Thomas holzer


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Thomas holzer

  1. 1. Emerging Sustainability Sustainability analysis of emerging market companies Andreas Holzer, Bank Sarasin TBLI, November 2010
  2. 2. Structure <ul><li>Sarasin Sustainable Investment </li></ul><ul><li>Sustainable development in emerging markets </li></ul><ul><li>Why invest along sustainability criteria in emerging markets? </li></ul><ul><li>Sustainability analysis of companies </li></ul>
  3. 3. Sarasin Sustainable Investment - Bank Sarasin & Co Ltd. <ul><li>Leading Swiss private bank – founded in 1841 </li></ul><ul><li>Investment advice and asset management for private and institutional clients as our core business </li></ul><ul><li>We specialise in: </li></ul><ul><ul><li>Sustainable asset management </li></ul></ul><ul><ul><li>Thematic asset management </li></ul></ul><ul><ul><li>Non-predictive or quantitative asset management </li></ul></ul><ul><li>Majority shareholder Rabobank has a triple-A credit rating* </li></ul><ul><li>Represented at more than 20 locations around the world, in Switzerland, Europe, the Middle East and Asia </li></ul>*Standard & Poors issues credit ratings of corporations: AAA is the best rating and denominates reliable and stable borrowers
  4. 4. <ul><li>Sustainability research since 1989 </li></ul><ul><li>Continuous build-up of staff </li></ul><ul><li>Very low fluctuation </li></ul><ul><li>Responsible for CHF 12,4 billion / EUR 9,4 billion assets </li></ul><ul><li>The team: </li></ul><ul><li>50 employees </li></ul><ul><li>30 portfolio manager </li></ul><ul><li>11 sustainability analysts </li></ul>Number of employees working in sustainable investment Sarasin Sustainable Investment - resources & experience Source: Bank Sarasin, as at 30/06/2010 0 5 10 15 20 25 30 35 40 45 50 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
  5. 5. Water pollution in China <ul><li>50% of cities have polluted drinking water </li></ul><ul><li>70% of rivers and lakes are substantially polluted </li></ul><ul><li>80% of household sewage is not treated </li></ul><ul><li>30% of rivers cannot even be used for agricultural or industrial purposes </li></ul><ul><li>190 million cases of illness each year caused by polluted water </li></ul>
  6. 6. Trend in global primary energy consumption (IEA) Source: IEA
  7. 7. G-20 countries with highest climate vulnerability 10 0,45 Japan 8 0,53 Australia 8 0,53 France 7 0,54 USA 6 0,55 Saudi-Arabia 4 0,62 China 4 0,62 South Africa 3 0,69 Brasil 2 0,70 Indonesia 1 0,74 India Rank Score Source: HSBC, 2009
  8. 8. High economic growth will continue and improve the living conditions… Source: IMF Source: UNCTAD
  9. 9. Quality of life – Sarasin Country Sustainability Rating Source: Bank Sarasin 2010 / based on data from 2006
  10. 10. <ul><li>The use of a sustainability screen is especially valuable in the case of emerging market investments, because… </li></ul>Why invest along sustainability criteria?
  11. 11. <ul><li>Strong economic growth has accentuated environmental and social problems: High air pollution in urban and industrial areas, widespread water pollution and scarcity. </li></ul><ul><li>High importance of the (more polluting) industrial sector </li></ul><ul><li>Increasing resource consumption per capita </li></ul><ul><li>Precarious working conditions, partial lack of political stability and political rights, corruption , incipient shortage of labour </li></ul><ul><li>Emerging markets will be heavily impacted by climate change </li></ul><ul><li>Emerging markets are confronted with growth-limiting environmental and social risks at a comparatively early stage of economic development </li></ul>… environmental and social risks for companies there are high…
  12. 12. <ul><li>As a reaction to the various environmental and social challenges, a shift towards sustainable development is evident on various levels within the emerging economies. </li></ul><ul><li>Governments are implementing tougher environmental laws, regulation and taxes and promote environmental technologies. </li></ul><ul><li>Consumers developed a preference for environmentally and socially sound products, that are safe (remember several food scandals in China). </li></ul><ul><li>Business clients want to improve social and environmental performance in the supply chain. </li></ul><ul><li>Employees and unions are using protests to improve working conditions (e.g. wages in China, occupational safety in South Africa). </li></ul><ul><li>More public protests in case of heavy pollution. </li></ul><ul><li>Various stock markets in emerging market nations have introduced sustai-nability reporting standards or sustainable investment indices. </li></ul>… and sustainability requirements for companies are on the rise
  13. 13. China getting tough on energy efficiency <ul><li>China in July scrapped preferential power rates for energy-intensive industries. </li></ul><ul><li>Beijing has ordered 2,000 firms in heavy industry to close their old plants by end September, or risk having bank loans frozen and power cut off. </li></ul><ul><li>In August, electricity supply for 500 energy intensive companies in the province of Anhui was cut by the government: Companies did not meet efficiency targets. </li></ul><ul><li>More than 1,000 energy intensive enterprises in Anhui were advised to restrict electricity use from October to December. </li></ul><ul><li>Young entrepreneur: &quot;I had to shut down my online shop for two weeks because I had no power for my computer.&quot; </li></ul><ul><li>Enterprises in Jiaxing (Zhejiang province) have to stop using electricity from the grid at least two days each week to meet conservation targets. (Side effect : increased demand for diesel for backup systems) </li></ul><ul><li>=> Probably not a sustainable solution in each case </li></ul>
  14. 14. <ul><li>In May of this year Chinese workers began to protest/strike for better remuneration in several companies (Foxconn, Hyundai etc.). </li></ul><ul><li>Wages were not below the legal minimum, but were not living wages. Many workers had therefore to do a lot of overtime. </li></ul><ul><li>Such protest is new and similar protests were cracked down by the government in the past. The government is currently more reluctant, because it knows that low wages could lead to more widespread unrest and strategically wants to improve domestic consumption. </li></ul><ul><li>Wages were substantially increased (50%+). </li></ul><ul><li>+ Labour shortage: In southern coastal regions and Beijing </li></ul><ul><li>Conclusion: Good working conditions become a competitive factor in emerging markets </li></ul>Chinese workers flex their muscles
  15. 15. The more sustainable companies will have a competitive advantage <ul><li>This new growth paradigm rewards companies for being more responsible and long-term thinking. </li></ul><ul><li>Additionally, a sustainability screen for emerging markets makes also sense because: </li></ul><ul><li>A good environmental and social performance is also an indicator for a well organized, transparent company that is able to manage risks. </li></ul><ul><li>ESG information on emerging market companies is used by few investors. It is not yet – or only partially – priced into company valuations. </li></ul><ul><li>Sustainable investments in EM will see strong growth; progressive companies will benefit from this investor demand. </li></ul>
  16. 16. More sustainable companies will therefore have a competitive advantage. High environmen-tal + social risks Trend to more sustainable development More sustainable companies Less sustainable companies
  17. 17. Country allocation MSCI Emerging Markets Index Source: MSCI, 31.10.10 16% 13% 11% 8% 7% 6% 4% 2% 2% 3% 1% 2% 2% 2% 18% China Brazil Korea Taiwan India South Africa Russia Mexico Malaysia Indonesia Turkey Chile Thailand Poland Colombia Peru Philippines Egypt Hungary Czech Republik Morocco
  18. 18. The investment process - example Emerging market universe 751 Stocks* * Data as of 01.10.2010, for illustrative purposes only The portfolio manager selects 50 stocks within the sustainable investable universe, based on the criteria of high volatility and low correlation, and weights them equally. The portfolio is rebalanced at monthly intervals and the stock selection is actively reviewed. Using mainly raw data provided by our research partner Asset4, our sustainability analysts screen the EM universe of companies along Sarasin criteria Investable universe 110* e.g. Sarasin Sustainable Equity - Global Emerging Markets Fund 50 Research universe 420* Stock selection Sustainability validation
  19. 19. <ul><li>Same criteria and weightings for the sustainability assessment of EM companies as for their counterparts in the developed markets. </li></ul><ul><li>Comparison with their international peers. </li></ul><ul><li>We enlarged the eligible area of our Sustainability Matrix </li></ul><ul><li>We included the Hong Kong and Singapore stock markets </li></ul><ul><li>As in all our sustainable investment products, we exclude the stock of any companies that generate more than 5% of their revenues from: </li></ul><ul><ul><ul><li>Nuclear energy </li></ul></ul></ul><ul><ul><ul><li>Arms </li></ul></ul></ul><ul><ul><ul><li>Chlorine and pesticides </li></ul></ul></ul><ul><ul><ul><li>Tobacco, pornography </li></ul></ul></ul><ul><ul><ul><li>Genetic engineering (in agriculture) </li></ul></ul></ul>How does our research work in the emerging markets?
  20. 20. Assessment of companies: the Sarasin Sustainability-Matrix® high low average Corporate sustainability Sector sustainability Best-of-classes Adaptation to EMMA countries Investable universe Non-investable universe Best-in-class High Average Low <ul><li>To ensure investability, we slightly expanded the eligible area </li></ul>
  21. 21. Distribution of rating classes Emerging Markets Developed Countries Source: Bank Sarasin 9% 2% 21% 24% 45% 25% 20% 32% 17% 6% above average average below average low high above average average below average low high
  22. 22. Country distribution of the sustainable universe vs. the MSCI Emerging Markets index Source: Bank Sarasin
  23. 23. Sustainability ratings of selected emerging market companies
  24. 24. Natura Cosméticos, Brasil <ul><li>Largest brasilian cosmetics company </li></ul><ul><li>Focus on plant based raw materials </li></ul><ul><li>Systematic use of environmental and social criteria in procurement </li></ul><ul><li>Strong brand in Latin America </li></ul><ul><li>Benefits from the trend to more natural cosmetics </li></ul>Development of the share price 31.10.2004 – 31.10.2010 in BRL Source: Datastream. No re-investment of dividends. 0 10 20 30 40 50 2004 2005 2006 2007 2008 2009 2010
  25. 25. Aspen Pharmacare, South Africa <ul><li>Africa‘s largest pharma company </li></ul><ul><li>One of the largest producers of generic antiretroviral drugs (HIV/Aids) </li></ul><ul><li>Committed to the prevention and therapy of HIV/Aids in Africa </li></ul><ul><li>Distribution agreement with GlaxoSmithKline for subsahara Africa </li></ul><ul><li>Advanced environmental management </li></ul>Development of the share price 31.10.2000 – 31.10.2010 in ZAR 0 20 40 60 80 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Datastream. No re-investment of dividends.
  26. 26. Bharti Airtel, India <ul><li>India‘s largest provider of mobile telecommunication; expands to Africa </li></ul><ul><li>Mobile telecom adds social and economic value </li></ul><ul><li>10 additional mobile phones per 100 inhabitants in a typical developing country => Increase of the GNP growth rate per capita of 0,6% </li></ul><ul><li>Fishermen in South India check market situation while on sea => Fishermen earnings +8% / Consumer prices -4% </li></ul><ul><li>Bharti: Improvement of energy efficiency / Use of renewable energy </li></ul>Development of the share price 31.10.2002 – 31.10.2010 in INR 0 100 200 300 400 500 600 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Datastream. No re-investment of dividends.
  27. 27. <ul><li>Perfect timing for starting to use a sustainability screen for investments in EM. Companies start to get rewarded for sustainability! </li></ul><ul><li>The share of sustainable companies is still lower than in developed markets, but there are many companies that comply with strict sustainability criteria. Not surprisingly for EM, they are catching up fast. </li></ul><ul><li>Some adaptation of the investment universe was necessary, but no need to substantially lower sustainability criteria. </li></ul><ul><li>There are specific ESG issues in emerging markets. But, most of these issues are known from the sustainability analysis of multinationals (supply chain!). </li></ul><ul><li>Nevertheless, the availability and quality of information/reporting needs to be improved. </li></ul>So!?
  28. 28. Important Information <ul><li>This marketing publication has been prepared by Bank Sarasin & Co. Ltd, Switzerland, (hereafter “BSC”) for information purposes only. It contains selected information and does not purport to be complete. This document is based on publicly available information and data (“the Information”) believed to be correct, accurate and complete. BSC has not verified and is unable to guarantee the accuracy and completeness of the Information contained herein. Possible errors or incompleteness of the Information do not constitute legal grounds (contractual or tacit) for liability, either with regard to direct, indirect or consequential damages. In particular, neither BSC nor its shareholders and employees shall be liable for the opinions, estimations and strategies contained in this document. The opinions expressed in this document, along with the quoted figures, data and forecasts, are subject to change without notice. A positive historical performance or simulation does not constitute any guarantee for a positive performance in the future. Discrepancies may emerge in respect of our own financial research or other publications of the Sarasin Group relating to the same financial instruments or issuers. It is impossible to rule out the possibility that a business connection may exist between a company which is the subject of research and a company within the Sarasin Group, from which a potential conflict of interest could result. </li></ul><ul><li>This document does not constitute either a request or offer, solicitation or recommendation to buy or sell investments or other specific financial instruments, products or services. It should not be considered as a substitute for individual advice and risk disclosure by a qualified financial, legal or tax advisor. </li></ul><ul><li>This document is intended for persons working in countries where the Sarasin Group has a business presence. BSC does not accept any liability whatsoever for losses arising from the use of the Information (or parts thereof) contained in this document. </li></ul><ul><li>© Copyright Bank Sarasin & Co. Ltd. All rights reserved. </li></ul><ul><li>Bank Sarasin & Co. Ltd </li></ul><ul><li>Elisabethenstrasse 62 </li></ul><ul><li>P.O.Box </li></ul><ul><li>CH - 4002 Basel </li></ul><ul><li>Switzerland </li></ul><ul><li>Tel + 41 (0)61 277 77 77 </li></ul><ul><li>Fax + 41 (0)61 272 02 05 </li></ul><ul><li> </li></ul><ul><li>. </li></ul>
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