ST 520 Responsible Management Session 6 Socially Responsible Investment (SRI)

Agenda Socially responsible investment (SRI) Terms, actors, growth Examples of SRI Funds SRI Strategies Sustainability Stock Market Indices Break Danone presentations

Ethics and Finance Two distinct and incompatible worlds?

Ethics and Finance Traditionally Financial credits not available to the poor Maximizing-financial-revenues mentality The banking and financial services industries Employ mostly white-collar workers Draw less attention than manufacturing industries regarding CSR which have more obvious environmental and labor issues. Issues Models of capitalism Preeminence of shareholders Short-term thinking Government regulation Taxing of financial transactions – Tobin Law in France

2008 Financial crisis How did it happen? What have governments and businesses learned from it? 2008 worldwide financial crisis explained (videos) Stock market collapse in 2008 after Lehman Brothers collapse (news broadcast) Understanding the finacial crisis 3 films on the subject Cleveland vs. Wall Street Inside Job (documentary) Margin Call 2011 – a parody of Lehman Brothers' collapse

If you won 100,000 €, how would you invest it? What would be your investment criteria?

SRI overview Terminology Definition: SRI is an investment process which considers the social and environmental impact of investments - both positive and negative – in a context of rigorous financial analysis. Videos: "What is SRI?" Principles of Responsible Investment SRI is also referred to: social investing ethical investing mission-based investing sustainable investing green investing triple bottom line investing socially aware investing

Historical background How do you conduct responsible business in apartheid South Africa before 1990?

Historical background Catalyst: The Sullivan Principles (RSA) 1970s - early 1990s, large institutions avoided investment in South Africa under Apartheid. In 1971, Reverend Leon Sullivan, a board member of General Motors at the time, drafted a code of conduct for practicing business in South Africa (RSA) - the Sullivan Principles. The Sullivan Principles had little impact on American companies' discrimination policies within South Africa Cities, states, colleges, faith-based groups and pension funds throughout the US brought political pressure on companies in RSA to divesting from their operations there. The drop in investment dollars eventually forced a group of businesses (75% of South African employers) to draft a charter calling for an and to Apartheid.

Historical background Diversification Since the 1990s, SRI has become a means to promote environmentally friendly sustainable development. Many investors consider effects to climate change a significant business and investment risk. EX: CERES was founded in 1989 as a network for investors, environmental organizations, and other public interest groups interested in working with companies to address environmental concerns. More recently, some social investors have sought to address the rights of indigenous peoples around the world who are affected by the business practices of various companies. Other social issues of concern to social investors: healthy working conditions, fair wages, product safety, and equal opportunity employment (non-discrimination)

Actors Who are SRI investors? Individual investors Institutions Companies Universities Hospitals Foundations Insurance companies Public and private pension funds Non-profit organizations Religious institutions

Historical background Government impetus Over the past decade, some national governments in Europe have passed regulations on social and environmental investments and savings. EX: The UK was the first country to regulate the disclosure of the social, environmental, and ethical investment policies of pension funds and charities. The 1995 Pensions Act requires the trustees of occupational pension funds to disclose in the Statement of Investment Principles "the extent (if at all) to which social, environmental and ethical considerations are taken into account in the selection, retention and realization of investments." Has contributed considerably to the growth of the SRI industry.

Selected actors ERIS – Experts in Responsible Investment Solutions PRI – Principles of Responsible Investment

ERIS Experts in responsible investment solutions NPO with 25 years experience Mission: "empower responsible investors with independent assessments of companies …" Scope: "responsible investment services to more than 100 asset owners, asset managers, banks, stock brokers and governments around the world - as well as major index providers."

PRI Principles for Responsible Investment UN-backed project made up of a network of investors which work together to implement the 6 PRI (Principles for Responsible Investment) These were devised by the investment community Reflect the view that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios should be given appropriate consideration by investors A voluntary framework by which all investors can incorporate ESG issues into their decision-making and ownership practices.

Actions and growth SRI involves evaluating companies on CSR issues analyzing corporate social and environmental risks engaging corporations to improve their CSR policies and practices SRI growth: from a curiosity and niche-market phenomenon in the 1970s to a global movement today

SRI portfolio growth in the U.S. Professionally managed assets of SRI portfolios including retail and institutional funds - pension funds, insurance funds, and separate accounts These assets came to $ 2.7 trillion in 2007, or approximately 11% of total assets under management (The Forum for Sustainable and Responsible Investment)

Growth in Europe The European SRI market has also grown rapidly. In 2007, SRI assets in Europe represented 17% of European funds under management (European Social Investment Forum) According to the Avanzi SRI Research "Green, social and ethical funds in Europe - 2009 Review, " strong CSR growth is in France, Belgium and Germany

European SRI statistics Source: Vigeo Italia (2009)

SRI funds per European country Source: Vigeo Italia (2009)

Distinction between different funds SRI fund labeling "Ethical, environmentally-friendly green, sustainable,…" Can be confusing for investors Ethical funds Use negative screening: provide information on stocks and industries where one should not invest Sustainable funds Use a positive screening approach. Examples of criteria – some seen in class: Social: Workplace engagement, quality of management, respect of workers' rights, etc. Environmental issues: carbon management, eco product design, recycling, clean technology, green supply chain management, etc

Ethical funds First ethical fund launched in 1984. The fund manager picks companies that have the potential do well socially and financially - do good and do well. These funds invest in companies that operate by moral standards approved by their investors. Example: Do not manufacture or sell weapons Do not do business in countries with poor human rights Use environmentally acceptable sources of raw materials. Etc.

Sustainability funds Take a more comprehensive view of issues ‒ political, economic, environmental, social - and how these are inter-related and contribute to development. Sustainable investors tend to engage more with their investments, raise areas of concern, and encourage good business practice. This engagement has the benefit of allowing investors to see if a company is a good investment, that it: Can adapt to legitimate investors' and consumers' concerns Can think long-term and emerge as a strong industry player.

Are SRI funds competitive? More than 20 studies demonstrating that SRI mutual fund performance is comparable to that of non-SRI funds can be found at www.sristudies.org — a compendium of all the major academic studies on SRI (see now at http://fsinsight.org) Arguments supporting the argument that SRI funds outperform conventional funds. Sound social and environmental performance signals high managerial quality, which translates usually into favorable financial performance. Social, ethical, and environmental screening may reduce the high costs that emerge during corporate social crises or environmental disasters. Even if financial markets tend to undervalue such costs, portfolios based on corporate governance, social, or environmental criteria may outperform their benchmarks. "FSinsight is a global platform where top scholars, policy makers and members of the business community can share knowledge of and experience with finance and sustainability. The site is a source of latest ideas and developments, which has set the encouragement of financing the transition towards a sustainable economy as its goal."

Exercise: Find a fund 1st group: look for social investment funds proposed by traditional banks: Fortis, BNP-Paribas, Société Générale, Cooperative Bank UK, HSBC,... 2nd group: look for independent / other investment funds. What characterizes these funds?

Examples of SRI funds and their providers Triodos (Dutch bank) Belsif Matrix (Belgian initiative)

Tridos Bank Belgium: one of the world's leading sustainable banks Mission: enable individuals and organizations to use their money in ways that benefit people and promote sustainable development. They are the only specialist bank to offer integrated lending and investment opportunities for sustainable sectors in a number of European countries How does Triodos ensure that clients' investments go only to companies with the best sustainability performance?

Triodos Bank - connecting Entrepreneurs & sustainable companies Investors "who want to change the world" How does Triodos ensure that clients' investments go only to companies with the best sustainability performance?

Investment decision process Step 1: Sustainable activities Identify companies that derive over 50% of their revenues from sustainable activities. Step 2: Best-in-class Identify companies whose sustainability performance respects at least 50% of 70 generic and sector-specific criteria relating to environmental, social, and governance issues. Companies whose score puts them in the top 50% within their industry qualify for Triodos investment. Step 3: Minimum standards Tridos also invests in organizations which meet its "minimum standards" But it never funds any business engaged in activities that are harmful to individuals, society or the environment.

BELSIF BELSIF, "Belgian Sustainable and Socially Responsible Investment Forum" Not-for-profit organization whose aim is to stimulate, promote and support all types of sustainable and socially responsible investments. Uses a exhaustive matrix which helps to differentiate various SRI funds available on the Belgian market A new comparison tool of 163 SRI products, 6 different types A detailed version for professional clients and a user-friendly version for retail clients

SRI activities Portfolio screening Shareholder advocacy or activism Community investing and economically targeted investments

SRI activites SRI Investing Community Investing Screening Shareholder Activism Community Development Banks Community Development Credit Unions Negative Screening Proxy Voting Divestment Positive Screening Community Development Venture Capital Funds Community Development Loan Funds Petitions 32

Portfolio screening The practice of evaluating investment portfolios or mutual funds based on social, environmental and good corporate governance (ESG) criteria Two types of screening: Positive (inclusion) Negative (exclusion)

Screening criteria Positive screening criteria – those which make a positive contribution to the environment and society. Examples: Strong employer-employee relations and environmental practices Safe and useful products Operations which respect human rights, etc. Negative screening criteria – products and practices harmful to individuals, communities, or the environment. Examples: pollution, poor working conditions, etc.

Best-in-class approach Positive screening which applies social, environmental and ethical guidelines to yield a preferred selection when all other factors are equal. Examples: investment in company leaders with clean technologies and exceptional social and governance practices.

SRI activites SRI Investing Community Investing Screening Shareholder Activism Community Development Banks Community Development Credit Unions Negative Screening Proxy Voting Divestment Positive Screening Community Development Venture Capital Funds Community Development Loan Funds Petitions 36

Shareholder Advocacy and Activism Example (video): Ethical funds Canada Shareholder activism: SR investors actively engage management and use shareholder voting rights to influence the company to be more sustainable. Means of influence: proxy voting, petitions, and divesting. (Proxy) Voting: Shareholders receive proxies in the mail Allow them to vote on corporation officers and policy changes. Many investors ignore proxies, but SRI investors do not. Many voices are louder than one, thus the power of SR mutual funds. Prior to the general meeting of a company, shareholders will receive a package in the mail containing a variety of documents that report financial data and operations results and announce important issues - such as proposals for changes to the company's share structure or mergers and acquisitions. These are all matters that shareholders or unit holders, the true owners of the company or mutual fund, will vote on at the general meeting. If, however, a shareholder is not able to attend an annual (or special) meeting, he or she can vote on proposals by means of a proxy, one of the documents that is included in the pre-meeting mailing package. Delegate their vote to another person… An agent legally authorized to act on behalf of another party Allowing someone else to cast votes OR electronically voting… 37

Shareholder Advocacy and Activism Petitions Drawn up by groups of shareholders and presented to owners of for a vote. Typically urge management or the board of directors to take action on a specific concern. Examples of resolutions: Stop business operations in a country with a repressive government overseas challenge Protest executive pay Ask the company to reveal its political contributions Divestment: the reduction of assets for either financial or ethical objectives the sale of an existing business for financial or ethical reasons Prior to the general meeting of a company, shareholders will receive a package in the mail containing a variety of documents that report financial data and operations results and announce important issues - such as proposals for changes to the company's share structure or mergers and acquisitions. These are all matters that shareholders or unit holders, the true owners of the company or mutual fund, will vote on at the general meeting. If, however, a shareholder is not able to attend an annual (or special) meeting, he or she can vote on proposals by means of a proxy, one of the documents that is included in the pre-meeting mailing package. Delegate their vote to another person… An agent legally authorized to act on behalf of another party Allowing someone else to cast votes OR electronically voting… 38

SRI activites SRI Investing Screening Shareholder Activism Community Investing Shareholder Activism Community Development Banks Community Development Credit Unions Negative Screening Proxy Voting Divestment Positive Screening Community Development Venture Capital Funds Community Development Loan Funds Petitions 39

Community Investing Definition: The use of finance to support economically disadvantaged communities, persons, or businesses underserved by mainstream financial institutions as low-income and disadvantaged communities are often underserved by traditional financial services. Makes it possible for local organizations to provide financial services to low-income individuals supply capital for small businesses provide vital community services - affordable housing, child care, healthcare, education, mentoring, and technical support. Community investing seeks to build relationships between families, non-profits, small businesses, and conventional financial institutions and markets. Close to microfinance or micro-credit concept.

Community Investment Institutions Community Development Banks like conventional banks, but focus on lending to rebuild lower-income communities Community Development Credit Unions offer (in the U.S.) federally insured accounts and other services available at conventional credit unions Community Development Loan Funds Pool investments and loans provided by individuals and institutions to further small business creation domestically and abroad Not federally insured, but investor money is protected Community Development Venture Capital Funds equity investments in competitive small businesses in geographic areas traditionally overlooked

Economically Targeted Investments Investments yielding competitive risk-adjusted rates of return which supports long-term economic development. Examples of long-term economic development sustainable job creation business development infrastructure improvements affordable housing Yield "a return to Society" Public pension plans are attracted to ETIs because they: strengthen local economies serve the interests of a variety of stakeholders – ETIs support local enterprise, develop neglected urban areas, and prevent outsourcing of local jobs.

Sustainability Stock Market Indices Measure companies’ sustainability initiatives and publish a series of global sustainability benchmarks Aim at linking investors’ interests in financial performance with the broader goal of sustainability Three of the most important indices are: DJSI (Dow Jones) FTSE4GOOD ASPI

DJSI Launched in 1999, the Dow Jones Sustainability Indexes (DJSI) are the first global indexes tracking the financial performance of the leading sustainability-driven companies worldwide. Based on the cooperation of Dow Jones Indexes and SAM - Sustainable Asset Management, a Swiss consultancy firm - they provide asset managers with reliable and objective benchmarks to manage sustainability portfolios. China Mobile the first Chinese firm to be listed on this index.

DJSI The DJSI follows a "best-in-class" approach and includes in the indices those companies identified as the sustainability leaders in each industry. Companies are assessed in line with general and industry-specific criteria,  are compared against their peers and ranked accordingly The companies accepted into the indices are chosen along the following criteria: Environmental sustainability – e.g. environmental reporting, eco-design, environmental management systems and executive commitment to environmental issues Economic sustainability – e.g. strategic planning, quality and knowledge management, corporate governance mechanisms Social sustainability – e.g. employment policies, management development, stakeholder dialogue, affirmative action and human rights policies, anti-corruption policies

DJSI - critiques The data for assessments are drawn from questionnaires, submitted documentation, corporate policies and public information. Criticisms of the DJSI: Data are provided by the companies themselves. Questionable criteria used to constitute the index. Some criticize why companies with major ethical problems (Nike,...) are included. The assessment focuses more on management processes than on actual sustainability of the company or its products. However, the DJSI is regarded as an important step in linking investors’ interests in financial performance and sustainability goals.