Bolsas y Mercados Argentinos SA · BCBA:BYMA
Bolsas y Mercados Argentinos SA — ESG Presentation (May 2018)
46 slides from Bolsas y Mercados Argentinos SA's sustainability presentation, May 2018
Slide 1: The Value of Corporate Sustainability Reporting for Investors
The Value of Corporate Sustainability Reporting for Investors Satyajit Bose, Columbia University May 2018 BID & BYMA
Slide 2: Overview of the Earth Institute
Overview of the Earth Institute The Earth Institute is a new form of academic institution designed to institutionalize interaction among many academic fields and professional disciplines to address the problems of global sustainability. – The Earth Institute is the largest research institute at Colu
Slide 3: Research Program on Sustainability Policy & Management
Research Program on Sustainability Policy & Management Launched in July 2013 to provide a rigorous analytic base to help inform sustainability decisions facing companies, organizations, and regions, and to help address the fundamental issues facing policy makers and professionals implementing these
Slide 4: Recent Projects – ESG Analytics
Research Program on Sustainability Policy & Management RECENT PROJECTS – ESG Analytics: Our team developed a scoring model for environmental, social, and governance (ESG) data for ESG Analytics (subsequently acquired by Sustainalytics). • The model uses an industry-sensitive artificial intelligence
Slide 5: Recent Projects – The Sustainable City
Research Program on Sustainability Policy & Management RECENT PROJECTS – The Sustainable City: In his newest book, Steven Cohen provides an overview of the urban systems of the twenty-first century, surveying policies and projects already under way in cities around the world and pointing to more way
Slide 6: Ongoing Projects – Sustainability Ratings for Chinese Cities
Research Program on Sustainability Policy & Management ONGOING PROJECTS • Sustainability Ratings Methodology for Chinese Cities: We have established a partnership with the China Center for International Economic Exchanges (CCIEE), a preeminent Chinese think tank, to design a sustainability metrics s
Slide 7: Ongoing Projects – Measuring Impact in Listed Equities
Research Program on Sustainability Policy & Management ONGOING PROJECTS • Measuring Impact in Listed Equities in Emerging Markets: We were approached by a French insurance and asset management firm to help them measure the sustainable development impact of targeted investments in publicly-traded eme
Slide 8: Ongoing Projects – Sustainability Metrics
Research Program on Sustainability Policy & Management ONGOING PROJECTS • Sustainability Metrics: A study which we hope will ultimately serve as a foundation towards developing a set of generally accepted sustainability metrics. • We created a database of nearly 600 environmental, social and governa
Slide 9: Motivating Questions
Motivating Questions 1. What is the value of a broad range of sustainability metrics for corporations? 2. What is the return on investing in companies with high or improving ESG scores?
Slide 10: Sustainable Finance
Sustainable Finance • Ethical/Negative Screening – “Values” Investing • Positive Screening/Best In Class – “Value” Investing • Community/Impact Investing/Social Entrepreneurship • Energy Transition/Cleantech Themes • Climate Finance • Conservation Finance • Green and Social Impact Bonds • Engagement
Slide 11: Investment Risk & Opportunity
Investment Risk & Opportunity • What Is Sustainability for the Investor? • Identifying repeatable sources of return through a holistic understanding of capital: natural, human as well as physical, financial • How Does it Create Opportunity? • By purchasing undervalued sources of return • How Can it
Slide 12: Long Term Investor
Long Term Investor Growth of Socially Responsible Investor: – Global sustainable investing assets under management rose from $13.3 trillion in 2012 to $22.9 trillion in 2016 (26% of professionally managed assets) – Growth primarily in US, Canada & Europe – Integrates environmental, social and govern
Slide 13: Long Term Investor
Long Term Investor Large institutional investors (e.g. CalPERS) accept that better investment decisions require assessment of natural capital and human capital-- CalPERS. 2
Slide 14: Room to Grow in US & Asia
Room to Grow in US & Asia Source: Global Sustainable Investment Review 2016
Slide 15: Green Bond Issuance
Green Bond Issuance Green bond issuance growing rapidly, and remains small as a portion of bond market. Source: Bloomberg New Energy Finance 2017
Slide 16: Investor Rationale for Stakeholder Relations
Investor Rationale for Stakeholder Relations • Green Consumers – Social responsibility is a normal good (high income increases customers’ willingness to pay) – Form of product differentiation/price discrimination/consumer loyalty • Reduced Information Asymmetries – Information about corporate practi
Slide 17: Reduced Information Asymmetries
Reduced Information Asymmetries Source: Glassdoor.com Source: CITI Index and Initial Assessment of 147 Brands, (IPE & NRDC 2014)
Slide 18: Forecast Diversity
Forecast Diversity Widening the range of performance signals beyond quarterly EPS:
Slide 19: Forecast Diversity
Forecast Diversity CSDIS weighting methodology Cross-sectional SD 100000 10000 II I 1000 Water per capita House-incom 2nd & 3rd Industry value per SD over time Urban Green Area built area 0 2 4 6100 8 10 12 14 16 18 Water consumption per GDP physicians per 10k citizen GDP expenditure on health days
Slide 20: Passive, Active or Activist Investing
Sustainability Metrics as a Form of Monitoring Passive, Active or Activist Investing Corporate Governance and the Tragedy of the Horizon (à la Mark Carney) • Governance and the principal-agent problem • Tension between asset owner (long term) and the asset manager, corporate manager (short term) • V
Slide 21: Investor Perception
Investor Perception ESG excellence signals competitive advantage: • Strategic leadership potential • Signal of management quality • High customer loyalty • Easier employee recruitment and retention • Efficient operations and supply chain • Greater institutional ownership • Lower cost of capital • Gr
Slide 22: Sample: Bloomberg ESG Screen
Sample: Bloomberg ESG Screen
Slide 23: GMI Ratings
GMI Ratings GMI Ratings on S&P 500 Issuers Company Ticker Market Cap ($mm) Industry ESG Rating ESG Score AGR Rating AGR Score Alphabet Inc NASD:GOOGL $295,897 IT Services / Consulting F 1 Average 43 CBS Corporation NYSE:CBS $27,243 Broadcasting F 1 Very Aggressive 10 Dow Chemical Co NYSE:DOW $75,778
Slide 24: Sample: Sony ESG Report
RTH INSTITUT A UNIVERSI1 WAL-MART STORES, INC. (WMT =o NS B B B RETAIL- FOOD & STAPLES | US GOVERNANCE SNAPSHOT Card Independence % 75.0% ‘Sienticant Votes Agninst Management No Entrenched Board No Pay Performance Gap NO Executive Pay Nom Dsclesure NO iMuteple Share Clasce with Diterant ive) Voting
Slide 25: Sample: Sony ESG Report
E EARTH INS JLUMBIA UNIV Wal-Mart Stores Inc (NYSE:WMT) i, Global ESG Rating: M S C | MY : y hh — r D (15) F ESG Analysis Industry: Retail - Specialty Country Inc; United States Last Data Update: Jan 26, 2017 Market Cap: USD 206,486.9mm (Large Cap) Home Market: United States Last ESG Rating Change:
Slide 26: Role of the Investor
Role of the Investor Functions of Financial Markets: 1. Facilitate resource allocation, spatially and across time, in an uncertain environment. 2. Risk-pooling and risk-sharing for households, firms, government. 3. HAYEK: Provide signals for decentralized decision- making.
Slide 27: The Flood of Metrics
The Flood of Metrics Environmental: • Energy (37) • Emissions (35) • Disclosure (30) • Water (24) • Materials (23) • Effluents and Waste (19) • Biodiversity (10) Social: • Private Sector • Human Rights & Resources (40) • Performance in Products, • Production & Supply Chain (20) • Public Sector • Saf
Slide 28: Passive, Active or Activist Investing
Passive, Active or Activist Investing Which category (E, S or G) is most important? For asset owners? For asset managers? Source: Barclays report “Sustainable Investing and Bond Returns” 2016
Slide 29: Data Source Hierarchy
Data Source Hierarchy 1. Issuer 2. Data Aggregators (CDP, GRI, CSRHub, TruValue) 3. Index Membership (FTSE, S&P, Ethisphere) 4. Ratings/Ranking Providers (MSCI, Sustainalytics) 5. Research Providers (Vigeo, OEKOM, Four Twenty Seven) 6. Trade Organizations 7. Stakeholder Information Clearinghouses (G
Slide 30: What metrics matter for return?
What metrics matter for return? What is the right metric for return? • Return vs. risk-adjusted return • Return adjusted for ‘factor’ exposures • ‘Beta’ • ‘Alpha’
Slide 31: Return Metrics
nl THE EARTH INSTITUTE Return Metrics Nui iN ONiUACTIN Expected Return Security Market Line Expected market return Risk- free return 1.0 Systematic Risk
Slide 32: Return Metrics
Return Metrics • Factor decomposition of realized return: 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑡𝑢𝑟𝑛𝑡 = α + β×𝐹𝑎𝑐𝑡𝑜𝑟 𝑅𝑒𝑡𝑢𝑟𝑛𝑡 + ε𝑡 Or more generally: 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑅𝑒𝑡𝑢𝑟𝑛𝑡 = α + ∑𝑖β𝑖 ×𝐹𝑎𝑐𝑡𝑜𝑟 𝑅𝑒𝑡𝑢𝑟𝑛𝑖𝑡 + ε𝑡
Slide 33: Example
Example Convertible arbitrage strategy return Factors: Equity market, interest rate, junk bonds, volatility, momentum Source: Mark Anson, “The Beta Continuum” Journal of Portfolio Management 2008
Slide 34: Motivating Questions
Motivating Questions 1. What is the return on investing in high or improving ESG companies?
Slide 35: Motivating Question
Motivating Question 1. What is the return on investing in high or improving ESG companies? • Hundreds of studies • Many definitions of return • Many more definitions of ESG • Some definitions of ESG lead to return in some periods with some kinds of stocks. • Broadly neutral relationship
Slide 36: ROI of ESG
ROI of ESG 1. Meta-analysis of 2,000+ studies of fund performance-sustainability performance
Slide 37: ROI of ESG
ROI of ESG Edmans (2011) Konar & Cohen (2001) Kempf & Osthoff (2007) More return Schroder (2007) Kreander, Gray et al Galema, Plantinga et al. Equal return (2005) (2008) Halbritter & Dorfleitner Nofsinger & Varma (2015) (2014) Utz & Wimmer (2014) Statman (2006) Hong & Kacperczyk (2009) Less return L
Slide 38: ESG Value of Information
ESG Value of Information 1. When should I expect ESG information to discriminate? – When cross-sectional return dispersion is high? – When cross-sectional ESG metric variation is high?
Slide 39: ESG Value of Information
ESG Value of Information ESG index returns indistinguishable from broad market returns. Source: Morningstar
Slide 40: ESG Value of Information
ESG Value of Information ESG Data Available Source: French Data Library, author calculations
Slide 41: ESG Value of Information
ESG Value of Information 2010 1999 12 month moving average returns of KLD 400 less S&P500 vs. 12 month cross-sectional dispersion, June 1991 – Dec 2015 Source: MSCI, CRSP and author calculations
Slide 42: ESG Value of Information
ESG Value of Information Average monthly excess return of KLD 400: • -0.01% if RD > 5 • 0.14% if RD < 5 (significant) IMPLIES: • ESG factor is discriminating in non-crisis periods, when RD is low. • But, that means, it may be indistinguishable from the ‘growth’ factor
Slide 43: ESG Value of Information
ESG Value of Information How to distinguish between ‘growth’ and ‘ESG’? • Isolate stocks with high ESG ratings and low multiples (“ESG Value”) • Are these the companies that try to look after stakeholders but fail to survive? • If so, why? • What can the ESG activist investor do to increase their ch
Slide 44: Financial Statement Mnemonic
Financial Statement Mnemonic 1. Revenue Impact • Input efficiency and reliability (energy, water) • Product differentiation • Customer loyalty 2. Cost Impact • Employee attraction, retention, productivity • Low maintenance • Ongoing fines • Disaster likelihood: regulatory, litigation, reputation 3.
Slide 45: Two Stories about missed ESG data
Two Stories about missed ESG data 1. BP: In the 3 years before 2010 spill, BP accounted for 829 of 851 willful OSHA violations by oil refineries. Data available in public responses to FOIA requests on OSHA website. 2. VW: natural language processing of corporate announcements showed that VW stopped
Slide 46: The Search for Return
The Search for Return As soon as the idea of the Deluge had subsided, A hare stopped in the clover and swaying flowerbells, and said a prayer to the rainbow, through the spider's web. -- Arthur Rimbaud
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