session iii - socially responsible, esg, and impact investing · 2019-10-23 · socially...
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© Copyright 2019 by K&L Gates LLP. All rights reserved.
Sasha Burstein, Partner, San FranciscoSonia Gioseffi, Partner, San FranciscoMichael McGrath, Partner, BostonTeresa Wells, Managing Director – Tiedemann Advisors
Socially Responsible, ESG, and Impact Investing
2019 SAN FRANCISCO INVESTMENT MANAGEMENT CONFERENCE
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TRENDS IN ESG, SRI AND IMPACT INVESTING Investors are increasingly focused on Environmental,
Social and Governance Issues (ESG), Socially Responsible Investing (SRI) and Impact Investing
Global Sustainable Investing Alliance reports that $23 trillion in assets around the world have been committed to socially responsible investing strategies
The 2018 GIIN Annual Impact Investor Survey estimates that 229 of the world’s leading impact investor organizations collectively manage over USD $228 billion in impact assets across the globe
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3
1.6%1.6%
3.2%3.2%3.2%
4.8%8.1%8.1%
9.7%17.0%
20.0%21.0%
27.0%39.0%
67.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
MedicalHedge funds
Cash and cash equivalentsCommodities
Development bank bondsPublic Equity (funds)
Fixed incomeGreen bonds
Public equity (direct)AlternativesPrivate debt
MicrofinanceReal Estate
EquityPrivate equity
Figure 1.28 Most common asset classes for impact investing
Source: The UBS / Campden Wealth Global Family Office Report 2018 Note: Respondents were able to select multiple options
Chart1
Medical
Hedge funds
Cash and cash equivalents
Commodities
Development bank bonds
Public Equity (funds)
Fixed income
Green bonds
Public equity (direct)
Alternatives
Private debt
Microfinance
Real Estate
Equity
Private equity
Series 1
Figure 1.28 Most common asset classes for impact investing
0.016
0.016
0.032
0.032
0.032
0.048
0.081
0.081
0.097
0.17
0.2
0.21
0.27
0.39
0.67
Sheet1
Series 1
Medical1.6%
Hedge funds1.6%
Cash and cash equivalents3.2%
Commodities3.2%
Development bank bonds3.2%
Public Equity (funds)4.8%
Fixed income8.1%
Green bonds8.1%
Public equity (direct)9.7%
Alternatives17.0%
Private debt20.0%
Microfinance21.0%
Real Estate27.0%
Equity39.0%
Private equity67.0%
To resize chart data range, drag lower right corner of range.
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1.6%
12.0%
15.0%
21.0%
22.0%
24.0%
25.0%
28.0%
30.0%
43.0%
49.0%
49.0%
51.0%
0%
10%
20%
30%
40%
50%
60%
Technology
Access to finance
Sustainable infrastructure
Healthcare and wellness
Job creation
Sustainable consumer products
Base of pyramid services
Environmental conservation
Energy and resource efficiency
Women's empowerment
Housing and community development
Agriculture and food
Education
Figure 1.29 Most common areas of impact investments
Source: The UBS / Campden Wealth Global Family Office Report 2018 Note: Respondents were able to select multiple options
*McCreless, Michael. ’Toward the Efficient Impact Frontier’, Stanford Social Innovation Review. Winter 2017, Volume 15, Number 1.
Chart1
Technology
Access to finance
Sustainable infrastructure
Healthcare and wellness
Job creation
Sustainable consumer products
Base of pyramid services
Environmental conservation
Energy and resource efficiency
Women's empowerment
Housing and community development
Agriculture and food
Education
Series 1
Figure 1.29 Most common areas of impact investments
0.016
0.12
0.15
0.21
0.22
0.24
0.25
0.28
0.3
0.43
0.49
0.49
0.51
Sheet1
Series 1
Technology1.6%
Access to finance12.0%
Sustainable infrastructure15.0%
Healthcare and wellness21.0%
Job creation22.0%
Sustainable consumer products24.0%
Base of pyramid services25.0%
Environmental conservation28.0%
Energy and resource efficiency30.0%
Women's empowerment43.0%
Housing and community development49.0%
Agriculture and food49.0%
Education51.0%
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Source: The UBS / Campden Wealth Global Family Office Report 2018 Note: Respondents were able to select multiple options
Chart1
High costs
Scale of the deals (too big / too small)
Insufficient knowledge / skills
High levels of risk
Lack of time / staff resources
Lack of government support
Returns don’t meet expectations
Lack of supportive / knowledgeable advisers
Lack of track record data on performance
Market at early stage / immature
Difficulties identifying attractive deals / funds or lack of deal flow
Due diligence challenges
Difficulties measuring social / environmental impact
Series 1
Figure 1.30 Most common challenges faced in impact investing
0.11
0.17
0.2
0.2
0.2
0.22
0.22
0.29
0.31
0.32
0.4
0.43
0.52
Sheet1
Series 1
High costs11.0%
Scale of the deals (too big / too small)17.0%
Insufficient knowledge / skills20.0%
High levels of risk20.0%
Lack of time / staff resources20.0%
Lack of government support22.0%
Returns don’t meet expectations22.0%
Lack of supportive / knowledgeable advisers29.0%
Lack of track record data on performance31.0%
Market at early stage / immature32.0%
Difficulties identifying attractive deals / funds or lack of deal flow40.0%
Due diligence challenges43.0%
Difficulties measuring social / environmental impact52.0%
To resize chart data range, drag lower right corner of range.
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GREENWASHING Greenwashing is the practice of making an
unsubstantiated or misleading claim about the environmental benefits of a product, service, technology or company practice.
Greenwashing can make a company (or an investment strategy) appear to be more environmentally friendly than it really is.
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GREENWASHING Advisers Act Rule 206(4)-1(a)(2):
“It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business
within the meaning of section 206(4) of the Act for any investment adviser … to publish, circulate, or
distribute any advertisement … which contains any untrue statement of a material fact, or which is
otherwise false or misleading.”
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ERISA INVESTORS ARE LARGE ASSET OWNERS
Source: Investment Company Institute, “Retirement Assets Total $29.1 Trillion in First Quarter 2019”. https://www.ici.org/research/stats/retirement/ret_19_q1
https://www.ici.org/research/stats/retirement/ret_19_q1
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DEPARTMENT OF LABOR GUIDANCE The Department of Labor (“DOL) has a longstanding position that
ERISA fiduciaries may not sacrifice investment returns or assume greater risks as a means of promoting collateral social policy goals
Series of DOL guidance. Most recent guidance issued in April (Field Assistance Bulletin 2018-
01). Clarification? Warning bell? ERISA fiduciaries must not too readily treat ESG factors as
economically relevant; rather, an evaluation of an investment opportunity should be focused on financial factors that have a material effect on return and risk.
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ERISA CONSIDERATIONS Can ESG-themed investments be included in a 401(k) investment
lineup? Can ESG-themed investments be a default investment option? Can a target date fund allocate to ESG-themed investments? What should an investment policy statement say about ESG
factors? What process should a fiduciary follow in considering ESG factors? Does the DOL’s guidance apply to IRAs? Public plans? Are there any specific considerations for defined benefit plans?
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ERISA AND THE POLITICAL CLIMATE “Are these shares being voted to drive
productivity in our economy and increase investors' return on their hard-earned investments, or are intermediaries using other people's money unbeknownst to them in order to advance environmental, social and other political policies?”
-Sen. Mike Crapo, chairman of the Senate Banking Committee
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SIGNIFICANT SHAREHOLDER REPORTING Section 13 of the Securities Exchange Act of 1934
requires reporting of efforts to influence or control a public issuer Schedule 13D filings are cumbersome and require disclosure of
the investor’s intent Filing obligations can also be imposed when acting as a “group”
with others Impact and engagement investing for environmental and
social goals Advocating for specific actions Advocating for governance goals
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IMPACT INVESTING DEFINED
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Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.
Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.
- Global Impact Investing Network
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DIFFERENT APPROACHES TO IMPACT INVESTING
INTEGRATED ESG (ENVIRONMENTAL, SOCIAL & GOVERNANCE)Active public equity and fixed income strategies that integrate impact evaluation into investment process
VALUES ALIGNED STRATEGIESPassive public equity and fixed income strategies that use negative and positive screens
THEMATIC STRATEGIESPrivate equity, venture capital, and private debt strategies within specific impact themes
EXAMPLE:Account that invests in stocks to replicate the S&P 500 Index, but client chooses to screen out coal stocks, gun manufacturers, and tobacco companies, and positively shift the portfolio towards companies with female representation in board and firm leadership.
EXAMPLE:Taxable bond strategy offering broad market exposure but seeks to invest proactively in bonds benefitting affordable housing or green initiatives but evaluates the use of proceeds on every bond in the portfolio to ascertain both the credit worthiness of the borrower and their impact on the community.
EXAMPLE:Regionally focused private timber strategy focused exclusively on sustainable practices. Offers ancillary benefits via wetland mitigation banking, ecosystem services and conservation, and also works in partnership with indigenous communities to restore tribal lands.
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For those seeking to advance environmental, social, or governance outcomes through active shareholder engagement, we offer a robust shareholder engagement solution – including proxy voting and co-filing resolutions in partnership with leading advocacy organization, As You Sow. We believe effective impact investing is not just about what you own, but also your role as an investor/ owner. We help clients develop strategies to elevate your voice to enhance corporate transparency, drive environmental outcomes, and advance corporate social responsibility.
SHAREHOLDER ENGAGEMENT
LEVEL 1: Vote Client drives
proxy voting No restriction on
$ value, # shares, or time owned
Anonymous
LEVEL 2: Proxy Vote Impact Manager
votes proxies No restriction on $
value, # shares or time owned.
Anonymous
LEVEL 3: Co-file Utilize company
such as As You Sow to co-sign resolutions
Must own $2,000 of the stock for 1 year+
Name is public
LEVEL 4: File Utilize company
such as As You Sow to file a resolution.
Must own $2,000 of the stock for 1 year+
as public
HOW Shareholders
CAN ENGAGE
QUESTIONS FOR
Shareholders
Do you have stocks in your
portfolio that are available for proxy
voting. Do these stocks represent
companies that are negligent or
lack transparency in their business
practices?
If you are not voting your proxy
vote, who is? What are the guidelines by which they are
voting and are these guidelines in
line with your values?
Do you wish to participate in co-filing
resolutions and co-resolutions?
Do you wish to directly engage with
corporations by filing your own
resolutions.
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1. Changing Demographics – 65% of women and 85% of millennials are interested in impact investing
A generational shift in social attitudes is driving the adoption of impact strategies generally.
A 2013 survey of 5,000 investors found that 40% of Millennial respondents felt “improved society” is the foremost business imperative.
2. Climate Change is almost universally acknowledged as a reality
3. Increasing corporate transparency –greater access to ESG data has enabled rapid integration of ESG factors into investment decisions
4. Growing evidence that ESG factors are material to financial performance
WHAT’S DRIVING DEMAND?
Source: PIMCO, June 26, 2017: “10 Reasons Impact Investing is Growing”
Source: World Economic Forum
Source: Deloitte, 2018
Primary Purpose of Business According to the Millennial Generation, % of Survey
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Impact investing is growing rapidly. In 2016, ~$8.8 trillion is subject to SRI versus $19.2 trillion in US domiciled assets in total. (USSIF, ICI, 2016)
U.S. IMPACT ASSETS UNDER MANAGEMENT GROWING
US Professionally Managed Assets That Incorporate ESG, SRI, Impact Or Shareholder Engagement
Practices
Source: USSIF, ICI, 2016
ESG: Environmental, Social, GovernanceSRI: Socially Responsible Investment
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PROBLEM AND OPPORTUNITY
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