The Link between ESG and Sovereign Debt - Florian Sommer

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TBLI CONFERENCE™ EUROPE 2012 - Zurich - Switzerland

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The Link between ESG and Sovereign Debt - Florian Sommer

  1. 1. TBLI Conference 2012The link between ESGand sovereign debtFlorian Sommer,Senior Strategist, Union Investment
  2. 2. 2Union Investment andsustainable investment solutions● Sustainability is consistent with our core values as a member of the German cooperative financial network – our cooperative roots.● A leading sustainable investment manager with over 20 years experience and a total of €5.3bn in SRI AuM.● A partner for sustainable investment solutions tailored to client needs across all main asset classes.● A differentiated engagement service based on a clear voting approach and dialogue with companies to ensure shareholder interests.● A clear commitment to the UN PRI principles.
  3. 3. 3The Sustainability Country Rating of Union Investment● In total 83 countries are covered that account together for 80% of the world‘s population, and 92% of the world‘s GDP.● Each ESG dimension is made up of six equally weighted issues.● Only publically available information from credible sources is being used e.g. Worldbank, UN, WHO.Source: Union Investment
  4. 4. 4The ESG dimensions of the Sustainability Rating Sustainability Rating Environment Social Governance • Water • Health • Rule of law • Climate change • Education • Politcal stability • Biodiversity • Crime & safety • Democratic rights • Air pollution • Demographics • Regulatory quality • Ecosystems • Poverty • Ease of doing business • Natural disasters • Inequality • CorruptionSource: Union Investment
  5. 5. 5Global Country Sustainability Rating 1st quartile 4th quartileNorway 94,6 Lebanon 35,7Sweden 88,7 Sri Lanka 35,1New Zealand 86,6 Vietnam 34,3Switzerland 85,6 Jordan 34,1Australia 84,8 Russia 33,9Iceland 84,3 Ecuador 32,0Canada 83,0 South Africa 29,1Denmark 81,3 China 28,2Netherlands 81,2 Bosnia 28,1Luxembourg 80,8 Philippines 27,3Finland 77,5 Senegal 27,3Austria 76,7 El Salvador 27,1France 76,0 Guatemala 26,4Ireland 75,3 Dominican Rep. 25,5Germany 71,3 Ukraine 25,4Singapore 70,6 Top 10% Jamaica 24,8United Kingdom 70,1 India 24,4 Second Best 10%Japan 69,0 Venezuela 22,6 Second Lowest 10%Slovenia 68,1 Nigeria 21,3 Bottom 10%United States 68,1 Pakistan 18,0Spain 65,9Source: Union Investment
  6. 6. 6Education index (S) 1st quartile 4st quartileNew Zealand 100 El Salvador 34,7Australia 95,0 China 34,5Norway 93,0 Sri Lanka 34,0Denmark 86,7 Philippines 33,3Iceland 85,7 Trinidad and T. 32,6Sweden 80,7 Kuwait 31,9Ireland 80,3 Ghana 31,4USA 78,9 Lebanon 31,2Finland 78,3 Egypt 31,2Netherlands 77,2 Vietnam 30,4Israel 77,0 Qatar 28,8Canada 76,0 Morroco 28,4South Korea 74,6 Turkey 27,3Belgium 73,9 Dominic. Rep 24,8Estonia 73,8 Indonesia 24,5Hungary 72,1 Top 10% Guatemala 19,2France 71,9 Second Best 10% Nigeria 18,0Germany 71,1 India 15,5 Second Lowest 10%Greece 68,8 Senegal 14,6 Bottom 10%Ukraine 68,7 Pakistan 0,0Lithuania 68,4Source: Union Investment, Human Development Index, UNDP, World Bank
  7. 7. 7Rule of law (G) 1st quartile 4st quartileFinland 100 Serbia 28,1Sweden 99,7 Vietnam 27,7New Zealand 99,1 Columbia 27,4Norway 97,9 Gabon 26,8Denmark 97,7 Jamaica 26,2Luxemburg 96,3 Philippines 25,2Netherlands 94,5 Indonesia 24,5Canada 94,5 Mexico 24,3Austria 93,8 Lebanon 22,7Switzerland 93,5 Peru 22,2Australia 92,7 Argentina 22,0Iceland 92,3 Dominic. Rep 20,7Ireland 92,2 Ukraine 20,4Great Britain 91,9 Russia 19,4Germany 89,4 El Salvador 19,2Singapore 88,6 Top10% Pakistan 15,8USA 85,6 Second Best 10% Guatemala 11,2Malta 85,1 Nigeria 8,7 Second Lowest 10%France 82,1 Ecuador 7,2 Bottom 10%Belgium 80,2 Venezuela 0,0Japan 78,2Source: Union Investment, World Bank
  8. 8. 8 Eurozone analysis CDS spreads of Eurozone countries Performance Sustainable Portfolio versus sustainability ratings versus iBoxx 5Y Eurozone 25 150 Eurozone Sovereigns 5Y Greece Sustainable Portfolio Portfolio nachhaltig Portugal Correlation Irland coefficient : 140 20 Rank CDS Spreads 2011 Spain 0,59 Italy Rumania 130 15 Poland 120 10 110 5 Germany Netherlands 100 Finland Sweden 0 90 0 10 20 30 2004 2006 2008 2010 2012 Rank Union Sustainability-Rating 2011Source: Bloomberg, Union Investment Source: Bloomberg, Union InvestmentCDS Spreads August 2011 2. Januar 2004 bis 23. März 2012, Backtest
  9. 9. 9PRI Sovereign Fixed Income Working GroupWorking Group Members include: Objective 1:Union Investment (chair)Allianz Global Investors Understand if ESG issues influence sovereignAPG Asset ManagementASR Nederland N.V. creditworthiness.AXA Investment Managers Paris Investigate how ESG issues can influenceBank Sarasin & Co. Ltd sovereign creditworthinessBloomberg L.P.ECP International S.A.Danske BankGeneration Investment Management LLP Objective 2:Hermes Fund Managers LimitedMaplecroft In the context of sovereign debt, understand toMSCI what extent ESG issues are already accountedoekom research AG for by mainstream investors and credit ratingsPension Protection Fund agencies.SNS Asset ManagementStichting Philips PensioenfondsUNEP Finance Initiative PRI Working Group contact: archie.beeching@unpri.orgUnipension Invest
  10. 10. 10Framework PRI SovereignFixed Income Working Group ESG Factors influencing Financial measures of creditworthiness creditworthiness • Economic development • Environmental issues • Credit ratings • Government debt burden • Social issues and debt maturity • Bond yields and risk premiums • Governance issues • Budgetary performance • Credit Default Spreads • Foreign liquidity and balance of trade • Institutional and political factors Mainstream Focus Extended ESG FocusSource: PRI Working Group
  11. 11. 11 High correlation between sustainability and credit ratings. Is there a causal link? 23 22 UK Germany Canada SwedenNorway AAA 21 20 Qatar Kuwait USA New Zealand AA 19 China Czech Republic Japan 18 17 A 16 Polen S&P 15 14 South Africa Russia Lithuania Ireland Rating BBB 13 India Ungarn Iceland Correlation Long Term 12 Romania Uruguay coefficient:Foreign Currency 11 Rating BB 10 Vietnam Latvia 0.76 9 Georgia 2011 8 Argentina B 7 Pakistan Equador 6 5 CCC 4 3 Greece CC 2 1 10 20 30 40 50 60 70 80 90 100 Sustainability Rating Union Investment 2011 Source: S&P, Union Investment August 2011
  12. 12. 12High correlation between sustainablityand GDP per capita $90.000 Norway $80.000 Qatar $70.000 Swiss GDP per capita $60.000 Denmark Kuwait Netherlands Sweden $50.000 Correlation Japan Finland Belgium Australien coefficient: Germany France $40.000 Italy 0.79 Spain New Zealand Israel $30.000 Greece Portugal South Korea $20.000 Slovakia Russia Croatia Chile Brazil $10.000 South Afrika Indonesia Peru Pakistan Nigeria $0 10 20 30 40 50 60 70 80 90 100 Sustainability Rating Union InvestmentSource: Bloomberg, Union Investment
  13. 13. 13Why corruption matters as an indicator fordownside riskCorruption Perception Index 2010top and bottom 10 of OECD countriesDenmark 9,3New Zealand 9,3Finland 9,2  Higher probability of fraud inSweden 9,2 government statisticsCanada 8,9Netherlands 8,8  Expansion of shadow economySwitzerland 8,7Australia 8,7  Lower ability to collect taxNorway 8,6Ireland 8 revenuesPortugal 6  Lower trust in government andKorea 5,4 lower ability to implementPoland 5,3 austerity measures.Hungary 4,7Czech Republic 4,6  Lower attactiveness for foreignTurkey 4,4 investorsSlovakia 4,3Italy 3,9Greece 3,5Mexico 3,1Source: Union Investment, Transparency International (Corruption Perception Index)
  14. 14. 14Why corruption matters as an indicator fordownside risk Change in Corruption Perception Index since 2000 in % Korea 35% Poland 29% Slovakia 23% Japan 22% Belgium 16% Turkey 16% Estonia 14% Ireland 11% Czech Republic 7% Australia 5% Mexico -6% Portugal -6% Israel -8% Finland -8% United States -9% Hungary -10% United Kingdom -13% Spain -13% Italy -15% Greece -29%Source: Union Investment, Transparency International (Corruption Perception Index)
  15. 15. 15Conclusion ESG and sovereign creditworthiness ● ESG is valuable for identifiying downside risks. ● Corruption provides an important insight. Lack of integrated ESG investment research ● Amongst different investment research service groups. ● Important questions for academic research.
  16. 16. 16Disclaimer● This advertising material is intended only for professional clients as described in section 31a, paragraph 2 of the German Securities Trading Act (WpHG). The present document has been prepared and issued by Union Investment Institutional GmbH. The document does not constitute a binding offer. Union Investment does not assume any obligation or liability for this document. The document is no substitute for the individual advice by Union Investment Institutional GmbH. Union Investment Institutional GmbH is not responsible for disadvantages that may arise directly or indirectly from the distribution of this document or its contents. For extensive product-specific information and details of the opportunities and risks presented by the respective fund, please refer to the latest sales prospectus, the Banks terms and conditions or the annual and half-yearly reports that can be obtained free of charge from Union Investment Institutional GmbH, Wiesenhüttenstrasse 10, 60329 Frankfurt am Main, Germany, telephone +49 69 2567-0. These documents constitute the sole legally binding basis for the purchase of fund units.● Origins of Data: Despite our effort and care no liability or guarantee can be assumed for the timeliness, accuracy or completeness of the data provided. Where data has been obtained from external sources, this is explicitly stated. We consider data obtained from external or publicly available sources to be reliable. Data obtained from external sources or contained in our own calculations may be incorrect. We assume no liability for any errors that may occur when data is passed on, recorded or entered or when calculations are made using this data.● Historical performance: Performance data shown is historical. Past performances can not be taken as a reliable guide for future investments. The BVI method (time- weighted return) is used for these calculations. Where the gross method has been used for such calculations (adjusted for management fees and depositary fees), this is explicitly stated. Data calculated and presented using either the BVI method or the gross method does not include any front-end fees or product-specific costs (fees, commissions and other charges).● Compliance with Global Investment Performance Standards (GIPS®) and the BVI-Rules of Conduct: Union Investment claims of compliance with GIPS® has undergone the verification process and has been verified by an independent third- party „verifier“. The Composite-Performance calculation and presentation comply with the GIPS® guidelines. The composite allocation of individual funds, or all Composites complying with GIPS® are available upon request. Union Investment Institutional GmbH has committed to comply with BVI’s code of conduct. In consequence, Union Investment Institutional GmbH employs the codes standards for performance illustrations. Cases of deviation will be individually indicated.● Future assessment: Any opinion expressed in this document (including estimates and forecasts) is solely for information purposes and does not constitute an individual offer or a guarantee for future performance. Any opinion contained herein was given at the date of publication and may be subject to change without notice.● Portfolio and performance simulation: The portfolio simulations contained in this documents are based on selected portfolios, which may be subject to change at any time. These portfolios are no forecasts and are merely shown to illustrate the development of parts of the portfolio. They do not substitute comprehensive investment advice and do not constitute investment recommendations or a guarantee for future performance.

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