Transcript Slide 1

Opportunities for Green
Investment
17th November 2008
The State of Responsible Business in
2008
Bob Gordon
17th November 2008
© EIRIS
Contents
•
EIRIS
•
The Principles for Responsible Investment (PRI)
•
The Report
•
Results: Environment & Climate Change
•
Recommendations
© EIRIS
EIRIS
•
Independent Research Provider
•
Operating for 25 years
•
Research c.3,000 companies worldwide
•
Covering over 60 areas
•
Robust methodology – assessing risk, identifying opportunity
•
Policy, systems, reporting, performance
© EIRIS
The Principles for Responsible Investment
•
A framework for incorporating ESG
•
Complements and promotes the UN Global Compact
•
Provides support
© EIRIS
Principle 1:
To incorporate ESG issues into investment
analysis and decision-making processes.
Principle 2:
To be active owners and incorporate ESG issues
into ownership policies and practices.
Principle 3:
To seek appropriate disclosure on ESG issues by
the companies invested in.
The State of Responsible Business
•
Objectives of the report
•
Response and reporting results
•
•
•
FTSE All World Developed Index
Addresses UN Global Compact issues
Explores risk exposure and corporate response
•
Convention Watch
•
EIRIS PRI Toolkit
© EIRIS
Environment
Response and reporting by high impact companies
100%
90%
80%
No evidence
70%
Limited
60%
50%
Intermediate
40%
Good
30%
Advanced
20%
10%
0%
Response
© EIRIS
Reporting
Environment
Regional response by high impact companies
100%
90%
80%
No evidence
70%
Limited
60%
50%
Intermediate
40%
Good
30%
Advanced
20%
10%
0%
Japan
© EIRIS
Europe
Aus / NZ
North
America
Asia exJapan
Climate Change
Response and reporting by very high and high impact
companies
100%
90%
80%
No evidence
70%
Limited
60%
Intermediate
50%
40%
Good
30%
Advanced
20%
10%
0%
Response
© EIRIS
Disclosure
Recommendations

Integrate ESG risk into your investment strategy

Engage to improve company performance

Seek better corporate disclosure

Support the PRI
© EIRIS
Opportunities for Green Investment
Jo Allen
Head of SEE Engagement & Research
17th November 2008
Summary
• The Co-operative Asset Management
• Why incorporate environment into investment analysis
• Our Approach: Investment Philosophy and Analysis Process
• Sustainable Leaders Trust
• Good Companies Guide
• Case Studies: Drax and Scottish & Southern Energy
• Engagement on Environmental Issues
• Investment Performance
12
The Co-operative Asset Management
• The Co-operative Asset Management
carry out the fund management activities
of The Co-operative Financial Services
and is part of The Co-operative Group.
• 300,000 investors in unit trust range approx £20 billion AUM.
• Co-operative ownership structure & longstanding socially responsible tradition.
• Fully integrate ESG issues throughout the
investment process.
• Ethical Engagement Policy launched
following customer consultation in 2005,
applied to all funds under management.
13
Why incorporate environmental issues into investment
decisions?
• ESG issues are material – robust evidence that ESG
affects shareholder value in both the short and long term
• Identification of potentially overlooked risks reduces
portfolio risk
• Engagement on environmental issues delivers more
decision-useful information
• Enhances fundamental company analysis
• Enhances fund performance
14
Investment Philosophy
We believe that by looking over a longer time horizon and using
a broader perspective than the market, we can identify
mispriced stocks and build focused portfolios to deliver
sustainable performance.
It is fundamental to our view of responsible investment to
promote good governance and reflect our investors’ values.
15
Our analysis process
Theme
• Identify and quantify macroeconomic, social and political trends
• Investigate long-term thematic changes with senior management at company meetings
• Medium to long term trends tend to be underestimated
• Industry
• Awareness of global industry changes and their interactions between industries
• Industry lifecyles can be more important than economic cycles
• Understanding the change in industry dynamics, particularly competitive behaviour
• Company
• Identify good businesses - cash generative, well capitalised, generating above WACC returns
• Focus on changing situations, e.g. new managements or transformational M&A
• House view on a stock derived from agreement between equity analysts, ESG and fixed income
Quantify change and incorporate to valuations
The Sustainable Leaders Trust: Screening Process
SLT:Negative Screening
SLT:Positive Screening
SLT:Best in Class
•Detrimental impact on the
environment or society
•Positive contribution to
human health, safety,
environment and quality of
life
•All companies assessed
in 3 generic areas
•Defence, tobacco, animal
testing for cosmetics,
nuclear power
•e.g. Pharmaceuticals,
healthcare, utilities
SLT:Advisory Committee
•Expert multi-disciplinary
panel
•Approves overall process
•Adjudicates on ‘marginal’
companies
SLT INVESTMENT UNIVERSE
•Sector specific issues
considered
•Companies scored on a
relative basis
Sustainable Leaders Trust: Investment Universe
What does the investment universe look like?
• Key underweights: Oil, mining, tobacco, defence
• Key overweights: Healthcare, utilities, housebuilders, business services
• Companies approved: Focused fund: invests in 40-50 companies (170
approved for investment = 52%of FTSE All-share) plus AIM and some
overseas. High quality
• Positive structural drivers: increasing demand for healthcare,
environmental and H&S regulation, sustainability
18
Investment Performance: SLT
19
Key ethical peers
Performance Data up to 31/07/08
Performance
3 months
%
1 year
%
3 years
%
TCAM Sustainable Leaders
-3.9
-11.8
28.0
Aegon Ethical
-6.1
-10.9
33.8
F&C Stewardship Growth
-12.2
-24.6
0.6
Jupiter Ecology
-3.1
-9.0
39.9
NU Sustainable Future
-7.3
-19.5
11.4
Source Lipper
• Consistent, competitive performance
Our Approach: The Good Companies Guide
• A guide to help individual investors wanting to put their
money into companies making a positive contribution to
society
• Highlight issues commonly considered as part of our
investment approach
• Investor transparency: UNPRI
• Naming and shaming? Unavoidable. But also
congratulating!
21
“The Good Companies Guide”: what we measured
• Risk Management & Reporting
• Environmental: control of impacts and management of
risk (e.g. arising from climate change).
• Social: management of stakeholder relationships and
workplace relations and the risks these pose to business
• Governance: independent oversight; board
effectiveness; audit; directors’ remuneration; shareholder
alignment.
• Sector-specific: e.g., food retailers – responsible
sourcing; planning and competition; labelling and
marketing; product sustainability.
22
Drax: squaring the circle?
SRI analysis identified:
• Single-asset coal plant proscribed by EU
ETS
• Limited headroom for reducing absolute
emissions
• Drax will suffer when Phase 2 of ETS
corrects over-allocation
• Significant costs (c. £160m p.a. assuming
$20 carbon price) 'til 2012, after which
permits are likely to be 100% auctioned
Integration in practice:
• This contributed to case for reducing
exposure to Drax and a bearish houseview
• Fund managers and SRI analysts working
together on what Drax's new 'Project
Willow' to build 3 biomass plants from
2015 means for our previous analysis.
Example: Scottish & Southern Energy
• Investment Case
• Themes
• Industry
• Company
- global power shortage, climate change
- consolidating industry trend
- outstanding management, very low debt
• ESG research highlights
• Major investment in renewables
• 100% rating for governance, 90% for environmental and social factors
• Industry leading social responsibility programme
• Largest overweight position in the funds since 2005
Engaging on the Environment
• Tar Sands “Unconventional Oil: Scraping the Bottom of the Barrel”:
commercialisation of unconventional fossil fuels. Intensively climate hostile sources
of energy. Called on companies to report on the risks associated with the env & soc
liabilities of oil sands operations. Halt further expansion.
• Biofuels: report on the sustainability risks and opportunities surrounding biofuels,
including the impact on food prices.
• HSBC Samling: investment in a Malaysian logging company was at odds with
HSBC commitment to the Equator Principles.
• Severn Trent: failures in governance since 2002. Fined £36m by OFWAT for
submitting to false customer satisfaction data, used to justify increases in customer
tariffs.
• UNPRI: Engagement clearinghouse
25
Jo Allen
Head of SEE Research & Engagement
The Co-operative Asset Management
22nd Floor, Miller Street
Manchester M60 0AL
t: (0)161 9034014 m: (0)7912162963
e: [email protected]
26
Disclaimer
This document is provided to you for your information and discussion only. It is not a solicitation or an offer to buy or sell any security or other financial
instrument. Any analytical information provided is for information purposes only and is not an impartial assessment of the value or the prospects of its
subject matter.
Nothing in this document constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or
appropriate to your or your clients' individual circumstances, or otherwise constitutes a personal recommendation to you or your clients.
Any information in this document (including facts, opinions or quotations) may be condensed or summarised and are expressed as of the date of
writing. The information may change without notice and The Co-operative Asset Management is under no obligation to ensure that such updates are
brought to your attention.
The price and value of investments mentioned and any income that might accrue could fall or rise or fluctuate, and investors may get back less than
they invest. Past performance is not a guide to future performance.
This document has been prepared from sources The Co-operative Asset Management believes to be reliable but we do not guarantee its accuracy or
completeness and do not accept liability for any loss arising from its use (including as a result of any acts or omissions based on the information).
The Co-operative Asset Management, its affiliates and/or their employees may have a position or holding, or other material interest or effect
transactions in any securities mentioned or options thereon, or other investments related thereto and from time to time may add to or dispose of such
investments.
This document is intended only for the person to whom it is issued by The Co-operative Asset Management. It may not be reproduced or distributed
either in whole, or in part, without our written permission. The distribution of this document and the offer and sale of the investment in certain
jurisdictions may be forbidden or restricted by law or regulation.
For the purposes of this document The Co-operative Asset Management means Co-operative Insurance Society Limited and or its subsidiary company
CIS Unit Managers Limited. Both companies are authorised and regulated by the Financial Services Authority. The registered address is CIS Tower,
Miller Street, Manchester, M60 OAL (CIS registered no: IP3615R, CIS Unit Managers Limited registered number: 02369965).
Opportunities for Green Investment
Presentation to charity advisors
and investors
17th November 2008
Pagasus House, 37-43 Sackville Street, London, W1S 3EH, UK
Tel: +44 (0)20 7434 1122 Fax: +44 (0)20 7437 1245
Impax Asset Management Limited is authorised & regulated by the Financial Services Authority
Agenda
•
Introduction to Impax Asset Management
•
Background on environmental investing
•
Different approaches to environmental investing
Introduction to Impax Asset Management
Impax Asset Management
• Investment manager dedicated to
FUM £m
Ca. £1 billion
the environmental sector
• Founded in 1994; quoted on AIM
Launch of
Absolute Return
Fund
1200
(ticker IPX) since 2001
1000
• Ca. £1 billion in funds under
Launch of principal
private equity fund
800
management or advisory
600
• 30 professional staff in London &
Hong Kong
• Experienced investment team
working together for over 10 years
Launch of Impax
Environmental
Markets plc
400
200
0
2001
2002
2003
2004
2005
2006
2007
2008
*Total assets under management and advisory
on 15 May were £1.26 billion.
Background on environmental investing
What is environmental investing?
Environmental investing:
“Investing in companies which provide, utilise, implement or advise
upon technology-based systems, products or services in
environmental markets, particularly those of alternative energy and
energy efficiency, water treatment and pollution control, and waste
technology and resource management.”
Environmental Investing differs from mainstream SRI by:
• Investing only in environment-related sectors
• Applying no ethical screens
• Focusing on returns only
Several forces driving the environmental sector
… including
Climate
Change
Source: IPCC
Leading to…
…temperature
increases
Source: IPCC
…and water shortages
Other drivers…
Water and air pollution
Source: World Bank
Increasing levels of consumption and waste
Source: OECD Environmental outlook to 2030
Economic and security factors…
including the price and availability of oil
Peak Oil – US production peaked in 1970
North Sea in 2000
US WTI Oil Price
CRUDOIL
17/11/08
160
12
140
10
120
8
100
80
6
60
4
US Production
40
2
20
North Sea Production
0
2001
2000
1999
Crude Oil-WTI Spot Cushing U$/BBL
2002
2003
2004
2005
2006
2007
2008
Source: Thomson Datastream
Source: Thomson DataStream
0
1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
Source: 1950-1970 Economist 100 years of Economic stats,
1971-1984 BP Statistical Review of world energy, 1985 2004 International Energy Agency Oil Market Report.
Ageing infrastructure
US water infrastructure spending requirements:
Forecasted expenditure of US$277 billion from 2008
to 2020
Source: US EPA
Environmental Markets
Energy
Water
Waste
Legislation
• Target market sizes
• Mandatory capex
• Emission limits
• Financial support
Technology
• New solutions
• Corporate R&D
• Government support
• Economies of scale
Aggregate revenues in excess of USD 200 billion per annum
Different approaches to environmental investing
Listed equities: Impax / FTSE sub-sectors
1. Alternative Energy & Energy Efficiency
Solar
Wind turbine
manufacturers
manufacturing
& integrators
Renewable
developers
& IPPs
Biofuels
Meters &
demand side
mgmt
Industrial
energy
efficiency
Buildings
energy
efficiency
Transports
energy
efficiency
Trading in
carbon
& other env.
assets
Fuel Cells
& hydrogen
2. Water Treatment & Pollution Control 3. Waste Technologies & Resource Management
MultiWater
Air pollution
technology
infrastructure
control
water treatment
companies
cos.
Testing
& sensing
Water
Utilities
Recycling eqpt. Commodity
& systems
recycling
Integrated
waste
management
Hazardous Environmental
waste
consultancy
management
companies
Impax’s Investment Universe
Full Universe – 1200+ stocks
•
Ca. 750 stocks with >50% revenues / profits or capital employed in environmental
markets
- 450 full liquidity
- 300 liquidity constrained
•
•
Ca. 450 stocks 20-50% with revenues / profits or capital employed in environmental
markets
Steady flow of Pre IPO and infrastructure project-related investments e.g. wind farms
Pure Play Universe
•
All Cap Universe
Ca. 750 stocks with >50%
revenues/profits
or capital employed in the
environmental sector
•
•
Typically small cap
•
•
$750 billion market cap
Ca. 1200 stocks with >20%
revenues/profits/capital employed in
the environmental sector
$4.5 trillion market cap
Pure Play: Portfolio Breakdown*
Size of Company
Share Listing
No rth
A merica
41%
Cash 4%
Rest o f
the
Wo rld
12%
<$200
m 12%
12%
EU &
EFTA
43%
Portfolio =
70-90 listed
companies
Cash
4%>$2bn
PER: 10 x
forward 12 mths
earnings to
October 09
•
Median forecast
annual portfolio
earnings growth
of 16%
$200m$2bn
72%
Sector Focus†
Forward 12 months’ Price to
Earnings Ratio to October 09
Cash
4%
Cash
4%
Energy
37%
Waste
31%
•
Unprofitable
2%
<15x
72%
Water
28%
* Impax Environmental Markets Plc by market cap., 31 October 2008
>20 x
11%
15-20x
11%
Pure Play: Top 10 Holdings*
Company
Description
Country
Holding %
Clean Harbors
Hazardous waste
US
3.4
Clarcor
Filtration
US
2.7
Pentair
Water treatment
US
2.6
Regal Beloit
High efficiency electric motors
US
2.6
Pall Corp
Filtration
US
Stericycle
2.5
Hospital waste treatment
US
Covanta
2.5
Waste to energy incineration
US
Water treatment & desalination
Japan
* Impax Environmental Markets plc, 31 October 2008
2.3
Kurita Water
Pure Play: Investment Performance*
YTD
(end Oct)
2007
2006
2005
2004
2003
3 Year
Volatilities†
IEM plc*
-32%
16%
21%
21%
16%
22%
17%
FTSE Global All Cap (Total Return)
-27%
10%
7%
25%
9%
N/A
17%
FTSE Global Small Cap (Total Return)
-31%
8%
19%
27%
16%
N/A
18%
FTSE ET50
-45%
68%
19%
23%
5%
18%
27%
FTSE All-Share (Total Return)
-31%
5%
17%
22%
13%
21%
22%
MSCI World (Total Return)
-24%
8%
6%
23%
7%
20%
17%
MSCI World Small Cap (Total Return)
-26%
-1%
3%
30%
16%
42%
17%
* NAV Performance of Impax Environmental Markets plc in Sterling
† Volatilities calculated using daily series as at 31 October 2008
Source: Thomson DataStream
Global growth in cleantech PE
investing
Source: Cleantech Venture Network
Example PE investment
•
•
•
•
•
Innovate design of fuel cells for fork-lift trucks
Focussed on distribution hub application – indoor,
clean-air demand
Fast recharging and consistent performance beat the
traditional battery alternative
Sold to Plug Power in March 2007
Impax investment return with 70%+ IRR
Infrastructure investing
• Sector has scale and is growing rapidly
• Individual projects offer low technology risk & attractive economics
• Sponsors can partner with a specialist fund or sell out to a utility
• Fund can add value e.g. by arranging debt, overseeing construction,
repackaging assets
• Early movers (funds) can leverage expertise and relationships
• Projected fund IRRs > 20%
Impax New Energy Investors LP:
Typical project structure
Senior Debt
Supply &
Construction
Sponsor Holding Co.
Project Company
Operation &
Maintenance
Investment
Contract
Power
Sales
Investment
Structuring
Options
Impax
Fund
Land Lease
Conclusio
ns
•
Strong market drivers leading to superior expected growth rates
•
Continuing government support for environmental sector
•
•
•
Well-chosen, diversified portfolios of listed stocks should outperform global
markets
Venture investments likely to perform well but exits dependent on
favourable markets
Project-related investments well suited to “infrastructure” asset class
Contact Details
Adrian Cornwall
Tel: +44 20 7432 2609
[email protected]
Disclaimer
This document has been prepared by Impax Asset Management Limited (Impax, authorized and regulated by the Financial Services
Authority). The information and any opinions contained in this document have been compiled in good faith, but no representation or warranty,
express or implied, is made as to their accuracy, completeness or correctness. Impax, its officers, employees, representatives and agents
expressly advise that they shall not be liable in any respect whatsoever for any loss or damage, whether direct, indirect, consequential or
otherwise however arising (whether in negligence or otherwise) out of or in connection with the contents of or any omissions from this
document. This document does not constitute an offer to sell, purchase, subscribe for or otherwise invest in units or shares of any fund
managed by Impax. It may not be relied upon as constituting any form of investment advice and prospective investors are advised to ensure
that they obtain appropriate independent professional advice before making any investment in any such Fund. Any offering is made only
pursuant to the relevant offering document and the relevant subscription application, all of which must be read in their entirety. Prospective
investors should review the offering memorandum, including the risk factors in the offering memorandum, before making a decision
to invest. Past performance of a fund is no guarantee as to its performance in the future. This presentation is not an advertisement and is not
intended for public use or distribution.
Les Jones
Ethical and Socially Responsible
Investment in Practice
Ethical and Socially Responsible Investment
What is it:
• Ethical – interpreted frequently as negative – avoid
certain companies
• Socially responsible investment – interpreted
frequently as positive – focus on positive companies
• The two get mixed
• I believe a sound policy should have elements of both
• Integrates values and social concerns with
investment decisions
• Considers both the charity’s investment needs and
the impact they will have on society/the environment
etc.
Ethical and Socially Responsible Investment
The Charity Commission’s views
• The governing document
• Trustees decide on any policy
• Case law (Bishop of Oxford) trustees must seek to
make returns on their investments but they can avoid
companies whose activities interfere with their
objectives
• A view that companies which act in a socially
responsible way deliver the best long term returns
• Trustees are free to adopt a policy they reasonably
believe provides the best balance of risk and reward
Ethical and Socially Responsible Investment
Why charities must consider a policy
• Exceptions to the primary responsibility to maximise
the return
– Where the activities of the company are clearly in conflict
with the charity’s aims
– Investing in a particular company or sector may hamper the
work of the charity e.g. reputational risk – donors
– Trustees may take a more personal moral stance if this does
not risk “significant financial detriment”
– If a policy exists it must be disclosed – SORP 2005
– If it doesn’t?
WWF – A Case Study
•
•
•
•
1996 a principles statement
1996 first challenge – Jonathon Porritt
1997 a new policy
1999 policy made more positive with more
engagements
• 2000 policy used as basis of WWF/NPI investment fund
– Economist
– Times
– Daily Mail
• 2000 policy extended to include all relationships with
business and industry
• Subsequently
- More positive
- More engagement
WWF Socially Responsible Investment Policy
• Overall objectives
• Primary objective: to maximise the value of its
investments by way of a diversified portfolio
• No investment will be permitted in companies whose
business operations conflict with or detract from the
objects of the charity
• Investments should promote the principles of socially
responsible investment
• This means investing in companies whose operations
enhance the environment for the benefit of present
and future generations
• The concept of “inherent sustainability”
WWF Socially Responsible Investment Policy
The three tests:
• Invest in positively sustainable companies
• The exclusion test
–
–
–
–
Armaments/offensive weapons
Tobacco
Trade in cites appendix 1 listed flora and/or fauna
Animal testing for cosmetic or other non-medical
products or medical testing on endangered
species
– Nuclear power
The 10% test
WWF Socially Responsible Investment Policy
The third test – extreme caution
• Investing in these sectors will shift the core business
on to a more sustainable basis e.g:
–
–
–
–
–
–
–
Genetic engineering
Pesticides and agro chemicals
Oil
Fossil fuels
Intensive farming
Mining
Environmentally insensitive tourism
• Best in sector
• The decisions are informed by the Ethical Investment
research Service (EIRIS)
WWF Socially Responsible Investment Policy
Engagement.
• Dialogue with companies we invest in
• Influence performance and attitudes to the
environment
• Research matrix
• Company questionnaires
• The policy to be disclosed in the annual
report and accounts
• Influence WWF International and the national
organisations
WWF Socially Responsible Investment Policy
Other factors:
• Campaigning engagement
–
–
–
–
BP shareholders motion
Portfolio share holding
Investment advisors
Animal testing etc.
• The business and industry policy
–
–
–
–
Based on investment policy
Who we take money from
Who we partner
Confrontation
• The business and industry group
– Cross departmental
– Considers relationships
– Knows what is in portfolio
Ethical and Socially Responsible Investment
Other charity involvement
• Animal charity
–
–
–
–
Animal testing
Human health
The laboratories
The environment
• Medical charity
– Smoking ?
– Airlines
– Insurance companies.
Ethical and Socially Responsible Investment
Getting involved
• He WWF-UK/NPI fund
–
–
–
–
–
Joint fund
Some of the proceeds to WWF-UK
Joint committee
Well received
Amp takeover
• The Living Planet fund
–
–
–
–
–
Owned by WWF International
A “world” fund
Delegate investment management
$50 million
Not yet marketed in the uk
• The future
– Morale hazard
Ethical and Socially Responsible Investment
Conclusion
• All charities need a socially responsible/ethical
policy/statement – irrespective of money or size
• Charities should set an example
• It needs to be realistic and balanced
• Trustees need to be involved
• Charities should engage
Opportunities for Green
Investment
www.charitysri.org