23nov2012_rolling_in_the_deep_reports5_sin_co

sustainable investment consulting | sincosinco.com/portfolio-climate-risks | @SinCoESG | [email protected] 1

REGULATORY INFORMATION No part of this report or proposal suggests or should understood to suggest endorsement or advice on any investment approach, strategy or offering. The rights and obligations of the investor are set out in the relevant policy contract. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.

sustainable investment consulting

…designing and developing world-class ESG architecture for institutional investment in frontier and emerging markets since 2006

sincosinco.com | @SinCoESG | [email protected]

WWF Project: Navigating Muddy Waters, 2012 Securing Investment Returns under Carbon and Water Constraints

Comments at Launch of Report 5: Synopsis Co-hosted by WWF / JSE / GEPF at JSE, Sandton, South Africa, 20 November 2012 wwf.org.za/media_room/publications/?7260/securing-investment-returns

sustainable investment consulting | sincosinco.com/portfolio-climate-risks | @SinCoESG | [email protected]

WWF Project: Navigating Muddy Waters, 2012 Securing Investment Returns under Carbon and Water Constraints

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Report 5: Synthesis Report

•  Synthesizes all materials from the project and summarizes problem statement, research approach, findings from underlying reports, and conclusions with next steps for action; provides facts-based research knowledgebase for engagement in 2013

•  Targeted at key role-players in investment value chain in South Africa such as policymakers, regulators, institutional investors (asset owners, asset consultants, investment managers, analysts), securities exchanges and companies, especially mining companies

Project uses 5 Hypotheses across research:

1.  Investors are not pricing climate change risks leading to portfolio & systemic risks

2.  Cross-listings mirror risks across markets

3.  Investors have large exposure from major firms’ equities & bonds

4.  High-carbon, institutional lock-in means re-pricing will be carbon shock

5.  New regulations for investment opportunities in low-carbon

Report 1 Report 2 Report 3 Report 4

Trucost Carbon Tracker SinCo WWF

*Carbon footprinting and water scarcity analysis to JSE ALSI, Top 100 and BESA CCI benchmarks, major CIS equity funds *Using Trucost and WWF-DEG analysis tools *GEPF as case study for equity and fixed income exposures

*Carbon footprinting of major JSE-listed coal mining companies Applied South Africa country carbon budget to coal resources & reserves *Using Carbon tracker analysis, GEPF as case study

*Mapping S.African institutional investor attitudes and practices, interviews & survey of 12 major investment mangers, 3 asset owners. *Using SinCo analysis tools, secondary research including Dirty Feet: Portfolio Carbon report

*Investigate investment mechanisms available to help de-carbonise institutional investment portfolios; and demonstrate investor water stewardship. *Using WWF policy research and analysis

sustainable investment consulting | sincosinco.com/portfolio-climate-risks | @SinCoESG | [email protected]

Decisions and assets flows in the investment value chain in South Africa

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Investment Manager

Asset Consultant

Portfolio

Investment Analysis

Assets / Securities

Secu

rities

Exc

hang

e Asset Owner

Listed Equities

Fixed Income

Cash

Real Estate

Private Equity

Venture Capital

Project Finance

Large Company

SOE* Company

SME Company

Sponsor / Saver

Infrastructure

Not li

sted o

r Bun

dled I

nto Li

sted V

ehicl

es

Agriculture

Property

Research & Data

Centers of regulations

SOE = state owned enterprise

SME = small / medium enterprise

©SinCo 2012

SinCo – sustainable investment consultants © 2006-2012 FOR PROFESSIONAL INVESTORS USE ONLY – NOT FOR DISTRIBUTION TO THE GENERAL PUBLIC 4





sustainable investment consulting | sincosinco.com | @SinCoESG | [email protected] 5


Rolling In The Deep: Institutional Investor Attitudes To Climate Change Portfolio Risks Report 3 of the “Navigating Muddy Waters” report series collaboration of work between WWF, Trucost, Carbon Tracker and SinCo explores the attitudes of major institutional investors to the climate change risk in their portfolios, owning high carbon portfolios in a dry land.

Designing and developing world-class ESG architecture for institutional investment in frontier and emerging markets since 2006

Graham Sinclair @esgarchitect

Principal SinCo sincosinco.com | @SinCoESG | [email protected]

President AfricaSIF.org

AfricaSIF.org | @AfricaSIF | [email protected]

@WWFSouthAfrica: “Navigating Muddy Waters” launch @MyJSE | 20 November 2012 10AM – 12.30PM

sustainable investment consulting | sincosinco.com | @SinCoESG | [email protected]

Analysis from primary research

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Major institutional investors survey •  15 survey responses from 8 asset owner + 8 investment manager universe •  September distribution + October 5 hypotheses testing (11 direct responses) via email +

2x follow-up with targeted contacts •  27 survey questions used multiple choice, quantitative and qualitative inputs

Universe of institutional investment influencers •  While the respondents represented this amount in total, overlapping

relationships imply some double-counting. •  Asset owners represented ZAR1,055 billion ($121billion);

investment managers ZAR 2,744 billion ($317 billion).

Hypothesis testing •  Follow-on specific testing of 5

hypotheses for agree/disagree conviction

•  Point toward potential break-through next steps

NOTES: 1. Mahesh Cooper of Allan Gray Investment Counsel, Malcolm Gray of Investec Asset Management, Anthony Walker of Prudential Asset Managers (SA), Angelique Kalam of Futuregrowth Asset Management, Jon Duncan of Old Mutual Investment Group, Sanlam Investment Management, Gordon Wessels of STANLIB Asset Management, Brad Preston of Mergence Investment Managers, Michelle Parkinson-Ismay of Kagiso Asset Management, Brendan Smith of Sanlam Investment Management, Adrian Bertrand of GEPF, Donovan O'Riley of Pathcare Retirement Fund, Nic Andrew of Nedgroup Investments, John de Kock of Momentum Asset Management, Gordon Archibald of Unilever SA Pension Fund, Pranay Chagan of Coronation Fund Managers and the WWF-SA endowment trustee. 2. See Report 3 (forthcoming) for list of responding funds, acknowledgements; investors listed in Report 5. 3. Cross rate used ZAR 8.63521 : US$ 1, from oando.com currency converter, 30 October 2012.

Four steps

1. Review secondary research including media and reports

2. Analyzed findings from survey, reviewed with WWF

3. Feedback from peer reviewers and WWF teams

4. Final report including appendix of survey responses.

Responses below expectations from asset owners BUT above expectations from investment managers, supplemented by secondary research, especially Dirty Feet: Portfolio Carbon (Jan 2012) and Defining Momentum (July 2012)

Material for Report 3 and across 4 reports


Rolling In The Deep …institutional investment practitioners seek the safety of relative performance against peers…“shoaling” behaviour around performance benchmarks, driven partly by quarterly

performance reviews and investment mandates

 Ph

oto cred

it: Steve Ben

jamin www.animalocean.co.za ©20

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Climate risks in portfolios What Do Institutional Investors Think? And Do?

HIGHLIGHTS   Promising Policies, Unclear Implementation, Impacts Awaited   Climate Risks In Portfolios Bring Short-term And Long-term Risks   Mis-pricing Climate Risks   Carbonized Portfolios In A Dry Land   Investment Boundaries, Cross-border Risks   High-carbon Infrastructure May Lead To Portfolio Shock   Few Direct Allocations To Low-carbon, Water-scarce Investment   Good Rules, Patchy Implementation

  Toward A Future Investment In Sustainability

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Long tail portfolio risks… does institutional investor factor all material political, environmental, social and technology risks?

Photo Image: coelacanth


Valuation effects of pricing climate costs

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Inactive stewards?

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CARTOON: end externalities by putting mining executives office underground

Role of business models and processes in pushing externalities outside the investment value chain


Major impact of voluntary initiatives in South Africa

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Leadership vs compliance with rules and regulations

…ask the better questions, track in public domain, and seek impacts

PHOTO: Lance Armstrong headshot


Mixed new ESG demand picture

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Premium for environmental performance

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Pho

to c

ourte

sy o

f The

Gua

rdia

n. V

iew

from

the

Sha

ngha

i Wor

ld F

inan

cial

Cen

tre

How does innovating on the current investment paradigm achieve the goals of growing a low-carbon, climate-resilient, inclusive economy in Africa? …

Sustainable investment is not the same as investing in sustainability

PHOTO: Smog-filled Shanghai skyline, China, 2009


Report 3: Toward A Future Investment In Sustainability

  Institutional investors responding to the survey pointed to ways to increase momentum for low-carbon investment, from across the supply versus demand side, technical aspects such as pricing models and standards, as well as the global regulatory context for pricing externalities. Institutional investors claim they need pull factors, for example fiscal incentives or new asset mandates with longer time horizons.

  But push factors help make ESG issues be taken more seriously, for example carbon taxes, global markets carbon regulation impact on company exports or input costs, or investment regulations requiring disclosures, for example Pension Funds’ Act Regulation 28 effective 1 January 2012. Most institutional investors respondents would pay a premium for better environmental performance, partly as a proxy for good management.

  A next generation investment-as-usual approach is needed for South Africa to invest in a de-carbonized, water-scarce paradigm. The investment value chain has embedded systemic risks that are not well understood, poorly tracked, and may have material impacts on valuations in South African portfolios.

  How can investors re-calibrate from “investment-as-usual” to investing in a climate-constrained world? Institutional investors, regulators and other actors in the investment value chain together need to take steps now to tackle the policy, economic, social and technology factors affecting the practice of investment management. Report 3: Rolling In The Deep offers 10 next steps to start down that low-carbon path.

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Climate risks in portfolios What Do Institutional Investors Think? And Do?

HIGHLIGHTS   Promising Policies, Unclear Implementation, Impacts Awaited   Climate Risks In Portfolios Bring Short-term And Long-term Risks   Mis-pricing Climate Risks   Carbonized Portfolios In A Dry Land   Investment Boundaries, Cross-border Risks   High-carbon Infrastructure May Lead To Portfolio Shock   Few Direct Allocations To Low-carbon, Water-scarce Investment   Good Rules, Patchy Implementation

  Toward A Future Investment In Sustainability

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SinCo

sincosinco.com



About SinCo team: Graham Sinclair

Graham Sinclair is Principal at SinCo, where his roles cover sustainable investment strategy, ESG architecture and global project management.   Graham has eight years specialist experience in sustainable investment globally after eight years in pensions consulting

and investment banking in Africa. Recent consulting engagements in sustainable investment include leading IFC-funded research into private equity and liquid equity ESG strategies in sub-Saharan Africa in South Africa, Kenya and Nigeria to be published in 2011, developing innovative financing mechanisms strategy and ESG index architecture for developed, emerging and frontier markets for a Swiss-based international organization, and for a global institutional investment firm in New York with a US$ one trillion AUM portfolio, designing ESG architecture across private equity, liquid and global real estate portfolios covering philosophy and process innovations and investment strategies. Currently he provides index architecture and stakeholder engagement for the Istanbul Stock Exchange Sustainability Index.

  As consultant to the UN, Graham developed strategy for 25 emerging markets and launched PRI in Emerging Markets project in Q2 2007 for UNEP FI, creating a network infrastructure, building relationships with 108 investor stakeholders including in Africa through 2008. Before launching the sustainable investment advisory boutique SinCo in 2006 in Boston, he was Product Manager at KLD Research & Analytics, Inc adding to his background in pension funds and asset management.

  Graham is a former contributor to the CSR Initiative at Harvard Kennedy School, Distinguished Member of Net Impact, alum of WWF One Planet Leaders programme and the Tallberg Forum New Leaders Program. He currently leads the AfricaSIF Project building an independent, pan-African not-for-profit Africa Sustainable Investment Forum network at africasif.org, member of ASISA’s Responsible Investment sub-committee, and a member of Investment Analysts Association of South Africa, and the Network for Sustainable Financial Markets. He has lectured at more than 25 graduate schools globally, and the most recently published work is chapters on Private Equity, Indexes and Africa to Evolutions in Sustainable Investing [Wiley Business, 2011].

  Graham earned his MBA on scholarship at Villanova University in the USA where he co-managed the Arnone-Lerer SRI Fund equity portfolio in 2004. He holds a B.Com from the University of Natal and LL.B from the Howard College School of Law as well as numerous industry specialist certifications. He holds diplomas in retirement funds and insurance law, and in 1998 he was one of the youngest ever dual-FILPAs. He resides in Cape, South Africa and Vermont, USA.

Graham Sinclair @esgarchitect Principal SinCo @SinCoESG sincosinco.com [email protected]

SinCo – sustainable investment consultants © 2006-2012 FOR PROFESSIONAL INVESTORS USE ONLY – NOT FOR DISTRIBUTION TO THE GENERAL PUBLIC 23





23nov2012_rolling_in_the_deep_reports5_sin_co

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