ESG AS VALUE DRIVER - Reutersshare.thomsonreuters.com/assets/forms/graham-sinclair.pdf · ESG AS...

ESG AS VALUE DRIVERDefining ESG globally, in emerging/ frontier markets, in Africa, how ESG factors materially impact valuations and investment hypothesis, effective ESG practices, getting started.

GRAHAM SINCLAIR | SinCo + AfricaSIF.org | @esgarchitect 5 March 2015 1.15PM SAST

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Acknowledgements: Villanova School of Business, IFC, SinCo, Deloitte, MSCI ESG, Trucost, ESSEX IP GEOS, Thomson Reuters Asset4, Goldman Sachs, CalPERS.

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@SinCoESGsincosinco.com

[email protected]

Sustainable Investment Consulting

• SinCo - sustainable investment consulting - is a specialist sustainable investment advisory boutique formed in February 2007. We have no other focus, we have no conflicts of interest. SinCo builds investment conviction and competence for our clients using environmental, social, and corporate governance ("ESG") factors in investment lifecycles. SinCo contributes to our client’s vision, strategy and implementation of sustainable investment programs.

• SinCo projects have included designing sustainability indexes and expanding portfolio research on ESG factors. We design ESG architecture across asset classes from global listed equity to private equity and green infrastructure for investment strategies that incorporate sustainable characteristics integrating ESG, responsible investment, and impact investment mandates.

Discussing the impact and future of the PRI with Kofi Annan in The Netherlands, May 2008.

Debating the progress of ESG in Africa and the role of private equity at the JSE in South Africa, August 2012.

With fellow CSR Africa keynote and sustainability legend, Gro Harlem Brundtland in Nigeria, May 2012.

SinCo designs ESG architecture

for long term sustainable

investment that matters.

mailto:[email protected]

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Indemnity• This ESG research by SinCo includes funds, firms and initiatives that may be clients of

SinCo, or the parent of, or affiliated with, a client of SinCo. SinCo ESG research reports, articles and profiles have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While we have exercised due care in compiling the information, we make no warranty, express or implied, regarding the accuracy, completeness or usefulness of the information and assume no liability with respect to the consequences of relying on the information for investment or other purposes. In particular, SinCo ESG research is not intended to constitute an offer, solicitation or advice to buy or sell securities.

• Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall SinCo have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

sustainable investment consulting

Prepared for #TRTAS15 by Graham Sinclair, Principal of SinCo. sincosinco.com 2015. Not for distribution outside intended audience. All rights reserved.

About AfricaSIF.org

Africa Sustainable Investment Forum is an independent,Pan-African, not-for-profit network, knowledgebase and advocate promoting investment in sustainable development across the continent.

Launched in June 2010, the AfricaSIF.org Project is run by volunteers building a network of institutions and individuals promoting sustainable investment in Africa by investors in public, private and philanthropy sectors across asset classes, countries and stakeholders from our platform at www.africasif.org

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@AfricaSIF

55REUTERS/AfDB

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START WITH THE LANGUAGE OF ESG• Determining how ESG adds value starts with being clear on what ESG factors are material

to the investment strategy, the investment sector and investment styles.

• Sustainable investment is an approach to investment in any asset class where environmental, social and governance (ESG) factors are proactively integrated at any stage of the investment life cycle. SOURCE: SinCo 2015.

• Impact investment is investment made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return, and target a range of returns from below market to market rate. SOURCE: Global Impact Investing Network 2014.

• Green Bonds enable capital-raising and investment for new and existing projects, and are issued in order to raise finance for climate change solutions - climate change mitigation or adaptation related projects or programs. SOURCE: Green Bond Principles via Ceres 2104.



A SHORT, SOME DODGY WOOD, A DENIAL• Zhou said he has made money from his short bet, though he declined to

say how much. “I made a profit, but it’s more than that,” Zhou said. “These are real people, real lives.” - How a 25-Year-Old Sparked Lumber Liquidators’ Stock Plunge, Matt Townsend, Bloomberg Businessweek 12:00 AM EST March 4, 2015. http://www.bloomberg.com/news/articles/2015-03-04/how-a-25-year-old-investor-spurred-lumber-liquidators-plunge

• “Up to Tuesday's close, Lumber Liquidators' stock had fallen about 41 percent since Feb. 24, a day before the company said it might face criminal charges under a law aimed at curbing illegal harvest of tropical hardwoods.” - Senator Bill Nelson calls for federal probe of Lumber Liquidators BY JIM FINKLE AND SAGARIKA JAISINGHANI, Reuters, Wed Mar 4, 2015 4:31pm EST http://www.reuters.com/article/2015/03/04/us-lumber-flooring-probe-idUSKBN0M028S20150304

• “We will do whatever regulations require. We have auditors who check the factory” - Tom Sullivan, CEO Lumber Liquidators, interview with Anderson Cooper, CBS 60 Minutes 1 March 2015, 7:23 PM http://www.cbsnews.com/videos/lumber-liquidators-linked-to-health-and-safety-violations/


8Prepared for #TRTAS15 by Graham Sinclair, Principal of SinCo. sincosinco.com 2015. Not for distribution outside intended audience. All rights reserved.

http://www.bloomberg.com/news/articles/2015-03-04/how-a-25-year-old-investor-spurred-lumber-liquidators-plunge

http://www.reuters.com/article/2015/03/04/us-lumber-flooring-probe-idUSKBN0M028S20150304

http://www.cbsnews.com/videos/lumber-liquidators-linked-to-health-and-safety-violations/

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ESG NUMBERS DEMONSTRATE SIZE• PRI $45 trillion AuM. 1,329 signatories • “$500 billion take Montreal Carbon Pledge to carbon footprint their portfolios”

• CDP $92 trillion AuM. 767 investors • “Seventy-eight per cent of the largest 500 publicly listed companies now report their carbon

emissions"

• SRI USA $6.57 trillion AuM. 1,500 investors • “sustainable, responsible and impact…$6.2 trillion in U.S.-domiciled assets at the beginning of

2014 held by 480 institutional investors, 308 money managers and 880 community investment institutions that apply various environmental, social and governance (ESG) criteria in their investment analysis and portfolio selection…nearly 18 percent of the $36.8 trillion in total assets under management tracked by Cerulli Associates.”



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DRIVERS FOR INTEGRATION OF ESG• Unique role of finance between companies and investors, some asset classes

more direct than others. Increased interest in infrastructure, private equity.

• Long term investment thinking and questioning of shareholder value as single metric. ESG as foundation for sustainable and strong economy.

• Global initiatives: DJSI 1999, UN Global Compact 2000, PRI in 2006, Equator Principles 2004, CRISA 2011.

• Global social and environmental challenges, e.g. secure energy supply, climate change, water shortages, BRICs growth.

• Increasing awareness of ESG issues by analysts and investors, availability of ESG data and ESG-trained talent. Evidence of impacts.

• Sector-specific technical, political and product-related risks.

SOURCE: Adapted by SinCo 2015 from GSAM for AHC 2006, http://www.cfainstitute.org/ethics/Documents/Research%20Topics%20and%20Positions%20Documents/goldman_sachs_presentation.pdf


http://www.cfainstitute.org/ethics/Documents/Research%20Topics%20and%20Positions%20Documents/goldman_sachs_presentation.pdf

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Current status of the control variables for seven of the planetary boundaries.The green zone is the safe operating space, yellow represents the zone of uncertainty (increasing risk), red is a high-risk zone.

Published by AAAS

OVERSTEPPING BOUNDARIES


PENSION REGULATIONS ENABLE ESG• "A fund has a fiduciary duty to act in the best interest of its members whose

benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities.”

• “Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character.”

• “This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.” – Regulation 28 of Pension Funds Act 24/1956 in South Africa, effective 1 January 2012



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INVESTORS SEEK ESG: NYCERS RFP• Q.51. Which ESG issues do you assess in company evaluation and how do you

assess their relevance to the company’s long-term business prospects? Examples include, but are not limited to, corporate governance structure, climate change, supply chain integrity, labor practices, and human resource management.

• Q.56. Is your firm a signatory to the Principles for Responsible Investment? What ESG-related organizations are you a member of and/or in what initiatives has your firm participated?

• Q.104. Do you currently report on the role of ESG issues in your investment decision making process? If so, what format of reporting do you use and how often do you report?

• Q.106. Are you willing to report to the New York City Retirement Systems on the role of ESG issues in your investment process?

Source: NYCERS investment mandate RFP ESG questions, 2013 file:///Users/grahamsinclair/Google%20Drive/ESG%20Questions%20in%20NYCERS%20Request%20for%20Proposals.pdf


Prepared for #TRTAS15 By Graham Sinclair, Principal of SinCo sincosinco.com 2015. Not for distribution outside intended audience. All rights reserved. 14

http://sincosinco.com

ESG METHODS• ESG integrated / branded

• ESG pure-play/ blended/ opportunistic/ delegated

• ESG in context of buy/ hold/ sell

• ESG engage/ advocate/ lobby/ isolate

• ESG drives value by increasing investment information quality in information-poor frontier markets.

• ESG drives value by increasing the opportunity set for sellers in M&A, and decreasing the complexity, uncertainty and investment due diligence timelines for investors and trade sale company exits.


Prepared for #TRTAS15 By Graham Sinclair, Principal of SinCo sincosinco.com 2015. Not for distribution outside intended audience. All rights reserved. 15

http://sincosinco.com

Live in front of video cameras and smartphone equipped audiences live tweeting, representative of NGO the Bench Marks Foundation seen posing questions to investors and companies the during Global Reporting Initiative stakeholder meeting for launch of South Africa Focal Point at Johannesburg Stock Exchange, February 2013. PHOTOCREDIT: Graham Sinclair/SinCo archive 2013

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Environmental Criteria ─Operational eco-efficiency ─Climate strategy ─Environmental reporting

Governance Criteria ─Corporate Governance ─Risk and Crisis Management ─Brand management

Social Criteria ─Human capital development ─Stakeholder engagement ─Supply chain management

Cost of Capital

Capital Structure

Return on Invested Capital

Weighted Average Cost of Capital

Revenues

Costs

Investments

Earnings

Invested Capital

FA I R VA L U E


Source: Adapted from RobecoSAM in Evolutions in Sustainable Investing, Wiley 2011.

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ESG by global majors: #WMTgreen

Inditex boosted supplier labor and safety audits 508% in the past three years to the highest level, relative to sales, among the only 13 retailers that disclose data. Concerns about supplier practices, especially since the 2013 Rana Plaza factory collapse in Bangladesh that killed 1,129 workers, have led companies including Wal-Mart, H&M and Marks & Spencer to increase oversight. NEXT was the only clothing retailer to record a decline in audits, although from industry-leading levels. - Sustainalytics 2015.

SOURCE: Can Walmart Get Us to Buy Sustainable Products? Andrew Winston, HBR Blog, 24 February 2015.


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Performance impact of ESG Factors 3-10 Years [n= 97 investors (51 PE investors) + 46

stakeholders;

Biodiversity.Micro-finance, micro-insurance.

Gender Diversity.Emissions of greenhouse gases.

HIV/AIDS.Broad-Based Black Economic EmpowermentProduct Health, Safety and Nutrition Issues.

Human and Indigenous Peoples Rights.Jobs creation [“decent paying” jobs].

Water scarcity or sanitation.Environmental Management

Employee Relations, Safety and Worker Rights.Infrastructure Development.

Corporate Governance.

0 30 60 90 120

3437

1615

3117

16128

2318

51115

3732

201727

2216152124

1312129

443129

2421211817161312866

Private Equity - Very ImportantInvestors (excluding PE) - Very ImportantStakeholders - Very Important


MATERIALITY


TRA4 ESG VALUE PROPOSITION• 5,000 Global Companies

• 13 Fiscal years of history

• Depth of data points

• Standardised information

• ESG News

• Quality data -95% accuracy

• Quantitative data

• Qualitative data


Prepared for #TRTAS15 by Graham Sinclair, Principal of SinCo. sincosinco.com 2015. Not for distribution outside intended audience. All rights reserved. 20

GLOBA COVERAGE TRA4• Universe of ~5,000 publicly listed companies

• Coverage of major indices including MSCI World, STOXX 600, Bovespa, FTSE250, ASX 300 and MSCI Emerging Market Index.

ASSET4 Universe by Geography

LATAM 150+

Europe 1100+ Japan

400+

North America 1600+

Asia600+

Australia & New Zealand

300+

Africa & Middle East

150+


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Availability of ESG growing in Africa


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ESG DATAFEEDS• ASSET4 ESG Datafeed provides access to over 5,000 publicly listed

companies and increasing. Updated bi-weekly.

• 200 + key performance indicators (for example CO2 / Revenue $)

• 500+ data points (for example emissions = CO2 tonnes)

• Up to 13 fiscal years of history per company

• All data points have been standardized and are objective / comparable

• Negative screening criteria eg: alcohol, tobacco, gambling


What ESG issues? Mining sector24

Platinum Rock drill operator at Lonmin mine coaching investors. PHOTOCREDIT: SinCo archive, September 2013

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Next-gen investment• Investment thinking and practice has moved on

since 20th century. Sustainable investment is a meta theme because ESG exists in all investment decisions.

• Whether ESG drives value or risks depends on the investor’s skill in mapping and managing the ESG factors in their investment lifecycle.

ESG AS VALUE DRIVERDefining ESG globally, in emerging/ frontier markets, in Africa, how ESG factors materially impact valuations and investment hypothesis, effective ESG practices, getting started.

GRAHAM SINCLAIR | SinCo + AfricaSIF.org | @esgarchitect 5 March 2015 1.15PM SAST

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Acknowledgements: Villanova School of Business, IFC, SinCo, Deloitte, MSCI ESG, Trucost, ESSEX IP GEOS, Thomson Reuters Asset4, Goldman Sachs, CalPERS.

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MINING: INTEGRATING ESG FACTORS• ESG analysis must balance top-down thematic issues with bottom-up company context.

analysis starts with an overarching view. Companies have influential and persuasive role in making the case to investors for materiality of ESG risks and opportunities.

• All analysis is also a competitive struggle for fastest, freshest and most accurate data offering information interpreted for knowledge of current and future value of investment opportunity. ESG data availability has ramped up since 2000, but still issues of frameworks (GRI vs integrated reporting vs SASB), availability, reliability, verification, auditing, comparability.

• Social - Child Labor, Consumer Product Safety, Diversity, Labor Relations

• Environmental - Environmental Performance, Global Sanctions, Superfund sites, Toxic Chemicals

• Tracking framework - Spills, Fines, Sites. Relative and absolute measures - for example, sites / $10 billion domestic company revenue, lbs / $1,000 domestic company revenue.


TRA4 data by Andre Chanavant, Prepared for #TRTAS15 by Graham Sinclair, Principal of SinCo. sincosinco.com 2015.

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MINING: ESG VALUE DRIVER 1/2• RISKS AND ASSUMPTIONS. Model risks to the target price/s, typically including the

increase in exploration, sustaining and development capital expenditure plans.

• Assumptions about trends in commodity pricing, success in above- and below-ground operational management, taxes (on average 30% across regions in the medium-to-long term), and input costs, such as labor.

• Risks include assumptions about productivity, and work-safety stoppages related to accidents and fatalities in operations.



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MINING: ESG VALUE DRIVER 2/2• INTEGRATING ESG. ESG issues typically enter the modeling as costs and/or risks, for

example environmental remediation. But may also reasonably be modeled as governance factors, for example the license to operate being granted or renewed based on offering a non-corrupt, transparent and community-validated approach to managing stakeholder relationships.

• Environmental issues may also bring mining exploration or operating to a halt: for example where mines contravene the National Environmental Management Act or the National Water Act. In South Africa, courts are increasingly siding with civil society and consumers where rights are threatened by state or private sector.



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NEWMONT MINING CORP NYSE:NEM• “Advancing our project pipeline: We manage…development risks associated with our

projects including permitting, local community and government support, engineering and procurement availability…

• “Estimates relating to new development projects…Potential delays relating to social and community issues, including, without limitation, issues resulting in protests, road blockages or work stoppages. Mining companies are increasingly required to consider and provide benefits to the communities and countries in which they operate, and are subject to extensive environmental, health and safety laws and regulations.”

Source: 10Q SEC Filing Filed 10/30/14 for the Period Ending 09/30/14



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Adapting to a changing climate: implications for the mining and metals industry

The cost of carbon pricing: competitiveness implications for the mining and metals industry

The role of mining in national economies

MINING INDUSTRY RESPONSES


32REUTERS/Philimon Bulawayo

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Case Study: CalPERS ESG impact on risk & return• Academic and broker studies review

• ESG themes are varied, more work completed on governance

• A relatively new field, there are gaps in the literature

• Focused on specific topics within asset class, much on exclusion

• High Level Findings • ESG results are primarily driven by manager skill and style

• It is a misconception that responsible investment leads to financial underperformance

• Balance of studies are positive to neutral, a minority are negative

SOURCE: CalPERS Sustainable Investing: Integration of Environmental, Social and Governance (ESG) Factors Workshop 2013, http://www.calpers.ca.gov/eip-docs/about/video-web-center/videos/pension-investments/esg-worshop.pdf


http://www.calpers.ca.gov/eip-docs/about/video-web-center/videos/pension-investments/esg-worshop.pdf

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Case Study: CalPERS approach • CalPERS “believes that the companies we invest in need a healthy, productive, and

motivated workforce to build a sustainable business model and deliver the returns we expect. Human capital plays a vital role in the value creation that underpins investment returns.”

• Opportunities

• Develop a total fund policy

• Integrate ESG factors into investment strategy

• Establish framework for monitoring

• Publish a Sustainable Investment Report

• Build out staff education


SOURCE: CalPERS Sustainable Investing: Integration of Environmental, Social and Governance (ESG) Factors Workshop 2013, http://www.calpers.ca.gov/eip-docs/about/video-web-center/videos/pension-investments/esg-worshop.pdf

http://www.calpers.ca.gov/eip-docs/about/video-web-center/videos/pension-investments/esg-worshop.pdf

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sincosinco.com

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• Graham is sustainable investment strategist at SinCo - sustainable investment consulting. At SinCo he leads engagements to design and develop the sustainable investment case for clients managing billion dollar investments or global investor initiatives. As ESG architect he integrates environmental, social and governance (ESG) factors into investment strategies, processes and indexes in frontier and emerging markets. Recent projects tackled private equity in emerging markets, infrastructure investment, green bonds, pension fund investment value chains, a national sustainability index and impact investing. Before joining KLD in Boston, he worked in investment banking and managed private sector pension funds at Alexander Forbes, Old Mutual and Nedcor Investment Bank, exiting global multi-manager SEI Investments in 2002. Graham is a member of the Investment Analysts Society, the Environmental Leadership Program and lifetime member of Net Impact. Graham is co-founder of the not-for-profit promoting the growth of sustainable investment in Africa, the Africa Sustainable Investment Forum project, AfricaSIF.org. Graham lectures on sustainable investment at leading business schools in North America, Europe and Africa, and has contributed three chapters on Private Equity, Africa and Sustainability Indexes to "Evolutions in Sustainable Investing" (Wiley Finance, 2012) and presented his big idea "Investing As If The Future Matters" at TEDxTableMountain. Graham holds an MBA from the Villanova School of Business and LL.B from the Howard College School of Law as well as various industry certifications. He resides in Vermont, USA and Cape Town, South Africa. On any day he would rather be cycling a mountain pass.

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