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Jessica Ground, Global Head of Stewardship
ESG & DC: Debunking the myths
May 2017
ESG Myths
Debunked
ESG myths debunked Refuting some of the misconceptions
1
Source: Schroders.
#1: It’s all about exclusions ESG integration is widely accepted
#2: It negatively impacts performance Academic and investment studies say otherwise
#3: Members don’t care Increasingly they do
#4: No benefit to engagement Engagement is key
#5: I’m passive so I don’t have risk All encompassing
Myth #1: It’s all about exclusions ESG covers a number of approaches and objectives
2
Source: Schroders.
Performance benefits (value)
Social benefits (values)
Bottom up, company driven
Thematic investing
Impact investing
Screened investments ESG integration
Governance and
active ownership
Best-in-class responsible investments
Top down, issue driven
Myth #1: It’s all about exclusions ESG integration is the most popular
3
Source: CFA Institute, ESG Issues in Investing: Investors Debunk the Myths (2015).
57%
38% 36%
26% 23%
21%
4%
0%
10%
20%
30%
40%
50%
60%
ESG integration ininvestment analysisand decision making
Best-in-classinvesting and
positive alignment
Exclusionary screening
Active ownership
Thematic investing
Impact investing
Other
Sugar Climate change
Myth #1: It’s all about exclusions Innovative thought
4
– 2015: Ground-breaking research into the topic – 2016: Round tables with companies on the issue – 2017: Established investor expectations on disclosure,
$1tn AUM signed up
– 2016 Proprietorial Carbon Value at Risk model developed
– Correlation between carbon intensity and carbon price impact on EBITDA
Source: Schroders.
– In depth thought pieces to follow
Fulton, 20121 Oxford-Arabesque, 20142
Myth #2: You will sacrifice returns Academic evidence says otherwise
5
– Firms with significant environmental concerns pay higher credit spreads
– A well governed firm can have an equity cost advantage between 0.8 to 1.32%
– Good corporate social governance can lead to a 1.8% reduction in the cost of equity
– 88% studies showed a positive relationship between sustainable companies and operational performance
– Rating agencies tend to give better ratings to issuers with good ESG policies
1Sustainable investing. Establishing Long-Term Value and Performance, Fulton, June 2012. 2From the Stockholder to the Stakeholder, Smith School of Enterprise and the Environment, University of Oxford and Arabesque Asset Management, September 2014.
0%
20%
40%
60%
80%
100%
Link higher CSR and ESG factorsto lower cost of capital
(debt and equities)
Link high ESG factor ratingsto market-based outperformance
Annualised returns: 9.2% FTSE World vs. 8.6% FTSE4 Good
Annualised returns: 17.6% MSCI World Tobacco vs. 8.7% MSCI World
Myth #2: You will sacrifice returns Exclusions and formulaic approaches struggle
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Source: Schroders.
0
50
100
150
200
250
300
Dec
-200
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6FTSE4GOOD Global TR FTSE WORLD TR
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100
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MSCI WORLD TR MSCI WORLD TOBACCO TR
How important are each of the following ESG issues to your choice of investments?
Myth #3: Members don’t care
7
Source: Schroders Global Investor Survey 2016 – Global Consumers.
(Scores out of 10)
6.4
6.1
6.0
5.9 5.9
Good corporate governance
Good record of socialresponsibility
Positive impact on theenvironment
Positive impact on localsocial outcomes
Positive impact on broadly-based social outcomes
Climate change, conflict and poverty are the most serious issues affecting the world today
Myth #3: Members don’t care How millennials see the world today
8
Source: WEF Global Shapers Annual Survey 2016.
45%
38%
34% 31%
22%
0%
10%
20%
30%
40%
50%
Climate change/destructionof natural resources
Large scale conflict/wars Religious conflicts Poverty Government accountability
Would you move, or consider moving, your money out of an investment that was performing well, if you discovered it was invested in the following types of companies?
Myth #3: Members don’t care ESG considerations taken more seriously
9
Source: Schroders Global Investor Survey 2016 – Global Consumers.
22%
32%
31%
24%
34%
44%
33%
40%
36%
49%
42%
33%
33%
48%
37%
35%
46%
39%
47%
33%
36%
34%
35%
29%
29%
21%
21%
21%
17%
18%
Links to repressive regimes
Associated with pornography/sex industry
Associated with arms or weapons manufacturing/dealing
They have a poor record of social responsibility
Use of animal testing
Associated with gambling activities
Their on-going activities negatively contribute to climate change
Reportedly using legal tax minimisation schemes
Companies in the news for the wrong reasons
Associated with tobacco or alcohol products
No Consider moving Definitely would move it
UK
78%
68%
69%
76%
66%
56%
67%
60%
64%
51%
Schroder survey of plan sponsors in UK/Europe:
Myth #3: Members don’t care Plans are acting
10
Source: Schroders Global Investor Survey 2016 – Plan Sponsor.
58% 28%
14% 40%
believe ESG is already important believe ESG will become important
believe ESG won’t become important of total portfolios factor in ESG principles
Myth #4: Engagement looks like this
11
Source: Google images.
Myth #4: Engagement looks like this Engagement topics during 2016
12
Source: Schroders as at 31 December 2016.
Environmental Social Governance
Biodiversity Customers Accounting practices
Climate change Data security Auditors
Environmental policy/strategy Health and safety Board committees
Environmental products and services Human capital management Board structure
Environmental supply chain Human rights Business integrity
Forests Labour standards Corporate strategy
Pollution Nutrition and obesity ESG governance and sustainability strategy
Waste management Product safety Governance oversight
Water management Social policy/strategy Remuneration
Supply chain management Shareholder rights
Succession planning
Transparency and disclosure
Voting
Myth #4: Engagement looks like this Successful engagement outcomes
13
– Since 2014 we have been engaging and asking the company to disclose its carbon scenarios/pricing and to improve it’s reporting on this issue
– In 2016, Schroders co-filed a shareholder resolution on climate change at the company’s AGM
– The 'Aiming for A' coalition proposed a resolution requesting that the company 'Approve Strategic Resilience for 2035 and Beyond', referring to the resilience of the company’s portfolio of commodities to climate change
– The resolution was an important step forward in escalating this process. Shareholders representing 5% of the voting shares co-filed and the resolutions went on to be supported by management and were passed – The company has since announced a drastic restructure aiming to
remove several assets from its portfolio (including thermal coal operations)
– This action complements the several good climate change initiatives in place, in particular its focus on energy efficiency and clean coal
Our objective: strengthen risk management and better adoption of industry best practices, which we expect should support the company stock price
Source: Schroders as at 30 June 2016. For illustrative purposes only and not to be considered a recommendation to buy or sell securities.
– In 2010, we met with Tesco to discuss its CSR report. While the company’s commitment to corporate responsibility was evident, we were disappointed with the lack of human capital performance data disclosed and requested better reporting
– Despite continuing to ask for better disclosure, there was no progress in 2011 and 2012; and limited data was disclosed in 2014
– In 2015 we engaged with the company further following the announcement of National Living Wage
– In 2016 we engaged with the Tesco’s Head of CSR and Supply Chain director to get an update on the company's sustainability efforts and the company's policy in health and wellness and its impact on products, customers and employees – In 2016, Tesco finally reporting more meaningful data on human
capital, including employee turnover, employee satisfaction and gender pay gap
Cumulative abnormal returns (CARs) after engagement
Myth #4: Engagement looks like this To benefit portfolios
14
Source: Dimson, Karakas and Li (2015). Fama-French size decile returns from Professor French’s website
Cumulative abnormal return (%)
-1
0
1
2
3
4
5
6
7
8
9
-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
All engagements Successful engagements Unsuccessful engagements
As a pension fund how do you interpret your stewardship responsibilities?
Myth #4: Engagement looks like this But funds not acting
15
– 98% agree that pension funds have stewardship responsibilities – 72% signatories to UK Stewardship Code – 31% discuss stewardship on an annual basis
Source: PLSA Stewardship Survey 2016.
74%
63%
54%
48%
48%
46%
41%
35%
20%
6%
0% 20% 40% 60% 80%
To maximise long-term risk-adjusted financial returns
Holding investment managers accountable for enhancing long-term value
Requiring investment managers to integrate material ESG issues into investment decisions
Selecting investment managers with a clear commitment to stewardship
Directly engaging with investee companies and/or exercising voting rights
A regulatory requirement and/or obligation
Directly/indirectly enhancing the value of individual securities to which the fund is exposed
Directly/indirectly enhancing the value of the markets to which the fund is exposed
To incorporate views of members/beneficiaries into the investment strategy
Other
Myth #5: There is no ESG risk in passive An ESG risk map for a typical default fund
16
Source: ESG Risk in Default Funds: Analysis of the UK’s DC pension market, PLSA Discussion paper, February 2017.
0%
2%
4%
6%
8%
10%
12%
0 5 10 15 20 25
Human capital
Business ethics
Product safety
Energy and emissions Effluents and waste
Health and safety
Data privacy and security
Water use
Community relations
Healthy living Physical climate impacts
Sustainable products
Human rights
ESG myths
Debunked
ESG myths debunked Refuting some of the misconceptions
17
Source: Schroders
#1: It’s all about exclusions ESG integration is widely accepted
#2: It negatively impacts performance Academic and investment studies say otherwise
#3: Members don’t care Increasingly they do
#4: No benefit to engagement Engagement is key
#5: I’m passive so I don’t have risk All encompassing
Important information For professional investors and advisers only. This material is not suitable for retail clients. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. Reliance should not be placed on the views and information in the presentation when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Investment Management Limited, 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Notes about the Schroders Global Investor Study 2016: This independent survey was commissioned by Schroders and was conducted between April and October 2016. 712 institutional investors were surveyed across the UK, France, Germany, Netherlands, Belgium, Switzerland, China, Japan, Hong Kong, Singapore, Australia, USA, Canada, Brazil and Chile. Schroders also commissioned a similar independent survey of 20,000 investors (consumers) in 28 countries around the world between 30 March and 25 April 2016, including Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, the Netherlands, Spain, the UK and the US. This research defined ‘investors’ as those who will be investing at least €10,000 (or the equivalent) in the next 12 months and who have made changes to their investments within the last five years. These individuals represent the views of investors in each country included in the survey. 1,836 independent financial advisers were also surveyed between 7th–29th April 2016 and these individuals represent the views of advisers in each of the eight countries included in the survey; Australia, Germany, Italy, Hong Kong, South Korea, Singapore, the UK and the US. Please note, where percentages do not add up to 100%, this is due to decimal rounding or a multi-coded question.
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