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Xavier Desmadryl, SRI Financial Analyst - HSBC Asset Management - UK
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Demystifying Responsible Investment Performance
Paris, November 15th, 2007
TBLI Europe
Xavier DESMADRYLHSBC InvestmentsGlobal Head of SRI ResearchUNEP FI Asset Management Working Group Co-Chair
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HSBC Investments
‘Sustainable Bank of the Year’ in the Financial Times Sustainable Banking Awards 2006
First major bank to go ‘Carbon Neutral’
The HSBC Climate Partnership: US$100 million investment – one of the largest ever corporate donations
Founding signatory of the United Nations Environment Programme’s Finance Initiative, Climate Group
Implementation of CR committees that function within the main structures of the HSBC Group
Development of sustainable business through: Equator Principles, sector guidelines and policies, microfinance, SRI…
Our quality is recognised by major rating agencies and indexes
HSBC: a leader of finance and sustainability
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HSBC Investments
HSBC Group Investment Businesses – A global SRI footprint
* Source: HSBC, figures as at 31/05/2007, relating to the assets of HSBC Investments, Halbis and SINOPIA
HSBC manages around $1.64bn of SRI assets globally*
Düsseldorf
Paris
London
Hong Kong
Vancouver
Singapore
Sao Paulo
Mandates
1 Global Equity fund2 UK Equity funds
+ Mandates
2 Pan-European Equity funds1 Euro Bonds fund
1 Pan-European Balanced fund+ Mandates
1 Brazilian Equity funds
1 Euro-Zone Balanced fund
Mandates
Mandates
AUM by investment vehicle
Funds of funds
Mandates
Mutual Funds
Balanced
Equities
Fixed Income
AUM by asset class
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Reflected into the structure of our product range
* Dedicated to UK charities** See prospectus for more information
The global SRI platform advises and supports the following funds…as well as a list of dedicated funds and mandates
Funds Domicile Available Investment universe SRI process SRI rating S&P rating
HSBC GIF Global Equity SRI Luxembourg Worldwide** Global equities Best in class - -
HSBC GIF Sustainability Leaders Luxembourg Worldwide** European equities Best in class - -
HSBC Mix Responsable France France Global balanced (50/50) Best in class - -
HSBC Valeurs Responsables France France European equities Best in class aa (Novethic) -
HSBC Euro Obligations Responsables France France Euro fixed income Best in class aa (Novethic) (31/08/2007)
HSBC Inik fonds LuxembourgGerman speaking countries
Euro fixed income Best in class - -
HSBC Common Fund for Growth* UK United Kingdom UK equities Ethical exclusion
HSBC Ethical Charity Unit Trust* UK United Kingdom UK equities Ethical exclusion - -
HSBC FI Acoes Sustentabilidade Empresarial - ISE
Brazil Brazil Brazilian equities Best in class - -
2 SRI projects are being discussed : a domestic Indian Equities SRI fund and a Global Emerging Markets fund.
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HSBC Investments
UNEP FI Asset Management Working Group in a nutshell :
A Strategic Alliance of leading asset managers :
ABN AMRO Banco Real Brasil Hermes Pensions ManagementAcuity Investment Management HSBC Investments (Co-Chair)BNP Paribas Asset Management Insight Investment ManagementCalvert Group (Co-Chair) Mitsubishi UFJ Trust & Banking Corp.ClearBridge Advisors, SAI Nikko Asset ManagementEurizon Capital Morley Fund ManagementGroupama Asset Management Pax World Management Corp.
Henderson Global Investors RCM (UK)
Mission :
Advance mainstream integration of environment, social and governance (ESG) issues into investment processes
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Sustainable Development and SRI: Definitions
People: consequences on employees, clients, suppliers, local communities
Planet: analysis of the impacts of companies and their products
Profit: financial performance, but also ability to contribute to economic development
* Source: From the Brundtland Report to the United Nations World Commission on Environment and Development, 1987
What is Sustainable Development?
What is CSR ?
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs (Bruntland Commission, 1987)
CSR = Corporate Social Responsibility
The implementation, on a corporate level, of the three pillars of sustainable development
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What is SRI ?
SRI and its approaches
SRI = Sustainable & Responsible Investment
An investment strategy that takes into account a company's performance in the three pillars of sustainable development, in addition to its financial performance, when selecting and managing investment portfolios
SRI includes numerous, varied approaches:
– Ethical
– Negative screening
– Positive screening
– Best in class
– Engagement
– Shareholder activism
– ESG integration
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HSBC Investments
UN Principles for Responsible Investment :Institutional investors lead the way to mainstreaming
PRI launched in April 2006 by UN Secretary General
“The Principles provide a framework for achieving better long-term investment returns, and more sustainable markets. They offer a path for integrating environmental, social and governance criteria into investment analysis and ownership practices. If implemented, they have tremendous potential to more closely align investment practices with the goals of the United Nations, thereby contributing to a more stable and inclusive global economy”.
Significant and growing support : 245 signatories. Representing > US$10 trillion.September 2007
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According to Markowitz Theory SRI should structurally underperform …
1952 : Markowitz theory proposes
– How rational investors will use diversification to optimize their portfolios,
– How an asset should be priced given its risk relative to the market as a whole.
The basic concepts of the theory are the
– Efficient frontier
– Capital Asset Pricing Model
– Beta coefficient
– Capital Market Line and Securities Market Line.
According to this theory
If markets are efficient the CAPM model should demonstrate the underperformance of any restricted asset management style such as ethical or SRI investment approach. Indeed, a restricted investment universe should lead to a lower diversification potential, thus a higher risk exposure
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But Moskowitz says SRI could leadto a “virtuous circle”
According to this theory
High level of information quality can improve investors’ decision making process thanks to a better understanding of companies issues and opportunities.
• 1972 : Moskowitz states
“social performance of corporations can be influenced by capital markets responding to
pressures from investors and customers who perceive new goal for their money.”
“while corporations have long been under a variety of pressures to meet their social
responsibilities, they are now faced with the possibility that their publicly traded shares will be
bought or dumped on the basis of their actions or inactions on this front.”
“socially investments need not, of course, be unsound financially. To the contrary, the
argument has been made that the socially aware corporation possesses the special sensitivity that
will enable it to surpass peers.”
• From intuition to theory
The idea enhanced extra financial integration and stakeholders transparency provide
investors with higher level of valuable information not yet identified by the market.
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And traditional “market icons” have different points of view
1. CSR as a business opportunity driving a competitive advantage
ESG positively seen as a caution for reputation protection
« It takes 20 years to build a reputation and five minutes to ruin it. » Warren Buffet.
2. CSR as an obstacle to capitalism, generating additional and useless costs
Milton Friedman. (The New York Times Magazine, 1970) shares these views, to say the least …
« The discussions of "social responsibilities of business" are notable of analytical looseness and lack of rigor. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society… »
« There is one and only one social responsibility of business : to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without fraud. »
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This controversy generated hugehuge academic research …
Around 150
research pieces published since the
early 70s
Nehrt (1996), « Timing and intensity effects of
environmental investments »
Dowell, Hart & Yeung (2005), « Do corporate global
environmental standards create or destroy value ? »
Wolf & Curcio (1996 ), « Corporate environmental
strategy : impact upon firm value »
Capon, Farley & Hoenig (1990), « Determinants of
financial performance : a meta-analysis »
DiBartolomeo & Kurtz (1999), « Managing risk
exposures of socially screened portfolios »
Blank, Herbert & Carty (2002), « The eco-efficiency
anomaly »
Abramson, Lorne & Dan Chung (2000), « Socially
responsible investing: viable for value investors ? »
Derwall & Koedijk (2005), « The performance of
socially responsible bond funds »
Angel & Rivoli (1997), « Does ethical investing impose a
cost upon the firm ? A theoritical examination »
King & Lenox (2000), « Does it really pay to be green ?
An empirical study of firm environmental and financial
performance »
Brown & Caylor (2004), « The correlation between
corporate governance and company performance »
Dimtcheva, Morrison & Marsland (2002), « Green with envy »
Dimtcheva, Morrison & Marsland (2002), « Boxing against green
shadows »
Goyen & Beal (1999), « To invest or to donate – an investigation of
the characteristics of some green investors »
Feldman, Soyka & Ameer (1996), « Does improving a firm’s
environmental management system and environmental performance
result in a higher stock price? »
Barth, McNichols & Wilson (1995), « Factors influencing firm’s
disclosures about environmental liabilities »
Fogler & Nutt (1975), « A note on social responsibility and stock
valuation »
Drobetz, Schillhofer & Zimmermann (2003), « Corporate governance
and expected stock returns, evidence from Germany »
Derwall, Guenster, Bauer & Koedijk (2005), « The eco-efficiency
premium puzzle »
Garz, Volk, Gilles (2002), « More gain than pain – SRI : sustainability
pays off »
Gond (2006), « Construire la relation (positive) entre performance
sociétale et financière sur le marché de l’ISR : de la performation à
l’autoréalisation ? »
And this is just a small sample …
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The Materiality of Environmental, Social and Governance issues to Equity Pricing, Launched in 2004 and Show Me The Money: Linking Environmental, Social and Governance Factors to Company Value, Second Materiality Report, July 2006
Objective: Identify and quantify the potential impact of Environmental, Social and Governance
(ESG) issues on stock pricing
Based upon research from major brokerage houses
Conclusion: Overwhelming evidence that ESG issues are material to portfolio investment value
Downloaded over 100,000 times
The broker community is publishing compelling ESG-related research
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… Producing interesting but diversified results
• This is why UNEP FI AMWG and Mercer Investment
Consulting have embarked into a meta analysis project.
• The idea is to link broker and academic research on
ESG factors in a report:
Demystifying the Responsible Investment Demystifying the Responsible Investment
PerformancePerformance.
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Demystifying Responsible Investment Performance :General outline of study
ForewordsUNEP FI Asset Management Working Group & Mercer Investment Consulting
Introduction
large matrix of studies and template aspects
Research20 academic and 10 broker studies
Conclusionacademic and broker/industry research connected
Future Research Opportunities
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Demystifying Responsible Investment Performance :A good start, the Mercer foreword
Foreword from Mercer’s Investment Consulting business
There has long been a debate between those who regard environmental, social and governance (ESG) factors as being risk factors which can have a material impact on investment performance and those who regard them as exclusive social issues. However, the evidence of materiality with regard to ESG factors is beginning to take shape as more academic and practitioner research in this field emerges.
Of the 20 academic studies reviewed in this report, it is interesting to see evidence of a positive relationship between ESG factors and portfolio performance in half of these, with 7 reporting a neutral effect and 3 a negative association. A combination of short data samples, variability in data sources and different geographical regions probably explains the divergence in results. Moreover, many of the academic studies are focused on examining the impact of screened versus traditional portfolio returns, which is not the approach that most mainstream investors now take in the integration of ESG factors into the investment process.
Over time, as more resources are allocated to research in this field and data comparability improves, we anticipate that the evidence supporting ESG integration will become more robust. Indeed, we are already seeing evidence of materiality in the returns that ESG integrated strategies are producing amongst practitioners (as evidenced by the broker studies also reviewed in this report). At Mercer we will continue to help asset owners in their quest to integrate ESG factors into fiduciary processes and to encourage investment managers to seek innovative solutions for integrating ESG into their investment decisions.
Tim Gardener Jane AmbachtsheerGlobal Head Global Head, Responsible InvestmentMercer’s Investment Consulting business Mercer’s Investment Consulting business
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Demystifying Responsible Investment Performance :Two representative samples
10 broker studies
Selected by the UNEP FI AMWG
Different research methods
Various sectors reviewed
Thematic bias reflecting brokerage industry’s current ESG research production …
… a smaller portion of quant ESG-integration research
20 academic studies
selected by Mercer Investment Consulting
approved by UNEP FI AMWG
representing almost all regions
applying diverse research methods
and the extent to which they measure the financial effect of E, S or G factors on portfolio performance.
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Framework of Study : A common matrix enabling comparison
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Academic studies : Detailed Results 1
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Academic studies : Detailed Results 2
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Academic studies : Key findings
The breadth and depth of academic research on measuring the relationship with portfolio performance has expanded.
Of the twenty studies reviewed :
- 10 showed evidence of a positive relationship between ESG factors and portfolio performance,
- 7 reported a neutral effect
- and 3 a negative association.
Results vary depending on the research methods used, and some of the studies still refer to a relatively short sample period that makes statistical analysis difficult to interpret
While the results vary, the evidence suggests that there does not appear to be a performance penalty from taking ESG factors into account in the portfolio management process.
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Brokers studies : Detailed results
*While the authors of these thematic studies were generally positive on ESG factors explored, specific tests for correlations between these considerations and investment performance were not conducted. For this reason, a neutral rating was assigned.
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Brokers studies: Key findings
True scarcity of brokers ESG quantitative research: Goldman Sachs and WestLB being exceptions with noteworthy findings highlighting that good ESG management demonstrates superior risk management and subsequently superior management overall
“ESG performance as a proxy for management quality, in so far as it reflects the company’s ability to respond to long term trends and maintain a competitive advantage” (2007). Goldman Sachs
Real hype about climate change, cleantechs, and Co2 related surveys seen as winning business case. But, there’s no free lunch. Some really original themes such as nanotechnology are also being reviewed (Oddo)
Still very difficult to find a clear link between mainstream financial criteria (e.g., share price volatility) and ESG factors: not yet been analysed long enough and in sufficient detail; and not yet been fully taken into account and priced in by many investors.
The studies suggest though there are important reasons to look at ESG factors more closely:
“ ESG issues, specifically climate change, can “gradually but powerfully change the economic landscape” and cause “periodic sharp movements in asset prices.” (2007:1) Lehman Brothers.
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Linking Academic and Brokers research :5 key messages
ESG integration is not synonymous to a few simple automatic exclusions.
SRI, as a financial discipline, which can be successfully implemented in virtually any investment style
The argument that integrating ESG factors into investment analysis and decision-making will only lead to underperformance simply cannot be made (manager skill, investment style, time period, etc. are integral)
More rigorous quantitative ESG research is vital to improve data comparability
Long-term horizon needed to integrate ESG factors more effectively and for investors to act more responsibly.
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Going forward:Lift off for a new research Odyssey New areas could be explored (e.g., ESG and emerging markets)
Systematically measuring ESG factors’ contribution on a sector by sector basis to:
- overall risk management policy: already embedded to some extent in large caps valuations
- opportunity generation: mainly considered for innovative small & midcaps
Next Step: UNEP FI AMWG initiating a second research project
The idea is obviously not to change the DCF model but to upgrade the discount rate valuation.
Our goal is to selectively mainstream ESG criteria but only if they deserve it.
“ Not everything that counts can be counted and not everything that can be counted counts “ (Albert Einstein) .
But we must try at least!
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