How to align investments with your mission:

a workshop for religious investors

September 27, 2013 Montréal, Québec

Hosted by: Sustainalytics and the Shareholder Association for Research and Education (SHARE)

Agenda Opening reflection

1. Global responsible investment trends

2. Selecting and monitoring your investment manager

3. Shareholder activism for small investors

4. Key environmental, social and governance issues

5. Human rights and the extractive sector

6. In the wake of Rana Plaza: investor action

Presenters

Laurence Loubières, Director, Advisory Services,

Sustainalytics

Peter Chapman, Executive Director, SHARE

Anne Wittman, Director of Law and Policy, SHARE

Kevin Thomas, Senior Analyst, SHARE

Sustainalytics

Award-winning global provider of sustainability research and analysis with broad coverage of global capital markets.

140+ staff and more

than 70 analysts

Coverage: more than

4,000 companies in

developed and

emerging markets

Over 20 years’

experience working with

institutional investors

to develop and

implement responsible

investment policies and

strategies.

Received the 2012 Best

RI Analysis Firm

according to the

Thomson Reuters Extel

RI Survey

What We Do

5

Data E S G Insights

Environment Social Governance

We help investors turn vast quantities of environmental, social and

governance information into insightful, value-added analysis

to enable more informed investment and business decisions.

1. RI trends and drivers

Sustainability is Being Driven by Converging Macro Trends

7

World’s economic output will rise by a factor of 6.3 by 2050

Macro Trends Population

Growth

Developing World

Convergence Urbanization

Younger Populations

Environmental Issues

Climate Change

Water Crisis Stressed

Ecosystems

Natural Resource Scarcity

Energy

Increased Per Capita

Consumption

Social Issues Poverty Human and

Labour Rights

Business Ethics

Stakeholder Engagement

Transparency

Impacts of ESG risks

• Financial

• Reputational

• Operational

• Legal

8

Lower returns Risks for investors

Result of a power outage in NYC

Local community disrupting access to a mine

ESG Opportunities

• Companies that integrate ESG issues in their – Business models – Governance structures – Risk management systems – Relationships with

stakeholders

are likely to benefit from sustainability-related opportunities

• Investors – will benefit from identifying

leaders and laggards in ESG integration

– need to be aware of ESG issues and monitor them to generate value

Source: Global Sustainable Investment Alliance (GSIA), Global Sustainable Investment Review, 2012

Global RI Assets by Region

• $13.6 trillion in RI strategies (using broad definition of RI strategies) • 21.8% of total global assets under management now managed under an RI strategy • Europe, United States and Canada combined account for 96% of global investments referencing ESG

considerations

1

2

3

4

5

6

7

RI Approaches

Active Ownership/ Engagement

Positive Best in Class/Screening

Negative Exclusionary

Screening

Norms-Based Screening

Integration in Investment Process

Positive Thematic and Impact investing

• Direct and collaborative corporate engagement • Explicit ESG considerations within proxy voting

• Investing in the top ESG performing companies across sectors

• Excluding poor ESG performers and/or companies that are involved in controversial business lines, e.g. tobacco, gambling

• Excluding companies that are in violation of basic societal norms, e.g. controversial weapons

• Incorporating ESG information into the traditional investment process: identification of positive signals and adjusting price targets

• Investments focused on companies that are solving sustainable development challenges, e.g. clean technology, water.

How ESG Factors are Integrated by Investors

11

Fragmented Marketplace: RI Strategies Vary Amongst Investors

Source: Global Sustainable Investment Alliance (GSIA), Global Sustainable Investment Review, 2012

The UN Principles for Responsible Investment • Voluntary principles launched in

2006 • 1231 signatories in September

2013 • Main countries represented: USA,

UK, Australia, France • Brazil has more signatories than

Canada • Framework for global best practice

in Responsible Investment.

13

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

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

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

4. We will promote acceptance and implementation of the Principles within the investment industry.

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

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

Asset Managers

765 62%

Asset Owners 271 22%

Service Providers

195 16%

What is Driving RI Markets?

Main drivers

Regulatory Risk: Legislation and International Treaties/Conventions • Europe: controversial weapons • U.S.: divestment from Sudan, Dodd-Frank and conflict minerals, California Transparency in Supply Chains

Act • UN Guiding Principles on Business and Human Rights • Global Compact, ILO

Client Demand: • Widen or maintain client base • Demand for product: fixed income, EMs, other asset classes • Access to European client base (largest RI market)

Search for Materiality • Risk management: fiduciary duty • Financial performance: new players are entering the RI market seeking alpha - impact investing, private

equity, alternative assets

Contribution to Sustainable Development • Universal ownership: capital markets play a leading role in addressing long-term systemic concerns

2. Selecting and monitoring your investment manager

Responsible investment strategy for faith-based organisations

• Connect

– Responsible Investment policy

– Asset management

– ESG research

– Engagement

– Reporting

Responsible investment

policy

Asset management

ESG research

Engagement

Reporting

RI policy Identification of sensitive issues • Mission related

– Human rights – Environment – Care for disadvantaged or

vulnerable populations – Life issues – …

• Industries

– Oil and gas – Mining – Food and beverage – …

• Company behaviours – Relationships with local

communities

• Topics – Human rights, – Child labour – Corruption, – Anti-competitive practices

Screening methodology 1. Negative Impact

Category 5 (raw score = 0 point) complicit violations of human rights, most serious forms of corruption

or fraud, most serious environmental crimes

Category 4 (raw score = 20 points) several controversies with major impact on stakeholders

Category 3 (raw score = 50 points) serious controversies with significant impact on stakeholders but not a

structural issue of the company

Category 2 (raw score = 80 points) recurring controversies, minor impacts on stakeholders, weak

operational procedures…

Category 1 (raw score = 99 points) minor controversies

No evidence of relevant controversies(raw score = 100 points)

Based on Sustainalytics controversy research; Sustainalytics tracks controversies related to 10 topics in the research framework: employees, local communities, environment, business ethics…

Hurricane scale used for assessment : 5 categories (1: lowest – 5 :

maximum)

Assessment based on various considerations including: Impact of the incident on internal and external stakeholders Level of recurrence (determines if the controversy is isolated or fits a

pattern of missteps) Degree of exceptionality (measures the magnitude of the controversy

relative to a company’s peers and industry) Company Responsibility (determined through ownership structure,

operational control and parent-subsidiary relationship) Company Response (determines a company’s preparedness to address

controversies) Outstanding Risks to the company and investors (includes financial,

legal, operational and reputational risks)

Example : Companies assessed at a Category 4 or 5 controversy level are ineligible

Screening methodology 2. “Worst in Class”

• Sustainalytics assesses company performance based on 150 Environmental, Social, and Governance indicators

• Indicators assess the quality of policies, programs and management systems; actual performance; and impact on stakeholders

• Companies are assigned an overall ESG score

• Companies are also ranked within their peer group supporting best-of-sector analysis

Exemple: Companies that rank within the bottom 5% of their peer group are ineligible

Screening methodology 3. Product Involvement

Adult entertainment

Alcohol

Controversial Weapons

Firearms

Fur and Specialty Leather

Gambling

Genetically Modified Organisms

Military Contracting

Nuclear power generation

Pesticides

Tobacco

Embryonic Stem cell research

Abortion

Product Involvement research highlights companies that manufacture products, run operations, and/or provide services that could be viewed as controversial

Involvement is classified as either direct or related

Threshold of involvement is defined in terms of the

percentage of total annual revenue derived from involvement

Example : Companies that derive 10% or more of their revenues from tobacco will be ineligible

How to select an Asset Manager?

• The firm – UNPRI signatory? – Range of experience and number

of years of involvement in RI – Contribution to networks,

publications

• ESG offer – Mutual funds / Segregated funds? – Track record : performance vs.

index – ESG rating of RI funds vs. ESG rating

of index – Size of AUM with ESG integration

vs. total AUM – Examples of other mandates – Fees – Philanthropic sharing mechanisms

attached?

• ESG process – Before or after financial

evaluation? – Outsourced or internal? – Throughout all asset management

or just for some funds? – Size of internal ESG team, level of

integration with other teams – Biographies of RI team members,

number of years experience, turnover in the last 3 years

– Access to research providers? – Process type: screening criteria,

best in class, controversies? – Proxy voting? – Engagement?

Monitoring the relationship

Define holding / selling strategies

Ask for regular reporting about the implementation of your policy Invite your AM to present regularly at your Investment committees Ask for reporting on screening, challenges, examples of decisions Ask for reporting on voting Get involved in decision making over specific companies

Company not

meeting filters

Hold company

Engage

directly or through coalitions or multi

stakeholder initiatives

Pay attention to AGM and vote

Exclude company

Put on watch list and reassess

eligibility later

3. Proxy voting and engagement: Shareholder activism for small

investors

Exercising your ownership rights

“Investors and other financial institutional

have a responsibility to exert influence

where possible on companies they invest

in to prevent or mitigate adverse impacts”

- Netherlands NCP for OECD Guidelines on

Multi-national Enterprises

September 25, 2013

Building capacity for collective action

• Proxy voting: Your votes count more than ever because results are not so one-sided any more. See annual Canadian Key Proxy Vote Survey

• Engagement: Investors speaking together have a stronger voice

Engaging companies together

Pooled Capacity

Foundation

Pension Fund

Religious Investor

Pension Fund

Foundation

Religious Investor

Mutual Fund

Environment

Governance Social

• Executive Compensation • Board Diversity • Sustainability Reporting

• Climate Change • Pollution • Hydraulic Fracturing • Toxics

• Supply Chain Standards • Decent Work • Human Rights

ESG engagement themes

4. Key ESG Issues

Selected 2013 Industry Issues

Industry ESG Issue Industry ESG Issue

Banks & Diversified Financials

Corporate Governance Risk management Tax Havens Executive Compensation Political contributions Responsible Investment and lending practices Speculation on Food commodities

Hi Tech Supply chain monitoring (labour rights, working conditions, health and safety Exposure to conflict minerals

Food, Beverage and Tobacco

Supply Chain Management Palm Oil Relationships with local communities Toxic emissions, carbon footprint

All Sectors Implementation of the UN Guiding Principles on Business and Human Rights • policy on human rights, • due diligence mechanisms • access to remedy in cases of human

rights violations

Oil, Gas, Coal and Consumable Fuels

Fossil fuel divestment Shale Gas Development Oil Sands Mountain top removal Community impacts Environmental preparedness

Source: Sustainalytics research team, 2013

Selected 2013 country focused ESG issues

Country/Region Key ESG issue Industry Risk

China Corporate Governance

• Banks/Diversified Financials

• Oil, Gas, Coal and Consumable Fuel

• Utilities

Operational

Regulatory

United States Political Transparency

• Banks/Diversified Financials

• Oil, Gas, Coal and Consumable Fuel

• Food, Beverage and Tobacco

Reputational

European Union Tax Havens • Banks/Diversified Financials Regulatory

Reputational

Australia Water

• Food , Beverage and Tobacco

• Oil, Gas, Coal and Consumable Fuel

• Utilities

Operational

Reputational

Canada Oil Sands • Oil, Gas, Coal and Consumable Fuel Reputational

Russia Corruption • Oil, Gas, Coal and Consumable Fuel Regulatory

Operational

Brazil Deep Water Drilling • Oil, Gas, Coal and Consumable Fuel Regulatory

Operational

Indonesia Palm Oil • Food, Beverage and Tobacco Reputational

Sub-Saharan Africa Land Grabbing • Food, Beverage and Tobacco

• Diversified Financials

Reputational

Regulatory

Source: Sustainalytics research team, 2013

5. Human rights and the extractive sector: what should investors

expect?

Key issues for responsible investors

• What are the human rights responsibilities of extractive companies?

• How do we measure the human rights performance of extractive companies?

• How do we engage with extractive companies in human rights issues?

What are the human rights responsibilities of extractive companies?

• UN Guiding Principles on Business and Human Rights: companies have a responsibility to RESPECT human rights

• Human rights standards: International Bill of Rights, ILO Declaration of Fundamental Principles and Rights at Work

How do we measure the human rights performance of extractive companies?

• UN Guiding Principles require: human rights policy statement, human rights due diligence (assessment, management system, grievance mechanism, tracking and communication), and remediation

• Performance measured against internationally recognised human rights norms

• Key areas for extractives: labour rights, indigenous rights, environmental rights (ie right to water) and rights relating to security forces

How do we engage extractive companies?

• Ask about policies and procedures

– What human rights standards they use

– How they operate across the company

– How they track their performance

– How they address impacts

– Approach to specific problems

• Where conflicting information

– May recommend independent assessment

4. In the wake of Rana Plaza: investor action

Couldn’t the Rana Plaza disaster have

been prevented?

Known risks in Bangladesh

• Fire and building safety: dozens of incidents with hundreds of deaths before Rana Plaza

• Treatment of workers: arrest and killing of union organizers

• Wages below basic subsistence levels

All of these are problems that can be fixed.

Collective responsibility

Each has the power – and therefore responsibility – to contribute to the solution

Solutions

Governments

Buyers

Civil Society

Suppliers

The Accord on Fire and Building Safety

• Independent inspections

• Transparency

• Funding for improvements

• Worker involvement

• Widespread endorsement

Investor action

• Open letters endorsing the Accord from investors with more than $3 trillion in assets

• Approaches to individual companies

• Taking it beyond Bangladesh: supply chain responsibility and transparency

• The power – and responsibility – to contribute to the solution

Questions ?

Thank you !

For more information contact:

Laurence Loubieres Sustainalytics Laurence.loubieres@sustainalytics.com

Peter Chapman SHARE pchapman@share.ca