Exclusion Screenings. From Morals to Sustainability Risks. Dr. Regina Schwegler, Senior Sustainability Analyst

Transcription

1 Exclusion Screenings From Morals to Sustainability Risks Dr. Regina Schwegler, Senior Sustainability Analyst Inrate Geneva/Berne, May 20/22, 2014 Slide 1

2 Content History Today s exclusion screenings: a market success Strenghts and weaknesses Relevance in sustainability ratings Do investors need a responsible investment position? Is there anything like a generally «correct» position? Conclusions Inrate Geneva/Berne, May 20/22, 2014 Slide 2

4 Taking a look From today Inrate Geneva/Berne, May 20/22, 2014 Slide 4

5 Taking a look From today To centuries back Inrate Geneva/Berne, May 20/22, 2014 Slide 5

6 Religious roots 18th century: Quakers Religious Society of Friends refused to participate in slave trade 1928: «US Pioneer Fund»: first responsible investment fund, excluded alcohol and tobacco Since 1960s: European churches and religious organisations exclude «sin stocks», e.g. weapons, alcohol, tobacco Exclusion screenings are oldest SRI practice Exclusion of «sinful» activities Inrate Geneva/Berne, May 20/22, 2014 Slide 6

7 Civil and social rights movement 1890 s 1950 s: US civil rights movement dialogues, boycotts, direct action targeted specific companies Protests against Vietnam war and outrage against profiting companies, e.g. Dow Chemicals (napalm) Protest against apartheid regime in South Africa: 1977 the Sullivan Principles encouraged divestment 1971: Pax World Funds founded, first ethical mutual funds Social and political exclusion criteria Inrate Geneva/Berne, May 20/22, 2014 Slide 7

8 Environmental movement 1972: Meadows & Meadows «Limits to Growth» to Club of Rome 1973: Oil crisis 1970 s: Anti-nuclear movement 1984: Union Carbide explosion in Bhopal, India 1986: Chernobyl nuclear catastrophe, Ukraine 1989: Exxon Valdez oil spill off the coast of Alaska Environmental management systems and company reportings Inrate Geneva/Berne, May 20/22, 2014 Slide 8

9 UN postulates «sustainable development» 1987: Brundtland Report, Earth Summit of UN WCED: «Sustainable development» as distributive justice for developing countries and future generations Environmental, social, economic dimensions Since 1990s: Sustainability assessments evaluating trade-offs 1990: «Domini Social Index» founded as first mutual fund 2006: UN launched Principles for Responsible Investment Sustainability as holistic concept Sustainability criteria used for exlusions and assessments Inrate Geneva/Berne, May 20/22, 2014 Slide 9

11 Today s exclusion screenings Value-based exclusions Products or industries, e.g. nuclear energy, alcohol, tobacco, pornography, weapons, GMO Practices, e.g. serious violations of human and labor rights, laws, serious ecological damages Norm-based exclusions, e.g. ILO Convention: labor rights e.g. freedom of association, child, forced labor UN Global Compact: e.g. human, labor rights, environment, corruption OECD Guidelines for multinational companies: human rights, business ethics, etc. UN Conv. on Certain Conventional Weapons: e.g. landmines, cluster bombs Biological / Chemical Weapons Convention Inrate Geneva/Berne, May 20/22, 2014 Slide 11

12 The market success of exclusion screenings Sustainable investment approaches in Switerland 2013 in Switzerland: 30% of SRI, resp. 48 Bn SFR Bn SFR Inrate Geneva/Berne, May 20/22, 2014 Slide 12 Source: FNG Market Report 2014

13 Current exclusion screenings Asset owners City of Zurich Pension Fund ABP (NL) Exclusion issues Cluster munitions, landmines, human rights, environment Landmines, cluster munitions, chemical, biological weapons, Global Compact Excluded companies PGGM (NL) Controversial weapons, tobacco, human rights, ILO 116 Norwegian pension fund AP4 (SE) Controversial weapons, tobacco, human rights, severe ecological impact, etc. Controversial weapons, ILO, UN Global Compact, OECD Principles for Corporate Governance and Multinational Corporations, int l law violations, etc Inrate Geneva/Berne, May 20/22, 2014 Slide 13

14 Inrate Exclusion Screening Results (Futura Funds) 0% Share 5% of companies 10% involved 15% 20% Excluded Companies (Total) Weapons Labour Issues Nuclear Business Ethics Social Impact of Products Human Rights Alcohol Gambling Tobacco Green GMO Ecological Impacts of Processes Pornography 5% 4% 4% 3% 3% 3% 2% 1% 1% 1% 1% 0% Source: Inrate, April % Value-based exclusion criteria 395 (resp. 19%) companies excluded due to at least one infringement Inrate Geneva/Berne, May 20/22, 2014 Slide 14

16 Strengths and weaknesses of exclusion screenings (1) improve sustainability impact Purposes of SRI: (2) reflect investors values Strengths! Weaknesses? Exclusion screenings Inrate Geneva/Berne, May 20/22, 2014 Slide 16

18 Exclusion screenings and sustainability impact Exclusion issues Company examples Investment risks Sustainability impact Nuclear power BKW (FMB), RWE hidden costs, regulation change major risks, external costs Genetic engineering Syngenta, Monsanto reputation, regulation change major risks Weapons Boeing, BAE Systems reputation, regulation risks ethical, societal costs Alcohol, tobacco Dufry, Lawson reputation external health care and societal costs Gambling Galaxy Entertainment, Int l Game Technology reputation, regulation change external social costs of addiction Human and labor rights BHP Billiton, Royal Dutch Shell reputation ethical, societal costs Legal compliance Credit Suisse, Deutsche Bank liabilites, reputation societal costs Inrate Geneva/Berne, May 20/22, 2014 Slide 18 Source: Inrate 2014

19 Exclusion screenings and sustainability impact Risk protection minimal exclusions ecompassing exclusions full sustainability approach Level of sustainability Source: Inrate, 2014 No matter why you exclude, you end up being more sustainable! But exclusion screenings are limited: not all relevant sustainability issues covered, minimum standards not always effective Inrate Geneva/Berne, May 20/22, 2014 Slide 19

21 Exclusion screenings and investors values Financially-driven investors might miss growth chances of energy efficient technologies and renewable energies, if merely excluding nuclear energy Reputation-driven investors might not be involved in human rights controversies, but do not benefit from good reputation of companies with best practices concerning equal rights of employees Value-driven investors might not finance weapons, but possibly climateintensive automobile companies Exclusions focus on highest and important risks! Other relevant risks and chances might be missed! Inrate Geneva/Berne, May 20/22, 2014 Slide 21

22 Strengths and weaknesses of exclusion screenings Strengths Tangible, straight-forward Avoid highest risks Easy to understand and communicate, cheap to implement Minimum standards essential components in ESG ratings First step for holistic sustainability assessments Weaknesses Often limited criteria, not scientifically based ( good vs. bad too simplistic) Criteria often vague, inconsistently applied Mostly insufficient to reflect responsible investors values Insufficient to assess sustainability performance of companies Risk of getting stuck with half-baked solutions Inrate Geneva/Berne, May 20/22, 2014 Slide 22

24 Relevance of exclusion screenings in sustainability ratings The Inrate rating approach Scientific bases: Ethical concepts such as universal human rights and responsibility Economic concepts of market failure, esp. external costs and benefits Methodological pillars: Sustainability assessment to identify companies that fulfil society s needs for mobility, nutrition, energy etc. with least sustainability impact Exclusion screenings as minimum standards, tackling serious sustainability impact and extreme risks Inrate Geneva/Berne, May 20/22, 2014 Slide 24

25 Inrate sustainability ratings Inrate Sustainability Assessment Exclusion Screening No Infringements, but: Nuclear energy: <1% turnover with products for nuclear power plants below threshold Weapons: <1% turnover with non-lethal defense equipment below threshold Inrate Geneva/Berne, May 20/22, 2014 Slide 25

26 Inrate sustainability ratings Inrate Sustainability Assessment Before: EXCLUDED lethal defence supplies for vessels and (nuclear) submarines (no threshold) But contact in 2013: company stopped program, but still capable of supplying nuclear submarines Exclusion Screening No Infringements, but: Nuclear energy: <1% turnover with products for nuclear power plants below threshold Weapons: <1% turnover with non-lethal defense equipment below threshold Inrate Geneva/Berne, May 20/22, 2014 Slide 26

27 Inrate sustainability ratings Inrate Sustainability Assessment Exclusion Screening No Infringements, but: Nuclear energy: <1% turnover with products for nuclear power plants below threshold Weapons: <1% turnover with non-lethal defense equipment below threshold Inrate Geneva/Berne, May 20/22, 2014 Slide 27

29 Responsible investment policies are trendy Formal policy Planned No formal policy Source: Novethic 2013 And make sense Inrate Geneva/Berne, May 20/22, 2014 Slide 29

30 Consequences of «no» position Investors held accountable for their investments impact! If challenged for problematic investments, the following reactions remain: 1. Doing nothing 2. Defend investment 3. Active engagement 4. Disinvest 1./2. ineffective, reputational/financial damages hit fully 3./4. demonstrate good will, aim at limiting damages Reactive behavior potentially costly Inrate Geneva/Berne, May 20/22, 2014 Slide 30

31 Consequences of «no» position Another risk factor: the time trap Reactive behavior is externally driven, «jumping the guns» Not enough time to set up appropriate strategies and investment tools Risk of ending up with unfavorable investment selections With relevant aspects of investments not sufficiently known Inrate Geneva/Berne, May 20/22, 2014 Slide 31

32 Pro-active behavior has clear advantages Working out and implementing responsible investment policy, investment strategies and criteria beforehand effectively avoids risks and damages prudent way of fiduciary investing: enough time to define right way to go, go ahead, best chance to get where you want to be Inrate Geneva/Berne, May 20/22, 2014 Slide 32

33 Content History Today s exclusion screenings: a market success Strenghts and weaknesses Relevance in sustainability assessments Do investors need a responsible investment position? Is there anything like a generally «correct» position? Conclusions Inrate Geneva/Berne, May 20/22, 2014 Slide 33

34 Diverse reasons to use ESG criteria with investments Financial performance 9% Protection of reputation 18% Long-term risk management 33% Contribution to sustainable development 38% Source: Novethic 2013 Each investor is different: Different missions, stakeholders, cultural norms and ideologies Inrate Geneva/Berne, May 20/22, 2014 Slide 34

35 Diverse reasons to use ESG criteria with investments : There is no correct position for everybody But one appropriate for yourself Inrate Geneva/Berne, May 20/22, 2014 Slide 35

36 How to define an investment position Step 1: Define your investment values In line with your organization s mission Aligned with values of relevant stakeholders and society Whose criticism are you willing and able to deal with? Step 2: Deduce your responsible investment policy Define sustainability issues considered and their relevance in case of trade-offs Possible stances: Materiality-driven, reputation-driven, value-driven How much risk do you want to avoid? Step 3: Select your responsible investment products and criteria Implement policy in product range (RI products) and investment decisions Select appropriate exclusion criteria, thresholds and sustainability assessments Inrate Geneva/Berne, May 20/22, 2014 Slide 36

37 Content History Today s exclusion screenings: a market success Strenghts and weaknesses Relevance in sustainability assessments Do investors need a responsible investment position? Is there anything like a generally «correct» position? Conclusions Inrate Geneva/Berne, May 20/22, 2014 Slide 37

38 Conclusions Ethical minimum standards via exclusion screenings.make sense and are essential if used in the right way! Don t get stuck with arbitrary, unfounded exclusion criteria. There are hidden risks, and chances missed! First define where you want to be, then choose the best way to go Inrate Geneva/Berne, May 20/22, 2014 Slide 38

39 Thanks! Inrate Geneva/Berne, May 20/22, 2014 Slide 39