Katie gordon

Wealth Management SRI Portfolio Construction

Across the Asset Classes

Katie Gordon, SRI, Cazenove Capital Management 12/11/10

Contents

• Wealth Management Market – SRI issues

• SRI Today

• 3rd Party Fund Selection

• Impact Investment

• Sample SRI Portfolios

• Appendix

Wealth Management – the market

Wealth Management – the market

Clients• Individuals• Trustees• Family offices

Advisors• Fund Managers• Intermediaries: IFA’s, Consultants, Accountants, Lawyers, Trust Companies

Issues• Understanding SRI today• Sustainable theme vs integration• Performance myth• Philanthropy vs investment• Portfolio styles: pooled vs segregated; asset class vs entire portfolio

SRI Today

Expansion of Socially Responsible Investment (SRI)

Earlier Style

Ethical Restrictions

Social Environmental Ethical Research

ACTIVISM & ENGAGEMENT

Best Practice

Walk Away Push for Change

4th Revolution

Sustainable Themes

Companies of the future

Source: Cazenove Capital

Integrated SEE research - best practice fund management

ANGLO AMERICAN ORD USD0.50RIO TINTO ORD GBP0.10

BHP BILLITON ORD USD0.50XSTRATA USD0.50

LONMIN USD1.0ANTOFAGASTA ORD GBP0.05

Riskmetrics ratings 5: Environmental impact of the sector (5 is high, 1 is

low) AAA: environmental rating of the stock compared to

its sector (AAA is best - CCC is worst) * Social rating is BB or below

Applies to all Pan-European funds

Specialist SEE Research Ratings within

our valuation matrix

Analysts aware of SEE issues in stock

selection

Specialists within investment team

Integrated Engagement: Analysts raise strategic SEE issues with CEO’s + CFD’s. “Challenge corporate leaders”

Satellite SRI Team: Specialists discuss SEE issues with middle management. “Self interested circle”


Why do we incorporate this research?Companies with good environmental management can outperform

Source: RiskMetrics* EV21 rating is the RiskMetrics environmental rating** Above average is AAA-BBB; Below average is BB-CCC*** Top 11 & bottom 11 stocks only due to the size of the sector

Above average EV21 rating* Below average EV21 rating**Difference

Paper and Forestry SectorTop half outperforms by 59%

Paper and Forestry SectorTop half outperforms by 59% Chemicals Sector

Top Half Outperforms by 78%

Chemicals SectorTop Half Outperforms by 78%

Banks SectorTop Half Outperforms by 23%***

Banks SectorTop Half Outperforms by 23%*** Autos Sector

Top Half Outperforms by 100%

Autos SectorTop Half Outperforms by 100%

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Sustainable investment results – Lamprell Plc

• Provides construction and engineering services for oil and gas rigs and the offshore wind market.

• This year the company has announced USD 320.4 million of contract awards for the design, construction and delivery of self elevating and propelled offshore wind turbine installation vessels.

• Ideally positioned to take advantage of the expansion of the global offshore wind farm market and the constraint on liftboat capacity.

• This area represents a significant proportion of the bidding pipeline.

* Source: Datastream* Source: Datastream

150

170

190

210

230

250

270

290

310

330

350

Oct 09 Dec 09 Feb 10 Apr 10 Jun 10 Aug 10

Selecting the best

3rd party fund selection

SRI Third Party Fund Selection

• Process Summary;

Strategy & SRI

SRI responsibility

• Is the investment strategy consistent with our own? E.g. sustainable theme selection• Does the fund structure reflect the strategy?

• Is the SRI research integrated into the funds investment process?

• Quality

• Multi-manager responsibility – final sign off and buy list ownership

• Qualitative assessment of investment philosophy, process and people.• Quantitative analysis helps to test our expectations of fund behaviour in a range of

market conditions

• Is it “Best in Class?”

SRI funds are selected and monitored alongside our in house specialist multi-manager team

Where philanthropy meets investment

Impact Investment

Mission/Social Impact Investing

Investments that fit with clients values

• Some clients wish to set up charities, or give to charities, traditionally called philanthropy

• However increasingly clients are seeing the benefit of investing in Social Impact/Impact/Mission investments. These are hybrid investments that offer a social and financial dividend.

• These investments are made within the investment portfolio (as part of the relevant asset class, or as an additional asset class). The money can come from the portfolio, from grant money or charitable contributions.

• E.g. client wanting to support Poverty Alleviation - Investments should include microfinance and support of fair trade

• Liquidity is often an issue with impact investments.

Sample SRI Portfolios

Sample SRI Portfolio – PC pooled portfolio (medium risk)

Equities

Fixed Income

Hedge

Cash

2 CCM funds

3 SRI funds

2 Cleantech investment trust/unit trust

1 CCM fund

2 3rd party funds

1 SRI 3rd party fund

3rd party account

2 Hedge funds

1SRI hedge fund

Engagement and SEE Integration

Negative screening

Positive screening

SEE integration

Positive and negative screening

2 Property funds1 SRI property fund Social/eco housingProperty

5%

10%

25%

20%

40%

SEE integration

Asset Class Investment Solution

SRI Solution

Engagement and screening

For illustrative purposes

Sample SRI Portfolio – PC segregated (medium risk)

Cash

Alternatives

Fixed Income

Equities

Global 3rd party funds

Individual stocks

Specialist SRI funds(investment trusts/unit trusts) e.g. Cleantech

Gilts (inc. Index Linked)

Individual corp. bonds

2 Hedge funds

1 SRI hedge fund or FofF

Microfinance

3rd party SRI deposit account

Asset Class Investment Solution

SRI Solution

Positive and negative screening,

Engagement

SEE integration, negative screening

SEE integration

Negative screening

Social/eco housing

Negative and positive screening

Property1 Property fund

1 SRI Property fund

5%

10%

20%

25%

10%

30%

Positive & negative screening

SEE integration

Sustainable themes and

positive screening


Sample SRI Portfolio – Social impact: poverty alleviation

UK segregated

Global 3rd party ethical funds

Global 3rd party sustainable & ethical funds & ETF’s

Investment solution

3rd party ethical funds

Hedge 5%

Social impact 20%

SRI style

SEE integration, engagement, sustainable themes & negative screening

Positive & negative screening, engagement, SEE integration

Sustainable themes (e.g. water, energy and climate change adaptation/mitigation)

Positive and negative screening, as well as social impact bonds

SEE integration & engagement/sustainability, negative screening

Social returns

Equities UK 20%Global 30%

Fixed income

Alternatives inc.hedge, & social impact


50%

25%

25%

Appendix

History and development of SRI

Negative Screening

Green Movement

Positive Screening

Engagement & Activism

Integrated Analysis

Sustainable Finance

1920s: Methodist Church align investments with its values by excluding alcohol and gaming

1980s: Anti-apartheid movement excludes investments in S Africa

1984: The first UK ethical funds is launched, followed later by European ethical fundlaunches

1992: Rio de Janeiro – UN conference on Development and the Environment

2000: Pension Act requires SRI disclosure in UK

Largest Dutch pension funds draft SRI policies following Trade Union pressure

UN Millennium Development Goals launched

2001: Social and environmental reporting by companies mandatory in France

Association of British Insurers (ABI) issues SRI disclosure Guidelines

German private pension fund regulation requiring SEE statement

2002: Rio +10 - UN conference on Development and the Environment (Johannesburg)

2003: Dutch insurance companies create Code of Conduct including social responsibility

UNEP FI – United Nations Environment Program Finance Initiative

2004: Italian and Belgian Pension reforms include SIP’s

Enhanced Analytics Initiative (EAI) founded

2005: Make Poverty History launched

UK Charities recommended to state the “extent to which SEE factors are considered in investment decisions”

UK Conservative party launches “Quality of life” policy group

2006: Launch of Sir Nicholas Stern’s report, The Economics of Climate Change

2007: Delegates from 189 countries met in Bali to begin negotiations on a new international climate change agreement to succeed Kyoto (expires 2012)

2010: UNPRI (United Nations Principles for Responsible Investment) approx $22trn signed up


SEE research analyses intangibles to enhance stock selection

• All companies are impacted by some of these. However, they are “intangible” and tend not to be included in financials

Transport

Biodiversity ProtectionLabour Standards

Animal Testing

Environmental Efficiency

Corporate governance

Directors’ remuneration

Bribery and corruption

Stakeholder engagement

Greenhouse Gas Emissions

Water Conservation

Fair Pricing

Renewable energy

Genetic Engineering

EMFFood Safety

Supply Chain Management Environmental Management

Equal Opportunities

Human Rights

Health and Safety

Tropical Hardwood Alternates to Toxic Chemicals

AIDS

Summary of our Socially Responsible Investment offering

Socially Responsible Investment policy launched Jan

2002.

Social, environmental and ethical (SEE) issues are

integrated into the investment process, which is

applied across all our Common Investment Funds and

other Pan-European funds.

Management of companies with poor SEE ratings are

engaged with, via both mainstream investor meetings

and one on one meetings.

Sustainable themes research help identify companies

exposed to these growth opportunities.

The Growth Trust for Charities, The Equity Income

Trust for Charities and The Income Trust for Charities

are restricted from holding tobacco stocks.

Negative ethical screens can be applied to larger clients.

Third party SRI fund selection.

Clients receive quarterly reports covering SEE and corporate governance

issues.

3rd Party Funds/ Social Impact

(UK only)Segregated Portfolios

(UK CIFs only)

Cazenove CapitalFunds

SustainableThemes

Engagement & SEE* Research


INTEGRATED RESEARCH

3rd Party Funds/ Social Impact

(UK only)Segregated Portfolios

(UK CIFs only)

Cazenove CapitalFunds

SustainableThemes

Engagement & SEE* Research


INTEGRATED RESEARCH

Pan European equities

All global asset classes

This enables a flexible solution to meet clients’ differing needs

• 1st – agrarian revolution

What is the 4th Revolution?...

• 2nd – industrial revolution

• 3rd - technological revolution (computers/mobiles etc)

• 4th – the sustainable revolution (alternatives, water capture etc)

…The Sustainable Revolution!Source: Cazenove Capital

Sustainability research – the philosophy

Source: CheuvreuxSource: Cheuvreux

Innovative and structured research approach

Green TechResearch

Focus

Population growth

Pressure on Natural Resources

ClimateChange

Security of Energy Supply

Local Pollution

The Lean Way

Global Challenges

Sustainable Solutions

The Clean Way The Green Way

Renewable Energy

-Hydro-Wind-Solar- Geothermal- Marine

-Hydro-Wind-Solar- Geothermal-Marine

Alternative Energy & Transport

- Hydrogen- Fuel cells-Power storage-Mass transport

- Hydrogen-Fuel cells-Power storage-Mass transport

Biomass resources

- Biofuels- Bioenergy-Biogas- Biomaterials-Wood

-Biofuels- Bioenergy-Biogas- Biomaterials-Wood

Waste Management

-Waste collection and handling-Waste treatment- Recycling

-Waste collection and handling-Waste treatment-Recycling

Eco-products &

services

- Engineering- Pollution control & testing-Eco-services


WaterManagement

-Water treatment-Water distribution-Water savings


Sustainable Technologies

ResearchFocus

Energy Efficiency

- Insulation & lighting-Efficient power and electricity-Efficient transports


Sustainable Tech Investment Universe

Population Growth

Pressure on Natural Resources

ClimateChange

Security of Energy Supply

Local Pollution

The Lean Way Sustainable

SolutionsThe Clean Way The Green Way

Renewable Energy



Renewable Energy









Biomass resources



Biomass resources



Waste Management



Waste Management



Eco-products &

services

- Engineering-Pollution control & testing-Eco-services


Eco-products &

services

- Engineering-Pollution control & testing-Eco-services


WaterManagement



WaterManagement



Sustainable Technologies

ResearchFocus

Energy Efficiency



Energy Efficiency



Sustainability Database

UN Principals of Responsible Investment

Principals• Principal 1 - We will incorporate ESG issues into

investment analysis and decision-making

• Principal 2 – We will be active owners and incorporate ESG issues into our ownership policies and practices

• Principal 3 – We will seek appropriate disclosure on ESG issues by the entities in which we invest

• Principal 4 – We will promote acceptance and implementation of the Principles within the investment industry

• Principal 5 – We will work together to enhance our effectiveness in implementing the Principles

• Principal 6 – We will each report on our activities and progress towards implementing the Principles

CCM’s solution• Integrated research – engagement, SEE

research, Sustainable themes

• SRI policy, Corporate Governance policy

• Integrated research – engagement, SEE research.

• Pressure on traditional and SEE research suppliers, UKSIF member, board member, committee members. SEE broker commission

• Engagement - RIN, investor collaboration

• Quarterly SEE report


Types of SRI

• Ethical/negative screening – Avoidance

• Best in class – Investment in leaders

• Constructive engagement – Dialogue & encouragement

• Shareholder activism – Confrontational engagementresolutions

• Sustainability theme investing/positive – Trend identification e.g. renewablescreening energy

• Integrated analysis – Risk & opportunity improve decision making

• Sustainable finance – Capital allocation to sustainable development solutions


SRI Biographies

Alexia Zavos, SRI

Alexia Zavos joined Cazenove in September 2006. She works with Katie

Gordon and focuses on the Social, Environmental and Ethical research

process across Pan Europe, ethical restriction implementation and Private

Client SRI marketing. Alexia joined from J M Finn where she was a

Private Client Fund Manager Assistant. Alexia has also worked at ISIS

(now F & C) and HSBC. Alexia worked with Katie for 6 months (SRI) in

2002 at Cazenove having graduated from Edinburgh University with an

MA in Geography. Alexia has 7 years investment experience and is a

Member of the Securities Institute (diploma).

DD: 020 34790244

[email protected]

.

Katie Gordon, SRI

Katie Gordon joined Cazenove in 2000. She is the Manager of Socially

Responsible Investment (SRI), focussing on the Social, Environmental

and Ethical research process across Pan Europe, ethical restriction

implementation and Charity SRI marketing. Katie joined from the

marketing company Swordfish where she was the founding account

director. Katie graduated from Bristol University with a 2:1 in Geography,

is a Board Director of (UKSIF) the UK Social Investment Forum and is

both a trustee and on the investment committee of Durrell Wildlife

Conservation Trust. Katie has 10 years of investment experience.

DD: 020 34790243

[email protected]

Regulatory Information and Risk Warnings

This document has been issued by Cazenove Capital Management. It is for information purposes only and does not constitute an offer to enter into any contract/agreement nor is it a solicitation to buy or sell any investment or to provide any services referred to therein. Cazenove Capital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove Investment Fund Management Limited (registered No. 2134680) each authorised and regulated by the Financial Services Authority provide investment products and services. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance.

The source of the data is Cazenove Capital Management unless otherwise stated.

Katie gordon

Economy & Finance

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