Sustainability and business relevance


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Helena Colle, Deputy Global Head Investments - Dexia Asset Management - Belgium

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Sustainability and business relevance

  1. 1. Sustainability : is it the Business of Business? TBLI November 3rd – Workshop SRI fund performance and strategy Helena Colle Dexia Asset Management
  2. 2. Index <ul><li>About Dexia Asset Management </li></ul><ul><li>Why should companies and investors bother about Sustainability? </li></ul><ul><li>How to capture the Sustainable Alpha? </li></ul><ul><ul><li>Via Business relevant Sustainability Analysis </li></ul></ul><ul><ul><li>Via an Investment Process designed to produce a Financial and a Sustainable Alpha </li></ul></ul>
  3. 3. Dexia AM in figures <ul><li>Created in 1998 </li></ul><ul><li>EUR 81.4 billion in assets under management* </li></ul><ul><li>505 members of staff </li></ul><ul><li>4 management centres: </li></ul><ul><ul><li>Brussels, Luxembourg, Paris, Sydney </li></ul></ul><ul><li>Numerous local branches : Belgium, Netherlands, Luxembourg, France, Italy, Spain, Switzerland, Germany, Austria, Scandinavia, Australia </li></ul>Significant growth of assets managed by Dexia AM (billion euros) <ul><li>10.1 billion euros in SRI at the end of June 2005, including : </li></ul><ul><ul><li>€ 2.4 billion in sustainable management </li></ul></ul><ul><ul><li>€ 7.7 billion managed respecting ILO norms </li></ul></ul>SRI assets managed by Dexia AM (million euros) 32 43 53 61 55 62 71 81,4 1998 1999 2000 2001 2002 2003 2004 Juin 05 244 330 587 796 1,233 1,505 7,905 10,141 1998 1999 2000 2001 2002 2003 2004 Juin 05
  4. 4. Why should companies and investors bother about Sustainability?
  5. 5. Why should a company bother about Sustainability…? <ul><li>“ The business of business is business” </li></ul><ul><li>So why bother about Sustainability issues? About Stakeholders other than the shareholders? </li></ul><ul><li>Sustainability Issues are early indicators of business risks and opportunities </li></ul><ul><li>Expectations from stakeholders act as signals of </li></ul><ul><ul><li>evolutions in society which ultimately impact business performance </li></ul></ul><ul><ul><li>unmet social needs and “externalities” </li></ul></ul><ul><li>It’s a matter of sound long term strategy </li></ul><ul><ul><li>L. R. Sorensen, CEO of Novo Nordisk: “I believe that our company must have a long-term strategic focus. To my mind, this is not altruism or charity, but simply a question of looking at factors that determine the future of our company with a very long-term perspective” </li></ul></ul><ul><ul><li>I. Davis, worldwide Managing Director of McKinsey & Company: ”Large companies need to build social issues into strategy in a way which reflects their actual business importance. […] social issues can have the potential fundamentally to alter their strategic future” </li></ul></ul>
  6. 6. Why should an investor bother about a company’s handling of Sustainability issues? <ul><li>Attention to the long-term </li></ul><ul><ul><li>A company’s value creation is a long term process </li></ul></ul><ul><ul><li>A company’s market value depends on expected cash flows beyond the short term horizon </li></ul></ul><ul><li>Widened scope of analysis </li></ul><ul><ul><li>Taking into account more relevant information </li></ul></ul><ul><ul><li>Systematic analysis of long term risks and opportunities </li></ul></ul>
  7. 7. <ul><li>Positive results… </li></ul><ul><li>… backed by both in-house and independent research </li></ul><ul><ul><li>Dexia AM: </li></ul></ul><ul><ul><li>In-house studies show that sustainable management performance is equivalent or superior to traditional management. </li></ul></ul><ul><ul><li>Orlitzki & al.: </li></ul></ul><ul><ul><li>End 2003, research carried out by M. Orlitzky et al., analysed the results of 52 studies. The research paper demonstrated a positive and significant relationship between social responsibility and a company’s financial performance. </li></ul></ul>Dexia AM’s global sustainable management versus the MSCI World index October 98 (launch) – June 2005 There is a Sustainable Alpha! Rendements Composite MSCI World 60 80 100 120 140 160 180 200 220 Oct 98. Jul 99 May 00 Mar 01 Jan 02 Nov 02 Sep 03 Jul 04 May 05 Rendements GIPS Composite MSCI World 60 80 100 120 140 160 180 200 220 Oct 98. Jul 99 May 00 Mar 01 Jan 02 Nov 02 Sep 03 Jul 04 May 05
  8. 8. How to capture the Sustainable Alpha
  9. 9. <ul><li>The two fundamental pillars of sustainability analysis </li></ul><ul><ul><li>Stakeholder interests </li></ul></ul><ul><ul><ul><li>Employees 4. Environment </li></ul></ul></ul><ul><ul><ul><li>Customers 5. Suppliers </li></ul></ul></ul><ul><ul><ul><li>Shareholders/bondholders 6. Society </li></ul></ul></ul><ul><ul><li>Risks and opportunities = transmission mechanisms </li></ul></ul><ul><ul><ul><ul><li>Risks Opportunities </li></ul></ul></ul></ul><ul><ul><ul><li>- Legal action - Gain of goodwill </li></ul></ul></ul><ul><ul><ul><li>- Regulatory pressures - Process improvements </li></ul></ul></ul><ul><ul><ul><li>- Process deterioration - Product i nnovation … </li></ul></ul></ul><ul><ul><ul><li>- Loss of reputation… </li></ul></ul></ul>A Business relevant Sustainability Analysis Long-term economic growth cannot be conceived without respect for stakeholder interests Interaction with stakeholders is a source of risks and opportunities
  10. 10. Two-tier sustainability analysis for stock selection Sector studies Company analysis and rating Stock selection <ul><ul><li>What are the issues related to sustainability in each sector? </li></ul></ul><ul><ul><li>What is their relevance in terms of corporate risks and opportunities? </li></ul></ul><ul><ul><li>Weightings in each sector of the differents themes/dimensions of sustainability </li></ul></ul><ul><ul><li>How does a company integrate the sustainability-related issues specific to its sector? </li></ul></ul><ul><ul><li>Intra-sector ranking of companies </li></ul></ul>
  11. 11. 1. Sector Studies : The same starting point for all sectors Then Zoom in on sector relevant issues …. <ul><li>Process related impacts </li></ul><ul><li>Emissions </li></ul><ul><li>Resource consumption </li></ul><ul><li>Climate change </li></ul>Employees Customers Environment <ul><li>Impacts / products & services </li></ul><ul><li>Life-cycle analysis (LCA) </li></ul><ul><li>Use related impact (inculding climate change) </li></ul><ul><li>Recycling related impact </li></ul>Supply chain <ul><li>Commercial practices </li></ul><ul><li>Responsible marketing </li></ul><ul><li>Anti-competitive practices </li></ul><ul><li>Access to product/service </li></ul><ul><li>Quality management & Product/service safety </li></ul><ul><li>Quality management </li></ul><ul><li>Product / service safety (traceability, recall procedures) </li></ul><ul><li>Human Rights </li></ul><ul><li>Child labour </li></ul><ul><li>Forced labour </li></ul><ul><li>Freedom of association </li></ul><ul><li>Non-discrimination / diversity </li></ul><ul><li>Working Conditions </li></ul><ul><li>Working time </li></ul><ul><li>Remunerations and compensation </li></ul><ul><li>Quality of contracts </li></ul>Supply Chain Labour relations and employee dialogue <ul><li>Employement management </li></ul><ul><li>Recruitment </li></ul><ul><li>Career management </li></ul><ul><li>Skills development </li></ul>Health & safety Suppliers Relationship management Shareholders <ul><li>Corporate Governance </li></ul><ul><li>Composition and independence of the board of directors </li></ul><ul><li>Audit and reporting </li></ul><ul><li>Shareholder rights </li></ul><ul><li>Remuneration </li></ul><ul><li>Long-term strategy </li></ul><ul><li>Core responsibility </li></ul><ul><li>Long-term vision </li></ul>Society <ul><li>Process related impacts </li></ul><ul><li>Impact on local economies </li></ul><ul><li>Social licence to operate </li></ul><ul><li>Local disturbance </li></ul><ul><li>Site safety/security </li></ul>Impacts / products & services <ul><li>Business ethics </li></ul><ul><li>Bribery & corruption </li></ul><ul><li>Ethical practices </li></ul>Company
  12. 12. … to arrive for each sector at suitable relative domain-weightings Weighting of sustainability domains based on business relevance : * incidents & expressed concerns by stakeholders * the financial impact via transmission mechanisms 19% 18% 10% 17% 18% 16% 8% 20% 24% 16% 21% 13% 0% 20% 40% 60% 80% 100% Energy sector Textile & Luxury sector Shareholders/ Bondholders Clients Employees Suppliers Society Environment
  13. 13. 2. Company analysis and rating In-depth company analysis <ul><li>T-S-P analysis </li></ul><ul><li>T - transparency </li></ul><ul><li>Does the company communicate on sector issues? </li></ul><ul><li>What is the extent of its communication / reporting? </li></ul><ul><li>Is that communication checked by third parties? </li></ul><ul><li>Has the company defined its sustainability indicators? </li></ul><ul><li>S - strategy </li></ul><ul><li>Does the company have a defined sustainability strategy? </li></ul><ul><li>Does its policy cover all the relevant issues? </li></ul><ul><li>Does the company refer to international standards? </li></ul><ul><li>Are the responsibilities for strategy implementation defined? </li></ul><ul><li>Is there a monitoring process? </li></ul><ul><li>P - performance </li></ul><ul><li>What is the company’s performance in comparison to its peers in the sector? </li></ul><ul><li>What is the trend of the performance? </li></ul><ul><li>Are there incidents which could affect that performance adversely? </li></ul><ul><li>Company scores reflect the T-S-P analysis for each relevant sustainability issues (i.e. sub-domains of the sector study) </li></ul><ul><li>These scores are formalised in the in-house sustainability database </li></ul><ul><li>These scores are then aggregated for each company </li></ul><ul><ul><li>Sustainability rating of each company in the MSCI World </li></ul></ul>
  14. 14. 3. Stock selection Construction of the sustainable universe <ul><li>Sustainable Universe = Leaders + Best-in-class + Runners-up </li></ul>0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Proportion of the global investment universe Leader Best-in-class Average Insufficient High-risk SUSTAINABLE UNIVERSE
  15. 15. Well-established and performing SRI investment process which reflects the sustainable alpha and the financial alpha Investment universe <ul><li>Phase 1: sustainability analysis </li></ul><ul><li>Positive approach </li></ul><ul><li>Analysis based on multiple dimensions </li></ul><ul><li>Phase 2: financial analysis </li></ul><ul><li>Fundamental analysis </li></ul><ul><li>Quantitative analysis </li></ul>Phase 1: best tracking portfolio Reduction of relative risk = neutrality / benchmark: - geographic allocation - sector - style Phase 2: optimisation Performance maximisation <ul><li>Risk control </li></ul><ul><li>Ex-ante </li></ul><ul><li>Ex-post </li></ul>Model portfolio Equity selection Portfolio construction Risk management
  16. 16. A dedicated and integrated SRI team <ul><li>Our sustainability analysts </li></ul><ul><li>A pooling of relevant experiences </li></ul><ul><ul><li>in company rating agencies </li></ul></ul><ul><ul><li>in companies, in posts associated with sustainability (quality standards, environmental certification) </li></ul></ul><ul><ul><li>in government agencies (ADEME) </li></ul></ul><ul><ul><li>in international organisations (World Bank, Food & Agriculture Organisation, ISO) </li></ul></ul><ul><ul><li>in academic posts dealing with aspects of sustainable development </li></ul></ul><ul><li>With varied cultural profiles </li></ul><ul><ul><li>of five different nationalities enabling an understanding of companies with appropriate cultural sensitivity </li></ul></ul>
  17. 17. <ul><li>Sustainable management </li></ul><ul><li>= Double Alpha </li></ul><ul><li>= Sustainable Alph a + Financial Alpha </li></ul>And f ina lly … Thank you for your attention