How To Understand The Value Of Sustainability

Transcription

1 Innovest Uncovering Hidden Value for Strategic Investors The Investor Perspective Sustainability & the Triple Bottom Line NYC, Fashion Institute of Technology 29 May 2008 New York Paris Toronto London San Francisco Sydney Tokyo 1

2 Presentation Outline Introduction to Innovest Sustainable investing ethical investors Sustainable investing traditional investors The iceberg balance sheet Signs of an awakening market Studies supporting ESG materiality The Global 100 one example of methodology and results 2

3 Introduction to Innovest Core activities: specialized investment research, consulting, asset management sub-advisory services 50+ company and industry Analysts. Largest Analyst team in the world in the non-traditional investment risk space. Collectively, the Innovest team speaks 18 languages. Research coverage: companies globally MSCI industry sectors Innovest s largest outside investors: APG (Netherlands), second-largest pension fund in the world; and State Street $1.3 billion in global and domestic sub-advisory mandates Offices in New York, Toronto, London, Paris, Sydney, Tokyo and San Francisco 8 out of the top 25 global asset managers in the world use Innovest research. Key clients include: UBS, HSBC, SSgA, APG, BNP Paribas, CalPERS 3

4 Sustainable Investing Market SRI in the US (USD billions) $3,000 $2,500 $2,000 $1,500 $1,000 Community Investing Screening & Advocacy Shareholder Advocacy Only Social Screening Only $500 $ Source: Social Investment Forum Foundation 4

5 Sustainable Investing Market Shareholder Resolution Activity Resolutions Filed Resolutions Withdrawn Resolutions Voted On Average Votes Received 9.8% 13.3% 15.4% Source: RiskMetrics Group 5

6 The Iceberg balance sheet Financial Capital 30% Four Key Intangible Value Drivers Intangible Capital 70% Sustainable Governance Strategy Capability/ Adaptability Traditional governance practices Environment Quality of environmental management Environmental risks & Ecoefficiency Strategic profit opportunities Human Capital Recruitment retention strategies Employee motivation Labor relations Innovation capacity Knowledge Development & Dissemination Health & Safety Progressive workplace practices Stakeholder Capital Regulators & Policymakers Local communities NGOs Customer relationships Alliance partners Supply chain Social benefits of products & services 6

7 Increasing relevance Increased public and investor awareness and concern over ESG issues, notably climate change. Recognition from the sell side Goldman Sachs, UBS, Morgan Stanley, etc. Non-correlated data, independent studies revealing the ability to deliver alpha Expansion of both investment and industrial competition to emerging markets, where ESG risks are highest New legitimacy for ESG issues for fiduciaries not only permissible but recommended (Mercer, Freshfields reports) Growth in institutional investor activism on ESG issues Carbon Disclosure Project, Investor network on Climate Risk, llgcc, etc. Asset allocation decisions by leading public funds ABP, CalPERS, CalSTRS, FRR, PGGM, CPPIB, etc. 7

8 Results from academia and financial institutions 88 separate studies identified, published in the last ten years, examining the impact of environmental, social and/or governance on financial performance. The literature review found strong evidence for the existence of a positive relationship between environmental governance and financial performance, 79 positive correlations, 11 neutral relationships and 9 negative correlations. Note: In some cases, an individual study identified a mix of correlations, some positive, others neutral or negative, depending on the range of ESG factors and financial indicators examined and which ones were correlated with another. For this reason the total number of correlations in the table below exceeds the total number of studies included in the review (88 in total). [as of Feb 07] Number of Correlations Number of Positive, Neutral and Negative Correlations Found Positive Neutral Negative 8

9 Research of Interest - Summary Columbia University - A portfolio of corporate bonds of companies rated highest by Innovest in each of the industries analyzed had a spread over Treasuries of 40 basis points lower than a similar portfolio of corporate bonds of companies rated lowest in each of the industries analyzed. Erasmus University and Maastricht University, The Netherlands - Constructed 2 portfolios, one consisting of high-ranked companies and the other of low-ranked companies, ran portfolios over 5 years. Cumulative differential over the test period was 30%. Innovest 2005 Global 100 Portfolio of Innovest s Global 100 companies, from Jan 2000 to Dec 2005, equal weighted, rebalanced quarterly, outperformed the MSCI World Index by 80% cumulatively over the period. Daniel A. Potash Investigated Innovest s Global 100 relative to peers. Companies in the Global 100 had P/E ratios 15% higher than their peers; this would translate into billions of dollars of stock market increased value for most large companies traded on major exchanges. 9

10 Research of Interest Columbia Economic Benefits of Certification Programs Study by Center for Environmental Research & Conservation at Columbia Among other subjects, investigated financial market reactions to sustainability performance, including fixed income markets (for which Innovest ratings were used) Conclusion: Companies in industries rated by Innovest as having least environmental impact had on average a 50 basis points lower spread over Treasuries than companies in the industries with the highest environmental impact. Companies rated in the top half in their industry had on average a 34 basis points lower spread over Treasuries than companies rated in the bottom half of that industry (of those companies and industries for which data was available and gathered). A portfolio of corporate bonds of companies rated highest by Innovest in each of the industries analyzed has a spread over Treasuries of 40 basis points lower than a similar portfolio of corporate bonds of companies rated lowest in each of the industries analyzed. There was no correlation between the Innovest company score and the bond rating (pearson correlation coefficient = 0.093). 10

11 Research of Interest - Erasmus et al The Eco-Efficiency Premium in the U.S. Equity Market Study by Erasmus University and Maastricht University, The Netherlands, October 2003 Constructed 2 portfolios, one consisting of high-ranked companies and the other of lowranked companies (U.S. companies only) Used a best-in-class approach on a sector by sector basis and remained sector-neutral overall Ran portfolios from May 1997 to December 2002 Results: Best-in-class portfolio had annual return of 5.76% Worst-in-class portfolio had annual return of 0.84% Cumulative differential over the test period was about 30% Conclusion: Eco-efficient companies as a group are already being rewarded in the marketplace 11

12 Research of Interest - Erasmus et al The Economic Value of Corporate Eco-Efficiency Study by Erasmus University and Maastricht University, The Netherlands, April 2005 Investigated relationship of eco-efficiency as determined by Innovest and firm value as measured by Tobin s Q Ran tests quarterly from 1997 to 2002 Results: The least eco-efficient companies had values that were significantly lower compared to those of the remainder of the sample Environmental winner companies initially did not trade at a premium relative to losers, but that the premium increased strongly over time the least eco-efficient firms display significant operational underperformance. Our findings, thus, strongly reject the notion expressed by CSR skeptics that the benefits of adopting a strong environmental policy are unlikely to outweigh the costs. Conclusion: Investors may interpret our results as evidence that corporate environmental performance is a potential source of information that facilitates them in generating superior excess returns. 12

13 Research of Interest Global 100 The Stock Market Value of Sustainability Study by Daniel A. Potash, Power Project Financing LLC Investigated Price/Earnings ratios as a measure of company value Tested Innovest s Global 100 (as presented at World Economic Forum) against comparable companies not on this list Conclusion: The stock market may give better share price valuation in terms of P/E to companies that are perceived of as sustainable versus comparison companies not so designated. Companies in the Global 100 had P/E ratios 15% higher than their peers; this would translate into billions of dollars of stock market increased value for most large companies traded on major exchanges. 13

14 The Global History The Global 100 Most Sustainable Corporations in the World was a project initiated by Corporate Knights Inc., a Canadian-based media company specializing in sustainability coverage. Innovest analysis has generated the Global 100 list since its inception in The list is released in January at the World Economic Forum s Annual Meeting in Davos, Switzerland. Innovest and Corporate Knights co-host an invitational-only dinner which has been extremely well-attended. Dr. Joseph Stiglitz, former Chief Economist of the World Bank and Nobel Laureate in Economics, has been the special commentator during the Global 100 dinner for the past two years. The Global 100 list has also received a great deal of media attention in such publications as Business Week, Newsweek, and a number of newspapers. 14

15 The Global Methodology STEP 1: Initial Eligible Universe: all AAA Innovest-rated stocks AAA rankings reflect top-quartile status in each industry sector, relative to samesector peers Ensures that all eligible stocks score well on 4 major sustainability factors, on both opportunities and risk management STEP 2: Restrict universe further to MSCI World universe (1700+ companies) STEP 3: Tilt the reduced universe further by placing additional weight on the forwardlooking factors eg. Exposure to next-generation opportunities STEP 4: Adjust remaining universe to reflect the industry sector weights in the MSCI World Index as closely as possible Industry sectors with greater capitalization weight in the MSCI World Index will have greater representation in the Global 100 STEP 5: Review candidates with Innovest sector analyst teams, eg. Oil and gas STEP 6: Final reality check with Innovest s Managing Director of Research STEP 7: Global 100 list created 15

16 Sustainable Investing Market Innovest Global 100 MSCI World (Free) Dow Jones Global Titans Dow Jones Industrials Out-performance of Global 100 Companies (Quarterly Adjusted) Feb05 May05 Aug05 Nov05 Feb06 May06 Aug06 Nov06 Feb07 May07 Aug07 Nov07 Feb08 16

17 Thank you Please feel free to contact us Conan Magee Deputy Research Director ext 209 Sarah Greenberg Director of Business Development ext