THE ROLE OF CORPORATIONS IN MODERN SOCIETY A Perspective from - PowerPoint PPT Presentation

THE ROLE OF CORPORATIONS IN MODERN SOCIETY A Perspective from Calvert Investments John Streur, President & CEO, Calvert Investments | AHC Group Corporate Affiliates Workshop, June 9, 2016

WHAT IS RESPONSIBLE INVESTING? Responsible investing (RI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate competitive long-term financial returns and positive societal impact. Source: The Forum for Sustainable and Responsible Investment (US SIF) 2

ASSET OWNERS AND INVESTMENT MANAGERS ARE EMBRACING RESPONSIBLE INVESTING PRINCIPLES SIGNATORIES – UN PRINCIPLES OF RESPONSIBLE INVESTING $T Each year, more capital markets 1,500 $70 $60 participants are embracing the UN $50 1,000 Principles for Responsible Investment. $40 $30 500 $20 $10 0 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Governance & Accountability Institute, Inc. 2016 research – www.ga-institute.com. For institutional use only. Not for public distribution. 3

DEMAND IS EXPLODING FIG. A: SUSTAINABLE AND RESPONSIBLE INVESTING IN THE UNITED STATES 1995-2014 As investors acknowledge the correlation between corporate $7,000 $6,000 sustainability efforts and financial $5,000 $ BILLIONS $4,000 performance, they are allocating $3,000 $2,000 capital in a manner that rewards $1,000 $0 good behavior. 1995 1997 1999 2001 2003 2005 2007 2010 2012 2014 OVERLAPPING ESG INCORPORATION SHAREHOLDER STRATEGIES ONLY RESOLUTIONS ONLY Source: The Forum for Sustainable and Responsible Investment (US SIF) 4

CALVERT IS THE GLOBAL LEADER IN RI AND SETTING ESG STANDARDS As an industry pioneer and leader over 40 years, Calvert has a differentiated, proprietary approach to RI. Focus on Market Returns Comprehensive ESG research Shareholder Engagement Direct Impact 5

CALVERT’S VIEW: THE NEW ROLE OF THE CORPORATION IN SOCIETY The role of the corporation in Shareholders have recognized this With investors now realizing this society is evolving — with the evolution and are allocating their correlation and the public sector general public now expecting capital in a manner that rewards strapped for resources, capital companies to balance their responsible corporate behavior. markets participants are poised to ESG goals and financial more actively shape the role performance objectives. companies play in addressing society’s largest challenges. 6

THE POWER AND INFLUENCE OF CORPORATIONS HAS GROWN In the United States, 5.7 million The emergence of large Although there were close to businesses employ 115.9 million corporations and their accumulation 50,000 publicly listed and actively people with an annual payroll of of profits and power have stemmed traded companies at the end of 2014 $5.4 trillion. from two centuries’ worth of around the world, the 500 largest important legal, regulatory, and comprise roughly 50% of the world’s macroeconomic trends. market capitalization. Source: Serafeim, George and Streur, John, The Role of the Corporation in Society: Implications for Investors (September 2015). Available at SSRN: 7 http://www.calvert.com/NRC/literature/documents/wp10012.pdf

THERE IS A NEW REALITY FOR CORPORATE MANAGERS The World Faces With Finite Public Resources Companies Are Stepping In And They Are Meeting Unprecented Challenges Stakeholder Expectations Governments and the public sector As this reality takes shape, are ill-equipped to independently corporations – specifically the From climate change to social Corporate managers’ decisions forge solutions due to rising deficits, world’s 500 largest companies – inequality, the global community to allocate resources toward limited human capital and are applying more of their power is confronted with an array of environmental and social issues jurisdictional boundaries. and influence to address challenges that impact every reflect both moral and economic environmental and social issues. segment of the world’s population. motives — as well as the acknowledgement of shareholder, consumer and general public expectations. Source: Serafeim, George and Streur, John, The Role of the Corporation in Society: Implications for Investors (September 2015). Available at SSRN: 8 http://www.calvert.com/NRC/literature/documents/wp10012.pdf

COMPANIES ARE NOW EXPECTED TO ACCOUNT FOR SOCIETAL ISSUES Today, companies are accounting for numerous challenges that impact the communities they operate and their bottom line: An array of broad societal issues, which also weigh on companies’ brands and balance sheets, have been central Climate change • factors driving increased corporate engagement. • Environmental degradation No one problem in isolation provides an adequate justification • Financial inclusion for corporate engagement — but considered together challenges • Income equality indicate a new status quo where corporations are devoting • Supply chain practices resources to mitigate their negative impact on society while Workplace health and quality • increasing their positive impact. Source: Serafeim, George and Streur, John, The Role of the Corporation in Society: Implications for Investors (September 2015). Available at SSRN: 9 http://www.calvert.com/NRC/literature/documents/wp10012.pdf

COMPANIES ARE INCREASINGLY ADDRESSING SOCIAL AND ENVIRONMENTAL ISSUES THROUGH NEW ACTIVITIES FIRM-SPECIFIC INITIATIVES INDUSTRY SELF-REGULATION WORKING WITH EMERGING MARKETS GOVERNMENTS AND NGOS ENGAGEMENT For example, companies are Some are forming sector singularly and proactively developing consortiums with scale to Others are partnering with The growth in emerging markets plans to address their impact on the address industry wide-issues. regulatory and non-regulatory offers multi-national opportunities environment and society. agencies to mitigate the impact to shape environmental and • • • of adverse global challenges social outcomes • • • and promote positive societal Gap, H&M, and other apparel brands • • • impact across areas. Unilever’s Sustainable Living Plan have implemented codes of conduct aims to double the size of company’s that attempt to self-regulate business For example, Grupo Bimbo • • • business, while simultaneously activities and influence working responded to the Mexican reducing its environmental footprint conditions in overseas factories. The Extractive Industries Transparency government’s health -focused and improving its social impact. Initiative (EITI) unites national regulations by improving governments, natural resource the nutritional profile of its extractives companies, and civil snack food products. society organizations to enhance transparency and accountability in the extractive industries. Source: Serafeim, George and Streur, John, The Role of the Corporation in Society: Implications for Investors (September 2015). Available at SSRN: 10 http://www.calvert.com/NRC/literature/documents/wp10012.pdf

SUSTAINABLE BUSINESS PRACTICES POSITIVELY IMPACT FINANCIAL PERFORMANCE THROUGH REVENUE GENERATION, COST REDUCTION AND BRAND ENHANCEMENT SUSTAINABLE BUSINESS PRACTICES HAVE AN IMPACT ON Revenues Costs Cost Of Capital BY AFFECTING Human & Social Capital & Products/ Social Capital Natural Capital Human Capital Financial Capital Intellectual Capital Products/Services Services THROUGH Employee Customer Employee Operating Engagement/ Satisfaction/ Brand Value Supply Chain Engagement/ Information Efficiency Innovation Loyalty Productivity Source: Serafeim, George and Streur, John, The Role of the Corporation in Society: Implications for Investors (September 2015). Available at SSRN: 11 http://www.calvert.com/NRC/literature/documents/wp10012.pdf

FIRMS INVESTING IN MATERIAL ESG ISSUES OUTPERFORM IN TERMS OF RISK-ADJUSTED STOCK PRICE AND PROFITABILITY MARGIN GROWTH EVOLUTION OF $1 INVESTED IN MARCH 1993 10 9 8 7 6 5 4 3 2 1 0 Sept-94 Sept-97 Sept-00 Sept-03 Sept-06 Sept-09 Sept-12 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-14 Mar-93 Jun-95 Mar-96 Jun-97 Mar-99 Jun-01 Mar-02 Jun-04 Mar-05 Jun-07 Mar-08 Jun-10 Mar-11 Jun-13 Mar-14 TOP ESG SCORE BOTTOM ESG SCORE Source: Khan, Mozaffar and Serafeim, George and Yoon, Aaron, Corporate Sustainability: First Evidence on Materiality (March 9, 2015). The Accounting Review, Forthcoming. 12 Available at SSRN: http://ssrn.com/abstract=2575912 orhttp://dx.doi.org/10.2139/ssrn.2575912

INVESTORS RECOGNIZE THE NEW REALITY: ESG PERFORMANCE CORRELATES WITH BETTER MANAGEMENT AND BUSINESS MODELS MARKET VALUE OVER BOOK VALUE OF EQUITY: Firms with low, medium, and high ESG performance 3.30 3.20 Valuations of firms with better ESG performance reflect higher expected 3.10 growth and lower cost of capital. 3.00 2.90 2.80 LOW MEDIUM HIGH Source: Barra, MSCI, Calvert-Serafeim Research. Firms ranked by their ESG score. Illustrated is the average market-to-book value of equity ratio in each portfolio. 13

SHAREHOLDER ADVOCACY IS ON THE RISE Along with allocating capital in a manner that rewards ESG corporate leaders, investors are lobbying for more direct impact through shareholder advocacy: Taking Meetings with Voting Filing Shareholder Developing Advancing Public Management Proxies Resolutions Corporate Profiles Policy Initiatives 14