ESG and Material Efficiency Perspective for Investors - Presentation by Céline Méchain for the WMF 17-19th June 2021
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ESG and Material Efficiency Perspective for Investors Presentation by Céline Méchain for the WMF 17-19th June 2021
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2
Growing awareness of Investors around
Environmental Challenges, Carbon Emissions,
Climate Risks and Scarcity of Planet Resources
Global Natural Disasters Social Preferences
Consequences of global natural disasters from 2000 to 2019 1
Growing interest by various demographic groups to incorporate ESG in
+81% investment decisions
4.0bn
$3.0trn increase in
$ Economic
Losses
losses vs.
previous
people
injured or
displaced
period General Population
85%
71% 75%
36%
52% 52%
The “Green Deal” in Europe (Dec-2019) 19% 23%
49%
2015 2017 2019
Largest Economic stimulus since the Marshall Plan
Millenials
€7 trillion total investments needed by 2050E 84% 86%
95%
25%
€1.85 trillion secured by the EU Recovery Package 56% 48%
70%
28% 38%
Acceleration of National Energy Plans through Covid-19
crisis 2015 2017 2019
2015 2017 2019
Very Interested Somewhat Interested
Interest in sustainable investing continues to grow
c.$5 of GDP by 2020 for every $1 of capex invested in amongst both millennials and the general
energy transition3 population
First benefits expected in 2022/2023
Sources: PRI, U.S. Trust Wealth and Worth Survey, GS Research.
Notes: 1 UNISDR, Human cost of disasters, Oct-2020. 2 $1,600 billion over the 1980-1999 period. 3 IRENA: International Energy Agency
3
Introduction to the EU Taxonomy
EU Sustainability Taxonomy Regulation (June 2020)
In June 2020, the EU's Sustainability Taxonomy Regulation was formally adopted
— Provides an EU-wide framework for classifying economic activity as environmentally sustainable
— Expected to reduce “greenwashing”, where financial products are marketed as environmentally sustainable without sufficient factual basis for their claims
The objective of the EU Taxonomy is to encourage capital flows to green activities by enabling investors to identify:
— Companies that fall under the scope of the Non-Financial Reporting Directive will have to disclose:
– The proportion of turnover from activities aligned with Taxonomy
– Capex and opex associated with Taxonomy-aligned activities
— The first company reports and investor disclosures using the EU Taxonomy are due at the start of 2022
1 2 Do no significant harm to any of the other five
environmental objectives, where relevant
Substantially contribute to at least one of the six
environmental objectives:
1. Climate change mitigation -- adopted by 2020YE and 3
enter into application by 2021YE Comply with minimum social safeguards:
— UN Guiding Principles on Business & Human Rights –
2. Climate change adaptation including 8 conventions of ILO1‘s Fundamental Rights &
3. Sustainable use and protection of water & marine Principles at Work; and International Bill of Human Rights
resources – rest adopted by 2021YE, apply 2022YE — OECD Guidelines on Multinational Enterprises
4. Transition to circular economy, waste prevention &
recycling
5. Pollution prevention & control 4 Comply with quantitative or qualitative Technical Screening
6. Protection of healthy ecosystems Criteria: quantitative technical screening criteria will be
tightened over time for CO2 intensity metrics which trend
towards zero by 2050
Currently covered in EU Taxonomy; Other objectives are to be covered at a later date
Note: 1 International Labour Organization
4
Evolution of the Principles for Responsible
Investment Signatories
PRI signatories have grown to more than 3,800 members, with c.$100 Trillion in assets under management
Growing Initiative Since 2006
120 3,200
Assets Under Management
Number of signatories
100 2,800
2,400
80
2,000
(US$ trn)
60 1,600
40 1,200
800
20
400
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Assets under management (US$ trillion) AO AUM ($ US trillion) Number of Assets Owners Number of Signatories
Overview of Signatories
Signatories as of April-2021
Net new signatories since April-2020 Benelux
145
+41 Nordic
287
UK & +45
Ireland
665
Canada +159
185 CEE & CIS
Germany,
+25 29 France Austria &
+8 304 Switzerland
Middle East +55 360
US 21 China Southern
Japan +95
+761 +7 56 Europe
94
+174 +17 209
+10
Africa +52
91 Rest of Asia
+3 142
Latin America Brazil +35
89 Australia & NZ
(Ex. Brazil)
+24 214
78
+14
+38
Source: UN PRI Initiative website
5
ESG is Increasingly Material to Financial Investors
… and is Becoming Increasingly Mainstream
200 ESG Funds Growing Steadily, Non-ESG Funds are Seeing Outflows
Cumulative Flows ($bn)
100
0
2020 saw ESG funds receive net inflows (100)
AuM1 is Growing… of $153bn whilst non-ESG funds
experienced net outflows of $37bn (200)
(300)
(400)
Jan-2019Jan-19 Jul-2019 Jan-2020
Jan-20 Jul-2020 Jan-21
All ESG Funds All Funds Excluding ESG
EMEA Leading the Charge
19 % 25 %
7% 35 %
9%
11 %
GS survey of 1,600 investors revealed
… and Mainstream
majority currently, or are planning to, 74 %
Adoption by Investors… incorporate ESG into investment process 54 %
66 %
EMEA Americas APAC
Currently Applying Planning to Apply Not Planning to Apply / Undecided
Cumulative ESG vs. Non-ESG Passive Fund Flows
100%
80%
60%
100%
100%
100%
99%
99%
99%
99%
99%
97%
… and in Passive ETFs2 The rise of ESG ETFs continues to place
2
86%
69%
an emphasis on having the right ESG 40%
too score for companies 20%
0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Non-ESG Flows ESG Flows
Notes: 1 Assets under Management. 2 Exchange Traded Funds.
6
The Market is Differentiating Already Between
“Good” and “Bad”
… Missed Opportunity to Maximise Value
250 245.58
203.62
200
ESG Favourites Strong market bias towards ESG Fund 167.62
Outperform… favourites 150
121.45
100
Jan-19 Jan-20 Jan-21
US ESG Favorites S&P 500 EU ESG Favorites STOXX 600
13x 24%
Premium (RHS)
Low carbon emitters (Q5)
12x 2019-21
High carbon emitters (Q5) 20%
avg premium:
12m Fwd EV/EBITDA
11x 14.6%
16%
10x
… High Carbon Emitters Low Carbon intensive companies trade at
Premium %
9x 12%
increasingly elevated premia vs. high
Penalised too… carbon sectors 8x
2015-19 avg premium: 8%
8.3%
7x
2010-15 avg premium: 4%
6x
4.4%
5x 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
16% 16%
15%
Adjusted WACC
14% 14%
13%
CROCI
12% 12%
Top ESG Disclosers have an average 11%
… and impacting WACC1 104bps lower WACC1 10% 10%
9%
8% 8%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2 1 1
Q1 (Top E&S Performers) WACC Q5 (Bot. E&S Performers) WACC
3 3
Q1 CROCI Q5 CROCI
Notes: 1 Weighted Average Cost of Capital. 2 Environment and Social. 3 Cash Return on Capital Invested
7
Growing Sophistication of Investors Means Risks
from Getting it “Wrong” are Greater
……With Potential For Rapid Value Impact For Communication Missteps
GS SUSTAIN ESG Universe Listed Since 2010, SUSTAIN Absolute Controversies
Scores (2010-2017); TSR is GICS 2 Relative
0.6%
0.3%
Rolling region-relative
0.0%
ESG missteps can have an enduring (0.3)%
ESG Crises
TSR
impact on value (0.6)%
(0.9)%
(1.2)%
Not Controversial Somewhat Controversial Very Controersial
1-year relative TSR 3-year relative TSR CAGR
… Amplified by the Mass Mass organised online social
engagement can rapidly amplify
and Social Media… perception and value from a crisis
Activist Value Influence on Board
Company Crisis Activist Thesis Changes?
Gas Leak Break-up Board Representation
Epstein ?
… A(a)ctivism Growing use of ESG as a ‘wedge’ issue Connection
Break-up Situation Ongoing
Increasing and greater investor engagement
Round up ?
Break-up Situation Ongoing
Litigation
Cost
Reductions,
“Dieselgate”
Remuneration Director Resignations
Reform
Navigating ESG is becoming increasingly more complex.
Understanding your ESG strengths and vulnerabilities are key to ensuring a robust investment case
8
ESG Investing Across the Fund Manager
Spectrum
Funds Reflect ESG
Criteria in Different
Ways
ALIGNMENT INTEGRATION IMPACT
Negative /
Exclusionary $19.8t
Screening
Seek to better align ESG considerations largely incorporated into High degree of ESG focus,
portfolios with ESG factors active investment processes with ESG specialist funds,
with minimal financial exclusionary criteria, and
ESG Integration $17.5t
impact positive screening
Still some uncertainty over how to incorporate ESG
into valuations, with few institutions actually adjusting
Typically avoid objectionable valuations to reflect sustainability as of yet Typically among the early PRI
exposures while optimizing for signatories (pre-2010)
Corporate desired exposures
Engagement /
Shareholder
$9.8t May employ both norms-based and negative ESG
Action screens Strong proponents of the
Ex. passive low carbon equity positive correlation between
strategy sustainability and future
Ex. Active ESG equity strategy valuations
Norms-based
$4.7t Developing more integrated
Screening
frameworks while mitigating At the more ESG-focused end are Blackrock and It is important to note that only
large ESG risks Amundi, with the latter having announced that ESG c.$3tn of AuM lies in these
analysis will be integrated across all Amundi funds relatively small funds
within 3 years
Other $3.2t The bulk of AuM2 lies in this group
Source: PRI Signatory Directory
Notes: 1 Preqin Ltd report. 2 Assets Under Management
9
Market Update | Growth of ESG-Labelled Bond
Diversification From Pure Green Bonds
Global ESG-Labelled Bonds European ESG-Labelled Bonds
Green
383.7 250.8
Green 5.6 Social 4.5
1.3 Sustainability 22.5 1.0
Social
Transition
Sustainability 51.9 Sustainability-Linked
93.7
Transition 138.1
3.9
Sustainability-Linked 12.0 0.5
9.1
289.3
3.9 69.8
60.8 7.8
0.5 6.2 - 129.2
32.3 5.2 112.7
120.1 26.8 30.4 5.5
2.7 3.7 56.8
2.0 25.0 1.6 49.1
14.7 22.1
2015 2016 2017 2018 2019 2020
Rest of the World ESG-Labelled Bonds
Green 147.8
143.8 Social 133.3 1.1
137.9 Sustainability 20.2
8.7 0.4 0.3
8.5 11.9 Transition 5.7
Sustainability-Linked 29.5
11.2 238.0
90.2 204.7 82.5
4.9 26.5
2.5
2.0 66.6
59.6 3.0 4.2
126.2 1.2 6.0 121.9
43.5 114.8 0.3
3.0 83.3 76.5 75.9
2.0 58.1
15.8 56.4
38.5 0.3
15.5
2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020
Sources: Bloomberg, ClimateBonds, as of Dec-2020 – foreign exchange used as of the date of the bond issuance
Note: In bn€-eq
10ESG Debt Instruments Available
Recent Evolution of Moving Away from “Project-Based” Structures to
“Target-Based” Structures
“Project-Based” Structures “Target-Based” Structure
Sustainability
Sustainability-Linked
Green Bond Social Bond Transition Bond SDGs Bond
Bond Bond
Funds dedicated to Funds dedicated to Funds dedicated to Funds dedicated to Funds dedicated to No requirements for the
strict green social projects both green and a wider range a wider range of use of proceeds
projects Follow the ICMA social projects green / energy both green / The issuer is indirectly
Short Follow the ICMA SBPs framework Follow the ICMA efficiency projects energy efficiency committed to meet green
Description GBPs framework SBPs and GBPs Follow the ICMA and social projects target(s) otherwise
frameworks GBPs framework Follow the ICMA coupon/return will
SBPs and GBPs increase
frameworks
Subject to a
Framework?
Project Based?
Funds Committed? Target based
structure gives
Issuer Retains
Flexibility? more flexibility
Return / Coupon
Increase? The coupon
step up gives
more comfort
ESG Investors’ that the issuer
Attractiveness will meet the
target
Included in Green
Indexes?
Will Attract
Dedicated Green
Investors?
Positive Marketing?
Size Available Target based
(Limited to the structure
Issuer’s Projects) allows for large
size
11Which KPIs Have Been Retained to Define
Sustainability in Recent Debt Issuances?
Increased Diversity of Criteria and Issuers Across All Sectors
Single or multi-criteria KPIs
Influencing the cost of debt issuance in case of non-compliance: “Greenium” vs. “Coupon step-up”
Donation to charities and reinvestment in environment
Bond KPIs Loan KPIs
Apr-2021 Feb-2021 Feb-2021 Feb-2021 Feb-2021
Greenhouse gas 25% reduction in 30% of recycles materials, 20% Patient satisfaction, medical Emissions reduction, content
emission reduction, greenhouse gas reduction of Scope 1 and 2 CO2 waste reduction and packaging and women In
Board diversity and emission by 2025 and emissions and 10% reduction of improvement of work / life management
investment advisory 10% increase in Scope 3 emissions from fabric balance for employees
professionals diversity recycled aluminum input production, garment
by 2026 manufacturing, raw materials
and upstream transport by 2025
Jan-2021 Jan-2021 Nov-2020 Jan-2021 Nov-2020
Water consumption, Reduce Scope 1 and 2 Target of kg net of CO2 Volumes of the company’s Implementing systems for collecting and
waste reuse / recycling greenhouse gas emitted per ton of products being used in wind recycling packaging from customers,
and reintroduction and / emissions by 60% cementitious material turbines increasing the share of green products
or reinforcement of wild and % of employees given the
species intro ecosystem opportunity to become shareholders
Sep-2020 Jun-2020
Nov-2020 Sep-2019 / Oct-2020 Increase number of patients Reduction in CO2
CO2 emissions, gender Increase installed reached in low- and middle- emissions
diversity and training of renewable energy and income countries (LMICs) with
underprivileged people reduce greenhouse gas strategic innovative therapies
emissions
Protect environment, Resources and Humanity
Sources: Company reports and press releases. 1Novartis global health flagship programs target leprosy, malaria, Chagas disease, and sickle cell disease.
Note: A positive “greenium” implies an estimated pricing benefit for the Issuer vs. a similar “vanilla” transaction
12Goldman Sachs Research on Thematic Deep
Dives
1st of 40 years: China de- ESG Sector Roadmaps: E- Investing in the Sustainable Top of Mind: Investing The Green Deal: EU Green ESG Sector Roadmap: Brands
carbonization: Reshaping of Commerce Development Goals Climate Change Deal estimate up 50%, now at & Apparel
upstream Apr-2021 Feb-2021 Jan-2021 €10trn Jan-2021
Apr-2021 Jan-2021
Carbonomics: China net zero: ESG Sector Roadmap: Banks Carbonomics: 10 key themes ESG Sector Roadmap: Carbonomics: Innovation, Green Hydrogen: The next
The clean tech revolution Dec-2020 from the inaugural conference Utilities Nov-2020 Deflation and Affordable De- transformational driver of the
Jan-2021 Nov-2020 carbonization Utilities industry
Oct-2020 Sept-2020
ESG Sector Roadmap: Food & The EU Green Deal: Green Carbonomics: The Rise of GS SUSTAIN: Carbon offsets: Carbonomics: The green The EU Green Deal: Towards
Beverage, Alcohol & Tobacco Upside Clean Hydrogen Tools for the low carbon engine of economic recovery "net zero": A plan to fight
Sep-2020 Jul-2020 Jul-2020 transition Jun-2020 climate change
Source: Goldman Sachs Research Jun-2020 Jan-2020
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