sustainable, responsible and impact investing...sustainable, responsible and impact investing...
TRANSCRIPT
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Sustainable, Responsible and Impact Investing
Gregory D. Wait, CEBSPresident
Falcons Rock Investment Counsel, LLCProphecy Impact Investments, LLC
Germantown, Wisconsin
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Donna Katzincirca 1988
At the time, she was Director of South Africa and International Justice Programs
for the Interfaith Center on Corporate Responsibility
Worked with religious bodies, institutional investors and community organizations to exert economic pressure to end apartheid
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Donna KatzinFounding Executive Director
Shared Interest
Shown here at the 19th Annual Shared Interest Awards Gala
“By unlocking local capital and building capacity for entrepreneurs,
we are benefiting low-income communities, helping them invest in a
brighter future.”
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History of “Socially Responsible Investing”
• Religious Organizations• 19th Century Methodists & Quakers opposed/prohibited investing in slavery and war
• No “sin stocks” – alcohol, tobacco, gambling, abortifacients, pornography, weapons
• Divestment Movement• 1960s/1970s – universities divest from military contractors to oppose the Vietnam War
• 1970s/1980s – screened investments in South Africa to pressure government to end apartheid
• 2000s – divest from companies doing business in Sudan to end genocide
• Current – focus on divesting investments in fossil-fuel businesses
• Environmental, Social and Governance (ESG) Criteria• 1982 – Trillium Asset Management – first investment advisor devoted exclusively to sustainable investing
• ESG criteria incorporated into investment management process
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Sustainable, Responsible and Impact (SRI) Investing
Traditional Investing
Seeks financial returns regardless of Environmental, Social or Governance (ESG) factors
Responsible Investing
Investments are screened out based on ESG risk
Sustainable Investing
Sustainability factors and financial returns drive investment selection
Impact Investing
Targeted themes and financial returns drive investment selection
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ESG Investment Methodologies
• Traditional investment criteria – P/E ratios, growth rates, dividend yields, duration and yield curve management, etc.
• Environmental, Social and Governance criteria used to examine a company’s sustainability practice – integrated into investment process
• Environmental – Energy and Water Usage, Waste Stream, Carbon Footprint• Social – Workplace Diversity, Safety, Employee Benefits, Customer Product
Safety, Community Philanthropy, Local Relations, Company Location• Governance – Leadership Structures, Management Turnover, Executive
Compensation, Business Ethics, Board Diversity, Transparency
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Financial Impact and Risk MitigationCategory ESG Factors Financial Impact
Environmental Climate Change Operational/reputation risks; renewable opportunitiesEnvironmental Emissions & Waste Liabilities/reputation risks; regulatory pollution
penaltiesEnvironmental Resource Efficiency Lower cost of capital; reduced operating costsSocial Diversity, Human Capital Increase productivity; employee recruitment/retentionSocial Supply Chain Management Reputational risks; minimize costs of recalls/litigationSocial Community Impact Minimize reputational riskGovernance Board & Executive
DiversityImprove decision-making, oversight, performance
Governance Accounting & Transparency
Increase accountability; regulatory/reputation risks
Governance Executive Compensation Incentivize sustainable, long-term value creation
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ESG Performance – Growth of $1,000 MSCI KLD 400 Social Index – ending value $13,046
S&P 500 Index – ending value $11,961
MSCI KLD 400 Social Index
S&P 500 Index
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SRI Investing in the United States 1995-2016SOURCE: US SIF Foundation
ESG Incorporation Only
Shareholder Resolutions Only
Overlapping Strategies
ESG Incorporation Only
Shareholder Resolutions Only
Overlapping Strategies
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SRI and the Fiduciary Standard
• DOL Interpretive Bulletin relating to the Fiduciary Standard under ERISA in considering Economically Targeted Investments (October, 2015)
• IB 2015-01 removed IB 2008-1, reinstates IB 94-1 and provides related guidance
• “Fiduciaries should appropriately consider factors that potentially influence risk and return” and “environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment.” “In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
• “Plan fiduciaries may invest in ETIs based, in part, on their collateral benefits so long as the investment is economically equivalent, with respect to return and risk to beneficiaries in the appropriate time horizon, to investments without such collateral benefits.”
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SRI and the Fiduciary Standard
• DOL Interpretive Bulletin (IB 2016-1, 12/29/2016) – clarifies fiduciary responsibility to vote proxies and engage management on issues that may affect the value of the plan’s investment (including ESG)
• The trend in Europe is clearly one of fiduciary duty being interpreted as requiringESG integration…but no current hard laws on this subject.
• IRS Notice 2015-62 clarifies the issue of a charity’s ability to invest according to their mission (Mission-Related Investments)
• IRC Sec. 4944(c) provides special rules for program-related investments (PRIs) of charities or private foundations
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Fiduciary Concerns with SRI
• Dismantle the “myth” of reduced returns with SRI
• Materiality of ESG integration processes
• ESG data/reporting/measurement • (IRIS, GIIRS, Morningstar, MSCI, SASB, Sustainalytics)
• Relatively few packaged SRI investments or experienced managers/advisors
• Concern with legislative or regulatory changes
• Communication
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Implementation of SRI –Qualified Retirement Plans
Defined Benefit Pension Plans Consider investment merits of ESG integration
Consider organizational culture and messaging
401(k) and Other Participant-Directed Defined Contribution Plans Consider organizational culture and messaging
Consider the business case for attracting and retaining employees
Communicate SRI funds as a separate investment “track”
Consistency of fund performance measurement and monitoring
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Impact – Shareholder Advocacy
• Active Ownership = Management Dialog + Shareholder Resolutions• Promotes improved ESG policies and investment scores• Examples include:
• Mitigating Deforestation – agreement with largest palm oil supplier expected to prevent 1.5 gigatonsof carbon pollution between now and 2020 (equivalent to annual emissions from all of Latin America)
• Board Diversity – Five companies revised their board-nominating language to strengthen the importance of diversity in director searches
• Sustainable Agriculture – One company agreed to strengthen disclosure of water risk in the supply chain
• Big Data – Two companies gave their board oversight of civil rights risks related to big data analytics
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Impact Investment Examples
• Themes: Affordable Housing, Education, Environmental Sustainability• Impact Bond – Harlem RBI, East Harlem, NY – mixed use development includes DREAM Charter School,
88 units of green affordable housing and public rehabilitated park
• Themes: Education, Environmental Sustainability, Neighborhood Redevelopment• Impact Bond – Apogee Football Stadium, University of North Texas Denton – wind turbines eliminated 323
metric tons of CO2 annually since 2012, 80% of construction waste recycled or reuses diverting 6,568 tons of waste from landfill
• Themes: Sustainable Real Assets, Clean Power• Private Equity – Luduk Gadang Hydro-Power Facility, Indonesia – facility avoided 10,400 tons of CO2 in
one quarter, benefits local communities through profit-sharing program in collaboration with local NGOs
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Impact Investments
The Ford Foundation will allocate up to $1 billion of their endowment to mission-related investments (MRIs), focusing on diversity, equity and inclusion
Research concluded that impactful investments can achieve an attractive rate of return on assets
Growing number of institutional investors (pension funds, university endowments, private foundations, public charities) recognizing how they can have a powerful impact on society
“If philanthropy’s past half century was about optimizing the 5 percent, its next half century will be about beginning to harness the 95 percent as well, carefully and creatively.” – Darren Walker, President, Ford Foundation
The Power of Private Capital
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