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Will sustainable investing
survive the recession?
Will sustainable investing survive?
• Winning the battle…
• but losing the war?
• A decade of transformation lies ahead
Looking through the lens of climate change
Winning the battle?
Sustainable investing: micro and macro
• Micro: The best way of generating superior riskadjusted returns in the 21st century is to fully
incorporate long-term economic, social and
environmental factors into investment and
ownership decision-making
• Macro: capital markets themselves need to be
recast to confront the risks of financial collapse
posed by long-term economic, social and
environmental realities
From inside out to outside in
Coping with the alphabet soup
Ethical investment
screening the status quo
Responsible investment
extending the scope of risk management
Sustainable investment
repositioning for long-term growth
USD5 and USD15 trillion now contain elements of ESG
The seven tribes of SRI
1.Negative screening – ethical, social, environmental
2.Positive screening – ethical, social, environmental
3.Community/social investing
4.Best in class
5.Integrated analysis
6. Sustainability themes
7.Investor activism and engagement
From inside out to outside in
Distinguishing features
• Seeks to identify ‘predictable surprises’
• Regards as tangible what others see as intangible
• Views factors as financial that others view as nonfinancial
• Reaffirms the imperative of prudence
• Prospective not retrospective, anticipating the key
challenges for management quality
And weakness? Being right too early
Sustainable investing – equity out-performance
20
One-year average percentage return (2007)
Three-year average percentage return (31 December 2004 - 31 December 2007)
18
Five-year average percentage return (31 December 2002 - 31 December 2007)
16
14
%
12
10
8
6
4
2
0
Sustainable Investing
Source: Krosinsky, 2008
MSCI World
S&P 500
FTSE 100
The long-term really matters
18
16
14
12
10
8
6
4
2
0
Low
Moderate
High
SRI fund turnover and performance over 5 years to December 2007
Source: Krosinsky, 2008
Sustainable investing – updated performance analysis
20%
1st Half of 2009
One-year return (2008)
Five-year return (31 December 2003 - 31 December 2008)
10%
0%
%
-10%
-20%
-30%
-40%
-50%
Sustainable Investing
Ethical Investing
MSCI World
S&P 500
FTSE 100
Losing the war?
The end of an era - 1
“On the face of it, shareholder value is the
dumbest idea in the world. Shareholder value is a
result not a strategy. Your main constituencies are
your employees, your colleagues, your products”
Jack Welch
The end of an era - 2
“The financial crisis has challenged the intellectual
assumptions on which previous regulatory
approaches were largely built, and in particular the
theory of rational and self-correcting markets”
Adair Turner
The end of an era - 3
“EMH is the financial equivalent of Monty Python’s
dead parrot. No matter how much you point out
that it is dead, the believers simply state that it is
just resting”
James Montier
Flying blind? Traditional investment and climate change
• Asset prices do not reflect climate costs
• Market behaviour discounts the long-term
• Driving capital misallocation
• Risking financial stability
“Climate change is the greatest market failure the world has ever seen”
Lord Nicholas Stern
Aligning time-scales…
“It is the long-term investor, he who most promotes
the public interest, who will in practice come in for
the most criticism wherever investment funds are
managed by committees or boards or banks. It is
in the essence of his behaviour that he should be
eccentric, unconventional and rash in the eyes of
average opinion.”
J.M Keynes, General Theory, 1936
Market myopia?
Average holding period for shares on the NYSE in years
10
9
8
7
6
5
4
3
2
1
0
1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: James Montier, 2008
Driving capital misallocation…
• UK is responsible for 2% of
world emissions
• But emissions from the
facilities and products of five
fossil fuel companies listed
on the London Stock
Exchange – Anglo, BP, Rio
Tinto, Shell and Xstrata responsible for over 10% of
global emissions
• Less than half proven
economically recoverable oil,
gas and coal reserves can be
emitted to stay below 2
degrees warming
Risking financial instability…
“According to current estimates, the possible
extent of losses caused by extreme natural
catastrophes in one of the world’s major
metropolises or industrial centres would be so
great as to cause the collapse of entire countries’
economic systems and could even bring about the
collapse of the world’s financial markets”
Munich Re, March 1997
Transformation ahead
Resetting responsibilities…
“Financial markets remain crucial as the circulatory
system for commerce, but they must be reset to
enable long-term sustainable performance in the
real economy. This mean less leveraged finance, a
fundamental repricing of risk, the ability to account
for externalities like greenhouse gas emissions
and a realignment of executive responsibility and
compensation with long-term performance”
GE, July 2009
Mapping the future investment transformation
Already disrupting valuations, but more still to come
Time for acceleration: the coming investment shift
1400
1304.6
1200
USD bn
1000
800
600
400
148.5
200
33.2
58.5
2004
2005
92.6
0
2006
2007
Clean energy needs x9 2007 levels; energy efficiency x50
Source: IEA, Energy Technology Perspectives, 2008; UNEP/NEF, Global Trends in Sustainable Energy
Investment, 2008
2005-2050
Average
Building a green recovery - USD512bn allocated
Asia leads the way with almost 2/3rd of green stimulus
Total Package- $32bn
Green- 9%
CC-39%, EE-51%, WW-10%
Total Package- $537bn
Green- 10%
CC-30%, EE-68%, WW-2%
Total Package- $648bn
Green- 33%
EE-84%, WW-16%
Total Package- $977bn
Green- 12%
CC-33%, EE-50%, WW-17%
CC- Low carbon
power
EE- energy
efficiency
WW- water & waste
Source: HSBC estimates, government websites,
others
Total Package- $640bn
Green- 6%)
CC-39%, EE-61%
Total Package- $76bn
Green- 79%
CC-51%, EE-25%, WW-23%
Total Package- $8bn
Green Component- 11%
EE-88%, WW-12%
Total Package- $27bn
Green- 21%
CC-34%, EE-66%
Growing international climate commitment
Copenhagen conference in December 2009 expected to confirm this trend
Turning the Corner Plan 2007
Emission- 20% below 2006 by 2020
White Paper 2008
EU Climate Energy Plan 2008
Emission- 20% below 1990 by 2020;
80% by 2050
Renewable- 20% by 2020
Efficiency- 20% by 2020
Efficiency – 20% by 2010
Renewable- 20% by 2020
Forest growth- 20% by 2020
Obama Administration 2008
Climate Change Plan 2009
Emission- 20% below 2005 by 2020;
80% by 2050
Renewable- 20% by 2020
Efficiency – 8% by 2020
Emission- 15% below 2005 by 2020
Renewable- 3% by 2010
National Action Plan 2008
Emission- per capita emissions not
to exceed developed countries
Renewable- 15% by 2020
National Plan (PNMC) 2008
Renewable- 7 GW between 2008-2010
Efficiency- 10% by 2030
Deforestation- 30% below 1996-2005 by
2010-13
Source: Government websites,
others
Climate Change Plan 2008
Emission- Emissions to peak by
2020-25
Renewable- Long term goal of zerocarbon electricity sector
Climate Change Policy 2008
Emission- 60% below 2000 by 2050
Renewable- Mandatory Renewable Energy
Target- c15GW by 2020
Short-term: Closing a deal in Copenhagen
1.
2.
3.
4.
5.
6.
7.
8.
9.
2050 targets: 2 degrees
2020 targets for industrialised countries: 15-20%
Low carbon plans for emerging markets
Taking action on tropical forests
Adapting to climate impacts
Promoting clean tech cooperation
Mobilising private capital
Reforming carbon markets
Avoiding ‘carbon protectionism’
A close run thing…but a deal will be done
Long-Term: Confronting the tough issues
• Markets: Making climate change a standard part of
accounting, disclosure and listing rules
• Responsibility: Modernising fiduciary duty to reflect
the reality of climate change
• Incentives: Rewarding the investment chain for
long-term sustainable performance
• Transparency: Reporting fund and institutional
ESG performance alongside financial returns
In the end: confidence and conviction
“There is no reason why we should not feel
ourselves to be bold, to be open, to experiment, to
take action, to try the possibilities of things. And
over against us, standing in the path, there is
nothing but a few old gentlemen tightly buttonedup in their frock coats, who only need to be treated
with a little friendly disrepect and bowled over like
ninepins.
Quite likely they will enjoy it themselves, once they
have got over the shock”
J.M Keynes, A Programme of Expansion, 1929
Thank you….
Thank you…
Nick Robins, Head of Climate Change Centre of Excellence
[email protected]