1 March 2013

Principles for Responsible Investment

Dr Wolfgang Engshuber, PRI Chair

Fiduciary duty

“Integrating ESG considerations into an investment analysis so as to

more reliably predict financial performance is clearly permissible and

is arguably required in all jurisdictions”

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Fiduciary duty

“in our opinion, it may be a breach of fiduciary duties to fail to take

account of ESG considerations that are relevant and to give them

appropriate weight, bearing in mind that some important economic

analysts and leading financial institutions are satisfied that a strong

link between good ESG performance and good financial performance

exists.”

A legal framework for the integration of environmental, social and

governance issues into institutional investment. UNEP FI &

Freshfields, Bruckhaus, Deringer (2005).

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The PRI Initiative starting point

An investment belief

‘As institutional investors, we have a duty to act in the best long-

term interests of our beneficiaries. In this fiduciary role, we

believe that environmental, social, and corporate governance

(ESG) issues can affect the performance of investment portfolios

(to varying degrees across companies, sectors, regions, asset

classes and through time). We also recognise that applying these

Principles may better align investors with broader objectives of

society.’

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Principles for Responsible Investment

1. Incorporate ESG issues into investment analysis and decision-making

processes

2. Be active owners and incorporate ESG issues into our ownership policies

and practices

3. Seek appropriate disclosure on ESG issues by the entities in which we

invest

4. Promote acceptance and implementation of the Principles within the

investment industry

5. Work together to enhance our effectiveness in implementing the Principles

6. Report on our activities and progress towards implementing the Principles

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Principles for Responsible Investment

• The PRI is a partnership between the United Nations and investors

to promote responsible investment

• A framework of six Principles which guide ESG integration

• Voluntary and aspirational

• Shared learning, implementation support and engagement

• A forum for discussion and action on long-term risk issues and

value drivers

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Materiality of ESG

‘High Sustainability companies significantly outperform their

counterparts over the long term, both in terms of stock market and

accounting performance’.

The Impact of a Corporate Culture of Sustainability on Corporate

Behavior and Performance - Eccles & Serafeim, Harvard Business

School (2012)

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ESG issues

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Implementation support work streams

Fixed income Listed equity Property Private equity Infrastructure

Commodities Hedge funds Inclusive finance

ESG-themed investing

Small signatories

Implementation support

Getting started

• Building and communicating the business case for responsible

investment. (The Why? What? And How? Of responsible

investment)

• Guidance for asset owners on writing a responsible investment

policy

• Aligning expectations guidance for asset owners on incorporating

ESG factors into manager selection, appointment and monitoring

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Getting started

• Establish the rationale for pursuing RI

• Organise RI governance and human resources

• Define what RI means to your organisation

• Source and disseminate research

• Develop a RI policy

• Join the RI debate (CDP, IIGCC, EITI, local SIF etc.)

• Familiarise yourself with PRI’s reporting requirements

• Create a budget

Guidance for asset owners on writing a

responsible investment policy

Examples from:

• Caisse de dépôt et placement du Québec

• CalPERS

• CalSTRS

• Canada Pension Plan and Investment Board

• Comité syndical national de retraite Bâtirente

• General Board of Pension and Health Benefits of The United

Methodist Church

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2011 Report on Progress - highlights

Asset owners

• 40% of external assets of PRI asset owners managed by PRI investment

managers

• One third of PRI asset owners write ESG into manager contracts

• Asking for evidence that ESG is integrated into research and investment

processes

• Asking how ESG is integrated into management structures and processes,

staff training, etc.

• Asking their investment consultants for guidance on ESG

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Integrating ESG criteria in manager

selection, agreements and monitoring

Key questions for asset owners to ask managers:

• How are ESG factors incorporated into investment analysis and

decision-making processes? (e.g. asset allocation, definition of the

investable universe, fundamental or sector analysis, portfolio

construction, stock selection, etc.)

• How do you use ESG information to identify investment risks and

opportunities or opportunities for engagement? How does this

information impact investment decisions?

• 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?

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Integrating ESG criteria in manager

selection, agreements and monitoring Key questions for asset owners to ask managers:

• 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 would you respond if you identified under-managed ESG risks

within the investment? (e.g. engage with the company to influence

change, change stock weighting)

• 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?

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What is active ownership?

Possible actions:

• Exercise voting rights or monitor compliance with voting policy

• File shareholder resolutions consistent with long-term ESG

considerations

• Engage with companies on ESG issues

• Participate in collaborative engagement initiatives

• Participate in the development of policy, regulation, and standard

setting (such as promoting and protecting shareholder rights)

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PRI Clearinghouse

Vision: to be the leading global platform of shareholder engagement

activities

Purpose: to provide institutional investors with resources and

information to conduct effective collaborative engagements with

companies and policy-makers across different sectors and regions.

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Clearinghouse engagements

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Recent engagements

CDP Carbon Action initiative

Call to companies to move ‘from disclosure to action’.

18 PRI signatories engaged with 24 companies from sectors including

oil & gas, metals & mining, industrials and utilities, to encourage them

to set a good quality emissions reduction target.

Outcome after the 1st year:

• 10 of the target companies had set and disclosed an emissions

reduction target

• 3 companies demonstrated through dialogues that they are taking

steps

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Recent engagements

Senior gender diversity

Companies that effectively incorporate diversity into their management

teams will be better able to attract and retain talent, better reflect the

composition of society as a whole, and be more likely to be successful

in a competitive global market over the long term.

10 investors engaged with companies in their national markets (US,

Canada, Brazil, Sweden, UK and Italy) to encourage greater

representation of women at board level and in senior management,

and to promote greater disclosure by companies on gender diversity.

45 companies in the target list - improvements in 2011 versus 2010 in

companies’ policies and implementation activities to promote gender

diversity, including enhanced nomination charter language.

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Recent engagements

Emerging Markets Disclosure Project, South Korea

Investor collaboration aimed at improving disclosure of ESG data by

companies in emerging markets. Over 2008-2012, country teams in

Brazil, Indonesia, South Africa and South Korea engaged 72

companies and achieved their goal of advancing sustainability

reporting in emerging markets.

In South Korea a group of 8 investors engaged with 15 companies.

Progress on reporting with all 15 companies engaged, including Hynix,

LG Electronics, Samsung and Shinhan Financial Group.

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Recent engagements

Annual engagement with inactive participants of the UN

Global Compact

Coalition of 30 PRI signatories representing approximately US$3

trillion in assets sent letters to the chief executives of listed

participants in the Global Compact that had not communicated their

progress in implementing the UN Global Compact principles.

Following the engagement, 76% of companies regained active status

as UN Global Compact participants. Among the companies that have

submitted their COPs and regained active status are Deutsche

Postbank AG (Germany), Ghabbour Auto SAE (Egypt) and OCBC

Bank Ltd (Singapore).

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Recent engagements

Anti-corruption engagement

Coalition of 21 PRI signatories began engaging with 20 companies in

14 countries in March 2010 to seek better disclosure and determine

whether their anti-corruption management systems complied with

international reporting frameworks.

Each of the 20 companies was deemed to have poor anti-corruption

systems in place at the start of the engagement, based on publicly-

available information, yet faced high levels of corruption risk. At the

end of the engagement three quarters of the companies targeted

significantly improved their transparency, enabling investors to better

assess and manage their exposure to the financial, operational and

reputational risks associated with corruption in their portfolios.

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Engagement priorities

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Topic Engagements

Environment

1) Carbon Disclosure Project - Carbon Action

2) Sustainable Palm Oil

3) Water

4) Fracking

Social

5) Labour standards in the supply chain

6) Human Rights

7) Human capital management

Corporate Governance

8) Corruption

9) ESG and remuneration

10) Board nomination process

UNGC Principles

11) PRI for Rio

12) COP leaders and laggards

13)ESG Investor Briefing

ESG Disclosure 14) Integrated Reporting

15) Sustainable Stock Exchanges

Responsible Investment

• Responsible investment is growing rapidly as a mainstream trend

around the world

• Driven by strategic trends in investment, the economy and broader

society

• Enhance risk management and identify new opportunity, within

fiduciary obligations

• Trends towards regulatory support for responsible investment

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Q&A