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Transcript of Closing panel presentation…
Jane AmbachtsheerToronto
Closing panel presentation…
Environmental Finance Workshop
University of Toronto, October 2004
Okay, so now what?Okay, so now what?
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Mercer Investment Consulting 2
“Socially responsible investing” Today’s umbrella…
“Socially Responsible Investing” is among the more ambiguous terms used in the investment industry today
Integrating social responsibility, governance, and environmental sustainability with investment (Mainstream investors)
The process of selecting or managing investments according to social or environmental criteria (Mission based investors)
Traditional Emerging
Mercer Investment Consulting 3
What Does this have to do with “Environmental Finance”?
Socially responsible investors typically separate non-financial indicators into three groups:
SE ESEE
Social Social Ethical Ethical Environ-mental
Environ-mental
Therefore, E is treated the same as SE …
Mercer Investment Consulting 4
Why hasn’t SRI become the “next big thing”?
It is associated with knowingly jeopardizing financial returns
Proponents of SRI are often dismissed on the grounds that they are pushing a social agenda (rather than a financial one)
Mainstream investors are not associated with an explicit social, ethical or environmental agenda
Fiduciaries may be reluctant to adopt SRI principles because they do not know what beneficiaries expect
Mercer Investment Consulting 5
SRI: Converging with the mainstream?
But a growing body of literature argues that
– corporate social performance can impact stock price
– SRI funds can produce risk/return characteristics comparable to those of traditional portfolios
and
SRI proponents argue that indications of superior social and/or environment performance can
– be a proxy for good management
– be a source of superior financial performance
Where does this knowledge leave investors?
Mercer Investment Consulting 6
The $1 million questionHow we tried to find out
In August 2004, we hosted an industry consultation with mainstream stakeholders
– “Even defining the issue is hard”
– “SRI is like any other issue investors face, it’s a world of gray”
– “We can’t make investment decisions based solely on SRI variables”
– “Hmm, why not use SRI as another input?”
– “In fact, should my investment manager look at these things in order to fulfil his fiduciary duties?”
– “As long as it has an aura of being ‘about a social agenda’ – trustees will not want to do it”
They started…
…and ended
Mercer Investment Consulting 7
SRI: Less agenda, more materiality
Industry Consultation: The conclusions
SRI needs to rebrand (sustainable or responsible investing?)
Proponents need a new angle
Overall, incorporating social and environmental criteria into investment decision making seems like a prudent thing to do (although need more empirical evidence of benefits)
But this isn’t happening today
How could a “new SRI” fit into the industry?
Mercer Investment Consulting 8
Converging agendasWhat were often cited night and day…
“Vice” funds Profit above all Singular financial
agenda
Mainstream Investors
Mission- based
Investors
“Nuts and berries” crowd
No sin stocks No weapons
Mercer Investment Consulting 9
Mission-basedInvestors
Mainstream Investors
Converging agendas…are edging towards centre…
Triple-bottom-line performance
Internationally agreed codes and conventions
Risk/return framework
Mission-basedInvestors
Mainstream Investors
Mercer Investment Consulting 10
Momentum investors
Mainstream investors
Mission-based investors
Very specific ethical criteria aligned to stakeholder groups
Converging agendas…to differ only at the margins?
All investors
Triple-bottom-line performance
Integrated investment analysis
Holistic risk/return framework
Mercer Investment Consulting 11
Implications of such convergence
Predictions
Widespread incorporation of social and environmental factors by investors in the decision making process could function to raise the bar for “corporate social responsibility” or CSR
This would raise the cost of capital for “riskier” (i.e. bad) firms, creating a financial reward for “good” firms
Bonus: This brings positive social change
Mercer Investment Consulting 12
Reality check: We’re not there yet! What can investors do today?
Delegate to/monitor social and
environmental risk analysis
by mainstream managers
Delegate to/monitor social and
environmental risk analysis
by mainstream managers
Invest in a niche
sustainable investment
product
Invest in a niche
sustainable investment
product
Discuss the issues,
enhance investment principles,
governance
Discuss the issues,
enhance investment principles,
governance
Develop proxy voting
guidelines (directly, or delegate) &
publish voting record
Develop proxy voting
guidelines (directly, or delegate) &
publish voting record
Discuss
Vote
Engage as a shareholder
(directly, or in consortium)
Engage as a shareholder
(directly, or in consortium)
Review existing
portfolios for exposure to
social & environmental
risks
Review existing
portfolios for exposure to
social & environmental
risks
Engage
Review
Delegate
Invest
Mercer Investment Consulting 13
Implementation - Pros and Cons of Various Strategies
Discuss Vote Engage Review Delegate Invest• Determine
relevant strategy • Fulfil fiduciary
duty• Demonstrate
active ownership• Convey activity
to stakeholders
• No restriction of investment universe
• Can influence companies’ behaviour
• (International: strongly encouraged by governments)
• More information should allow better decision making
• “E” is a small component of pension management
• Sustainability could be a winning investment style
• Avoids companies hit by adverse publicity
• “Feel good” factor
• Sustainability could be a winning investment style
• Requires effort/cost
• Unclear incentives, expectations
• Other priorities
• Requires effort/cost
• Unaccustomed to monitoring actively/what to ask
• Requires effort/cost
• Availability of “engagers”
• Requires effort/cost
• Process of “reviewing”
• Requires effort/cost
• Availability of experienced investors
• Difficult to monitor
• Requires effort/cost
• Reduced universe
• Difficult to decide criteria
• Can you really influence?
• Sector bias / volatile results
PR
OS
CO
NS
Mercer Investment Consulting 14
Expectations
Corporate governance and activism will remain ‘hot ticket’, ahead of social and environmental issues
Growth of engagement type products, and further emphasis on engagement/activism within mainstream investing
Most activity among large non-corporate plans (public plans, universities)
Evolution of specific approaches into measurable styles
SRI service/provider market consolidation
Role of clean technology/eco-venture cap?
Mercer Investment Consulting 15
Shaping the future
Growing evidence of materiality Good returns Corporate scandals Pressure from stakeholders/reputation risk Industry integration/sophistication International legislation Regional and global initiatives
– UNEP Finance Initiative, UN Global Compact, GRI, Carbon Disclosure Project, Investor Network on Climate Risk, Enhanced Analytics Initiative, NYSFA SRI Committee,
– Canada: TSFA SRI Lunch (Jan 2005), Conferences (SIO 2005, GLOBE, Venture Forum etc.), SRI Industry Consultations, these workshops!
Drivers Naysayers
Lingering “moral” reputation and fiduciary concerns
Lack of training/education
Change takes time
What should we call it?
Barriers