Sustainability: integrating investment risks of the future Belinda Gan, Product Manager, Sustainable Investment team, Schroders IAPF Annual Governance Conference 2018
Sustainability A perfect storm Regula latory y Acceler elerat atin ing g Global bal Membe ber r scrutin iny change chall llenges es pressur sure Average tenure in the S&P 500 Require finance’s Regulators trying to make the Savers are increasingly focused has dropped from involvement to solve whole financial chain on sustainability-related issues 50 years to under 15 years over more sustainable the last five decades Trustees told to “wake up and smell the coffee” IAPF Annual Governance Conference 2018 2
Sustainable investing increasingly important to end investors globally 76% 64% 62% 62% of investors felt sustainable have increased their allocation to interested in sustainable investment investing is more important than sustainable investments over the funds e.g. climate change and 5 years ago past 5 years good corporate governance Source: Schroders Global Investor Study 2018. IAPF Annual Governance Conference 2018
But sustainable investing is not simple Lack ck of Confus fusio ion over Performa rmance ce Quest stio ions s over transp anspar aren ency cy concer erns members’ views defin init itio ions Range of different investment Many products in this space Leading to confusion over What do they want? products under the have not met what the intended approach is broad umbrella performance expectations IAPF Annual Governance Conference 2018
Barriers to investing more sustainably Which, if any, of the following specific factors do you consider a challenge of investing in sustainable investments? Performance concerns 53% Lack of transparency and reported data 50% Difficulty measuring and managing risk 33% Cost 28% Investment committee is not comfortable 17% making sustainable investments I do not believe in sustainable investments 16% I do not consider there to be any challenges to 12% investing in sustainable investments Other 3% 0% 10% 20% 30% 40% 50% 60% Source: Schroders 2018 Institutional Investor Study. IAPF Annual Governance Conference 2018
Performance concerns Tick box approaches have struggled Indexed, latest – 100 Name Name me me MSCI pre MSCI pre re even re even ent ent MSCI chan MSCI chan hange hange MSCI post MSCI post st even st even ent ent BHP Billiton BHP Billiton A A +1 +1 BBB BBB Volkswagen BBB +3 CCC Volkswagen BBB +3 CCC 140 Toshiba AAA +3 BBB Toshiba AAA +3 BBB Olympus AAA +6 CCC 130 Olympus AAA +6 CCC Siemens AAA 0 AAA Compass Group A +1 BBB Siemens AAA 0 AAA Carnival BB +2 CCC 120 Compass Group A +1 BBB BP AA +3 BB Carnival BB +2 CCC Barclays A +3 B BP AA +3 BB 110 Comcast B +1 CCC Barclays A +3 B Costco BBB +3 CCC Experian A +1 BBB Comcast B +1 CCC 100 Target BB +2 CCC Costco BBB +3 CCC Sports Direct A +1 BBB Experian A +1 BBB 90 Lloyds BBB +3 CCC Target BB +2 CCC Vodafone AA -1 AAA Sports Direct A +1 BBB Lloyds BBB +3 CCC 80 Vodafone AA -1 AAA 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 +1.06 3.69 Average rating pre and post controver versy sy 4.76 Dow Jones Sustainability World FTSE4Good Global MSCI ESG Stoxx Global ESG Source: Thomson Reuters, MSCI, Schroders, based on data as at 31 January 2017. Ratings adjusted as to numbers as follows: AAA=1, AA=2, A=3. BBB=4, BB=5, B=6, CCC=7. Companies mentioned are for illustrative purposes only and are not intended to be a recommendation to buy or sell any security. IAPF Annual Governance Conference 2018
Challenges with conventional ESG ratings Little consistency or transparency Less than 20% probability of ESG scores being the same across providers 25% 20% 15% 10% 5% 0% AAA AA A BBB BB B CCC MSCI vs. Sustainalytics MSCI vs. Thomson Reuters Sustainalytics vs. Thomson Reuters Source: Schroders, March 2018. IAPF Annual Governance Conference 2018 7
What might members want? Understanding of sustainable investing has become more sophisticated Which of these phrases describe what you think a Sustainable Investment fund is? 52% 47% 25% 25 9% Invest in companies which are Invest in companies that are best t Specifically avoid ids D on’t know proactive in making sure their in class ss when it comes to companies that are active in businesses are prepare red for for environmental social or contr ntroversia rsial l areas envir nvironm nmenta tal and socia ial l chang nges governance issues, even which will affect them if they y are not the most attractive ctive investments Source: Schroders Global Investor Study 2018. IAPF Annual Governance Conference 2018 8
What do investors care about the most? Priorities for engagement and influencing company behaviours Areas of importance to potential investors on a scale of 1 (not at all important) to 10 (extremely important) 7.9 7.6 7.4 .4 Ending bribery Pollution from Treatment of and corruption operations/use of company workforce renewable energy 7.3 7.0 6.7 Climate change Selling unhealthy or Diversity of the addictive products company’s workforce Source: Schroders Global Investor Study 2018. IAPF Annual Governance Conference 2018 9
Bridging the gap Transp anspar arency cy Compreh ehen ensive sive Activ ive e Provid idin ing approach ch ownershi ship clar arit ity Integrating the risks of the Deeper and more Reporting on engagement, Being clear on what we are future, in investment terms meaningful engagement voting and the sustainability targeting with profile of portfolios different approaches IAPF Annual Governance Conference 2018
Comprehensive approach Unique sustainability insights Climate progress dashboard Shows how climate change will Equities: s: highlighted benefits of impact a number of industries, and being the cleanest player in the scale of the challenge challenged industries. Reflected in stock selection Demonstrates the gap between winners and losers between and Fixed Incom ome: : demonstrated need Carbon Value at Risk (CVaR) within sectors for ongoing R+D for auto. Positioned in best invested names Engaged with companies not disclosing enough on the risks Event for non-exec directors to educate them on the systemic risks Source: Schroders. IAPF Annual Governance Conference 2018
Comprehensive approach Identifying emerging trends and actively engaging with companies 2015: Thematic research 2016: Sugar roundtable 2017: Investor expectations – Engaged with companies to better – Calls for greater transparency understand how they are managing and more consistent data their exposure – Outlines five core principles for board consideration – Provides suggested KPIs and categories – Endorsed by over 20 investors globally representing £1.8 .8 trillion on Adjust portfolio positioning Fixed income portfolios reduce their sugar Board Nutrition Policy Lobbying Disclosure oversight strategy exposure ahead of the announcement of many sugar taxes Source: Schroders. IAPF Annual Governance Conference 2018
Comprehensive, forward-looking approach Analysing impacts not yet reflected in financial statements Companies contri ribute to society iety and impose se costs on it, neither of which are reflected in their financial statements. Those socia ial l defici cits s and credit its can be quantified. They are borne by the public sector today or create debts that will be repaid in the future. Source: Schroders. IAPF Annual Governance Conference 2018
We have identified a range of quantifiable impacts Business activities with measureable social costs or benefits Gover ernme nments Waste e gener nerat ation on Innovat vation on Subsidi dies es Royal alties es Air pollut ution on Alcoh ohol olism sm Taxation on Nuclea ear waste Environme onment Custom omers Malnutrition on Carbon bon emissi ssion ons Compan panies es Smoking ng Biodi diver versi sity y loss Obes esity Community donation ons Water er use Gambl bling ng Bribe bery Salaries es and Training ng Armed ed violenc ence compensa pensation on Unsafe e sex Access ess to water er and sanitation on Injuries es and Communities es Empl ployee oyees fatalities es Access ess to ICT Source: Schroders. IAPF Annual Governance Conference 2018
SustainEx: focusing on the ‘E’ and ‘S’ of ESG Comprehensive research-driven process Over 400 academic 50 50 and industry studies of social impacts and externalities measures of social or 70 70 reported data environmental impact points for each company, estimated where not disclosed e.g. wages, taxes ~9k ~9k Unconve ventio ional l data from public sources e.g. patent registrations, stress perceptions large global companies examined Source: Schroders. IAPF Annual Governance Conference 2018
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