Ethical Investing Presentation

Harpsden Overview

• Award winning Portfolio Managers and Chartered Financial Planners providing independent financial advice
• We currently have £265m AUM. We run six model portfolios including an Ethical model
• We also make an active effort to contribute to society with our charitable contributions both locally and in Africa
• We have sponsored the local cricket club, the Henley Youth Festival, and also donated to the charity My Cancer My Choices and Riverside Counselling Service
• In Africa we have donated to Ashanti Development in Ghana and the charity School Aid

Everyone was clearly pleased with the work we were doing!

Overview of the Responsible Investing Universe

• As of 2015, there were $59 trillion of assets covered by the Principles of Responsible
Investment, up 29% from the previous year

• Kames Capital now manages £2.45bn in specialist ethical and sustainable funds, a rise of
51% over the past 3 years. Schroders have highlighted the movement in the below chart.

Even the US are getting involved!

What the Trends Report measures
The 2016 Trends Report is a snapshot of US-domiciled assets engaged in sustainable, responsible and impact (SRI) strategies at year-end 2015. The report measures two SRI strategies: (1) ESG incorporation, and (2) Filing shareholder resolutions on ESG issues.

33% growth over the past two years, and a 14-fold increase since 1995

• SRI investing continues to expand – now accounting for more than one of of every five dollars under professional management in the United States.

• The total US-domiciled assets under management using SRI strategies grew to $8.72 trillion at the start of 2016, an increase of 33% since 2014.

SRI – Socially Responsible Investing

• Investing community have traditionally been far from convinced; “the social responsibility
of business is to increase profits”. Milton Friedman, 1970.

• SRI and the origins of ethical investing date back hundreds of years – “Sin Stocks”.

• There has been several catalysts for change in the SRI industry; Apartheid, Vietnam War,
and more recently climate change.

• From the outset with Ethical investing, it has always been the case that exclusions and
methods differ from one group in society to another, and often from one individual to
another. Christians may have tended to exclude ‘sin stocks’, Islamic investors may have
zero tolerance for pork products and a requirement to refrain from financial leverage in
accordance with Sharia law.

• Problems with negative screening – negative by definition, not really forward looking,
doesn’t help you find improvers

Negative Screening


Source; EdenTree Standard RI Slide Pack

ESG

• Although still maintaining an important relationship with negative screening and SRI, the
next development in the space concerns ESG.

• Environmental – climate change, carbon emissions, deforestation.

• Social – diversity, gender equality, consumer protection, animal testing.

• Governance – Executive pay, shareholder rights, community relations.

• Increasing importance within mainstream funds as a risk measure – ability to outsource
ESG analytics and hence flag up issues (primarily with Governance) which may have a
detrimental effect on share price. BOA Merrill Lynch shows that you could have helped
investors avoid 90% of bankruptcies since 2008 with an ESG screen.

• An example of ESG helping to avoid a scandal related to the theme of this talk would be
the VW emissions scandal, whereby funds have told us that they avoided this share price
collapse due to outstanding governance issues.

Analytics Providers

Positive Screening


Source; EdenTree Standard RI Slide Pack

Sustainable Investing

• Definition of Sustainability Themed Investing: The selection of assets specifically related
to sustainability in single- or multi-themed funds.

• Benefit financially from companies that are set to positively affect the world in the long
term.

• This could be, for example, by providing water treatment solutions, clean air technology
or renewable forms of energy

• WHEB Sustainability Fund; strategy is built upon 9 sustainable investment themes – 5
environmental (cleaner energy, environmental services, resource efficiency, sustainable
transport, and water management) and 4 social themes (education, health, safety, and
well-being).

Source; WHEB; http://www.whebgroup.com

Impact Investing

• Definition of Impact Investing: Investment in companies, organizations and funds, often in private markets, with the intention to generate social and environmental impact alongside a financial return, which can range from below market to market rate.

• Impact investing is a similar principle to sustainable investing, however this offers the development of investing in companies that are already making a positive impact on the world.

• There are several UN Initiatives that have encouraged these developments in Ethical investing, beginning with the 2000 UN Global Compact initiative, the 2005 Principles for Responsible Investment (PRIs), and more recently the UN’s Sustainable Development Goals (SDGs).

• Many sustainable and impact funds have been able to highlight their contributions to such UN initiatives, and the SDGs are now often seen in fund presentations to show which goals they are striving to achieve.

UN SDGs

Impact Reports

• One of the challenges with Impact Funds is the ability to measure the exact impact their investments are having. As a result these funds are often accompanied with yearly Impact Reports which display, in measureable and investor friendly terms, the impact their investments have been able to have.

• Vontobel, Aberdeen Standard Life, Baillie Gifford, WHEB, among others.

• Some examples of positive outputs from the holdings in the Aberdeen Standard Life Impact portfolio;
• 28 million trees saved – the equivalent of a quarter of the size of California
• 9 billion gallons of water saved – 14,000 Olympic swimming pools
• 1,574 affordable homes provided
• 400,000m3 of waste recycled and avoiding land fill – the equivalent of three and a half super tankers

Myth busting – does investing ‘ethically’ affect returns

• One of the stigmas with ethical investing (in all its forms) is that it has a detrimental affect upon returns.

• However, increasingly studies have shown this not to be the case, and there is now a firm argument to suggest that ESG integration can positively impact returns – for example studies by Mercer and BOA Merrill Lynch

• A Merrill Lynch study cited by Vontobel suggested that ESG integration actually reduces the volatility of returns

• The MSCI study ‘Can ESG Add Alpha?’, used by Kames, suggests that specifically the factor ESG momentum (companies with improving ESG scores) generates the greatest returns when integrating ESG

• Inflows forecast for the future are signs that investors believe in the investment opportunities – Bloomberg New Energy Finance predicts that annual investment in renewable energy will reach $630bn in 2030 vs $189bn in 2012

ESG as a risk measure – Vontobel example

Impax have highlighted the positive impact of removing fossil fuels from the MSCI World

Everyone’s ethics are different

• As mentioned earlier, ethical priorities differ from person to person.
• They also differ from fund house to fund house.

• Some funds use negative screening processes (Unicorn), some use positive screening (Alquity), and some use both (EdenTree).

• There are even issues with some funds that are advertised as ‘sustainable’ – they can be merely focussed upon businesses with sustainable business models and are therefore not necessarily driven by ethical considerations. This highlights the importance of due diligence.

• One way ESG is incorporated in more mainstream funds is as a risk metric. Particularly the governance aspect which helps managers avoid companies with unsustainable management structures.

Things we need to bear in mind

• It is very difficult to be fully ethical, for example, if you want to support Fair Trade your produce might clock up more air miles to get to you than something grown locally – making it less environmentally friendly

• Electric Vehicles, products that many are expecting to be at the forefront with regards to tackling climate change, are another with hidden environmental costs. For example take the below chart forecasting the increasing demand for nickel. In 2017 the Philippines closed or suspended 17 nickel mines because of environmental concerns

Fund Examples

• Kames’ ‘Sustainable Fund’ was in the top 5% of all global funds in 2017.

• Alquity – 10% management fees go to charitable causes.

• Vontobel EM Sustainability leaders, Schroders Income – ESG used as a risk measure to improve performance.

• On the WHEB website it is possible to type in your own personal level of investment and the website is able to show how that amount has positively impacted the world through the holdings in the WHEB Sustainability Fund.

• Several analytics providers used by EdenTree and Hermes among others to give diversification in analysis and to try and find the truest ESG scores for companies.

• Hermes EOS – engagement.

Only 97% of scientists believe humans cause climate change!

2 Degrees Scenario – and other potential scenarios


Source; Climate Change: Action, Trends and Implications for Business. The IPCC’s Fifth Assessment Report, Working Group 1. University of Cambridge, Cambridge Programme for Sustainability Leadership

By 2011 we had burnt 65% of our ‘carbon budget’, and by 2015 it was estimated we would have to keep more than two thirds of known fossil fuel reserves in the ground

What are the authorities doing about it?

What are the authorities doing about it?

• The Paris agreement

• Carbon Pricing strategies – taxation and cap-and-trade

• The Powering Past Coal initiative launched by the UK and Canada in November 2017 had gained support of over 50 counties, regions and businesses within a month.1

• Subsidies have also had success. EVs are part of a new industrial policy in China known as Made in China 2025 – whereby China aims to have national champions in 10 high-tech industries. Subsidies of up to $15,000 per vehicle have been allotted to EVs in China, and they now sell the most EVs in the world.2

• Norway has also seen a high rate of adoption, with 29% of new car registrations last year being fully electric or plug-in hybrids.

1 Source; Powering past coal alliance membership blows out past 50. www.cleantechnica.com
2 Source; Subsidies help China sell the most electric cars. www.ft.com

There are still many problems to overcome

• President Trump withdrew the US from the Paris agreement – this will make it harder to reach its targets considering the US contributes 15% of global carbon emissions

• Carbon Pricing in Europe has not had the desired effect as the price of carbon has become deflated

• Chinese EVs – after Beijing decided to encourage renewable transport in 2009 with large subsidies, this resulted in excessive numbers of start-ups. Now, many of the 169 officially registered makers of “new-energy” cars are surviving almost entirely on government subsidies. China accounted for half of the $16bn in subsidies offered globally to new- energy car makers in the past decade, and in the process has created a number of “zombie” companies.

There is still a long way to go

• The IMF reported that global fossil fuel subsidies in 2015 were projected at $5.3 trillion, the equivalent of 6.5% of global GDP in 2015 and more than is spent by governments around the world on public health.

• Germany, the US, Italy and Spain are the 4 largest subsidisers of renewable energy in the world. However their combined subsidies are still less than the fossil fuel subsidies of Saudi Arabia

What are investors doing about it?

• The most straightforward way to combat climate change is divesting from fossil fuels. This is the route Norway’s £1 trillion state pension fund is considering. However money from divestment can be put to use elsewhere…

• These investments may be into Ethical, Sustainable and Impact funds. Measureable
impacts of such investments are becoming increasingly available, for example;
• Aberdeen Standard Life – 261 million tons of CO2 saved by holdings in their impact fund – equivalent of half of Brazil’s 2013 carbon emissions
• WHEB Sustainability fund – for every £1m invested, 1,600 tonnes of CO2e was avoided Vontobel’s Clean Technology fund’s Potentially Avoided Emissions (PAE) numbers were equivalent
to the CO2 produced by 1,159,627 flights between Zurich and New York
• In 2016 Wellington Management’s Global Impact fund generated 311 terawatt hours of renewable energy – enough to power 32 million homes and avoid 218 million metric tons of CO2 emissions.

• There are other ways to measure fossil fuel output and carbon footprint. “Fossil Fuel Funds” is a website created by As You Sow (not for profit company that specialised on engagement with companies) that also incorporates data from South Pole group. This website measures and makes available the carbon footprint of many US equity funds.

• MSCI now publically reports the carbon footprint of all its major equity indexes. They
measure three metrics;
• Carbon Emissions – The normalised carbon footprint per $m invested of a portfolio tracking the index
• Carbon Intensity – Efficiency of a portfolio tracking the index in terms of total carbon emissions per unit of output
• Weighted Average Carbon Intensity – Exposure to carbon-intensive companies

• Deutsche Asset Management have produced a report that measures the physical risk of
climate change, specifically for the CAC 40.

• They have also highlighted that physical risk is an important factor particularly in Asia; in China 145 million people living on land are threatened by rising sea levels. The economic assets that support these people are similarly at risk. Deutsche bank have therefore mapped the physical climate risk for 500 large and mid-cap Asian companies. Therefore investors can assess which companies are more or less at risk

Investments helping solve climate change

• Companies in impact funds are having a positive effect on climate change, here are some examples of companies having such a change;

• Acuity brands have been held by WHEB and Janus Henderson – they produce LED lighting which is 80% more efficient than traditional lights.

• Vontobel’s largest contributor to their avoided emissions total is Jinko Solar, a Chinese manufacturer of photovoltaic (PV) modules that generate renewable energy. They contributed to 57% of PAE in the fund.

• Infineon Technologies are a company example from Aberdeen Standard Life’s Impact Fund. They design, manufacture and market semiconductors, whilst aiming to strategically capitalise on its exposure to clean auto trends, clean power generation, smart lighting, automation and smart grids

Opportunities created

• Efforts around the world to restrict carbon emissions are creating opportunities; subsidies
and regulation have meant that companies are now incentivised to invest in renewables

• Ford has said it will boost its investment in electric vehicles to $11bn in the next 5 years and by 2022 will have 40 hybrid and fully electric vehicles in its range

• Porsche to invest $7.4bn by 2022 towards EV

• Dyson investing $2.7bn to develop and electric car from scratch

• General Motors, Toyota, Volkswagen are among the others who have made EV commitments

• Solar jobs are growing at 17 times the rate of traditional energy jobs

• Demand for batteries has increased due to EVs – the race for ‘solid-state’

And as a result they are becoming the cheaper alternatives

Increases in demand for renewables is lowering costs. This may have been a problem for certain solar stocks in the past, and may well be for others in the future. However these low costs are appealing to customers, and are starting to lure developing countries to turn to these environmentally friendly renewable energy sources.

Source; Low costs of solar power and wind power crush coal, crush nuclear, and beat natural gas. www.cleantechnica.com. (2016)

However there are still risks involved

Source; The solar energy paradox – why solar is booming and companies are going out of business. www.fool.com

Source; Blackrock

Summary

• Socially Responsible Investing including ESG, Sustainable and Impact is gaining momentum and increasingly becoming part of what was hitherto known as mainstream investing.

• Carbon emission reduction is a core element of this. There is much to be done but with governments, NGOs, fund management groups and individual investors all on board it has never been easier to monitor and reduce the carbon footprint.

• With ongoing engagement with company managements by the likes of Hermes and EdenTree, we are confident further necessary progress will be made.

• While the most obvious way to reduce carbon emissions in your portfolio is to include an exclusionary screen, increasingly we can help the planet by providing capital to those funds and companies which seek to make a sustainable impact now and in the future.

• Investors large and small are being encouraged to divest; the Guardian newspaper has also launched a ‘Keep it in the Ground’ campaign, which has urged the world’s two largest health charities – the Bill and Melinda Gates Foundation and the Wellcome Trust – to divest out of fossil fuel investments.

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