Christopher mc knett

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TBLICONFERENCE Europe 2011

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Christopher mc knett

  1. 1. TBLI CONFERENCE™ EUROPE 2011 Workshop 12 – Integrating ESG Into Portfolios #2 Integrating ESG from the Perspective of an (Mega-) Institutional Manager November 11, 2011 Christopher C. McKnett The material contained in this presentation is current as of the presentation date, unless otherwise indicated. The views expressed in this material are the views of Chris McKnett through the period ended 11/11/11 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000. Facsimile: 020 3395 6350. 1CMINST-5760
  2. 2. A Leading Provider of Financial Services to Institutional Investors • Subsidiary of State Street Corporation, one of the worlds leading providers of financial services to institutional SSgA is a global leader investors, with a heritage dating back over two centuries in asset management relied • Entrusted with over $1.8 trillion* in assets worldwide on by sophisticated • Clients include governmental entities, corporations, endowments and foundations, third party asset gatherers, institutions worldwide for multi employer plans, pension funds and sovereign their investment needs wealth funds • ETF industry pioneer and leader since 1993 with $247 billion* in AUM State Street State Street Global Services Global Markets A global leader in State Street A global leader in asset servicing Global Advisors research and trading A global leader in asset management As of September 30, 2011 * This AUM includes the assets of the SPDR Gold Trust (approx. $64 billion as of September 30, 2011), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors, serves as the marketing agent. 2CMINST-5760
  3. 3. A Global Perspective with Local Expertise Dublin London Amsterdam Brussels Paris Frankfurt Toronto Montreal Zurich San Francisco Chicago Munich Boston Geneva Milan Rye Brook Wilton, CT New York Seoul Tokyo Atlanta Shanghai Hangzhou Dubai Hong Kong Bangalore Singapore Investment Center Marketing/Relationship Management Office Sydney Global Alliance Company Melbourne • 29 local offices, bringing a global • 24 hour global trading capability with trading perspective to managing client needs desks in Boston, London, Hong Kong and Dublin • 10 investment centers, promoting • Acquired Bank of Ireland Asset Management diversity of ideas in Q1 2011 As of September 30, 2011 3CMINST-5760
  4. 4. A Broad Range of Investment Solutions and Products We offer broad-based market exposure in highly specialized active and passive strategies across the risk return spectrum Equity Fixed Income Cash Currency Alternatives Active Active Enhanced Active Commodities Enhanced Enhanced Indexed Hedged Real Estate Indexed Indexed Indexed Private Equity Fundamental Hedge Fund of Funds Managed Volatility Absolute Return ETFs Industry leader Core, sector, industry, style, international and fixed income funds As of September 30, 2011 4CMINST-5760
  5. 5. Investor Motivations and Strategies Two primary motivations with multiple pathways to implementation ESG Value Motivation Financial Motivation Positive Screening Negative Best-In-Class and Themed Investing Screening Integration Faith Based or Ethical “ESG Inside” Screens Active Ownership Engagement and Proxy Voting Impact Investing 5CMINST-5760
  6. 6. Evolution of ESG Investing From values-based to value-creating approaches Representative Phase Goal Motivation Primary Techniques Management Style Capabilities First • Avoid investments in • Align investments • Exclusionary • Active or Passive • Screened S&P 500 Generation companies that are with values or screening not compatible with mission • Socially mission and goals Responsible US Credit Index Second • Incorporate ESG • Recognize • Positive screening • Active or Passive • Dow Jones Generation factors into materiality of some Sustainability investment decisions ESG issues • Best in class World Index selection • Improve standards • US Community of corporate • Engagement Investing Index behavior • Proxy voting Third • ESG issues can be • Generate alpha • Use ESG data to • Mainly Active • Europe SRI Alpha Generation used to seek identify companies enhanced • Risk management that managers • Australia performance and believe are Sustainable Yield manage risk expected to outperform 6CMINST-5760
  7. 7. ESG Resources Team: Champion ESG investing through Vendors: multiple relationships enable portfolio management, product broad coverage and increased flexibility to management, governance and strategy satisfy multiple ESG objectives • Chris McKnett • Research – Vice President – EIRIS – Sr. Product Engineer, ESG Investments – Ethix SRI Advisors AB • Mahesh Jayakumar – GovernanceMetrics International – Principal – MSCI Inc. – Portfolio Manager, Global Fixed Income – Sustainalytics BV • Selim Dekali • Indexes – Principal – Dow Jones Sustainability Indexes – Portfolio Manager, Global Equity Beta – MSCI ESG Indexes Solutions – FTSE4Good Indexes • Andrew Letts • Proxy voting and engagement* – Managing Director – ISS – Director, Corporate Governance and – F&C’s Responsible Engagement Global Proxy Voting Overlay (reo®) • Laura Aarnio – Principal – Senior ESG/Governance Analyst * ISS, a subsidiary of MSCI Inc., is contracted for proxy voting policy development and voting execution when clients wish to retain proxy voting discretion in separate accounts. F&C’s Responsible Engagement Overlay can be licensed when clients seek ESG engagement in separate accounts. Vendors shown are those with which State Street Global Advisors has a commercial relationship with and are subject to change. reo is a registered trade mark of F&C Asset Management plc. 7CMINST-5760
  8. 8. Research and Publications 8CMINST-5760
  9. 9. Historical ESG Research Insights Key finding: The relationship between ESG performance in share price is variable yet there are pockets of alpha power within the broader result • Highly ranked ESG companies did not outperform poorly ranked ESG companies • However, selective application of ESG factors may add value Yearly Average Information Coefficient of “Super ESG" Rating MSCI All Country Index 2003 – 2009 0.04 0.02 0.00 -0.02 -0.04 -0.06 -0.08 -0.10 2003 2004 2005 2006 2007 2008 2009 Average 1 mo 3 mo 6 mo 12 mo Source: State Street Global Advisors, 2010. This information is not intended as investment advice. Information Coefficient: A correlation value that measures the relationship between a variables predicted and actual values. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns. 9CMINST-5760
  10. 10. Contemporary Research Insights Emerging findings explore implications of ESG on risk protection 3-Month Quintile Spreads versus Market Returns Quintile MSCI All Country Spread % World Index Returns % 4% 40% 3% 30% 2% 20% 1% 10% 0% 0% -1% -10% -2% -20% -3% -30% -4% -40% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 Quintile Spread MSCI All Country World 3M Return Source: State Street Global Advisors, 2010. This information is not intended as investment advice. 10CMINST-5760
  11. 11. ESG Data Coverage: Improving but Challenges Remain 2500 2000 1500 1000 500 0 200301 200307 200401 200407 200501 200507 200601 200607 200701 200707 200801 200807 200901 200907 Universe Eco Social Gov Source: SSgA, May 2011. This information is not intended as investment advice. 11CMINST-5760
  12. 12. Efficacy of ESG Factor across Global Developed Market Universe ESG Factor 6-month Information Coefficient (IC) and Information Ratio of IC 6.00% 2 5.00% 1.5 4.00% 1 3.00% 0.5 2.00% 1.00% 0 0.00% -0.5 -1.00% -1 -2.00% -1.5 -3.00% -4.00% -2 2003 2004 2005 2006 2007 2008 2009 ESG 6m IC ESG 6m IR_IC Source: SSgA, May 2011. This information is not intended as investment advice. 12CMINST-5760
  13. 13. Efficacy of ESG Factor across Developed Market Regions ESG Factor 6-month Information Coefficient (IC) and Information Ratio of IC by Region (January 2003 – December 2009) 5.00% 0.6 4.00% 0.5 3.00% 0.4 2.00% 0.3 0.2 1.00% 0.1 0.00% 0 -1.00% -0.1 -2.00% -0.2 -3.00% -0.3 -4.00% -0.4 Asia/Pac Europe Japan North Am 6m IC 6m IR_IC Source: SSgA, May 2011. This information is not intended as investment advice. 13CMINST-5760
  14. 14. Integration of ESG Rating into Stock Selection Process for Europe Active Equity Returns spread varied year-over-year SRI Alpha strategy displayed similar and quarter-over-quarter total risk patterns Rolling 3 years Volatility Live Returns Spread (SRI Alpha - Alpha) 24% Europe Alpha vs. Europe SRI Alpha vs. MSCI Europe 1.0% 104 0.8% 22% 103 0.6% 102 20% 0.4% 101 cum ulative return 0.2% 18% 0.0% 100 -0.2% 99 16% -0.4% 98 -0.6% 14% 97 -0.8% 12% -1.0% 96 03-2005 06-2005 09-2005 12-2005 03-2006 06-2006 09-2006 12-2006 03-2007 06-2007 09-2007 12-2007 03-2008 06-2008 09-2008 12-2008 03-2009 06-2009 09-2009 12-2009 10% 02-2008 04-2008 06-2008 08-2008 10-2008 12-2008 02-2009 04-2009 06-2009 08-2009 10-2009 12-2009 Monthly Spread Cumulative Index Europe Alpha Europe SRI Alpha MSCI Europe Sources: SSgA Active Quantitative Equity as of December 2009. This information is not intended as investment advice. 14CMINST-5760
  15. 15. Transitioning to a Low Carbon Economy • Greenhouse gas emissions need to decrease substantially relative to a business as usual scenario to avert the direst consequences of climate change • Transitioning to a low carbon economy is possible using a variety of technologies and policy mechanisms • Investors face significant threats and opportunities as the transition unfolds • International Energy Agency estimates $600 billion to $1 trillion in incremental investment in climate solutions is required per annum through 2035 • Private investment must be mobilized to Total New Investment in Clean Energy by Region supplement public funds (US$ Billion) 94.4 • Narrowing the capital gap to finance 82.8 75.5 environmental solutions requires financially 61.9 70.2 59.4 65.8 62.4 sound investment products 47.7 48.6 41.2 50.5 EMEA Americas Asia & Oceania 2007 2008 2009 2010 Sources: Stern Review: The Economics of Climate Change, 2006; McKinsey & Co, International Energy Agency, World Energy Outlook 2010; Bloomberg New Energy Finance. The information is not intended to provide investment advice. SSgA does not guarantee the suitability or potential value of any particular investment. The information contained above is for illustrative purposes only. 15CMINST-5760
  16. 16. Green Bond Concept: Pillars of Green Bond Investing Long term objective Conceptual Diversified Green Bond Strategy Multilateral Issuer types Housing and State and Financial Corporate Other Real Estate Municipal Institutions PACE GSE Backed Energy Clean Energy Efficient MBS Supranational and Other Retro-fit Finance Project Finance Sovereign Green Bond types Multilateral Financial LEED certified (or Opportunities Bonds Institution Green Other Environmental equivalent) CMBS - GB, AU, NL, US etc. bonds CapEx - EIB, IBRD, IFC etc. Energy and resource Military Base Housing efficient infrastructure General issues from Retrofits green screened issuer Other Project Debt Near-term Mid/long term The information is not intended to provide investment advice. SSgA does not guarantee the suitability or potential value of any particular investment. The information contained above is for illustrative purposes only. 16CMINST-5760
  17. 17. Market for Green Bonds Supranational green bonds Supranational • AAA issuances (IBRD • Investors do not assume project risk IFC EIB • Funds are ring fenced and/or earmarked for green projects EBRD • Rely on the issuer to conduct due diligence to identify and monitor green ADB projects AfDB • Trading similar to Agencies in spread over UST IADB) • Multiple currencies including USD, EUR and a host of local currencies ~45% Estimated Mulilateral Green Bond Issuance Asset Backed $12.00 • Estimates for climate ~25% change funding $10.00 needs range greatly $8.00 but all are substantial $ Billions Municipal $6.00 • Our estimates for ~5% $4.00 supranational green $2.00 bond issuance stands Other (US $0.00 at $25 to $30 billion CREB, Retail 2011 2012 2013 2014 2015 by 2015 etc.) IBRD IFC EIB EBRD ADB ~25% $12 billion in total issuance at mid 2011 Green bond issuance data was calculated based on external data from supranational institutions and internal estimates The information is not intended to provide investment advice. SSgA does not guarantee the suitability or potential value of any particular investment. . The information contained above is for illustrative purposes only. 17CMINST-5760
  18. 18. “Valuing Non-financial Performance” — Project Delphi Antecedent Primary objective Market value Financial Revenue Operational Risk drivers Brand equity Cost of capital growth efficiency management Core Human Customer Corporate non-financial Environment Society Innovation factors capital relations governance • Carbon emissions • Employee • Customer • Public perception • New product and • Ethical integrity Key metrics • Waste engagement satisfaction • Supply chain process • Processes and management management development procedures • Energy efficiency • Absence rate • Customer loyalty • Opinion former • Value of patents • Ethical code deployment • Deployment of • Staff turnover • Retention perception • Customer perception • Board composition renewables • Health and safety • Reputation • Media coverage • Talent recruitment and • Equality and diversity • Waste reduction • Fair restructuring • Trust • Community investment retention • Talent development • Training ESG factors • Recycling • Performance • Price, product, • Stakeholder dialogue • Training • Audit processes • Environmental impacts service quality • Legal/regulatory • R&D expenditure • Reporting and management • Environmental breaches • Competitive positioning breaches transparency • Equality and diversity • Lifecycle assessment • Reputation • License to operate • Reputation • Commitment to customer • Inclusion • Shareholder interests • Talent recruitment • Social capital • Anticorruption and retention policy/practice • Competitiveness E S G environment society governance Adapted from CSR Europe, retrieved from http://www.investorvalue.org/framework.htm 18CMINST-5760
  19. 19. Project Delphi — Investor section of “Valuing Non-Financial Performance” ESG “Super Factors”, Metrics, KPIs and Validation with Investors Overview of Project Delphi Initial <<Straw-man>> hypothesis drawn from VNFP Laboratory (Including corporate and initial asset owner input) Asset Managers EFFAS + others Short-list of material Metrics for the factors + weights material factors Dialog with panel of investment consultants Proposed Super-factors + metrics Validation by panel of large Asset Owners + Wider survey of Asset Owners Recommended Framework for ESG investment criteria, relative importance and metrics to be included in VNFP Collaborative Venture report 19CMINST-5760
  20. 20. ESG Integration — What’s Next? Significance and Growth of Regional ESG Strategies (Based on % of Regional Market’s Total ESG Assets) • 94% of ESG strategy assets are concentrated in Australia, Benelux, France, Nordics, Active Impact North America, and UK Screening Ownership Integration Investing • Institutional Investors in above mentioned North markets will continue to drive ESG Strategy Growth America • Japan and Asia Ex-Japan: ESG interest and Europe participation is limited and nascent No Trend Australia Determined • Integration is the next ESG strategy primed for growth in key markets Japan No Trend Limited Limited Determined Information Information • Active Ownership is gaining ground as a Asia No Trend Limited No Trend Limited predominant ESG strategy in some of the Ex-Japan Determined Information Determined Information largest markets Note: Quantitative Measures are used when data is available, and Qualitative measures are used when data • ESG Product interest and allocation is limited is limited. Sources vary and table information aggregated from information located in the appendix. Strategy Size • PRI participation has grown rapidly at a CAGR of 64% over past 5.5-years and is expected to grow Small < 5% of Total Regional ESG AUM • ESG Data is becoming easily accessible by Moderate 5% – 30% of Total Region ESG AUM mainstream investors Large > 30% of ESG AUM Growth Trajectory Strategy Growth is Increasing Quickly Strategy Growth is Flat to Moderate Sources: EuroSIF European SRI Study 2010. US SIF, 2010: Report on Socially Responsible Investing Trends in the US RIAA “Responsible Investment 2010: Inside RI” Report, November 2010. Investment & Pensions Europe (IPE): “Investors in Asia don’t care about ESG, consultancy says,” 5/27/2011. “Sustainable Investment in China 2009,” BSR, 9/1/2009. SIF Japan, 2009 Review of Socially Responsible Investment in Japan. SIF-Japan, 2007 Review of Socially Responsible Investment in Japan. Responsible Investor: “Black Rock taps Thomson Reuters’ ASSET4 for global ESG data,” 4/11/2011. “Thomson Reuters to push ESG data out to 45,000 buy and sell-side analyst clients,” 12/3/2010. RI: “Bloomberg chief outlines ESG data strategy,” 6/4/2010; http://www.reuters.com/article/2009/12/10/us-bloomberg-idUSTRE5B916D20091210. BSR: “ESG in the Mainstream,” 9/2009; http://www.fastcompany.com/magazine/154/making-the-bottom-line-green.html. RI: “<SCI buys RiskMetrics for $1.55bn,” 3/1/2010. PRI: ‘2011 Annual Report of the PRI. Interviews with SSgA managers, Asset Owners, & Consultants 20CMINST-5760

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