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ESG INTEGRATION: FOCUS ON ENVIRONMENTAL RISK AND OPPORTUNITY

LENORA SUKI

SUSTAINABLE BUSINESS AND FINANCE

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WHERE INVESTORS SHOULD FOCUS NOW AND IN THE FUTURE

ESG INTEGRATION: FOCUS ON ENVIRONMENTAL RISK AND

OPPORTUNITY AGENDA

• Sustainable and responsible investment today

• ESG analysis and integration in the investment process

• Industry specific analysis of risk and opportunity

• Use of company data and scores

• Performance and investment insights

• The next frontiers

>>>>>>>>>>>>>>

SUSTAINABLE AND RESPONSIBLE INVESTMENT TODAY

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WIDESPREAD MOVEMENT ACROSS ASSET CLASSES TO CONSIDER

NON-TRADITIONAL FACTORS AND ANALYSES IN INVESTMENT PROCESS

SUSTAINABLE INVESTMENT EMBRACES A BROAD RANGE OF APPROACHES

Source: Sonen Capital

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27%

NY – 73%

DU - 11%

THE MAJORITY OF ASSET OWNERS EXPECT AN

INCREASE IN SUSTAINABLE INVESTING PRINCIPLES

Source: Bloomberg Media, Morgan Stanley Institute for Sustainable Investing

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27%

NY – 73%

DU - 11%

ASSETS COMMITTED TO RESPONSIBLE INVESTMENTS ARE GROWING GLOBALLY

Source: Principles for Responsible Investment

PRINCIPLES FOR RESPONSIBLE INVESTMENT: 10 YEAR GROWTH

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SUSTAINABLE INVESTING IS A GLOBAL, RAPID GROWTH SEGMENT OF INVESTMENT INDUSTRY

Source: GSIA 2014 Global

Sustainable Investment Review

SRI Assets

(bn)

SRI /

Total AUM

SRI Assets

(bn)

SRI /

Total AUM

Growth of

SRI Assets

2012 2014

Europe $8,758 49.0% $13,608 58.8% 55%

Canada $589 20.2% $945 31.3% 60%

US $3,740 11.2% $6,572 17.9% 76%

Australia $134 12.5% $180 16.6% 34%

Asia $40 0.6% $53 0.8% 32%

Global - 21.5% - 30.2% -

Total $13,261 100% $21,358 100% 61%

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SUSTAINABLE VS. TRADITIONAL RISK VS. RETURN (7 YR TRAILING)

INVESTORS FOCUSED ON MARKET COMPARABLE RETURNS – NO TRADEOFF OF RETURN FOR IMPACT

Source: Morgan Stanley: Sustainable Reality

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FOCUSING ON MATERIAL ESG FACTORS LEADS TO OUTPERFORMANCE

Source: “Corporate Sustainability: First Evidence on Materiality” by Mozaffar Khan, George Serafeim, and Aaron Yoon

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PRESSURES FROM LAWMAKERS, INVESTORS, ECONOMICS AND PUBLIC

Legislative/Regulatory

• Regulatory mandates

• Pushing on materiality

• Disclosure reform

• Exchange listing requirements

Investors

• Shareholder resolutions

• Questionnaire overload

• Calls for divestment

• Rejection of boilerplate

Economics

• Resource constraints

• Climate change

• Intangibles and valuation

Public/stakeholders

• Campaigns and protests

• NGO oversight

• Political spillover

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$3 tn target by COP21

$8 tn in assets to disclose footprints

$100 bn target by COP21

PDC oversees $230 bn in AUM

THE MOVEMENT FOR DECARBONIZATION AND DISCLOSURE ACROSS STAKEHOLDERS IS GROWING

$24 tn in AUM calling for an agreement

on climate change

154 companies with $4 tn in revenues pledge

environmental goals

$22 tn investor group engaging with over

1,300 companies

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PRODUCTS AND INITIATIVES PROLIFERATING ACROSS

ASSET CLASSES AND ORGANIZATIONS

Mutual Funds (Equity and Fixed Income)

Sell-Side Research

Index Products

Exchange Traded Product

Stock Exchanges

Private Equity

THE RANGE OF INSTITUTIONS INTEGRATING ESG INTO THEIR

BUSINESS ILLUSTRATES UPTAKE:

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27%

NY – 73%

DU - 11%

PRODUCT IS GROWING BUT MOSTLY FOCUSED ON

PUBLIC EQUITIES, STILL NEED CROSS ASSET CLASS

Funds With Sustainable Investment Strategies

>>>>>>>>>>>>>>

ESG ANALYSIS AND INTEGRATION IN THE INVESTMENT PROCESS

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27%

NY – 73%

DU - 11%

BLOOMBERG IS ACCELERATING CHANGE, INNOVATION AND TRANSPARENCY

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INTANGIBLES INCLUDE PHYSICAL, HUMAN AND SOCIAL CAPITAL – REPUTATION,

BRAND VALUE, CORPORATE CULTURE, INNOVATION CAPACITY

INTANGIBLES MAKE UP THE HIGHEST PROPORTION OF CORPORATE VALUE

17% 32%

68% 80% 84%

Source: Ocean Tomo LLC, Jan 2015

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27%

NY – 73%

DU - 11%

WHY? ESG HIGHLIGHTS INTANGIBLES, LESS TRANSPARENT INFO ABOUT MANAGEMENT

23%

20%

14% 13% 13%

10%

6%

0% 0% 0%

To identifyESG risks

andopportunities

Engagement-to focus our

dialogue withcompany

managementteams

Negativescreening

To complywith PRI or

other externalmandates

To identifycompanies for

furtherscrutiny

Positivescreening

Stockselection

within broaderportfolios

Productdevelopment

(e.g.specialist

portfolios ofthematic

universes ofstocks)

To run best inclass

portfolios

Other

SOURCE: INTEGRITY RESEARCH ASSOCIATES, “ESG RESEARCH SURVEY RESULTS, MARCH 2012

Identify risks and opportunities

Focus dialogue with company management

WHAT ROLE DOES ESG ANALYSIS PLAY IN INVESTMENT DECISIONS?

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FIRST FOCUS ON EMISSIONS, ENERGY, WATER AND WASTE MOVING

INTO GOVERNANCE, ANALYTICS AND OTHER BUSINESS FACTORS

ENVIRONMENTAL FACTOR ANALYSIS EVOLVING FROM BASIC,

BACKWARD-LOOKING TO MORE COMPLEX, FORWARD-LOOKING

Backward looking basic data (company, industry and country level)

No benchmarking against climate goals

No connections with systems view or goals

Forward-looking data on capex, embedded emissions, etc.

Plant and project level real assets’ information to roll up to owners

Cross asset class environmental evaluation (e.g. carbon footprint vs. goals)

Decarbonization pathway models aligned between govts and corps

High frequency info on progress to targets

Portfolio optimization to identify most efficient decarbonization pathway

Advanced analyses – value at risk, scenario and stress testing

Linkages across ESG factors beyond E

>>>>>>>>>>>>>>

INDUSTRY SPECIFIC ANALYSIS OF RISK AND OPPORTUNITY

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ESG <GO> & BLOOMBERG INTELLIGENCE SHOW MOST RELEVANT FIELDS

AND MEDIAN PERFORMANCE BY INDUSTRY – UTILITIES FOCUS ON

EMISSIONS, FEEDSTOCK FUELS AND WATER INTENSITY AND RECYCLING

DERIVING ESG INSIGHTS FOR THE INVESTMENT PROCESS REQUIRES KNOWING WHERE TO FOCUS

Source: Bloomberg

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INDUSTRY PRIMERS AND RESEARCH » Outline of fundamental factors and risks

» Focus on changing fundamentals, regulatory risks

» Role of innovation in meeting demand

27%

NY – 73%

DU - 11%

BI <GO> BI ESG <GO>

Source: Bloomberg

CONTEXT - NOT JUST DATA - IS NECESSARY TO UNDERSTAND INDUSTRY TRANSFORMATION

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BNEF <GO>

27%

NY – 73%

DU - 11%

Source: Bloomberg

INDUSTRY AND

TECHNOLOGY

INSIGHTS

» Deep global coverage

of companies and

projects at the heart of

the low carbon

economy transition

CONTEXT - NOT JUST DATA - IS NECESSARY TO UNDERSTAND INDUSTRY TRANSFORMATION

>>>>>>>>>>>>>>

PERFORMANCE EVALUATION AND INVESTMENT INSIGHTS

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27%

NY – 73%

DU - 11%

FA ESG <GO>

Source: Bloomberg

ESG DATA ON BLOOMBERG

» Fully integrated into financial

analysis

COMPANY PERFORMANCE IS SHIFTING IN RESPONSE TO CHALLENGES

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27%

NY – 73%

DU - 11%

RV <GO>

ESG FACTORS IN INDUSTRY ANALYSIS

» Companies assessed relative to peers

Source: Bloomberg

PEER COMPARISONS CLARIFY STRONG/WEAK AREAS OF PERFORMANCE

XLTP XSCR <GO>

COMPANY ENGAGEMENT

BASED ON STRENGTHS

AND WEAKNESSES

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PORTFOLIO CARBON FOOTPRINT TOOL DRAWS ON REPORTED CARBON DATA

Source: Bloomberg

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27%

NY – 73%

DU - 11%

LEAG NEW<GO>

GREEN/SOCIAL BONDS AIM AT IMPACT INVESTMENT BUT CREDIT MARKET INTEGRATION LAGGING

Source: Bloomberg

>>>>>>>>>>>>>>

THE NEXT FRONTIERS

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Participation with the

Corporate Reporting Dialogue

(IIRC)

SUSTAINABLE ACCOUNTING STANDARDS BOARD

TO UNLOCK MATERIALITY

» SASB’s mission is to develop and disseminate sustainability accounting standards

that help public corporations disclose material, decision-useful information to

investors through a rigorous process that includes evidence-based research and

broad, balanced stakeholder participation.

» 80 industries and over 200 sustainability issues

» Documentation of materiality by regularly scan of 10,000+ source docs per sector

» Financial analyses and valuation models, cost-benefit analysis, technical protocols

» Engagement, advisory groups, public comment response and education

» Streamlining and alignment of reporting efforts

Source: SASB

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Source: SASB

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MATERIAL

ENVIRONMENTAL

FACTORS EMERGE IN

MANY TOPICS.

REPORTING

EXPECTATIONS WILL

FOLLOW.

Source: SASB

Established by the Financial Stability Board on 4 December 2015

The first global, industry-led initiative developing recommendations for

voluntary climate-related financial disclosures for companies

Chaired by Michael R. Bloomberg

What is the FSB Task Force?

9

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Key Themes Survey Response

Components of

Disclosures

The majority of respondents agreed on:

Forward-looking disclosure (short, medium and long-term)

Ability to set/achieve targets, with strategies for achievement

Align with material risks

Sector-specification

vs. Aggregation

Respondents differed on sector-specific disclosures vs disclosures

aggregated across sectors, including:

31% prefer sector-specific disclosures to be the priority

31% prefer both sector-specific and aggregated disclosures

16% prefer aggregated disclosures

22% provided alternative commentary

Transition Risk The majority of respondents agreed with definition of “risks

associated with the transition to low-carbon economy”

Many respondents offered additional thoughts on transition risk

Scenario Analysis 96% of respondents see scenario analysis as key to disclosure

* The majority of respondents to the public consultation represented users of financial

disclosures from across the investment value chain.

17

TASK FORCE ON CLIMATE RELATED FINANCIAL

DISCLOSURES WILL HAVE IMPORTANT IMPLICATIONS

Source: TCFD

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27%

NY – 73%

DU - 11%

BMAP<GO>

INVESTORS LOOKING FOR MORE GRANULAR INFORMATION ABOUT RISKS AND OPPORTUNITIES

Source: Bloomberg

GEOLOCATION AND

DATA LAYERS

SPLC<GO> SUPPLY CHAINS IN

GREATER DETAIL

NEFQ<GO> LOW CARBON SOLUTIONS

ACROSS ASSET CLASSES

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CLOSING THOUGHTS

ESG information is becoming mainstream for investors

Investors are finding value in ESG information as the demand for sustainable and

responsible investment products grows.

ESG performance contributes intangible company value

Many ESG factors may have financial implications, but most are difficult to quantify.

The investment industry is working to link valuation to ESG factors.

ESG factors have to be understood at the level of the industry

New initiatives and mainstream investor adoption is driving a focus on what is

relevant depending on business fundamentals.

Environmental insights and impacts are at peer, portfolio, systems level

Whatever the sustainability evaluation, these factors must be understood across

asset classes at multiple levels, especially relative to global goals.

The future will see unprecedented transparency and analytical sophistication

Investors are becoming more sophisticated and more demanding of the type,

quality and granularity of information on environmental risks and opportunities.