closing panel presentation…

Jane AmbachtsheerToronto

Closing panel presentation…

Environmental Finance Workshop

University of Toronto, October 2004

Okay, so now what?Okay, so now what?

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Mercer Investment Consulting 2

“Socially responsible investing” Today’s umbrella…

“Socially Responsible Investing” is among the more ambiguous terms used in the investment industry today

Integrating social responsibility, governance, and environmental sustainability with investment (Mainstream investors)

The process of selecting or managing investments according to social or environmental criteria (Mission based investors)

Traditional Emerging


What Does this have to do with “Environmental Finance”?

Socially responsible investors typically separate non-financial indicators into three groups:

SE ESEE

Social Social Ethical Ethical Environ-mental

Environ-mental

Therefore, E is treated the same as SE …


Why hasn’t SRI become the “next big thing”?

It is associated with knowingly jeopardizing financial returns

Proponents of SRI are often dismissed on the grounds that they are pushing a social agenda (rather than a financial one)

Mainstream investors are not associated with an explicit social, ethical or environmental agenda

Fiduciaries may be reluctant to adopt SRI principles because they do not know what beneficiaries expect


SRI: Converging with the mainstream?

But a growing body of literature argues that

– corporate social performance can impact stock price

– SRI funds can produce risk/return characteristics comparable to those of traditional portfolios

and

SRI proponents argue that indications of superior social and/or environment performance can

– be a proxy for good management

– be a source of superior financial performance

Where does this knowledge leave investors?


The $1 million questionHow we tried to find out

In August 2004, we hosted an industry consultation with mainstream stakeholders

– “Even defining the issue is hard”

– “SRI is like any other issue investors face, it’s a world of gray”

– “We can’t make investment decisions based solely on SRI variables”

– “Hmm, why not use SRI as another input?”

– “In fact, should my investment manager look at these things in order to fulfil his fiduciary duties?”

– “As long as it has an aura of being ‘about a social agenda’ – trustees will not want to do it”

They started…

…and ended


SRI: Less agenda, more materiality

Industry Consultation: The conclusions

SRI needs to rebrand (sustainable or responsible investing?)

Proponents need a new angle

Overall, incorporating social and environmental criteria into investment decision making seems like a prudent thing to do (although need more empirical evidence of benefits)

But this isn’t happening today

How could a “new SRI” fit into the industry?


Converging agendasWhat were often cited night and day…

“Vice” funds Profit above all Singular financial

agenda

Mainstream Investors

Mission- based

Investors

“Nuts and berries” crowd

No sin stocks No weapons


Mission-basedInvestors


Converging agendas…are edging towards centre…

Triple-bottom-line performance

Internationally agreed codes and conventions

Risk/return framework

Mission-basedInvestors



Momentum investors

Mainstream investors

Mission-based investors

Very specific ethical criteria aligned to stakeholder groups

Converging agendas…to differ only at the margins?

All investors

Triple-bottom-line performance

Integrated investment analysis

Holistic risk/return framework


Implications of such convergence

Predictions

Widespread incorporation of social and environmental factors by investors in the decision making process could function to raise the bar for “corporate social responsibility” or CSR

This would raise the cost of capital for “riskier” (i.e. bad) firms, creating a financial reward for “good” firms

Bonus: This brings positive social change


Reality check: We’re not there yet! What can investors do today?

Delegate to/monitor social and

environmental risk analysis

by mainstream managers

Delegate to/monitor social and

environmental risk analysis

by mainstream managers

Invest in a niche

sustainable investment

product

Invest in a niche

sustainable investment

product

Discuss the issues,

enhance investment principles,

governance

Discuss the issues,

enhance investment principles,

governance

Develop proxy voting

guidelines (directly, or delegate) &

publish voting record

Develop proxy voting

guidelines (directly, or delegate) &

publish voting record

Discuss

Vote

Engage as a shareholder

(directly, or in consortium)

Engage as a shareholder

(directly, or in consortium)

Review existing

portfolios for exposure to

social & environmental

risks

Review existing

portfolios for exposure to

social & environmental

risks

Engage

Review

Delegate

Invest


Implementation - Pros and Cons of Various Strategies

Discuss Vote Engage Review Delegate Invest• Determine

relevant strategy • Fulfil fiduciary

duty• Demonstrate

active ownership• Convey activity

to stakeholders

• No restriction of investment universe

• Can influence companies’ behaviour

• (International: strongly encouraged by governments)

• More information should allow better decision making

• “E” is a small component of pension management

• Sustainability could be a winning investment style

• Avoids companies hit by adverse publicity

• “Feel good” factor

• Sustainability could be a winning investment style

• Requires effort/cost

• Unclear incentives, expectations

• Other priorities


• Unaccustomed to monitoring actively/what to ask


• Availability of “engagers”


• Process of “reviewing”


• Availability of experienced investors

• Difficult to monitor


• Reduced universe

• Difficult to decide criteria

• Can you really influence?

• Sector bias / volatile results

PR

OS

CO

NS


Expectations

Corporate governance and activism will remain ‘hot ticket’, ahead of social and environmental issues

Growth of engagement type products, and further emphasis on engagement/activism within mainstream investing

Most activity among large non-corporate plans (public plans, universities)

Evolution of specific approaches into measurable styles

SRI service/provider market consolidation

Role of clean technology/eco-venture cap?


Shaping the future

Growing evidence of materiality Good returns Corporate scandals Pressure from stakeholders/reputation risk Industry integration/sophistication International legislation Regional and global initiatives

– UNEP Finance Initiative, UN Global Compact, GRI, Carbon Disclosure Project, Investor Network on Climate Risk, Enhanced Analytics Initiative, NYSFA SRI Committee,

– Canada: TSFA SRI Lunch (Jan 2005), Conferences (SIO 2005, GLOBE, Venture Forum etc.), SRI Industry Consultations, these workshops!

Drivers Naysayers

Lingering “moral” reputation and fiduciary concerns

Lack of training/education

Change takes time

What should we call it?

Barriers

closing panel presentation…

Documents