S ocially R esponsible I nvesting I ntegration I nto the L ocal A gency P ortfolio December 10, 2019 D avid C arr, A ssistant C ity T reasurer, C ity of S anta M onica T ara D unn, R esearch D ata S pecialist, CDIAC K evin W ebb, CFA , P iper J affray 1
H ousekeeping T echnical I ssues Contact GoToWebinar at (877) 582-7011 or https://support.logmeininc.com/gotowebinar H andouts Downloadable PDF of slides available in the Handouts section of the menu Q uestions Submit throughout the presentation using the menu, questions will be answered at the end L ive C aptioning Available at https://www.streamtext.net/player?event=CDIAC R eplay and T ranscript Available about 2 weeks after the initial webinar C ertificates of A ttendance Sent to attendees who are logged in for at least 70% of the webinar, about 1-2 weeks after the original airing date P resentation L inks Provided for additional research, links accessible in PDF version of the slides 2 2
R esources C DIAC P ublications: • Socially Responsible Investing – What Does it Mean and What’s the Risk? • Local Agency Investment Guidelines (LAIG) O ther R esources A list of ESG and SRI resources can be found at the back of Socially Responsible Investing publication and on the webinar page. 3 3
S peaker I ntroductions D avid C arr T ara D unn K evin W ebb A ssistant C ity R esearch D ata T reasurer S pecialist CFA City of Santa Monica California Debt and Piper Jaffray Investment Advisory (CDIAC) 4 4
F undamentals T ara D unn, R esearch D ata S pecialist, CDIAC Optional Socially Positive and/or Responsible Negative Investing Screening Defined Factors to Consider 5
S ocially R esponsible I nvesting Strategies to promote concepts and ideals a local agency seeks to support while practicing prudent investment management. 6
S afety P rudent L iquidity I nvestor S tandard Y ield Section 53600.3 Section 53600.5 R ecommended B est P ractice : I nvestment P olicy P ermissible C alifornia C oncept 3 I nvestments I nvestment See LAIG, Chapter 2 R esources: R equirements 2019 CDIAC’s L ocal A gency I nvestment G uidelines (LAIG) CDIAC’s C alifornia Public F und I nvestment P rimer 7
P ermissible I nvestments: M andatory A llowable I nvestments P er G overnment C ode 8
I nvestment P olicy: B est P ractice 9
O ptional S creening S trategies 10
D etermining ‘ W ant’ Whether an agency uses positive or negative screening, they still must build their ‘screen’ by determining what they do or do not want in their investments. E nvironmental, S ocial, and G overnance C riteria 1. E xamples of ESG C ategories Environmental Social Governance I mpact I nvesting Climate change and Customer satisfaction Board composition carbon emissions G reen B onds Air and water Data protection and Audit committee structure pollution privacy L ocal C ommunity B anks Biodiversity Gender and diversity Bribery, fraud and corruption E conomic D evelopment Deforestation Employee engagement Executive compensation Energy efficiency Community relations Lobbying I nfrastructure, A ffordable Waste management Human rights Political contributions H ousing Water scarcity Labor standards Whistleblower schemes 2. C ompany /I nvestment S cores/ R atings Source: CFA Institute 11
F actors to C onsider F lexibility • A dapt to M arket C omplexity C hanges • P rocess • I mproved ESG • A nalysis M etrics • A lternatives • A vailable D ata N arrow F ocus of I nformal P ractice C riteria • S takeholder S entiment • I nvestment T ype • B oard D irection • I nvestment S ector • D eveloping E xpertise • E xceptions 12
A udience P oll D o you currently use ESG/SRI in your investment process? 13
S anta M onica’s P erspective D avid C arr, A ssistant C ity T reasurer, C ity of S anta M onica Implementing Next ESG/SRI Into ESG/SRI Steps Investment Definition Decision Principles Making Measuring / Fiduciary Benchmarking and Political ESG-Related Considerations Performance 14
W hat is E SG / S RI? Responsible investment is an approach to investing that aims to incorporate environmental, social, and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long- term returns. UN Principles of Responsible Investment 15
S ustainable G rowth I nvestors using socially responsible criteria hit $12 trillion in US assets. $15T $10T $5T $0 1995 1997 1999 2001 2003 2005 2007 2010 2012 2014 2016 2018 Source: US SF Assets Under Management BLOOMBERG 16
F iduciary and P olitical C onsiderations E SG I mpact on C redit R atings E SG vs S RI in S anta M onica P olitical C onsiderations Integration Risk vs Reward Governing Board Sets Policy Screening History in Santa Monica Thematic 17
S anta M onica’s S RI E volution Wells Fargo and Other Banks Lending to Fossil Myanmar Arizona Fuel Companies (repealed 2010) 1999 2010 2013 2017 Current 1995 1985 South Africa Green Bonds Informal Fossil Fuels (Apartheid) ESG Standards (repealed 1993) Social Impact Bonds Added 18
17. S ocially R esponsible I nvesting S anta RESTRICTIONS – The direct investment of City funds are restricted as follows: M onica’s a. Investments are to be made in entities that support clean and healthy environment, including following safe and environmentally sound practices. b. No investments will be made in fossil fuel companies as defined I nvestment by the organization 350.org or in banking institutions that provide financing to said companies. c. No investments are to be made in tobacco or tobacco-related products. P olicy d. No investments are to be made to support the production of weapons, military systems, or nuclear power. e. Investments are to be made in entities that promote community economic development. Funds invested with trustee and/or outside investment managers such as the Cemetery and Mausoleum Perpetual Care Funds will comply with this section of the policy. 19
E SG I mplementation O ne component of investment analysis and decision making. T ypically applicable to corporates, but can be applied to other asset classes. V ariety of ESG data tools: Bloomberg Yahoo! Brokers Private ESG Analytical Firms (Sustainalytics, MSCI, RobecoSAM, etc. ) 20
I mplementation in S anta M onica E SG does not alter other daily investment processes. C heck ESG score of corporates as an added component of credit analysis. P artner with broker to look for suitable investments. C orporates are not the only sector where SRI applies. 21
S anta M onica P ortfolio As of 11/25/19 Munis Supranationals 4% 7% Treasuries 1% Corporate 25% Fed Agency (GSE) 54% LAIF 9% 22
S upranationals $24.5 million (3.4%) M unicipal B onds $8.5 million (1.2%) S anta M onica’s S ustainable C orporates I nvestments: $2.5 million (.4%) Green, Social, and Impact Bonds 23
E SG I mpact on R eturns C ompanies with higher ESG scores tend to have slightly higher returns. G overnance scores are the most highly correlated. I ncrease of 0.3% to 0.4% annually. 24
E SG in C redit A nalysis C redit R ating A gency S ignatories Axesor Rating Liberum Ratings Beyond Ratings Microfinanza Rating China Chengxin International Credit Rating Co., Ltd Moody’s Corporation Dagong Global Credit Ratings Group RAM Ratings Fedafin AG Rating-Agentur Expert RA GmbH Fitch Group, Inc Rating and Investment Information, Inc. Golden Credit Rating International Co., Ltd Scope Ratings Japan Credit Rating Agency Spread Ratings JCR Eurasia Rating S&P Global Ratings 25
E SG in C redit A nalysis E xample Country US Sector Banking Bank 7 February 2019 ESG Factor Social and Governance Action Credit rating downgraded from A to A-; outlook stable Key Rationale Asset growth capped until the company further enhances its governance and compliance and risk management to the standards required by the regulator; the downgrade also reflects ongoing ramifications of its retail sales practices issues. Source S&P Global Ratings
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N ext S teps Increasing interest in public sector. There is a need for education. GIOA Committee Workshops and Conferences Consistency needed in: Standards in measuring Benchmarking 30
S ummary E SG/SRI is expected to continue increasing in the public sector. E SG/SRI is not just for corporates. T here are different approaches for each organization. N o evidence of decreased returns. T here are tools available! 31
T ools for E SG A nalysis K evin W ebb, CFA , P iper J affray Y ahoo! B loomberg F inance Subscription Sustainalytics Service Data for All Users 32
B loomberg ESG<GO> 33
B loomberg Example CSCO Equity <GO> ESG<GO> 34
B loomberg ESG Relative Comparison to Peers 35
B loomberg Can automate using Bloomberg Excel functionality. 36
Y ahoo! F ebruary 2018: A nnounces it is only free provider of S ustainalytics scores. Source 37
Y ahoo! C an access Sustainalytics information directly online. 38
Y ahoo! S hows historical performance of company versus the category average with breakdowns. 39
Y ahoo! S hows ESG versus peers and product involvement areas. 40
C omparison 41
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