Integrating ESG Into Investment Strategy: Risks and Opportunities. Presentation on sustainable investment to Zambia Pension Fund conference Lusaka 7 March 2013

Integrating ESG Into Investment Strategy: Risks and Opportunities

Graham Sinclair President, AfricaSIF.org [email protected] Principal, [email protected]@sincosinco.com "1

sustainable investment consulting

Zambia Pension Fund Investment Forum

www.africasif.org@[email protected]

www.sincosinco.com@[email protected]

mailto:[email protected]


http://www.sincosinco.com


Presentation flow

What do investors want?About AfricaSIF.orgRationale for sustainable investmentWhat ESG issues?Strategies for ESG integration in AfricaFrameworks for ESGLet's grow investment in Zambia, sustainably

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http://AfricaSIF.org

http://AfricaSIF.org

What do investors want?"3

What do investors want?

Investors are seeking net-of-fees, net-of-inflation, risk-adjusted positive investment returns, for example equity (dividends market price increases) or fixed income (coupon payments and principal repatriation). Investors value diversity, non-correlation and liquidity. Investors have a sense of long-term investment, but investor behavior may be irrational, herd-driven on the fear-greed spectrum. Limits on scale, information and operational efficiency are parameters to universal investment. Investors want to reduce their buy/hold/sell decision to 2 pages describing the investment structure (debt/equity), competitive advantages of firm and its products/services, quality of its management, operational efficiency and strategic prospects. investors always want to buy their investments for the lowest price, at the bottom of the J-curve (buy low-sell high).

"4@SinCoESG I sincosinco.com I [email protected]


http://sincosinco.com


Quick facts on Zambia Only tells part of storyExports - China 34.8%, Switzerland 18.2%, South Africa 7.8%, DRC 5.4%, South Korea 4.4% (2011). Imports - South Africa 36.7%, DRC 20.6%, China 10%, Kuwait 5.9% (2011). Traded stocks - $4.009 billion (31 December 2011), country comparison to the world: 91. $2.817 billion (31 December 2010). $2.804 billion (31 December 2009). GDP. agriculture: 20.2% industry: 33.5% services: 46.3% (2012 est.)Workforce 5.83m in agriculture: 85% industry: 6% services: 9% (2004). Environmental issues. air pollution and resulting acid rain in the mineral extraction and refining region; chemical runoff into watersheds; poaching seriously threatens rhinoceros, elephant, antelope, and large cat populations; deforestation; soil erosion; desertification; lack of adequate water treatment presents human health risks. "5

About AfricaSIF.org

Africa Sustainable Investment Forum is an independent,Pan-African, not-for-profit network, knowledgebase and advocate promoting investment in sustainable development across the continent. Launched in June 2010, the AfricaSIF.org Project is run by volunteers building a network of institutions and individuals promoting sustainable investment in Africa by investors in public, private and philanthropy sectors across asset classes, countries and stakeholders from our platform at www.africasif.org.

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About AfricaSIF.org

AfricaSIF.org is a new, strategic step in facilitating investment in Africa that purposefully integrates environmental, social and governance (ESG) factors. AfricaSIF.org defines "sustainable investment" as: "an approach to investment in any asset class in Africa where t, social and governance (ESG) factors are proactively integrated at any stage of the investment life cycle."

*AfricaSIF.org Trends 2012 Report* Please join our major Africa sustainable investment research project - www.africasif.org/marketplace-and-trends-report.php"10

Rationale for sustainable investment 1/2

1. More beneficial owners - you and me - and the trustees stewarding retirement funds, are asking more questions. Institutional investment is a competitive global industry. professionals manage portfolios across asset classes, project and company types; financing/investing in stages of companies/projects business cycles. 2. Increasing materiality of environmental, social and governance (ESG) factors is driving investors, and their end-clients, to integrate sustainability concepts. $13.6 trillion globally, $229 billion in Africa reports proactively using ESG in investment policy or process. 3. Increasing quality of coverage of ESG flowing from professional ratings agencies and sharper focus. with more coverage, opportunity to use of new ESG valuation models. Pursuit of "sustainability alpha" continues; ESG benchmarking and performance attribution growing. 4. Improving African investment context is attracting capital. Benefit from making the sustainable investment case for the positive outcomes, or reduction in negative impacts. 50% investment dollars in private equity in Sub-Saharan Africa is DFI-linked.

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GEPF Developmental Investment Policy $5 billion over 5 years

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Pillar I

Investments in Economic

Pillar II

Investments in Social

Pillar III

Investments in

Pillar IV

Investments in Enterprise Development

Sustainable long-term investment returns for the GEPF

Rationale for sustainable investment 2/2 Global pension investment best practice from Africa

Regulation 28 of Pension Funds Act 24/1956 effective 1 January 2012PREAMBLE "A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment."

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@SinCoESG I sincosinco.com I [email protected]



Investment case is sum of all operations and investments. ESG issues are material, but methods for valuing differ. Timing, shocks and impacts differ.

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WHAT ESG ISSUES? All the the companies' strategy, operational plans and realities are tested in the harsh light

of investment analyst presentations, and a public forum where stakeholders have a voice

Food security, food supply chains and nutrition of food & beverages is important to food companies, investors. People want to trust what they eat?

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Social - Child Labor, Consumer Product Safety, Diversity, Labor Relation

Environmental - Environmental Performance, Global Sanctions, Superfund sites, Toxic Chemicals

Governance - board representation, separation of powers and duties, independent directors, separate Chairman and CEO.

What ESG Issues?

Strategies for ESG Integration in Africa 1/2

How will the least possible ESG data delivered as information on sustainability lead to the maximum knowledge on the current value and future expected value of the and its franchise with consumers, employees, policymakers, regulators, investors, and other stakeholders? Investors do not want a list of "material issues" for sector or generic firm. Investors need the firm to explain the business critical sustainability issues, and ow the firm with map and monitor and mitigate ESG risks, and maximize ESG opportunities.

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HEADLINE RISK TO INVESTORS ESG is a factor throughout

investment life cycle

Impacts of all investor portfolio companies/securities/projects sums to portfolio-level ESG.

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Strategies for ESG Integration in Africa 2/2

• 1. Macro thematic issues relevant to mining or extractives - for example water scarcity, carbon taxes, labour relations. Themes inform sense of "investment conviction" about how sector, industry and firm may manage key issues in strategy and operations.

• 2. Key value creators/destroyers - at sector and company levels, filters for best/worst in class; tempers financial data with sense of prospects. for example, firm may be estimated to have 35% upside but be worst performer.

• 3. Active ownership over time - using ESG information as active shareholder to steer company away from high-risk, low-reward situations or binary issues with negative reputation impacts. Voluntary initiatives like CRISA, PRI, EITI, Equator Principles or CDP play a role.





Frameworks for ESG - global and local




Frameworks for ESG - mining sector

• Social licenses to operate, obtained through community engagement and sustainability management, are ever more essential to mining companies’ ability to run a successful mine.

• The industry is faced with many tough decisions. Management at many companies must choose between layoffs or profits. Others are forced to choose between ramping up production of low grade mines – the result could mean higher carbon emissions, wastes, and costs - or move operations deeper into regions with high uncertainty due to risks of corruption, social changes, or sensitive environments that can block projects from going forward.

• The increasingly scarce high grade projects are also often in regions where safety and environmental standards need to be drastically upgraded to meet international standards. Poor social and environmental performances also significantly raise risks of resource nationalization and higher payment demands.

• Labor cost inflation reaches double digits for many companies and diminishes long term confidence that high margin mines in areas of unrest will remain strong investments. Mining companies face additional risks of cost hikes through increased regulatory pressure, expanding carbon regulations, and higher costs for energy and supplies





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What sustainable investment will reward his pension lifestyle?

Let's grow investment in Zambia, sustainably

• Increased demand for growing economies. More demand for ESG strategies. $13.6 trillion globally, $229 billion in Africa reports proactively using ESG in investment policy or process. 50% investment dollars in private equity in Sub-Saharan Africa is DFI-linked.

• Increasing materiality of environmental, social and governance (ESG) factors is driving investors, and their end-clients, to integrate sustainability concepts.

• Increasing quality of coverage of ESG flowing from professional ratings agencies and sharper focus. with more coverage, opportunity to use of new ESG valuation models.

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Integrating ESG Into Investment Strategy: Risks and Opportunities

Graham Sinclair President, AfricaSIF.org [email protected] Principal, [email protected]@sincosinco.com "24



www.africasif.org@[email protected]

www.sincosinco.com@[email protected]





Indemnity

This ESG research by SinCo includes funds, firms and initiatives that may be clients of SinCo, or the parent of, or affiliated with, a client of SinCo. SinCo ESG research reports, articles and profiles have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While we have exercised due care in compiling the information, we make no warranty, express or implied, regarding the accuracy, completeness or usefulness of the information and assume no liability with respect to the consequences of relying on the information for investment or other purposes. In particular, SinCo ESG research is not intended to constitute an offer, solicitation or advice to buy or sell securities.

Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall SinCo have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

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Quick facts on Zambia Only tells part of storyExports - China 34.8%, Switzerland 18.2%, South Africa 7.8%, Democratic Republic of the Congo 5.4%, South Korea 4.4% (2011)Imports - South Africa 36.7%, Democratic Republic of the Congo 20.6%, China 10%, Kuwait 5.9% (2011). Traded stocks - $4.009 billion (31 December 2011), country comparison to the world: 91. $2.817 billion (31 December 2010). $2.804 billion (31 December 2009). Urban population: 36% of total population (2010). rate of urbanization: 3.2% annual rate of change (2010-15 est.). Labour force. 5.839 million (2012 est.) country comparison to the world: 67Unemployment. 14% (2006 est.) country comparison to the world: 138. 50% (2000 est.). GDP. agriculture: 20.2% industry: 33.5% services: 46.3% (2012 est.)Workforce 5.83m in agriculture: 85% industry: 6% services: 9% (2004). Environmental issues. air pollution and resulting acid rain in the mineral extraction and refining region; chemical runoff into watersheds; poaching seriously threatens rhinoceros, elephant, antelope, and large cat populations; deforestation; soil erosion; desertification; lack of adequate water treatment presents human health risks. Landline 85,700 (2011) country comparison to the world: 149. Mobile 8.165 million (2011) country comparison to the world: 87. Internet users 816,200 (2009) country comparison to the world: 105. "26

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Rationale for sustainable investment 2/3

• $13.6 trillion (21.8%) of professionally managed assets reporting incorporating environmental, social and governance (ESG) factors into investment selection and management (Jan 2013 on 31 Dec 2011 data). Positive/best-in-class screening stands at just over $1.0 trillion, while impact investing ($89 billion) and sustainability-themed investments ($83 billion) are comparatively small.

• Investment in Africa reporting proactively investing using ESG factors $228 billion AuM. Integration of ESG is $198 billion AuM. South Africa is 95% of Africa investment market; ESG-branded investment products make up just 1% AuM.

• According to Bloomberg ESG, "in 2010, 5,000 investors in 29 countries accessed more than 50 million ESG indicators in the Bloomberg platform— a 29 percent increase over 2011."

• 40 percent of shareholder resolutions in 2012 in the USA pertained to environmental and social concerns, up from 30 percent during the prior proxy season. RSA share owner activity increasing off low base, online reporting of proxy votes.

• ESG performance studies reflect sustainability may increase returns. ESG tilts in listed equity perform best for buying ESG "improvers" and shorting "laggards" *2008-12

• $10 billion annual savings on U.S. electric bills from new lightbulb standards. 59% proportion of emissions-reductions efforts pay for themselves in 3 years.

• 67% return from listed equity portfolio based on the Carbon Disclosure Leadership Index since 2006. 31% return of by CDP Leadership Index's Global 500 peers during the same period.




What ESG Issues? 2/3

CARBON From SinCo research for Navigating Muddy Waters research series commissioned by WWF with SinCo, Trucost and Carbon Tracker, using GEPF's fixed income and equity portfolio as worked example. Confirmed that investors attitudes to carbon & water scarcity risks ranged from ambivalent to concerned. Previous studies of the development of institutional investor approaches to sustainable investment in South Africa identified 1/3 had no knowledge of a carbon tax pricing scenario, another 1/3 had zero. *2015 carbon tax shifted valuations - Arcelormittal lost 6%

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What ESG Issues? 3/3WATER Analyst note from Standard Bank on 14 resources companies.Most mining and industrial operations in RSA in water-stressed areas: Waterberg and Witbank Coal fields, Witwatersrand gold complex, and Bushveld PGM igneous complex. Lonmin and SASOL have lowest scores on their proprietary ratings for water management. "Anglo Platinum has the highest score, implying the lowest risk, it is still without IWUL at its key operations, based on public information available at date of publication...SA Resource sector is still only about one year into setting fixed targets and monitoring them"

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Integrating ESG Into Investment Strategy: Risks and Opportunities. Presentation on sustainable investment to Zambia Pension Fund conference Lusaka 7 March 2013

Economy & Finance

investment strategy

facilitating investment

universal investment

investment dollars

institutional investment

sustainable investment

denes sustainable investment

positive investment