ceep 2020 fossil fuel-free investing: triple bottom line · 2020. 6. 16. · ceep 2020 fossil...

CEEP 2020

Fossil Fuel-Free Investing:

Triple Bottom Line

“We can use our resources for the

realization of God’s will in the world,”

--Bishop Michael Curry

June 2020

JoAnn Hanson, President & Chief Executive OfficerT: 845-351-2671

www.churchinvestment.org

“The financial world is morally complex, and it is essential to work with people who understand our beliefs. The Church Investment Group’s fossil-fuel free investment approach allows us to earn a good return on our money while being good stewards of God’s creation,”

-- Bishop Andrew M.L. Dietsche, Diocese of New York

Church Investment Group’s Missions

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Performance and Capital Preservation through Full-Time Investment ManagementCIG enables Episcopal endowments to invest like the largest endowments and pension plans using an Outsource Chief Investment Officer (OCIO).

Cost Effective Fees Based on CIG’s Collective Size

Faith-Based Investing Approaches – CIG is a UN Principles of Responsible Investors Signatory.

• Environmental, Social and Governance Multi-Asset Fund with a complete asset allocation.• Fossil Fuel-Free ESG Multi-Asset Fund with a complete asset allocation.• Separate accounts for larger endowments with ESG investment options.

Proxy Voting and AdvocacyInvestments structured to vote proxies and support corporate resolutions through the interfaith Center on Corporate Responsibility (ICCR) and CDP.

Church Investment Group is an independent Episcopal non-profit 501(c)(3).

Fossil-Fuel Free Investing: Triple Bottom Line


An Abbreviated History of Episcopal Faith-Based InvestingJesus talked more about money and its right use than anything else except the Kingdom of God.

Ethical Investment Policy:The Church Commissioners (managers of the Church of England’s endowment) establishedan ethical investment policy in 1948 when they first started to invest in equities.

Shareholder Advocacy:The Episcopal Church drafted the first religious shareholder proposal in March 1971.The proposal resulted in GM removing its business from apartheid South Africa.

Renewable Energy:The Executive Council of the Episcopal Church in February 2002 asked the Treasurer tovote in favor of all resolutions asking companies to report on how they will promote renewable energy sources.

Consideration of Fossil-Fuel Divestment:The 2015 78th Episcopal Church General Convention urged all dioceses and parishes of theEpiscopal Church to engage on the topic of divestment from fossil fuels and reinvestment in clean energy.

2030 Net Zero Carbon Target:On February 12, 2020, the Church of England’s General Synod set targets for the Churchto work to become carbon “net zero” by 2030.

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Why Consider Fossil Fuel Free Investing?

Aid efforts to keep carbon resources

in the ground.

Avoid potential “carbon bubble”

exposure.

Make a statement about global

climate change.

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TOOL #1: THE TRANSITION PATH INITIATIVEIt assesses companies' preparedness for the transition to a low-carbon economy, supporting efforts to address climate change.TPI covers the largest corporations in 14 emission-intensive sectors.

▪ Companies’ carbon performance is assessed using the modelling conducted by the International Energy Agency (IEA) for its biennial Energy Technology Perspectives report.

▪ This modelling is used to translate emissions targets made at the international level into sectoral benchmarks, against which the performance of individual companies can be compared.

▪ This framework is known as the Sectoral DecarbonizationApproach.

▪ Benchmarks: A Paris Pledges scenario, A 2 Degrees scenario, A Below 2 Degrees scenario

TWO DIMENSIIONAL ANALYSIS

▪ Management Quality (MQ): the quality of companies’ governance/management of their greenhouse gas emissions and of risks andopportunities related to the low-carbon transition

▪ Carbon Performance (CP): how companies’ carbon performance now and in the future might compare to the international targets andnational pledges made as part of the 2015 UN Paris Agreement.

MANAGEMENT QUALITY (MQ) CARBON PERFORMANCE (CP)

Companies’ management quality is assessed against a series of indicators: company policy, emissions reporting and verification, targets, strategic risk assessment and executive remuneration.

Companies are placed on one of five levels:

▪ Level 0 – Unaware of (or not Acknowledging) Climate Change as a Business Issue

▪ Level 1 – Acknowledging Climate Change as a Business Issue

▪ Level 2 – Building Capacity

▪ Level 3 – Integrated into Operational Decision-making

▪ Level 4 – Strategic Assessment

Fossil-Fuel Free Investing- Triple Bottom LineKnow What you Own

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TRANSITION READINESS: BBH CIG PORTFOLIO

It assesses companies' preparedness for the transition to a low-carbon economy, supporting efforts to address climate change. TPI covers the largest corporations in 14 emission-intensive sectors.

The Transition Path Initiative Tool Database of 337

corporations in 14 emissions-intensive sectors

Level 0 – Unaware of (or not Acknowledging) Climate Change as a Business IssueLevel 1 – Acknowledging Climate Change as a Business IssueLevel 2 – Building CapacityLevel 3 – Integrated into Operational Decision-makingLevel 4 – Strategic Assessment

Fossil Fuel Free Investing: Triple Bottom Line

BHH Core Select(US Large Cap)

Holdings Level

Unilever 4

Colgate Palmolive 4

Nestle 4

BHH Partners Fund(International Equities

Holdings Level

CRH 3

Nestle 4

Phillips 4

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BBH CIG Portfolio Analyze and rate companies in the portfolio that has exposure to 14

emission-intensive sectors =Management Assessment

OUTPUT

TOOL #2: 2 DEGREES INVESTING INITIATIVEThis report provides a scenario analysis of the investment portfolio. It responds to the recommendations of the G20 Financial Stability Task Force on Climate-related Financial Disclosures (TCFD).

▪ Provide an analysis of the portfolio relative to an economic transition consisting with limiting global warming to below 2 degrees Celsius (B2DS) above pre-industrial levels, as well as comparison to peers.

ANSWER TO 3 QUESTIONS

1. What is the current exposure in the portfolio to economic activities affected by the transition to a low-carbon economy?

2. Does the portfolio increase or decrease its alignment with a Sustainable Development Scenario (SDS) transition over the next 5 years?

3. What is the expected future exposure to high-and low-carbon economic activities?

Type of Analysis

1. Current Exposure: provides information on the estimated percent of the portfolio currently exposed to activities across fossil fuel, power, and automotive sectors

2. Trajectory of the Portfolio Relative to Transition Scenarios: shows the alignment of selected power technologies, fossil fuels and automobile technologies in the portfolio relative to the IEA transition scenarios B2DS, SDS, NPS and CPS. For each technology, the analysis shows the planned evolution or trajectory of power, fossil fuel and automobile production allocated to the portfolio over the next 5 years

3. Exposure of the Portfolio to the SDS in 2023: shows the estimated exposure in 2023 to high-carbon and low-carbon technologies for the fossil fuels, power and automotive sector in the CIG portfolio

4. Company Exposure: provide insight into the specific companies driving the results

Fossil-Fuel Free Investing: Triple Bottom LineKnow What You Own

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Fossil Fuel Free Investing: Triple Bottom LineKnow What You Own

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Scenario analysis: BBH CIG PortfolioBBH leverages the 2 Degrees Investing Initiative Tool in order to perform Scenario Analysis on the BBH CIG Portfolio, as compared to the MSCI All Country World Index (ACWI) benchmark.

SECTION 2: THE CURRENT EXPOSURE

SCOPE

2DII devised the Paris Agreement Capital Transition Assessment (PACTA) tool in order to address a major gap in analyses conducted by investors, Who historically based their assessment of climate risk and impact on backward-looking carbon footprints – which is now widely viewed as an incomplete methodology.

PACTA also helps investors implement the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), as well as comply with related regulations (Article 173 of France’s Law on Energy Transition for Green Growth, upcoming EU disclosure requirements, and more).

Know What You Own

In a recent study, Just Capital looked at the top-scoring 20% of companies for workers in eachindustry, contrasted with the bottom 20% and found the top quintile significantly out-performs the bottom quintile on both a ROE and cumulative return basis.

Companies that have cared for their workers in the past are seeing financial results. Just Capital’s top quintile, constructed of the best performing workers scores, saw a median 5-year average ROE of 14.0% while the bottom quintile posted a 12.5% ROE. On a cumulative return basis, Just Capital sees the Top 20% posting an average cumulative return in the first four months of 2020 of -13.1%, outperforming the Bottom 20% with its return of -18.4%.

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Know What You Own

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❖ Divested from companies with significant in-the-ground reserves in: • US Equities• International Equities • Emerging Market Equities• Fixed Income

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❖ All Saints Church—Pasadena CA is the Lead Investor In the Fund

CIG’s Fossil-Fuel Free Multi-Asset ESG Fund

Case Study of the Diocese of New York working with the Church

Investment Group to Divest from Fossil Fuels

November 2014Diocesan Task Force on Socially and Environmentally Responsible Investing makes an initial report on the merits of adopting ESG investing.

February 2015Church Investment Group (CIG) suggests adopting Ethical Investment Guidelines and implementing ESG Investing to the NY Diocesan Investment Committee.

April 2015Bishop Andrew M.L. Dietsche, Bishop of New York, becomes a signatory to The World is Our Host: A Call to Urgent Action for Climate Justice.

September 14, 2015Diocesan Task Force publishes Bearing Witness: Report of the Task Force on Socially andEnvironmentally Responsible Investing.

November 2015The Convention of the Diocese of New York urges adoption of ethical investment guidelines and divestment from fossil fuel companies, especially coal companies.

February 2016The Church Investment Group proposes a fossil- fuel free asset allocation.

July 2016The Diocesan Investment Committee reviews Tracking Error Studies.

November 2016Trustees of the Diocese of New York adopt Ethical Investment Guidelines to minimizeinvestment in fossil fuels and to divest from fossil fuels in US and International Stocksand US Corporate Bonds.

January 24, 2017The Diocese of NY Endowment, advised by CIG, divests from fossil fuels. 12

Annualized Absolute Returns (Nominal Terms): 1989-2017A Divested Portfolio would have Outperformed the S&P 500

Source: The Race of Our Lives Revisited, Jeremy Grantham, GMO (White Paper, 2018)

How Will Divestment Impact Your Endowment’sPerformance?

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The Fossil-Fuel Free Investing: Triple Bottom Line

Divestment Gain/Cost back to 1925

Source: The Race of Our Lives Revisited, Jeremy Grantham, GMO (White Paper,2018)

Historical Impact of Fossil Fuel Divestment on Performance

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How Will Divestment Impact Your Endowment’s Performance?

MSCI ACWI EX FOSSIL FUELS INDEX HAS OUTPERFORMED

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JoAnn Hanson

President & Chief Executive OfficerChurch Investment [email protected]

Thank you.

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Resources on Environmental, Social and Governance Investing

“Robustness of the Corporate, Social and Financial Performance Relation, “ Timo Busch and Gunar Friede, 2018

“How ESG Affects Equity Valuation, Risk and Performance,” MSCI, November 2017

“From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance,” University of Oxford, Arabesque Partners.

Resources for Minimizing Fossil Fuel Exposure

“The Alleged Perils of Divestment from The Race of Our Lives Revisited,” Jeremy Grantham, GMOWhitepaper, 2018

“Examining the Impact of Fossil Fuel Free Investment on University Portfolios,” Christopher J. Ryan, Jr., Associate Professor of Law, Roger Williams School of Law, and Christopher R. Marsicano, Visiting Assistant Professor of Educational Studies, Davidson College, January, 2020.

“Studies with Estimates of Tracking Errors for Fossil Fuel Free Portfolios,” Church Investment Group, 2016

“Fossil Fuel Free Investing,” Parametric, 2015

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Profitable Investing with ESG

Members of the Board of Directors of CIG are a highly qualified, accomplished and diverse group of individuals committed tothe mission of the Episcopal Church at large.

Thomas A. Quinn

Vice Chairman of the Board CEO and Founder, CornerCap Investment Counsel, Atlanta, GA; Chair of the Diocese of AtlantaDIT

The Rt. Rev. Gayle Elizabeth Harris,Ph.D.Bishop Suffragan of the Diocese of Massachusetts , Past Vice Chair of theChurch Pension Fund and serves on the Steering Committee of Bishops Working for A Just World

The Rt. Rev. J.Neil AlexanderDean, School of Theology, The University of the South; formerBishop of theDiocese of Atlanta

Quintin Primo, III Chairman of the Board Chairman & Chief Executive Officer, Capri Investment Group, Chicago,IL

David Robinson,Vice Chairman ofthe BoardFormer ChiefFinancial Officer Diocese of Southern Ohio, Cincinnati, OH

JoAnn HansonPresident and Chief Executive OfficerT:[email protected]

CIG’s Board of Directors

The Rt. Rev. Andrew M.L. Dietsche, Bishop of the Diocese of New York

The Rt. Rev. W. Michie Klusmeyer, Bishop of the Diocese of WestVirginia

W. Allen Barnett Secretary-Treasurer Former Chief of Finance and Operations ofthe Diocese of New York

Thomas S.DiemarSeniorVice President,Brown Brothers HarrimanCo.,New York,NY

Gary A. Glynn, Emeritus Former member of investment committees of the Cathedral Church of St. John the Divine and St.Thomas Church Fifth Avenue; past chair of the DIT and Investment Committee of the Diocese of New York; former president US SteelPension Fund

Charles W. Hall, Esq. NortonRose Fullbright, Houston,Texas

Eric Hutchinson Managing Director, United Capital Financial Advisors, Little Rock,AR

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• The forecasted deviation between a portfolio’s returns and the benchmarkor index it was meant to mimic or beat.

• Factors impacting return include: industry, country, risk indices (beta, priceto book, momentum growth, etc.).

• Example: 1% tracking error concludes that in a normal environment, the portfolio could deviate 1% higher or lower than the benchmark.

• Estimates of annual tracking error range from 0.72% to 1.6% vs. ACWI.

Fossil Fuel Free Return Variability


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What is Tracking Error (Active Risk)?

Studies with Estimates of Tracking Error for Fossil Fuel Free Portfolios

Name Date Estimate of Tracking Error

California Teachers’ Retirement Board Investment Committee Report on ACWI ex- FossilFuels

July, 2016 1% vs. ACWI* (11/30/10-5/31/16)*All Country World Index

MSCI ACWI ex Fossil Fuels Information June, 2016 1.05% vs. ACWI (11/30/10 - 6/30/16)

Aperio Group, “Do the Investment Math:

Building a Carbon-Free Portfolio"

2016 .75% vs. Russell 3000 (1/1/88 –12/31/15)

.72% vs. ACWI (1/1/97 – 12/31/15)

Parametric, “Fossil Free Investing” February, 2015 1.39% vs. S&P 500

.93% vs. EAFE** (1/1/04 – 12/31/14)** Large and Mid-Cap Developed Market Equities, ex-US andCanada

Perella Weinberg ESG Review and

Investment Strategy

October, 2014 .71% vs. S&P 500

.77% vs. ACWI(Dates not provided)

MSCI ESG Research, “Responding to the Call

for Fossil-Fuel Free Portfolios (ACWI Ex CALSTERS Fossil Fuel List)

December, 2013 .99% vs ACWI (6/03 –5/13)

IMPAX Asset Management, “Beyond Fossil

Fuels: Investment Case for Fossil Fuel Divestment”

April 2013 1.6% vs. ACWI (3/08-4/13)

Advisory Partners, “Fossil Fuel Divestment:

Risks and Opportunities”

2012 1.57% vs. S&P 500 (1/1/90-8/31/12)

Fossil Fuel Fee Investing: Triple Bottom Line

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Prepared by Church Investment Group 2016

DISCLOSURES

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“BBH Guidelines” represent the strategic asset allocation as recommended by the BBH Asset Allocation Committee. “Client Targets” represent account holders’ asset allocation objectives, reflecting individual circumstances and restrictions.

Investors should notify their Relationship Manager if there have been any changes in their financial situation, investment objectives, requested restrictions or other circumstances which might affect the manner in which their assets should be invested.

Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

Mutual funds are sold by prospectus. Investors should consider a Fund's investment objectives, risks, charges and expenses carefully before investing. Information about these and other important subjects is in the Fund's prospectus, which an investor should read carefully before investing. For more complete information, contact Relationship Manager for prospectuses.

If applicable to an individual’s account, credit ratings are provided by Standard and Poor’s, which are independent third parties. Issuers with credit ratings of BBB or better are considered of good credit quality, with adequate capacity to meet financial commitments. Issuers with credit ratings below BBB are considered speculative in nature and are vulnerable to the possibility of issuer failure or business interruption. For additional information please go to the Understanding Ratings section at www.standardandpoors.com. “Others” include fixed income products, including mutual funds, that are not subject to credit quality ratings. Holdings may not equal 100% due to rounding.

If applicable to an individual’s account, the Yield to Maturity (YTM) represents the yield that the Fixed Income portion of the Portfolio would achieve if all bonds currently held in the Portfolio were held to maturity, assuming all coupon and principal payments are received as scheduled. Yield to maturity is only an estimation of future return because the rate of return at which coupon payments can be reinvested upon receipt is unknown. This figure is subject to change and is not meant to represent the rate of return earned by any particular client.

If applicable to an individual’s account, the SEC 30-day yield, also referred to as the ‘standardized yield’, is a return figure based on the most recent 30-day period covered by a mutual fund's filings with the SEC. The yield figure reflects the dividends and interest earned during the period, after the deduction of the fund's expenses.

This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) to recipients, who are classified as Professional Clients and Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA. BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. ©Brown Brothers Harriman & Co. 2018. All rights reserved. 2018.

©2019 Brown Brothers Harriman & Co. Confidential & Proprietary. Not to be reproduced without the explicit consent of BBH & Co. “BBH” and “BBH & Co.” are registered service marks of Brown Brothers Harriman & Co.

ceep 2020 fossil fuel-free investing: triple bottom line · 2020. 6. 16. · ceep 2020 fossil...

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