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Sustainable Investing n Finance and Sustainability n The Financial Case y Empirical Studies y Live & Model Investment Portfolios y Financial Analysis Incorporating.

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Presentation on theme: "Sustainable Investing n Finance and Sustainability n The Financial Case y Empirical Studies y Live & Model Investment Portfolios y Financial Analysis Incorporating."— Presentation transcript:

1 Sustainable Investing n Finance and Sustainability n The Financial Case y Empirical Studies y Live & Model Investment Portfolios y Financial Analysis Incorporating Sustainability y Case Studies y Logical Connection to Known Value Drivers n Socially Responsible vs. Sustainability Investing November 28, 2001

2 Sustainable Investing Whats here & whats not Here n How do you think about the financial case for corporate sustainability? n What are Wall Street investors are up to in this area? Not here n Other sections deal with how to work with internal financial people and investors n Red hot investment advice

3 Sustainable Investing Finance & Sustainability n Systems perspective n Capital & related financial services play crucial roles: z Investment: capital formation for growth, compensation z Insurance: risk underwriting lets firms reduce the risk they face directly z Lending: capital formation

4 Sustainable Investing Analysis by Investors new risks unfamiliar actors connection to society is key odd partners & opportunities. Forces for Change Physical Forces population climate H20 soils megacities etc. Magnifiers connectivity transparency social action CNN World victory of markets etc. Operating Environment for Companies > expectations accountability disclosure target for action

5 Sustainable Investing Forces for Change and Finance n For financial service companies: z Lenders & Insurers: no upside, so risk management at operating company is crucial. Understanding changes affects pricing (interest rates & premiums) z Investors: face upside and downside for companies performance as well as how they behave when combined in a portfolio z Intermediaries: face upside and downside for companies performance during transactions

6 Sustainable Investing Overview n Sustainability and Finance z The cases for connection & how they fit z Socially Responsible Investing (SRI) z Mainstream financial institutions z System change n Getting CFOs to Get It z Making the business case z Creating value and communicating z Targeting the right investors

7 Sustainable Investing Sustainability – Finance Connection The Case comes from: n Empirical Studies n Live & Model Investment Portfolios n Financial Analysis Incorporating Sustainability n Case Studies n Logical Connection to Known Value Drivers

8 Sustainable Investing Empirical Studies n Most studies conclude there is a positive relationship between financial and sustainability performance n Problems with statistical approaches: z Lack of data (i.e., What to really measure?) z Causation vs. correlation z Coincidence n Even if it were true, so what? It doesn t say anything about my company.

9 Sustainable Investing Investment Portfolios n Asset managers using best-in-class on environmental and/or sustainability criteria overall have outperformed their benchmarks regardless of: z Active versus passive (index) z Large or small companies z US or global focus

10 Sustainable Investing Total Return Dow Jones Sustainability Index (DJSI) Performance /31/00 Passively Managed Gobal Large Cap

11 Sustainable Investing DJSI Performance /31/00 by Region Total Return Passively Managed Global Large Cap

12 Sustainable Investing Actively Managed Global All Cap: Sustainable Performance Group Market capitalization CHF 400 mio. Performance 1999:36% Performance 2000:17% 62.5% 32.2%

13 Sustainable Investing SAM Sustainability Pioneer Fund Performance: November, – January 31, % 16.6% Actively Managed Global Small Cap

14 Sustainable Investing Passively Managed US Large Cap: Weighted to Environmental Leaders

15 Sustainable Investing Model Portfolios n Innovest eco-efficiency premium n Top and bottom rated companies return

16 Sustainable Investing Detailed Financial Analysis n Best way to demonstrate that environmental and social issues can be material in specific industries and at specific companies n Can integrate analysis of sustainability issues with analysis of other financial issues n Few examples beyond WRIs Pure Profit n Proves business case only in specific instances, but shows the way for main-stream analysts n Is based on understanding causal relationships, not correlation The next big horizon

17 Sustainable Investing Financial Analysis: WRI Methodology n It is forward-looking and uses scenarios to envisage different futures n It can readily be integrated into conventional valuation techniques

18 Sustainable Investing PHASE 1 Identify salient impending environmental issues PHASE 2 Develop scenarios around each PHASE 3 Assess individual company exposures PHASE 4 Analyze financial implications of each scenario Financial Analysis: The Four Steps

19 Sustainable Investing Financial exposure of major pulp and paper companies to pending environmental issues Expected Financial Impact (as %age of market value)

20 Sustainable Investing Case Studies n Anecdotes of financial experience of companies n Same old [tired] examples: z 3M z Interface z Electrolux n Often not rigorous, but do bring some of the potential to light n It is not clear how much anecdotes matter; they dont appear to move other people or organizations

21 Sustainable Investing Connection to Known Drivers n Standardized shareholder value n Ecos Corporation screens for strategies that: z Improve margins z Reduce risks z Increase revenues z Increase capital efficiency n Doesnt prove business case; proves that the right sustainability strategies can produce value

22 Sustainable Investing The Overall Business Case n Preponderance of evidence z Different methods z Different data, time periods, analytical techniques n Doesnt mean be sustainable and financial success will follow n A measure of good management n Does mean that value is at stake: companies create or destroy value on sustainability issues Empirical Evidence

23 Sustainable Investing So Who Understands the Value of Sustainability? n Lenders understand environmental liability associated with properties & big issues, but most US lenders dont see additional risks to their repayment based on sustainability performance n Insurers understand the connection to liabilities, but are insulated from many ongoing risks by contractual provisions n Reinsurance industry is beginning to understand climate change n Investors z Socially responsible investors get it z Mainstream showing hopeful signs but no more z The CFOs of leading companies get the operating issues, but have yet to apply the same to their role as investor in other companies both directly and through their pension funds

24 Sustainable Investing Investors on Sustainability n Socially Responsible Investing (SRI) z Most still just screen out undesirable industries & companies z Some apply positive screens for good performers n Sustainable Investors z Use best-in-class rather than negative screens z Short track records, but interesting results z Sustainability as investment insight n Mainstream z Long-term value investors are place to start Moving toward best-in-class and understanding the business case

25 Sustainable Investing Socially Responsble vs. Sustainable Investors SRI n Avoid companies whose industry or practices offend n Impact: z raise cost of capital z shareholder action Sustainable Investing n Select best-in-class n Not good & bad, but best prepared for Forces of Change n Impact: z Create competition on sustainability performance

26 Sustainable Investing Socially Responsible/Sustainable Investors n Significant and growing part of capital markets in US, Europe, Japan & Australia n Reliable US estimate is $100B in US SRI mutual funds plus perhaps a slightly larger amount in private accounts

27 Sustainable Investing The Record of Socially Responsible Investment Morningstar: z 21% of SRI funds in Morningstar database have 5-star ratingstwice the rate of the overall fund universe. z SRI funds look even better when compared to their specific Morningstar categories. ¼ have 5 stars; half have ratings of 4 or 5 stars. z SRI funds have top category ratings in seven different categories. z That doesnt mean social screens add value, but its hard to make the case that they subtract it. (source: Calvert Funds Presentation)

28 Sustainable Investing Mainstream Investors n Main game in town n Some using best-in-class approach z CitiAsset Mgmt z UBS z Credit Suisse z Storebrand n Friends, Ivory applies sustainability engagement across whole portfolio n Hermes Investment Management: portfolio companies should report on social, environmental & ethical matters

29 Sustainable Investing The Value–Sustainability Connection n Rules of the game consistently make doing the right thing economical n Companies articulate how they are creating value through sustainability n Investors have suitable means to incorporate sustainability into existing analysis n Sustainability contributes to investment outperformance Becomes part of investors fiduciary duty The System Conditions to Drive Change

30 Sustainable Investing Pathways World Resources Institute We gratefully acknowledge the financial support of: The Surdna, Joyce and Olin Foundations & WRIs Corporate Council and Partners And the support and contributions of the talented staff of WRIs Sustainable Enterprise Program

31 Sustainable Investing Terms of Use Pathways is provided to help foster environmentally sound and socially equitable economic development. We request your compliance with the following terms of use: n All materials contained in Pathways modules are believed to be property of World Resources Institute or to be in the public domain. n The opinions and analysis contained herein is that of the authors and editors. n Original sources are credited on the slides or in the notes to the best of our knowledge; please bring errors or omission of citation to our immediate attention. n Please credit original materials to World Resources Institute. n Materials may be copied and edited and revised for internal company use and for non- commercial, educational purposes. n For commercial or other use of materials, please contact Don S. Doering at or (202)

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