Responsible Investment: Celebrating our Successes in an Increasingly Challenging Environment

RIA Conference Banff, AB

June 1, 2015

Our time together

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The foundation of success

What does success look like?

Drivers of success

Storm clouds

Ensuring our “silver lining”

“If there is something to be changed in this world, then it can only happen through music.” Jimi Hendrix

Predictions

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I’ve got a poor track record

Responsible Investment

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Turn the clock back…

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“Hey farmer farmer Put away that DDT now Give me spots on my apples But leave me the birds and the bees Please! Don't it always seem to go That you don't know what you've got Till it's gone They paved paradise And put up a parking lot” Joni Mitchell, Big Yellow Taxi, 1970

Foundations of success: 1970s

Investment in Oppression, YWCA, May 1973 – a study of Canadian economic links with South Africa

Taskforce on the Churches and Corporate Responsibility (TCCR) formed in January 1975

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"I have not the slightest doubt that, were your

recommendations to be followed by the international

community and the white population of South Africa

left without any modern means of self-defence, they,

who almost alone have populated and developed

that remarkable country, would be eliminated as an

ethnic entity by the gruesome combination of

subjection, massacre and expulsion.”

Conrad Black, Chair of Massey-Ferguson

Foundations of success: 1980s

Public policy – Mulroney government’s active involvement in both environmental and

social issues – Environmental Protection Act (1988) – Acid Rain Accord (1991) – Strong stand against apartheid, recommending economic and diplomatic

sanctions against South Africa

Capital markets – Ethical Growth Fund (Vancouver City Savings Credit Union) – SUMMA Fund (Investors Group) – Environmental Investment Funds (Energy Probe) – Social Investment Organization

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Change is in the air

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“There's something happening here, But what it is ain't exactly clear” Buffalo Springfield For What It’s Worth, January 1967

What does success look like?

According to a survey across 3,344 executives, 86% viewed sustainability as a “top 3”, if not top, priority topic

The survey further revealed that the top drivers for executives to considering ESG issues are: alignment with the firm’s business goals, reputation management and improving operational efficiency

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Source: McKinsey & Company, Sustainability’s strategic worth: McKinsey Global Survey results, 2014

Sustainability is a top 3 priority for CEOs globally

What does success look like?

Source: GSIA, Global Sustainable Investment Review, 2014

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30.2% of total global assets under management are managed under an RI strategy

Source: UNPRI

What does success look like?

Collaboration among market actors Focusing Capital on the Long Term Launched in May 2013 by Canada Pension Plan

Investment Board and McKinsey focusing on how to promote long-term behaviour at institutional investors and companies

Since the launch 17 companies and investors have joined, including Blackrock, Singapore state investor GIC, New Zealand Superannuation Fund, Tata and Unilever

4 areas for action: Re-orient portfolio strategy; engagement & active ownership; improve dialogue between investors and corporations; shift board focus to support long-term strategy and sustainable growth.

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www.fclt.org

What does success look like?

Climate change – shifts in public opinion

Media – A sharp rise in media reporting put global coverage of climate

change in 2014 back near its 2009 peak

– The Guardian led the pack, with at least 1,338 climate stories published in 2014 – almost four per day

Capital markets – Recent AGMs at Royal Dutch Shell (98.9%) and Statoil (99.9%)

received nearly unanimous shareholder support for resolutions, filed by the “Aiming for A” coalition, demanding improved disclosure of climate strategies

Canadian Council of Canadian Academies – Asked by the Environment Canada and Natural Resources Canada

to assess how technology could reduce environmental Impact of oil sands production

– No “silver bullets”

– Sense of urgency

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What does success look like?

53 Canadian PRI signatories

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$459.53 $566.68 $517.93

$600.88

$1,010.79

$0.00

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

2006 2008 2010 2011 2013

Canadian RI Industry Growth (billions)

Source: 2015 Canadian Responsible Investment Trends Report, Responsible Investment Association

What does success look like?

14 Source: 2015 Canadian Responsible Investment Trends Report, Responsible Investment Association

Engagement

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“You can choose a ready guide in some celestial voice

If you choose not to decide, you still have made a choice

You can choose from phantom fears and kindness that can kill

I will choose a path that's clear

I will choose freewill”

Rush, Freewill, 1980

Drivers of Success

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Information age - demand for information (insights) will not disappear

“Obvious investment risks are few; hidden ones are plentiful” – Blackrock

“Hey hey, my my

Rock and roll can never die

There's more to the picture

Than meets the eye.

Hey hey, my my.”

Neil Young, Out Of The Blue, 1979

Drivers of Success: Value

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The good news is that the performance myth is dying.

Bring out yer dead!

I’m not dead yet!

Drivers of Success: Value

The mainstreaming of responsible investment is founded on the recognition that ESG issues can be material.

Academic and sell-side research strongly supports this view

It is a view also supported by the CFA, the SEC, McKinsey and Co., the Harvard Business Review, and many of the world’s largest institutional investors

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Drivers of Success: Regulatory Framework

Korean National Assembly passed two RI-related pieces of legislation in

late December – one focused on the mandatory disclosure of ESG information by listed companies – the other, on the National Pension Service, which now has legislative clarity with respect to taking ESG issues into consideration

After 14 years of discussion, Ontario is making changes to the Pensions Benefit Act that will require

funds to reveal whether, and if so how, ESG considerations are taken into account in investment policy.

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Drivers of Success: Retail

To be successful longer-term, RI has to connect to “main street,” not just “Bay Street”

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Drivers of Success: Values

Values will increasingly be an important part of the ESG discussion and mix

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Drivers of Success: Values

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Drivers of Success: Values

Values will increasingly be an important part of the ESG discussion and mix

It is not just about financial security for members, or safeguarding the pension promise – it’s about securing a world in which your plan members wish to retire into

"A good pension is worth nothing in a polluted and unsafe world. We intend to use the power of this money to bring a better world closer.” - Peter Borgdorff, Managing Director of PFZ (the second largest pension fund in the Netherlands with 2.6 million members and €156 billion AUM)

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Storm Clouds

Public Policy – United States

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Storm Clouds

Recent election results will most likely lead to a less friendly platform for sustainability issues, if not for ESG itself

Mitch McConnell - Senate Majority Leader – received more campaign money from coal companies than any other senator in

this last election cycle - fourth-largest recipient of oil and gas industry money

– “I’m not a scientist. I am interested in protecting Kentucky’s economy, I’m interested in having low-cost electricity.”

James Inhofe – Chair of the Environment and Public Works Committee

– Author of The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future

– “God’s still up there…“The arrogance of people to think that we, human beings, would be able to change what He is doing in the climate is to me outrageous.”

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Storm Clouds

Public Policy – United States – Canada

Canadian companies – sustainability pullback? Capital markets

– ESG integration is difficult – Value creation “proof of concept” hasn’t reached the tipping point – RI/ESG infrastructure (industry associations/organizations) facing more

challenging environments (funding, governance, mission drift)

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Storm Clouds: We Matter

RI/ESG has roots that go back more than 40 years in Canada and our success is underpinned by a strong foundation – we are a force to be reckoned with

BUT

Our success has now put RI/ESG on the radar screens of companies/ organizations/people that don’t like what we’re doing

QUESTION

Is RI/ESG’s foundation strong enough to withstand the backlash?

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Storm Clouds: We Matter

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“First they ignore you, then they ridicule you, then they fight you, and then you win.”

Storm Clouds: We Matter

Our industry will face well-funded, better organized and more ferocious adversaries than in the past

– Proxy advisory firms – regulatory scrutiny in Europe and North America

– Civil society • In October 2014 it was reported that HEG Technology (Chinese-based supplier to Lenovo Group,

Samsung, etc.) launched legal action against U.S.-based China Labour Watch subsequent the August 2014 investigative report on HEG’s labour violations

• In 2013 Canada’s Resolute Forest Products Inc. sought $5-million in damages and $2-million in punitive damages from Greenpeace and two of it’s activists for an allegedly false and misleading report.

Australia – Reaction to Australian National University’s decision to divest 7 fossil fuel companies was

unprecedented in its vitriol

– Australian Prime Minister Tony Abbott commented that it was a “stupid decision”

– ASX-listed Sandfire Resources, one of the companies affected by ANU’s decision, filed proceedings in the Federal Court of Australia against CAER, an Australian-based ESG research house 30

Silver Linings

Our industry’s ability to muster a collaborative and credible response will become increasingly important in allowing us to capture the opportunities available to us.

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Silver Linings

Collaboration – Among stakeholder groups (capital markets, civil society, corporate,

government) – Within stakeholder groups

“Co-opetition” occurs when companies interact with partial congruence of interests – Confronting risks (proxy advisory) – Leveraging Opportunities (engagement) – Leadership

Public policy

– GreenPAC (http://www.greenpac.ca/)

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Silver Linings: Capital Markets

Industry Groups (sustainability, ESG, RI, CSR, etc.) – Funding, governance, “mission” challenges – There is no RI/ESG organization in the “too big too fail” category

Consolidation is necessary

– Creative risk-taking and “political will” is required – Compromise required to forge “win-win” scenarios – Better outcomes when starting from a position of strength (without

the baggage of ego)

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One last request…

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Whatever it is you chose to do, wherever you chose to do it, and whomever

you choose to do it with, please keep in mind the immortal words of Raymond

McGuire and Brian Smith

Raise a little hell

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If you don't like what you got, why don't you change it? If your world is all screwed up, then rearrange it? Raise a little hell, raise a little hell, raise a little hell! Raise a little hell, raise a little hell, raise a little hell! If you don't like what you see, why don't you fight it? If you know there's something wrong why don't you right it? Raise a little hell, raise a little hell, raise a little hell! Raise a little hell, raise a little hell, raise a little hell! Trooper, 1978

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