Responsible Investing and Shareholder Value

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Responsible Investing and Shareholder Value

• Tessa Hebb
• Carleton Centre for Community Innovation
• Carleton University
• Canadian Institutional Investors Summit
• Gatineau, Quebec
• October 26th 2008

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Presentation Overview

• Defining responsible investment.
• How and why responsible investment is used.
• Intersecting interest with SRI.
• A corporate engagement typology.
• Responsible investing challenges and policy
  implications.

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Defining Responsible Investing

• Factors environmental, social, and governance
  standards into investment decision-making.
• A concern for long-term share value.
• The legitimate use of shareowners to provide
  oversight and protect shareholder value.

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Relationship to Financial Performance

• Long-term shareholder value.
• Risk reduction.
• Pro-active search for alpha through emerging
  trends and changing demographics.

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Who Practices Responsible Investing?

• Institutional investors with a long-term view of
  share value.
• Primarily large, public sector, defined benefit
  pension funds in US and Canada and a few large
  defined contribution funds.
• Activist in nature.
• Unitary economic actors.
• Prepared to work in coalitions.

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Responsible Investment Drivers

• Size of assets (Universal Owners ).
• Passive indexing.
• The business case for ESG factors.
• Exposure to international markets and risks.

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Impact of Index Funds

• In the 1990s pension funds moved assets into
  index funds. The size of pension fund holdings
  and use of indexes mean they can no longer sell
  stock when unhappy with performance.

If you cant sell, you have to care.
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UN Principles for Responsible Investing

• Six key principles.
• Global signatories representing 15 trillion
  assets under management.
• 17 Canadian signatories.

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Responsible Investment can be

• Found across all asset classes.
• Passive or active.
• Quiet or noisy.
• Reactive or proactive.
• Uses corporate engagement.

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Types of Corporate Engagement

• One-on-one company dialogue.
• Voting proxies.
• Proxy voting disclosure.
• Using positive screens.
• Submitting minority shareholder resolutions.
• Pro-active investment policies.

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Responsible Investing and Socially Responsible
Investing
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Intersecting Interest with SRI

• Looking for similar raised standards but from
  very different starting points.
• RI concerned with long-term share value in the
  interest of shareholders risk is key.
• SRI concerned with outcomes that effect multiple
  stakeholders and does not over privilege
  shareholders.

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Responsible Investing and Corporate Engagement
Typology Steps 1-5

• Develop a policy statement.
• Identifying areas of major concern in corporate
  ESG conduct.
• Develop proxy voting guidelines and vote proxies
  in a manner that addresses concern.
• Take membership in coalitions of institutional
  investors.
• Include formal codes of ESG conduct that address
  these concerns in proxy voting guidelines.

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Responsible Investing and Corporate Engagement
Typology Steps 6-10

• Direct engagement with company officials on
  extra-financial issues identified above.
• Consideration of ESG factors in investment
  selection and monitoring.
• Consider ESG factors in fund management selection
  and monitoring.
• Relationship and proactive investing.
• Proposing minority shareholder resolutions and
  Focus Lists.

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Responsible Investing Challenges

• Search for alpha clouds long-term view of
  value.
• Social factors in ESG are hard to quantify.
• Greater coordination in coalitions funds must
  accept free riders.
• Private sector pension funds and mutual funds not
  active owners.
• Current market turmoil undermines long- term
  perspective.

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Policy Implications

• Well functioning markets require owner engagement
  and oversight.
• Increased transparency is key with mandatory
  disclosure.
• Companies will pursue voluntary ESG standards.
• National governments continue to play a strong
  role in standard setting.
• Pension funds must also increase transparency.

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Future Research

• Pension fund responsible investing is a powerful
  lever in extending environmental, social and
  governance factors in investment decision making.
• More research is needed to quantify the impacts
  of pension fund corporate engagement.
• Responsible Investing Initiative at Carleton
  Centre for Community Innovation is undertaking
  such research.
• For more information Please contact
• Tessa Hebb
• thebb_at_attglobal or
• http//www.carleton.ca/3ci/