An Introduction to Ethical, Sustainable and Responsible Investment

Draft Client PresentationXyz Financial Advisory Ltd

Date

For use by financial services professionals only

Agenda

• Introduction to Ethical / Sustainable & Responsible Investment

• Issues and Approaches• Fund strategies• Advice • Next steps• Addendum

Introduction: What is ‘ethical investment’ or ‘SRI’?

– Broadly defined as: ‘Any investment that considers environmental, social and ethical issues’ as part of its investment strategy.

– ‘Investment strategy’ can relate to the ‘buy’ and ‘sell’ decisions as well as what investment firms do with assets whilst they own them.

– A very broad and diverse group of fund options, known by many different names. ‘SRI’ is generally taken to refer to a wider group than ‘Ethical’.

How much is invested in SRI/ethical strategies?

• UK ‘Screened’ ethical/ themed SRI funds c£11bn (from £4 bn 10 years ago) – around 1.5% of UK retail investment market (EIRIS,2011)

• Eurosif (2009) estimate £5 trillion across Europe, of which 92% is institutional money

• UNPRI (United Nations Principles of Responsible Investment) membership $30 trillion – 1000 signatories in 5 year (2012)

Main issues considered include...• Environment

Environmental challenges, such; as climate change, pollution, biodiversity, environmental management, waste management, the use of natural resources – including water, forestry, mining

• SocialIssues that relate to people, such as; human rights, labour standards, child labour, equal opportunities, food supply

• GovernanceIssues relating to company management, such as; board structure, executive remuneration, bonuses, avoidance of bribery and corruption

• Traditional EthicalValues based and ethical concerns, such as; tobacco, armaments, pornography, alcohol, irresponsible marketing or advertising, animal welfare, animal testing

Main approaches include...

• Themed investment and positive screening - buying investments that are believed to be positive or beneficial – and/or fit within a ethical, social or environmental theme

• Avoidance or negative screening - avoiding companies that do not meet certain ethical, social or environmental criteria or standards

• Responsible engagement – using investment ownership as a means of influencing companies so that they behave more responsibly – improving environmental, social or governance standards

Ethical & SRI funds in practice:• In practice funds combine these issues and

approaches in many different ways. This can lead to many different SRI strategies as fund managers have different aims.

• Fund managers also have different investment strategies and focus on different types of clients who have a range of different needs.

• In addition – strategies can change over time as new issues emerge and opinions change.

• Because investors needs vary needs no single strategy that suits everyone.

• There are however commonly held views such as; ‘environmental , social and/or governance progress is necessary, is happening and will/is creating opportunities and threats.’

Ethical and SRI Funds can be grouped into ‘Styles’

Responsible Engagement

Sustainability Themed

Balanced Ethical

Environmental Theme

Traditional Ethical

Faith Based

Clean Technology

The good news is that these funds can be split into ‘Styles’ - based on their core characteristics (a combinations of their core issues & approaches)

The main Styles are:

Responsible Engagement

Sustainability Themed

Environmental ThemeFaith

Balanced Ethical

Traditional Ethical

SRI Styles – different fund strategies Different fund styles suit different investors

Ethical Values Financial Goals

Clean Technology

Benefit financially from being ‘ahead of the curve’ . Want fund manager to focus on environmental, social and governance risk /opportunity. Favours well informed companies or sector/market leaders. May want to encourage change.

Reflect personal values/beliefs by avoiding unethical industries or companies . May want to encourage positive progress and change.

Combine ethical considerations with business trends to help reduce risk and benefit from holding more responsible companies - and encourage positive change. Investor wants to feel comfortable with responsible, forward looking investment strategy.Fu

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Step 1• Decide - are you interested in bringing

ethical, social or environmental issues into your investment decision making?

• You decide - Yes / No

Step 2 • Identify your SRI Aims• If yes – you need to think through what your

aims are . We can then work out which SRI Styles may suit you best.

Step 3

• Combine SRI Aims/Styles with other financial information to work out which types of SRI investments may be suitable

• We identify relevant investment areas from which to select SRI options

Step 4• Identify funds that may suit both your

ethical/SRI and your financial needs• We draw up a shortlist of possible fund options

Step 5• Identify best fit options and make

recommendations• We agree which options suit your needs best and

for what proportion of your investment

SRI Advice Process

What next?

• You complete ‘SRI StyleFinder’ questionnaire to identify SRI Aims and best fit SRI Styles. Available at: www.sristylefinder.fundecomarket.co.uk

• We combine this with your personal and financial details and we take it from there...

Addendum (1): SRI Style classifications• Responsible Engagement options are regular or ‘mainstream’

funds, offered by many fund managers .They encourage positive change through dialogue and voting but do not normally directly impact investment strategy. Often not identified as SRI by fund managers.

• Sustainability Themed funds research a range of issues relating to the sustainability agenda when considering where to invest. They aim to hold positive, forward-looking companies, with strong environmental and social credentials. Fund managers typically favour companies that are well placed to benefit from societal, regulatory and legislative change.

• Balanced Ethical funds are ethically screened funds that balance the positive and negative aspects of companies across a range of ethical, social and environmental issues. Likely to invest in most sectors, may favour market leaders or ‘best in sector’ companies. Tend to have fewer absolute negative exclusions and be ‘less strict’ than ‘traditional ethical’ funds.

• Environmentally Themed funds significantly integrate environmental opportunities and risks into their investment decisions. Environmental funds may focus on a range of environmental themes or specialise in a single issue or resource. Some environmental funds consider social and ethical issues alongside environmental criteria.

• Traditional Ethical funds primary approach is clear, strict avoidance of a range of negative ethical or ‘values based’ activities. They are likely to also consider environmental and social issues, screening out companies that do not meet the fund’s negative criteria. They may

also have positive criteria but these won’t normally override the fund’s negative screens.

• Faith Based funds invest in line with a specific set of religious values. This is a small group of funds with few investment options at present.

• Clean Technology funds specialise in market leading clean technology and environmental solutions companies. Fund managers often focus on environmental markets and may favour pure-play companies that are well placed to lead change. These are thematic funds and do not have ethical screening criteria.

• Other - these do not represent the whole market as (eg) specialist/unregulated options are not included in Fund EcoMarket tool.