esg & dc: debunking the myths - schroders...esg myths debunked esg myths debunked refuting some...

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Jessica Ground, Global Head of Stewardship ESG & DC: Debunking the myths May 2017

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Page 1: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Jessica Ground, Global Head of Stewardship

ESG & DC: Debunking the myths

May 2017

Page 2: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

ESG Myths

Debunked

ESG myths debunked Refuting some of the misconceptions

1

Source: Schroders.

#1: It’s all about exclusions ESG integration is widely accepted

#2: It negatively impacts performance Academic and investment studies say otherwise

#3: Members don’t care Increasingly they do

#4: No benefit to engagement Engagement is key

#5: I’m passive so I don’t have risk All encompassing

Page 3: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Myth #1: It’s all about exclusions ESG covers a number of approaches and objectives

2

Source: Schroders.

Performance benefits (value)

Social benefits (values)

Bottom up, company driven

Thematic investing

Impact investing

Screened investments ESG integration

Governance and

active ownership

Best-in-class responsible investments

Top down, issue driven

Page 4: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Myth #1: It’s all about exclusions ESG integration is the most popular

3

Source: CFA Institute, ESG Issues in Investing: Investors Debunk the Myths (2015).

57%

38% 36%

26% 23%

21%

4%

0%

10%

20%

30%

40%

50%

60%

ESG integration ininvestment analysisand decision making

Best-in-classinvesting and

positive alignment

Exclusionary screening

Active ownership

Thematic investing

Impact investing

Other

Page 5: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Sugar Climate change

Myth #1: It’s all about exclusions Innovative thought

4

– 2015: Ground-breaking research into the topic – 2016: Round tables with companies on the issue – 2017: Established investor expectations on disclosure,

$1tn AUM signed up

– 2016 Proprietorial Carbon Value at Risk model developed

– Correlation between carbon intensity and carbon price impact on EBITDA

Source: Schroders.

– In depth thought pieces to follow

Page 6: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Fulton, 20121 Oxford-Arabesque, 20142

Myth #2: You will sacrifice returns Academic evidence says otherwise

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– Firms with significant environmental concerns pay higher credit spreads

– A well governed firm can have an equity cost advantage between 0.8 to 1.32%

– Good corporate social governance can lead to a 1.8% reduction in the cost of equity

– 88% studies showed a positive relationship between sustainable companies and operational performance

– Rating agencies tend to give better ratings to issuers with good ESG policies

1Sustainable investing. Establishing Long-Term Value and Performance, Fulton, June 2012. 2From the Stockholder to the Stakeholder, Smith School of Enterprise and the Environment, University of Oxford and Arabesque Asset Management, September 2014.

0%

20%

40%

60%

80%

100%

Link higher CSR and ESG factorsto lower cost of capital

(debt and equities)

Link high ESG factor ratingsto market-based outperformance

Page 7: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Annualised returns: 9.2% FTSE World vs. 8.6% FTSE4 Good

Annualised returns: 17.6% MSCI World Tobacco vs. 8.7% MSCI World

Myth #2: You will sacrifice returns Exclusions and formulaic approaches struggle

6

Source: Schroders.

0

50

100

150

200

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300

Dec

-200

6

Dec

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-201

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6FTSE4GOOD Global TR FTSE WORLD TR

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-200

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-201

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MSCI WORLD TR MSCI WORLD TOBACCO TR

Page 8: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

How important are each of the following ESG issues to your choice of investments?

Myth #3: Members don’t care

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Source: Schroders Global Investor Survey 2016 – Global Consumers.

(Scores out of 10)

6.4

6.1

6.0

5.9 5.9

Good corporate governance

Good record of socialresponsibility

Positive impact on theenvironment

Positive impact on localsocial outcomes

Positive impact on broadly-based social outcomes

Page 9: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Climate change, conflict and poverty are the most serious issues affecting the world today

Myth #3: Members don’t care How millennials see the world today

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Source: WEF Global Shapers Annual Survey 2016.

45%

38%

34% 31%

22%

0%

10%

20%

30%

40%

50%

Climate change/destructionof natural resources

Large scale conflict/wars Religious conflicts Poverty Government accountability

Page 10: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Would you move, or consider moving, your money out of an investment that was performing well, if you discovered it was invested in the following types of companies?

Myth #3: Members don’t care ESG considerations taken more seriously

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Source: Schroders Global Investor Survey 2016 – Global Consumers.

22%

32%

31%

24%

34%

44%

33%

40%

36%

49%

42%

33%

33%

48%

37%

35%

46%

39%

47%

33%

36%

34%

35%

29%

29%

21%

21%

21%

17%

18%

Links to repressive regimes

Associated with pornography/sex industry

Associated with arms or weapons manufacturing/dealing

They have a poor record of social responsibility

Use of animal testing

Associated with gambling activities

Their on-going activities negatively contribute to climate change

Reportedly using legal tax minimisation schemes

Companies in the news for the wrong reasons

Associated with tobacco or alcohol products

No Consider moving Definitely would move it

UK

78%

68%

69%

76%

66%

56%

67%

60%

64%

51%

Page 11: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Schroder survey of plan sponsors in UK/Europe:

Myth #3: Members don’t care Plans are acting

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Source: Schroders Global Investor Survey 2016 – Plan Sponsor.

58% 28%

14% 40%

believe ESG is already important believe ESG will become important

believe ESG won’t become important of total portfolios factor in ESG principles

Page 13: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Myth #4: Engagement looks like this Engagement topics during 2016

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Source: Schroders as at 31 December 2016.

Environmental Social Governance

Biodiversity Customers Accounting practices

Climate change Data security Auditors

Environmental policy/strategy Health and safety Board committees

Environmental products and services Human capital management Board structure

Environmental supply chain Human rights Business integrity

Forests Labour standards Corporate strategy

Pollution Nutrition and obesity ESG governance and sustainability strategy

Waste management Product safety Governance oversight

Water management Social policy/strategy Remuneration

Supply chain management Shareholder rights

Succession planning

Transparency and disclosure

Voting

Page 14: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Myth #4: Engagement looks like this Successful engagement outcomes

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– Since 2014 we have been engaging and asking the company to disclose its carbon scenarios/pricing and to improve it’s reporting on this issue

– In 2016, Schroders co-filed a shareholder resolution on climate change at the company’s AGM

– The 'Aiming for A' coalition proposed a resolution requesting that the company 'Approve Strategic Resilience for 2035 and Beyond', referring to the resilience of the company’s portfolio of commodities to climate change

– The resolution was an important step forward in escalating this process. Shareholders representing 5% of the voting shares co-filed and the resolutions went on to be supported by management and were passed – The company has since announced a drastic restructure aiming to

remove several assets from its portfolio (including thermal coal operations)

– This action complements the several good climate change initiatives in place, in particular its focus on energy efficiency and clean coal

Our objective: strengthen risk management and better adoption of industry best practices, which we expect should support the company stock price

Source: Schroders as at 30 June 2016. For illustrative purposes only and not to be considered a recommendation to buy or sell securities.

– In 2010, we met with Tesco to discuss its CSR report. While the company’s commitment to corporate responsibility was evident, we were disappointed with the lack of human capital performance data disclosed and requested better reporting

– Despite continuing to ask for better disclosure, there was no progress in 2011 and 2012; and limited data was disclosed in 2014

– In 2015 we engaged with the company further following the announcement of National Living Wage

– In 2016 we engaged with the Tesco’s Head of CSR and Supply Chain director to get an update on the company's sustainability efforts and the company's policy in health and wellness and its impact on products, customers and employees – In 2016, Tesco finally reporting more meaningful data on human

capital, including employee turnover, employee satisfaction and gender pay gap

Page 15: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Cumulative abnormal returns (CARs) after engagement

Myth #4: Engagement looks like this To benefit portfolios

14

Source: Dimson, Karakas and Li (2015). Fama-French size decile returns from Professor French’s website

Cumulative abnormal return (%)

-1

0

1

2

3

4

5

6

7

8

9

-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

All engagements Successful engagements Unsuccessful engagements

Page 16: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

As a pension fund how do you interpret your stewardship responsibilities?

Myth #4: Engagement looks like this But funds not acting

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– 98% agree that pension funds have stewardship responsibilities – 72% signatories to UK Stewardship Code – 31% discuss stewardship on an annual basis

Source: PLSA Stewardship Survey 2016.

74%

63%

54%

48%

48%

46%

41%

35%

20%

6%

0% 20% 40% 60% 80%

To maximise long-term risk-adjusted financial returns

Holding investment managers accountable for enhancing long-term value

Requiring investment managers to integrate material ESG issues into investment decisions

Selecting investment managers with a clear commitment to stewardship

Directly engaging with investee companies and/or exercising voting rights

A regulatory requirement and/or obligation

Directly/indirectly enhancing the value of individual securities to which the fund is exposed

Directly/indirectly enhancing the value of the markets to which the fund is exposed

To incorporate views of members/beneficiaries into the investment strategy

Other

Page 17: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Myth #5: There is no ESG risk in passive An ESG risk map for a typical default fund

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Source: ESG Risk in Default Funds: Analysis of the UK’s DC pension market, PLSA Discussion paper, February 2017.

0%

2%

4%

6%

8%

10%

12%

0 5 10 15 20 25

Human capital

Business ethics

Product safety

Energy and emissions Effluents and waste

Health and safety

Data privacy and security

Water use

Community relations

Healthy living Physical climate impacts

Sustainable products

Human rights

Page 18: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

ESG myths

Debunked

ESG myths debunked Refuting some of the misconceptions

17

Source: Schroders

#1: It’s all about exclusions ESG integration is widely accepted

#2: It negatively impacts performance Academic and investment studies say otherwise

#3: Members don’t care Increasingly they do

#4: No benefit to engagement Engagement is key

#5: I’m passive so I don’t have risk All encompassing

Page 19: ESG & DC: Debunking the myths - Schroders...ESG Myths Debunked ESG myths debunked Refuting some of the misconceptions 1 Source: Schroders. #1: It’s all about exclusions ESG integration

Important information For professional investors and advisers only. This material is not suitable for retail clients. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. Reliance should not be placed on the views and information in the presentation when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Investment Management Limited, 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Notes about the Schroders Global Investor Study 2016: This independent survey was commissioned by Schroders and was conducted between April and October 2016. 712 institutional investors were surveyed across the UK, France, Germany, Netherlands, Belgium, Switzerland, China, Japan, Hong Kong, Singapore, Australia, USA, Canada, Brazil and Chile. Schroders also commissioned a similar independent survey of 20,000 investors (consumers) in 28 countries around the world between 30 March and 25 April 2016, including Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, the Netherlands, Spain, the UK and the US. This research defined ‘investors’ as those who will be investing at least €10,000 (or the equivalent) in the next 12 months and who have made changes to their investments within the last five years. These individuals represent the views of investors in each country included in the survey. 1,836 independent financial advisers were also surveyed between 7th–29th April 2016 and these individuals represent the views of advisers in each of the eight countries included in the survey; Australia, Germany, Italy, Hong Kong, South Korea, Singapore, the UK and the US. Please note, where percentages do not add up to 100%, this is due to decimal rounding or a multi-coded question.

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