The Environmental, Social and Governance (ESG) Implications of Sovereign Wealth Funds’ (SWF)...

TBLI Amsterdam – November 2008

Afshin Mehrpouya

New York

Paris

Toronto

London

San Francisco

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Tokyo

Innovest UncoveringHidden Value forStrategic Investors

Sovereign Wealth Funds

Who are they?

Are they game changers in ESG investing?

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Innovest is an investment research and advisory firm which focuses on “non-traditional,”

drivers of investment risk and returns, including companies’ performance on

environmental, social, and strategic governance (ESG) issues.

Core products

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Sector reports

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Global Compact Screen

Carbon Audits

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Research coverage:

- 2300 companies globally

- 70 MSCI industry sectors

Headquartered in New York with 8 offices in 7 countries, 4 continents.

8 out of the top 25 global asset managers in the world use Innovest research.

70 clients globally including: UBS, HSBC, SSgA, ING, ABP, BNP Paribas, CalPERS

Ranked # 1 independent research provider by 2006 & 2007 Thomson Extel Survey

Introduction to Innovest

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Sovereign Wealth Funds – A perspective

SWFs are large pools of capital controlled by a government and invested in private markets (abroad?), against which the government has no liability

What are they?

Different from:

•Pension funds

•Government owned and/or managed companies

•Central Banks / Foreign Reserves

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Government surplus from commodities ( e.g. Kuwait Investment Authority, Abu Dhabi Investment Authority, Chilean Sovereign Wealth Fund)

Non-commodity surpluses [e.g. CIC (China), GIC & Temasek (Singapore)]

– Usually aimed at exchange rate or inflation control

– Usually a debt in local currency from central bank to the fund Other sources of government surplus

– Privatization (Australian Sovereign Wealth Fund)

– Superannuation support (New Zealand Superannuation Fund) ?Pension / social security’s savings?

– The French Phenomenon (National Strategic Investment Fund)

– Protection of national champions using

Sources of capital

Sovereign Wealth Funds – Risk and Opportunities

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S

Then, why are they in the spotlight?

– Commodity price boom

– Credit crisis

– Increased risk appetite of national governments

– A few highly publicized exposures

• Temasek and telecom case in Indonesia and Thailand

– Weaker US Dollar and the search for an escape route


Are they a new phenomenon?

Source: Various - SWF websites, IMF, etc. – upper estimation limits in all cases

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Some of the larger transactions:

Sovereign Wealth Funds – A Perspective

Source: Various; SWF websites and news sources

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How large are they?


Source: Morgan Stanley; Sovereign Wealth Funds: A Growing Global Force in Corporate Finance

USD 10 trillion by 2015, given the historical levels of foreign reserve growth and launch of new SWFs (Japan, India, France, etc.)Source: Morgan Stanley

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Intergenerational Savings (e.g. Norwegian Government Pension Fund, Kuwait Investment Authority, etc.)

– Long term

– Strict government withdrawal covenants

– Lower return pressure Oil Stabilization Fund (e.g. Russian Oil Stabilization Fund)

– Short to medium term

– Low risk tolerance

– Need higher liquidity Reserve Investment Entities [e.g. China (CIC), Singapore (Temasek, GIC), etc]

– Mostly non-commodity surpluses

– Need higher returns

– Higher risk tolerance Development funds (e.g. Nordic Development Fund, European Development Fund, etc.)

– Goal oriented

– Not return focused

– Small relative size ?Protection of The ‘National Champions’ against ‘predator investors’?

Fund Mission


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I

Categories and risk appetites


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Sovereign Wealth Funds – An ESG Perspective

Why should SWFs integrate ESG into their investment practices?

What are the extra-financial risks and opportunities posed by SWFs for their co-investors?

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Why should SWFs integrate ESG into their investment practices?

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The ESG Challenge

Financial Performance

ES

G

ESG

Strategic (political) objectives

Traditional Investors SWFs with potential non-commercial agenda

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SWFs sourced from oil– Hedging against oil risks through investing in Clean Energy

All long term funds– Reaping long term superior ESG integration returns

– Diffusion of national values and commitments

• Commitment to engagement aiming at improving environmental and social performance based on diffusion of Norwegian GPF, NZ SWF

• Carbon portfolio audits for Kyoto Signatories?

– Image concerns

• An ESG agenda can allay some of current public & regulatory concerns about SWFs

– Pursuing national & regional social and environmental agendas

Key ESG Motifs for SWFs

Norwegian Government Pension FundThe overarching objective of the active

ownership effort is to safeguard the financialinterests of the Pension Fund. The ethical

guidelines are premised on favorable returns over time being dependent on sustainable development, in the financial, ecologic and

social sense.

Source: NPF Report to Storting 2008

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SWF ESG Trends

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Who can help get them more involved?

ESG investment forums and codes (PRI, GC, etc.)

Asset managers

Publicized SWF Practices Analysis and Ratings

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What are the risks and opportunities posed by SWFs for the co-investors?

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All non-transparent funds

– Influence aiming at non-economic gains

• Conflicts with the economic objectives of co-investors and the investee

Passive SWF Investors

– Dilution of shareholder voting power

Stabilization funds

– Possibility of short to term sovereign wealth investments

• Instability in the target firm and/or capital markets

SWFs of politically unstable countries

– Unpredictability of behavior in the face of political changes

All SWFs

– Lack of sufficient outsourcing management or internal management skills

• Unpredictable fund behavior both on portfolio adjustments and engagement

Key SWF risks and opportunity for the target companies

Key Risks

Better access to the SWF’s regional markets and networks

Privileged access to SWF liquidity in followings financing rounds

Key Opportunities

CIC has invested USD 5 billion in Morgan Stanley and 3 billion in Blackstone without demanding any

managerial role and claiming passivity.

Furthermore it declined the offer of a board seat offered by UBS, though it may exercise its voting

stake in some cases

Source: Financial Times

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Innovest’s SWF opportunities and risks analysis platform

Investment time horizon

Stated Investments horizon / type of reporting in national accounts

Scale of influence on the investee

Passive or active

Frequency of portfolio adjustments Percentage of shares

Regulations for withdrawal of money from the fund Voting rights

Economic mandate

Stated mandate Seats on the board

Transparency of the investment process Type of government

Independence of Board of Governors

SkillsInternal & external management teams and control processes

Type of legal entity

Environmental and Social Opportunities

Specific E&S investments Mandate

Degree and type of dependency on external entities

E&S Engagement practices

Proxy voting analysis

Ethical risks Mitigation

Code of ethics

Portfolio transparencyEthics governance platform

Portfolio deviations from market (the visible portion)

Portfolio analysis for inter-investee conflict of interests (the visible portion)

GAPP Compliance

Rating

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SWF comprehensive report

– Comparative opportunities / risks analysis

– Analysis of best practices

SWF profiles and ratings

– Detailed factor analysis

– Relative / absolute rating

– Outlook


Innovest’s SWF opportunities and risk analysis products

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Afshin Mehrpouya

Senior Analyst - FranceInnovest Strategic Value Advisors

Tel: +33 (0)1 44 54 04 [email protected]

www.innovestgroup.com

Thank you.

Perrine Dutronc

Managing Director - FranceInnovest Strategic Value Advisors

Tel: +33 (0)1 44 54 04 [email protected]

Andy White

Managing Director - UKInnovest Strategic Value Advisors

Tel: +44 (0) 20 7073 0470 [email protected]

The Environmental, Social and Governance (ESG) Implications of Sovereign Wealth Funds’ (SWF)...

Economy & Finance

Transcript of The Environmental, Social and Governance (ESG) Implications of Sovereign Wealth Funds’ (SWF)...