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The Integration of Environmental, Social andGovernance issues in Investment Decision-making

A License to Operate issue?

Mike Clark, Director, Relationship Management & Chair, RussellSustainability Council

8 August 2011

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Agenda

� The drivers of change

� Russell and Sustainability� Environmental, Social and Governance (ESG) factors

� United Nations Principles for Responsible Investment(UN PRI)

� Universal Owner concept

� ESG integration vs. SRI

� ESG integration around the world

� Russell’s approach

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What are the drivers of change?

� Value-seeking through sustainability� Accommodating social and environmental issues

� ESG risks can deliver financial loss

� A desire for “Stewardship”� Moving from considerations of only quantity (more) towardsquality (better)

� The credit crunch

� Regulation

� Is the meaning of fiduciary responsibility evolving?

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Russell and Sustainability

� Sustainability Council established in Sep 2009� Born out of the work of the Innovation Council� Mandate: Drive Russell’s Sustainability workexternally (client investment needs) and internally(work practices)

� 13 members in 7 offices� Russell signed UN PRI in September 2009

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UN Principles for Responsible InvestmentUN PRI – Six Principles

1. We will incorporate ESG issues into investment analysis anddecision-making processes

2. We will be active owners and incorporate ESG issues into ourownership policies and practices

3. We will seek appropriate disclosure by the entities in which weinvest.

4. We will promote acceptance and implementation of thePrinciples within the investment industry

5. We will work together to enhance our effectiveness inimplementing the Principles

6. We will each report on our activities and progress towardsimplementing the Principles

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UN PRIA growing force

� Over 900 signatories, $35trn assets� Mostly Asset Owners and Investment Managers

� PRI business model moving from advocacy body toservice provider

� Annual Report & Assessment Survey

� Freshfields Report (2005)� Considered fiduciary duty re ESG in nine jurisdictions

� Followed by “Fiduciary II” (2009)

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ESG IssuesWide-ranging – financially material?

SSuicides Sparks Inquiries (Foxconn)- Wall Street Journal 27 May 2010

Nine charged over Satyam fraud scandal- The Times 8 April 2009

Coastal assets worth $226 billion at risk: Combet- Sydney Morning Herald 5 June 2011

Spain’s solar power subsidy cuts attacked- Financial Times 22 December 2010

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Universal Owner concept

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Not treating wastesaves $1

Treating waste costs$1.50

The largest 3,000 public companiescaused over $2.15 trillion of globalenvironmental costs in 2008, whichequates to nearly 7% of theircombined revenues.

N t t ti tNot treating wastegaves $1aves $1

p blic companiespublic companiestrillion of global

Treatintrillion of globalt i 2008 hi h Treatin

$1 50ts in 2008, which

$1.50,

7% of their7% of theirs.s.

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ESG integration vs SRIValue vs values

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ESG integration Socially ResponsibleInvestment (SRI)

� Sustainable financial value

� Mainstream, though slow

� UN PRI

� Aligns with fiduciary role

� Internalise economicexternalities

� End-investor has valuesbeyond only financial goals

� Often leads to securityexclusion

� Pooled fund challenges

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What is happening around the world?Responsible Ownership

� UK Stewardship Code� Seven principles of Responsible Ownership� Regulatory requirement for every asset manager to publish response

� European Commission: Corporate Governance Green Paper� Europe: Regulator (ESMA) consulting on proxy advisor role� Netherlands: Eumedian as collective investor voice� Australia: ACSI similar

� South Africa� Code on Responsible Investing (CRISA)

� Growing Russell client interest in proxy outcome reporting

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Around the World (2)

� Netherlands: Frijns Report� “The pension fund cannot avoid being aware of the broader socialconsequences of its conduct”, yet

� “Socially responsible conduct does not yet form an integrated part ofrisk policy and investment policy”

� Landmine and cluster bomb production increasingly avoided

� Denmark: Corporate social legislation leading to consideration ofESG issues in sponsor’s pension plan

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Who influences whom?

Government / Regulators

Asset Owners(Trustees, Bancassurers

etc.)

InvestmentManagers Companies

Beneficiaries Citizens Customers / Employees

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Case Study: US & Pan-Europe Core RE FundsRussell research

� Applying ESG to private real estate� Interviews with fund managers conducted in winter 2009/10

� Tracking sustainability elements in portfolios

� Major themes� Emphasis on “E” in ESG

� Regulatory pressures and push/pull on tenants

� Getting paid to be green

� Development of frameworks / scorecards

� Future proofing

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Carbon risk – One to watch?

� CO2 emissions (“carbon”) are often a negativeeconomic externality

� Some governments are developing a pricing regime� EU ETS (Emissions Trading Scheme)

� Australia: fixed carbon price, market price from 2015

� UK: escalating minimum carbon price

� China: latest Five Year Plan

� Evolution towards a global carbon price?

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Russell responseClient-driven

� Funds� Climate Change, Shariah, Environmental Technology

� Responsible Ownership� Extension of global Proxy Policy to E&S issues; Engagement

� Appointment of ESG data provider� Publications� Local office Sustainable Work Practice groups� Responsible Investment Policy (in progress)

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Summary

� ESG factors need to be considered for financialmateriality

� ESG Integration is taking place

� Different countries/markets focus on differentissues…

� …and tackle them in different ways

� A client’s specific SRI requirements need acustomised solution