TBLI Bangkok – May 30, 2008 Afshin Mehrpouya New York Paris Toronto London San Francisco Sydney Tokyo Innovest  Uncovering...
<ul><ul><li>Innovest   is an   investment research and advisory firm   which focuses on   “non-traditional,”  drivers of i...
Sovereign Wealth Funds – A perspective <ul><li>SWFs are large pools of capital controlled by a government and invested in ...
S <ul><li>Then, why are they in the spotlight? </li></ul><ul><ul><li>Commodity price boom </li></ul></ul><ul><ul><li>Credi...
<ul><li>Government surplus from commodities ( e.g. Kuwait Investment Authority, Abu Dhabi Investment Authority, Chilean So...
Some of the larger transactions: Sovereign Wealth Funds – A Perspective Source: Various; SWF websites and news sources
Sovereign Wealth Funds – A perspective How large are they? Source: Morgan Stanley; Sovereign Wealth Funds: A Growing Globa...
<ul><li>Intergenerational Savings (e.g. Norwegian Government Pension Fund, Kuwait Investment Authority, etc.) </li></ul><u...
<ul><li>I </li></ul>Categories and risk appetites Sovereign Wealth Funds – A Perspective
<ul><li>We believe SWFs can be significant source of extra-financial  opportunity  and  risk  primarily to the community o...
<ul><li>Mission </li></ul><ul><li>Quality of management </li></ul><ul><li>Long term vs. short term </li></ul><ul><li>Activ...
<ul><li>Oil stabilization funds </li></ul><ul><ul><li>Hedging against oil risks through investing in Clean Energy </li></u...
<ul><li>All non-transparent funds </li></ul><ul><ul><li>Influence aiming at non-economic gains </li></ul></ul><ul><ul><ul>...
Sovereign Wealth Funds – Risk and Opportunities Best practices:  Norwegian Government Pension Fund - Global Capital Market...
Investment Guidelines (including Negative Screening) Sovereign Wealth Funds – Risk and Opportunities Best practices:  Kuwa...
Sovereign Wealth Funds – Risk and Opportunities Innovest’s SWF opportunities and risks analysis platform Portfolio analysi...
<ul><li>SWF comprehensive report </li></ul><ul><ul><li>Comparative opportunities / risks analysis </li></ul></ul><ul><ul><...
Afshin Mehrpouya Senior Analyst - France Innovest Strategic Value Advisors Tel: +33 (0)1 44 54 04 89 [email_address] www.i...
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The Environmental, Social and Governance (ESG) Implications of Sovereign Wealth Funds (SWF) in the Capitals Markets and Innovest’s Risk Analysis Approach to SWFs

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Talk given by Afshin Mehrpouya at TBLI Bangkok – May 30, 2008

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  • The Environmental, Social and Governance (ESG) Implications of Sovereign Wealth Funds (SWF) in the Capitals Markets and Innovest’s Risk Analysis Approach to SWFs

    1. 1. TBLI Bangkok – May 30, 2008 Afshin Mehrpouya New York Paris Toronto London San Francisco Sydney Tokyo Innovest Uncovering Hidden Value for Strategic Investors The Environmental, Social and Governance (ESG) Implications of Sovereign Wealth Funds (SWF) in the Capitals Markets and Innovest’s Risk Analysis Approach to SWFs
    2. 2. <ul><ul><li>Innovest is an investment research and advisory firm which focuses on “non-traditional,” drivers of investment risk and returns , including companies’ performance on environmental, social, and strategic governance (ESG) issues. </li></ul></ul><ul><ul><li>Core products </li></ul></ul><ul><ul><ul><li>Company profiles and ratings </li></ul></ul></ul><ul><ul><ul><li>Sector reports </li></ul></ul></ul><ul><ul><ul><li>Carbon Beta™ Impact Analysis </li></ul></ul></ul><ul><ul><ul><li>Global Compact Screen </li></ul></ul></ul><ul><ul><ul><li>Carbon Audits </li></ul></ul></ul><ul><ul><ul><li>Sustainability Audits </li></ul></ul></ul><ul><ul><li>Research coverage: </li></ul></ul><ul><ul><ul><li>- 2300 companies globally </li></ul></ul></ul><ul><ul><ul><li>- 70 MSCI industry sectors </li></ul></ul></ul><ul><ul><li>Headquartered in New York with 7 offices in 6 countries in 4 continents . </li></ul></ul><ul><ul><li>8 out of the top 25 global asset managers in the world use Innovest research. </li></ul></ul><ul><ul><li>70 clients globally including: UBS, HSBC, SSgA, ING, ABP, BNP Paribas, CalPERS </li></ul></ul><ul><ul><li>Ranked # 1 independent research provider by 2006 & 2007 Thomson Extel Survey </li></ul></ul>Introduction to Innovest
    3. 3. Sovereign Wealth Funds – A perspective <ul><li>SWFs are large pools of capital controlled by a government and invested in private markets (abroad?), against which the government has no external liability </li></ul>What are they? <ul><li>Different from: </li></ul><ul><ul><li>Pension funds </li></ul></ul><ul><ul><li>Government owned and/or managed companies </li></ul></ul><ul><ul><li>Central Banks / Foreign Reserves </li></ul></ul>
    4. 4. S <ul><li>Then, why are they in the spotlight? </li></ul><ul><ul><li>Commodity price boom </li></ul></ul><ul><ul><li>Credit crisis </li></ul></ul><ul><ul><li>Increased risk appetite of national governments </li></ul></ul><ul><ul><li>A few highly publicized exposures </li></ul></ul><ul><ul><li>Weaker US Dollar </li></ul></ul><ul><ul><li>SWF move from diversified small shares, to large transactions </li></ul></ul>Sovereign Wealth Funds – A perspective Are they a new phenomenon? Source: Various - SWF websites, IMF, etc. – upper estimation limits in all cases
    5. 5. <ul><li>Government surplus from commodities ( e.g. Kuwait Investment Authority, Abu Dhabi Investment Authority, Chilean Sovereign Wealth Fund) </li></ul><ul><li>Non-commodity surpluses [e.g. CIC (China), GIC & Temasek (Singapore)] </li></ul><ul><ul><li>Usually aimed at exchange rate or inflation control </li></ul></ul><ul><ul><li>Usually a debt in local currency from central bank to the fund </li></ul></ul><ul><li>Other sources of government surplus </li></ul><ul><ul><li>Privatization (Australian Sovereign Wealth Fund) </li></ul></ul><ul><ul><li>Superannuation support (New Zealand Superannuation Fund ) </li></ul></ul>Sources of capital Sovereign Wealth Funds – Risk and Opportunities
    6. 6. Some of the larger transactions: Sovereign Wealth Funds – A Perspective Source: Various; SWF websites and news sources
    7. 7. Sovereign Wealth Funds – A perspective How large are they? Source: Morgan Stanley; Sovereign Wealth Funds: A Growing Global Force in Corporate Finance USD 12 trillion by 2012 , given the historical levels of foreign reserve growth and launch of new SWFs Source: IMF Global Financial Stability Report
    8. 8. <ul><li>Intergenerational Savings (e.g. Norwegian Government Pension Fund, Kuwait Investment Authority, etc.) </li></ul><ul><ul><li>Long term </li></ul></ul><ul><ul><li>Strict government withdrawal covenants </li></ul></ul><ul><ul><li>Lower return pressure </li></ul></ul><ul><li>Oil Stabilization Fund (e.g. Russian Oil Stabilization Fund ) </li></ul><ul><ul><li>Short to medium term </li></ul></ul><ul><ul><li>Low risk tolerance </li></ul></ul><ul><ul><li>Need higher liquidity </li></ul></ul><ul><li>Reserve Investment Entities [e.g. China (CIC), Singapore (Temasek, GIC), etc] </li></ul><ul><ul><li>Mostly non-commodity surpluses </li></ul></ul><ul><ul><li>Need higher returns </li></ul></ul><ul><ul><li>Higher risk tolerance </li></ul></ul><ul><li>Development funds (e.g. Nordic Development Fund, European Development Fund, etc.) </li></ul><ul><ul><li>Goal oriented </li></ul></ul><ul><ul><li>Not return focused </li></ul></ul><ul><ul><li>Small relative size </li></ul></ul>Fund Mission Sovereign Wealth Funds – A Perspective
    9. 9. <ul><li>I </li></ul>Categories and risk appetites Sovereign Wealth Funds – A Perspective
    10. 10. <ul><li>We believe SWFs can be significant source of extra-financial opportunity and risk primarily to the community of their investees and co-investors, and ESG research can offer them significant benefits. </li></ul>Why is Innovest concerned? Sovereign Wealth Funds – A Perspective
    11. 11. <ul><li>Mission </li></ul><ul><li>Quality of management </li></ul><ul><li>Long term vs. short term </li></ul><ul><li>Active vs. passive </li></ul><ul><li>Economic vs. strategic mandate </li></ul><ul><li>Return requirements </li></ul><ul><li>National values </li></ul>Factors defining behaviour Sovereign Wealth Funds – Risk and Opportunities
    12. 12. <ul><li>Oil stabilization funds </li></ul><ul><ul><li>Hedging against oil risks through investing in Clean Energy </li></ul></ul><ul><li>All long term funds </li></ul><ul><ul><li>Long term perspective resulting in higher regard for environmental, social and governance (ESG) performance of portfolio </li></ul></ul><ul><ul><ul><li>Norwegian GPF, NZ SWF </li></ul></ul></ul><ul><ul><li>Commitment to engagement aiming at improving environmental and social performance based on diffusion of national values </li></ul></ul><ul><ul><ul><li>Norwegian GPF, NZ SWF </li></ul></ul></ul><ul><ul><li>Privileged access of the investee to additional liquidity </li></ul></ul>Key opportunities Sovereign Wealth Funds – Risk and Opportunities Norwegian Government Pension Fund The overarching objective of the active ownership effort is to safeguard the financial interests of the Pension Fund. The ethical guidelines are premised on favorable returns over time being dependent on sustainable development, in the financial, ecologic and social sense . Source: NPF Report to Storting 2008
    13. 13. <ul><li>All non-transparent funds </li></ul><ul><ul><li>Influence aiming at non-economic gains </li></ul></ul><ul><ul><ul><li>Conflicts with the economic objectives of co-investors and the investee </li></ul></ul></ul><ul><li>Passive SWF Investors </li></ul><ul><ul><li>Dilution of shareholder voting power </li></ul></ul><ul><li>Stabilization and local currency debt funds </li></ul><ul><ul><li>Possibility of short to mid-term sovereign wealth investments </li></ul></ul><ul><ul><ul><li>Instability in the target firm and/or capital markets </li></ul></ul></ul><ul><li>All SWFs </li></ul><ul><ul><li>Lack of sufficient outsourcing management or internal management skills </li></ul></ul><ul><ul><ul><li>Unpredictable fund behavior both on portfolio adjustments and engagement </li></ul></ul></ul>Sovereign Wealth Funds – Risk and Opportunities Key Risks CIC has invested USD 5 billion in Morgan Stanley and 3 billion in Blackstone without demanding any managerial role and claiming passivity . Furthermore it declined the offer of a board seat offered by UBS, though it may exercise its voting stake in some cases Source: Financial Times
    14. 14. Sovereign Wealth Funds – Risk and Opportunities Best practices: Norwegian Government Pension Fund - Global Capital Markets Source: Petroleum Stated type: Trans-generational saving Size: USD 328 billion Source: Norwegian Ministry of finance Norwegian Ministry of Finance Active and Long Negative Screening based on national values ESG engagement Discloses Portfolio ‘ The fiscal rule’ for withdrawal which is mostly limited to fund returns Norges Bank Portfolio highly diversified; maximum ownership threshold set to 10% ( increased from 5% in 2008) Design of index portfolio And Guidelines Outsourcing of Management Quarterly public reports Annual public reports Storting (Parliament) SWF Oil revenues Council of Ethics Guidelines and Supervision Key areas for improvement: No proxy voting disclosure Lack of independent executive board for the fund exposes it to short term political volatility Guidelines Recommendations
    15. 15. Investment Guidelines (including Negative Screening) Sovereign Wealth Funds – Risk and Opportunities Best practices: Kuwait Investment Authority Capital Markets Source: Oil Stated type: Trans-generational saving Size: USD 213 billion Source: IMF Board of Directors (Kuwaitian Ministry of Finance) No withdrawal right without parliamentary ratification SWF Internal Audit National Assembly Reports Annual Closed doors presentation of full activity External Asset Managers Daily / Monthly / Quarterly private reports External Audit Executive Committee Assist in Strategic goals and Objectives 10% of Annual Oil Revenue Active and Long Term Commercially driven Investments (stated) Key disclosure gaps: No portfolio disclosure No investment process disclosure No ceiling on percentage of shares Lack of transparency on external managers and quality process No Proxy voting disclosure
    16. 16. Sovereign Wealth Funds – Risk and Opportunities Innovest’s SWF opportunities and risks analysis platform Portfolio analysis for inter-investee conflict of interests (the visible portion) Portfolio deviations from market (the visible portion) Ethics governance platform Portfolio transparency Code of ethics Ethical risks Mitigation Proxy voting analysis E&S Engagement practices Degree and type of dependency on external entities Specific E&S investments Mandate Environmental and Social Opportunities Type of legal entity Internal & external management teams and control processes Skills Independence of Board of Governors Type of government Transparency of the investment process Seats on the board Stated mandate Economic mandate Voting rights Regulations for withdrawal of money from the fund Percentage of shares Frequency of portfolio adjustments Passive or active Scale of influence on the investee Stated Investments horizon / type of reporting in national accounts Investment time horizon
    17. 17. <ul><li>SWF comprehensive report </li></ul><ul><ul><li>Comparative opportunities / risks analysis </li></ul></ul><ul><ul><li>Analysis of best practices </li></ul></ul><ul><li>SWF profiles and ratings </li></ul><ul><ul><li>Detailed factor analysis </li></ul></ul><ul><ul><li>Relative rating </li></ul></ul><ul><ul><li>Outlook </li></ul></ul>Sovereign Wealth Funds – Risk and Opportunities Innovest’s SWF opportunities and risk analysis products
    18. 18. Afshin Mehrpouya Senior Analyst - France Innovest Strategic Value Advisors Tel: +33 (0)1 44 54 04 89 [email_address] www.innovestgroup.com Thank you. Perrine Dutronc Managing Director - France Innovest Strategic Value Advisors Tel: +33 (0)1 44 54 04 89 [email_address] Bill Hartnett Managing Director - Asia Pacific Innovest Strategic Value Advisors T: +61 2 9940 2688 [email_address]

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