Jk tbli asia 15092011 screen

PROPRIETARY.Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.

Impact Investing viaEfficient Design and Use of ESG Indices

Julia Kochetygova

Senior Director

S&P Indices

September 15, 2011

PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. 2

Agenda

• Role of the ESG Indices in impact investing

• ESG Indices space and variety

• Index philosophy and selection of parameters

• Relevance versus reliability (S&P Approach)


Why ESG Indices?

• ESG index investing is a viable option for “active passive” investors who want to make an impact– They can generate enhanced financial returns – Simultaneously promote corporate citizenship– It is a relatively simple, cost-effective and objective tool– Moreover, as market participants incorporate the ESG

information, the impact on returns will increase going forward

– The indices also provide investors with a powerful engagement platform


Rapid Expansion of ESG Indices Globally

0

1

2

3

4

5

6

7

1 Bolsa Mexicana de Valores (BMV) Sustainability Index launched in 2010, but as of August 2011 is not published

Launches of emerging markets sustainability indices1

(Total number = 19**)

Source: Esty Environmental Partners’ Research

**See full list in the Appendix

• 26 Global ESG Index families

• 8 regional ESG Index families

• 35+ country-specific ESG indices*

• 26 Global ESG Index families

• 8 regional ESG Index families

• 35+ country-specific ESG indices*

*See some examples in the Appendix

Investments into ESG Indices are rapidly growing, but still small: less than $40 billion, or 0.5% of the estimated AUMs of passively managed funds


Sustainability Index Market Challenges: the “Leaky Pipe”

Potential

Investor

Value

1 2 3 4

Investor Sustainability

Framework and Metrics

Data Sourcing Data Analysis

Investor Intent & Index Communication

Investor Value

Index providers

ESG data providers Companies Investors

Market Challenges

While Sustainability Indices have the potential to deliver value to investors, market challenges along the value chain can cause value to leak out

Sustainability Indices Value Chain

Source: Esty Environmental Partners’ Research, S&P Indices

ESG Indices Philosophies & Technologies


Ethical

Environmental

Composite ESG

Var

ious

Per

spec

tives

Negative screenin

g

Tilting based on analytical criteria

Various ApproachesVarious Approaches

Selecting

sectoral Best-in-Class

Incorporating factor analysis or not

Investors need to carefully differentiate between philosophies of various ESG indices in order to choose the one capturing tangible

factors that really lead to sustainable performance!

Normalizing within industries or not

PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.

7

ESG Parameters’ Dilemma: Relevance vs. Reliability

Type of Parameter

Relevance Reliability Measurability

Performance High Low Low/Moderate

Policies Moderate Moderate Moderate

Disclosure Low/Moderate High High

Environment

Social Responsibility Governance

ESG Parameters measure the companies’ performance in the areas of:

ESG ScoreESG ScoreWeights

Weights

Weights

What Relevance of Parameters Means

Capturing ability to mitigate risks Unveiling growth potential


Exposure


Relevance: S&P ESG India Historical Performance

Historical Performance (Dec 2004 - May 2011)

0

50

100

150

200

250

300

350

400

450

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

S&P CNX Nifty S&P ESG India

“Source: S&P Indices and India Index Services & Products. Data as of May 31, 2011. Charts are provided for illustrative purposes only. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.


Relevance: S&P/Hawkamah ESG Historical Performance

“Source: S&P Indices and India Index Services & Products. Data as of May 31, 2011. Charts are provided for illustrative purposes only. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

Historical Performance (November 2007 - May 2011)

0

20

40

60

80

100

120

140

Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11

S&P Pan Arab Composite S&P Hawkamah ESG

Relevance: Transparency and Market Value


R2 = 0.18

0

1

2

3

4

5

6

7

20% 30% 40% 50% 60% 70% 80% 90%T&D Score

P/B

Rat

io

Source: Standard & Poor’s Transparency & Disclosure Study of Russian Companies, 2009

Transparency & Disclosure (T&D) of ESG parameters measure the level of awareness which markets and companies possess on important issues. Information for analysis is obtained from public sources such as annual reports and other disclosures

R2 - Determination Coefficient

Examples of Parameters: Environment


Parameter Type of Parameter

Relevance

Reliability

Measurability

Amount of waste produced, in relation to revenue

Performance 3 1-2 2

Amount of environment-related R&D expenses per year

Performance 3 1 2

Voluntary reduction requirements for gas emissions and waste disposal

Policies 2 2 2

Disclosure of absolute and relative numbers of GHG emissions and other pollutions

Disclosure 1 3 3

3 = High; 2 = Moderate; 1 – LowThe methodology is the property of S&P Indices, Standard & Poor’s and will be published along with the launch of the S&P ESG Global BMI Index series

Examples of Parameters: Social



Relevance

Reliability

Measurability

Whether the company's activities generate positive externalities for the community

Performance 3 1-2 2

Rates of injury, occupational diseases and other work-related fatalities

Performance 3 1 2

Procedures in place to receive, record and address stakeholder demands

Policies 2 2 2

Disclosure of rates of accidents and professional diseases

Disclosure 1 3 3


Examples of Parameters: Governance



Relevance

Reliability

Measurability

Percent of non-executive and non-affiliated directors

Performance 3 2 3

Existence of large shareholders’ related business interests

Performance 3 1 2

Whether internal audit department reports to the audit committee of the board

Policies 3 2 3

Disclosure of management remuneration policy and levels

Disclosure 1 3 3


Summary: Index Setup for Impact Investing


Index philosophy

/Scoring guidelines

Eligibility / weighting

criteria

Back-testing to

prove Alpha

Communi-cation to investors

ETFs / Mutual funds launch

Engagement with

companies

Impact


Performance Disclosure

• The inception date of the S&P ESG India Index was January 31 2008 , at the market close. All information presented prior to the index inception date is back-tested. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.indices.standardandpoors.com.

• The inception date of the S&P ESG Pan Arab Index was February 1 2011, at the market close. All information presented prior to the index inception date is back-tested. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.indices.standardandpoors.com.

• Past performance is not an indication of future results. Prospective application of the methodology used to construct the S&P ESG India Index, S&P ESG Egypt Index and S&P ESG Pan-Arab Index may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the index. Please refer to the methodology paper for the index, available at www.standardandpoors.com for more details about the indices, including the manner in which they are rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. It is not possible to invest directly in an Index.

• Also, another limitation of hypothetical information is that generally the index is prepared with the benefit of hindsight. Back-tested data reflect the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities (or fixed income, or commodities) markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance.

• The index returns shown do not represent the results of actual trading of investor assets. Standard & Poor’s maintains the indices and calculates the index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of theses fees and charges would cause actual and back-tested performance to be lower than the performance shown. In a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US$ 10,000) and an actual asset-based fee of 1.5% were imposed at the end of the period on the investment plus accrued interest (or US$ 1,650), the net return would be 8.35% (or US$ 8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US$ 5,375, and a cumulative net return of 27.2% (or US$ 27,200).


General Disclaimer

•This document does not constitute an offer of services in jurisdictions where Standard & Poor’s Financial Services LLC (“S&P”) or its affiliates do not have the necessary licenses. All information provided by S&P is impersonal and not tailored to the needs of any person, entity or group of persons. S&P receives compensation in connection with licensing its indices to third parties. Any returns or performance provided within are for illustrative purposes only and do not demonstrate actual performance. Past performance is not a guarantee of future investment results.•It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any S&P index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. S&P is not an investment advisor, and S&P and its affiliates make no representation regarding the advisability of investing in any such investment fund or other vehicle. A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by S&P to buy, sell, or hold such security, nor is it considered to be investment advice.•S&P does not guarantee the accuracy and/or completeness of any S&P index, any data included therein, or any data from which it is based, and Standard & Poor’s shall have no liability for any errors, omissions, or interruptions therein. S&P makes no warranties, express or implied, as to results to be obtained from use of information provided by S&P, and S&P expressly disclaims all warranties of suitability with respect thereto. While S&P has obtained information believed to be reliable, S&P shall not be liable for any claims or losses of any nature in connection with information contained in this document, including but not limited to, lost profits or punitive or consequential damages, even if it is advised of the possibility of same.•S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. S&P and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address.•Copyright © 2011 by Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part is prohibited without written permission.S&P, S&P INDICES, and STANDARD & POOR’S are registered trademarks of Standard & Poor’s Financial Services LLC.

Analytic services and products by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.


Thank you.For questions, please contact:

Julia Kochetygova

Senior Director

S&P Indices

+7-495-783-4025

[email protected]

Appendix: the ESG Index Universe



ESG Indices Coverage

26 Global Index

familiesDow Jones

Sustainability World Index

Dow Jones Sustainability World Index

FTSE4Good Global

Benchmark Index

FTSE4Good Global

Benchmark Index

MSCI ESG IndicesMSCI ESG Indices

S&P ESG Indices (underway)

S&P ESG Indices (underway)

8 Regional Index

familiesDow Jones

Sustainability Asia-Pacific Index

Dow Jones Sustainability

Asia-Pacific Index

S&P Pan-Arab ESG Index

S&P Pan-Arab ESG Index

FTSE4Good Europe IndexFTSE4Good

Europe Index

MSCI Pacific ESG Index

MSCI Pacific ESG Index

35+ Country Indices

S&P ESG India Index

S&P ESG India Index

SSE Social Responsibility

Index

SSE Social Responsibility

Index

Australian SAM Sustainability

Index

Australian SAM Sustainability

Index

KRX SRI IndexKRX SRI Index

… … …


Geographic Coverage of Emerging Markets Sustainability Indices

Global (2 indices)

• ECPI Ethical Emerging Markets

Tradable Equity Index

• S&P/IFCI Carbon Efficient Index

Country Specific: Central and South America (3 indices)

• BM&FBovespa Corporate Sustainability Index (ISE) – Brazil• Brazil Carbon Efficient Index – Brazil• BMV Sustainability Index – Mexico2

Regional (2 indices)

• CEE Responsible Investment Universe Index• S&P/Hawkamah ESG Pan-Arab Index

Country Specific: Asia (9 indices)

• OWW Responsibility SRI Index Series – Malaysia (and other countries)

• S&P ESG Indi Index – India

• Dow Jones Sustainability Korea Index – South Korea

• SRI-KEHATI Index – Indonesia

• SSE Social Responsibility Index – China

• CSI ECPI ESG China 40 Index – China

• Hang Seng Corporate Sustainability Indexes China

• Bursa Malaysia ESG Index – Malaysia1

Country Specific: Asia (9 indices)

• OWW Responsibility SRI Index Series – Malaysia (and other countries)

• S&P ESG Indi Index – India

• Dow Jones Sustainability Korea Index – South Korea

• SRI-KEHATI Index – Indonesia

• SSE Social Responsibility Index – China

• CSI ECPI ESG China 40 Index – China

• Hang Seng Corporate Sustainability Indexes China

• Bursa Malaysia ESG Index – Malaysia1

Country Specific: Middle East/Africa (3 indices)

• Johannesburg Stock Exchange Socially Responsible Investment Index - South Africa• S&P/EGX ESG Index –Egypt• Istanbul Sustainability Index – Turkey1

Source: Esty Environmental Partners’ Research

1. Index in development, as of June 2011

2. Index is launched, but not published, as of June 2011

Jk tbli asia 15092011 screen

Business