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Progressive Investing:       A “State of the Union” Review of Performance and Impact                                 Mark ...
SRI Investing Today: Sizing the Market                         570 UN                     “Principles for                 ...
SRI: Terminology    Ethical Investing: “Negative screening. Avoiding    companies on ethical, moral or religious grounds (...
SRI: Terminology    Sustainable Investing / ESG: “Simultaneously pursuing    opportunities that arise from climate change ...
The New Criteria:            ESG   • Environmental   • Social   • Governance   • Used to find hidden value or   deficienci...
Sustainable Investing Provides              Better Risk Management Pricing in risk      Credit risk      Liability risk...
Source: Krosinsksy & Robins, 20106/17/2010                  Mark T. Donohue: BaseCamp SRI, NYC   7
RiskMetrics Global ESG 100   Source: RiskMetrics Group, “Global ESG 100” January 20106/17/2010                  Mark T. Do...
Examining the Links Between ESGFactors & Investment Performance                                                           ...
Moskowitz Prize Winners 2004-2009 • 2004: “Corporate Social and Financial Performance: A Meta-Analysis” • 2005: "The Econo...
SRI as Valid Statistical Construct    2004 Winners - Orlitzky, Schmidt & Rynes: “Corporate     Social and Financial Perfor...
Linking Environmental & Financial          Performance to Valuation  2005 Winners - Guenster, Derwall, Bauer and Koedijk: ...
Measuring the Impact of      Shareholder and Social Activism            2006 Winner - Barber - "Monitoring the Monitor:   ...
Quantifying the Human Element  2007 Winner – Edmans - "Does the Stock Market Fully Value     Intangibles? Employee Satisfa...
Examining ‘Doing Well by Doing Good’               2008 Winners – Statman & Glushkov –                "The Wages of Social...
The Relationship Among CSP, CFP          and Social Pressure     2009 Winners – Baron, Jo, Harjoto - "The Economics and   ...
Paul Hawken: Critic or Purist?    “The cumulative investment portfolio of the    combined SRI mutual funds is virtually no...
Walking the Walk: Hawken &                 Highwater Global      • Over 90% of Fortune 500 companies fail HG screening    ...
Selected SRI Fund Performance 2006-2009   25%                                                               20%   20%    1...
Source: Krosinsksy & Robins, 20106/17/2010                   Mark T. Donohue: BaseCamp SRI, NYC   20
Reviewing Performance Across            Selected Asset Classes6/17/2010     Mark T. Donohue: BaseCamp SRI, NYC   21
The Blended Value Approach  “…that all organizations, whether for-profit or  not, create value that consists of economic, ...
Asset Class                     Vehicles                Benchmark Cash / cash equivalents    Community banks, credit      ...
Asset Class: Cash/Cash Equivalents     Small Banks/Credit Unions     • Support community development       • Local farming...
Asset Class: Fixed Income Securities     Bonds: Targeted Investments     • Traditional low levels of ESG activity     • Co...
Fixed Income: Domini Social Bond Fund6/17/2010   Mark T. Donohue: BaseCamp SRI, NYC   26
Fixed Income: Pax World High Yield        Bond vs. Barclays Aggregate Bond6/17/2010     Mark T. Donohue: BaseCamp SRI, NYC...
Asset Class: Public Equities      Financial Analysis & Portfolio Construction     • ESG analysis provides insight beyond w...
Winslow Green Growth vs. Russell 20006/17/2010   Mark T. Donohue: BaseCamp SRI, NYC   29
Performance of CleanTech Indices vs S&P 500    80%    60%    40%    20%      0%            2007     2008           2009   ...
Powershares CleanTech vs. Russell 20006/17/2010   Mark T. Donohue: BaseCamp SRI, NYC   31
Powershares Global Water Index vs. Russell 2000  6/17/2010   Mark T. Donohue: BaseCamp SRI, NYC   32
Water: Long-Term Outperformance            Water Utility Stocks vs. Major Indices                          1998-2003      ...
Water: A True Neccessity     5 Yr Annualized Returns            25%            20%            15%                         ...
Asset Class: PE/VC       Private Equity & Hedge Funds      • Hedge funds can incorporate SRI criteria as input into       ...
International Clean Technology            Returns Analysis (ICTRA)       • Comprehensive annual report prepared by New Ene...
ICTRA Report: Investment IRR by Outcomes                                              (# investments, # companies)        ...
Asset Class: Real Estate         Real Estate as Hard Assets     •    Responsible Property Investing (RPI)     •    No-cost...
Investments in Energy Efficiency = High Returns                   Investment/ Rate of                     Annual       Ass...
Asset Class: Commodities      Few opportunities for ESG     • Commodities directly tied to natural       resources     Wha...
What Does the Future Hold?     • The convergence of sustainability and financial analysis will continue     • Continued in...
Q&A                        Contact Information:                        Mark T. Donohue                    Mark.donohue@bab...
Appendix: United Nations Principles for      Responsible Investment 1. We will incorporate ESG issues into investment    a...
Selected Sources • Sustainable Investing: The Art of Long-Term Performance, Krosinsky & Robins • Handbook on Responsible I...
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Socially Responsible Investing - Keynote - "State of the Union"

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In June 2010, Mark was asked to present a one-hour keynote on the state of research into socially responsible investing. This was presented in NYC to a large group organized by Steve Scheuth and his SRI in the Rockies / First Affirmative Financial organizations.

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Socially Responsible Investing - Keynote - "State of the Union"

  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 Mark.donohue@babson.edu 617.571.4440 http://www.linkedin.com/in/marktdonohue6/17/2010 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

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