S&P ESG Pan-Europe Developed Sovereign Bond Index June 2015
Content 1 Introduction 2 RobecoSAM Country Sustainability Ranking 3 S&P ESG pan-europe Developed Sovereign Bond Index 4 Conclusion 2
Introduction The financial crisis has shown that market participants significantly underestimated the importance of country risks in their sovereign fixed-income portfolios: Yields on European government bonds (10Y) Source: Markt-Daten.de, as at 08/01/2014 45 40 35 30 25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Greece Portugal Spain Ireland Italy Germany 3
Introduction Investment rationale of S&P ESG Sovereign Bond Index family Integrate countries Countries with a The resulting index The RobecoSAM sustainability favorable ESG family shows both Country Sustainability profile into the profile receive a an improved Ranking provides weighting scheme higher weight ESG profile and the underlying for sovereign bond compared with pure improved risk/ research indices debt-weighted indices return profile methodology 4
RobecoSAM Country Sustainability Ranking Overview Robeco and The analysis Data and analysis The RobecoSAM RobecoSAM have comprises all history going back Country developed a developed and to 2008 Sustainability sustainability emerging market Ranking is used as analysis model to countries the basis for assess countries sovereign fixed- long-term income investment environmental, solutions social and governance risks 5
RobecoSAM Country Sustainability Ranking Integrated approach Integration of ESG risk factors into classical country assessment In addition to fiscal stability, such factors as social stability or political risk are assessed The analysis shows the long-term stability of a country from an investor s perspective This is particularly important in emerging markets where legal, social and political stability is often neglected in investment decisions Debt Sustainability ESG Profile Economic Cycle 6
RobecoSAM Country Sustainability Ranking Debt Sustainability ESG Profile Economic Cycle Political Risk Debt Labor Credit Rating Growth Current Account Interest Payment Change in Debt Budget Balance Governance Social Enviromental Inflation Indicators Inflation Producer Consumer 7
RobecoSAM Country Sustainability Ranking ESG analysis addresses important issues: ENVIRONMENTAL How dependent is a country on energy imports? How energy efficient is the country and what is the percentage of renewable energy? SOCIAL Are there social problems due to wealth disparity? Is there a social system that can absorb economic or social shocks? Are social systems financed in a sustainable way? GOVERNANCE Is there an effective legal system to enforce legal claims? Are key institutions (central bank, supreme court) independent of the government? Is there an effectively operating tax system? 8
RobecoSAM Country Sustainability Ranking The ESG country assessment is based on well-known public sources: Overview of information sources ENVIRONMENTAL SOCIAL GOVERNANCE EIRIS IEA UN Energy The World Risk Report (Alliance Development Works) EIRIS Fragile States Index UN Human Development Index EIRIS World Bank (various databases) PRS political risk rating World Economic Forum S&P HelpAge 9
RobecoSAM Country Sustainability Ranking Example: Political risk score within the governance score Political risk score (100 is best possible) 90 85 80 75 70 65 60 07/2007 07/2008 07/2009 07/2010 07/2011 07/2012 07/2013 07/2014 Greece Germany 10
RobecoSAM Country Sustainability Ranking Weighting scheme of dimensions and sub-indicators: Every sub-indicator is scaled to the interval 0-10. Aggregation of scores based on a pre-defined scorecard: Detailed overview indicators ESG country ranking Robeco INDICATOR (WEIGHT%) SUB INDICATORS E 15% Environmental Status (10%) Atmosphere Water Land Energy (2.5%) Energy use Renewables Imports Biodiversity and Institutional Capacity Environmental Risk (2.5%) Exposure to natural hazards Susceptibility Coping capacities Adaptive capacities Social Indicators (10%) Education and human welfare Work and equality S 25% Human Development (10% ) Health Education Living Standards Social unrest (5%) Riots & Protests Refugees Brain drain Group grievance Food and water scarcity G 60% Liberty & Inequality (10%) Competitiveness (10%) Political rights Institutions Civil liberties Infrastructure Quality of Governance and Gender Inequality Index Macroeconomic environment Health and primary education Higher education and training Goods market efficiency Labor market efficiency Financial market development Technological readiness Market size Business sophistication Political Risk (10%) Government Stability Socioeconomic Conditions Investment Profile Internal Conflict External Conflict Corruption Military in Politics Religious Tensions Law and Order Ethnic Tensions Democratic Accountability 11
RobecoSAM Country Sustainability Ranking Detailed overview indicators ESG country ranking Robeco INDICATOR (WEIGHT%) SUB INDICATORS Accountability (2.5%) Confidence in honesty of elections Press Freedom Index Media Sustainability Index Political Participation Stability (2.5%) Frequency of political killings Conflicts of ethnic, religious, regional nature Civil unrest G 60% Government effectiveness (2.5%) Regulatory Quality (2.5%) Rule of Law (2.5%) Corruption (2.5%) Aging (10%) Institutions (5%) Quality of public administration Trade policy Property rights Anti-Corruption policy Dependency ratio Burden of government regulation Satisfaction with public transportation system Price liberalisation Judicial framework Public trust in financial honesty of politicians Dependency ratio change Judicial independence Bureaucratic quality Ease of Starting a business Confidence in the police force Frequency of corruption Official retirement change Property rights Tax Effectiveness Access to land Age-related spending change Intellectual property protection AgeWatch index Efficiency of legal framework in settling disputes Efficiency of legal framework in challenging regulations Transparency of government policymaking Strength of audditing and reporting standards 12
RobecoSAM Country Sustainability Ranking Top 10 and bottom 10 countries (Data as of April 10, 2015) 9 8 7 6 Governance Social Environmental 5 4 3 2 1 0 13
RobecoSAM Country Sustainability Ranking Objective Integrate country Integration is Index methodology Weighting scheme ESG profile into achieved by tilting is to improve the to reduce exposure existing debt- country weights overall ESG profile to highly indebted weighted sovereign toward the more of the index and the countries seen in bond index sustainable risk/return profile standard countries in the benchmarks underlying benchmark index 14
Tilt factor S&P ESG pan-europe Developed Sovereign Bond Index Index methodology The index is based on the existing S&P sovereign bond index universe Country weights are tilted toward more sustainable countries by using a tilt factor: 1.0 75 % x ESG country score +25 % x yearly change of score Average The tilt factor is a linear function of 75% x score + 25% x yearly change of score The country scores are normalized using z-scores to ensure comparability across years 15
S&P ESG pan-europe Developed Sovereign Bond Index Back test performance (EUR, June 2015) Source: S&P 170 160 150 140 S&P ESG Pan-Europe Developed Sovereign Bond (EUR) S&P Pan-Europe Developed Sovereign Bond (EUR) 130 120 110 100 90 16
S&P ESG pan-europe Developed Sovereign Bond Index Back test cumulative outperformance (EUR, June 2015) Source: S&P 12% 10% 8% 6% 4% 2% 0% -2% -4% 17
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 S&P ESG pan-europe Developed Sovereign Bond Index Back test country allocation Source: S&P 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Switzerland Sweden Spain Portugal Norway Netherlands Italy Ireland Greece Great Britain Germany France Finland EU Denmark Belgium Austria 18
Conclusion The S&P ESG Instead of purely The index method- The S&P ESG pan- Sovereign Bond weighting countries ology achieves an Europe Developed Index methodology according to improvement in Sovereign Bond offers an alternative outstanding debt, the financial perfor- Index will to the well-known the S&P ESG mance across the be extended to problem of debt- Sovereign Bond business cycle, risk a family of indices weighted bond Index methodology figures, the Sharpe covering Europe, indices tilts country weights ratio and the overall the Eurozone, global toward more ESG profile of the developed and sustainable underlying index emerging markets countries portfolio compared with a debtweighted index 19
Disclaimer No warranty This publication is derived from sources believed to be accurate and reliable, but neither its accuracy nor completeness is guaranteed. The material and information in this publication are provided "as is" and without warranties of any kind, either expressed or implied. RobecoSAM AG and its related, affiliated and subsidiary companies disclaim all warranties, expressed or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose. Any opinions and views in this publication reflect the current judgment of the authors and may change without notice. It is each reader's responsibility to evaluate the accuracy, completeness and usefulness of any opinions, advice, services or other information provided in this publication. Limitation of liability All information contained in this publication is distributed with the understanding that the authors, publishers and distributors are not rendering legal, accounting or other professional advice or opinions on specific facts or matters and accordingly assume no liability whatsoever in connection with its use. In no event shall RobecoSAM AG and its related, affiliated and subsidiary companies be liable for any direct, indirect, special, incidental or consequential damages arising out of the use of any opinion or information expressly or implicitly contained in this publication. Copyright Unless otherwise noted, text, images and layout of this publication are the exclusive property of RobecoSAM AG and/or its related, affiliated and subsidiary companies and may not be copied or distributed, in whole or in part, without the express written consent of RobecoSAM AG or its related, affiliated and subsidiary companies. No Offer The information and opinions contained in this publication constitutes neither a solicitation, nor a recommendation, nor an offer to buy or sell investment instruments or other services, or to engage in any other kind of transaction. The information described in this publication is not directed to persons in any jurisdiction where the provision of such information would run counter to local laws and regulation. 20