Looking forward to Wednesday when we will explore how Private Equity investors with an increasing focus on value creation through operational factors are embracing ESG issues. A recent Capital Dynamics study highlights that 51% of value is created by PE through operational drivers whilst leverage amounts for only 31%.
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Policy initiatives to tackle climate change through real estate investment – UNEP Finance Initiative9/7/2015 PRI in Person 2015 kicks off Tuesday 8 September with over 1000 delegates from around the world. Buildings account for approximately a third of the world’s energy consumption and global greenhouse gas (GHG) emissions. They are considered a high-impact sector for urgent mitigation action on climate change. Energy efficiency investments play a key role in this context. Today, energy efficiency investment clearly is the most cost-effective and economically beneficial solution to reduce the reliance and expenditure on energy, while also decarbonizing the energy system, especially in Europe. In fact, according to recent estimates from the International Energy Agency, 49% of the measures required to keep global temperatures below 2 degree Celsius, will need to be energy efficiency related. Energy efficiency also meets the EU’s climate and energy strategy and, importantly, provides attractive financial opportunities for real estate investors. Presently, however, there is largely insufficient public and private investment in energy efficiency in buildings, industry and SMEs. Overall, investment levels are eight times below the level what would be required to meet global emission reduction targets. Clearly, tackling this investment gap requires urgency and attention from all stakeholders.
Therefore, an Energy Efficiency Financial Institution Group (EEFIG), jointly convened by the European Commission and UNEP FI, was established in late 2013 to determine how to overcome the challenges to obtaining long-term financing for energy efficiency. The EEFIG report provides an insightful analysis of the most imminent challenges to energy efficiency in buildings and develops recommendations for policy makers and market participants, on a sector-by-sector level, on how to overcome these. The report can be downloaded here. More recently, the G20 Energy Efficiency Finance Task Group which aims to promote energy efficiency finance ahead of the G20 Leaders’ Summit in November 2015 has come together to draw up a “G20 Energy Efficiency Investor Statement” which has been co-signed and endorsed by the UNEP FI and the PRI. PRI signatories can find this statement on the PRI Clearinghouse platform and are encouraged to lend their support. This statement aims to demonstrate to G20 leaders that the investment community is supportive of energy efficiency activities and its financing and, eventually, to encourage countries to increase their political engagement and support on this important topic. In parallel, the group also issued energy efficiency investment principles dedicated to countries as voluntary recommendations to help support the removal of barriers and create the momentum for enhanced policy support. These two examples of collaboration between the policy and industry on tackling climate change and overcoming common barriers to energy efficiency investment and green building initiatives show how the policy side is increasingly working with (real estate) investors as key actors to collaboratively develop win-win solutions to these important challenges. Bird flu, swine flu, antibiotic resistance, recalls of contaminated meats, rising emissions, drought in California and the UN’s new goal to end world hunger - good investment is often about the ability to see hidden connections, and I believe that these seemingly disparate events and trends raise an urgent question for investors about how their exposure to the modern meat industry puts their portfolios at risk. "As responsible investors descend on London for PRI in Person, they must mind the knowledge gap on the issue of farm animal welfare". - Jeremy Coller Connecting the dotsTo find the connection, I urge investors to reflect on the remarkable growth of industrial factory farming over the last half century. This method of food production, where livestock are concentrated on an unprecedented scale, only emerged in the 1950s but now accounts for over 70% of all meat production globally and 99% in the US. And as emerging markets grow in both size and wealth, and demand more animal protein, the industrialisation of meat production is ramping up; between 1993 and 2013 chicken numbers in China increased from 2.7 billion to 5.5 billion.. Good you might say - we’re feeding the world, meat is cheaper for consumers and investments in the factory farming industry have delivered decent returns over the years. However, as with other ESG issues I believe there are some inconvenient truths about this industrial model that should raise a red flag to responsible investors or those with a mandate to deliver stable long-term returns. And understanding these truths will help investors see how the modern meat industry connects the diverse sustainability issues I raised in the first paragraph. The hidden impacts of factory farming The first of these inconvenient truths is the emerging risks to human health. These take two forms. First is the very real risk of drug resistant bacteria emanating from the massive overuse of antibiotics on farm animals. Using extreme amounts of anti-biotics is the main way that factory farms avoid disease spreading around such tightly packed animals but it is now at a level where around 80% of all antibiotics produced in the US are now used on farm animals. This runs the risk of catalysing the development of resistant bacteria which could lead us, in the words of UK Prime Minister David Cameron, back to the ‘medical dark ages[1]’ Secondly, factory farms provide ideal conditions for viruses to develop and spread. For example there is evidence that the 2009 H1N1 strain of swine flu, which killed over 150,000 people[2] originated in a US factory farm. From an investor’s point of view this is a very clear and present material risk – and one can look at how swine flu wiped billions off the value of many agriculture investments in 2009 as evidence of this. In this limited blog let me provide some other ‘food for thought’ on why responsible investors need to look more deeply at this issue: · The livestock sector is responsible for 14.5% of man-made greenhouse gas emissions, more than the transport sector. So is therefore likely to suffer more than most sectors as a tougher international climate regime evolves. · Factory farms use an unsustainable amount of natural resources such as water. In California, for example, there is a drought and a state of emergency over water shortages. Yet factory farmed animal agriculture accounts for nearly 50% of the state’s water use[3]. · With over 800 million people suffering from undernourishment, one third of the world’s grain harvest is fed to animals, enough to feed 4 billion people. Growing the soy this requires also causes major deforestation. I ask investors to look closely at the factory farm model. Its long-term impacts run counter to many of the Sustainable Development Goals that the UN will announce this month and yet it is a model supported by massive government subsidies. In the US alone, the industry receives almost US$54 bn in benefits annually from subsidised grain. [1] http://www.bbc.co.uk/news/health-28098838 [2] http://www.cdc.gov/flu/spotlights/pandemic-global-estimates.htm [3] http://www.huffingtonpost.com/stephen-wells/water-wars-in-california-factory-farms-draining-the-state-dry_b_7021414.html Opportunities abound As the world begins to reconsider the most sustainable ways to feed the world, there are opportunities for smart investors who are ahead of the curve.
For example, Hampton Creek, a company that uses plant proteins as egg substitutes is set to become the fastest growing food company in history, with a revenue run rate predicted to leap from $48m to $120m by next January. I urge the responsible investment community to look more deeply at farm animal welfare issues. Joining initiatives like the Farm Animal Investment Risk & Return (FAIRR) Initiative (www.fairr.org) can help them understand the broad impacts across the value chain and help them consider their exposure to the risks, and opportunities, likely to emerge in the coming years. Jeremy Coller is Founder and CIO, Coller Capital; and also founder of the Jeremy Coller Foundation and FAIRR initiative. Don Jordison, Managing Director, Property at Columbia Threadneedle Investments talks about how low carbon strategies in real estate cater to institutional investors’ fiduciary duty and shape active investment solutions Climate change is firmly back on the agenda. In December, United Nations delegates will meet at the 2015 Climate Change Conference in Paris to negotiate a global agreement on climate change. As large asset owners, institutional investors have an important role to play in helping to mitigate the risk of climate change. I know from my own conversations with clients that they are keen drive positive outcomes for society, not least because as large asset owners, they have a moral responsibility to do so. But there is also an incentive to take climate change into account when it comes to investment decisions. "As large asset owners, institutional investors have an important role to play in helping to mitigate the risk of climate change" Indeed in July last year, the Law Commission released a report on the fiduciary duty of pension trustees, noting that taking ESG factors into account is designed to reduce risk and should therefore be considered along with financial factors. This doesn’t mean institutional investors have to give up financial return on their investment, in fact quite the opposite is the case. The emphasis is on active investment solutions – not divestment.
We know that as a large investment manager we have the ability – and the responsibility – to help investors facilitate flows into investments with tangible environmental outcomes. In 2010 we took a pioneering step towards CO2 reduction by teaming up with Stanhope, one of the leading commercial developers and the Carbon Trust, a world-leading adviser to businesses, governments and the public sector on carbon reduction. Together we launched the Low Carbon Workplace (LCW) Trust, a partnership between industry leaders in property investment management, design, carbon engineering/refurbishment and carbon compliance. We identify suitable office buildings and turn them into modern, energy-efficient workplaces, while at the same time generating returns for investors. We then let and manage the buildings to ensure ongoing management and reduction of energy wastage. LCW offers a compelling investment case. Last year, it returned 11.7% per cent net of fees. Lower energy costs mean properties are resistant to functional and environmental obsolescence. Due to the imbalance between supply and demand, low carbon properties also benefit from better security and quality of income, greater potential for capital gains, shorter void periods and access to pre-let developments. A good example of a recent refurbishment project undertaken is the six-storey Mansel Court in Wimbledon. Built in the 1960s, it had been losing a lot of heat due to its single-glazed windows with metal frames and poor seals. We transformed Mansel Court into a state-of-the-art eco building that is now over 50% more energy efficient than it was before the refurbishment. Air-tightness exceeds building regulations while tenants can still make use of the windows. It was also the first commercial building to have capillary matting embedded in its floors and ceilings. This low-energy system enables cold water to circulate through small plastic tubes to cool the building efficiently. Smart meters and occupancy sensors compare energy consumption to occupancy levels, helping the Carbon Trust to monitor and improve the energy performance of the building together with the tenants. 1. Dr Bronwyn King, you've been awarded for encouraging superannuation funds to divest tobacco holdings. Would you say that tobacco divestment is the next big ESG issue?
As a practicing doctor and somewhat of an outsider to the industry, I haven’t necessarily viewed tobacco as an ESG issue specifically, but rather as an issue for the finance industry more broadly. I suppose for me, it is a mainstream concern. 2. What's the opportunity and risk for investors if incidences of tobacco divestment continue? I like to think of tobacco free investment as an opportunity for organisations and leaders to demonstrate ethical decision-making that considers a range of duties beyond financial risk and return, such as human rights and health. In terms of the health impact, the risks of supporting tobacco are well documented. There is no safe level of exposure to tobacco. There is also the investment risk to consider. Of course there is reputation risk as well. An issue of great importance to me, and I’m sure many in the finance industry is that almost no cigarette can be guaranteed to be free from child labour[1]. I believe we are now seeing a Paradigm Shift on tobacco recognised through the World Health Organisation’s Framework Convention on Tobacco Control (WHO FCTC) which was launched in 2004 and now has 180 signatories. 3. What role do you play in shaping the global ESG agenda? If you were to give one piece of advise to a team of investors, what would it be? Whilst I am now the CEO of Tobacco Free Portfolios, the not-for-profit organisation I founded, I am also the Project Manager for the Global Task Force on Tobacco Free Portfolios established to encourage tobacco free investment across the globe, therefore I am very much engaged in the global agenda, from both a health and finance perspective. My one piece of advice to a team of investors would be to implement a tobacco free mandate for all investments. Tobacco stands alone to any other product or resource, if a product was produced tomorrow that had the devastating impact of tobacco – six million deaths per year - it would not be tolerated. Every investment decision, no matter how small, contributes to this positive, and important movement. 4. If we look beyond tobacco, what next big issue do you see entering the forefront of the ESG / responsible investment agenda? I see the next big issue that should be addressed is the concept of fiduciary duties. A re-framing of these duties to make responsible, long-term decision-making to the benefit of society paramount is essential to all issues considered under the ESG and mainstream agendas. 5. Why should investors attend the "The emerging ESG issues" session at PRI in Person? I have found the people that work in ESG and RI to be passionate, dedicated and hard working. It always helps to see and listen to people to really understand what they are championing and why it matters. I certainly hope people come to listen to me as I’ve come a long way to speak! [1] Graen, L. (2015, January 27). BMJ Group blogs. Retrieved August 30, 2015, from http://blogs.bmj.com/tc/2015/01/27/tobacco-industry-confronted-with-child-labour/?q=w_tc_blog_sidetab Cyber is widely used as an adjective to describe a range of issues related to information technology (IT) networks and systems - cyber landscape, cyber threat, cyber attack, cyber security etc. The extraordinarily rapid development of these networks now touches every aspect of our lives. While its impact is overwhelmingly beneficial, our increasing dependence on cyber technology creates vulnerability. This is because the cyber pioneers who developed the worldwide web were idealists. They never developed their systems with security in mind - in fact, they deliberately kept them as open as possible. Unfortunately, there are plenty of others with an interest in subverting the Internet. They do this to steal, to damage or even to destroy. They are state security agencies, criminals, terrorists or others with an agenda. Private companies have been slow to grasp the implications. Too many firms still make the fundamental mistake of seeing cyber risk management as a technology issue, best left to their IT managers. This is understandable, since IT specialists - with all respect - are not always the best people to explain complex technicalities to a lay audience. As a result, many Boards are happy to delegate issues that they don’t fully understand. Under pressure to do something to mitigate a "technology risk", they have thought it enough to invest in expensive software designed to keep attackers out. Meanwhile the attackers - as often as not - are already inside the company's systems. They use software and social engineering techniques originally called "advanced persistent threats" (APT), but which are now standard elements in the attackers' toolkit. These sophisticated attack methods - once the sole preserve of nation states - have proliferated and are freely available on the Internet. They are relatively cheap to buy and can be re-used multiple times, providing criminals with a highly attractive business model - especially as the chances of prosecution by law enforcement are negligible. But it’s really important to remember that the vast majority of cyber attacks succeed not because of technical failures, but because of the action or inaction of employees inside the companies concerned – the so-called "insider threat". Some of these people have malicious motives, but most will simply have done something as apparently innocuous as clicking on a link in an email. By doing so, they have unwittingly downloaded malicious software on to their firm's IT systems. This “spyware” gives the attacker the ability to take control of the victim's systems. It's worth noting, too, that a cyber breach is not necessarily the same as a data breach. That may be the main risk for a company with retail customers, for example. But even those firms will have broader concerns about possible damage from cyber risk, including financial loss through fraud, business interruption, damage to property, and theft of intellectual property. These concerns increase still further with the arrival of the Internet of things, described in Wikipedia as “allowing objects to be sensed and controlled remotely across existing network infrastructure, creating opportunities for more direct integration between the physical world and computer-based systems, and resulting in improved efficiency, accuracy and economic benefit”. Who is liable if hackers take control of a car management system and cause a serious accident, for example? Or if they manipulate the energy supply to a city? Implications for companies and their investors of the complex cyber threat environment Let’s turn to the implications for companies and their investors of this complex cyber threat environment.
The first point is that companies must not treat "cyber security" as some kind of black art incomprehensible to non-specialists and quite distinct from other aspects of security. As I explained earlier, most successful cyber attacks do not result from technology failures. They rely on the careless, possibly stupid or even malicious actions of employees or insiders. To meet such a complex range of threats, Boards must ensure that their technical and corporate security functions are working to a common strategy and a single set of priorities. Equally important, security must report to a single person who takes overall responsibility for all security issues at the Executive Committee level. This is essential to ensure alignment of strategy, budget and priorities. I have heard (often fiercely expressed) differing views on precisely where the security function should sit in a company organisation. I will not go into that subject here, except to say that in my view, security should not sit under Finance, HR or Technology, all functions which security may need to challenge. And at the Board level? Should the Board appoint a member with knowledge of cyber security issues to advise them? I think that this will depend on the company's assessment of the risks that it faces. There is certainly a move in the U.S. to appoint non-executive directors with the knowledge and experience to provide independent advice. The second implication follows very closely from the first. The UK Government’s latest annual breach report shows that 81% of large businesses and 60% of small businesses suffered a cyber security breach in 2014. Of course, this statistic only reflects those who actually knew that their defences had been successfully defeated...! Meanwhile the World Economic Forum’s 2015 report on Global Risks firmly positions the cyber threat as a major risk in terms of likelihood and of impact. The WEF recognises it as one of the top commercial risks, along with geopolitics, the environment, and the economy. My point here is that cyber risk is now an existential threat to every business in every sector, whether retail (customer data), technology (intellectual property) etc. This means that Boards cannot afford simply to leave the issue to their security professionals. We have to accept that a cyber breach is inevitable and that a company's reaction will need a detailed and carefully prepared response from a wide range of departments including Commercial, Legal, Finance, HR, Internal & External Comms. This means that dealing with cyber threats must be a key element of every company's enterprise risk management process. It also means that as with other types of business interruption, the company must be well-prepared to manage sudden incidents. If it is not, the reputational damage - let alone more tangible forms of loss - may be devastating. Boards are belatedly waking up to this: in 2014, 88% of FTSE 350 companies included cyber risk in their strategic risk report, up from 58% in 2013. But responsible investors have a key role in ensuring that Boards of Directors in the companies where they are investing are managing cyber threat issues in a consistent, practical and effective way. At PRI in Person this year we have four main plenary sessions with senior industry leaders dissecting the big issues. To help us unlock the barriers to the future growth of responsible investment and take the debate forward, these discussions will focus on:
· How transformational leadership can impact long-term investment decisions · The global, systemic challenges including Sustainable Development Goals, COP21 Paris, the Sustainable Stock Exchanges Initiative and the Inquiry into the Design of a Sustainable Financial System · The future of impact investing and what good measurement looks like · Does sustainable investment have an image problem and why does it matter · How beneficiaries can be engaged to deliver stronger mandates for mainstreaming responsible investment practices Take a look at the detailed agenda to fully appreciate this year’s coverage. By attending, you will leave with a greater understanding of the challenges and how to practically overcome them. PRI in Person 2015 will take place at ICC ExCeL London from 8-10 September and provides a truly global three-day programme for the investor community. Five distinct tracks will cover ESG integration, active ownership, asset owners and trustees, academic research and roundtable discussions. |
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