Sustainable 60 Workshop

Strategy & Governance: an investor’s view

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Agenda

• Why Responsible Investment part of our Strategy?• Why is sustainability important to investors?• What role for investors –

o Investment analysiso Investor oversight

• Communicating with investors

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Why do we focus on Responsible Investment?

We must manage the Fund in a manner consistent with:• Best-practice portfolio management;• Maximising return without undue risk to the Fund as a whole; • Avoiding prejudice to New Zealand’s reputation as a responsible

member of the world community

We must establish policies, standards and procedures that cover:• ethical investment including avoiding prejudice; and• use of voting rights

We believe that:• Responsible asset owners should have concern for ESG issues• Improving ESG can improve long-term financial performance

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Standard for Investors: UNPRI

P1-6 GNZS Workstream

Principle Description

P1 Integration We will incorporate ESG issues into investment analysis and decision-making processes.

P2 Ownership We will be active owners and incorporate ESG issues into our ownership policies and practices.

P3 Disclosure We will seek appropriate disclosure on ESG issues by the entities in which we invest.

P4 Best Practice We will promote acceptance and implementation of the Principles within the investment industry.

P5 Collaboration We will work together to enhance our effectiveness in implementing the Principles.

P6 Communication We will each report on our activities and progress towards implementing the Principles.

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Standards for companies

Corporate Governance guidelines

UN Global Compact

Subject area Principles

Human rights 1. Support and respect human rights2. No complicity in abuses

Labour 3. Uphold freedom of association4. Eliminate forced/compulsory labour5. Abolish child labour6. Eliminate discrimination

Environment 7. Precautionary approach 8. Act to promote greater responsibility9. Encourage environmentally friendly technologies

Anti-Corruption 10. Work against corruption

Why these benchmarks?• Universally recognised• Signatories include our peers, investment managers and investee companies• Unlikely to be superceded

International Corporate Governance Network guidelines

Proxy Agency voting guidelines

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Why is sustainability important to investors?

• View in two ways : Long-term themes & company analysis

• Themes include:• Increased sensitivity to climate change by the state and the individual• Natural resource scarcity - energy, food and water• Demographics & emerging markets

• Company analysis includes:• management quality, brand, skills (IP), resources (people, capital,

natural) & regulatory environment• management of risks & opportunities from environmental, social and

governance themes

• Less clarity around how this is priced in from an investors perspective• Also impact it has on other parts of portfolio – universal owners perspective• May not be called sustainability - but that is just a definitional issue

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Warning signs prior to the BP disaster

Source: Yahoofinance.com

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Up until April 19 (the day before the Deepwater Horizon explosion), his [BP’s] performance was excellent.An investor close to BP quoted by The Financial Times, July 25th 2010

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Warning signs leading up to BP disaster

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KKR Green Portfolio Results

Total

Greenhouse Gas Emissions 345,000 metric tons

$160,000,000Waste 1.2 million tons

Forest Resources 8,500 tons

Program cumulative results for 2008-2009

PRIMEDIA: Paper Use Reduction

Notes: See methodology section for description of avoided and efficiency calculations.

The total % change is aggregate change between the baseline year and the most recent year of data. All other % changes are expressed as year-over-year.

Results-to-date 2008 2009 Average TotalChange in absolute paper use -25.0% -39.0% -32.0% -54.3%Estimated avoided paper use (tons) 3,200 5,300 4,200 8,500

Avoided/Actual paper use 29% 79% 48% 48%Estimated avoided costs $2,931,000 $4,561,000 $3,746,000 $7,491,000Change in intensity (tons/$1000 revenue) -22.4% -28.1% -25.2% -44.2%

KKR Portfolio - value growth

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Investment Analysis – growing role of ESG research

Basic data and ratings• Bloomberg• MSCI• Array of specialists

Integration into investment analysis• Sell-side: HSBC; Goldman Sachs; JB Were; Citi• Buy-side: varies with active stock pickers more likely those with quantitative models

But ratings could change that: e.g. MSCI ESG rating seeks to reflect three key questions:

• What are the key ESG risks and opportunities applicable to each sector?• Do companies have ESG risk management strategies commensurate with the ESG risks they face?• Do companies have strategies to capture potential opportunities in the ESG space?

UNPRI is a driver but also an indicator of changing perception of fiduciary role

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Investor ownership & oversight

Why have an ownership strategy?• Responsible asset owners should have concern for ESG issues• Improving ESG practice can improve long-term financial performance• Institutional investors are “universal owners” and through collaboration can

reduce value destroying practices across markets • Exercising rights as shareholders helps to reduce agency risk and improve

shareholder oversight

Activities• Governance & Voting – to encourage high governance standards across

markets & asset classes

• Engagement –ask companies to address significant breaches of standards & encourage best practice

• Substantial owner (e.g. NZ companies) – engagement on material ESG issues with companies in which we have a significant stake

Investment landscape can get complicated

Asset Owner Fund Manager Research Provider Assets

Government and Regulators

Institutional Investors

Governance

Policy

Standards

e.g. UN PRI

Investment

Mandates

Investment Managers

Advisors

In-house Manager

Sell Side

e.g. E.A.I

Proxy Voting

RI Research

Equities

Bonds

Other

Collaborative Initiatives e.g. CDP

Portfolio Monitoring

Voting

Engagement – investors & companies

Beneficiaries

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Communicating with investors

• Integrate into normal communication channels – annual report; website, meetings

• Board and CEO main points of contact – ensure key issues are on Board agenda

• Strategy and governance investors main focus – and bottom line

• Develop strategy, KPIs, targets and report e.g. GRI

• Consider third party verification/assurance

• Monitor investor trends on ESG factors

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THEMATICS

Sustainability is about:

Building trust with stakeholders

Being prepared

Being opportunistic