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Enhancing Investing Through Socially Responsible Strategies

Explore the world of Socially Responsible Investing (SRI) beyond ESG factors, covering positive/negative screenings, investor engagement, and integrated analysis. Learn how ESG factors influence long-term investment performance and understand the complexities and trends in SRI.

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Enhancing Investing Through Socially Responsible Strategies

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  1. CFA South AfricaSocially Responsible Investing:Beyond ESG FactorsAndrew C. Canter CFA April 2009

  2. Agenda Where it’s been • SRI: Finding a common lexicon • A world of non-conformity • Prescription: rearing up again • Points of confusion • Trends in SRI… • …and how to get there • Conclusions Where it’s going SRI = Socially Responsible Investing

  3. The 3 styles of Socially Responsible Investing 1) Positive Screened Investments …infrastructure, carbon, housing, ESG*, FTSE4Good, etc 2) Negative Screened Investments …Shari’ah compliant, ESG*, etc (“1st do no harm”) 3) Investor Engagement & Activism …environmental, labour, governance, BEE, etc Integrated ESG Analysis & PRI seek to cover all areas SRI is 1st "Investing" ESG = what they do & how they do it PRI = UNEP Principles of Responsible Investing. ESG = Environmental, Social & Governance factors

  4. basics! water / electricity / roads telecomms / housing greenhouse gases carbon footprint governance Developing world has a different perspective... But unity in spirit ... seek to avoid harm and do good... ...protect and improve body, spirit and environment.... ... doing well and doing good... … civilisation is about self restraint

  5. ESG: It’s a matter of time before… … statistics will prove that “good” companies perform better over long periods… … and ESG factors become embedded in all investment decision processes. See “Does Governance Matter to Long-Term Investment Performance?” David Beatty, CFA Institute Conference 05/2008

  6. Interjecting some reality into ESG (1) • Narrow universe reduces portfolio efficiency. • Excludes some high ROE/cash flow sectors • Unsavoury businesses have less competition • Definitions: Every firm gives it a new name • Evidence of outperformance? • Product development vs investment process

  7. Interjecting some reality into ESG (2) • EDHEC Business School 6 year study (2002-2007) of 124 European SRI funds: • “did not identify alpha values both positive and statistically significant for SRI funds. In fact… most… obtained negative, but not statistically significant, alpha…” • “it seems regrettable to us that, despite the lack of empirical evidence of… outperformance, asset management firms and consultants have larded their communications with promises of SRI fund outperformance and failed to express the necessary reservations.” See “Socially Responsible Investment Performance in France”, 12/2008 EDHEC Business School

  8. SRI: Fads, Trends and Fashions… After Before After Negative and Positive screening

  9. Question Accountants and you should get the same answer Question Doctors and you hope to get a similar opinion Question Asset Managers… you’ll get numerous answers! Living in a world of non-conforming views … ask about SRI and you will get double the number of opinions

  10. Prescription: The ends do not justify the means • No SRI “standard”: Who decides what to “prescribe”?! • Prescription distorts capital markets...its a “tax” on returns • If government prescribes, they must underwrite the risk! • Undermines risk:return efforts of the retirement fund industry • Seeking gov’t “regulation” of SRI is an abdication of responsibility • Government can directly influence a) the funds where they are • direct stakeholders, and b) the well capitalised DFIs • Money is not the problem – capacity to deliver remains • Danger of money flood: Value will be lost by funds Reg 28: enabling vs. prescriptive:“retirement funds are encouraged to consider the broader social impact of their investments on the development of the nation”or“retirement funds will allocate 10% of assets to SRI”

  11. Points of Confusion

  12. Points of confusion… what SRI is and isn’t Is SRI the same as Corporate Social Investment? SRI = how the money is invested (returns & impact) CSI = giving back to the community (grants, gifts, goodwill)

  13. Points of confusion… what SRI is and isn’t Is SRI Positive Procurement? Hiring PDI or pro-active firms to provide services PDI = Previously Disadvantaged Individual

  14. Points of confusion… what SRI is and isn’t Is SRI an Asset Class? SRI is a theme, must fit into an strategic asset allocation 6% SRI… strategic asset allocation maintained

  15. Points of confusion… what SRI is and isn’t • Principles of portfolio management prevail! • SRI is not subsidy finance! Does SRI mean lower returns? JSE-SRI vs JSE-ALSI: Index 2004 - 2008

  16. Higher risk should mean higher returns SA Bond Managers: 3 Year Risk: Return - 31 January 2009 Note: SRI funds should have market benchmarks Alexander Forbes Bond Survey including FG Infrastructure and Development Bond Fund

  17. Futuregrowth Community Property Fund Comparative Performance CPF appears 2nd over six months in the IDB (Investment Data Bank) survey

  18. Comparative Investment Productivity Incremental Output per unit of Infrastructure Investment AFR = Ethiopia, Kenya, Madagascar, Senegal, Tanzania EAP = China, Indonesia, Laos, Vietnam ECA = Bosnia, Kazakhstan, Moldova, Turkey LCR = Argentina, Brazil, Honduras, Nicaragua MNA = Morocco, Yemen SAR = India, Sri Lanka Source: Benno Ndulu, 2004

  19. Community Returns on Infrastructure Investment (a) Output change for a 1% change in the level of infrastructure (b) PV of output increase/PV of infrastructure investment Source: World Bank, World Bank Development Report, 1994: Infrastructure for Investment

  20. If investors get risk adjusted returns… …then who offers subsidised capital? The role of Development Finance Institutions Private sector keeps “score” by returns, public sector uses a balanced scorecard DFI = Development Finance Institution

  21. SMME equity Private equity Listed/Rated.. Diversity/liquidity Unlisted/Unrated.. Non-diverse/il-liquid MTN 1998 2008 Measuring Social Impact is a thorny issue SRI today... mainstream tomorrow Expected Return Social Impact ≈ Higher Risk ≈ Lower liquidity ≈ More Effort/work • Private Equity is not necessarily SRI (but SMME finance is…) • Early mover/higher risk is often SRI… simple competition isn’t • Impact measures are subjective (“jobs created”, “families affected”...)

  22. Broad Categories of SRI & Impact * Proxy voting is normal practice and excluded

  23. SRI Reporting: Positive Screened, Category Level Futuregrowth Infrastructure & Development Bond Fund Updated 28/02/2009

  24. SRI Reporting: Infrastructure & Social Services Futuregrowth Infrastructure & Development Bond Fund Updated 28/02/2009

  25. Where is SRI Going… …and how to get there

  26. Where’s SRI going (1)... Integrating ESG into investment process… …allows 100% of the fund to be SRI …with a range of impact

  27. Where’s SRI going (2)... Shareholder plutocracy in action…. SRI/ESG Screens… Investor engagement… Investor Activism Developing world: positive screening… infrastructure, development, job creations, labour, environment, governanceDeveloped Countries focus on both positive & negative screening and ESG analyses Continued differences…

  28. Where’s SRI going (3)... Infrastructure % of firms that consider infrastructure to be a serious obstacle to doing business Source: Shigeo Katsu, VP Europe & Central Asia, World Bank, 09/2007

  29. Infrastructure spending numbers are big… • Globally $2 trillion per annum to 2015* • Global GDP + $54.4 trn*, p.a. spend is +3.7% of GDP • Global Stock of Infrastructure • 60% in high-income countries (16% population)** • 13% in low-income countries (39% population)** • $370bn p.a. globally to 2010 for telecoms, energy, water, transport… • … of which $233bn p.a. in EM (+2.5% of GDP)** *OECD **World Bank

  30. Direct Infrastructure funds - Africa Debt 13.9%, Equity 86.1% Source: Public-Private Infrastructure Advisory Facility (2008 in process), Futuregrowth

  31. Previous (2007) 3 year capex: R568 billion Source: Budget Review 2008, Macquarie Research, August 2008 The numbers are big: South Africa Public Sector Infrastructure Plans SA: R787 bn (US$79bn) to 2012 (+9.7% of GDP) Source: Macquarie FirstSouth Securities, Let the Construction Begin: SA Infrastructure Update, 09/2008

  32. Pre-Requisite: The Formulation of an SRI Policy 1) Fund asset allocation policy must prevail 2) Fund profile & position Size & life of fund Structure of benefits (DB/DC/member choice) Risk tolerance, liquidity needs, diversity needs Governance & decision process Internal management capacity 3) Aspirations of constituent stakeholders Members Shareholders Work force/labour Customers Government relations

  33. Formulation of SRI Policy Key Issues for SRI Policy • Set SRI Goals & Desired Impact • Adopt SRI definitions • Identify categories of SRI in which to participate • Establish risk: return guidelines • Set target percentage to SRIs (100% to 0%) • Delineate ramp-up period • Identify methods (direct, indirect) to employ • Identify measurement & reporting requirements

  34. SRI Headlines: Funds Have a Choice… • SRI is “in the eye of the beholder”… fads & trends… • Non-Conformity of information, goals & methods: No “one size fits all” • Prescription is a non-starter… the problem isn’t money • SRI is a theme (screening/reporting), not an asset class … stick to your asset class measures … “social impact” is hard to define … SRI is always an additional analysis & decision process • Portfolio management principles prevail… • … don’t compromise your manager selection criteria • Returns & Social Impact must always be compatible • Government & DFIs do subsidised finance • Answer 1: Results happen when the investor engages! • Answer 2: Thought leadership by A.M., consultants, clients

  35. Opening of Khayelitsha Mall

  36. Thank you

  37. Futuregrowth Suite of SRI Products Positive Screened Funds: Futuregrowth Infrastructure & Development Bond Fund Futuregrowth Infrastructure & Development Equity Fund Futuregrowth Community Property Fund Negative Screened Funds: Futuregrowth SRI Equity Fund Futuregrowth Albaraka Equity Fund

  38. Infrastructure and Development Bond Fund Mandate

  39. Infrastructure & Development Bond Fund Investment Performance as at 28 February 2009 *annualised/GIPS compliant

  40. Infrastructure and Development Equity Fund Product profile

  41. Development Equity Fund Investment Performance as at 28 February 2009 *annualised/GIPS compliant

  42. Community Property Fund Product profile as at 28 February 2009

  43. Community Property Fund Investment performance as at 28 February 2009 *Annualised/ GIPS Compliant

  44. Futuregrowth SRI Equity Fund Mandate Investment Focus Benchmark Return Target Investment Process Fund Structure Inception Date Listed companies with Triple Bottom Line focus JSE SRI Index SRI Index + 3% p.a. Active Equity Unitised portfolio 1 July 2004

  45. SRI Equity Fund Investment Performance as at 28 February 2009 *annualised

  46. Futuregrowth Albaraka Equity Fund Mandate • Negatively screened fund • Shari’ah compliant companies • Excludes banks, alcohol, tobacco, gambling etc. • Narrow target market

  47. Albaraka Equity Fund Investment Performance as at 28 February 2009 *annualised/GIPS compliant

  48. SRI Balanced Fund Investment Performance as at 28 February 2009 *annualised/GIPS compliant

  49. SRI Balanced Fund Mandate

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