The State of SRI in 2013 and Implications for the Financial Sector

1. The State of SRI in 2013 and Implications for the Financial Sector Sandrine Tesner March 11, 2013

2. This presentation has four objectives: • Presenting the key findings of the 2012 Eurosif survey, Europe’s leading source of data on socially responsible investment and ESG • Presenting the key findings of the 2012 US Social Investment Forum (SIF)’s survey, which does the same for the US • Drawing a few comparisons (reference is made to the Global Sustainable Investment Alliance’s 2012 survey.) • Showing overlaps between the growing field of SRI/ESG and the rest of the financial industry

3. EUROPE: over $8.7 trillion**Note: adding the sums presented in the EUROSIF survey gives a total of 11.6 trillion euros but it includes double-counting of strategies.

4. Sustainability-themed investment: focused on one or several ESG criteria. Best-in-class investment: selection or weighting, best-in-class, or ‘most improved assets’ along ESG criteria. Norms-based screening: selects investments based on international norms defined by such bodies as the UN. Exclusion: excludes from funds or portfolios investments in such sectors as weapons or tobacco. ESG integration: refers to the explicit inclusion of extra-financial criteria in analysis and financial decisions. Shareholder strategies: covers the active engagement of managers with companies on ESG issues and the use of voting rights to affect those issues. Impact investment: investments made into companies or funds with the intent of generating a social or environmental impact in addition to financial return. Ex: microfinance, community investing, social business/micro-entrepreneurship 7 strategies that include Environmental, Social and Governance (ESG) criteria are analyzed by Eurosif:

5. A few points on the Eurosif methodology • The study is based on a survey sent to asset managers in the countries where the SRI assets are being managed, not owned. • It covers both retail and institutional assets. • The survey is based on self-reporting (with verification). • 14 countries are included: Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Poland, Spain, Switzerland, Sweden, UK

6. Themed investments totaled over 48 billion € in 2011, almost double their level in 2009. Biggest managers: Netherlands, Switzerland, UK. Best-in-class and positive screening: over 283 billion € in 2011 with France leading the pack, followed by Sweden. Norms-based screening: 2.3 trillion € in 2011 with France well ahead of the group, followed by Italy. Impact investing: 8.75 billion € with 55% allocated to microfinance. Exclusions: 3.8 trillion € in 2011 (about 100% growth since 2009), with the Netherlands leading. ESG integration: has grown with the adoption of the UN’s Principles for Responsible Investment (UNPRI). 3.2 trillion € in 2011, with 1.8 trillion for France alone. Shareholder strategies: just under 2 trillion €, with a predominance of governance concerns. Results for the 7 strategies

7. Allocation and drivers • Institutional investors account for 94% of total investments in SRI and ESG mechanisms, the balance of 6% going to retail investors. • Bonds account for 51% of assets vs. 33% for equities, the balance going to other categories. • Demand from institutional investors therefore constitutes the main driver behind this investment trend, fueled by legislative initiatives at the EU and the national levels. • The retail market constitutes an obvious area of future growth.

8. The UNITED STATES: about $3.8 trillion in 2012 or more than one in every 9 dollars invested.All dollar signs in this presentation refer to USD.

9. Key findings of the US SIF survey • ESG integration accounts for $3.33 trillion while shareholder resolutions account for $1.5 trillion. $1.1 trillion is deducted from this total to account for overlaps. • The ESG/SRI universe has increased almost 500% in the US in the decade 1995-2006 vs. 376% for the regular investment universe. • Assets in the SRI universe represent 11.3% of the $33.3 trillion in assets under management tracked by Thomson Reuters. • Assets incorporating ESG issues have increased 78% to $1.01 trillion in 2012, distributed among 720 distinct ESG funds. • 301 alternative investment vehicles—private equity and venture capital funds, responsible property funds and hedge funds—manage a total of $132 billion, +250% since 2010.

10. The E, the S, and the G • Environmental criteria are incorporated in the management of 551 investment vehicles, with $240 billion under management. • Social criteria are incorporated in the management of $1.2 trillion across 622 investment vehicles. • Governance issues are incorporated by a total of 346 investment vehicles with $623 billion in assets. • Product-specific criteria and exclusions (tobacco, weapons, alcohol) are included in the management of 390 investment vehicles with $290 billion in assets.

11. Drivers and trends • As in Europe, demand stems from institutional investors. • Exclusions related to the repressive Sudan regime affect more than $1.63 trillion in institutional assets. • Governance has become the leading criterion among ESG. Incorporated across 346 investment vehicles, it affects $913.9 billion in institutional investor capital. A growing number of US corporations are separating the CEO and Chairman roles. • Consumer demands and campaigns in the aftermath of the Great Recession and the banking crisis constitute another driver. (Community development bank assets were $30.1 billion at the outset of 2012, up 73% since 2010.) • There is a strong upward trend in shareholder support for resolutions on environmental and social issues: 24% or more of such resolutions each year receive the support of more than 30% of the shares voted. • 82 portfolio managers with close to $5 trillion in assets under management reported pursuing a ‘dialogue’ with portfolio companies.

12. Europe vs. US • Europe invests more than twice as much in ESG strategies as the US. • Norm-based screening is entirely a European strategy. • Sustainability-themed investment is absent in the US while Europe represents 75% of the world’s total. • ESG integration is also predominant in Europe. It is used in 49% of assets managed professionally vs. 11% in the US. Europe represents 67% of the global total for ESG integration vs. 19.5% for the US. • The gap between the two regions closes when considering corporate engagement/shareholder strategies (Europe=54% of the global total vs. 33% for the US), and in both regions governance concerns are predominant. • Impact community investing (defined as banks, credit unions, loan funds and venture capital funds with an explicit mission of serving low- and moderate-income communities) is much stronger in the US (69% of the global total vs. 13% for Europe, the balance going to other regions.)

13. In its 2012 report, the Global Sustainable Investment Alliance finds that $13.6 trillion of professionally managed assets incorporate ESG, or close to 22% of global assets. Europe leads the way with 65% of the total. Negative screening/exclusion accounts for $8.3 trillion, followed by ESG integration ($6.2 trillion) and corporate engagement/shareholder actions ($4.7 trillion). Europe lags the rest of the world (and the US, in particular) in terms of the size of the ESG retail market. Sustainable investment in Australia amounted to $178.5 billion, or about 18% of total assets under management (about equal Canada). ESG/SRI was included in investments worth $74 billion in Asia (incl. Japan for $10 billion). Remarkably, Africa accounts for close to $230 billion of total ESG assets invested globally. ESG integration represents $198 billion of the total. Globally in 2012….

14. Overlaps across the financial industry • At this stage, ESG is clearly predominant in asset management. It is a growing consideration, however, in other areas of finance, including wealth management (see next slide) and project finance (The Equator Principles are just one example of how ESG affects large project financing.) • Continuing breaches of ethical conduct in the financial sector, and the unfinished business of rebuilding it after 2008-09, mean that governance will remain at the top of investors’ agendas. • There seems to be great potential, in Europe especially, for increasing the size of ESG considerations in the retail investor market. • The greatest overlap, however, is likely to be between ESG and emerging/frontier markets.

15. High-net-worth individuals and SRI • In a 2010 survey, Eurosif estimated the European high-net-worth sustainable investment market to total 729 billion euros, or about 11% of those portfolios. The trend was up 35% over the two-year period preceding the study. • It also estimated that over 10% of high-net-worth European investors at that time were ‘pure players’, investing more than 50% of their assets in sustainable products. • As far as drivers are concerned, one manager put it thus: “for the inherited wealth band, sustainable investments flow from a wider responsibility towards society; for the entrepreneurial wealth band, sustainable investments offer opportunities for a green industrial revolution.” • As shown below, there is an overlap among wealth management, sustainability, and emerging/frontier markets.

16. ESG and emerging/frontier markets • The high-net-worth market in Asia Pacific now leads the world with 3.37 million individuals in 2011. (Capgemini and RBC Wealth Management 2012 report) • In 2009, IFC and Mercer estimated the amount of sustainable investment in emerging markets at $300 billion. • In a 2009 report on sustainable investment in emerging markets, US SIF found that a lack of ESG disclosure was the biggest impediment to sustainable investment in emerging markets; Brazil and South Africa were making most progress toward improvement. • Corporate governance was the primary strategy of European investors in those markets and corporate culture their primary concern, while US investors were more concerned with ESG disclosure.

17. ESG and Africa • As per the already cited Global Sustainable Investment Survey 2012, Africa accounts for close to $230 billion of total ESG assets invested globally. ESG integration represents $198 billion of the total. • Africa accounts for 13.6% of sustainability-themed investment, the second largest proportion after Europe. This makes sense given that several investment priority-areas have major sustainability impacts, including energy, utilities, health and food production, and extractive sector. High-net worth individuals interested in micro-private equity concepts with a sustainability/social focus are also likely to look to the African continent. • South Africa is pointing to the future with a $121 billion South African Government Employees Pension Fund and a pension regulation that references the opportunity for managers to include ESG in their investment decision-making. Since 2010, integrated reporting has been mandatory on the Johannesburg Stock Exchange on a ‘comply or explain’ basis. Shareholder engagement is growing.

18. To conclude … • Ever since Taylor organized industrial production and Mr. Ford told us that we could have any car we wanted as long as it was black, it has been in the nature of business to separate functions and impose professional specialization. • At this juncture though, this historical background calls for two remarks: 1. Separation is not the paradigm of the 21st century. On the contrary, we live today in a context of hyper- and fast-paced integration: integration among and within regions, people, industries, finance and the rest of the business world, intellectual disciplines, the private and the public sector, business and civil society, etc. 2. In the financial sector, there seems to be an ongoing integration of sustainability concerns (ESG) in all aspects of the industry’s practices and products, with a particularly strong overlap among money management (institutional and wealth), emerging and frontier markets, and sustainability. Given the continuing need to reform the financial system, ESG considerations can only be expected to grow.