Today – Session VI Presentation: Socially Responsible Investment (SRI) 2. Break

1. Today – Session VI • Presentation: • Socially Responsible Investment (SRI) • 2. Break • 3. Danone Presentations

2. Content • Socially Responsible Investment (SRI) • Introduction to Socially Responsible Investment (SRI) • Sustainability Stock Market Indices • Socially Responsible Investment Strategies • Performance and Socially Responsible Investments • Examples of SRI Funds

3. 1. Introduction to Socially Responsible Investment (SRI) • What is Socially Responsible Investment? • History and Background • Distinction between different Funds • Some SRI Statistics

4. What is Socially Responsible Investment? • Socially responsible investment (SRI)—also called • social investing, • ethical investing, • mission-based investing, • sustainable investing, • green investing, • double or triple bottom line investing or • socially aware investing is an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. • SRI involves evaluating companies on CSR issues, analyzing corporate social and environmental risks, and engaging corporations to improve their CSR policies and practices.

5. What is Socially Responsible Investment? • SRI involves evaluating companies on CSR issues, analyzing corporate social and environmental risks, and engaging corporations to improve their CSR policies and practices. • SRI investors include individuals, institutions, corporations, universities, hospitals, foundations, insurance companies, public and private pension funds, non-profit organizations and religious institutions. • Since the early 1970s, SRI has grown from a curiosity and niche-market phenomenon in the financial world to become a global movement, which is embraced now in most countries around the world.

6. History and Background (1) • The origins of SRI is said to date back to the Religious Society of Friends (Quakers). • For example, in 1758, the Quaker Philadelphia Yearly meeting prohibited members from participating in the slave trade, referring to the buying or selling of humans. • One of the most articulate early adopters was Sir John Wesley (1703-1791), one of the founders of Methodism. • His sermon ‘The Use of Money’ outlined his basic tenets of social investing i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers.

7. History and Background (2) • The modern SRI movement evolved with the political climate of the 1960s. • Economic projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott established the model for future SRI efforts. • During this time social investors increasingly sought to address equality for women, civil rights and labour-management issues. • In the1970s, SRI activism gave increasing attention to nuclear power and automobile emissions control.

8. History and Background (3) • From the 1970s to the early 1990s, large institutions avoided investment in South Africa under Apartheid. In 1976 the United Nations imposed a mandatory arms embargo against South Africa. • In 1971, Reverend Leon Sullivan (a board member of General Motors at the time) drafted a code of conduct for practicing business in South Africa which became known as the Sullivan Principles. • Reports documenting the application of the Sullivan Principles showed that American companies were not attempting to lessen discrimination within South Africa.

9. History and Background (4) • The result was increasing political pressure: cities, states, colleges, faith-based groups and pension funds throughout the US began divesting from companies operating in South Africa. • The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an and to Apartheid. • While SRI efforts didn’t bring an end to Apartheid, it focused and persuaded international pressure on the South African business community.

10. History and Background (5) • Since the 1990s, SRI has become increasingly defined as a means to promote environmentally friendly sustainable development. Many investors consider effects to climate change a significant business and investment risk. • For example, CERES was founded in 1989 by Joan Bavaria and Dennis Hayes as a network for investors, environmental organizations, and other public interest groups interested in working with companies to address environmental concerns. • More recently, some social investors have sought to address the rights of indigenous peoples around the world who are affected by the business practices of various companies. Healthy working conditions, fair wages, product safety, and equal opportunity employment also remain headline concerns for many social investors.

11. History and Background (6) • Over the past decade, a number of national governments in Europe have passed a series of regulations on social and environmental investments and savings. • For instance, the United Kingdom was the first country to regulate the disclosure of the social, environmental, and ethical investment policies of pension funds and charities. • The Amendment to the 1995 Pensions Act requires the trustees of occupational pension funds to disclose in the Statement of Investment Principles “the extent (if at all) to which social, environmental and ethical considerations are taken into account in the selection, retention and realization of investments”. • This has contributed considerably to the growth of the SRI industry.

12. Differentiation between the different Types of Funds (1) • Environmentally friendly, ethical, sustainable, green - for investors, it can be confusing to differentiate the jargon of 'responsible investment'. • But in the investment world there are important differences, for example, between what is ethical and what is sustainable. • For instance, whereas a traditional ethical fund typically uses a form of negative screening to decide which stocks and sectors it will invest in, a sustainable fund will often include the quality of the management approach (how a company looks after its employees, for instance) and its sustainable consumption (such as whether or not it adheres to a recycling process or how it mitigates its carbon emissions).

13. Differentiation between different Types of Funds (2) • Ethical Fundsare a type of SRI fund. • An ethical fund invests in companies that operate by moral standards approved of by their investors, such as not manufacturing or selling weapons, not trading with countries with poor human rights records, or using only environmentally acceptable sources of raw materials. • Ethical Investment has also been defined as putting your money where your morals are, or investing according to your beliefs. • The term "ethical investment" has been in circulation for over 20 years, since the first ethical fund was launched in 1984. The idea behind the ethical philosophy is that the fund manager will pick companies that • have the potential to do well both socially and financially.

14. Differentiation between the different Funds (3) • Sustainability Funds comprise all issues - political, economical, environmental, social - and how they are connected to each other and how they contribute to development as a whole. • Sustainable investors engage with their investments, raising areas of concern and encouraging good business practice. • From an investor's perspective, this practice can only be beneficial. • For example, if companies are aware of the issues which concern investors and consumers, and if they change positively, then it shows a company is adaptable in a changing market. It may then emerge as the strongest company in the market which is able to think ahead. • According to empirical studies, because these companies are thinking long term, they are a better investment choice for investors.

15. Some SRI Statistics (1) • SRI has experienced a phenomenal growth around the world. • According to the Social Investment Forum, the professionally managed assets of SRI portfolios in the United States, including retail and, more importantly, institutional funds (for example, pension funds, insurance funds, and separate accounts), reached $2.7 trillion in 2007, or approximately 11% of total assets under management. • The European SRI market is also growing rapidly. In 2007, SRI assets in Europe amounted to €2.7 trillion, representing 17% of European funds under management (European Social Investment Forum). • Trends drawn by Avanzi SRI Research in their report "Green, social and ethical funds in Europe - 2009 Review" show that the phenomenon is growing, in particular, at the moment, in France, Belgium and Germany.

16. SRI Statistics (2) Source : Vigeo Italia (2009)

17. SRI Statistics (3) SR Funds assets per country (bln Europe on 30 June 2009) Source : Vigeo Italia (2009)

18. QUESTIONS • Which types of issues are mainly addressed under SRI funds? Why? • Why do many investors consider climate change a significant business and investment risk? • Which are the main differences between an ethical fund and a sustainable fund? • Why do you think CSR is growing more in certain countries than in others?

19. Sustainable Stock Market Indices (1) • Sustainability Stock Market Indices measures companies’ sustainability initiatives. • The more longstanding tradition originated in the United States with the establishment of the Dow Jones Sustainability Index (DJSI) in 1999. It is considered the leading sustainability index. • In cooperation with SAM (Sustainable Asset Management), a Swiss consultancy firm, the DJSI publishes and licenses the Dow Jones Sustainability World Indexes (DJSI), a series of global sustainability benchmarks. • The combination of the know-how of the world's leading index provider Dow Jones & Company with SAM's many years of sustainability expertise has resulted in a family of indexes that provides a growing number of asset managers with objective and professional benchmarks for sustainability investments. • The indexes are based on SAM's corporate sustainability assessment, which identifies global sustainability leaders.

20. Sustainable Stock Market Indices (2) • The DJSI follows a ‘best-in-class’ approach comprising those identified as the sustainability leaders in each industry. • Companies are assessed in line with general and industry-specific criteria, which means that they are compared against their peers and ranked accordingly. The companies accepted into the index are chosen along the following criteria: • Environmental sustainability – e.g. environmental reporting, eco-design, environmental management systems and executive commitment to environmental issues. • Economic sustainability – e.g. strategic planning, quality and knowledge management, corporate governance mechanisms. • Social sustainability – e.g. employment policies, management development, stakeholder dialogue, affirmative action and human rights policies, anti-corruption policies.

21. Sustainable Stock Market Indices (3) • The data that form the basis for the judgments are based on questionnaires, submitted documentation, corporate policies and public information. • The main critiques against the DJSI include the following points: • The data on which a company is accepted into the index is largely provided by the company itself. • The criteria used by the index is considered questionable. For example, some critics ask how certain companies considered to have major ethical problems, such as Nike, are included in the index. • The sustainability assessment focuses mainly on management processes rather than on actual sustainability of the company or its products. • However, overall the DJSI is regarded as an important step in linking investors’ interests in financial performance with the broader goal of sustainability.

22. QUESTIONS • What are the characteristics of sustainable stock market indices? • What does ‘sustainable investment’ refer to? • What do you think are the potential outcomes of sustainable investment? • Which types of companies appear in the DJSI? • Are certain industries linked more to issues of sustainability? Why?

23. Socially Responsible Investment Strategies • Portfolio Screening • Shareholder Advocacy or Activism • Divestment • Community Investing • Economically Targeted Investments

24. Socially Responsible Investment Strategies Social Investing Social Screening Community Investing Shareholder Activism Community Development Banks Community Development Credit Unions Negative Screening Proxy Voting Divestment Positive Screening Community Development Venture Capital Funds Community Development Loan Funds Petitions

25. Portfolio Screening (1) • Portfolio screening is the practice of evaluating investment portfolios or mutual funds based on social, environmental and good corporate governance criteria. • Two types of screening: • Positive screening: Social investors seek to own profitable companies that make positive contributions to society. For example, good employer- employee relations, strong environmental practices, products that are safe and useful, and operations that respect human rights around the world matter to social investors. • Negative Screening: Many social investors avoid investing in companies whose products and business practices are harmful to individuals, communities, or the environment. These include pollution and poor working conditions.

26. Portfolio Screening (2) • SRI screens are being used more and more frequently to invest in companies that are leaders in adopting clean technologies and exceptional social and governance practices. • A best-in-class approach applies social, environmental and ethical guidelines to give a preferred selection when all other factors are equal. • For example, an ethical fund might have criteria which enable it to invest in the oil and gas sector, but only in those oil companies which are ‘best in their class’ as they have a better record on the environment and human rights than others in their sector.

27. Shareholder Advocacy and Activism (1) • Rather than passively following the activities of the companies in which they invest, socially responsible investors engage management in the issues they consider important. • There may do this principally in two ways: voting when receiving proxies and by drawing up petitions.

28. Shareholder Advocacy and Activism (2) • Proxy Voting: Shareholders are owners of the company and, as in any other owner/management relationships, management must be accountable to the owners. • All shareholders receive proxies in the mail that allow them to vote on corporation officers and changes in corporate policies. • Many investors ignore proxies, either not bothering to fill them out or routinely voting yes on all items. Investors who do that miss opportunities to make their voices heard. • Many voices, of course, speak more loudly than one voice, and there in lies the power of socially responsible mutual funds. • The managers of socially responsible funds make it their business to know the candidates and the issues and to cast votes that reflect the views of their own shareholders.

29. Shareholder Advocacy and Activism (3) • Petitions: Another common practice is to participate in shareholder resolutions, which are petitions drawn up by groups of shareholders that are presented to all the owners of the company for a vote. • Typically they urge management or the board of directors to take action on a concern. • A resolution might include calling for a company to sever its connections with a repressive government overseas, challenge its executive pay or reveal its political contributions • While shareholder resolutions have been instrumental in many cases in which companies changed practices regarding workplace conditions for workers, projects that harmed the environment and reversed policies that permitted employment discrimination, they are often withdrawn before they are brought up for a vote among all the owners. • This may for example happen when a resolution has been reached by the company and the petitioners.

30. Divestment (1) • In finance and economics, divestment or divesture is the reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm, for financial or ethical reasons. • A divestment is the opposite of an investment. • For investors, divestment can be used as a social tool to protest particular corporate policies, such as a company trading with a country known for child labour abuses.

31. Divestment (2) • Example: • Nordea Responsible Investments (RI) Committee on June 4 2010 decided to divest from BP in the Nordea dedicated RI funds and mandates. • It was decided to suspend further investments in BP for all other Nordea funds until clarification from BP on systematic risk management has been evaluated. • In total, some 20 Nordea funds available in the Nordic countries with BP investments are directly affected.

32. Divestment (3) • The decision of the RI Committee was taken because • the company has failed to comply with its own safety and environmental rules according to the information available; and • the company does not disclose information and is not transparent regarding how other similar operations are managed from a safety and environmental perspective.

33. Community Investing (1) • Community investment is the use of finance to support economically disadvantaged communities, persons, or businesses underserved by mainstream financial institutions as low-income and disadvantaged communities are often underserved by traditional financial services. • Community investing makes it possible for local organizations to provide financial services to low-income individuals, supply capital for small businesses, and provide vital community services, like affordable housing, child care, healthcare, education, mentoring, and technical support. • Community investing seeks to build relationships between families, nonprofits, small businesses, and conventional financial institutions and markets.

34. Community Investing (2) • There are four primary types of community investment institutions (CIIs), commonly referred to as community development financial institutions (CDFIs): • 1. Community Development Banks (CDBs): • These operate much like conventional banks, but they focus on lending to rebuild lower-income communities. • They offer services available at conventional banks, including federally insured savings, checking, certificate of deposit, money market, and individual retirement accounts. • Fifty-four CDBs account for the largest amount of assets in measured CIIs, at $10.1 billion.

35. Community Investing (3) • 2. Community Development Credit Unions (CDCUs): • These are the second-largest type of CII, with assets of $5.1 billion. • Over 275 membership-owned and -controlled non-profit CDCUs serve people and communities underserved by mainstream financial institutions. • These regulated institutions offer federally insured accounts and other services available at conventional credit unions.

36. Community Investing (4) • Community Development Loan Funds (CDLFs): • Thesepool investments and loans provided by individuals and institutions to further community development in specific geographic areas. • The 180 CDLFs use their $3.4 billion in assets to make or guarantee loans to small businesses, afford­able housing developments, and community service organizations. • Of this, $165 million are in international funds that provide or guarantee loans for small business creation and community development abroad. • CDLFs are not federally insured, though investor money is protected by collateral, loan-loss reserves, and the institution or fund’s net worth.

37. Community Investing (5) • Community Development Venture Capital Funds (CDVCs): • These make equity and equity-like investments in highly competitive small businesses that have the potential for rapid growth. • CDVCs target their $870 million of capital under management to geographic areas that traditional venture capital funds have overlooked.

38. Economically Targeted Investments • Economically targeted investments (ETIs) are investments yielding competitive risk-adjusted rates of return issued to support the long-term economic development (e.g., sustainable job creation, business development, infrastructure improvements, and affordable housing) of targeted communities, regions, economic sectors, residents, and workers. • A number of public pension plans see ETIs as prudent investments that strengthen local economies and serve the interests of stakeholders by supporting local enterprise, developing shattered urban areas, and preventing the outsourcing of local jobs.

39. Questions • Why is screening considered by some as a very effective SRI tool? • How can shareholders affect investment? • Can you think of an example where an SRI fund divested from a company or companies? • Why do you think community investing has increased considerably over the past years? • Do you know of any community development banks and how they contributed to community development? • Which kinds of issues do economically targeted investments take into consideration?

40. 3. Performance and Socially Responsible Investments

41. Performance and Socially Responsible Investment (1) • Existing studies hint, but do not unequivocally demonstrate, that SRI investors are willing to accept suboptimal financial performance to pursue social or ethical objectives. • However, often socially responsible investors prefer companies that are good corporate citizens, but they also seek to maximize the return on their investment. • Like all investors, socially responsible investors seek a competitive financial return on their investments, and the according to statistics it is possible to consistently achieve this.

42. Performance and Socially Responsible Investment (2) • A growing number of academic studies have demonstrated that SRI mutual funds perform competitively with non-SRI funds over time. • More than 20 studies demonstrating that SRI mutual fund performance is comparable to that of non-SRI funds can be found at www.sristudies.org — a compendium of all the major academic studies on SRI.

43. Performance and Socially Responsible Investment (3) • The fact that SRI funds apply screens that limit the full diversification potential may shift the towards less favorable risk–return tradeoffs than those of conventional portfolios. • For instance, excluding part of the stock market (firms producing alcohol, tobacco, pornography) may negatively influence the risk–return tradeoffs of SRI funds. • By this logic, SRI funds are expected to generate a weaker performance than conventional funds for two reasons: • SRI funds under-invest in financially attractive investment opportunities, as some of these opportunities are excluded from the investment universe because they do not contribute sufficiently to the SRI objectives of the fund. • Second, more intense screening intensity further reduces the investment universe, which may further weaken performance.

44. Performance and Socially Responsible Investment (4) • However, there are two arguments supporting the alternative hypothesis that states that SRI funds outperform conventional funds. • First, sound social and environmental performance signals high managerial quality, which translates into favourable financial performance. • Second, social, ethical, and environmental screening may reduce the high costs that emerge during corporate social crises or environmental disasters. • If financial markets tend to undervalue such costs, portfolios based on corporate governance, social, or environmental criteria may outperform their benchmarks.

45. Questions • What is the link between SRI and financial performance? • Why is SRI sometimes considered as greenwashing? • Why do some say that socially responsible investment is not necessarily a viable business strategy?

46. Examples of SRI Funds and Financial-based Institutions • Domini Social Investments – Social Investments • Green Century Funds – Environmentally Oriented • Women Oriented – Women’s Equity • Triodos - SRI financial-based Institution

47. Domini Social Investments (1) • Offering several funds, Domini has been considered as the trailblazer and benchmark for socially responsible investing. • For their equity funds, Domini enacts positive SRI screens for the following components: • “contribute to the local communities in which they are located, produce high-quality, safe, and useful products, enrich the ecosystems on which they depend, invest in the health and development of their employees, treat their investors and lenders openly and transparently, and strengthen the capabilities of their suppliers.”

48. Domini Social Investments (2) • Domini also negatively screens for companies performing negatively in the arenas of • human rights issues, • climate change contributions, • community development – • as well as the alcohol, tobacco, gambling, military weapons, and nuclear power industries. • They also offer international SRI investing funds, as well as bonds that focus on providing opportunities to underprivileged communities.

49. Green Century Funds • Green Century Funds is an environmentally friendly fund which provides investors who care about a clean, healthy planet the opportunity to use their investment dollars to encourage environmentally responsible corporate behaviour. • These green mutual funds screen for companies that have positive environmental track records and those who are committed to “solving environmental problems.” • Their green investing strategy employs negative screens against companies with poor track records in environmental sustainability. • The fund states that “green investing” means investing in a diverse array of companies that are helping to build a cleaner, greener future – from small, innovative wind power producers to large, established firms using cleaner technologies to run their businesses and bring their products to market.

50. Women’s Equity • The Women’s Equity Mutual Fund promotes the advancement of women in the workplace along with family-friendly corporate policies. • One of the yardsticks it uses to evaluate companies is the number of women in top management positions. • Because of pressure from socially responsible investors, today more and more corporations voluntarily release employment statistics. In cases where corporations refuse, the Women’s Equity Mutual Fund files shareholder resolutions to request that companies release the information to the public. • To increase its clout, the Fund often files its ballot under the name of its sub-advisor, the United States Trust Company of Boston, one of the oldest and largest managers of socially responsible portfolios. • While some companies have complied with its requests to release employment statistics, others have ignored the shareholder resolutions that failed to get a large percentage of the vote.