norm-based exclusiona key to pri implementation

ECOFACT AG, Zurich, Switzerland, www.ecofact.com. RepRisk® is a registered trademark of ECOFACT AG.

Norm-based ExclusionA Key to PRI Implementation

TBLI Conference Europe

Amsterdam, November 13, 2009

Olivier JaeggiManaging PartnerECOFACT AG

Tel. +41 44 350 60 [email protected]


"We will incorporate ESG issues into investment analysis and decision-making

processes."

Possible actions:

Address ESG issues in investment policy statements

Support development of ESG-related tools, metrics, and analyses

Assess the capabilities of internal investment managers to incorporate ESG issues

Assess the capabilities of external investment managers to incorporate ESG issues

Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis

Encourage academic and other research on this theme

Advocate ESG training for investment professionals

UN PRI: Principle 1

TBLI / November 13, 2009


“We will incorporate ESG issues into investment analysis and decision-making

processes.”

Possible actions:

Address ESG issues in investment policy statements

Support development of ESG-related tools, metrics, and analyses

Assess the capabilities of internal investment managers to incorporate ESG issues

Assess the capabilities of external investment managers to incorporate ESG issues

Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis

Encourage academic and other research on this theme

Advocate ESG training for investment professionals

UN PRI: Principle 1


"Starting in 2011, the PRI will

introduce a set of minimum disclosure

requirements."


Many institutional investors are skeptical towards traditional SRI approaches.

Traditional SRI/ESG solutions: "best-in-class" approach. Investments into shares of companies such as BP, Nestle, British

Airways, etc.Some funds exclude the most controversial sectors, such as defense or

tobacco.

For most investors this has two downsides:

This approach reduces the investment universe significantly; only a few hundred companies will be "best-in-class".

Most investors would like to see some form of positive impact on sustainable development. The "best-in-class" approach is difficult to communicate; investors remain skeptical.

UN PRI: Why Many Institutional Investors Hesitate



UN PRI: Stock-Picking vs. Stock-Kicking

"Best-in-class" "Norm-based Exclusion" Engage or exclude

Research Universe Research Universe


ECOFACT AG, Zurich, Switzerland, www.ecofact.com. RepRisk® is a registered trademark of ECOFACT AG. 6

Companies are Exposed to Environmental and Social Risks


Natural Environment

Society

Economy

Investors CompanyInvestments


Natural Environment

Society

Economy

Impacts

Company


InvestorsInvestments



Natural Environment

Society

Economy

Impacts Perception Reactions

Company





The Rules of the Game are Changing


1. More information available, growing concern about issues.

2. New and strengthened environmental and social standards.

3. New requirements present new risks (and new opportunities).

The tipping point?

Voluntary standards become common business practice.

Reputational issues become compliance issues.


UN Global Compact Voluntary guidelines by the United Nations in the range of human rights, labor standards, environment and anti-corruption.[www.globalcompact.com]

OECD Guidelines for Multinational Enterprises(Semi-)Voluntary principles for responsible business practice including human rights, environment, corruption and other issues. National Contact Points (CH: SECO).[www.oecd.org/dataoecd/56/36/1922428.pdf]

New and Strengthened International StandardsIncrease Risks IFC Environmental and

Social Standards (World Bank Group) > 60 sector-specific Environmental, Health and Safety Guidelines; Exclusion List; Performance Standards.[www.ifc.org/sustainability]

Equator PrinciplesSigned by more than 50 banks and export credit agencies (covering approx. 80% of the project finance market).[www.equator-principles.com]



Engage with or exclude a small number of the worst companies.

Easier to communicate:

No impact on the investment universe.

Obvious "ethical" upside: If I hold a stock I bet on the company's future cash flows.By excluding the worst violators an investor can easily avoid participating in the revenues of a company that grossly violates international minimum standards.

Norm-based Exclusion: A First Step to PRI Implementation



Natural Environment

Society

Economy

Financial andReputational Risk

Impacts Perception Reactions

Company



How to Identify these Companies?


RepRisk®: Selected ClientsCase Study: Norwegian Government Pension Fund - Global



Controversies Around Companies and Projects Are Captured by RepRisk®

Print Media

Newsletters

News Websites

Governmental Agencies

“The Web”, Blogs

NGO Websites2nd LevelAnalysts

IC

P

C S

NG

News1st LevelAnalysts

Approval by1st Level Analyst(double check principle)

Advanced search algorithms covering English, Spanish, Chinese, German, French, Korean, Portuguese, and Russian sources worldwide



The RepRisk Index (RRI) Is an Indicator of the Exposure to Environmental, Social and Reputational risks


The RepRisk Index (RRI) supports the user when assessing risks: relevant risks are highlighted the risk exposure of entities can be

compared with peers risk trends can be tracked over time

The RRI calculation is based on relevance of news sources frequency and timing of news, and news content, i.e. severity and

novelty.

The Peak RRI gives the maximum RRI value in the last 24 months


Norm-based Exclusion: A First Step to PRI Implementation


"Starting in 2011, the PRI will

introduce a set of minimum disclosure

requirements."

norm-based exclusiona key to pri implementation

Economy & Finance