Norm-based Exclusion A Key to PRI Implementation

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Oliver Jaeggi, Managing Partner/ Chairman - ECOFACT AG - Switzerland

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Norm-based Exclusion A Key to PRI Implementation

  1. 1. Norm-based Exclusion A Key to PRI Implementation TBLI Conference Europe Amsterdam, November 13, 2009 Olivier Jaeggi Managing Partner ECOFACT AG Tel. +41 44 350 60 62 [email_address] www.ecofact.com
  2. 2. <ul><li>&quot;We will incorporate ESG issues into investment analysis and decision-making </li></ul><ul><li>processes.&quot; </li></ul><ul><li>Possible actions: </li></ul><ul><li>Address ESG issues in investment policy statements </li></ul><ul><li>Support development of ESG-related tools , metrics, and analyses </li></ul><ul><li>Assess the capabilities of internal investment managers to incorporate ESG issues </li></ul><ul><li>Assess the capabilities of external investment managers to incorporate ESG issues </li></ul><ul><li>Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis </li></ul><ul><li>Encourage academic and other research on this theme </li></ul><ul><li>Advocate ESG training for investment professionals </li></ul>UN PRI: Principle 1 TBLI / November 13, 2009
  3. 3. <ul><li>“ We will incorporate ESG issues into investment analysis and decision-making </li></ul><ul><li>processes.” </li></ul><ul><li>Possible actions: </li></ul><ul><li>Address ESG issues in investment policy statements </li></ul><ul><li>Support development of ESG-related tools , metrics, and analyses </li></ul><ul><li>Assess the capabilities of internal investment managers to incorporate ESG issues </li></ul><ul><li>Assess the capabilities of external investment managers to incorporate ESG issues </li></ul><ul><li>Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis </li></ul><ul><li>Encourage academic and other research on this theme </li></ul><ul><li>Advocate ESG training for investment professionals </li></ul>UN PRI: Principle 1 TBLI / November 13, 2009 &quot;Starting in 2011, the PRI will introduce a set of minimum disclosure requirements.&quot;
  4. 4. <ul><li>Many institutional investors are skeptical towards traditional SRI approaches. </li></ul><ul><li>Traditional SRI/ESG solutions: &quot;best-in-class&quot; approach. </li></ul><ul><li> Investments into shares of companies such as BP, Nestle, British Airways, etc. </li></ul><ul><li>Some funds exclude the most controversial sectors, such as defense or tobacco. </li></ul><ul><li>For most investors this has two downsides: </li></ul><ul><li>This approach reduces the investment universe significantly; only a few hundred companies will be &quot;best-in-class&quot;. </li></ul><ul><li>Most investors would like to see some form of positive impact on sustainable development. The &quot;best-in-class&quot; approach is difficult to communicate; investors remain skeptical. </li></ul>UN PRI: Why Many Institutional Investors Hesitate TBLI / November 13, 2009
  5. 5. UN PRI: Stock-Picking vs. Stock-Kicking &quot;Best-in-class&quot; &quot;Norm-based Exclusion&quot;  Engage or exclude Research Universe Research Universe TBLI / November 13, 2009
  6. 6. Companies are Exposed to Environmental and Social Risks TBLI / November 13, 2009 Natural Environment Society Economy Investors Company Investments
  7. 7. Natural Environment Society Economy Impacts Company TBLI / November 13, 2009 Investors Investments Companies are Exposed to Environmental and Social Risks
  8. 8. Natural Environment Society Economy Impacts  Perception  Reactions Company TBLI / November 13, 2009 Investors Investments Companies are Exposed to Environmental and Social Risks
  9. 9. The Rules of the Game are Changing TBLI / November 13, 2009 1. More information available, growing concern about issues. 2. New and strengthened environmental and social standards. 3. New requirements present new risks (and new opportunities). <ul><li>The tipping point? </li></ul><ul><li>Voluntary standards become common business practice. </li></ul><ul><li>Reputational issues become compliance issues. </li></ul>
  10. 10. New and Strengthened International Standards Increase Risks <ul><li>UN Global Compact Voluntary guidelines by the United Nations in the range of human rights, labor standards, environment and anti-corruption. [www.globalcompact.com] </li></ul><ul><li>OECD Guidelines for Multinational Enterprises (Semi-)Voluntary principles for responsible business practice including human rights, environment, corruption and other issues. National Contact Points (CH: SECO). [www.oecd.org/dataoecd/56/36/1922428.pdf] </li></ul><ul><li>IFC Environmental and Social Standards (World Bank Group) > 60 sector-specific Environmental, Health and Safety Guidelines; Exclusion List; Performance Standards. [www.ifc.org/sustainability] </li></ul><ul><li>Equator Principles Signed by more than 50 banks and export credit agencies (covering approx. 80% of the project finance market). [www.equator-principles.com] </li></ul>TBLI / November 13, 2009
  11. 13. <ul><li>Engage with or exclude a small number of the worst companies. </li></ul><ul><li>Easier to communicate: </li></ul><ul><li>No impact on the investment universe. </li></ul><ul><li>Obvious &quot;ethical&quot; upside:  If I hold a stock I bet on the company's future cash flows. By excluding the worst violators an investor can easily avoid participating in the revenues of a company that grossly violates international minimum standards. </li></ul>Norm-based Exclusion: A First Step to PRI Implementation TBLI / November 13, 2009
  12. 14. Natural Environment Society Economy Financial and Reputational Risk Impacts  Perception  Reactions Company TBLI / November 13, 2009 Investors Investments How to Identify these Companies?
  13. 15. RepRisk ® : Selected Clients Case Study: Norwegian Government Pension Fund - Global TBLI / November 13, 2009
  14. 16. Controversies Around Companies and Projects Are Captured by RepRisk ® Print Media Newsletters News Websites Governmental Agencies “ The Web”, Blogs NGO Websites 2nd Level Analysts I C P C S N G News 1st Level Analysts Approval by 1st Level Analyst (double check principle) Advanced search algorithms covering English, Spanish, Chinese, German, French, Korean, Portuguese, and Russian sources worldwide TBLI / November 13, 2009
  15. 17. The RepRisk Index (RRI) Is an Indicator of the Exposure to Environmental, Social and Reputational risks TBLI / November 13, 2009 <ul><li>The RepRisk Index (RRI) supports the user when assessing risks : </li></ul><ul><ul><li>relevant risks are highlighted </li></ul></ul><ul><ul><li>the risk exposure of entities can be compared with peers </li></ul></ul><ul><ul><li>risk trends can be tracked over time </li></ul></ul><ul><li>The RRI calculation is based on </li></ul><ul><ul><li>relevance of news sources </li></ul></ul><ul><ul><li>frequency and timing of news, and </li></ul></ul><ul><ul><li>news content, i.e. severity and novelty. </li></ul></ul><ul><li>The Peak RRI gives the maximum RRI value in the last 24 months </li></ul>
  16. 18. Norm-based Exclusion: A First Step to PRI Implementation TBLI / November 13, 2009 &quot;Starting in 2011, the PRI will introduce a set of minimum disclosure requirements.&quot;

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