Socially Responsible Investing Keynote


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  • Over the past 30 years, the field of socially responsible investing has grown and become more sophisticated. With these developments has come a new and evolving vocabulary to define and describe the industry. Some observers, notably Paul Hawken, take a decidedly more critical approach to this evolving language: “The language used to describe SRI mutual funds, including the term “SRI” itself, is vague and indiscriminate and leads to misperception and distortion of investor goals.”
  • Over the past 30 years, the field of socially responsible investing has grown and become more sophisticated. With these developments has come a new and evolving vocabulary to define and describe the industry. Some observers, notably Paul Hawken, take a decidedly more critical approach to this evolving language: “The language used to describe SRI mutual funds, including the term “SRI” itself, is vague and indiscriminate and leads to misperception and distortion of investor goals.”
  • While leading companies and organizations such as Risk Metrics Group (formerly Innovest) and the United Nations Principles for Responsible Investment are working to establish international standards for ESG criteria, this is still an area that is evolving. However, we can see from across the spectrum of SRI funds that ESG criteria are the common theme when it comes to determining which companies are including in portfolio construction.ESG investing underscores the widespread acceptance of the principle that investors cannot, in the long run, achieve their goals by investing in corporations that externalize their costs onto society.The common theme among the new vocabulary of SRI is the foundation of environmental, social and governance issues. ESG criteria is the primary metric by which companies are being measured and valued today. As ESG criteria become standardized and integrated into more financial modeling and valuation techniques, the underlying investment philosophy will begin to change.
  • It is not entirely clear how risks posed to financial institutions when considering environmental/climate/social issues are priced into valuations. Current research suggests using beta analysis – that is, measuring a company’s financial risk – that includes sustainability criteria as derived from ESG metrics. Examples include looking at costs-benefits, e.g. impact of potential litigation costs from environmental factors (asbestos, oil spills, etc.)Cost-benefit: costs associated with regulations, legal costs, taxes, environmental provisionsLT growth: sustainability themes, demographics, renewables, developing world market growthRisk mitigation: internal policies, HR + human capital practices, stakeholder dialog, corporate governance practices, environmental management systems
  • Where are we today? After a horrendous 2008 where all funds across the world were battered, 2009 shows that sustainable funds are bouncing back quicker than other types of funds. As stated by analysts at SAM, sustainable investing is an “all-weather approach” that is supported by strong correlations between social performance (or CSR) and financial performance (as shown by stock returns).The Social Investment Forum (SIF), using data provided by an independent third party, Thompson Reuters, conducted a review of 160 socially responsible mutual funds from 22 different fund families. The analysis showed that 65% of the 160 funds outperformed their benchmarks over the entire 2009 calendar year. Social Investment Forum (January 21, 2010) “Two thirds of Socially Responsible Mutual Funds Outperformed Benchmarks During 2009 Economic Downturn.” Press Release. Retrieved 2010-3-27.
  • From its inception in February 2005, the Global ESG 100 has outperformed the benchmark FTSE All World Developed (AWD) Index by 116 basis points per annum, as of the end of 2009. This is just one example of several ESG-calculated funds that has outperformed its traditional, “mainstream” benchmark comparison index.
  • Adapted from Demystifying Responsible Investment Performance: A review of key academic and broker research on ESG factors (joint study by UNEP FI and Mercer).50% of the academic studies show a positive correlation between ESG factors and investment performance.
  • The annual Moskowitz Prize is the only global award recognizing outstanding quantitative research in the field of socially responsible investing (SRI). The prize was launched in 1996 by the Social Investment Forum - the national trade association for the socially and environmentally responsible investing (SRI) industry - to recognize the best quantitative SRI study.
  • Meta-analysis of SRI performance over the past 30 years shows that there is not a trade-off between social performance and financial performance of companies. In fact, the data shows that one reinforces the other. Ultimately, market mechanisms may encourage social performance.
  • Authors used Innovest environmental rating system as basis for hypothesis testing. Through statistical testing, they showed that companies with higher eco-efficiency ratings had higher values and better ROA.
  • From the paper:“The amount business spends on CSP dwarfs the amount it spends on campaign contributions and lobbying expenditures. Milyo, Primo, andGroseclose (2000) estimated that corporate campaign contributions and lobbying expenditures were $300 million and $3 billion, respectively, whereas charitable contributions alone were $35 billion.”“Despite the embrace by much of the business community, the relations between social performance, financial performance, and social pressure remain as much a matter of faith and speculation as of evidence, assessment, and calibration. Moreover, interpretations of empirical results vary, and the direction of causation remains an open question. That is, good CSP could cause good CFP, but good CFP could provide slack resources to spend on CSP.”
  • Highwater Global clearly outperforms other SRI funds.
  • One of the hallmarks of truly sustainable funds is low portfolio turnover. The graphic clearly shows a positive correlation between low turnover and fund performance. This further emphasizes the importance of having a long-term investment horizon versus short-term, more speculative holdings.As a broader illustration of how far removed we are from this ‘truth’, consider that stock market turnover has increased in the US, for example, from 25% in 1986 to 150% in 2004. What further proof is needed that fund managers and large investment banks focus on trading at the expense of long-term value creation?
  • Much of the research in SRI categorizes investments by asset class. These are some examples of the different investment vehicles available to investors in each category as well as a conventional benchmark that is used to measure SRI fund performance against the broader market. These are examples; different academics have differing views on benchmarking.Approaches [among investment funds] still vary widely between firms, which is confirmed by statistics from PRIassessments. ESG integration remains far from covering all asset classes. The latestreport noted that:■ Integration primarily concerns equities for both asset owners and investmentmanagers.■ Fixed-income products, especially those issued by governments, and hedge fundspost a lesser degree of integration.
  • Some important elements for this asset class include: Understand bank’s mission statement Identify key features of the financial institution’s internal social and environmental performanceExamples: Shore Bank (US);Triodos Bank (UK/NED), Wainwright, New Resource bank, RS Social FinanceCDFI: Community Development Finance Institution - are entitled to special federal grants on the condition thatthey direct a certain percentage of their capital and business to serving thosewho have historically lacked access to the financial markets.The generally strong performance of their loan portfolios demonstrates that,while the risk of lending in low-income communities—or to emerging sectorssuch as green banking—may be different, it is not necessarily greater than thatin other markets.Equator Principles: identify social and environmental guidelines for project finance.
  • Investors who want to select SRI-themed bonds are forced to rely on specialist asset managers/research providers as the ratings agencies are not yet playing a major role. New investments in infrastructure include certain cleantech initiatives such as water/wastewater treatment, efficiency projects, solar/wind & other power generation projects.Best practices include: Understand role of credit-ratings agencies Analyze credit risk through ESG lens to help identify elements that could lead to default Investors should directly negotiate terms that include ESG criteriaFund examples include Sarasin Sustainable Bond EUR (SUI); Pax World High-Yield Bond Fund (US); Norwich Sustainable Future Corporate Bond (UK); ABN AMRO Groen Funds (NED)
  • The Domini Social Bond Fund seeks to provide its shareholders with a high level of current income and total return by investing in bonds and other debt instruments that meet the Fund's social and environmental standards.Standards are achieved primarily through negative screening (tobacco, arms, etc.)Domini shows better performance than other, similar funds in this particular asset class. It is interesting to note the severity of the drop in late 2008 of the Barclay’s benchmark fund; Domini shows a much less severe drop and a more sustained rise in 2009.
  • The High Yield Bond Fund seeks to invest in forward-thinking companies with sustainable business models that meet positive environmental, social and governance standards. The High Yield Bond Fund avoids investing in companies that its investment adviser determines are significantly involved in the manufacture of weapons or weapons-related products, manufacture tobacco products, or engage in unethical business practices (negative screening).The fund typically invests in fixed income securities with ratings of BBB- or below (junk bonds).
  • - Review Some studies show positive correlation between ESG/CSR and financial performance while other studies show no statistical significance:: jury is still out?- Screened investment products—and many other investment products as well—typically use optimization techniques to readjust the risk characteristicsof their screened portfolios relative to a particular benchmark.SRI funds typically show lower volatility than non-ESG screened funds. By properly recognizing the importance of certain ESG issues to the long-term performance of companies, investors are able to benefit as well as create incentives for managers to overcome the short-term pressure created by “market myopia.”It is important to determine whether or not fund managers have adequate ESG research capabilities; there are 3rd parties who can provide such specialized research including KLD Research & Analytics in the US and others around the world.Cleantech Index/CleanEdge Index (as proxies for cleantech industry)Alternative Energy IndexPZD (Powershares) / other ETFs
  • 2001-2010 comparison rangeWGGTX: The investment seeks long-term capital growth. The fund normally invests 80% of net assets (plus any borrowings for investment purposes) in equity securities of environmentally sustainable companies. It may invest in any industry sector, but tends to focus on certain environmentally-oriented investment themes. The fund may invest in companies of any size capitalization. It intends to invest a significant portion of assets in domestic small-capitalization companies.The fund may invest up to 20% of assets in foreign securities
  • Brief history of Cleantech Index:Trading on the New York Stock Exchange (NYSE) since January 15, 2009, Cleantech Index (CTIUS) was introduced on the American Stock Exchange (ASE) in February, 2006 and represented the first index of its kind. The purpose of CTIUS was to provide the first cost-effective way to invest in the rapid growth of clean technology companies (which are found in a variety of industrial sectors). Within the Index, CTIUS companies fall into industrial sectors corresponding with the Cleantech Group's definition of cleantech.Additional remarks on cleantech as a separate asset class (from Cleantech Forum Paris, 2010)Asset class of clean technologies are exempt from taxes in some countries—these measures need to be increasingly widespreadClean energy needs to be a sustainable asset class to attract institutional investors, e.g. pension funds and bond finance. To achieve this, we have to be able to rate clean power plants, so investors can evaluate their investments.
  • Notes on Powershares Cleantech:The PowerShares Cleantech Portfolio (Fund) is based on the Cleantech Index™ (Index). The Fund will normally invest at least 90% of its total assets in securities that comprise the Index and ADRs based on the stocks in the Index.
  • PHO started in 2007 – only 3 yr performance comparison available
  • Water is very much a localized resource, unlike electricity or natural gas that can be widely distributed, so local waterprovision is one of the world’s few true natural monopolies. Their business is simple – to provide anuninterrupted supply of clean water and dependable wastewater services to an ever-growing andnever-satiated demographic. But this rather dull business model, plus the fact that water has no economicsubstitute, has created an enduring industry that is unequaled in long-term performance and relativelyunaffected by cyclical market conditions. (Taken from Summit Global water case study)
  • Impact of shorting on SRI: On the positive side, shorting is a way for responsible investors to profit from their insight into the materiality of ESG risks rather than just divesting a stock and preventing capital loss. (Taken from BC IRI handbook.)Basically, SRI investors can short companies that they think are not prepared to handle rigors of ESG-screening and go long on those that are higher ranked according to ESG criteria.
  • Participation is limited to private equity and venture capital investors that have made at least one clean technology investment in Europe or North America over the past seven years.Formerly known as the European Clean Energy Venture Returns Analysis (ECEVRA), ICTRA presents a comprehensive and robust insight into returns being achieved internationally on clean energy and green technology investments. Gathered from all stages of private equity investments across Europe and North America, the analysis delivers aggregate return metrics at the investment level rather than the fund level. 
  • Energy conservation is the central factor that benefits investment returns: - Lowers operating costs - Improves net operating margins - Raises valuations = higher returns from operations and price appreciationREITs offer some targeted opportunities for investors to look at certain trusts that emphasize green buildings, energy efficiency, etc.MBS as fixed-income vehicles: burden lies with investors to examine MBS envelopes for holdings, e.g. are pools of mortgages tied to community (re)development, affordable housing, new ‘green’ construction, etc.CalPERS and CalSTRS have goals to reduce energy consumption in their RE holdings by 20% over 5 years.
  • This simple table shows that relatively small investments (low-cost strategy) are proven to result in increased returns and lower risks associated with exposure (financial, physical and policy risks).
  • Responsible investment in commodities remains more an idea to be explored than a developed practice.
  • Negative screening offers the potential to remove from investmentportfolios stocks that destroy long-term value through externalities, createheightened risk exposure because of social and/or environmental changes, orviolate an investor’s moral principles.Positive screens are used to emphasize those industries that responsibleinvestors believe are contributing solutions to ESG problems. Because ESGissues impact the long-term sustainability of companies and industries, positivescreens can act as a proxy for sound, long-term management practices in acompany.Henderson Global Investors Global Care Growth FundPerformance-based or “best-in-sector” screens are similar to positive screens,but rather than focusing on industry sectors, an external performance indicatoris used to identify companies that qualify as investable. For example, a company may be within thisinvestable universe if its level of carbon reductions puts it in the top 10 percentof its industry, or if its carbon emissions are below a particular percentage overa given time.
  • Socially Responsible Investing Keynote

    1. 1. Progressive Investing: A “State of the Union” Review of Performance and Impact Mark T. Donohue Clean Technology Entrepreneur-in-Residence, Babson College & President, Sustainable Impact Investing, LLC6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 1
    2. 2. SRI Investing Today: Sizing the Market 570 UN “Principles for Responsible SRI Industry Investment” Signatories $7 trillion in assets under management $18 trillion in assets under management Source: UNEP Finance Initiative - Annual Report of the PRI initiative 2009; swissHEDGE 6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 2
    3. 3. SRI: Terminology Ethical Investing: “Negative screening. Avoiding companies on ethical, moral or religious grounds (e.g. gambling, alcohol, tobacco). Classic SRI can embody solely negative screens or negative plus positive screens. Impact investing: “Actively placing capital in businesses and funds that generate social and/or environmental good and a range of returns, from return of principal to above market.”* The primary focus is solely on positive screens. *Adapted from the Monitor Institute: Investing for Social and Environmental Impact **Adapted from Krosinsky: Sustainable Investing: The Art of Long-Term Performance6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 3
    4. 4. SRI: Terminology Sustainable Investing / ESG: “Simultaneously pursuing opportunities that arise from climate change while at the same time avoiding risk in securities and industries that will most likely be affected by ESG issues.” (Environment, Social & Governance issues)** *Adapted from the Monitor Institute: Investing for Social and Environmental Impact **Adapted from Krosinsky: Sustainable Investing: The Art of Long-Term Performance6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 4
    5. 5. The New Criteria: ESG • Environmental • Social • Governance • Used to find hidden value or deficiencies that may not yet be reflected in financial results and share prices. * *Adapted from RiskMetrics methodology, “Global ESG 100” January 20106/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 5
    6. 6. Sustainable Investing Provides Better Risk Management Pricing in risk  Credit risk  Liability risk  Reputational risk  Adds managers that diversify world view of your portfolio Defining materiality of extra-financial factors  Life cycle environmental cost-benefit-risk analysis  Companies with enhanced ESG performance offer reduced risk in terms of “long term” beta, given their mgrs’ better info6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 6
    7. 7. Source: Krosinsksy & Robins, 20106/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 7
    8. 8. RiskMetrics Global ESG 100 Source: RiskMetrics Group, “Global ESG 100” January 20106/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 8
    9. 9. Examining the Links Between ESGFactors & Investment Performance A review of 20 academic 12 studies that examined fund performance from 1963-2005 (adapted from “Demystifying Responsible Investment Performance,” UNEP & Mercer 4 4 Positive Negative Neutral6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 9
    10. 10. Moskowitz Prize Winners 2004-2009 • 2004: “Corporate Social and Financial Performance: A Meta-Analysis” • 2005: "The Economic Value of Corporate Eco-Efficiency” • 2006: "Monitoring the Monitor: Evaluating CalPERS Shareholder Activism” • 2007: "Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices” • 2008: "The Wages of Social Responsibility” • 2009: "The Economics and Politics of Corporate Social Performance" Source: Center for Responsible Business, Haas School of Business, UC Berkeley; www.sristudies.org6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 10
    11. 11. SRI as Valid Statistical Construct 2004 Winners - Orlitzky, Schmidt & Rynes: “Corporate Social and Financial Performance: A Meta-Analysis” University of Sydney & University of Iowa • Meta-analysis of 52 studies examining the relationship between Corporate Social Performance (CSP) and Financial Performance (CFP) • The studies were performed during the 1972-1997 time period • Conclusion: ”There is a positive association between CSP and CFP across industries and across study contexts."6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 11
    12. 12. Linking Environmental & Financial Performance to Valuation 2005 Winners - Guenster, Derwall, Bauer and Koedijk: "The Economic Value of Corporate Eco-Efficiency" Erasmus University • Authors found positive links between eco-efficiency and firm value and eco-efficiency and return on assets • Conclusion: “Results suggest that managers do not face a tradeoff between eco-efficiency and financial performance, and that investors can use environmental information for investment decisions."6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 12
    13. 13. Measuring the Impact of Shareholder and Social Activism 2006 Winner - Barber - "Monitoring the Monitor: Evaluating CalPERS Shareholder Activism" University of California at Davis • Author reviews the theory and empirical evidence underlying the motivation for institutional activism while distinguishing between social activism and shareholder activism. • Estimated wealth generated via CalPERS shareholder activism is $3.1bn between 1992-2005 (author’s figures) • Conclusion: “Institutional activism should be limited shareholder activism where there is strong theoretical and empirical evidence indicating the proposed reforms will increase shareholder value”6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 13
    14. 14. Quantifying the Human Element 2007 Winner – Edmans - "Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices" University of Pennsylvania, The Wharton School • A value-weighted portfolio of the "100 Best Companies to Work For in America" earned an annual alpha of 3.5% from 1984-2009, and 2.1% above industry benchmarks. • Conclusions • Employee satisfaction is positively correlated with shareholder returns • The stock market does not fully value intangibles • Certain ("SRI") screens may improve investment returns6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 14
    15. 15. Examining ‘Doing Well by Doing Good’ 2008 Winners – Statman & Glushkov – "The Wages of Social Responsibility" Santa Clara University, Leavey School of Business • The return advantage that comes to SR portfolios from the tilt toward stocks of companies with high scores on social responsibility is largely offset by the return disadvantage that comes to them by the exclusion of stocks of ‘shunned’ companies. • Conclusion: Investors can “do well by doing good” by using a best-in-class method for portfolio construction. However, this method does not call for negative screening of ‘sin’ stocks.6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 15
    16. 16. The Relationship Among CSP, CFP and Social Pressure 2009 Winners – Baron, Jo, Harjoto - "The Economics and Politics of Corporate Social Performance" Stanford University, Santa Clara University, Pepperdine University • Authors examined examines the interrelations among CFP, CSP, and social pressure using a large data set of firms with social engagement for 1996 to 2004. • For consumer industries, greater CSP is associated with better CFP and the opposite is true for industrial industries. Conclusion: “Empirical studies have examined the relation between CSR and CFP, and while the results are mixed, overall the research has found a positive but weak correlation.”6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 16
    17. 17. Paul Hawken: Critic or Purist? “The cumulative investment portfolio of the combined SRI mutual funds is virtually no different than the combined portfolio of conventional mutual funds.” “The language used to describe SRI mutual funds, including the term “SRI” itself, is vague and indiscriminate and leads to misperception and distortion of investor goals.”6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 17
    18. 18. Walking the Walk: Hawken & Highwater Global • Over 90% of Fortune 500 companies fail HG screening • Google, Vestas, Ford among select companies • Since inception in the fall of 2005, Highwater has returned a total of 52.55% (as of Feb, 2010) • Key question: “Are the companys products or services helpful?”6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 18
    19. 19. Selected SRI Fund Performance 2006-2009 25% 20% 20% 15% 10% 5% 0% 0% -5% -10% -15% -13% -16% -20% Calvert Social Domini Social Parnassus Equity Highwater Investment Equity Income Global Fund6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 19
    20. 20. Source: Krosinsksy & Robins, 20106/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 20
    21. 21. Reviewing Performance Across Selected Asset Classes6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 21
    22. 22. The Blended Value Approach “…that all organizations, whether for-profit or not, create value that consists of economic, social and environmental value components—and that investors simultaneously generate all three forms of value through providing capital to organizations.” - Jed Emerson6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 22
    23. 23. Asset Class Vehicles Benchmark Cash / cash equivalents Community banks, credit 91-day Treasury Index unions, loan funds Fixed income Bonds, debt securities Barclay’s Capital (sovereign, corporate) Aggregate Bond Index Public equities Stocks, mutual funds, ETFs Russell 2000, S&P 500 Private equity Hedge funds, fund of funds, Private Equity other niche products Performance Index Real estate REITs, MBSs NCREIF Property Index Commodities ETFs linked to commodities, S&P GSCI Commodity Chicago Climate Exchange Index6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 23
    24. 24. Asset Class: Cash/Cash Equivalents Small Banks/Credit Unions • Support community development • Local farming • Local small, sustainable businesses • Energy efficiency programs Large Banks • Via ESG/CSR criteria • Provide funding to underserved communities • Microfinance • Community Reinvestment laws (CRA)6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 24
    25. 25. Asset Class: Fixed Income Securities Bonds: Targeted Investments • Traditional low levels of ESG activity • Community development / infrastructure Corporate Debt • Issued by corporations with strong social/environmental programs Government Debt • Creation of public goods • Development of sustainable energy sources • Risk of political controversy for investors6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 25
    26. 26. Fixed Income: Domini Social Bond Fund6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 26
    27. 27. Fixed Income: Pax World High Yield Bond vs. Barclays Aggregate Bond6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 27
    28. 28. Asset Class: Public Equities Financial Analysis & Portfolio Construction • ESG analysis provides insight beyond what is presented in financial statements • SRI + ESG screening criteria results in slightly lower volatility than non-screened benchmarks Long Term Investment Horizon • Lower turnover = higher returns • Incentives for management to overcome ST pressures, i.e. ‘market myopia’6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 28
    29. 29. Winslow Green Growth vs. Russell 20006/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 29
    30. 30. Performance of CleanTech Indices vs S&P 500 80% 60% 40% 20% 0% 2007 2008 2009 LTM Q1 2010 3 YTD -20% -40% -60% -80% CTIUS ECO AGIGL NEX S&P6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 30
    31. 31. Powershares CleanTech vs. Russell 20006/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 31
    32. 32. Powershares Global Water Index vs. Russell 2000 6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 32
    33. 33. Water: Long-Term Outperformance Water Utility Stocks vs. Major Indices 1998-2003 800% 600% 400% Water Utility Stocks DJIA 200% S&P 500 Nasdaq Composite 0% Water DJIA S&P 500 Nasdaq Utility Composite Stocks Source: Summit Global Management, Bloomberg6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 33
    34. 34. Water: A True Neccessity 5 Yr Annualized Returns 25% 20% 15% Water Utility Stoc DJIA 10% S&P 500 Nasdaq Composit 5% 0% 1989-1993 1993-1998 1998-2003 2003-2008 -5% Source: Summit Global Management, Bloom6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC berg 34
    35. 35. Asset Class: PE/VC Private Equity & Hedge Funds • Hedge funds can incorporate SRI criteria as input into taking long and short positions in instruments • Funds may adjust standard investment strategies by limiting exposure to pre-defined SRI-compliant instruments* • Relatively few hedge funds known to incorporate ESG criteria Venture Capital • Classic VC investments in SRI are found in the cleantech sector6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 35
    36. 36. International Clean Technology Returns Analysis (ICTRA) • Comprehensive annual report prepared by New Energy Finance (Bloomberg) and European Energy Venture Fair • Gathered from all stages of private equity investments across EU and N. America, the analysis delivers aggregate return metrics at the investment level rather than the fund level • 456 investments, 379 portfolio companies analyzed • 2010 results will be presented in September at the European Energy Venture Fair (EEVF)6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 36
    37. 37. ICTRA Report: Investment IRR by Outcomes (# investments, # companies) 21.3%* Public listing (31, 25) 83.2% Later up round (69, 65) 32.9% M&A (33, 27) 13.5% PIPE** (13, 12) -0.5% No substantial change (186, 169) 0.0% Later down round (56, 48) -15.5% Written down (30, 29) -44.4% Liquidated/written off (38, 35) N/A All Venture (456, 379) 42.4%Source: ICTRA, Bloomberg New Energy Finance 4.5%* 6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 37
    38. 38. Asset Class: Real Estate Real Estate as Hard Assets • Responsible Property Investing (RPI) • No-cost & value-add strategies • Green building & energy efficiency • Community (re)development • Sustainable materials • Smart growth & conservation Real Estate as Securities • REITs • Mortgage-backed securities6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 38
    39. 39. Investments in Energy Efficiency = High Returns Investment/ Rate of Annual Asset value Simple sq ft (US$) energy savings/sq increase at payback savings ft (US$) 10% cap rate (US$)Janitorial 0.01 5% 0.14 135,000 ImmediateO&M 0.05 9% 0.20 198,000 4 monthsLighting 1.04 16% 0.36 360,000 3 yearsHVAC 1.21 9% 0.21 207,000 6 yearsCombined 2.30 40% 0.90 900,000 2.5 years Source: Krosinsky & Robins, 2010 6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 39
    40. 40. Asset Class: Commodities Few opportunities for ESG • Commodities directly tied to natural resources What role for carbon? • As pricing mechanism for externalities Potential for sub-categories • Allow for sustainability factors, i.e. land use6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 40
    41. 41. What Does the Future Hold? • The convergence of sustainability and financial analysis will continue • Continued integration of ESG criteria by more asset/fund managers across asset classes, but primarily in public equities • Evolution of regulations, standards and disclosures related to emissions/exposures • Growth and development of carbon markets will provide opportunities and challenges • Release of key UN report, "The Economics of Ecosystems and Biodiversity“ in late 2010, which will try to offer best of class metrics is valuing material inputs to business.6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 41
    42. 42. Q&A Contact Information: Mark T. Donohue 617.571.4440 Mark T. Donohue: BaseCamp SRI, NYC 42
    43. 43. Appendix: United Nations Principles for Responsible Investment 1. We will incorporate ESG issues into investment analysis and decision-making processes. 2. We will be active owners and incorporate ESG issues into our ownership policies and practices. 3. We will seek appropriate disclosure on ESG issues by the entities in which we invest. 4. We will promote acceptance and implementation of the Principles within the investment industry. 5. We will work together to enhance our effectiveness in implementing the Principles. 6. We will each report on our activities and progress towards implementing the Principles.6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 43
    44. 44. Selected Sources • Sustainable Investing: The Art of Long-Term Performance, Krosinsky & Robins • Handbook on Responsible Investing Across Asset Classes, Boston College Carroll School of Management, Institute for Responsible Investment • UNEP FI publication: “Translating ESG into Sustainable Business Value” • UNEP FI publication: “Demystifying Responsible Investment Performance” • Goldman Sachs Global Investment Research: GS SUSTAIN focus list • Impact Investing Report, The Parthenon Group • Demystifying Responsible Investment Performance: A review of key academic and broker research on ESG factors , UNEP FI & Mercer6/17/2010 Mark T. Donohue: BaseCamp SRI, NYC 44