Maximizing your Social Good: The Evolution and Impact of Socially Responsible Investing

Transcription

1 Maximizing your Social Good: The Evolution and Impact of Socially Responsible Investing Karen D. Watson, CFA, AIF Area Senior Vice President, Gallagher Fiduciary Advisors, LLC Margaret Mary Cosgrove, BVM Director of Client Services, Great Lakes Advisors Roderick B. Crane, JD Managing Director, Religious Market, TIAA-CREF

2 The SRI Marketplace Sustainable and responsible investing continues to grow Trends Report found more than one out of every nine dollars or 11.2% under professional management in the United States is invested according to SRI strategies. 2

3 Types & Assets of Investment Vehicles & Financial Institutions Incorporating ESG Criteria* * Source: US SIF Foundation, Report on Sustainable and Responsible Investing Trends in the United States,

4 Responsible Investing Growing Global Focus More than $13.6 trillion* AUM in ESG strategies globally Mainstream asset owners and asset managers are adopting ESG strategies The Principles for Responsible Investment (PRI) is growing with more than 1100 signatories, representing $32 trillion in assets (Jan 2013) Consultants are tracking and rating ESG practices of asset managers Consulting firms are developing specialist/teams documenting the ESG practices of mainstream managers across a range of asset classes ESG is becoming integrated throughout the investment value chain approaches * 2012 Global Sustainable Investment Review. Published by Global Sustainable Investment Alliance (GSIA). January Data as of December 31,

5 ESG Asset Growth Reflects Broader Demand Institutional investors and "impact investment" trend are primary drivers 84% of plans sponsors predict demand for SRI options will increase or remain steady over the next 5 years Financial advisers predict significant growth opportunity in retail HNW market o 69% of advisers view SRI as growth opportunity, with $650 billion market potential 1 5

6 What does SRI Mean? Socially Responsible Investing means using your financial resources in a proactive manner Identifying and evaluating investment managers that: Share your mission Support issues on your behalf (i.e. corporate resolutions) Suggest the elimination of companies that may violate the spirit of the investment guidelines Conduct independent reviews to assess social criteria of portfolio companies 6

7 Proactive Investing, Prohibitive Lists Abortion Alcohol Animal Testing Contraception Embryonic Stem Cell and Human Cloning Environment Firearms Gambling Genetically Modified Organisms Human Rights Labor & Employment Nuclear Power Pornography/Violence Tobacco U.S. Government Securities Weapons 7

8 Being Proactive SRI is continuing to evolve into ESG (Environmental, Social and Governance) as organizations seek to be more proactive. Environmental Social Governance Companies Governance Funds Climate change Consumer rights Board structure Fund governance Environment policy Sustainability best practice Environment management Water supply Supply chain management Health and safety Product safety Labor relationships including relationships with unions Executive pay Shareowner rights Accounting/audit Business ethics Sustainable transport Community relations Conflicts of interest Advisory committee powers and composition Valuation issues Fee structures Waste management Source: PRI Association, UBS, as of 30 June 2013 Stakeholder relations 8

9 Impact of Restrictions Can restrictions impact performance? The ultimate impact on the investment return may be minimal over a long period of time. The table below compares the performance of a global screened index to the unscreened index as of April 30, Yr. 3 Yr. 5 Yr. MSCI ACWI ESG MSCI ACWI Note: Returns greater than one year are annualized. 9

10 Catholic Values Portfolio The ESG/Catholic Values Mission is to provide you with an investment solution focused on your total return needs without compromising either your investment goals or the mission of the Catholic Church. By delivering an investment solution that Efficiently captures return opportunities Manages portfolio risk Promotes companies with positive ESG practices & Catholic values Avoids companies with negative ESG practices & Catholic values We believe you can better achieve and align your investment goals with your philanthropic goals. 10

11 Catholic Values Portfolio Bonus Human Rights Community Product Responsibility Suppliers Social Impact Diseases of Developing World Technology Sharing Catholic Mission Diversity and Opportunity Abortion Contraceptives Stem Cell Social Labels Female Male Ratio Family Friendly Penalty Land Mines/Cluster Bombs Pornography Human Rights Community Board Structure Diversity and Opportunity Child Labor Controversies Indigenous People Diversity Compliance Controversies Product Responsibility Social Exclusion 11

12 Risk Benefits Companies with lower ESG scores exhibit significantly more tail risk Higher propensity for extremely negative outcomes 30% Frequency % 25% 20% 15% 10% 5% ESG Q1 Freq % ESG Q5 Freq % Bin Q1 Cumulative % Q5 Cumulative % -75% 0.25% 0.65% -50% 1.27% 3.37% -25% 8.66% 14.25% -15% 15.80% 21.76% 0% 34.90% 40.03% 15% 62.29% 61.14% 25% 78.34% 73.45% 50% 97.58% 92.75% 75% 99.24% 96.63% More % % 0% Annual Returns Source: ASSET4, MSCI Barra, GLA Disciplined Equity Team. As of 08/31/

13 ESG Research Companies with lower ESG Scores exhibit significantly more risk. Our research shows in aggregate, these companies have 10 20% more stock specific and total risk than those with higher scores. % Risk, Annualized ESG & Associated Volatility Top Quintile Benchmark Bottom Quintile SRISK% TRISK% Source: ASSET4, MSCI Barra, Disciplined Equity Team Research 13

14 Executing SRI/ESG in Retirement Plans Fiduciary Considerations Participants interests must come first SRI/ESG policies subject to fiduciary prudence and due diligence SRI/ESG strategies must be subject to ongoing performance review o Benchmarking SRI/ESG The importance of expert investment and legal advice 14

15 Executing SRI/ESG in Retirement Plans SRI/ESG Investment Structures for Defined Contribution Plans Mutual Fund Screening Insurance Company General Accounts? Separately Manage Accounts Custom Portfolios What about - Insurance company general accounts? Collective stable value? Self-directed brokerage windows? Lifetime income solutions? 15

16 Executing SRI/ESG in Retirement Plans Participant Communication and Education Explaining SRI/ESG and its value Positioning What about employees who object? What about employees who want more SRI/ESG? 16

17 Biographies Karen D. Watson, CFA, AIF Ms. Watson provides investment consulting services to a wide variety of the firm s clients, including religious organizations, healthcare organizations and corporations. Her responsibilities include asset allocation modeling, investment portfolio design and construction, and investment policy formation. Prior to joining Gallagher, Ms. Watson served as Manager of Equities for the Boeing Company in Chicago, where she managed the $20 billion equity portfolio in its defined benefit plan. Previously, she was employed by Baxter International, Inc (in Deerfield, Ill.) where her responsibilities included evaluating the portfolio structure and performance of Baxter s benefit plans. Ms. Watson graduated from The Pennsylvania State University with a BS in Finance and she earned an MBA in Corporate Finance from the University of Dallas. 17

18 Biographies Margaret Mary Cosgrove, BVM Margaret Mary Cosgrove, BVM, joined Great Lakes Advisors in 2008 as an independent director and became a part time Director of Client Services in February She works to ensure that the firm provides superior customer service to all clients in all circumstances. In addition to her role with the firm, Margaret Mary also serves on several investment/stewardship committees for a university, several religious communities, and a social service agency. Margaret Mary serves on the Finance Council and the Audit Committee of the Archdiocese of Dubuque. Before joining the firm, Margaret Mary worked in the not-for-profit sector and in academics as a faculty member and Department Chair for both Clarke University and Loras College in Dubuque, Iowa. She also served as Treasurer and CFO for the Sisters of Charity for 12 years. Margaret Mary graduated from Mundelein College (now Loyola University, Chicago) with a BA in Theology and she earned an MBA in Finance and Accounting from the University of Iowa. 18

19 Biographies Roderick B. Crane, JD Roderick B. Crane is a national authority on religious and public sector retirement plans and is responsible for developing and executing strategies for the religious and state and local government 401(a), 457, 401(k) and 403(b) markets for TIAA-CREF. Before joining TIAA-CREF, Mr. Crane was a senior consultant with The Segal Company and Mercer Human Resources Consulting. Prior to entering the benefits consulting arena, he served as staff legal counsel for the North Dakota Legislative Assembly and its public employee retirement oversight committee. As an attorney, Mr. Crane also brings expertise with regard to federal tax and workplace laws as they apply to defined benefit and defined contribution retirement plans (401(a), 401(k), 457 and 403(b)) arrangements as well as fiduciary and governance requirements that apply to plan sponsors and boards of trustees. Mr. Crane is a member of the Colorado Bar Association, the National Association of Church Personnel Administrators, the National Association of Governmental Defined Contribution Administrators, the National Association of State Retirement Administrators, the National Council on Teacher Retirement, and a past Instructor for International Foundation of Employee Benefits Certificate for Public Pension Plan Policy (CAPPP) program. 19

20 Disclosures With respect to the slides presented by: Karen D. Watson, CFA, AIF Area Senior Vice President Gallagher Fiduciary Advisors, LLC This information is provided for educational purposes only. The information provided herein, even if generally applicable, cannot possibly take into account all of the various factors that may affect you, your company, or your particular situation. Your attorney and accountant should be consulted for legal and tax implications. Gallagher Fiduciary Advisors does not provide legal or tax advice. Investment advisory services and named and independent fiduciary services are offered through Gallagher Fiduciary Advisors, LLC, an SEC Registered Investment Adviser. This document contains proprietary information that belongs to Gallagher Fiduciary Advisors, LLC and is protected by copyright, trade secret and other State and Federal laws. Any copying, redistribution, or retransmission of any of the contents without the written consent of Gallagher Fiduciary Advisors, LLC is expressly prohibited. Gallagher Fiduciary Advisors, LLC is a single-member, limitedliability company, with Gallagher Benefit Services, Inc. as its single member. Neither Arthur J. Gallagher & Co., Gallagher Fiduciary Advisors, LLC nor their affiliates provide accounting, legal or tax advice. 20