Fund Performance & Strategy- Are SRI funds performing and what are some strategies for creating and maintaining a sri portfolio.

Mark BythewayCEO, Sustainable Investment Research Institute - SIRIS

Presentation to TBLI Asia, May 2006

Presentation Agenda

• Introduction• Some Definitions

– Values based SRI– Values Seeking SRI– Value Enhancing SRI

• Performance Analysis– Domestic Aust Equities– International Equities

• Strategies• Summary

Dedicated, specialised investment research and advisory group

– Provides sustainable sustainability and governance research across > 1100 companies across Asian region

– 11 Analysts– Established early 2000– Independent – funding and minority shareholding from financial institutions

• Goldman Sachs JB Were• IOOF Limited

– Melbourne based

Who/What is SIRIS?

Some definitions

• Defining ‘SRI’ and ‘performing’

• Socially Responsible Investment (SRI) combines investors' financial objectives with their concerns about social, environmental and ethical (SEE) issues (UKSIF)

• Expressions

– Ethical Investing– Socially Responsible – Sustainability Investing

• What is SRI and thus an SRI Fund?– SRI combines investors’ financial objectives with their commitment to

social concerns such as social justice, economic development, peace or a healthy environment” (UK Social Investment Forum)

• Three Expressions1

– Values based– Value Seeking – Value Enhanced

1. Kinder @ http://www.kld.com/resources/papers/SRIevolving050901.pdf

Some Definitions

• or mission based (ethical investing)– the original form of SRI, is about investors seeking to align their

portfolio holdings with their beliefs – combines investors’ financial objectives with their commitment to

social concerns such as social justice, economic development, peace or a healthy environment” (UK Social Investment Forum)

• Investment Proposition• values separated from investment proposition i.e. • not concerned if ‘sin sells’• - ve screen

Values based SRI

developed in the late 1990s, seeks to identify social and environmental criteria that

may affect financial performance and therefore share price

investment proposition– benefit from “doing well by doing good” – doing good is via risk and opportunity management

Value seeking SRI

sustainability risk analysis fundamental aspect of investment analysis– incorporates sustainability risk profile into investment decision– brings externalities into investment assessment

Investment proposition – proposition is developing– by definition a longer term perspective

– Specifically not addressing ethical or values - based investing -

except if environmental protection is included as part of value set.

Value seeking SRI – Risk Management

Value seeking SRI – Opportunity Management

• Thematic investing – Investing behind the opportunities generated by ESG analysis

• I.e. companies that, develop and offer sustainable technologies, products and/or services

• Ostensibly growth investment/small cap opportunity

Value seeking SRI – Opportunity Management

Opportunities Include:• Material Efficiency Development and improved management of scarce

resources• including renewable energy and energy efficiency developments.• Remediation technologies

– including clean technology, waste and emission reduction, waste management reduction and recycling systems, technologies and services

• Products with improved environmental performance• Human health and well being including, medical technologies, healthcare

products and services,• recreation, tourism and leisure

Value-enhancing SRI

• is about using shareholder activism to maintain and increase the value of one's investment, and its focus is almost exclusively on corporate governance – PV– Shareholder Activism/Engagement

Time

Values V ReturnTrade Off

Strict Financial Analysis

Ethical Investing

Traditional Investment Process

Values based investing Negative preclusive screening Tobacco / alcohol Gambling etc.

Socially Responsive Investing

Notion of a responsible company generally includes:

Negative screening Positive screening

Sustainability Investing

Notion of risks/ opportunities Generally low priority on negative

screening Strong positive screen perspective

Thematic Investing

Changing regs and consumer prefs generating new products services and asset lasses

Renewable energy/clean tech/leisure

PV Engagement

Values seeking investing

Values enhancing investing

‘SRI Map’

Performance

• There is a significant and increasingly critical mass of research on values based and value seeking funds.

• But this is risk management or non-thematic funds

Are SRI Funds Performing?

“…almost all of the funds have outperformed both the FTSE All Share Index and FTSE4Good across all time periods shown…”.

1. Does Socially Responsible Investment (“SRI”) Add Value?, Mercer Investment Consulting, November, 2004

Are SRI Funds Performing?

MercerIC Survey- March 2006 Aust Domestic Equities

0.0

10.0

20.0

30.0

40.0

3 Months 1 Year 2 Years 3 Years 5 Years

Period

Return (%)

Median SRI Fund

S&P/ASX 300

Source :http://www.merceric.com/referencecontent.jhtml?idContent=1210735

SRI Fund Performance cont.

MercerIC Survey March 2006International Equities

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

3 Months 1 Year 2 Years 3 Years 5 Years

Period

Median SRI Fund

MSCI Wld (ex Aus)

Source :http://www.merceric.com/referencecontent.jhtml?idContent=1210735

SRI Fund Performance cont.

AMP Capital SRI Median Study March 31 2006

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

1 year 2 years 3 years 5 years

Period (Yrs)

Return

ASX 200

SRI Median

AMPCI SRI

Mercer Median

Source: Capital SRI Industry Performance Study

SRI Find Performance cont.

SRI Fund Returns cf Mainstream - Aust Share Funds

10.00

15.00

20.00

25.00

30.00

35.00

1 3 5 7Period (Yrs)

Ave SRI Fund

Ave M/stream Fund- WholesaleAve M/stream Fund- RetailS&P/ASX 300Accum. I ndex

Source: Ethical Investor Magazine from data provided by Standard & Poors

-6.0

-4.0

-2.0

0.0

2.0

4.0

Performance Differential (% )

1 3 5 7

Period (Yrs)

Relative Performance of Ave Aust SRI Fund to Benchmark Index

Source: Ethical Investor Magazine from data provided by Standard & Poors

SRI Find Performance cont.

SRI Performance cf Mainstream Overseas Share Funds

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

1 3 5 7

Period (Yrs)

% Return

Ave SRI Fund

Ave M/stream Fund -W/saleAve M/stream Fund -W/sale

Source: Ethical Investor Magazine from data provided by Standard & Poors

SRI Find Performance cont.

Are SRI Funds Performing?

…..there is no evidence to prove that UK equity SRI funds will perform better, or worse, than mainstream investments. On the basis of our findings to date, we do not see such a trend developing…..

…. we continue to believe that the “skill” of the fund manager probably carries even more weight for SRI funds than for mainstream investments

….From a theoretical standpoint, we continue to have some sympathy with the argument that “socially responsible” companies are likely to be the better performers, over the long term, relative to competitors with lower standards….

Does Socially Responsible Investment (“SRI”) Add Value?, Mercer Investment Consulting, November, 2004

Are SRI Funds Performing - What about the ‘SR’ in SRI

• Difficulty– In measuring net social benefits– for market to place private $ value on improved social benefits

(valuing and internalising an externality )

• Accounting for change in contribution from SRI– Conceptually very difficult

• Again, problem of measuring & applying $ value• Also - isolating SRI as the catalyst agent of change

Strategies

• Segment the market and provide appropriate product– Values based – investors that wish to investment consistent with

values– Value Seeking – generally investors which are concerned at the

implications of not accounting for ESG issues• concern may/may not specifically manifest as material financial

concern– Value enhancing SRI is about using shareholder activism to

maintain and increase the value of one's investment, and its focus is almost exclusively on corporate governance

Strategies

• Values based– General product target is faith or philanthropic sector

• Product strategy • Need to address unacceptable products services

– not concerned if ‘sin sells’• - ve screen – precludes products/services not consistent with

values• +ve screen/over weighting – highlights/emphasises positive

attributes sought

Strategies – Values seeking

• Product strategies1. Enhancing existing investment process or universe

- investment outcome• avoid/substitute• +ve and -ve screens

- Not seeing much new product here b/c1. Move to thematic investing2. Utilisation of information by non-SRI Funds

2. Thematic investment – Seeking investment opportunities arising from changing resource

availability, technology regulation and consumer preferences.

Thematic Investing

• Seeing developing environmental asset class – funds investing into environmental investments

• In Aust • B&B Environmental Fund, • Babcock and Brown Wind Partners Group• James Fielding/Mirvac - Australian Sustainable Investments

Fund, • Macquarie Cleantech Fund,• Viridis Clean Energy Group

Strategies – Value Enhancing

• Also seeing increase in participation in following – Proxy Voting – Engagement Strategies

Strategies – Value Enhancing

Proxy Voting • 3 drivers

– Developing acceptance of the investment proposition of good governance

– Increasing concern over executive remuneration– Rising requirement by industry pension funds for managers

to vote and reconcile basis– See eg www.unisuper.com.au

Value Enhancing SRI

Engagement

• Engagement/ “shareholder activism”, investors seek to improve a company's SEE performance by means of dialogue and/or voting at AGMs.

• Shareholders acting as owners• typically the methodology used by institutional investors, such

as pension funds and insurance companies, but is also used by selected consumer SRI funds, churches and charities.

Value Enhancing SRI

Benefits• Avoids alteration to underlying investment process, esp

screening - Used as an overlay

- Enables specific targeting/action focussed on issue(s) of concern

- Signals investors concern to company (at senior level)

Summary

• Three expressions of SRI• Historically no trade-off and outperformance can be

evidenced• Mercers philosophically supportive• Would expect financial materiality to be more profound going

forward• Strategies should depend on the market profile seeking to

address and investment process wish to adopt