23nov2012_rolling_in_the_deep_reports5_sin_co

WWF Project:
Navigating Muddy Waters, 2012
Securing Investment Returns under Carbon and Water Constraints
Comments at Launch of Report 5: Synopsis
Co-hosted by WWF / JSE / GEPF at JSE, Sandton, South Africa, 20 November 2012
wwf.org.za/media_room/publications/?7260/securing-investment-returns

sustainable investment consulting

…designing and developing world-class ESG architecture for institutional investment in frontier and emerging markets since 2006

sincosinco.com | @SinCoESG | info@sinco.com

REGULATORY INFORMATION
No part of this report or proposal suggests or should understood to suggest endorsement or advice on any investment approach, strategy or offering. The rights and obligations of the investor are set out in the relevant policy contract.
Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount
invested. Past performance is not necessarily a guide to future investment performance.

sustainable investment consulting | sincosinco.com/portfolio-climate-risks | @SinCoESG | info@sincosinco.com

1

WWF Project: Navigating Muddy Waters, 2012
Securing Investment Returns under Carbon and Water Constraints

Report 5: Synthesis Report
•  Synthesizes all materials from the project and summarizes problem statement, research approach, findings from underlying reports, and conclusions
with next steps for action; provides facts-based research knowledgebase for engagement in 2013
•  Targeted at key role-players in investment value chain in South Africa such as policymakers, regulators, institutional investors (asset owners, asset
consultants, investment managers, analysts), securities exchanges and companies, especially mining companies

Report 1 Report 2 Report 3 Report 4
Project uses 5 Hypotheses
Trucost Carbon Tracker SinCo WWF across research:
1.  Investors are not pricing
*Carbon footprinting *Carbon footprinting of *Mapping S.African *Investigate investment
climate change risks leading
and water scarcity major JSE-listed coal institutional investor mechanisms available
to portfolio & systemic risks
analysis to JSE ALSI, mining companies attitudes and practices, to help de-carbonise
Top 100 and BESA CCI Applied South Africa interviews & survey of institutional investment 2.  Cross-listings mirror risks
benchmarks, major CIS country carbon budget 12 major investment portfolios; and across markets
equity funds to coal resources & mangers, 3 asset demonstrate investor 3.  Investors have large
*Using Trucost and reserves owners. water stewardship. exposure from major firms’
WWF-DEG analysis equities & bonds
tools *Using Carbon tracker *Using SinCo analysis *Using WWF policy 4.  High-carbon, institutional
analysis, GEPF as case tools, secondary research and analysis lock-in means re-pricing will
*GEPF as case study study research including Dirty be carbon shock
for equity and fixed Feet: Portfolio Carbon 5.  New regulations for
income exposures report investment opportunities in
low-carbon


2

Decisions and assets flows
in the investment value chain in South Africa

Securities Exchange
Research & Large
Data Listed Equities
Company

Investment SOE*
Fixed Income
Analysis Company

Investment Assets / SME
Portfolio
Manager Securities Company

Not listed or Bundled Into Listed Vehicles
Cash
Property
Asset
Consultant Real Estate

Agriculture
Private Equity
Asset Owner
Venture Capital Infrastructure
Centers of regulations
Sponsor /
SOE = state owned enterprise Project Finance ©SinCo 2012

Saver
SME = small / medium enterprise


3





No part of this report or proposal suggests or should understood to suggest endorsement or advice on any investment approach, strategy or offering.The rights and obligations of the investor are set out in the relevant policy
contract. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back
the full amount invested. Past performance is not necessarily a guide to future investment performance.

SinCo – sustainable investment consultants © 2006-2012 FOR PROFESSIONAL INVESTORS USE ONLY – NOT FOR DISTRIBUTION TO THE GENERAL PUBLIC 4

Rolling In The Deep:
Institutional Investor Attitudes
To Climate Change Portfolio Risks

Report 3 of the “Navigating Muddy Waters” report series collaboration of work between
WWF, Trucost, Carbon Tracker and SinCo explores the attitudes of major institutional
investors to the climate change risk in their portfolios, owning high carbon portfolios in a
dry land.

Graham Sinclair
@esgarchitect
Principal President
SinCo AfricaSIF.org
sincosinco.com | @SinCoESG | info@sincosinco.com AfricaSIF.org | @AfricaSIF | AfricaSIF@gmail.com

@WWFSouthAfrica: “Navigating Muddy Waters” launch @MyJSE | 20 November 2012 10AM – 12.30PM

Designing and developing world-class ESG architecture for institutional investment in frontier and emerging markets since 2006

No part of this report or proposal suggests or should understood to suggest endorsement or advice on any investment approach, strategy or offering.The rights and obligations of the investor
sustainable investment consulting | sincosinco.com | @SinCoESG | info@sincosinco.com
are set out in the relevant policy contract. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the
performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.

5

Analysis from primary research

Major institutional investors survey Four steps
•  15 survey responses from 8 asset owner + 8 investment manager universe
•  September distribution + October 5 hypotheses testing (11 direct responses) via email + 1. Review secondary research
2x follow-up with targeted contacts including media and reports
•  27 survey questions used multiple choice, quantitative and qualitative inputs

Responses below
expectations from
asset owners BUT
Universe of institutional investment influencers 2. Analyzed findings from survey,
•  While the respondents represented this amount in total, overlapping reviewed with WWF
above expectations
relationships imply some double-counting.
from investment
•  Asset owners represented ZAR1,055 billion ($121billion);
managers,
investment managers ZAR 2,744 billion ($317 billion).
supplemented by
secondary research,
3. Feedback from peer reviewers and
especially Dirty Feet: Hypothesis testing WWF teams
Portfolio Carbon (Jan
•  Follow-on specific testing of 5
2012) and Defining
Momentum (July Material for hypotheses for agree/disagree
2012) Report 3 and conviction
across 4 reports •  Point toward potential break-
4. Final report including appendix of
through next steps
survey responses.

NOTES: 1. Mahesh Cooper of Allan Gray Investment Counsel, Malcolm Gray of Investec Asset Management, Anthony Walker of Prudential Asset Managers (SA), Angelique Kalam of Futuregrowth
Asset Management, Jon Duncan of Old Mutual Investment Group, Sanlam Investment Management, Gordon Wessels of STANLIB Asset Management, Brad Preston of Mergence Investment
Managers, Michelle Parkinson-Ismay of Kagiso Asset Management, Brendan Smith of Sanlam Investment Management, Adrian Bertrand of GEPF, Donovan O'Riley of Pathcare Retirement Fund, Nic
Andrew of Nedgroup Investments, John de Kock of Momentum Asset Management, Gordon Archibald of Unilever SA Pension Fund, Pranay Chagan of Coronation Fund Managers and the WWF-SA
endowment trustee. 2. See Report 3 (forthcoming) for list of responding funds, acknowledgements; investors listed in Report 5. 3. Cross rate used ZAR 8.63521 : US$ 1, from oando.com currency
converter, 30 October 2012.

sustainable investment consulting | sincosinco.com | @SinCoESG | info@sincosinco.com 6

Photo
credit:
Steve
Benjamin
www.animalocean.co.za
©2012

 

Rolling In The Deep …institutional investment practitioners seek the safety of relative performance
against peers…“shoaling” behaviour around performance benchmarks, driven partly by quarterly
performance reviews and investment mandates


Climate risks in portfolios
What Do Institutional Investors Think? And Do?

HIGHLIGHTS
  Promising Policies, Unclear Implementation, Impacts Awaited
  Climate Risks In Portfolios Bring Short-term And Long-term Risks
  Mis-pricing Climate Risks
  Carbonized Portfolios In A Dry Land
  Investment Boundaries, Cross-border Risks
  High-carbon Infrastructure May Lead To Portfolio Shock
  Few Direct Allocations To Low-carbon, Water-scarce Investment
  Good Rules, Patchy Implementation
  Toward A Future Investment In Sustainability


Photo Image: coelacanth

Long tail portfolio risks… does institutional investor factor all material
political, environmental, social and technology risks?


Valuation effects of pricing climate costs


Inactive stewards?


CARTOON: end externalities by putting mining executives office underground

Role of business models and processes in pushing externalities outside the
investment value chain


Major impact of voluntary initiatives in South Africa


PHOTO: Lance Armstrong headshot

Leadership vs compliance with rules and regulations

…ask the better questions, track in public domain, and seek impacts


Mixed new ESG demand picture


Premium for environmental performance


Photo courtesy of The Guardian. View from the Shanghai World Financial Centre

PHOTO: Smog-ﬁlled Shanghai skyline, China, 2009

How does innovating on the current investment paradigm achieve the goals
of growing a low-carbon, climate-resilient, inclusive economy in Africa? …
Sustainable investment is not the same as investing in sustainability

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Report 3: Toward A Future Investment In Sustainability

  Institutional investors responding to the survey pointed to ways to increase momentum for low-carbon investment, from across
the supply versus demand side, technical aspects such as pricing models and standards, as well as the global regulatory context
for pricing externalities. Institutional investors claim they need pull factors, for example fiscal incentives or new asset mandates with
longer time horizons.
  But push factors help make ESG issues be taken more seriously, for example carbon taxes, global markets carbon regulation
impact on company exports or input costs, or investment regulations requiring disclosures, for example Pension Funds’ Act
Regulation 28 effective 1 January 2012. Most institutional investors respondents would pay a premium for better
environmental performance, partly as a proxy for good management.

  A next generation investment-as-usual approach is needed for South Africa to invest in a de-carbonized, water-scarce
paradigm. The investment value chain has embedded systemic risks that are not well understood, poorly tracked, and may have
material impacts on valuations in South African portfolios.
  How can investors re-calibrate from “investment-as-usual” to investing in a climate-constrained world? Institutional investors,
regulators and other actors in the investment value chain together need to take steps now to tackle the policy, economic, social and
technology factors affecting the practice of investment management. Report 3: Rolling In The Deep offers 10 next steps to start
down that low-carbon path.


Climate risks in portfolios
What Do Institutional Investors Think? And Do?

HIGHLIGHTS
  Promising Policies, Unclear Implementation, Impacts Awaited
  Climate Risks In Portfolios Bring Short-term And Long-term Risks
  Mis-pricing Climate Risks
  Carbonized Portfolios In A Dry Land
  Investment Boundaries, Cross-border Risks
  High-carbon Infrastructure May Lead To Portfolio Shock
  Few Direct Allocations To Low-carbon, Water-scarce Investment
  Good Rules, Patchy Implementation
  Toward A Future Investment In Sustainability





No part of this report or proposal suggests or should understood to suggest endorsement or advice on any investment approach, strategy or offering. The rights and obligations of the investor are set out in the relevant policy contract.
Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount
invested. Past performance is not necessarily a guide to future investment performance.

20

SinCo


sincosinco.com

About SinCo team: Graham Sinclair
Graham Sinclair is Principal at SinCo, where his roles cover sustainable investment strategy, ESG
architecture and global project management.
  Graham has eight years specialist experience in sustainable investment globally after eight years in pensions consulting
and investment banking in Africa. Recent consulting engagements in sustainable investment include leading IFC-funded
research into private equity and liquid equity ESG strategies in sub-Saharan Africa in South Africa, Kenya and Nigeria to
be published in 2011, developing innovative financing mechanisms strategy and ESG index architecture for developed,
emerging and frontier markets for a Swiss-based international organization, and for a global institutional investment firm
in New York with a US$ one trillion AUM portfolio, designing ESG architecture across private equity, liquid and global
real estate portfolios covering philosophy and process innovations and investment strategies. Currently he provides
index architecture and stakeholder engagement for the Istanbul Stock Exchange Sustainability Index.
  As consultant to the UN, Graham developed strategy for 25 emerging markets and launched PRI in Emerging Markets
project in Q2 2007 for UNEP FI, creating a network infrastructure, building relationships with 108 investor stakeholders
Graham Sinclair

including in Africa through 2008. Before launching the sustainable investment advisory boutique SinCo in 2006 in
@esgarchitect

Boston, he was Product Manager at KLD Research & Analytics, Inc adding to his background in pension funds and

asset management.
Principal

SinCo

  Graham is a former contributor to the CSR Initiative at Harvard Kennedy School, Distinguished Member of Net Impact,
@SinCoESG

alum of WWF One Planet Leaders programme and the Tallberg Forum New Leaders Program. He currently leads the
sincosinco.com

AfricaSIF Project building an independent, pan-African not-for-profit Africa Sustainable Investment Forum network at
info@sincosinco.com

africasif.org, member of ASISA’s Responsible Investment sub-committee, and a member of Investment Analysts

Association of South Africa, and the Network for Sustainable Financial Markets. He has lectured at more than 25
graduate schools globally, and the most recently published work is chapters on Private Equity, Indexes and Africa to
Evolutions in Sustainable Investing [Wiley Business, 2011].
  Graham earned his MBA on scholarship at Villanova University in the USA where he co-managed the Arnone-Lerer SRI
Fund equity portfolio in 2004. He holds a B.Com from the University of Natal and LL.B from the Howard College School
of Law as well as numerous industry specialist certifications. He holds diplomas in retirement funds and insurance law,
and in 1998 he was one of the youngest ever dual-FILPAs. He resides in Cape, South Africa and Vermont, USA.

22





No part of this report or proposal suggests or should understood to suggest endorsement or advice on any investment approach, strategy or offering.The rights and obligations of the investor are set out in the relevant policy
contract. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back
the full amount invested. Past performance is not necessarily a guide to future investment performance.

SinCo – sustainable investment consultants © 2006-2012 FOR PROFESSIONAL INVESTORS USE ONLY – NOT FOR DISTRIBUTION TO THE GENERAL PUBLIC 23

23nov2012_rolling_in_the_deep_reports5_sin_co

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