will sustainable investing survive the recession?
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Will sustainable investing survive the recession?. Will sustainable investing survive?. Winning the battle… but losing the war? A decade of transformation lies ahead. Looking through the lens of climate change. Winning the battle?. Sustainable investing: micro and macro. - PowerPoint PPT PresentationTRANSCRIPT
Will sustainable investing survive the recession?
Will sustainable investing survive?
• Winning the battle…
• but losing the war?
• A decade of transformation lies ahead
Looking through the lens of climate change
Winning the battle?
Sustainable investing: micro and macro
• Micro: The best way of generating superior risk-adjusted returns in the 21st century is to fully incorporate long-term economic, social and environmental factors into investment and ownership decision-making
• Macro: capital markets themselves need to be recast to confront the risks of financial collapse posed by long-term economic, social and environmental realities
From inside out to outside in
Coping with the alphabet soup
Ethical investment
screening the status quo
Responsible investment
extending the scope of risk management
Sustainable investment
repositioning for long-term growth
USD5 and USD15 trillion now contain elements of ESG
The seven tribes of SRI
1.Negative screening – ethical, social, environmental2.Positive screening – ethical, social, environmental3.Community/social investing4.Best in class5.Integrated analysis6. Sustainability themes7.Investor activism and engagement
From inside out to outside in
Distinguishing features
• Seeks to identify ‘predictable surprises’
• Regards as tangible what others see as intangible
• Views factors as financial that others view as non-financial
• Reaffirms the imperative of prudence
• Prospective not retrospective, anticipating the key challenges for management quality
And weakness? Being right too early
Sustainable investing – equity out-performance
Source: Krosinsky, 2008
0
2
4
6
8
10
12
14
16
18
20
Sustainable Investing MSCI World S&P 500 FTSE 100
%
One-year average percentage return (2007)
Three-year average percentage return (31 December 2004 - 31 December 2007)
Five-year average percentage return (31 December 2002 - 31 December 2007)
The long-term really matters
Source: Krosinsky, 2008
SRI fund turnover and performance over 5 years to December 2007
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2
4
6
8
10
12
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16
18
Low Moderate High
Sustainable investing – updated performance analysis
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
Sustainable Investing Ethical Investing MSCI World S&P 500 FTSE 100
%
1st Half of 2009One-year return (2008)Five-year return (31 December 2003 - 31 December 2008)
Losing the war?
The end of an era - 1
“On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result not a strategy. Your main constituencies are your employees, your colleagues, your products”
Jack Welch
The end of an era - 2
“The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets”
Adair Turner
The end of an era - 3
“EMH is the financial equivalent of Monty Python’s dead parrot. No matter how much you point out that it is dead, the believers simply state that it is just resting”
James Montier
Flying blind? Traditional investment and climate change
• Asset prices do not reflect climate costs
• Market behaviour discounts the long-term
• Driving capital misallocation
• Risking financial stability
“Climate change is the greatest market failure the world has ever seen”
Lord Nicholas Stern
Aligning time-scales…
“It is the long-term investor, he who most promotes the public interest, who will in practice come in for the most criticism wherever investment funds are managed by committees or boards or banks. It is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion.”
J.M Keynes, General Theory, 1936
Market myopia?
Source: James Montier, 2008
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1
2
3
4
5
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9
10
1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Average holding period for shares on the NYSE in years
Driving capital misallocation…
• UK is responsible for 2% of world emissions
• But emissions from the facilities and products of five fossil fuel companies listed on the London Stock Exchange – Anglo, BP, Rio Tinto, Shell and Xstrata - responsible for over 10% of global emissions
• Less than half proven economically recoverable oil, gas and coal reserves can be emitted to stay below 2 degrees warming
Risking financial instability…
“According to current estimates, the possible extent of losses caused by extreme natural catastrophes in one of the world’s major metropolises or industrial centres would be so great as to cause the collapse of entire countries’ economic systems and could even bring about the collapse of the world’s financial markets”
Munich Re, March 1997
Transformation ahead
Resetting responsibilities…
“Financial markets remain crucial as the circulatory system for commerce, but they must be reset to enable long-term sustainable performance in the real economy. This mean less leveraged finance, a fundamental repricing of risk, the ability to account for externalities like greenhouse gas emissions and a realignment of executive responsibility and compensation with long-term performance”
GE, July 2009
Mapping the future investment transformation
Already disrupting valuations, but more still to come
Time for acceleration: the coming investment shift
Source: IEA, Energy Technology Perspectives, 2008; UNEP/NEF, Global Trends in Sustainable Energy Investment, 2008
33.2 58.592.6
148.5
1304.6
0
200
400
600
800
1000
1200
1400
2004 2005 2006 2007 2005-2050Average
USD
bn
Clean energy needs x9 2007 levels; energy efficiency x50
Building a green recovery - USD512bn allocated
Total Package- $977bnGreen- 12%CC-33%, EE-50%, WW-17%
Total Package- $32bnGreen- 9%CC-39%, EE-51%, WW-10%
Total Package- $537bnGreen- 10%CC-30%, EE-68%, WW-2%
Total Package- $27bnGreen- 21%CC-34%, EE-66%
Total Package- $648bnGreen- 33%EE-84%, WW-16%
Total Package- $640bnGreen- 6%) CC-39%, EE-61%
Total Package- $8bnGreen Component- 11%EE-88%, WW-12%
Total Package- $76bnGreen- 79%CC-51%, EE-25%, WW-23%
CC- Low carbon power
EE- energy efficiency
WW- water & waste
Source: HSBC estimates, government websites, others
Asia leads the way with almost 2/3rd of green stimulus
Growing international climate commitment
Obama Administration 2008Emission- 20% below 2005 by 2020; 80% by 2050Renewable- 20% by 2020Efficiency – 8% by 2020
Turning the Corner Plan 2007Emission- 20% below 2006 by 2020
National Plan (PNMC) 2008Renewable- 7 GW between 2008-2010Efficiency- 10% by 2030Deforestation- 30% below 1996-2005 by 2010-13
EU Climate Energy Plan 2008Emission- 20% below 1990 by 2020; 80% by 2050Renewable- 20% by 2020Efficiency- 20% by 2020
Climate Change Policy 2008Emission- 60% below 2000 by 2050Renewable- Mandatory Renewable Energy Target- c15GW by 2020
White Paper 2008 Efficiency – 20% by 2010Renewable- 20% by 2020Forest growth- 20% by 2020
Climate Change Plan 2009Emission- 15% below 2005 by 2020Renewable- 3% by 2010National Action Plan 2008
Emission- per capita emissions not to exceed developed countriesRenewable- 15% by 2020
Climate Change Plan 2008Emission- Emissions to peak by 2020-25Renewable- Long term goal of zero-carbon electricity sector
Source: Government websites, others
Copenhagen conference in December 2009 expected to confirm this trend
Short-term: Closing a deal in Copenhagen
1. 2050 targets: 2 degrees2. 2020 targets for industrialised countries: 15-20%3. Low carbon plans for emerging markets 4. Taking action on tropical forests5. Adapting to climate impacts6. Promoting clean tech cooperation7. Mobilising private capital 8. Reforming carbon markets9. Avoiding ‘carbon protectionism’
A close run thing…but a deal will be done
Long-Term: Confronting the tough issues
• Markets: Making climate change a standard part of accounting, disclosure and listing rules
• Responsibility: Modernising fiduciary duty to reflect the reality of climate change
• Incentives: Rewarding the investment chain for long-term sustainable performance
• Transparency: Reporting fund and institutional ESG performance alongside financial returns
In the end: confidence and conviction
“There is no reason why we should not feel ourselves to be bold, to be open, to experiment, to take action, to try the possibilities of things. And over against us, standing in the path, there is nothing but a few old gentlemen tightly buttoned-up in their frock coats, who only need to be treated with a little friendly disrepect and bowled over like ninepins.
Quite likely they will enjoy it themselves, once they have got over the shock”
J.M Keynes, A Programme of Expansion, 1929
Thank you….
