integration of esg into asset allocation
DESCRIPTION
Steffen Hörter, Business Director - risklab GmbH - GermanyTRANSCRIPT
Integration of E S G into Asset AIntegration of E.S.G. into Asset A
TBLI CONFERENCE™ ASIA 2010
Tokyo, May 27th 2010
Dr. Steffen Hörter | risklab GmbH | Director
© Copyright of risklab GmbHDistribution or reproduction of this material only with prior written consent
AllocationAllocation
AgendaAgendaIntegration of E.S.G. Factors into Asset Allocatio
1. Putting E.S.G. Factors into the DNA of the Invest
2. Integrating E.S.G. in Top-Down Strategic Asset A
— Environmental Scenario Based SAA
— Integration of E.S.G. Risk Factors into SAA
3. Bottom up Modeling of Photovoltaic Investment a
4. Key Conclusions for Investor
on
tment Process
Allocation
and Asset Allocation
2
Putting E.S.G. Factors into the DNAA of the Investment Process
3
- Approach Towards ResponResponsible Investing
Positive Selection
Best in class E.S.G. scoring
1
E.S.G. themed funds
1. Asset Owner Engagement Activity2
Voting (shareholder rights)
Covenants (creditor)
Dialogue Dialogue
2. Exclusion (examples)
Cluster munitions provider3
Cluster munitions provider
E.S.G. rogue corporates(which violate environmentalstandards, labor rights, ...), g , )
3. Integration of E.S.G. factors4
nsible Investing
Explicit and systematic inclusion of E S G risk factors into traditional‘ investment process
- E.S.G. approach
E.S.G. risk factors into ‚traditional investment process and capital market research
Full spelling of E.S.G. alphabet – not only focus on environmental riskon environmental risk
Integrated E.S.G. client investment solutions
Formulation of Investment Policy & Strategy
Asset Allocation & Risk management
Asset Class Analysis incl. Alternative Real Assets
Timber
Renewable Energy/ Cleantech
Other
Bottom-up modelling
4
E.S.G. Based Portfolio Strategy Opt
C / E S G S t lit A hCore / E.S.G. Satelite Approach
C
Fixed Income (securitieexamples)
Worldbank Green Bond
Core: Traditional Finance Investments
Equity Strategies (examples)
Worldbank Green Bond
Social Impact Bond
Corporate Climate Bond (redemption value linachievement of envirThemed/ Green Equity Investing
Water
Low Carbon
achievement of envirtargets)
ABS Micro Finance Bond
Alternative (Real) AssetsTimber & Forestry ...
ESG Best in Class Emerging Market ...
Alternative (Real) Assets
Renewable energy(Photovoltaic, wind energy, ...)
Agricultural land ...
tions
E S G C / E S G S t lit A hE.S.G. Core / E.S.G. Satelite Approach
RI Equity Strategies (BM examples)RI Equity Strategies (BM examples)
Global Equity Sustainability Index
Asian / European Sustainability Index, …
Core: E.S.G. managedInvestments
s
RI Bond Strategies
…
nked to ronmental
E.S.G. Satellite Investments
…
ronmental
...
)
RI R ibl I i
5
RI =Responsible Investing
Integrating E.S.G. in Top Down Straategic Asset Allocation
6
E.S.G. Based Strategic Asset Alloca
SAA d t i t 90% f i t t i kSAA determines up to 90% of investment risks Considered more important than selection of sec
market timing etc. B ild l t i d ti Builds on long-term views and assumptions:
need to reflect major risk factors such as climchange
Financial direction and impact of E.S.G. factors toinvestigated Investors are uncertain about the risk/ return effe Investors are uncertain about the risk/ return effe
E.S.G. investing
Analysis of regional, sectoral and asset class imp New definition of asset risk profile based on E.S Changes of regional or sectoral attractiveness? Strategic flexibility in investments?Strategic flexibility in investments?
Please note: concerning the return and risk related information please refer to the disc
ation: Motivation
curities,
mate
o be
ects ofects of
pact.G.?
7
claimer at the end of the document.
Environmental Scenario Based SAAA
8
Example Scenario Based SAA Anal
Environmental Scenario I t AEnvironmental Scenario[2020 – 2100] Impact An
Scenario High Risk“ EconomyScenario „High Risk
High level/ increasing carbon
emission:
Economy
Energy price shock
Food / clean water
GDP shocks no global agreement on carbon
reduction objectives
extended use of fossile energies
GDP shocks
....
Capital Markets
Increasing (equity) comparatively small private
(sector) carbon offsetting
Measurable climate changes:
Increasing (equity)
Increasing credit sp
Higher liquidity prem
Inflation risk: + (foo
Desertification / Flooding
Extreme Heat/ Cold Days
Increasing frequency of severe
(industrial goods), .
Adjustment of real assumptions per as
For example equitieIncreasing frequency of severe
storms
Regional social unrest/ migration
p qdifferential vs. basemultiplier 1.4....
Please note: concerning the return and risk related information please refer to the disc
SIMPLIFIED: FORlysis
SIMPLIFIED: FOR ILLUSTRATION ONLY
l i C l i SAAalysis Conclusions on SAA
Difference of Assetks
price shocks
Difference of AssetAllocation vs. BenchmarkPortfolio
volatility
EM Equity
Developed Equity
volatility
preads
mia
d/ water) /
Real Rate (highly credit rated)
Bonds
Alternative Assets
..
return and risksset class
es: -2.0% return
Cash/ short term debt
e case; vola
9
claimer at the end of the document.
Integration of E.S.G. Risk Factors in
1
nto SAA
0
Cornerstones of risklab E.S.G. StudObjectiveObjective
Integrated modeling of environmental, social and gove
Focus is the analysis of long-term risks on a 20 years h
E.S.G. Risk Factor Modeling Process
Key assumption: E.S.G. risks do not impact expected r
E.S.G. risk factor analysis and selection
E.S.G. risk factor modeling: definition + calibration of stochastic processes
EconomGeneraE.S.G. simulat
E.S.G. Risk Portfolio Analysis
Robustportfolio optimization(key criterion CVaR 95%)
Portfolio simulation (efficient frontiers: selection of 3 alternative portfolios)
ConclusioSAA w.r.t
1
dy
ernance risk factors in a portfolio context
horizon
I t f E S G E it
returns
InputPortfolioAnalysis
mic Scenario ation incl. risk factor
tion
Input of E.S.G. Equity risk sensitivities
Computation of prices for all assets [G i C hfor all assets [Govies, Cash, +E.S.G./Global/-E.S.G.Equity]
F t P j tiFuture Projections10,000 Paths
ons for Investors:t. E.S.G. risks
1
E.S.G. Risk Factor Screening and S
Environmental Risk S
Global Warming
Emission Waste+ Pollution
Hu
LaborRights
MultipleRisk
Factors
ResourceDepletion
Carbon Emission Sick Selection
RiskDriver
Rights Spot Price Change
Relative sector carbon RelatRelative sector carbon footprint costs
Short-listing E.S.G. risk factors: causalit
1
Short Listing
Social Risk Governance Risk
uman Rights
r s
Child Labor
Bribery + Corruption
Unequal share voting
Conflict ofInterest
Safety +Health
WrongIncentives
Rates Corporate Governance
tive sector staff
p
Relative sector s / sales governance ratings
ty, fit to modeling, data availability, SRI expert input
2
Risk / Return Characteristics of Equ
Return / Risk Metric Positive GlobalReturn / Risk Metric
(average values p.a. over 20 years)
Positive E.S.G.
Global
Equity Equity
Expected Return 7.6% 7.6%
CVaR 95% -26.7% -38.8%
Volatility 15.5% 19.3%
CVaR (95%):Conditional Value at Risk (CVaR) 95%: Average expected return incurred in the 5% worst case
* Global Equity represents an equity allocation with an average E.S.G. exposure
expected return incurred in the 5% worst case scenarios p.a.
1
Please note: concerning the return and risk related information please refer to the disc
uity Returns
Key findingsNegative Key findings
In comparison the CVaR risk of +E.S.G./Global/-E.S.G. Equity is very different
NegativeE.S.G.Equity
7.6% very different.
The CVaR risk of +E.S.G. Equity is approx. one-third less than Global Equity*
-52.3%
Global Equity .
The CVaR risk of –E.S.G. is approximately double that of +E S G Equity
23.7%
+E.S.G. Equity.
E.S.G. risk is assumed to have no impact on expected equity
t b t i i k d ireturns but is a risk driver.
3
claimer at the end of the document.
Significant Optimization OpportunitieSignificant Optimization OpportunitieE.S.G. Equity Allocation
Portfolio “Balanced”Portfolio Balanced
Cash, 6%
Global Equity, 30%
B Equities +E40%
A
Government Bonds, 64%
Cash, 8%
Equities +E S G
Portfolio “Lower Risk”
Return / RisEquities +E.S.G.,
30%
Expected R
Government Bonds, 62%
CVaR 95%
Volatility
1
Please note: concerning the return and risk related information please refer to the disc
es Through Positivees Through Positive
Portfolio “Higher Return”Portfolio Higher Return
Cash, 6%
Government
E.S.G.,
Government Bonds, 55%
sk Metric Portfolio Portfolio Portfolio
Option BOption A
"Balanced" "Lower Risk" "Higher Return"
Return 5.5% 5.5% 5.8%
-7.4% -5.1% -7.4%
6.2% 5.2% 6.5%
4
claimer at the end of the document.
Bottom up Modeling of Photovoltaic
1
c Investment and Asset Allocation
5
Real Alternative Assets
Alternative Re
IlliquidListed
Timbe
Agricultu
...
1
eal Assets
d
Renewable Energy
er Wind Energy
Photovoltaicure
...
6
Modeling of Alternative Real Assets
Bottom-up Modeling
+ RevenuesReturn
+ Revenues
- Investments / CapEx
- Operating Costs
- Interest
- Tax
Oth t- Other costs
1
s
Stochastic Drivers
For exampleGlobal Solar Radiation
InflationInflation
Interest rate
7
Photovoltaic: Modeling of Global So
Stochastic Model for Global RadiationStochastic Model for Global Radiation
tSIatSIatRad Rad0Rad1Rad0Rad ,,,, σ))((σ))(()(
Rad(t): Globalstrahlung, aRad,0, aRad,1: Lageparameter, I(S(t)): Indikatorfunktion, S(t): R
σRad,0, σRad,1 : Volatilitätsparameter, W Rad (t): Brownsche Bewegung
Probability DensityProbability DensityFunction
0 7 0 5 0 3 0 1 0 1 0 3 0 5-0.7 -0.5 -0.3 -0.1 0.1 0.3 0.5Global Solar
Radiation
Source: risklab. Vgl. auch Šúri M., Huld T., Dunlop E.D., Albuisson M., Lefèvre M., Wasolar radiation.
1
Please note: concerning the return and risk related information please refer to disclaim
olar Radiation FOR ILLUSTRATION
tWRad1
Paths of specific energy yield
Regime
450 p gy y(examples)
435
440
445
420
425
430
405
410
415
Time
ald L., 2007. Uncertainties in photovoltaic electricity yield prediction from fluctuation of
8
mer at the end of the document.
Efficient Portfolios and Share of Pho
Ausgangsportfolio
Effiziente Portfolios max. 25% Photovoltaik
Effiziente Portfolios max. 15% Photovoltaik
Effiziente Portfolios max. 5% Photovoltaik
ff f l h l k
Initial AllocationEfficient Portfolios with max. 25% PhotovoltaicEfficient Portfolios with max. 15% PhotovoltaicEfficient Portfolios with max. 5% PhotovoltaicEfficient Portfolios ith 0% Photo oltaicEffiziente Portfolios 0% PhotovoltaikEfficient Portfolios with 0% Photovoltaic
Ret
urn
Initial Allocation
Expe
cted
R
Expected Risk
Source: risklab; Mader, Treu, Willutzky (2010): „Alternative Real Assets in a Portfolio CPublisher: World Scientific.Expected return and expected volatility based on annualized IRR of portfolios.
1
p p y pPlease note: concerning the return and risk related information please refer to disclaim
otovoltaic FOR ILLUSTRATION
Context“, in: Kiesel, Scherer, Zagst „Alternative Investments and Strategies“,
9
mer at the end of the document.
Key Conclusions for Investors
20
Reasons for Investors to Integrate E
Fiduciary responsibility and opportbroader goals of society and other1
E.S.G. (risk-) factors considered imincorporation into asset allocation 2
More and more investment producfacilitate comprehensive responsib3
2
Please note: concerning the return and risk related information please refer to the disc
E.S.G. into Asset Allocation
tunities to better align investment objectives with r stakeholders (UN PRI).
mportant on a portfolio and asset class level: reveals optimization opportunities.
cts, service providers and data available which ble investing.
1
claimer at the end of the document.
Appendix
22
Integration of E.S.G. Risk Factors in
For executive summaries of the risklab studyFor executive summaries of the risklab study`E.S.G. risks in a portfolio context´ please ref
Responsible Investor - Quant study shows signifterm ESG risk reduction and return boost
1term ESG risk reduction and return boost
http://www.responsible-investor.com/home/article
IPE - ESG risk in a portfolio context - 1 April 2012
http://www.ipe.com/magazine/esg-risk-in-a-portfocontext_34522.php)
PROJECT M Study: ESG delivers financial ben3 PROJECT M - Study: ESG delivers financial ben
http://www.projectm-online.com/en/globalopportunities/2009_3/Pagesnds aspx
3
nds.aspx
The study was also published as an article in Ge´Nachhaltige Investments im Portfoliokontext (Hö
4Nachhaltige Investments im Portfoliokontext (Hö
Menzinger)´ in ´Absolute Report 53/2010`
http://www.absolut-report.de/absolutreport/ausga
2
nto Strategic Asset Allocation
yyfer to
ficant, long-
e/risklab/)
0
olio-
nefitnefit
s/52StudyFi
erman örter Mader
The risklab study was performedby S. Hörter, W. Mader, B. Menzinger.
Expert responsible investing input was given by Mr D Diamond Head of SRIörter, Mader,
aben/)
given by Mr. D. Diamond, Head of SRI, AllianzGI France and other RI Experts. E.S.G. factor and data research was supported by Mr. S. Einsiedel, AllianzGI Europe .
3
Contact
Dr. Steffen HörterBusiness Director
Tel.: +49.89.1220 [email protected]
www risklab comwww.risklab.com
2244
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