TBLI Amsterdam – November 2008
Afshin Mehrpouya
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Innovest UncoveringHidden Value forStrategic Investors
Sovereign Wealth Funds
Who are they?
Are they game changers in ESG investing?
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Innovest is an investment research and advisory firm which focuses on “non-traditional,”
drivers of investment risk and returns, including companies’ performance on
environmental, social, and strategic governance (ESG) issues.
Core products
Company profiles and ratings
Sector reports
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Global Compact Screen
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Research coverage:
- 2300 companies globally
- 70 MSCI industry sectors
Headquartered in New York with 8 offices in 7 countries, 4 continents.
8 out of the top 25 global asset managers in the world use Innovest research.
70 clients globally including: UBS, HSBC, SSgA, ING, ABP, BNP Paribas, CalPERS
Ranked # 1 independent research provider by 2006 & 2007 Thomson Extel Survey
Introduction to Innovest
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Sovereign Wealth Funds – A perspective
SWFs are large pools of capital controlled by a government and invested in private markets (abroad?), against which the government has no liability
What are they?
Different from:
•Pension funds
•Government owned and/or managed companies
•Central Banks / Foreign Reserves
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Government surplus from commodities ( e.g. Kuwait Investment Authority, Abu Dhabi Investment Authority, Chilean Sovereign Wealth Fund)
Non-commodity surpluses [e.g. CIC (China), GIC & Temasek (Singapore)]
– Usually aimed at exchange rate or inflation control
– Usually a debt in local currency from central bank to the fund Other sources of government surplus
– Privatization (Australian Sovereign Wealth Fund)
– Superannuation support (New Zealand Superannuation Fund) ?Pension / social security’s savings?
– The French Phenomenon (National Strategic Investment Fund)
– Protection of national champions using
Sources of capital
Sovereign Wealth Funds – Risk and Opportunities
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Then, why are they in the spotlight?
– Commodity price boom
– Credit crisis
– Increased risk appetite of national governments
– A few highly publicized exposures
• Temasek and telecom case in Indonesia and Thailand
– Weaker US Dollar and the search for an escape route
Sovereign Wealth Funds – A perspective
Are they a new phenomenon?
Source: Various - SWF websites, IMF, etc. – upper estimation limits in all cases
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Some of the larger transactions:
Sovereign Wealth Funds – A Perspective
Source: Various; SWF websites and news sources
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How large are they?
Sovereign Wealth Funds – A perspective
Source: Morgan Stanley; Sovereign Wealth Funds: A Growing Global Force in Corporate Finance
USD 10 trillion by 2015, given the historical levels of foreign reserve growth and launch of new SWFs (Japan, India, France, etc.)Source: Morgan Stanley
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Intergenerational Savings (e.g. Norwegian Government Pension Fund, Kuwait Investment Authority, etc.)
– Long term
– Strict government withdrawal covenants
– Lower return pressure Oil Stabilization Fund (e.g. Russian Oil Stabilization Fund)
– Short to medium term
– Low risk tolerance
– Need higher liquidity Reserve Investment Entities [e.g. China (CIC), Singapore (Temasek, GIC), etc]
– Mostly non-commodity surpluses
– Need higher returns
– Higher risk tolerance Development funds (e.g. Nordic Development Fund, European Development Fund, etc.)
– Goal oriented
– Not return focused
– Small relative size ?Protection of The ‘National Champions’ against ‘predator investors’?
Fund Mission
Sovereign Wealth Funds – A Perspective
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I
Categories and risk appetites
Sovereign Wealth Funds – A Perspective
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Sovereign Wealth Funds – An ESG Perspective
Why should SWFs integrate ESG into their investment practices?
What are the extra-financial risks and opportunities posed by SWFs for their co-investors?
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Why should SWFs integrate ESG into their investment practices?
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The ESG Challenge
Financial Performance
ES
G
ESG
Strategic (political) objectives
Traditional Investors SWFs with potential non-commercial agenda
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SWFs sourced from oil– Hedging against oil risks through investing in Clean Energy
All long term funds– Reaping long term superior ESG integration returns
– Diffusion of national values and commitments
• Commitment to engagement aiming at improving environmental and social performance based on diffusion of Norwegian GPF, NZ SWF
• Carbon portfolio audits for Kyoto Signatories?
– Image concerns
• An ESG agenda can allay some of current public & regulatory concerns about SWFs
– Pursuing national & regional social and environmental agendas
Key ESG Motifs for SWFs
Norwegian Government Pension FundThe overarching objective of the active
ownership effort is to safeguard the financialinterests of the Pension Fund. The ethical
guidelines are premised on favorable returns over time being dependent on sustainable development, in the financial, ecologic and
social sense.
Source: NPF Report to Storting 2008
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SWF ESG Trends
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Who can help get them more involved?
ESG investment forums and codes (PRI, GC, etc.)
Asset managers
Publicized SWF Practices Analysis and Ratings
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What are the risks and opportunities posed by SWFs for the co-investors?
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All non-transparent funds
– Influence aiming at non-economic gains
• Conflicts with the economic objectives of co-investors and the investee
Passive SWF Investors
– Dilution of shareholder voting power
Stabilization funds
– Possibility of short to term sovereign wealth investments
• Instability in the target firm and/or capital markets
SWFs of politically unstable countries
– Unpredictability of behavior in the face of political changes
All SWFs
– Lack of sufficient outsourcing management or internal management skills
• Unpredictable fund behavior both on portfolio adjustments and engagement
Key SWF risks and opportunity for the target companies
Key Risks
Better access to the SWF’s regional markets and networks
Privileged access to SWF liquidity in followings financing rounds
Key Opportunities
CIC has invested USD 5 billion in Morgan Stanley and 3 billion in Blackstone without demanding any
managerial role and claiming passivity.
Furthermore it declined the offer of a board seat offered by UBS, though it may exercise its voting
stake in some cases
Source: Financial Times
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Sovereign Wealth Funds – Risk and Opportunities
Innovest’s SWF opportunities and risks analysis platform
Investment time horizon
Stated Investments horizon / type of reporting in national accounts
Scale of influence on the investee
Passive or active
Frequency of portfolio adjustments Percentage of shares
Regulations for withdrawal of money from the fund Voting rights
Economic mandate
Stated mandate Seats on the board
Transparency of the investment process Type of government
Independence of Board of Governors
SkillsInternal & external management teams and control processes
Type of legal entity
Environmental and Social Opportunities
Specific E&S investments Mandate
Degree and type of dependency on external entities
E&S Engagement practices
Proxy voting analysis
Ethical risks Mitigation
Code of ethics
Portfolio transparencyEthics governance platform
Portfolio deviations from market (the visible portion)
Portfolio analysis for inter-investee conflict of interests (the visible portion)
GAPP Compliance
Rating
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SWF comprehensive report
– Comparative opportunities / risks analysis
– Analysis of best practices
SWF profiles and ratings
– Detailed factor analysis
– Relative / absolute rating
– Outlook
Sovereign Wealth Funds – Risk and Opportunities
Innovest’s SWF opportunities and risk analysis products
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Afshin Mehrpouya
Senior Analyst - FranceInnovest Strategic Value Advisors
Tel: +33 (0)1 44 54 04 [email protected]
www.innovestgroup.com
Thank you.
Perrine Dutronc
Managing Director - FranceInnovest Strategic Value Advisors
Tel: +33 (0)1 44 54 04 [email protected]
Andy White
Managing Director - UKInnovest Strategic Value Advisors
Tel: +44 (0) 20 7073 0470 [email protected]