Transcript Sustainable Investment- Opportunities for Mainstream Investors by

Sustainable Investment:
Opportunities for Mainstream Investors
CFA Ireland
Steven A. Falci, CFA
Vice President-Sustainable Investment
KBC Asset Management Ltd.
January 21st 2009
Evolution of SRI
Terms
•Socially Responsible Investing
Mercer
1st Generation SRI
2nd Generation SRI
3rd Generation SRI
• Ethics
• Exclusion
• Ethics
• Inclusion
• Exclusion
• Sustainability
• Materiality
• Investment Return
•Exclusionary Screening
•Positive Screening
•Best in Class
•Pioneer Screening
•ESG Integration – Active Management
•Thematic Products – Active Management
Emphasis
Broad Vehicles
Primary Market
Focus
Examples
2
•Sustainable Investing
•Responsible Investing
•Environmental, Social and Governance (ESG)
•Engagement - ethical
• Engagement – performance/ethical
•Retail
•Institutional – Values Driven (F&E, charities, i.e)
• Institutional Mainstream Market
• Differentiated Retail Products
• High Net Worth Individuals
Exclude
•Alcohol
•Tobacco
•Weapons
•Gambling etc.
•Best in Class Companies
(challenging industries)
•Companies with positive
environmental initiatives
•Leading companies providing innovative
solutions to sustainability challenges
•Companies with strong sustainability and
financial profiles
SRI ↔ Sustainable Investment
1st Generation SRI
Ethical
Sustainable investing
Materiality
Criteria
Focus
ESG /
Investment
Process
Exclusionary
Separate
Historical
Time
Orientation
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Inclusionary
Integrated
Future
Global Market Size
 Hard to precisely define – But various Indicators
point to a Large and Growing Market
 Eurosif – €5 trillion
o European Social Investment Forum
o Begin to distinguish approaches (Core and Broad)
 UNPRI – $14 trillion
o 380 Asset Owners and Asset Managers
o Assert intention to integrate Environmental, Social and
Governance Factors into investment process
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Global Growth SRI
2003 €1.9 Trillion
North America
84%
Europe 16%
Australia/Asia
0%
16%
2005 €2.6 Trillion
North America
64%
Europe 35%
0%
1%
35%
Australia / Asia
1%
84%
2007 €5 Trillion
North America
39%
Europe 53%
Australia/Asia
8%
Source: Eurosif
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8%
39%
53%
64%
Sustainable Investment Strategies
 Thematic Strategies
o Investment opportunities in companies providing
solutions to our most pressing global challenges
o Renewable Energy, Water, Climate Change
 ESG Integration
o Material risks and opportunities related to
Environmental, Social and Governance factors are an
integral part of investment analysis
o Companies with strong sustainability and financial
profiles
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Global Mega Trends
Innovation to meet challenges to our environment are driven
by 3 Global Mega Trends.
 World’s changing demographic profile
o
The combination of population growth, industrialization, economic growth and
urbanization will continue to test the limits of our eco–system and will require
investment in innovation and infrastructure in the developed and developing world to
meet the needs of growing, more affluent global population.
 Natural resource supply/demand imbalance
o
A growing, more affluent global population has and will continue to put increasing
pressure on the supply of natural resources. Meeting the needs for energy, water
and food is a major challenge of the 21st century.
 Climate change -and operating in a carbon constrained world
o
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Sustained pressure for lower carbon economies continue to gain momentum
through efforts to mitigate and adapt too combat the effects of climate change. The
growing demand for energy will need to be met through less reliance on the
historically dominant carbon emitting sources of oil and coal and with more reliance
on renewable alternative energy and energy efficiency.
Alternative Energy Investment Thesis
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1.
Global Energy Demand – Population & Industrialization
2.
Limited Supply of Fossil Fuel Energy
3.
Falling Costs of Renewable Energy – Technology &
Investment
4.
Security of Fuel Supply – Local Source Necessary
5.
Climate Change – Political & Regulatory Support
Renewables as % of Energy Mix
 Renewable Energy
• Wind
• Solar
• Fuel Cells
International Energy Agency:
30% of all energy related
Investments in next 30 years will
be in renewables
• Biofuels
• Waste to Energy
Renewable electricity capacity, share of 2005 electricity production
Small hydro
1.3%
Nuclear
16.0%
Large Hydro
14.9%
Conventional
65.5%
Wind Power
1.2%
Other
3.6%
Biomass
0.9%
Geothermal
0.2%
Solar PV
0.1%
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Source: Renewables Global Status Report 2006 Update, REN 21
Ocean (tidal)
0.0%
Solar Thermal
0.0%
Falling Costs of Renewables
Renewable energy actual cost of production — cents/kWh
Expected cumulative reduction in costs of renewable technologies by 2020
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Source: United Nations Economic and Social Council
Alternative Energy Portfolio Summary
Top 10 Holdings
Market Weights
IBERDROLA RENOVABLES
7.6%
N. AMERICA
28.4
EDP RENOVAVIES
6.2%
EUROZONE
41.1
GAMESA
5.6%
REST OF EUROPE
20.1
FPL
4.9%
FORTUM
4.3%
REST OF WORLD
10.4
VESTAS
4.1%
RENEWABLE ENERGY CORP
4.1%
KYOCERA
4.0%
JOHNSON MATTHEY
3.9%
FIRST SOLAR
3.9%
Sector Distribution %
Actual Weight
Neutral Weight
UTILITIES
16.0%
15.0%
WIND ENERGY
37.4%
30.0%
SOLAR
26.7%
30.0%
FUEL CELLS
6.5%
10.0%
BIOMASS
10.5%
10.0%
OTHER
2.9%
5.0%
Source: KBCAM Data as at 31.12.08.
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%
%
Water Investment Thesis
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1.
Demand – Population growth / Demographics
2.
Supply problems – Availability, Infrastructure & Pollution
3.
Regulatory Drivers
4.
Technological Advancements
1% of Water Useable
Less than 1% of all water is available for human consumption
There is no substitute for water; that’s why it is rapidly becoming
such a valuable resource.
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Water and Population Growth Chart
1000
900
Standard of
Living
800
700
600
Population
Growth
500
400
Economic
300
Growth
200
100
0
1900
1940
1950
1960
Global Population
1970
1980
1995
2000
2010
2025
Global Water Consumption
Sources: US Census Bureau / German Ministry of Environment
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1990
Population/Water Divergence
Asia has 36% of
the world’s water
supply and 60%
of the population
Source: UNESCO
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Investment Required
Source: Boenning & Scattergood
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Water Portfolio Summary
Market Weights
Top 10 Holdings
%
VEOLIA ENVIRONNEMENT
5.8%
SUEZ
5.3%
ROPER INDUSTRIES
4.5%
12.9
PENTAIR
4.4%
19.4
AGILENT TECH
3.8%
ITRON INC
3.3%
GEBERIT
3.3%
SEVERN TRENT
3.1%
MUELLER WATER
3.1%
FLOWSERVE CORP
3.0%
N. AMERICA
48.5
EUROZONE
19.2
REST OF EUROPE
REST OF WORLD
Sector Distribution %
Actual Weight
Neutral Weight
WATER INFRASTRUCTURE
37.3%
40.0%
WATER/WASTEWATER UTILITIES
35.7%
35.0%
WATER TECHNOLOGY
27.0%
25.0%
Source: KBCAM, Data as at 31.12.08.
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%
Climate Change Investment Thesis
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1.
Growing Population, Industrialization and Urbanization
has led to increased carbon emissions.
2.
Immediate action required to mitigate long term human,
environmental and economic costs
3.
Demand for Cleaner Energy, Energy Efficiency & Waste
Management
4.
Technological Advancements
5.
Political, Regulatory & Popular Support
Regulatory and Policy Initiatives continue
to support increasing investment
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Energy Efficiency Multiplier Effect
Fuel = Coal
65% Loss
Power Plant
10% Loss
Every 1 unit of energy saved at
home or business represents up
to 4 units saved at the power
plant
Transmission Lines
Source: Sustainable Energy, Choosing Among Options (Tester, Drake, Driscoll, Golay, Peters), UBS Research
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2/3 of Projected Co2 emission savings to
come from energy efficiency
Source: International Energy Agency
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Climate Change Portfolio Summary
Top 10 Holdings
Market Weights
N. AMERICA
39.6
EUROZONE
33.0
REST OF EUROPE
19.1
REST OF WORLD
8.4
Sector Distribution %
22
%
%
WASTE MANAGEMENT
6.0%
E.ON
5.4%
ABB
4.5%
EAST JAPAN RAILWAY
3.7%
EMERSON ELECTRIC
3.3%
CLIMATE EXCHANGE
3.1%
SCHNEIDER ELECTRIC
3.0%
KONICO PHILLIPS
3.0%
SAINT GOBAIN
2.9%
CANADIAN NATIONAL RAIL
2.7%
Actual Weight
Neutral Weight
WATER
15.0%
15.0%
RENEWABLE ENERGY
23.2%
25.0%
CLEAN ENERGY
9.1%
10.0%
ENERGY EFFICIENCY
34.8%
35.0%
WASTE MGT/RECYCLING/NEW MATERIALS
10.7%
10.0%
CARBON TRADING
6.4%
5.0%
Source: KBCAM. Data as at 31.12.08.
ESG Integration
Environment
Social
GHG Emissions
Human Capital Practices
Eco Efficiency
Environmental
Management Systems
Health and Safety Issues
• Costs and Revenues
• Cost of Capital
Environmental Products
• Balance Sheet Risk
Environmental Liability
• Brand and Reputation Risk
Water Consumption
• Competitive Advantage
• Valuation
Governance
• Executive Comp Tied to Performance
• Board Structure and Accountability
• Transparency
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Consumer Markets
Labor Markets
Supply Chain Management
Human Rights
ESG Integration – Opportunities and Challenges
 Opportunities
o Capture sources of Intangible Value
 Approximately 80% of market value driven by intangibles Prof Baruch Lev, NYU Stern School of Business
 Opportunities and Risks
o Underpriced in market place
 Challenges
o Assessing materiality over time
o Assessing materiality across industries / sectors / regions
o Quantification and measurement
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Goldman Sachs Sustain - Integrated Process
Management Quality
(ESG)
Industry Positioning
Return on capital
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Source: Goldman Sachs Research
Energy
Basic
Materials
Capital
Goods
Media
Consumer
Staples
Healthcare
Banks
Insurance
Technology
Hardware
24%
24%
25%
33%
26%
27%
32%
39%
27%
Leadership
8%
8%
8%
17%
9%
9%
11%
11%
9%
Employees
28%
28%
29%
23%
22%
18%
26%
17%
23%
Stakeholders
12%
20%
13%
13%
22%
27%
21%
22%
14%
28%
20%
25%
14%
22%
18%
11%
11%
27%
Corporate
Governance
Social
Management Quality
(ESG)
GS Sustain – ESG Weightings
Environment
Source: Goldman Sachs Research
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Relative Carbon Exposure
FPL Group
Carbon Price
Annual Cost of Compliance ($1000)
Exposure (% of EBITDA)
NPV of Abatement Costs ($1000)
Exposure (% of market cap)
Expected Case
Minimum Case
Maximum Case
$28
$18
$45
$349,150
$212,840
$560,335
11.80%
7.20%
18.90%
$1,584,034
$1,006,866
$2,543,329
5.70%
3.60%
9.20%
Expected Case
Minimum Case
Maximum Case
$28
$18
$45
$1,187,710
$724,024
$1,906,103
34.40%
21%
50%
$5,388,442
$3,425,077
$8,651,697
29%
18.40%
46.60%
American Electric Power
Carbon Price
Annual Cost of Compliance ($1000)
Exposure (% of EBITDA)
NPV of Abatement Costs ($1000)
Exposure (% of market cap)
Source: CFA Magazine / Sept-Oct 2008
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Innovest Sustainability Matrix
10
Performance of Company
9
8
7
6
5
4
3
2
1
0
0
1
2
3
4
5
6
7
8
Alpha Intensity of Sub-Factor
Strategic Governance
Environment
Human Capital
Stakeholder Capital
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Source: Innovest Strategic Value Advisors
9
10
Proposed DCF framework for integration of
ESG Factors
Exposure to
ESG issues
Issue 1
Strategy, policies,
management systems
Transmission
Factors
Financial value
drivers
Valuation
components
Litigation and
regulatory risks
Issue 2
Operational risks
Issue 3
Risk
premiums
Reputation and
brands
WACC
Issue 4
Operational efficiency
Costs
Issue 5
Shareholder
Innovation
value
Issue 6
Access to new
/existing markets
Revenues
Issue 7
Issue 8
Access to
Knowledge and skills
Issue 9
Access to key
resources
Issue 10
Others
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Source: Expanding the Investment Frontier – The Conference Board
Free cash
flows
Others (tax,
reinvestment
rates)
ESG Ratings Development
 Materiality of ESG Factor for Sector
 Comparative Ranking
 Support Wide Array of Implementation Options
o
o
o
o
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Top Quintile ESG & Top Quintile
ESG Tilt
ESG Beta
Hybrid Strategies – Quant / Fundamental Blend
Performance Studies –Definitional
Challenges
 SRI vs Sustainable Investment
 Risk characteristics in individual strategies
 Time period, market conditions, geographic
markets
 Performance impact of specific ESG factors
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SRI vs Sustainable Investment
 Cary Krosinsky –The Rise of Sustainable Investing in Sustainable
Investing the Art of Long Term Investing – 2008
o Time Period 2002-2007
o 135 mutual funds
Sustainable Investing
18.7%
Ethical
13.8%
Style Drift SRI
11.6%
MSCI World
17.0%
S&P 500
13.2%
 Meir Statman – The Wages of Social Responsibility –December 2008
Time Period 1992-2007
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o KLD Research Scores
o Tilt toward stocks with positive SRI scores – Positive Return Impact
o Exclusionary practices detracted from returns
Performance Reviews
 Demystifying Responsible Investment Performance
o 2007 UNEP-FI Asset Management Working Group / Mercer
Consulting
o Compilation of 20 Academic Studies and 10 Broker Research




13 positive
10 neutral
4 neutral / positive or neutral / negative
3 negative
 Lloyd Kurtz-Answers to Four Questions
o SRI Performance and Risk
o Positive ESG Alpha
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 Environment – 13 studies
 Governance – 7 studies
 Employment Practice – 6 studies
Studies on ESG Factors
 Environment
o Derwall, Guenster, Baver, Koedijk “The Eco-Efficiency
Premium Puzzle” 2005
o Gluck and Becker “ Can Environmental Factors Improve
Stock Selection” 2004
 Social
o Edmans “ Does the Stock Market Fully Value Intangibles?
Employee Satisfaction and Equity Prices” 2008
 Governance
o Gompers, Ishii, Metrick “Corporate Governance and
Equity Prices” 2003
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Conclusion
 As with all active management what matters most
o
o
o
o
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Rigorous Investment Process
Unique Insights
Innovation
Vision
Reading - Sustainability, Investing and Business
 Matthew Kiernan Investing in a Sustainable World (2008)
 Cary Krosinsky and Nick Robbins, eds. Sustainable Investing: The
Art of Long Term Performance (2008)
 Thomas Friedman Hot Flat and Crowded (2008)
 Holiday, Schmidheiny, Watts Walking the Talk: The Business Case
for Sustainable Development (2002)
 Mark Epstein, Making Sustainability Work (2008)
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