromised - sound familiar? 11 people died on the P-36 rig. “Family members of oil workers on the P-36 say they believe pressure by the company for increased production may have led to corners being cut on safety procedures.” Source: BBC News March 2001 In 2009, Petrobras announced a market capitalization plan to finance its future investments in ultra-deep oil exploration. The share offering in the Brazilian Stock Exchange took place in September 2010, becoming the largest market capitalization in history, with US$ 69,97 billion in shares issued.Mercer 10
  12. 12. Forecasting "We dont like their sound, and guitar music is on the way out." Decca Recording Co. rejecting the Beatles, 1962.Mercer 11
  13. 13. Forecasting and anticipating riskMercer 12
  14. 14. Mapping Key Industry Codes – expect further developmentsWhat codes relate to who? Name of Industry Code Sponsor Aimed At UK Stewardship Code FRC Asset managers* Dutch Stewardship Code Eumedion ? UK Corporate Governance Code FRC Corporates Corporate Governance Policy and Voting NAPF Corporates and investors** Guidelines (UK) ABI Remuneration Guidelines (UK) ABI Corporates and investors UN Global Compact United Nations Corporates UN Principles for Responsible United Nations Investors Investment Global Corporate Governance Principles ICGN Corporates and investors OECD Corporate Governance Principles OECD Corporates * Note all institutional investors are encouraged to comply with the Code ** Investors refers to both investment managers and asset ownersMercer 13
  15. 15. Why is Stewardship Relevant to our Clients?Mercer supported the introduction of the UK Stewardship Code. Protect and enhance shareholder value. Consistent with application of fiduciary duties. Helps “typical” schemes strengthen their investment policies. Meet the expectations of beneficiaries and other stakeholders. Demonstrate investor responsibility and leadership. Useful additional information for manager selection and monitoring. Enhance transparency and accountability from managers. Enhance the wider investment system.Mercer 14
  16. 16. Mercer’s ESG ratings – Proxy for a View on Current Practice Equity strategies by ESG ratingESG4ESG3ESG2ESG1 Number of rated strategies 0 200 400 600 800 1000 1200 ESG manager research has been integrated into Mercer’s manager research capabilities since April 2008. Over 4,000 strategies rated ESG1 (the highest rating). Extensive coverage of all asset classes. Mercer 15
  17. 17. ESG integration in actionBP oil spill – case studies Asset manager 1 – Resources: In-house team dedicated to identifying ESG factors that impact particular sectors. Analysis undertaken on all equity holdings and assign scores for use in fundamental analysis. – Prior to oil spill: ESG analyst responsible for oil and gas assigned BP a score slightly above average. The ESG analyst discussed this rating and concern over company health & safety statistics with the financial analyst counterpart, and determined the concern was ‘valuation-neutral’ (i.e. it was not significant enough to impact the valuation) although there was additional concern about BP’s past five years of remuneration reports. As a result, in March 2010, the manager continued to underweight shares of BP compared to the index. – Immediately after oil spill: Following the Gulf of Mexico spill, the ESG analyst downgraded BP to reflect reduced confidence in the company’s health and safety management, which resulted in an adjustment to the weighted average cost of capital and, thereby, a reduction in the target valuation. At this point, the manager began to close its historically underweight positions.Mercer 16
  18. 18. ESG integration in action (2)BP oil spill – case studies Asset manager 2 – Resources: Combination of in-house specialists and third party research to gather information about companies’ ESG performance. Information available across the firm for integration into the stock selection and valuation process. The manager also uses an engagement process as an input into the investment decision-making process. – Prior to oil spill: Historically, had “minimal or zero exposure to BP across all funds in our group” partly due to ESG-related concerns. Based on fundamental research and engagement activities, including conversations with other companies involved with offshore drilling and conversations with BP’s management, the manager determined that the level of risk associated with execution of health and safety management was not reflected in the company’s stock price. – Immediately after oil spill: No changeMercer 17
  19. 19. Mercer’s ESG RatingsCommon characteristics among leaders A policy stating a firm-wide commitment to ESG integration Dedicated resources or expertise to facilitate ESG integration Structured process for voting and engagement Process for building ESG factors into valuation metrics Willingness to collaborate with other investors Long-term investment horizonMercer 18
  20. 20. Summary ESG factors can comprise risks to long term value protection and therefore overall portfolio performance “Conventional” investment analysis is not sufficient We are not good at forecasting systemic risks Understand differences between manager approaches Monitor managers over time and be clear in investment policy Better informed managers should be “better” investors Effective stewardship is an integral aspect of investor responsibility and can be an important element in both protecting and enhancing long term shareholder value.Mercer 19
  21. 21. Mercer Limited is authorised and regulated by the Financial Services AuthorityRegistered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU