ERSTE RESPONSIBLE RETURN The ESG Letter on Environmental, Social and Governance issues Topic of this edition: Toys Edition 4/2016 "In the beginning, there was only Chaos…” Editorial Good and Evil in Toy Heaven Investment Board „A brand does not guarantee sustainability of a toy” Interview with Matador Toys Facts & Figures No company of the month? Merry Christ mess Lasting Words Responsible-Investment-Universe Changes Responsible funds at a glance Certified Erste AM Funds Edition 4/2016
Transcript
ERSTE RESPONSIBLE RETURNThe ESG Letter on Environmental, Social and Governance issues Topic of this edition: Toys Edition 4/2016
"In the beginning, there was onlyChaos…”Editorial
Good and Evil in Toy HeavenInvestment Board
„A brand does not guaranteesustainability of a toy”Interview with Matador Toys Facts & Figures
No company of the month?Merry ChristmessLasting Words
Responsible-Investment-UniverseChanges Responsible funds at a glance
Certified Erste AM Funds
Edition 4/2016
… this is how Greek Mythology begins.
The Gospel according to John, on the other hand, starts out with the claim that “In the beginning was the Word”. Theeditorial meetings for our ESG Letter are a perfect synthesis of the two. I know what I am talking about, because I am justcoming from one. Our topic for the latest ESG Letter are toys, which is fitting, given that Christmas is coming up. And this iswhere the brainstorming starts, the chaos that I have to mould into words for them to turn into text at the far end.
When you think of toys, you soon think of China, i.e. the world’s biggest toy manufacturer. Paul Krugman once summed upthe economic relationship between China and the USA this way: “China sends us poisonous toys and we send them toxicsecurities.“ Ten years ago this might have come as a surprise, but one financial crisis and many reports on the sometimeshazardous quality of Chinese products later, this statement has turned into common knowledge.
The good news: thank God not everything poisonous in the production process also makes it into the actual toy. The badnews: the poison remains on site and thus contributes to the environmental contamination.
Having run through all the ramifications of the topic up to and including environmental contamination, our editorial meetinglost a bit of focus. We have a few young fathers in our editorial team, which led us to our next topic. Toys are nice and fine,but the truly coveted gadgets nowadays are processor-driven. Children are crazy about mobile phones, computers, tabletsand the games these devices offer. I can confirm this from my own experience. While my daughter cannot speak yet, shehas already uploaded an app. In my case, it is the other way around – so at least we complement each other.
As soon as one broaches the topic of e-games, a whole range of other issues enter the picture: responsibility for settingchildren’s boundaries, long-term effects of content (e.g. violent games), and fast-paced exposure (including customisationto specific forms of consumer behaviour).
Ultimately, our meetings tend to run into the same dilemma every time: too many ideas for too little space. That beingsaid, we are sure that toys are an issue that should be considered in a designated ESG Letter, especially with Christmasdrawing closer.
Mag. Gerold Permoser
Gerold Permoser is Chief Investment Officer (CIO) of Erste Asset Management. In thisfunction he is in charge of the asset management activities and investment strategies ofall investment funds of the Erste Asset Management Group in Austria, Croatia, CzechRepublic, Germany, Hungary, Romania and Slovakia.
"In the beginning, there was only Chaos…”Editorial
Edition 4/2016 Page 1 of 13
The EAM Investment Board gives a structured form to the ongoing and responsive dialogue with and among sustainabilityresearch agencies. The Board offers the chance to integrate in-house and external research. It also discusses rating details,the ESG‘s assessment of the IPOs of new issuers and sustainability issues in general.
When you are strolling through the toy stores of Vienna’s 7th district, you will find yourself in a world of toys produced tothe highest ecological and social standards. Numerous small toy companies have jumped on the bandwagon of globallyrising demand for sustainable products. As beautiful as their products may be, they remain a premium-price niche.
The five producers dominating the global market, i.e. Hasbro, Mattel, Bandai Namco, Jakks Pacific, and Lego, play to adifferent set of rules. While the development among the aforementioned small companies has caused their rules to becomeslightly more transparent in recent times, they are yet to achieve sustainability. The rise of China to the world’s no.1 toyfactory has even widened this gap in terms of sustainable production standards . The problems that have cropped up arethose also pestering the IT and textile industries in this region: catastrophic workplace conditions and an alarming handlingof toxic substances. However, while the work of the NGOs has brought about improvements in the past years in theseindustries, it has had no effect in the toy industry.
Only catastrophes will bring about changeEven if we have seen some progress, for example in supply chain management, overall the industry standards of the sectorremain below par. While the electronics industry improves its industry standards annually, the toy industry has not updatedits guidelines since 2010. As a result, the conditions in Mattel’s own factories in China are as bad as at their suppliers.According to our partners, only dramatic events such as the catastrophe of the Rana Plaza building or the suicides at theiPhone producer would stir the public and bring about change in the toy industry. In addition, there is a lack of control withregard to regulatory requirements and it is common practice to skip external audits altogether.
On the upside, at least the worst forms of child labour are not found in the toy industry. However, forced internships ofstudents are still commonplace. Only Disney – a company only related to the toy industry at best – has developed stringentsystems to avoid child labour.
Toy producers are overly passive when it comes to sustainable practiceGenerally speaking, innovation seems to be originate from outside the industry, both when it comes to sustainability anddigitalisation. However, the rise of electronics in the toy industry has caused an increase in environmental risk. So far onlyHasbro has made any significant effort to mitigate this risk and offers to take back discarded toys for recycling. But theindustry is miles away from the production standards of Sony’s PlayStation or other IT companies. Digitalisation also raisesanother issue: responsible marketing. However, this area is largely bare of any standards. Only Disney and Hasbro have setstandards for their TV stations. Neither the concept of protecting children from unknowing online purchases nor anincreased data privacy for children, as rightly demanded by the legislator, has been taken into consideration.
Trends such as stereotyped toys and the propagation of questionable role models especially for girls (in spite of the optionof anatomically correct Barbie dolls) are hardly actively curbed; nor is the omnipresent access to more and more realisticviolence in video games. With regard to the last issue, however, our partners see a problem more with demand than purelyon the supply side. After all, even the most sustainable toy cannot absolve parents from their responsibility for the well-being of their children.
[Dominik Benedikt]
Good and Evil in Toy HeavenInvestment Board
Edition 4/2016 Page 2 of 13
Matador is an Austrian toy producer with a sustainable stance on their products and has been in the business for already115 years. Michael Tobias, Managing Director of Matador, answers questions on sustainability in the toy industry.
Sustainability and toys: do these two concepts go together?
Michael Tobias: Sustainability is a topic that of course affects toys as well. This issue has substantially gained in relevanceover the past years. Whereas the safety of toys is regulated by standards and legislation, the area of sustainability is stillbased on voluntary acts. I believe that we are all responsible for making sparing use of the resources our environmentprovides us with and for leaving Earth as healthy as possible to future generations. This in itself is why toys andsustainability definitely go together.
What are the established standards and certifications that are available for toys?
Tobias: Practically speaking, when it comes to toys made from renewable raw materials, we usually talk about wood – witha limited number of exceptions. In this segment, we have two relatively similar standards that certify sustainability: ForestStewardship Council (FSC) and Programme for the Endorsement of Forest Certification Schemes (PEFC). These standardsare real certificates of sustainability. They comprehensively screen the entire value chain from the logger to the last workerin the system once a year. However, this certification is aimed largely at the sustainability of the raw material in use, i.e. inthis case, at the reforestation of wood.
What are the key criteria of sustainable toys?
Tobias: As far as environmental concerns go, additional aspects are of relevance: how long is a toy up to date? What is itsuseful life? How much time does a child spend with it? What happens to the toy once it is not needed anymore – will it bestored or binned? What sort of waste is created at the end of the useful life of a toy – is it biodegradable or hazardouswaste? All these factors determine how sustainable a toy is.
„A brand does not guarantee sustainability of a toy”Interview with Matador
Is it important to go for well-known quality brands when buying toys?
Tobias: A brand as such does not guarantee the sustainability of a toy. The brand can only support as far as marketingcommunication is concerned. If you want to buy a non-hazardous, sustainable toy nowadays, you have to pay attention tothe actual product. For example, is it made from a sustainable raw material? Does it come with a guarantee of reforestationor replantation of the raw material, and will this be certified by an FSC or PEFC seal?
How do you ensure that Matador’s operations are sustainable?
Tobias: The traits of sustainability at Matador are simple and transparent. All Matadorproducts are manufactured from PEFC-certified, domestic wood of the European beech.Matador creates toys that are of high pedagogic value by supporting creativity, fine motorskills, manual skills, spatial awareness, logic, the ability to solve problems, and many othertraits. Given the fact that Matador enables the child to build an unlimited number ofmodels, it remains interesting for a long period and often accompanies the child throughseveral phases of its childhood. The lifecycle of Matador products is unbelievably long –sometimes model kits are passed on across numerous generations. In this context, it is alsoimportant to guarantee the availability of spare parts; Matador offers replacements forevery single piece, and they are easily available at agreeable cost. At the end of their longlifecycle, Matador biodegrades quickly.
How do the masses of toys affect the environment?
Tobias: Children nowadays are often showered in toys, as a result of which some toys arehardly used anymore. A child cannot decide whether a specific toy is pedagogically valuable. It will want to play with thetoy that it finds the most entertaining at any given point in time. Usually the parents are responsible for the selection oftoys that are available to the child. Another consequence is also the fact that toys account for a significant share in thewaste industry. Overall, the questions of how recyclable and compostable toys are and whether they come with shortperiods of degradation therefore have a measurable impact on the environment.
Edition 4/2016 Page 4 of 13
Toys Facts & Figures
Edition 4/2016 Page 5 of 13
This time, the search for a company of the month was more difficult than expected. Therefore we select
Our search for the company of the month has been more difficult than usually. A glance at the advertising mail we receivein the weeks before Christmas illustrates what gifts we are supposed to buy. The range includes teddy bears, model kits,musical instruments, electronic and wooden toys, and remote-controlled vehicles and aircraft of all sorts (including drones),which could turn into this year’s fast seller. Even this incomplete list indicates that, given the wide range of items,companies across numerous sectors could end up on the shortlist.
In the financial industry, toys are classified as leisure goods. This also includes bicycles, sports equipment, or musicalinstruments. We currently monitor 14 companies in this sector, and among them only two bona fide toy manufacturers.Neither of these two fully fulfills the requirements of a “company of the month”.
Scrutinising the companiesOf the two analysed companies, Mattel (EAM rating C) passes the minimum threshold according to our ESG criteria, whileHasbro (EAM rating C) is excluded due to labour rights issues at suppliers in China. Regardless, neither of the two currentlyconvinces us sufficiently to invest.
This is mainly due to recurrent issues like workplace conditions at suppliers and toxines in the finished toys, e.g. heavymetals or softeners. As a result there is increasing regulatory pressure in these fields to improve product safety and qualitystandards.
However, we have noticed a certain degree of progress at both companies: both have imposed internal and external auditsin order to ensure compliance with workplace and social standards. Freedom of association and the elimination of child andforced labour are increasingly finding their way into supplier requirements and are subject to at least some checks to meetregulatory requirements.
That being said, the sector still seems to be exposed to insufficient levels of public pressure. This is to a certain degree dueto the high concentration in the sector. In addition, well-known brands such as for example Lego, Duplo, Playmobil,Matador, or Ravensburger are family-owned businesses and are therefore not listed. As such, we cannot invest in them, norcan we exert any influence on them. This makes the active engagement of NGOs, consumers, and sustainable investors inthis sector even more difficult.
Our fund manager Clemens Klein evaluates Mattel from a financial perspective:“Mattel has been battling a decline in sales and income for years, since the company has failed to enter into creativealliances with companies from the media and entertainment industry – in contrast to Hasbro, which cooperates with Disney,and Lego, which has teamed up with Warner Brothers. After a change of management in 2015, rumours have been floatingaround recently about another change on that level. In spite of an attractive dividend yield we remain cautious for the timebeing and are therefore not invested in shares of the company.”
[Alexander Osojnik]
No company of the month?
Edition 4/2016 Page 6 of 13
“Nowadays Christmas is becoming more and more commercialized” says Gerold Permoser, Chief investment Officer (CIO)and Chief Sustainable Officer (CSIO) of Erste Asset Management.
To all those of you with children, giving toys as presents for Christmas probably comes naturally. Toys are among the mostpopular Christmas presents. And who could think of a world without Christmas presents anyway? However, a look intohistory reveals that Christmas and presents have not always gone together.
Prior to reformation, it was customary to exchange gifts on 6 December, i.e. the feast day of Saint Nicholas. But theProtestant Church rejected the veneration of saints, and as a result Saint Nicholas’ Day was no longer celebrated either,and there was no reason to exchange gifts anymore. Instead, people started giving presents to each other for Christmas – acustom that was ultimately taken over in Catholically dominated regions, as a result of which children there would receivegifts on two separate occasions: once for Saint Nicholas’ Day, and once for Christmas. Historians claim that within thecontext of counter-reformation this was a phenomenon gladly put up with in order to highlight the upside of the “correct”religion.
I cannot say whether this is true. Even if it is, it still holds no candle to the brutal commercialisation of Christmas nowadays.I was in Hong Kong and Tokyo – two cities without Christian tradition – at the end of October, beginning of November: inboth cities, I was able to marvel at festively decorated Christmas trees.
However, it does make sense if you look at the list of the most popular Christmas presents. Clothes, toys, CDs/DVDs,consumer electronics, sporting goods, computers, smartphones, and home furnishings – all items that are largely producedin Asia. In the retail sector, the Christmas shopping season accounts for 25% of annual sales, and in the manufacturingsector the situation will not be significantly different. It is almost consistent to put up a Christmas tree in a Chineseshopping mall.
I will of course not be able to escape consumption around Christmas. My family can relax – there will be Christmaspresents. What I took from the research that came with this ESG Letter is the intention to think about everything that goesinto a present. And I do not mean that only in a figurative, but also in a concrete sense, i.e. in the shape of workplaceconditions, environmental contamination, and waste disposal. I hope that this Letter will lead some of you to engage insimilar thoughts, and I wish you and your loved ones Merry Christmas.
[Gerold Permoser]
Merry ChristmessLasting Words
Edition 4/2016 Page 7 of 13
September 2016 – November 2016:
Ideal Power has received subsidies of several million US dollars for itsinnovative technology.Source: ir.idealpower.com
The definition of our investment universe is the corner stone in building our funds.
Admitted
Ideal Power (sector: Electrical Components & Equipment), EAM ESG rating 11/2016 of C; has developed atechnology aimed at the increase of both the flexibility and efficiency of power converters and inverters. These areused in commercial and industrial energy storage solutions and the link-up of renewable energy and decentralisedpower producers to the grid.
Philips Lighting (sector: Electrical Components & Equipment), EAM ESG rating 11/2016 of B-; among the globalleaders in lighting, and one of the few companies that are fully integrated across the entire value chain. The companydevelops and produces lamps, light sources, controls, modules, software, and lighting systems for private, public,and commercial use.
Excluded
ConocoPhillips (sector: Oil & Gas Exploration & Production), EAM ESG rating 01/2016 of C; global companyinvolved in the exploration, production, and distribution of crude oil, bitumen, natural gas, and liquefied natural gas.
[Stefanie Schock, Alexander Osojnik]
Admitted to the investment universe of ERSTE WWF STOCK ENVIRONMENT as of November 2016The solutions of the company facilitate the efficient use of energy and the feed-in of power generated fromrenewable sources into the gridImproved load management at peak times of power demandNo information on the policies relevant to sustainability
Comprehensive protection of workers who handle hazardous substancesAvoidance and substitution of potentially hazardous substances to a degree that goes beyond the Restriction ofthe Use of Certain Hazardous Substances (RoHS ) in Electrical and Electronic Equipment EU Directive(2011/65/EU)Advancement of environmentally friendly lighting solutions such as LED lighting and systemsDedication to in-depth screening and transparency of suppliers of conflict commoditiesGoal of becoming carbon neutral by 2020
Exclusion from the sustainable investment universe due to the high share of unconventional oil and natural gasreserves in terms of total reserves (above 20%)No significant activities in renewable energiesHigh share of fracking in US oil and gas productionInfringement with human and work rights and environmental lawsIntensity of carbon emissions below industrial average
Erste Asset Management recognized the importance of responsible fund management early on. Over the course of the pastdecade we have developed and successfully introduced a broad range of sustainable funds. The following funds areavailable in line with Erste Asset Management’s „Responsible Investment Approach“.
Equity fundsAll funds are denominated in Euro.
Fund name
year-to-date, in
%2015, in
%2014, in
%2013, in
%2012, in
%2011, in
%Mgmt. fe
e in %Volume i
n mn.Risk not
es1)
ERSTE RESPONSIBLE STOCK GLOBAL -1,35 10,87 15,21 17,52 -9,51 -4,90 1,50 187,8
ERSTE RESPONSIBLE STOCK EUROPE -11,57 10,67 6,89 18,55 20,88 -23,03 1,50 39,4 A
ERSTE WWF STOCK ENVIRONMENT** -4,00 9,46 14,65 35,34 5,63 -23,99 1,50 102,4 A
Performance calculated according to the OeKB (Österreichische Kontrollbank AG) method, as of 30.11.2016. The management fee is included inthe performance. Subscription fees applicable atthe time of purchase of up to 5.00% and other fees that may reduce returns, such as individual accountand deposit fees, are not included in this presentation. Past performance is not a reliableindicator of the future performance of a fund. Please note that it is not possible to draw any conclusions on the volatility or risk of an investment from annualized averages for multi-yearperiods.* in USD**Fund merger: ERSTE WWF STOCK CLIMATE CHANGE merged with ERSTE WWF STOCK UMWELT and was renamed to ERSTE WWF STOCK ENVIRONMENT, valid as of 09.10.2015
1) Risk notes according to 2011 Austrian Investment Fund Act
A) ERSTE RESPONSIBLE STOCK EUROPE and ERSTE WWF STOCK ENVIRONMENT may exhibit increased volatility due to the composition of its portfolio: i.e. the unit value can be subject to significant fluctuations both upwards and downwards within short periods of time.
Bond funds, mixed fundsAll funds are denominated in Euro.
ERSTE RESPONSIBLE BOND 3,17 -0,37 9,74 0,43 10,58 0,93 0,60 129,1
ERSTE RESPONSIBLE BOND EURO CORPORATE 4,14 -1,13 7,55 1,45 12,89 * 0,60 167,8
ERSTE RESPONSIBLE BOND EMERGING CORPORATE 3,84 0,55 6,00 * * * 0,96 108,4
ERSTE RESPONSIBLE BOND GLOBAL IMPACT* 3,33 -2,23 * * * * 0,60 47,8
ERSTE RESPONSIBLE BALANCED 2,05 -2,26 7,63 1,65 * * 1,00 26,0 B
Performance calculated according to the OeKB (Österreichische Kontrollbank AG) method, as 30.11.2016. The management fee is included inthe performance. Subscription fees applicable atthe time of purchase of up to 5.00% and other fees that may reduce returns, such as individual accountand deposit fees, are not included in this presentation. Past performance is not a reliableindicator of the future performance of a fund. Please note that it is not possible to draw any conclusions on the volatility or risk of an investment from annualized averages for multi-yearperiods.* Fund inception during fiscal year (on 01.06.2015), annual performance can therefore not be shown.
2) Risk notes according to 2011 Austrian Investment Fund Act
B) The ERSTE RESPONSIBLE BALANCED fund may invest significant amounts in investment funds (UCITS, UCIs) pursuant to Paragraph 71 of the InvFG 2011 (Investment Fund Act, Austria).
Responsible funds at a glance
Edition 4/2016 Page 9 of 13
Microfinance fundsAll funds are denominated in Euro.
Fund name
year-to-date, in
%2015, in
%2014, in
%2013, in
%2012, in
%2011, in
%Mgmt. fee, in %
Volume in mn.
Risk notes 3)
ERSTE RESPONSIBLE MICROFINANCE 0,10 3,45 4,09 2,54 3,62 1,96 1,00 52,7 C
Performance calculated according to the OeKB (Österreichische Kontrollbank AG) method, as of 30.09.2016. The management fee is includedin performance. Subscription fees applicable at thetime of purchase of up to 5.00% and other fees that may reduce returns, such as individualaccount and deposit fees, are not included in this presentation. Past performance is not a reliableindicator of the future performance of a fund.Please note that it is not possible to draw any conclusions on the volatility or risk of an investment from annualized averages for multi-yearperiods.
3) Risk notes according to 2011 Austrian Investment Fund Act
C) The ERSTE RESPONSIBLE MICROFINANCE fund may invest significant amounts in investment funds (UCITS, UCIs) pursuant to Paragraph 7line 1 of the InvFG 2011 (Investment FundAct, Austria).
The Austrian Financial Market Authority (FMA) herby warns: The ERSTE RESPONSIBLE MICROFINANCE invests entirely in assets pursuant to Paragraph 166, Section 1 line 3 of the InvFG 2011 (Alternative Investments), which represent a higher investment risk compared to traditional investments. In particular, these investments mayresult in a loss or even a total loss of capital invested.
[Alexander Osojnik]
Edition 4/2016 Page 10 of 13
A excellentB goodC statisfactoryD inadequate, notinvestableE insufficent, not investable
The EAM RESPONSIBLE funds are subject to constant scrutiny with regard to their sustainable quality. Frequent domesticand international certifications confirm the quality of our sustainability processes. Among them are the Austrian Ecolabel,the FNG-Siegel 2017, and the Novethic SRI LABEL 2015. For further details please visit our website: www.erste-am.at/responsible-investing/
Erste AM-Rating for Responsible-Fonds
Average ESG-Rating and Exclusion RateThe Average ESG Rating of the Fund refers to all securities actually held by the fund, whereas the the Average ESGRating of the Fund Universe denotes the average of all securities that are rated for the fund, based on the stringentsustainability criteria of Erste Asset Management.
The Exclusion Rate indicates how many securities from the respective fund universe are rate “not investable” for therespective fund. For example, a 60% exclusion ratio means that only 40% of all potential securities are investable for thefund.
Erste AM-specific ESG RatingThe EAM-specific ESG Rating ranges from A+ to E. It scrutinises exclusively thosecompanies that have already been rated by the three rating agencies cooperatingwith Erste Asset Management. In evaluating ESG criteria, EAM takes a very stringentapproach. Thus, only 44 % of the approx.3,800 companies currently rated (i.e. theEAM Total Universe) are investable (with a rating from A+ to C). At the moment, theaverage rating of the EAM Total Universe is C–. The investable universe is furtherrestricted by exclusion criteria. Nine companies achieve our current top rating of B+.
The Erste AM Emerging Markets ESG RatingThe rating of ERSTE RESPONSIBLE BOND EMERGING CORPORATE hinges on the analysis of the management of therespective issuer via ESG risk factors on the basis of a model adapted for emerging markets. In the process, the companiesare compared on a scale of AAA to C. Companies with environmental benefits are accounted for on the basis of criteria ofexclusion.All Data (Average ESG-Rating for Funds, the Funds Universe and the Exclusion Rate) per 30.11.2016
