adding sustainable investing sustainable investing to your ... · tobacco, and gaming quakers...

4/26/2016

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Adding Sustainable Investing

To Your Practice

Adding Sustainable Investing

To Your Practice

Patrick Drum MBA, CFA, CFP®

Portfolio Manager

Craig Churman MBA, AIF®

Vice President - Product Development

© 2015 Saturna Capital Institutional Use Only • Not For Public Distribution Page of 28

Executive Summary

• What is Sustainable Investing?

• What Does Sustainable InvestingMean To Your Practice?

• How To Position Yourself To Have “That” Conversation and Position Yourself As The Solution

• Case Studies

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SustainabilityThe ability to be maintained at a certain rate or level.1

But what does it really mean?

• Socially Responsible Investing (SRI)

• Sustainable and Responsible Investing

• Environmental, Social, and Governance (ESG) Factors

• Impact Investing

• Advocacy Investing

• Integrated Finance

• Faith-Based Investing

• Values-Based Investing

1 New Oxford American Dictionary

3 © 2015 Saturna Capital Institutional Use Only • Not For Public Distribution Page of 28

Growing Market

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1997 1999 2001 2003 2005 2007 2010 2012 2014

Overlapping Assets

Shareholder Resolutions Only

ESG Incorporation Only

Source: US SIF Foundation

1997-2014, in billions

Sustainable and Responsible Investing in the US

$6.7 trillion

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A Brief History of Sustainable Investing

Methodists “firmly opposed” the slave trade; employed negative screens for alcohol, tobacco, and gaming

Quakers shunned slave trade and war

profiteering

Sources: US SIF Foundation; SRI Conference on Sustainable, Responsible, Impact Investing; Saturna Capital

Pioneer Fund screened “sin” stocks (negative screening)

1700s 1758 1928 1971Pax World

founded

1960sDawn of “shareholder

activism”

1980s

Anti-Apartheid movement and Bhopal, Chernobyl, Exxon Valdez catastrophes galvanize institutional investors and research firms to begin collecting data and reporting on environmental concerns

US SIF

Calvert Investments

founded

1976 1984 1989Ceres

1990s 2000s 2010s

SRI, ESG, Sustainable Investing go “mainstream”

Saturna Capital founded

UN PRI - Principles for Responsible Investment

2006

Alternative Investing as a concept gains traction

2014$6.7 trillion in

Sustainable and Responsible

strategies

Carbon Disclosure Project

SRI in the Rockies

Domini Social Index


Ocean Detritus

Sources: Wall Street Journal; Science; University of Georgia; University of California; Sea Education Association

Origin by country of mismanaged plastic waste in 2010

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UN PRI Signatories by Continent

Source: UN PRI, 2014 Report on Progress

Europe

438 Asia

34

Oceania

111

Middle East

1Africa

35Latin America

39

North America

156


Why Sustainable is Important to You

• Increase interest with a broader audience

• Strategies appeal to UHNW

• Prepare for inter-generational wealth transfer

• Value to younger clients

• Your competition is doing it

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Evolution of Sustainable Investing

Issues Managers Consider

Faith Based Environmental Social Governance

Negative Screens Clean TechnologyHealth Care and

DiseaseCorporate

Responsibility

Personal Values Water Education Philanthropy

JudaismChristianityIslam

Waste Management Workplace Equality Compensation

Energy Political Risks Diversity

AdvocacyResource Management

Labor Practices Long-term Focus


Impact Themes With Asset ClassesStable Assets Growth Assets Inflation Protection

Cash /Cash Alternatives

Fixed Income Public Equity Hedge Funds Private Equity Real EstateCommodities,

Timber & Other Real Assets

Climate ChangeGreen Bank

Deposit

Tax-Exempt Green Bonds

Positive & Negative Screening

CO2 TradingClean Tech

Venture CapitalGreen REITs

EnergyScreened

Corporate BondsExchange Traded

FundsRenewable Energy

Energy Efficiency Venture Capital

Sustainable Feedstocks

WaterCorporate

Infrastructure Bonds

Unit Investment Trust, Closed End

FundWater Funds

Water Technology Venture Capital

Water Rights

Community Development

Community Bank CDs

Foreclosure RepairShareholder Proxy

Voting

Microfinance Institutions Debt /

Equity

Community Development

Venture Capital

Transportation - Smart Development Funds

Habitat Conservation

Social EnterprisesSocial Enterprise

CreditMicro-Cap Listed Social Companies

Small & Medium Enterprise

Conservation / Ecotourism

Health & WellnessStructured Public

NoteConsumer Product

Venture CapitalOrganic Farming

Sustainable Development

Trade Finance Guarantee /

Deposit

Smart Growth Municipal Bonds

Thematic Screening

Blended Debt Equity Hybrid

Structures

Ranch Land, Agriculture

Sustainable Timber

EducationLinked Deposit /

GuaranteeCharter School

BondsEducation Private

EquityUniversity Green

Building

So

cia

l, E

nv

iro

nm

en

tal, o

r B

len

de

d Im

pa

ct

Th

em

es

Source: Rockefeller Philanthropy Advisors, Solutions for Impact Investors

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Hot Topics

• Fossil Fuel Divestment

• Green Bonds

• Capital Advocacy

• Fiduciary Responsibility

• Performance Drag?


Fiduciary Responsibilities• 1994 - Unified Prudent Investor Act

• “No form of so-called ‘social investing’ is consistent with the

duty of loyalty….”

• 2006 - UN PRI - Six Principles For Responsible Investment

• “Unprecedented environmental and social pressures …have

become material issues for business.”

• 2009 - UNEP Finance Initiative

• “It is an obligation on pension fund trustees … to state in their

Statement of Investment Principles what the fund’s guidelines

are on responsible investment….”

• 2015 - Current Evolution

• “Embedding Sustainability in Valuation”

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Performance Drag?

Minimal impact from sustainable strategies

• June 2011: ‘Corporate Environmental Management and

Credit Risk’ - Rob Bauer, Daniel Hann, Maastricht University

• Environmental concerns are associated with a higher cost of debt financing and lower credit rating …

• …while proactive environmental practices are associated with a lower cost of debt.


Performance Drag?

Minimal impact from sustainable strategies

• September 2011: ‘Does corporate social responsibility

affect the cost of capital’ - Sadok El Ghoul, Omrane

Guedhami,Chuck C.Y. Kwok, Dev R. Mishra

• Firms with better Corporate Social Responsibility

scores exhibit:

• Higher valuation and lower risk

• Lower equity financing costs through alignment

of corporate leadership with the interests of

shareholders and stakeholders.

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Studied To Death

Number of Sustainability Articles By Year

Source: Novais, João, Serralvo; African Journal of Business Management


Performance Drag

“Market” index is calculated from the value-weight return of all CRSP firms incorporated in the

US and listed on the NYSE, AMEX, or NASDAQ that meet inclusion criteria set by the

CRSP. “Market Ex-Energy Sector” index represents those same companies but excludes companies in the Energy sector.

The data in this chart was compiled by the University of

Chicago Center for Research in Security Prices (CRSP) with calculations applied by Saturna

Capital.

†

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Resources• US SIF (www.ussif.org)

The Forum for Sustainable and Responsible Investment

• UN PRI (www.unpri.org)Principles for Responsible Investment

• GSIA (www.gsi-alliance.org)Global Sustainable Investment Alliance

• SRI in the Rockies (www.sriconference.com)Conference on Sustainable, Responsible, Impact Investing

• Ceres (www.ceres.org)Mobilizing Business Leadership for a Sustainable World


Incorporating Financial & Non-Financial

Sustainable strategies should seek companies with:

• Long-term focus

• High quality operations

• Sustainable growth rates

• Strong balance sheets

• Risk consciousness

• Management stake

• Low debt

• Positive sustainability factors

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What Does It Mean To Your Practice?• Relationship Catalyst

• Not just performance driven

• Helps personal intangibles become tangible

• Helps to define success, purpose with clients

• Inter-generational wealth transfer (helping to keep assets in house)

• Know Your Client (Rule 405)

• Helps you Know Your Client better

• Be sure to define strategy parameters (success, exclusions, etc.) in management agreement


Position Your Practice As The Solution

Identifying client and prospect types

Conventional Practice Philanthropic

Integrated

Ethical / Advocacy

Impact / Thematic

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Identifying client and prospect types

Exclusion Proactive

Single Agenda

Single Security Exclusion

Ethical /Advocacy

Broad Scope

Industry ExclusionsIntegrated /Best in

Class



Listening is KEY

• Key Words

• Local market

• Buy locally

• Find better companies

• More involved in community: philanthropy / volunteering / church

• Want to make a difference

• Leaving a legacy

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How to have “that” conversation

• Don’t ask:

• Do you want ‘sustainable investments’?

• Instead, open a dialogue:

• I noticed you have …

• Word recognition: local farms, good or better companies

• More clients expressing an interest in sustainable investing or seeking “good companies that can also make a difference”


Position Your Practice As Sustainable

Crafting the value proposition: why clients should go to you for a sustainable solution

• Benefit:

• Integrating personal values into investment plan gaining interest.

• Link Benefit to Value Delivery:

• I invite you to keep me in mind when you’re ready to have that discussion.

• Differentiation:

• I know how I can help you achieve your goals.

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Case Studies

• Financial Planning

• Defining success

• Making a difference

• Legacy Planning

• Broker / Charitable Organizations

• Retain assets corporate trustee

• Inter-generational wealth transfer

• Donor Advised Funds


Presenter Bios

Craig Churman MBA, AIF®

Vice President — Product DevelopmentPatrick Drum MBA, CFA, CFP®

Portfolio Manager

Patrick T. Drum, Research Analyst and Portfolio Manager, joined Saturna Capital in October 2014. He is the portfolio manager for the firm’s institutional subsidiary, Saturna Sdn Bhd in Kuala Lumpur Malaysia, directing the sharia compliant fixed income investments.

He is a select member of the United Nation’s Principles for Investment (UNPRI) Fixed Income Outreach Subcommittee and an adjunct professor of finance at Pinchot University, formerly known as Bainbridge Graduate Institute (BGI). Mr. Drum has nearly ten years of experience integrating ESG considerations into fixed income portfolio management.

He holds a BA in economics from Western Washington University and an MBA from Seattle University Albers School of Business. He is a Chartered Financial Analyst Charterholder (CFA) and a Certified Financial Planner®. Mr. Drum has nearly twenty years of investment experience in serving institutions and private clients throughout his career at UBS Financial Services, Moss Adams, Washington Mutual and Morgan Stanley.

Craig Churman, Vice President, Product Development, joined Saturna in August 2011. He is a graduate of West Virginia University, with a BS in Business Administration, and has an MBA from the University of Pittsburgh. Mr. Churman earned the Accredited Investment Fiduciary® Designation from the Center for Fiduciary Studies in 2013.

Prior to Saturna, he spent ten years in sales and product development at PNC Global Investment Services, transitioning to Bank of New York Mellon when it acquired PNC GIS in July 2010.

With over thirty years of experience in financial services, Mr. Churman has held positions in client services, product development, mergers and acquisitions, and finance, at firms such as Federated Investors, BISYS, and Invesmart.

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