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TBLI Amsterdam – November 2008 Afshin Mehrpouya New York Paris Toronto London San Francisco Sydney Tokyo Innovest  Uncover...
<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 ...
<ul><li>Government surplus from commodities  ( e.g. Kuwait Investment Authority, Abu Dhabi Investment Authority, Chilean S...
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...
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
Sovereign Wealth Funds – An ESG Perspective Why should SWFs  integrate ESG  into their investment practices? What are the ...
<ul><li>Why should SWFs  integrate ESG  into their investment practices? </li></ul>
The ESG Challenge Financial Performance Strategic (political) objectives Traditional Investors SWFs with potential non-com...
<ul><li>SWFs sourced from oil </li></ul><ul><ul><li>Hedging against oil risks through investing in Clean Energy </li></ul>...
SWF ESG Trends
Who  can  help get them more involved? <ul><li>ESG investment forums and codes (PRI, GC, etc.) </li></ul><ul><li>Asset man...
<ul><li>What are the risks and opportunities posed by SWFs for the  co-investors ? </li></ul>
<ul><li>All non-transparent funds </li></ul><ul><ul><li>Influence aiming at non-economic gains </li></ul></ul><ul><ul><ul>...
<ul><li>Mission </li></ul><ul><li>Quality of management </li></ul><ul><li>In-house vs. outsourced investment management </...
Sovereign Wealth Funds – Risk and Opportunities Innovest’s SWF opportunities and risks analysis platform GAPP Compliance R...
<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) Influence in the Capitals Markets and Innovest’s Risk Analysis Approach to SWFs.

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A presentation by Afshin Mehrpouya at TBLI CONFERENCE EUROPE 2008.

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

  1. 1. TBLI Amsterdam – November 2008 Afshin Mehrpouya New York Paris Toronto London San Francisco Sydney Tokyo Innovest Uncovering Hidden Value for Strategic Investors Sovereign Wealth Funds Who are they? Are they game changers in ESG investing?
  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 8 offices in 7 countries, 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 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. <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><ul><li>?Pension / social security’s savings? </li></ul><ul><ul><li>The French Phenomenon (National Strategic Investment Fund) </li></ul></ul><ul><ul><li>Protection of national champions using </li></ul></ul>Sources of capital Sovereign Wealth Funds – Risk and Opportunities
  5. 5. 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><ul><li>Temasek and telecom case in Indonesia and Thailand </li></ul></ul></ul><ul><ul><li>Weaker US Dollar and the search for an escape route </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
  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 10 trillion by 2015 , given the historical levels of foreign reserve growth and launch of new SWFs (Japan, India, France, etc.) Source: Morgan Stanley
  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><ul><li>?Protection of The ‘National Champions’ against ‘predator investors’? </li></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. Sovereign Wealth Funds – An ESG Perspective Why should SWFs integrate ESG into their investment practices? What are the extra-financial risks and opportunities posed by SWFs for t h e i r co-investors?
  11. 11. <ul><li>Why should SWFs integrate ESG into their investment practices? </li></ul>
  12. 12. The ESG Challenge Financial Performance Strategic (political) objectives Traditional Investors SWFs with potential non-commercial agenda ESG ESG
  13. 13. <ul><li>SWFs sourced from oil </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>Reaping long term superior ESG integration returns </li></ul></ul><ul><ul><li>Diffusion of national values and commitments </li></ul></ul><ul><ul><ul><li>Commitment to engagement aiming at improving environmental and social performance based on diffusion of Norwegian GPF, NZ SWF </li></ul></ul></ul><ul><ul><ul><li>Carbon portfolio audits for Kyoto Signatories? </li></ul></ul></ul><ul><ul><li>Image concerns </li></ul></ul><ul><ul><ul><li>An ESG agenda can allay some of current public & regulatory concerns about SWFs </li></ul></ul></ul><ul><ul><li>Pursuing national & regional social and environmental agendas </li></ul></ul>Key ESG Motifs for SWFs 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
  14. 14. SWF ESG Trends
  15. 15. Who can help get them more involved? <ul><li>ESG investment forums and codes (PRI, GC, etc.) </li></ul><ul><li>Asset managers </li></ul><ul><li>Publicized SWF Practices Analysis and Ratings </li></ul>
  16. 16. <ul><li>What are the risks and opportunities posed by SWFs for the co-investors ? </li></ul>
  17. 17. <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 funds </li></ul><ul><ul><li>Possibility of short to 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>SWFs of politically unstable countries </li></ul><ul><ul><li>Unpredictability of behavior in the face of political changes </li></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>Key SWF risks and opportunity for the target companies Key Risks <ul><li>Better access to the SWF’s regional markets and networks </li></ul><ul><li>Privileged access to SWF liquidity in followings financing rounds </li></ul>Key Opportunities 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
  18. 18. <ul><li>Mission </li></ul><ul><li>Quality of management </li></ul><ul><li>In-house vs. outsourced investment 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
  19. 19. Sovereign Wealth Funds – Risk and Opportunities Innovest’s SWF opportunities and risks analysis platform GAPP Compliance Rating 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
  20. 20. <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 / absolute 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
  21. 21. 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] Andy White Managing Director - UK Innovest Strategic Value Advisors Tel: +44 (0) 20 7073 0470 [email_address]

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