V908
The Integration of Environmental, Social andGovernance issues in Investment Decision-making
A License to Operate issue?
Leola Ross, Ph.D., CFA
Senior Investment Strategist
Member, Russell Sustainability Council
September 15, 2011
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Important Information
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First used: August 2011
USI-10673-08-12
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Agenda
The drivers of change
Russell and Sustainability
Environmental, Social and Governance (ESG) factors
United Nations Principles for Responsible Investment(UN PRI)
Universal Owner concept
ESG integration vs. SRI
ESG integration around the world
Russell’s approach
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What are the drivers of change?
Value-seeking through sustainability
Accommodating social and environmental issues
ESG risks can deliver financial loss
A desire for “Stewardship”
Moving from considerations of only quantity (more) towardsquality (better)
The credit crunch
Regulation
Is the meaning of fiduciary responsibility evolving?
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Russell and Sustainability
Sustainability Council established in Sep 2009
Born out of the work of the Innovation Council
Mandate: Drive Russell’s Sustainability workexternally (client investment needs) and internally(work practices)
13 members in 7 offices
Russell signed UN PRI in September 2009
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UN Principles for Responsible InvestmentUN PRI – Six Principles
1. We will incorporate ESG issues into investment analysis anddecision-making processes
2. We will be active owners and incorporate ESG issues into ourownership policies and practices
3. We will seek appropriate disclosure by the entities in which weinvest.
4. We will promote acceptance and implementation of thePrinciples within the investment industry
5. We will work together to enhance our effectiveness inimplementing the Principles
6. We will each report on our activities and progress towardsimplementing the Principles
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UN PRIA growing force
Over 900 signatories, $35trn assets
Mostly Asset Owners and Investment Managers
PRI business model moving from advocacy body toservice provider
Annual Report & Assessment Survey
Freshfields Report (2005)
Considered fiduciary duty re ESG in nine jurisdictions
Followed by “Fiduciary II” (2009)
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ESG IssuesWide-ranging – financially material?
Suicides Sparks Inquiries (Foxconn)- Wall Street Journal 27 May 2010
Nine charged over Satyam fraud scandal- The Times 8 April 2009
Coastal assets worth $226 billion at risk: Combet- Sydney Morning Herald 5 June 2011
Spain’s solar power subsidy cuts attacked- Financial Times 22 December 2010
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Universal Owner concept
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Not treating wastesaves $1
Treating waste costs$1.50
The largest 3,000 public companiescaused over $2.15 trillion of globalenvironmental costs in 2008, whichequates to nearly 7% of theircombined revenues.
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ESG integration vs SRIValue vs values
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ESG integrationSocially Responsible
Investment (SRI)
Sustainable financial value
Mainstream, though slow
UN PRI
Aligns with fiduciary role
Internalize economicexternalities
End-investor has valuesbeyond only financial goals
Often leads to securityexclusion
Pooled fund challenges
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How do different countries stack up?
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Country Evaluation on E, S and G criteria
Source: Goldman Sachs Research, February 2010
Bars show scores achieved as % of maximum (100%)
Emerging Countries
Data is as of the specified date. Current data may be different.
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What is happening around the world?Responsible Ownership
UK Stewardship Code
Seven principles of Responsible Ownership
Regulatory requirement for every asset manager to publish response
European Commission: Corporate Governance Green Paper
Europe: Regulator (ESMA) consulting on proxy advisor role
Netherlands: Eumedian as collective investor voice
Australia: ACSI similar
South Africa
Code on Responsible Investing (CRISA)
Growing Russell client interest in proxy outcome reporting
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Around the World (2)
Netherlands: Frijns Report (March 1, 2010)
“The pension fund cannot avoid being aware of the broader socialconsequences of its conduct”, yet
“Socially responsible conduct does not yet form an integrated part ofrisk policy and investment policy”
Landmine and cluster bomb production increasingly avoided
Denmark: Corporate social legislation leading to consideration ofESG issues in sponsor’s pension plan
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Who influences whom?
Government / Regulators
Asset Owners(Trustees, Bancassurers
etc.)
InvestmentManagers
Companies
Beneficiaries Citizens Customers / Employees
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Case Study: US & Pan-Europe Core RE FundsRussell research
Applying ESG to private real estate
Interviews with fund managers conducted in winter 2009/10
Tracking sustainability elements in portfolios
Major themes
Emphasis on “E” in ESG
Regulatory pressures and push/pull on tenants
Getting paid to be green
Development of frameworks / scorecards
Future proofing
Source: Russell research
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Carbon risk – One to watch?
CO2 emissions (“carbon”) are often a negativeeconomic externality
Some governments are developing a pricing regime
EU ETS (Emissions Trading Scheme)
Australia: fixed carbon price, market price from 2015
UK: escalating minimum carbon price
China: latest Five Year Plan
Evolution towards a global carbon price?
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Russell responseClient-driven
Funds*
Climate Change, Shariah, Environmental Technology
Responsible Ownership
Extension of global Proxy Policy to E&S issues; Engagement
Appointment of ESG data provider
Publications
Local office Sustainable Work Practice groups
Responsible Investment Policy (in progress)
* Fund names provided for illustrative purposes only. This is not an offer or solicitation to purchase any type of security. Please note that not all funds are available to all types of investors.
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Summary
ESG factors need to be considered for financialmateriality
ESG Integration is taking place
Different countries/markets focus on differentissues…
…and tackle them in different ways
A client’s specific SRI requirements need acustomised solution