14:30 - 16:15

Erik Floyd (People's Republic of China)
Joint Executive Director - ASrIA - Association for Sustainable and Responsible Investment in Asia

Marie Rosencrantz (United Kingdom)
Founder - Rosencrantz & Co.

CDC's New Toolkit on ESG for Fund Managers

In 2010, the UK development finance institution CDC Group plc. will publish a new Toolkit on ESG for fund managers. The Toolkit will provide concrete guidance on how to incorporate ESG matters into the investment process, with a focus on private equity fund managers investing in emerging markets. The Toolkit builds on and incorporates international best practice standards and CDC's experiences as a leading intermediated emerging markets investor. The presentation will introduce the Toolkit, which will be available to down-load through CDC's website www.cdcgroup.com.

David Orr (Denmark)
Portfolio Manager - Sparinvest Asset Management Ltd.

ESG: A Way to Reduce Downside Risk

As long-term value investors with a strict bottom-up investment process, when looking at investment candidates we have always considered downside risks before upside potential. We are wary of any factors that could ultimately weaken corporate value – and this means that our process has integrated many ESG considerations not as a goal in themselves, but to strengthen performance. Arguably, we were stronger on environmental and governance issues, with less focus on the social. In 2008 we added external sector-based and norm-based screenings to our existing process. Few of our existing holdings were excluded – and in this sense, you could say that we were almost “ethical by chance”. We are convinced that implementing ESG does not necessarily act as a brake on performance – and indeed, can be a useful tool to help avoid value destruction, and thereby enhance performance.

Steffen Hörter (Germany)
Business Director - risklab GmbH

Integration of ESG into Asset Allocation

The integration of ESG factors into portfolio construction could significantly reduce long-term investment risk and potentially boost returns because of a high probability that companies that don’t manage ESG issues will be more volatile, according to a study by quant researchers at risklab, part of Allianz Global Investors. The quant firm said the research was important because it had notable implications for investor strategic asset allocation decisions, which it said accounted for up to 90% of long-term portfolio risks and are a significant driver of returns. The study, titled: ‘ESG Risk factors in a Portfolio Context’, involved building a quantitative model of ESG risk factors in a portfolio to determine their influence on equity risk over a 20-year horizon. The firm chose spot price changes of carbon emission rights as a proxy for environmental risks, employee sick days as its social risk criteria, and corporate governance ratings, to ‘operationalise’ ESG risks and run stochastic models with 10,000 different capital markets scenarios. As a reference, risklab created a conservatively balanced portfolio with 30% global equities and 70% bonds and measured the impact of each ESG factor on equity risk within two distinct groups: positive ESG equity where company management actively tries to minimise the ESG risk, and negative ESG where the risks are ignored. It then replaced the 30% global equity of the reference portfolio with either positive or negative ESG equity strategies. It found that the optimised positive ESG equity allocation gave a portfolio tail risk reduction – the likelihood that the risk of a portfolio of assets will move more than 3 standard deviation from its current price – of around 30%, at the same levels of expected return. The same portfolio also gave an increase of expected return of 30 basis points at similar levels of expected portfolio risk. The effects, risklab said, were amplified when comparing riskier portfolios with higher equity allocations. Dr. Steffen Hörter, director at risklab, said: “While much research has been done on ESG opportunities at the stock picking or company analysis level, little has been researched on the link between ESG and the risk/return profile of an entire portfolio. The connection to the portfolio context and strategic asset allocation, which we view as the most important factor driving long-term portfolio returns, has been missing. In the long-term, ESG factors are expected to have significant tail risk impact on equity investments. Therefore, investors should strive to optimise their global equity investments and minimise exposure to ESG risks, which could be achieved by choosing equity investments, where corporate management proactively mitigates these risk factors.
© http://www.responsible-investor.com/home/article/risklab/

Eric Borremans (France)
Head of SRI Research and Development - BNP Paribas Investment Partners

Measuring ESG Performance of Your Portfolios

Reporting is the proof of the pudding for investors. With ESG criteria increasingly used in portfolio management, sophisticated investors need greater levels of disclosure and transparency to better understand the real impact it has on portfolio composition. While financial reporting is a well-established technique, it provides little or no insight to SRI-minded investors. New metrics and "extra-financial" performance indicators that enable to measure key ESG characteristics of portfolios are today becoming a must to provide concrete evidence that portfolios provide real value-added from a sustainability point of view.