Investment Strategies for a Turbulent Future

							Investment Strategies for a Turbulent Future



            September Workshop
                        Dr Robert Howell
          Council for Socially Responsible Investment

                     Dr Wayne Cartwright
              Sustainable Aotearoa New Zealand
               Outline of Workshop

Welcome, Introduction and Objectives

  Session 1: Responsible Investment - Based on
             Sustainable Fundamentals?
             Presentation and plenary discussion

  Session 2: Overview of Major Drivers of Global Change
             Presentation followed by table discussion and
             plenary review.
                   Outline of Workshop
Session 3: Implications of Global Change for Investment
       Presentation, table discussions and plenary review of -

   Impacts and reasons for expected low/no growth economy and
    increasing variation in business performance
   Emergent new sources of risk and approaches to analysis and
    mitigation
   Emergent new opportunities for growth business segments
   The changing profile of desirable investee businesses
   The changing role of investment advisers and the skills of
    investors
               Outline of Workshop


Session 4: Scoping Exercise: What are the specific
implications of sessions 1 - 3 for our investment
organisations? What actions would we recommend to
them?


Table discussion with feedback to plenary review.
              Outline of Workshop
Times:

Start: 8.45

Morning break:10.30

Lunch:12.30

Afternoon break: 3.15

Conclusion: 4.30
Investment Strategies for a Turbulent Future



  Are investments in New Zealand and around the world
          based on sustainable fundamentals?


          What are the options for investors?


                  Dr Robert Howell
Investment Strategies for a Turbulent Future

Outline

   Definitions/ Models of SRI
   New Zealand
   World – SRI
   Europe and USA – SRI
   SRI Returns
   Sovereign Wealth Funds
   CSRI Strategy Review
Investment Strategies for a Turbulent Future




            Definitions / Models
                  of SRI
Investment Strategies for a Turbulent Future

    SRI (social and environmental factors)
       Exclusion
       Engagement
       Positive selection
    Examples:
       Apartheid
       General Electric
       Interfaith Centre for Corporate Responsibility
Investment Strategies for a Turbulent Future


 EuroSIF continues to use the term “SRI” as the
 most readily acknowledged expression for this
 field. EuroSIF defines SRI as follows:

 A generic term covering ethical investments,
 responsible investments, sustainable investments,
 and any other investment process that combines
 investors’ financial objectives with their concerns
 about environmental, social and governance (ESG)
 issues.
Investment Strategies for a Turbulent Future




               New Zealand
Investment Strategies for a Turbulent Future
 Investment by New Zealand Government [$ Billion]
 Government CFIs
 NZ Superfund                13.1 (3.83%)
 ACC                          9.6 (2008)
 Earthquake Com               5.5 (2008)
 Govt Super, NPF              3.5 (2008)
                   approx    32bn
 CFI Criteria
  “to avoid prejudice to New Zealand’s reputation as a
  responsible member of the world community”.
Investment Strategies for a Turbulent Future
 NZ Superfund
    - Adopted UNPRI, UN Global Compact, Carbon Disclosure Project
    - Divested from companies involved with cluster munitions, whale
      meat, tobacco.
    - Have engaged with other UNPRI signatories with 103 companies
      in reporting progress on UN Global Compact.

 ACC
   - Divested tobacco.
   - Divested in the nuclear weapons industry (2008).

 Problems with Codes of Conduct
    - Sethi: Setting Global Standards
    - Rosett: Global Compact
    - Schepers: Equator Principles
        www.csri.org.nz
Investment Strategies for a Turbulent Future

 Reserve Bank C17 Household Deposits: Registered Banks
         [March 2009]                   Millions $

 NZ Dollar deposits                     88,320

 Foreign Currency deposits               2,286

 Total Household deposits               90,606

 Memo Item PIE Accounts                  3,880
Investment Strategies for a Turbulent Future
 Reserve Bank C15 Managed Fund Assets
                       [March 2009]                  Millions $

 Life Insurance                                         6,764

 Kiwisaver [1.1m people]                                2,507

 All Other Super                                        16,064

 Unit trusts and GIFs                                   12,086
         [Group Investment Funds]

 Other Managed Funds                                    17,114

                                      TOTAL 54,536
Investment Strategies for a Turbulent Future
                             New Zealand
   Kiwisaver SRI Option                             Million $

   [Source: Morningstar]


 ASB First Choice Kiwisaver Global Sustainability      0.54
 ING Kiwisaver SIL Sustainable Growth                  0.17
 Asteron Kiwisaver SRI Share Fund                      3.57
 Fidelity Kiwisaver Ethical Kiwi                       0.43
 Others                                                 u/k
 TOTAL                                                 4.71

 5m of 2,507m of Kiwisaver funds = 0.2 %
Investment Strategies for a Turbulent Future




                World SRI
Investment Strategies for a Turbulent Future
            SRI Investments: World
            Social Screen -
USA 07      77%                  US$ 2098    US$ 2710 € 1,917 (39%)
            Shareholder           US$ 739
            Advocacy
            Screen &            (US$ 151)
            Shareholder
            Community              US$26
Canada 06   Core SRI                 C$57       C$504          € 333
            Broad SRI               C$446
Aust / NZ   Core SRI                 A$19       A$72             € 41
            Broad SRI                A$53
Japan 07                             ¥ 840                        €5
Europe 07   Core SRI -19%            € 512              € 2,665 (53%)
            Broad SRI              € 2,154
            Source: EuroSIF                    TOTAL          € 4,963
Investment Strategies for a Turbulent Future
                          Europe
Core SRI

• Ethical Exclusions (more than two)
• Positive Screen (best in class, SRI themes e.g water)
• Combinations

Broad SRI

• Simple screens (includes norm based ,one to two screens)
• Engagement
• Integration (ESG risk included in traditional investment)
        Investment Strategies for a Turbulent Future

                      Europe SRI
Core [3.4%]
Ethical exclusion
Best in Class
Other Positive Screens
                      Subtotal                   511      19%
Broad [14.2%]
Simple *
Engagement
Integration
                         Sub Total               2154     81%
                         Total                  €2.665    trillion
[17.6% of European Asset Management Industry]
*Simple = Weapons €656, Norms based €402, Tobacco €17.5
Investment Strategies for a Turbulent Future

                     USA SRI

    Social Investment Forum USA
    11% of $27.1 trillion under professional
    management is SRI (2007)


    Tobacco 88%, alcohol 75%, gambling 23%
        (2005 study)
Investment Strategies for a Turbulent Future




        Sovereign Wealth Funds
Investment Strategies for a turbulent future


 Sovereign Wealth Funds
                               billions $

 UAE Abu Dhabi                 627          Oil
 Saudi Arabia                  431          Oil
 Norway                        396          Oil
 China (SAFE Inv Cpy)          347
 China (China Inv Corp)        289
 Singapore (Govt S Inv Corp)   247
 Kuwait (K Inv Auth)           203          Oil
 China HK (HK Monetary
 Auth)                         193
Investment Strategies for a Turbulent Future
       Sovereign Wealth Funds cont…

                                       billions $

Russia (National Welfare Fd)        178               Oil
Singapore (Temasek)                  85
China (National Soc
Security)                            82
UAE Dubai (Inv Corp D)               82               Oil
Libya (L Inv Auth)                   65               Oil
Qatar (Q Inv Auth)                   65               Oil
                   Total Oil & Gas (60%)                      2259
                   Total (billions)                         $3,759
               SWF = 2% of traded securities (2008)
Investment Strategies for a Turbulent Future


              Sovereign Wealth Funds


 “In terms of disclosure on performance, investment
 strategy or even basic philosophy, many SWFs rank
 below the most secretive hedge fund.”

                 - Financial Times May 25 07 / Economist Jan 19 2008
Investment Strategies for a Turbulent Future


                    Pension Funds


   “The largest category of investor is pension funds:
   ahead of mutual funds, insurance companies,
   currency reserves, sovereign wealth funds, hedge
   funds, or private equity”
                                   - Quoted in wikipedia.org
Investment Strategies for a Turbulent Future




               SRI Returns
Investment Strategies for a Turbulent Future

Sustainable Investing: Cary Krosinsky and Nick Robins


             - 850 SRI global public portfolios
             - $US100 million + 5 years or more

                      = 135 funds
Investment Strategies for a Turbulent Future
      SRI Styles

   1. Ethical negative screening
   2. Environmental/social negative screening
   3. Positive screening
   4. Community and social screening
   5. Extra-financial best in class
   6. Financially weighted best in class
   7. Sustainability themes
   8. Constructive engagement
   9. Shareholder activism
   10. Integrated analysis
   11. Norms-based screening
                      - Sustainable Investing: Cary Krosinsky and Nick Robins
Investment Strategies for a Turbulent Future
     Relative Returns by SRI subcategory v Mainstream Indices
                              One Year      Three Year   Five Year
                              % return 07   04-07        02-07
      Sustainable             14            19.3         18.7
      Investing
      [5,6,7,10]
      Ethical                 3.6           12.3         13.8
      [1,2,3,4,11]
      Style Drift SRI         0.3           9.6          11.6
      [funds e.g overweight
      in oil and gas]
      MSCI World              9             12.7         17

      S&P 500                 5.5           8.7          13.2
      FTSE 100                5.9           12.9         13

                          - Sustainable Investing: Cary Krosinsky and Nick Robins
Investment Strategies for a Turbulent Future

Examples of successful funds

• Winslow Green Growth Fund (USA)

   Managed out of Boston 27.4 average returns
   2003-2007

• Jupiter Ecology Fund (UK)

   Established to invest with sustainability goals
   Consistently out performed 2003-2007

                - Sustainable Investing: Cary Krosinsky and Nick Robins
Investment Strategies for a Turbulent Future

Companies most owned by sustainable investing practitioners:

Abengoa           Spain        Industrial
Aviva             UK           Insurance
British Telecom   UK           Telecoms
Canadian Hydro    Canada       Energy
Canon             Japan        Electronics
Conergy           Germany      Energy
Garnesa           Spain        Energy

                       - Sustainable Investing: Cary Krosinsky and Nick Robins
Investment Strategies for a Turbulent Future
Companies most owned by sustainable investing practitioners:

cont…
 Geberit            Switzerland     Sanitation Technology
 ING                Netherlands     Insurance
 Itron              US              Utilities Technology
 Nokia              Finland         Telecoms
 Novozymes          Denmark         Biotech
 SolarWorld         Germany         Energy
 Veolia Environment France          Environmental Services
 Vestas             Denmark         Energy
                  - Sustainable Investing: Cary Krosinsky and Nick Robins
Investment Strategies for a Turbulent Future


                  CSRI Strategy:
               factors and choices

   •   What went wrong with Wall Street
   •   CSRI Board goal
   •   Alliance Bernstein
   •   Government fiscal stimulus
Investment Strategies for a Turbulent Future

         Wall Street Crisis: What went Wrong


   • Inevitable consequence of the laissez-faire philosophy
     that allowed financial services to innovate and spread
     almost unchecked.


  • Complex, interdependent system prone to conflicts of
    interest - fraud has been rampant in the sale of subprime
    mortgages.
                                         - Economist, March 22, 2008
Investment Strategies for a Turbulent Future
    Wall Street Crisis: What went Wrong
   • Pay that was geared to short-term gains, bankers and
     fund managers stand accused of pocketing bonuses with
     no thought for the longer-term consequences of what they
     were doing.

   • If disaster struck, someone else (borrowers, investors,
    taxpayers) would end up bearing at least some of the
    losses. Their gambling has been fed by the knowledge
    that, if disaster struck, someone else--borrowers,
    investors, taxpayers--would end up bearing at least some
    of the losses.
                                       - Economist, March 22, 2008
Investment Strategies for a Turbulent Future




                   • Share of corporate profits 10% to
                     40%

                   • Stockmarket value 6% to 19%

                   • Gross value 15%

                   • 5% of private sector jobs
                           [20% in Britain]
Investment Strategies for a Turbulent Future

  • Two years ago, the CSRI Board set a goal of aiming to
    have SRI mainstream in New Zealand within five years.
    The Board has recognised now that this goal is
    unattainable.

  • Even in Europe and the USA where SRI advocates have
    been working much longer (and with much greater
    resources), SRI investment has not advanced beyond 17%
    with the widest and most liberal definition of SRI.
Investment Strategies for a Turbulent Future



   The evidence indicates that under the Business-
   As-Usual (BAU) model, economic returns will
   always dominate so that even the very mainstream
   SRI goals will not be met.
Investment Strategies for a Turbulent Future


  Despite financial returns to support climate change
  solutions (eg wind farms, solar energy) the financial
  incentives under the business-as-usual model
  always dominate over environmental and social
  factors.
Investment Strategies for a Turbulent Future




      Economic


                                 Mickey Mouse Model of
 Environment, Social, Economic
                                 Triple Bottom Line
     Triple Bottom Line Model
                                      - Andrew Fergus
Investment Strategies for a Turbulent Future



 The current economic model will not deliver solutions
 to the threat of environmental degradation.

      - “Globalization and the Good Corporation: Whither Socially
      Responsible Investment?” in HSM 27 (3) 2008 243-254
Investment Strategies for a Turbulent Future
Investment Strategies for a Turbulent Future


    One response for CSRI is to support the calls for
    better regulation, in the belief that the current
    downturn is part of the usual business cycle of
    ups and downs, and that with improved regulation
    confidence with BAU can be restored in a year or
    so.
Investment Strategies for a Turbulent Future


   While we believe that improved regulation is
   needed, we do not believe that it is sufficient. We
   believe a better risk and strategic analysis needs to
   be carried out to identify those factors that increase
   risk (which have been either ignored or poorly
   assessed by the financial sector), and to take steps
   to mitigate these for investors.
Investment Strategies for a Turbulent Future

        Options:

     1 Mandatory reduction of energy consumption

     2 Increasing natural CO2 absorption

     3 Improve energy efficiency

     4 Increase power generation

     5 Capture and store CO2
                - AllianceBernstein : Abating Climate Change (2008)
Investment Strategies for a Turbulent Future

    • US$5 trillion would be spent globally through
      2030 on power plants and factories.

    • Billions more would fund efforts to improve the
      efficiency of energy-intensive equipment, e.g
      automobiles, industrial motor systems, motor
      systems for various large consumer appliances
      (e.g refrigerators).

                   - AllianceBernstein : Abating Climate Change (2008)
Investment Strategies for a Turbulent Future
   BAU Scenario                           Emission Abatement Scenario




                  - AllianceBernstein : Abating Climate Change (2008)
Investment Strategies for a Turbulent Future

 •   The earth will continue to warm despite the
     aggressive emissions-abatement scenario
     outlined.

 •   The consequences would be adverse, rather than
     catastrophic.

 •   Adapting to changes in sea levels, weather and
     water availability will likely impose significant
     social and economic costs.
                  - AllianceBernstein : Abating Climate Change (2008)
Investment Strategies for a Turbulent Future

   Option of increasing natural absorption of CO2
   rejected because too expensive or unworkable at the
   necessary scale.

   “The simplest option is do less by cutting back on activities
   that require burning fossil fuels for energy. This would
   reduce the standard of living in developed countries.
   Clearly no country would agree, so we crossed this off our
   list of options.”

   This is walking north on a south bound train
Investment Strategies for a Turbulent Future
Investment Strategies for a Turbulent Future




               Conclusion
Investment Strategies for a Turbulent Future

 •   Many SRI funds have a dubious claim to be ethical or
     sustainable. Using a most generous definition, 17% of
     funds could be classed as SRI in Europe, and 11% in
     the US. Yet perhaps 5% or less of funds are socially
     responsible and environmentally sustainable. [Less
     than 1% if a strong sustainability definition is used.]


 •   The majority of Sovereign Wealth Funds are not SRI.
Investment Strategies for a Turbulent Future

   •   The overwhelming majority of investment in New
       Zealand is not socially responsible or
       environmentally sustainable. The SRI option via
       KiwiSaver has been a flop.


   •   Increases in the trend to SRI are currently too small
       to provide a solution to ecological degradation. Yet
       unless this trend is significantly and quickly
       changed, then ecological disaster is likely.
Investment Strategies for a Turbulent Future

   •   The SRI model of assessing the social and
       environmental impact and taking certain actions, is
       flawed. [How can you be interested in your funds’
       social and environmental profile, if your fund has
       been stolen,lost or significantly reduced?]

   •   People concerned about SRI need to also be
       concerned about the unethical and unsustainable
       behaviour of the finance sector.
Investment Strategies for a Turbulent Future



  While investment in sustainable energy,
  transport, food and housing is necessary, at the
  best it is likely to reduce a catastrophic future to
  an adverse one (and current indications from
  Copenhagen are not good).
Investment Strategies for a Turbulent Future

  • Investment in adaptation measures (as well as
    mitigation efforts) is necessary. Adaptation requires a
    much more regional and local focus.

  • Investors should plan for considerable disruption to
    climate and weather, leading to increased floods,
    droughts, loss of physical infrastructure and
    productive agricultural land.
Investment Strategies for a Turbulent Future

   • If the scenarios about ecological disaster are only
     conservatively accurate, then major changes are
     coming, similar to the introduction of electricity, the
     manufacture of metal and steel at the beginning of
     the industrial revolution, and possibly the end of the
     most recent Ice Age.


   • Markets and business as we know them, will be
     different, and will effect the risk of investments such
     as pension funds.
Investment Strategies for a Turbulent Future

                                 • The predicted year when
                                 summers in the Arctic would
                                 be free of sea ice causing a
                                 one metre rise, has now fallen
                                 from 2100 to 2050 to 2030 in a
                                 couple of years.


• A one metre rise would require new defences for New York,
London, Mumbai and Shanghai, and imperil swaths of low-
lying land from Bangladesh to Florida. Vulnerable areas
accommodate 10% of the world's population (600 million).

                         - Patrick Barkham,Guardian,1 September, 2009