Will sustainable investing survive the recession

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Will sustainable investing survive the recession?
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Will sustainable investing survive?

• Winning the battle
• but losing the war?
• A decade of transformation lies ahead

Looking through the lens of climate change
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Winning the battle?
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Sustainable investing micro and macro

• Micro The best way of generating superior
  risk-adjusted returns in the 21st century is to
  fully incorporate long-term economic, social and
  environmental factors into investment and
  ownership decision-making
• Macro capital markets themselves need to be
  recast to confront the risks of financial
  collapse posed by long-term economic, social and
  environmental realities

From inside out to outside in
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Coping with the alphabet soup

• Ethical investment
• screening the status quo
• Responsible investment
• extending the scope of risk management
• Sustainable investment
• repositioning for long-term growth

USD5 and USD15 trillion now contain elements of
ESG
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The seven tribes of SRI

• 1.Negative screening ethical, social,
  environmental
• 2.Positive screening ethical, social,
  environmental
• 3.Community/social investing
• 4.Best in class
• 5.Integrated analysis
• 6. Sustainability themes
• 7.Investor activism and engagement

From inside out to outside in
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Distinguishing features

• Seeks to identify predictable surprises
• Regards as tangible what others see as intangible
• Views factors as financial that others view as
  non-financial
• Reaffirms the imperative of prudence
• Prospective not retrospective, anticipating the
  key challenges for management quality

And weakness? Being right too early
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Sustainable investing equity out-performance
Source Krosinsky, 2008
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The long-term really matters
SRI fund turnover and performance over 5 years to
December 2007
Source Krosinsky, 2008
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Sustainable investing updated performance
analysis
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Losing the war?
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The end of an era - 1

• On the face of it, shareholder value is the
  dumbest idea in the world. Shareholder value is a
  result not a strategy. Your main constituencies
  are your employees, your colleagues, your
  products
• Jack Welch

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The end of an era - 2

• The financial crisis has challenged the
  intellectual assumptions on which previous
  regulatory approaches were largely built, and in
  particular the theory of rational and
  self-correcting markets
• Adair Turner

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The end of an era - 3

• EMH is the financial equivalent of Monty
  Pythons dead parrot. No matter how much you
  point out that it is dead, the believers simply
  state that it is just resting
• James Montier

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Flying blind? Traditional investment and climate
change

• Asset prices do not reflect climate costs
• Market behaviour discounts the long-term
• Driving capital misallocation
• Risking financial stability

Climate change is the greatest market failure
the world has ever seen Lord Nicholas Stern
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Aligning time-scales

• It is the long-term investor, he who most
  promotes the public interest, who will in
  practice come in for the most criticism wherever
  investment funds are managed by committees or
  boards or banks. It is in the essence of his
  behaviour that he should be eccentric,
  unconventional and rash in the eyes of average
  opinion.
• J.M Keynes, General Theory, 1936

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Market myopia?
Average holding period for shares on the NYSE in
years
Source James Montier, 2008
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Driving capital misallocation

• UK is responsible for 2 of world emissions
• But emissions from the facilities and products of
  five fossil fuel companies listed on the London
  Stock Exchange Anglo, BP, Rio Tinto, Shell and
  Xstrata - responsible for over 10 of global
  emissions
• Less than half proven economically recoverable
  oil, gas and coal reserves can be emitted to stay
  below 2 degrees warming

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Risking financial instability

• According to current estimates, the possible
  extent of losses caused by extreme natural
  catastrophes in one of the worlds major
  metropolises or industrial centres would be so
  great as to cause the collapse of entire
  countries economic systems and could even bring
  about the collapse of the worlds financial
  markets

Munich Re, March 1997
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Transformation ahead
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Resetting responsibilities

• Financial markets remain crucial as the
  circulatory system for commerce, but they must be
  reset to enable long-term sustainable performance
  in the real economy. This mean less leveraged
  finance, a fundamental repricing of risk, the
  ability to account for externalities like
  greenhouse gas emissions and a realignment of
  executive responsibility and compensation with
  long-term performance

GE, July 2009
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Mapping the future investment transformation
Already disrupting valuations, but more still to
come
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Time for acceleration the coming investment shift
Clean energy needs x9 2007 levels energy
efficiency x50
Source IEA, Energy Technology Perspectives,
2008 UNEP/NEF, Global Trends in Sustainable
Energy Investment, 2008
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Building a green recovery - USD512bn allocated
Asia leads the way with almost 2/3rd of green
stimulus
Total Package- 32bn Green- 9 CC-39, EE-51,
WW-10
Total Package- 640bn Green- 6) CC-39, EE-61
Total Package- 648bn Green- 33 EE-84, WW-16
Total Package- 537bn Green- 10 CC-30, EE-68,
WW-2
Total Package- 977bn Green- 12 CC-33, EE-50,
WW-17
Total Package- 76bn Green- 79 CC-51, EE-25,
WW-23
Total Package- 8bn Green Component- 11 EE-88,
WW-12
Total Package- 27bn Green- 21 CC-34, EE-66
CC- Low carbon power EE- energy efficiency WW-
water waste
Source HSBC estimates, government websites,
others
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Growing international climate commitment
Copenhagen conference in December 2009 expected
to confirm this trend
Turning the Corner Plan 2007 Emission- 20 below
2006 by 2020
White Paper 2008 Efficiency 20 by
2010 Renewable- 20 by 2020 Forest growth- 20 by
2020
EU Climate Energy Plan 2008 Emission- 20 below
1990 by 2020 80 by 2050 Renewable- 20 by
2020 Efficiency- 20 by 2020
Obama Administration 2008 Emission- 20 below
2005 by 2020 80 by 2050 Renewable- 20 by
2020 Efficiency 8 by 2020
Climate Change Plan 2009 Emission- 15 below 2005
by 2020 Renewable- 3 by 2010
National Action Plan 2008 Emission- per capita
emissions not to exceed developed
countries Renewable- 15 by 2020
National Plan (PNMC) 2008 Renewable- 7 GW between
2008-2010 Efficiency- 10 by 2030 Deforestation-
30 below 1996-2005 by 2010-13
Climate Change Plan 2008 Emission- Emissions to
peak by 2020-25 Renewable- Long term goal of
zero-carbon electricity sector
Climate Change Policy 2008 Emission- 60 below
2000 by 2050 Renewable- Mandatory Renewable
Energy Target- c15GW by 2020
Source Government websites, others
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Short-term Closing a deal in Copenhagen

• 2050 targets 2 degrees
• 2020 targets for industrialised countries 15-20
• Low carbon plans for emerging markets
• Taking action on tropical forests
• Adapting to climate impacts
• Promoting clean tech cooperation
• Mobilising private capital
• Reforming carbon markets
• Avoiding carbon protectionism

A close run thingbut a deal will be done
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Long-Term Confronting the tough issues

• Markets Making climate change a standard part of
  accounting, disclosure and listing rules
• Responsibility Modernising fiduciary duty to
  reflect the reality of climate change
• Incentives Rewarding the investment chain for
  long-term sustainable performance
• Transparency Reporting fund and institutional
  ESG performance alongside financial returns

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In the end confidence and conviction

• There is no reason why we should not feel
  ourselves to be bold, to be open, to experiment,
  to take action, to try the possibilities of
  things. And over against us, standing in the
  path, there is nothing but a few old gentlemen
  tightly buttoned-up in their frock coats, who
  only need to be treated with a little friendly
  disrepect and bowled over like ninepins.
• Quite likely they will enjoy it themselves, once
  they have got over the shock
• J.M Keynes, A Programme of Expansion, 1929

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Thank you.
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Thank you
Nick Robins, Head of Climate Change Centre of
Excellence nick.robins_at_hsbc.com