2013-06-20 Gifford Megatrends Morning

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20 June 2013 Megatrends morning

Dr James Gifford, PRI Executive Director 01

Image is photograph from launch of PRI in 2006. Note: UN General Secretary Kofi Annan in centre

- In 2005, 20 institutional investors from 12 countries were invited by the UN Secretary General to discuss the development of the Principles for Responsible Investment.

1Principles for Responsible Investment As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that ESG issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognize that applying these Principles may better align investors with broader objectives of society.

2The six Principles

Incorporate ESG issues into investment analysis and decision-making processesBe active owners and incorporate ESG issues into our ownership policies and practicesSeek appropriate disclosure on ESG issues by the entities in which we investPromote acceptance and implementation of the Principles within the investment industryWork together to enhance our effectiveness in implementing the PrinciplesReport on our activities and progress towards implementing the Principles

1.2.3.4.5.6.3Growth in PRI signatoriesNearly 1,200 signatories representing USD $34 trillion AUM

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Another year of record growth for the Initiative and we are reaching more investors in more places than ever before.A further 212 organisations joined the PRI during 2012 - bringing total signatory numbers to almost 1,200, managing around $34 trillion. Nearly 30 of these new signatories were asset owners; a constituency that we will support with renewed vigour over the coming years as part of our new strategic focus. 44 major trends in responsible investment Integration of environmental, social and governance (ESG) factors into investment processes Shareholder dialogue with companies and policy makersTransparency: company and investorAddressing systemic issues

51. Academic evidence is mounting that ESG integration can add valueHigh Sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance

The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance - Eccles and Serafeim, Harvard Business School

6ESG integration strategies can lead to abnormal returns (Alpha):

Corporate Governance (Bebchuk et al., 2009, Gompers et al., 2003)ESG Engagement (Becht et al. 2009; Dimson et al. 2012)Eco-efficiency (Derwall et al., 2005)Employee Relations (Statman and Glushkov, 2009; Edmans, 2011)Community Relations (Kempf and Osthoff, 2007, Statman and Glushkov, 2009)Green Real Estate (Eichholtz, Kok and Quigley, 2010)Best in class strategies (Kempf and Osthoff, 2007; Statman and Glushkov, 20097Successful ESG investment requires specific skills (Gil-Bazo et al., 2009)

Financial institutions with more ESG appeal are found to:

Realise better competitive outcome in mortgage and deposit markets (Callado-Muoz & Utrero-Gonzalez, 2011)Have more loyal clients (Bollen, 2007).

Academic evidence: Returns High Sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance - Eccles and Serafeim, Harvard Business School

7Companies with high ESG scores are found to have less company specific risk (Bouslah et al., 2012; Boutin-Dufresne and Savaria, 2004; Lee and Faff, 2009; Bauer, Derwall and Hann, 2009; Oikonomou et al., 2012).

Corporations with better ESG ratings are found to have lower cost of debt and higher credit ratings (Bauer et al., 2009; Bauer and Hann, 2011; Oikonomou et al. 2011).

8ESG criteria are found to provide an insurance like protection for firms in legitimacy crisis (Godfrey, Merrill and Hansen, 2009).

ESG criteria can help to improve portfolio diversification and reduce worst case risk (Hoepner, 2010; Hoepner et al., 2013)

Academic evidence: Risk 8Positive market reactions to ESG investor engagements with US public firms over 1999-2009.

The average one-year abnormal return after initial engagement is 1.8%, with 4.4% for successful engagements whereas there is no market reaction to unsuccessful ones.

The positive abnormal returns are most pronounced for engagements on the themes of corporate governance and climate change.

Active Ownership Dimson, Karakas, Li, 2012

9Academic evidence: Active ownership

This new research by Prof. Elroy Dimson of London Business School finds that companies subject to engagement on corporate governance and climate change show significant financial outperformance of the market in the period following engagement.

9Use of ESG informationExamplesQuantifying the benefits and costs of specific ESG factorsInvestors can integrate their understanding of ESG factors into earnings forecasts or by adjusting the discount rate in DCF valuation.Identifying risks and opportunities that traditional investment research may notCompanies that operate in politically and socially sensitive areas are potentially subject to high operational risk and share price risks in terms of strikes and volatile unstable institutions.Identifying leaders and laggardsBest in class funds identify leaders and focus funds select companies with poor ESG performance and seek to improve it as a means of adding investment value.Identifying the beneficiaries of longer-term structural changes in the economy Thematic research may be used to identify stocks that are then subject to more detailed analysis or to create a thematic fund. An example of an ESG theme would be demographic change such as ageing populations in many developed countries.Assessing company performance against its ESG objectives and targetsAttention to ESG performance can signal a companys ability to deliver on all areas of business strategy.Negative or positive screeningInvestors can screen their portfolios based on various negative or positive criteria. 10How do investors use ESG information?10Integrating ESG into fundamental equity analysisA standard research structure11

Integrated analysis For IMs: To showcase insightful examples of how integrating the analysis of ESG information into fundamental equity analysis can help investors gain a better idea of a stocks fundamental value

For AOs: To help them identify leading integrated analysis practices so the can engage in a more detailed way with their IMs (see appendix)

For companies: To show the type of ESG information investors want and what they do with it

Report sectionCase studies byEconomic analysis: Newton Investment Management, Oddo SecuritiesIndustry analysis: Societe Generale, Clearbridge Investments, Macquarie SecuritiesCompany strategy: UBSFinancial reports: Kepler Capital Markets, Cheuvreux, Carbon Tracker Initiative, Societe Generale, Macquarie Securities, Citi, RobecoSAM, West LBValuation tools: Citi, RobecoSAM, Macquarie Securities, West LB

Conclusions High quality integrated analysis is being done!ESG factors may present new risks and opportunities but they are being assessed through standard models of business valuationReliance on traditional valuation tools can create tension between short timeframes and the longer term nature of some ESG factorsAcquiring and assessing ESG information is more resource intensive than that of audited financial informationCompanies are frequently doing more than what they discloseRaw ESG data without context can be misleadingThe identification of material ESG issues remains an art rather than a science

11Implementation support work streams12Fixed incomeListed equityPropertyPrivate equityInfrastructureCommoditiesHedge fundsE&S themed investingSmall and resource-constrained signatoriesAt this point in the presentation, go into the extranet and show attendees a typical work stream page.

Highlight where to find the active working groups and the recently released publications. 12Guide for GPs on how to incorporate ESG considerations into private equity due diligence

Linking ESG and Sovereign Credit Risk

The rationale for Responsible Property Investing13Upcoming research and tools

Alongside webinarsWe would welcome your ideas for tools or research that you might find useful132. Increase in investor-company dialogueMore than 400 investors involved in over 470 projects14

Globally, over 400 signatories have taken part in at least one of the 470 initiatives posted to the platform since 2006

A brief analysis of the figures on the signatories who proposed or joined at least one initiative in the Clearinghouse provides some interesting results.

From January-March 2013, 217 investors have done so. On average, they are involved in 4 initiatives.

Asset Managers are the most active (52%) reflecting the composition of the PRI membership overall (at the moment 62% of PRI signatories are asset managers, while 23% are asset owners).

The most active region is Europe, followed by North America and Oceania.

According to the 2011 PRI Report on Progress, 63% of respondents (343 signatories out of 545 signatories) used the Clearinghouse in 2010 with more than 116 investors reporting using it for the first time this year. For those using it, the CH serves as a learning tool (96% of them), a place to join engagements initiated by others (42%) and a place to initiate an engagement (14%).

More services for signatories coordinating their own engagements via the Clearinghouse:Private online workspaces via Huddle Conference numbers and webinar platform Limited administrative support (depending on availability)

Recent changes to the CH

New guidelines piloted in 2013, key changes include: Engagement service providers can post proposalsAOs can create a CH post visible only to other asset owners Engagements requiring financial commitments can be posted (e.g. for research costs)

14Recent case study Engagement on anti-corruption 3 year engagement by a coalition of 21 signatories representing approx. $1.7tr AUM. Engaged 21 companies exposed to corruption-related risks, to encourage them to improve transparency and disclosure of anti-corruption strategies, policies and management. 75% of companies targeted significantly improved transparency Next phase of the engagement focuses on up to 50 companies in high risk sectors, based on research from Transparency International. 15The press release highlights the results of a three-year engagement project (2010 2013) by a coalition of 21 signatories representing approximately $1.7 trillion in AUMs. The group engaged with 21 companies around the world that had significant exposure to corruption-related risk, to encourage them to improve transparency and disclosure of their anti-corruption strategies, policies and management. You can find more information on the engagement on the extranet:http://intranet.unpri.org/index.php?fuseaction=posts.post&post_id=7173&category_id=1Anti-corruption remains a key priority for the Clearinghouse and, as indicated in the attached press release, we already have in place a steering group of 12 investors workingon launching the next phase of the collaboration. The new initiative will target up to 50 companies across a wider range of sectors and countries to better understand their ability to manage and reduce corruption-related risks and their capacity to improve practices and transparency.We are very excited about the next phase of the anti-corruption engagement:We have brought together a steering group that is very committed to the success of the projectThe group is working hard to establish a solid framework that will meet the desired objectives, test new engagement strategies and employ a concrete assessment methodologyMore signatories have already expressed interest to join when launchedCollective action by global investors has great potential to address key systemic issues such as bribery and corruption, which are incompatible with good governance and harmful to the creation of value.

15 Environmental engagements

Image: Angus

Image: Ian BrittonCDP Carbon Action initiative - dialogues with 30 energy intensive companies to set GHG reduction goalsInvestor working group on sustainable palm oil increasing demand for certified oil & improving the sustainability of the value chain Water risk - management of direct and supply chain water risksFracking covering water scarcity and pollution, greenhouse gas emissions, and community relations This slides presents PRI coordinated collaborative engagements focused on environmental issues.

For more information on the single initiatives please refer to the relevant quarterly updates: C:\SharePRI\Clearinghouse\CH quarterly updates.

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Image: Marissa OrtonSocial issue engagements

Labour standards in the agricultural supply chain improving the implementation of labour codes among food and beverage retailers and producers UNGC-PRI Pilot Project to implement the Guidance on Responsible Business in Conflict-affected and High Risk Areas Human rights in the extractive sector improving management of human rights in joint venturesCollaborative engagement on direct employee relations identifying relevant indicators and improving management practices and disclosure among retailers This slides presents PRI coordinated collaborative engagements focused on social issues.

For more information on the single initiatives please refer to the relevant quarterly updates: C:\SharePRI\Clearinghouse\CH quarterly updates.

17Corporate governance engagementsImage source: UNODC

Image: The_Warfield (Flickr)Anti-corruption engaging with companies on implementation and disclosure of anti-corruption policies and practices, and management of related risksESG and executive Pay - developing guidance for the extractives and utilities sectors on how to link ESG metrics to payBoard nomination process - identifying best practices in key markets and engaging with laggard companies to improve the effectiveness of the director nomination process

This slides presents PRI coordinated collaborative engagements focused on corporate governance issues.

For more information on the single initiatives please refer to the relevant quarterly updates: C:\SharePRI\Clearinghouse\CH quarterly updates.18

ESG Disclosure & UN Global Compact

Sustainable Stock Exchanges initiative: engaging with stock exchanges to promote better ESG disclosure and performance by listed companies (in collaboration with UNGC, UNCTAD and UNEP FI)PRI for RIO: inviting 2000 listed companies to join the UN Global CompactLeaders and Laggards: inviting non communicating companies to submit their Communication on Progress to UNGC ESG Investor Briefing: communicating ESG value drivers to investors Integrated Reporting Investor Network providing feedback to the final development of the IIRC framework

This slide presents PRI coordinated initiatives focused on dialogues with UN Global Compact companies.

For more information on the single initiatives please refer to the relevant quarterly updates: C:\SharePRI\Clearinghouse\CH quarterly updates.193. Unprecedented transparencyCompany sideImpact of technology and social mediaRegulatory and industry momentum (Integrated reporting, GRI, EU)20Investor sidePRI Reporting and Assessment processGreater expectations around transparency from clients and beneficiariesGreater media and NGO awarenessWe believe that a sustainable global financial system that is efficient in economic terms is a necessity for long-term value creation, rewards long-term responsible investment and benefits the environment and society as a whole.

The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration for their implementation; fostering good governance, integrity and accountability; and addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation

Notes from Rob key messages:

- new Mission- bigger, deeper issues across the market as a whole and along the investment chain- endemic short-termism may depress company and portfolio returns (cf Kay) and contribute to volatility and market instability (though important also to stress that some short-term strategies are important even for long-term asset owners - they need liquidity and flexibility)- long-term financial impacts of sustainability issues such as climate change and resource depletion are starting to be assessed - e.g recent work by Institute of Actuaries modelling implications for discount rates of different sustainability scenarios. This means it's in L-T investors' financial interest to think about externalities across the whole portfolio.- concrete actions might include new kinds of mandate - eg different benchmarks that weight stocks differently based on sustainability exposure - new ways of structuring fees to support long-termism- financial market stability - importance of risk management by the TBTF bails - hence the proposed project on this in the consultation- stress that this is both new and a continuation and deepening of existing work - eg AO Guide, focus on disclosure which could move to stock exchange regulators- stress policy work will not 'represent' signatories

Outcomes from the latest consultation: Support for PRI to work on broader issues, particularly short termismNo consensus on what investors should doFocus to remain investor collaborationPRI not positioning for public policy lobbying on highly contested issuesNot speaking on behalf of signatoriesThink tank approach on key systemic issues that are core responsible investmentExternal funding focused on core PRI strategyNext steps working with advisory committee to develop the program further

204. Investors working on systemic issuesCompany and investor short-termism and overall market returnsMandate design, portfolio structure and strategic asset allocationExternalities long-term financial implications of environmental and social externalitiesFinancing the sustainable economyClear signatory preference to take action on short-termism21We believe that a sustainable global financial system that is efficient in economic terms is a necessity for long-term value creation, rewards long-term responsible investment and benefits the environment and society as a whole.

The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration for their implementation; fostering good governance, integrity and accountability; and addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation

Notes from Rob key messages:

- new Mission- bigger, deeper issues across the market as a whole and along the investment chain- endemic short-termism may depress company and portfolio returns (cf Kay) and contribute to volatility and market instability (though important also to stress that some short-term strategies are important even for long-term asset owners - they need liquidity and flexibility)- long-term financial impacts of sustainability issues such as climate change and resource depletion are starting to be assessed - e.g recent work by Institute of Actuaries modelling implications for discount rates of different sustainability scenarios. This means it's in L-T investors' financial interest to think about externalities across the whole portfolio.- concrete actions might include new kinds of mandate - eg different benchmarks that weight stocks differently based on sustainability exposure - new ways of structuring fees to support long-termism- financial market stability - importance of risk management by the TBTF bails - hence the proposed project on this in the consultation- stress that this is both new and a continuation and deepening of existing work - eg AO Guide, focus on disclosure which could move to stock exchange regulators- stress policy work will not 'represent' signatories

Outcomes from the latest consultation: Support for PRI to work on broader issues, particularly short termismNo consensus on what investors should doFocus to remain investor collaborationPRI not positioning for public policy lobbying on highly contested issuesNot speaking on behalf of signatoriesThink tank approach on key systemic issues that are core responsible investmentExternal funding focused on core PRI strategyNext steps working with advisory committee to develop the program further

21Questions and answers

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