Date post: | 18-Jan-2018 |
Category: |
Documents |
Upload: | lillian-french |
View: | 225 times |
Download: | 0 times |
Sustainable Investment: Opportunities for Mainstream Investors
CFA Ireland
Steven A. Falci, CFAVice President-Sustainable Investment
KBC Asset Management Ltd. January 21st 2009
2
Evolution of SRI
•Socially Responsible Investing •Sustainable Investing•Responsible Investing •Environmental, Social and Governance (ESG)
1st Generation SRI 2nd Generation SRI 3rd Generation SRI
• Ethics• Exclusion
• Ethics • Inclusion• Exclusion
• Sustainability • Materiality• Investment Return
•Exclusionary Screening •Positive Screening•Best in Class•Pioneer Screening
•ESG Integration – Active Management•Thematic Products – Active Management
•Engagement - ethical • Engagement – performance/ethical
•Retail•Institutional – Values Driven (F&E, charities, i.e)
• Institutional Mainstream Market• Differentiated Retail Products • High Net Worth Individuals
Exclude•Alcohol•Tobacco•Weapons•Gambling etc.
•Best in Class Companies (challenging industries)•Companies with positive environmental initiatives
•Leading companies providing innovative solutions to sustainability challenges•Companies with strong sustainability and financial profiles
Terms
Mercer
Emphasis
Broad Vehicles
Primary MarketFocus
Examples
3
SRI ↔ Sustainable Investment
1st Generation SRI Sustainable investing
Historical Future
Separate Integrated
Ethical
Exclusionary
Materiality
Inclusionary
Criteria
Focus
ESG / Investment Process
Time Orientation
4
Global Market Size
Hard to precisely define – But various Indicators point to a Large and Growing Market
Eurosif – €5 trilliono European Social Investment Forumo Begin to distinguish approaches (Core and Broad)
UNPRI – $14 trilliono 380 Asset Owners and Asset Managerso Assert intention to integrate Environmental, Social and
Governance Factors into investment process
5
Global Growth SRI
2003 €1.9 Trillion
84%
16% 0%North America84%Europe 16%
Australia/Asia0%
2005 €2.6 Trillion
64%
35%1%North America
64%Europe 35%
Australia / Asia1%
2007 €5 Trillion
39%
53%
8%North America39%Europe 53%
Australia/Asia8%
Source: Eurosif
6
Sustainable Investment Strategies
Thematic Strategieso Investment opportunities in companies providing
solutions to our most pressing global challengeso Renewable Energy, Water, Climate Change
ESG Integrationo Material risks and opportunities related to
Environmental, Social and Governance factors are an integral part of investment analysis
o Companies with strong sustainability and financial profiles
7
Global Mega Trends
World’s changing demographic profileo The combination of population growth, industrialization, economic growth and
urbanization will continue to test the limits of our eco–system and will require investment in innovation and infrastructure in the developed and developing world to meet the needs of growing, more affluent global population.
Natural resource supply/demand imbalanceo A growing, more affluent global population has and will continue to put increasing
pressure on the supply of natural resources. Meeting the needs for energy, water and food is a major challenge of the 21st century.
Climate change -and operating in a carbon constrained worldo Sustained pressure for lower carbon economies continue to gain momentum
through efforts to mitigate and adapt too combat the effects of climate change. The growing demand for energy will need to be met through less reliance on the historically dominant carbon emitting sources of oil and coal and with more reliance on renewable alternative energy and energy efficiency.
Innovation to meet challenges to our environment are driven by 3 Global Mega Trends.
8
Alternative Energy Investment Thesis
1. Global Energy Demand – Population & Industrialization
2. Limited Supply of Fossil Fuel Energy
3. Falling Costs of Renewable Energy – Technology & Investment
4. Security of Fuel Supply – Local Source Necessary
5. Climate Change – Political & Regulatory Support
9
Renewables as % of Energy Mix
Other3.6%
Ocean (tidal)0.0%
Nuclear16.0%
Conventional65.5%
Large Hydro14.9%
Small hydro1.3%
Wind Power1.2%
Solar Thermal0.0%
Solar PV0.1%
Geothermal0.2%
Biomass0.9%
Renewable Energy• Wind• Solar • Biofuels• Fuel Cells • Waste to Energy
International Energy Agency:30% of all energy related
Investments in next 30 years willbe in renewables
Renewable electricity capacity, share of 2005 electricity production
Source: Renewables Global Status Report 2006 Update, REN 21
10
Falling Costs of Renewables Renewable energy actual cost of production — cents/kWh
Expected cumulative reduction in costs of renewable technologies by 2020
Source: United Nations Economic and Social Council
11
Alternative Energy Portfolio Summary
Source: KBCAM Data as at 31.12.08.
Sector Distribution % Actual Weight Neutral WeightUTILITIES 16.0% 15.0%
WIND ENERGY 37.4% 30.0%
SOLAR 26.7% 30.0%
FUEL CELLS 6.5% 10.0%
BIOMASS 10.5% 10.0%
OTHER 2.9% 5.0%
Top 10 Holdings %
IBERDROLA RENOVABLES 7.6%
EDP RENOVAVIES 6.2%
GAMESA 5.6%
FPL 4.9%
FORTUM 4.3%
VESTAS 4.1%
RENEWABLE ENERGY CORP 4.1%
KYOCERA 4.0%
JOHNSON MATTHEY 3.9%
FIRST SOLAR 3.9%
Market Weights %
N. AMERICA 28.4
EUROZONE 41.1
REST OF EUROPE 20.1
REST OF WORLD 10.4
12
Water Investment Thesis
1. Demand – Population growth / Demographics
2. Supply problems – Availability, Infrastructure & Pollution
3. Regulatory Drivers
4. Technological Advancements
13
1% of Water Useable
Less than 1% of all water is available for human consumption
There is no substitute for water; that’s why it is rapidly becoming such a valuable resource.
14
Water and Population Growth Chart
0100200300400500600700800900
1000
1900 1940 1950 1960 1970 1980 1990 1995 2000 2010 2025
Global Population Global Water Consumption
Sources: US Census Bureau / German Ministry of Environment
Economic Growth
Population Growth
Standard of Living
15
Population/Water Divergence
Source: UNESCO
Asia has 36% of the world’s water
supply and 60% of the population
16
Investment Required
Source: Boenning & Scattergood
17
Water Portfolio Summary
Sector Distribution % Actual Weight Neutral WeightWATER INFRASTRUCTURE 37.3% 40.0%
WATER/WASTEWATER UTILITIES 35.7% 35.0%
WATER TECHNOLOGY 27.0% 25.0%
Top 10 Holdings %VEOLIA ENVIRONNEMENT 5.8%
SUEZ 5.3%
ROPER INDUSTRIES 4.5%
PENTAIR 4.4%
AGILENT TECH 3.8%
ITRON INC 3.3%
GEBERIT 3.3%
SEVERN TRENT 3.1%
MUELLER WATER 3.1%
FLOWSERVE CORP 3.0%
Market Weights %
N. AMERICA 48.5
EUROZONE 19.2
REST OF EUROPE 12.9
REST OF WORLD 19.4
Source: KBCAM, Data as at 31.12.08.
18
Climate Change Investment Thesis
1. Growing Population, Industrialization and Urbanization has led to increased carbon emissions.
2. Immediate action required to mitigate long term human, environmental and economic costs
3. Demand for Cleaner Energy, Energy Efficiency & Waste Management
4. Technological Advancements
5. Political, Regulatory & Popular Support
19
Regulatory and Policy Initiatives continue to support increasing investment
20
Energy Efficiency Multiplier Effect
Fuel = Coal
Transmission Lines
Power Plant65% Loss
10% Loss
Every 1 unit of energy saved at home or business represents up to 4 units saved at the power plant
Source: Sustainable Energy, Choosing Among Options (Tester, Drake, Driscoll, Golay, Peters), UBS Research
21
2/3 of Projected Co2 emission savings to come from energy efficiency
Source: International Energy Agency
22
Climate Change Portfolio Summary
Sector Distribution % Actual Weight Neutral WeightWATER 15.0% 15.0%
RENEWABLE ENERGY 23.2% 25.0%
CLEAN ENERGY 9.1% 10.0%
ENERGY EFFICIENCY 34.8% 35.0%
WASTE MGT/RECYCLING/NEW MATERIALS 10.7% 10.0%
CARBON TRADING 6.4% 5.0%
Top 10 Holdings %WASTE MANAGEMENT 6.0%
E.ON 5.4%
ABB 4.5%
EAST JAPAN RAILWAY 3.7%
EMERSON ELECTRIC 3.3%
CLIMATE EXCHANGE 3.1%
SCHNEIDER ELECTRIC 3.0%
KONICO PHILLIPS 3.0%
SAINT GOBAIN 2.9%
CANADIAN NATIONAL RAIL 2.7%
Market Weights %
N. AMERICA 39.6
EUROZONE 33.0
REST OF EUROPE 19.1
REST OF WORLD 8.4
Source: KBCAM. Data as at 31.12.08.
23
ESG Integration
Environment Social
Governance
GHG Emissions
Eco EfficiencyEnvironmental Management Systems Environmental Products
Environmental LiabilityWater Consumption
Human Capital Practices
Health and Safety Issues
Consumer Markets
Labor Markets
Supply Chain Management
Human Rights
• Costs and Revenues
• Cost of Capital
• Balance Sheet Risk
• Brand and Reputation Risk
• Competitive Advantage
• Valuation
• Executive Comp Tied to Performance
• Board Structure and Accountability
• Transparency
24
ESG Integration – Opportunities and Challenges
Opportunitieso Capture sources of Intangible Value
Approximately 80% of market value driven by intangibles - Prof Baruch Lev, NYU Stern School of Business
Opportunities and Risks o Underpriced in market place
Challengeso Assessing materiality over timeo Assessing materiality across industries / sectors / regionso Quantification and measurement
25
Goldman Sachs Sustain - Integrated Process
Management Quality(ESG)
Industry Positioning
Return on capital
Source: Goldman Sachs Research
26
GS Sustain – ESG Weightings
Energy Basic
MaterialsCapital Goods Media
Consumer Staples Healthcare Banks Insurance
Technology Hardware
Corporate Governance 24% 24% 25% 33% 26% 27% 32% 39% 27%
Leadership 8% 8% 8% 17% 9% 9% 11% 11% 9%
Employees 28% 28% 29% 23% 22% 18% 26% 17% 23%
Stakeholders 12% 20% 13% 13% 22% 27% 21% 22% 14%
Environment 28% 20% 25% 14% 22% 18% 11% 11% 27%
Man
agem
ent Q
ualit
y (E
SG)
Soci al
Source: Goldman Sachs Research
27
Relative Carbon Exposure
FPL Group Expected Case Minimum Case Maximum Case
Carbon Price $28 $18 $45
Annual Cost of Compliance ($1000) $349,150 $212,840 $560,335
Exposure (% of EBITDA) 11.80% 7.20% 18.90%
NPV of Abatement Costs ($1000) $1,584,034 $1,006,866 $2,543,329
Exposure (% of market cap) 5.70% 3.60% 9.20%
American Electric Power
Expected Case Minimum Case Maximum Case
Carbon Price $28 $18 $45
Annual Cost of Compliance ($1000) $1,187,710 $724,024 $1,906,103
Exposure (% of EBITDA) 34.40% 21% 50%
NPV of Abatement Costs ($1000) $5,388,442 $3,425,077 $8,651,697
Exposure (% of market cap) 29% 18.40% 46.60%
Source: CFA Magazine / Sept-Oct 2008
28
Innovest Sustainability Matrix
10
9
8
7
6
5
4
3
2
1
00 1 2 3 4 5 6 7 8 9 10
Perf
orm
ance
of C
ompa
ny
Alpha Intensity of Sub-FactorStrategic Governance Environment
Human Capital Stakeholder Capital
Source: Innovest Strategic Value Advisors
29
Proposed DCF framework for integration of ESG Factors
Issue 1
Issue 2
Issue 3
Issue 4
Issue 5
Issue 6
Issue 7
Issue 8
Issue 9
Issue 10
Exposure to ESG issues
Strategy, policies, management systems
Transmission Factors
Financial value drivers
Valuation components
Litigation and regulatory risks
Operational risks
Reputation andbrands
Operational efficiency
Innovation
Access to new /existing markets
Access toKnowledge and skills
Access to keyresources
Others
Risk premiums
Costs
Revenues
Others (tax, reinvestment
rates)
WACC
Free cash flows
Shareholder
value
Source: Expanding the Investment Frontier – The Conference Board
30
ESG Ratings Development
Materiality of ESG Factor for Sector Comparative Ranking Support Wide Array of Implementation Options
o Top Quintile ESG & Top Quintileo ESG Tilto ESG Betao Hybrid Strategies – Quant / Fundamental Blend
31
Performance Studies –Definitional Challenges
SRI vs Sustainable Investment
Risk characteristics in individual strategies
Time period, market conditions, geographic markets
Performance impact of specific ESG factors
32
SRI vs Sustainable Investment
Cary Krosinsky –The Rise of Sustainable Investing in Sustainable Investing the Art of Long Term Investing – 2008
o Time Period 2002-2007o 135 mutual funds
Meir Statman – The Wages of Social Responsibility –December 2008 Time Period 1992-2007
o KLD Research Scoreso Tilt toward stocks with positive SRI scores – Positive Return Impacto Exclusionary practices detracted from returns
Sustainable Investing 18.7%Ethical 13.8%Style Drift SRI 11.6%MSCI World 17.0%S&P 500 13.2%
33
Performance Reviews
Demystifying Responsible Investment Performance o 2007 UNEP-FI Asset Management Working Group / Mercer
Consultingo Compilation of 20 Academic Studies and 10 Broker Research
13 positive 10 neutral 4 neutral / positive or neutral / negative 3 negative
Lloyd Kurtz-Answers to Four Questions o SRI Performance and Risko Positive ESG Alpha
Environment – 13 studies Governance – 7 studies Employment Practice – 6 studies
34
Studies on ESG Factors
Environmento Derwall, Guenster, Baver, Koedijk “The Eco-Efficiency
Premium Puzzle” 2005o Gluck and Becker “ Can Environmental Factors Improve
Stock Selection” 2004
Socialo Edmans “ Does the Stock Market Fully Value Intangibles?
Employee Satisfaction and Equity Prices” 2008
Governanceo Gompers, Ishii, Metrick “Corporate Governance and
Equity Prices” 2003
35
Conclusion
As with all active management what matters most
o Rigorous Investment Processo Unique Insightso Innovationo Vision
36
Reading - Sustainability, Investing and Business
Matthew Kiernan Investing in a Sustainable World (2008)
Cary Krosinsky and Nick Robbins, eds. Sustainable Investing: The Art of Long Term Performance (2008)
Thomas Friedman Hot Flat and Crowded (2008)
Holiday, Schmidheiny, Watts Walking the Talk: The Business Case for Sustainable Development (2002)
Mark Epstein, Making Sustainability Work (2008)