Sagarika Chatterjee, General Manager, PRI

ESG integration by asset managers - a PRI perspective

BC Pension Forum

Vancouver, 28th February 2014

THE SIX PRINCIPLES

Signatories commit to the following:

WHAT IS ESG INCORPORATION?

Environmental, Social and Governance (ESG) factors:

Climate change, water, UN human rights conventions, remuneration

How can ESG factors be incorporated into investment analysis and decision-making?

Screening, thematic, integration or combination

Integration = inclusion of ESG factors into valuation

ESG INTEGRATION IN PRACTICE

Integrated Analysis: How Investors are addressing Environmental, Social and Governance factors in fundamental equity valuation, PRI, 2013

Integrated fundamental analysis: a method of integrating ESG factors into investment decisions

A standard research structure can be used:

EXAMPLE: ECONOMIC ANALYSIS

Newton Investment Management: water constraints in China

Key take aways:

Risks are more immediate than opportunities, particularly in water intensive sectors such as agriculture, textiles and power generation.

2012 CDP Global Water Report reveals 53% of 185 Global 500 companies (38% in 2011) experiencing negative impacts from water-related challenges including water scarcity, flooding, rising compliance costs, regulatory uncertainty and poor water quality in the past five years.

Structural steps towards sustainable economic growth may lead to costs for companies in the short term.

However sustainable governance structures support long-term investment opportunities and advantages for companies that already manage ESG factors well.

EXAMPLE: VALUATION TOOL

Citi: Adjusting the discount rate for mining stocks

Key takeaways:

Citi’s Sustainable Mining Index identified companies best positioned to create long-term shareholder value given their current sustainability profile.

Five indicators of sustainability used to adjust mining company discount rates. These indicators were mine development, country exposure, commodities extracted, the ability to control HSEE in operations and sustainability governance.

For example, Citi regarded a company’s ability to manage ESG risks as fundamental to developing mining projects on time and to budget and therefore to future earnings capacity.

Mining company WACCs were adjusted for sustainability risk and target prices revised accordingly.

SIMPLE WAYS TO ENCOURAGE YOUR INVESTMENT

MANAGERS TO INTEGRATE ESG

Ask questions in performance review meetings:

What ESG topics are on your radar in 2014?

Can you explain how ESG analysis is integrated into investment decisions?

Be clear you want more than “lip service:”

Ask for specific company examples from the last 12 months

Compare manager responses and highlight good practice

Understanding why a fund manager considered and assessed a specific ESG factor as “immaterial” provides deeper insight into the quality of analysis underway and how your portfolio is being managed

HOW COULD YOU WORK WITH YOUR MANAGERS TO

ENCOURAGE ESG INTEGRATION?

What is the context for you?

What is the funding position? Where are ESG risks and opportunities for integration?

Consider fund time horizon, ESG risk profile and time horizon, number of fund managers and resourcing

Where are you today?

Benchmark your managers, investment committee review

Develop a responsible investment policy covering ESG integration:

Implement in manager appointment, mandates and monitoring

Communicate annually on ESG integration:

Acknowledge imperfections and solicit stakeholder feedback

Input from fund managers including plans for improvements

HOW COULD PRI ASSIST YOUR MANAGERS IN ESG

INTEGRATION?

Networking with global and regional investors on good practice developments

Dedicated PRI Implementation Support Team working across asset classes

Dedicated Investor Engagement Programmes to mitigate ESG risks

Mandatory public report and confidential assessment of practices

RESPONSIBLE INVESTMENT TRANSPARENCY REPORT

RESPONSIBLE INVESTMENT ASSESSMENT REPORT

ASSESSMENT REPORT PEER COMPARISON

SUMMARY

Why ESG integration?

Understand and mitigate ESG risks that could affect investor value

How?

ESG factors can be assessed through standard models of business valuation

Asset owners are in a unique position to encourage fund managers to take account of ESG factors

Appendix

5 February 2014

FURTHER QUESTIONS ON ESG INTEGRATION FOR

YOUR MANAGERS

How do you consider ESG factors in your analysis of a country’s economic growth and macro themes that may impact a country such as resource security?

Do you assess how ESG factors affect industries, for example, through changing consumer preferences or regulatory change such as environmental legislation?

How do you assess a company’s ability to identify and manage ESG-related risks and opportunities?

How do you integrate ESG factors into the financial valuation of an investment?

How do you approach the analysis of investment risks that may have a low probability but a severe impact?

How would you respond if you identified under-managed ESG risks within the investment?

RESPONSIBLE INVESTMENT MARKET

Useful sources on the size and nature of the responsible investment market:

5 February 2014

PRI integrated analysis publication: http://www.unpri.org/viewer/?file=wp-content/uploads/Integrated_Analysis_2013.pdf

Definition of responsible investment: http://www.unpri.org/viewer/?file=wp-content/uploads/1.Whatisresponsibleinvestment.pdf

List of all PRI signatories: http://www.unpri.org/signatories

Report on how European asset owners’ responsible investment strategies: http://www.novethic.com/novethic/french-sri/investment-ethics/sri-indices.jsp

Ethical exclusions: http://www.yourethicalmoney.org/investments/

ACADEMIC RESEARCH ON ESG AND RISK

5 February 2014

Companies with high ESG scores are found to have less company specific risk (Bouslah et al., 2012; Boutin-Dufresne and Savaria, 2004; Lee and Faff, 2009; Bauer, Derwall and Hann, 2009; Oikonomou et al., 2012)

Corporations with better ESG ratings are found to have lower cost of debt and higher credit ratings (Bauer et al., 2009; Bauer and Hann, 2011; Oikonomou et al. 2011)

ESG criteria are found to provide an insurance like protection for firms in legitimacy crisis (Godfrey, Merrill and Hansen, 2009)

ESG criteria can help to improve portfolio diversification and reduce worst case risk (Hoepner, 2010; Hoepner et al., 2013)

SPEAKER BIOGRAPHY

Sagarika Chatterjee, General Manager, PRI

Sagarika joined PRI in 2013 and focuses on supporting investor implementation of the Principles

for Responsible Investment. Prior to this, she worked for 11 years on F&C Investments'

Governance & Sustainable Investment Team, where she helped build a market-leading investor

engagement service, headed research for sustainability funds and worked with fund managers

on integration of corporate governance and sustainability issues into investment analysis. She

previously held a commercial role at Kingfisher plc, sourcing timber from sustainably-managed

forests. Sagarika serves in a personal capacity on the Investment Sub-Committee of the Joseph

Rowntree Foundation. She holds an MSc in Development Studies from the University of

London, a Diploma in Management Studies from the University of Oxford and a BA in Social and

Political Sciences from the University of Cambridge.

sagarika.chatterjee@unpri.org

5 February 2014