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New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG
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New Generation SRI - How Integrated Approaches Can Make Financial Sense of ESG

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A presentation by Stewart Armer at TBLI CONFERENCE EUROPE 2008.

A presentation by Stewart Armer at TBLI CONFERENCE EUROPE 2008.

Published in: Economy & Finance, Technology
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  • 1. November 2008 | 1 New Generation SRI: Making financial sense of ESG Stewart Armer CIO of Sustainable and Responsible Investment 11 novembre 2008 Designator | author 1
  • 2. Fortis Investments Overview Perverse outcomes: The climate change case Making financial sense of ESG: Introducing the time dimension Mapping the internalisation process Company response Who pays the price? Market mispricing of sustainability risk & opportunities Back testing for perverse outcomes 5 key insights | November 2008 | 2
  • 3. November 2008 | 3 Perverse outcomes
  • 4. Fortis Investments Perverse outcomes – the climate change case Phase I – Polluters Profit 35.0 € 30.0 € 25.0 € 20.0 € 15.0 € 10.0 € 5.0 € 0.0 € ja nv.-05 m a i-0 5 sep t.-05 ja nv.- 06 m ai-0 6 sep t.-0 6 janv.-07 ma i-07 sept.-0 7 ja nv.-0 8 m ai-08 sept.-0 8 EU ETS Y0 7 EU ET S Y08 | November 2008 | 4
  • 5. Fortis Investments Perverse outcomes – the climate change case Polluters who should pay don’t pay | November 2008 | 5
  • 6. Fortis Investments Global Perverse outcomes – the climate change case Food for biofuels (feedstock price evolution) 18 00 250 16 00 200 14 00 Fortis Investments Biofuels Index 12 00 150 Commodity Index 10 00 8 00 100 6 00 4 00 50 2 00 0 0 J an -0 4 M a y-0 4 S ep -0 4 J a n-0 5 M a y-0 5 S ep -0 5 J a n-0 6 M a y-0 6 S ep -0 6 J a n-0 7 M a y- 07 S ep -0 7 J a n-0 8 M ay -0 8 FI M B IO F UE L I ND E X C B O T C om m o dity In d ex Sources: Bloomberg, Fortis Investments, période 01/01/2004 – 18/08/2008 | November 2008 | 6
  • 7. Fortis Investments Perverse outcomes SRI indexes: poor performance and exposure to CC Dow Jones Sustainability Index / Focus on the Utilities sector 10 companies retained in DJSI Stoxx / Utilities – Centrica, E.ON, Endesa, Iberdrola, National Grid, RWE, SVT, Union Fenosa, United Utilities, Veolia Environnement 27 companies in MSCI Europe Utilities Sector 10 companies retained in the DJSI Stoxx represent 50% of the direct GHG emissions of the MSCI Europe Utilities DJSI Stoxx Utilities: 542 t.CO2/y MSCI Europe Utilities Sector: 1089 t. CO2/y Average cost of CO2 emissions is higher in the DJSI compared to MSCI Europe Utilities Sector DJSI Stoxx: EUR 1347 mn / co. MSCI Europe Utilities Sector: EUR 1043 mn / co. | November 2008 | 7
  • 8. November 2008 | 8 Integrating sustainability issues into finance
  • 9. Fortis Investments Integrating sustainability issues into finance From exclusion to integration Exclusion Best-in-class Integration Satisfy ethical clients Focus on reputation and risk Focus on sustainability drivers Avoid involvement in controversial Practice driven concept Product driven concept activities Cannot capture transition, change Able to capture transition, change and Not able to catch sustainability and technological innovations technological switch trends Relatively small impact on risk Positive impact of risk/return profiles Negative impact on expected return (sector neutral) and return (diversification, exposure to new and on risk businesses) | November 2008 | 9
  • 10. Fortis Investments ESG Not an investment framework Environment: Social Governance Greenhouse Gases Human Rights Independence and Effectiveness of Board Waste Food Crisis Shareholder Rights Water Abstraction & Toxicity Scarcity Compensation of Board Health & Safety Members Natural Resources Obesity Audit Independence Depletion Nanotechnologies Bribery & Corruption Polluting Emissions … … Biodiversity … | November 2008 | 10
  • 11. Fortis Investments Introducing the time dimension Fortis Sustainability Radar™ Growing Political/ Voluntary Media Codes Attention Strong Scientific Some Evidence Scientific Evidence Legislation Calls for in place tighter legislation Sustainability EMERGING MOMENTUM ESTABLISHED Issues | November 2008 | 11 Sources: Fortis Investments
  • 12. | November 2008 | 12 Fortis Investments Electro Magnetic Fields (S) Issue development Nanotechnology (S) EMERGING Obesity (S) Food Crisis (S) Greenhouse Gases (E) Water Abstraction (E) MOMENTUM Waste (E) Audit Independence (G) Fortis Sustainability Radar™ Labour Rights, Health & Safety (S) Asbestos (S) ESTABLISHED Issues Sustainability Sources: Fortis Investments
  • 13. Fortis Investments The transition to sustainability Fortis Sustainability Radar™ SUBSIDIES INCENTIVES Eg: Capital subsidies, grants or rebates, Feed-in tariff FISCAL INCENTIVES Eg: Tax credit, sales tax, energy tax, VAT reduction PROCUREMENT DECISIONS Eg: Public investment, loans, or financing, bidding CONSUMER CHOICE MANDATORY TARGETS Eg:Tradable certificates PENALTIES MANDATORY STANDARDS Time & political implication | November 2008 | 13 Sources: Fortis Investments
  • 14. Fortis Investments How do companies respond? Fortis Sustainability Radar™ Business Response PRODUCT Companies with products or STRATEGIC services that solve the problem BEST Companies who achieve PRACTICES competitive advantage through better practices WORST Companies with a defensive or PRACTICES minimalist approach | November 2008 | 14 Sources: Fortis Investments
  • 15. Fortis Investments How do companies respond? Fortis Sustainability Radar™ Business Response PRODUCT Companies with products or STRATEGIC services that solve the problem Big-Cap Companies strategically transitioning to more sustainable model BEST Companies who achieve PRACTICES competitive advantage through better practices WORST Companies with a defensive or PRACTICES minimalist approach | November 2008 | 15 Sources: Fortis Investments
  • 16. Fortis Investments Investment Insight: Carbon redistribution / Who internalizes? CARBON EXPOSURE Product Production process PRODUCT SUBSTITUTION PRICING / PURCHASING POWER Potential replacement of existing products by KEY QUESTIONS Capacity to pass carbon costs through less carbon-intensive products to consumers/suppliers BARRIERS TO ENTRY Competitive situation on the current market Investments required by carbon constraint | November 2008 | 16 Sources: Fortis Investments
  • 17. Fortis Investments Sustainability insight: The right technological path (avoiding blind alleys) Fortis Sustainability Radar™ Business INVESTMENT Response OPPORTUNITY ZONE PRODUCT Example: IKEA STRATEGIC Sustainable investor “backcasts” from future BEST PRACTICES Conventional investor “forecasts” from present forecasts” WORST PRACTICES Sustainability EMERGING MOMENTUM ESTABLISHED Issues | November 2008 | 17 Sources: Fortis Investments
  • 18. Fortis Investments Investment insight Market mispricing of sustainability risks/opportunities Fortis Sustainability Radar™ Business INVESTMENT Response OPPORTUNITY ZONE PRODUCT STRATEGIC Sustainable Winners PARAMETERS ARE PARAMETERS ARE BEST NOT CLEAR – VERY CLEAR – PRACTICES TOO EARLY TOO LATE WORST Unsustainable PRACTICES Losers Sustainability EMERGING MOMENTUM ESTABLISHED Issues | November 2008 | 18 Sources: Fortis Investments
  • 19. Fortis Investments Back-testing for perverse outcomes Phase I – polluters profit 35.0 € 30.0 € 25.0 € 20.0 € 15.0 € 10.0 € 5.0 € 0.0 € janv.-05 mai-05 sept.-05 janv.- 06 m ai-06 sept.-06 janv.-07 mai-07 sept.-07 janv.-08 mai-08 sept.-08 EU ETS Y07 EU ETS Y08 Investors need to focus on what policy makers “really” want | November 2008 | 19
  • 20. Fortis Investments Back-testing for perverse outcomes Polluters who should pay don’t pay Investors need to ask “who internalises” CARBON EXPOSURE Product Production process PRODUCT SUBSTITUTION PRICING / PURCHASING POWER Potential replacement of existing products by KEY QUESTIONS Capacity to pass carbon costs through less carbon-intensive products to consumers/suppliers BARRIERS TO ENTRY Competitive situation on the current market Investments required by carbon constraint | November 2008 | 20
  • 21. Fortis Investments Back-testing for perverse outcomes Food for biofuels Investors need to “backcast” 18 00 250 16 00 200 14 00 Fortis Investments Biofuels Index 12 00 150 Commodity Index 10 00 8 00 100 6 00 4 00 50 2 00 0 0 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 FIM BIOFUEL INDEX CBOT Com modity Index | November 2008 | 21
  • 22. Fortis Investments Back-testing for perverse outcomes Traditional SRI frameworks are carbon intensive SRI frameworks need to fully integrate the clean tech opportunity | November 2008 | 22
  • 23. Fortis Investments 5 Key Insights Polluters will not always pay – investors need to know who are the winners and losers ESG factors are not by themselves a sustainability or investment framework Traditional SRI indexes are carbon intensive Perverse outcomes likely until sustainability built into policy making - the “time dimension” is critical Investors need to capture the clean-tech opportunity A strategic sustainability-based approach helps us avoid technological “blind alleys” and avoid “perverse outcomes”! | November 2008 | 23
  • 24. Fortis Investments Mapping the SRI Market STRONG ENVIRONMENTAL INTEGRATED THEMATIC “NEW GENERATION” SRI (no sustainability screening) (Sustainability and financial analysis integrated in one strong, coherent process) OPPORTUNITY FOCUS RISK and OPPORTUNITY FOCUS Financial Process TRADITIONAL ETHICAL BEST-IN-CLASS EXCLUSIONS (Non-integrated approach creates trade-off (Non-integrated approach, lack of between strength of financial and sustainable product dimension removes sustainability process). alpha drivers) RISK FOCUS RISK FOCUS WEAK Sustainability Process STRONG | November 2008 | 24
  • 25. Fortis Investments Disclaimer Investors and distribution partners should ensure that they are fully informed about the sub-funds, classes and sub-classes of shares that are authorised to be marketed in their country of residence and the constraints applicable in each of these countries. This document has been prepared solely for informational purposes and does not constitute 1) an offer to buy or sell or a solicitation of an offer to buy or sell any security or financial instrument mentioned in this document or 2) any investment advice. Any decision to invest in the securities described herein should be made after reviewing the most recent version of the prospectus, which can be obtained free of charge from Fortis Investments*. Moreover, prospective investors should conduct such investigations as the investor deems necessary and should seek their own legal, accounting and tax advice in order to make an independent determination of the suitability and consequences of an investment in the securities. The opinions contained herein are subject to change without notice. Investors should ensure themselves that they read the last available version of this document. Past performance or achievements are not indicative of current or future performance. The performance data do not take account of the commissions and costs incurred on the issue and redemption of units. For more information, please contact fortisfunds@fortisinvestments.com Fortis Investments is the trade name for all entities within the group of Fortis Investment Management. This document has been issued by Fortis Investment Management Belgium N.V./S.A. (address : Avenue de l’Astronomie 14, 1210 Brussels, Belgium, RPM/RPR 0882 221 433). | November 2008 | 25

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