The link between ESG

and sovereign debt

TBLI Conference 2012

Florian Sommer, Senior Strategist, Union Investment

● Sustainability is consistent with our core values as a member of the German

cooperative financial network – our cooperative roots.

● A leading sustainable investment manager with over 20 years experience

and a total of €5.3bn in SRI AuM.

● A partner for sustainable investment solutions tailored to client needs

across all main asset classes.

● A differentiated engagement service based on a clear voting approach and

dialogue with companies to ensure shareholder interests.

● A clear commitment to the UN PRI principles.

Union Investment and sustainable investment solutions

2

● In total 83 countries are covered that

account together for 80% of the world‘s

population, and 92% of the world‘s

GDP.

● Each ESG dimension is made up of six

equally weighted issues.

● Only publically available information

from credible sources is being used

e.g. Worldbank, UN, WHO.

The Sustainability Country Rating of Union Investment

3

Source: Union Investment

The ESG dimensions of the Sustainability Rating

4

Sustainability Rating

Environment Social Governance

• Water

• Climate change

• Biodiversity

• Air pollution

• Ecosystems

• Natural disasters

• Rule of law

• Politcal stability

• Democratic rights

• Regulatory quality

• Ease of doing

business

• Corruption

Source: Union Investment

• Health

• Education

• Crime & safety

• Demographics

• Poverty

• Inequality

1st quartile 4th quartile

Norway 94,6 Lebanon 35,7

Sweden 88,7 Sri Lanka 35,1

New Zealand 86,6 Vietnam 34,3

Switzerland 85,6 Jordan 34,1

Australia 84,8 Russia 33,9

Iceland 84,3 Ecuador 32,0

Canada 83,0 South Africa 29,1

Denmark 81,3 China 28,2

Netherlands 81,2 Bosnia 28,1

Luxembourg 80,8 Philippines 27,3

Finland 77,5 Senegal 27,3

Austria 76,7 El Salvador 27,1

France 76,0 Guatemala 26,4

Ireland 75,3 Dominican Rep. 25,5

Germany 71,3 Ukraine 25,4

Singapore 70,6 Jamaica 24,8

United Kingdom 70,1 India 24,4

Japan 69,0 Venezuela 22,6

Slovenia 68,1 Nigeria 21,3

United States 68,1 Pakistan 18,0

Spain 65,9

Global Country Sustainability Rating

5

Source: Union Investment

Top 10%

Second Best 10%

Second Lowest 10%

Bottom 10%

1st quartile 4st quartile

New Zealand 100 El Salvador 34,7

Australia 95,0 China 34,5

Norway 93,0 Sri Lanka 34,0

Denmark 86,7 Philippines 33,3

Iceland 85,7 Trinidad and T. 32,6

Sweden 80,7 Kuwait 31,9

Ireland 80,3 Ghana 31,4

USA 78,9 Lebanon 31,2

Finland 78,3 Egypt 31,2

Netherlands 77,2 Vietnam 30,4

Israel 77,0 Qatar 28,8

Canada 76,0 Morroco 28,4

South Korea 74,6 Turkey 27,3

Belgium 73,9 Dominic. Rep 24,8

Estonia 73,8 Indonesia 24,5

Hungary 72,1 Guatemala 19,2

France 71,9 Nigeria 18,0

Germany 71,1 India 15,5

Greece 68,8 Senegal 14,6

Ukraine 68,7 Pakistan 0,0

Lithuania 68,4

Education index (S)

6

Source: Union Investment, Human Development Index, UNDP, World Bank

Top 10%

Second Best 10%

Second Lowest 10%

Bottom 10%

1st quartile 4st quartile

Finland 100 Serbia 28,1

Sweden 99,7 Vietnam 27,7

New Zealand 99,1 Columbia 27,4

Norway 97,9 Gabon 26,8

Denmark 97,7 Jamaica 26,2

Luxemburg 96,3 Philippines 25,2

Netherlands 94,5 Indonesia 24,5

Canada 94,5 Mexico 24,3

Austria 93,8 Lebanon 22,7

Switzerland 93,5 Peru 22,2

Australia 92,7 Argentina 22,0

Iceland 92,3 Dominic. Rep 20,7

Ireland 92,2 Ukraine 20,4

Great Britain 91,9 Russia 19,4

Germany 89,4 El Salvador 19,2

Singapore 88,6 Pakistan 15,8

USA 85,6 Guatemala 11,2

Malta 85,1 Nigeria 8,7

France 82,1 Ecuador 7,2

Belgium 80,2 Venezuela 0,0

Japan 78,2

Rule of law (G)

7

Source: Union Investment, World Bank

Top10%

Second Best 10%

Second Lowest 10%

Bottom 10%

CDS spreads of Eurozone countries

versus sustainability ratings

Eurozone analysis

8

Source: Bloomberg, Union Investment

CDS Spreads August 2011

Performance Sustainable Portfolio

versus iBoxx 5Y Eurozone

Source: Bloomberg, Union Investment

2. Januar 2004 bis 23. März 2012, Backtest

90

100

110

120

130

140

150

2004 2006 2008 2010 2012

Eurozone Sovereigns 5Y

Portfolio nachhaltig

0

5

10

15

20

25

0 10 20 30

Ran

k C

DS

S

pre

ad

s 2

011

Rank Union Sustainability-Rating 2011

Correlation

coefficient :

0,59

Portugal

Greece

Poland

Sweden

Germany

Netherlands Finland

Irland

Spain Italy

Rumania

Sustainable Portfolio

PRI Sovereign Fixed Income Working Group

9

Objective 1:

Understand if ESG issues influence sovereign

creditworthiness.

Investigate how ESG issues can influence

sovereign creditworthiness

Objective 2:

In the context of sovereign debt, understand to

what extent ESG issues are already accounted

for by mainstream investors and credit ratings

agencies.

Working Group Members include:

Union Investment (chair)

Allianz Global Investors

APG Asset Management

ASR Nederland N.V.

AXA Investment Managers Paris

Bank Sarasin & Co. Ltd

Bloomberg L.P.

ECP International S.A.

Danske Bank

Generation Investment Management LLP

Hermes Fund Managers Limited

Maplecroft

MSCI

oekom research AG

Pension Protection Fund

SNS Asset Management

Stichting Philips Pensioenfonds

UNEP Finance Initiative

Unipension Invest

PRI Working Group contact: archie.beeching@unpri.org

Framework PRI Sovereign Fixed Income Working Group

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ESG

• Environmental issues

• Social issues

• Governance issues

Factors influencing

creditworthiness

• Economic development

• Government debt burden

and debt maturity

• Budgetary performance

• Foreign liquidity and

balance of trade

• Institutional and political

factors

Financial measures of

creditworthiness

• Credit ratings

• Bond yields and risk

premiums

• Credit Default Spreads

Mainstream Focus

Extended ESG Focus

Source: PRI Working Group

High correlation between sustainability and credit ratings. Is there a causal link?

11

Sustainability Rating Union Investment 2011

Germany

Greece

Ireland

Iceland

Japan

Canada

New Zealand

Norway Sweden

Czech Republic

Argentina

China

Georgia

India

Qatar Kuwait

Polen

Ungarn

Uruguay

Vietnam

Equador Pakistan

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

10 20 30 40 50 60 70 80 90 100

UK

Source: S&P, Union Investment August 2011

Correlation

coefficient:

0.76

AAA

AA

A

BBB

BB

B

CCC

CC

S&P

Rating Long Term

Foreign Currency

Rating

2011

South Africa

Russia

Romania

Latvia

Lithuania

USA

High correlation between sustainablity and GDP per capita

12

Sustainability Rating Union Investment

GD

P p

er

cap

ita

Australien Belgium

Denmark

Germany

Finland

France

Greece

Israel

Italy

Japan

New Zealand

Netherlands

Norway

Portugal

Sweden

Swiss

Slovakia

Spain

Brazil Chile

Indonesia

Qatar

Croatia

Kuwait

Nigeria

Russia

South Afrika

South Korea

Pakistan

Peru

$0

$10.000

$20.000

$30.000

$40.000

$50.000

$60.000

$70.000

$80.000

$90.000

10 20 30 40 50 60 70 80 90 100

Source: Bloomberg, Union Investment

Correlation

coefficient:

0.79

Why corruption matters as an indicator for downside risk

13

Denmark 9,3

New Zealand 9,3

Finland 9,2

Sweden 9,2

Canada 8,9

Netherlands 8,8

Switzerland 8,7

Australia 8,7

Norway 8,6

Ireland 8

Portugal 6

Korea 5,4

Poland 5,3

Hungary 4,7

Czech Republic 4,6

Turkey 4,4

Slovakia 4,3

Italy 3,9

Greece 3,5

Mexico 3,1

Corruption Perception Index 2010

top and bottom 10 of OECD countries

Source: Union Investment, Transparency International (Corruption Perception Index)

Higher probability of fraud in

government statistics

Expansion of shadow economy

Lower ability to collect tax

revenues

Lower trust in government and

lower ability to implement

austerity measures.

Lower attactiveness for foreign

investors

Why corruption matters as an indicator for downside risk

14

Source: Union Investment, Transparency International (Corruption Perception Index)

Korea 35%

Poland 29%

Slovakia 23%

Japan 22%

Belgium 16%

Turkey 16%

Estonia 14%

Ireland 11%

Czech Republic 7%

Australia 5%

Mexico -6%

Portugal -6%

Israel -8%

Finland -8%

United States -9%

Hungary -10%

United Kingdom -13%

Spain -13%

Italy -15%

Greece -29%

Change in Corruption Perception

Index since 2000 in %

Conclusion

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ESG and sovereign creditworthiness

● ESG is valuable for identifiying downside risks.

● Corruption provides an important insight.

Lack of integrated ESG investment research

● Amongst different investment research service groups.

● Important questions for academic research.

Disclaimer

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● This advertising material is intended only for professional clients as described in section 31a, paragraph 2 of the German Securities Trading Act (WpHG). The present document has been prepared and issued by Union Investment Institutional GmbH. The document does not constitute a binding offer. Union Investment does not assume any obligation or liability for this document. The document is no substitute for the individual advice by Union Investment Institutional GmbH. Union Investment Institutional GmbH is not responsible for disadvantages that may arise directly or indirectly from the distribution of this document or its contents. For extensive product-specific information and details of the opportunities and risks presented by the respective fund, please refer to the latest sales prospectus, the Bank's terms and conditions or the annual and half-yearly reports that can be obtained free of charge from Union Investment Institutional GmbH, Wiesenhüttenstrasse 10, 60329 Frankfurt am Main, Germany, telephone +49 69 2567-0. These documents constitute the sole legally binding basis for the purchase of fund units.

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