Integrating ESG factors in the investment decision

← 1. The UN PRI has an international network of over 3 000 investor signatories which are required to report annually on their responsible investment activities according to a set framework. https://www.unpri.org/about-the-pri. As of 2019, 255 of the UN PRI signatories provide services in connection with pension or insurance: 69 are corporate pension, superannuation, retirement or provident funds or plans; 132 are non-corporate pension, superannuation, retirement or provident funds or plans; and 54 are insurance companies. The geographical split of the UN PRI signatories under consideration demonstrates that a majority (150 out of 255) of pension funds and insurance companies that are UN PRI signatories are based in Europe, whereas 37 are based in North America, 32 in Australia and New Zealand, 16 in Asia, 11 in Central and Latin America and 9 in Africa.

← 2. The OECD ESG survey received responses from 51 insurance companies that run life, non-life and reinsurance business lines, with total assets of over USD 2,445 trillion at the end of 2018, and 25 pension funds managing over USD 2.4 trillion in assets at the end of 2018, across 21 countries overall. Insurance companies from 11 countries (Canada, Finland, France, Italy, Japan, Korea, the Netherlands, Portugal, Slovenia, Sweden and Switzerland), and pension funds from 14 countries (Australia, Austria, Brazil, Canada, Croatia, Denmark, Finland, Iceland, the Netherlands, New Zealand, Norway, Russia, Spain and Sweden) responded to the survey. Assets managed were provided by companies responding to the OECD ESG survey and converted to US Dollars using the International Monetary Fund published exchange rate for 31/12/2018.

Given the ESG focus of the survey, it should be noted that the institutional investors who responded may not constitute a representative sample as it is possible that they already have an interest in ESG considerations. This potential self-selection bias does not preclude conclusions being drawn on some of the needs and processes used to integrate ESG factors in investment decision-making processes.

← 3. Institutional investors covered by this survey include asset managers, as well as insurance companies and pension funds.

← 4. It is worth noting that insurance companies and pension funds might delegate part of the management of their assets to external asset managers, and request them to use similar ESG integration strategies.

← 5. The study breaks down the corporate bond universe of the ICE BofAML indices into quintiles, based on ESG scores from Sustainalytics. Over 12 months, the credit spread of portfolio with the best ESG-rated companies tightened by about 20%, compared to a tightening of around 12% for the portfolio with the worst ESG ratings.

← 6. The German Prime Standard is a market segment of the Frankfurt Stock Exchange that includes companies which comply with transparency standards higher than those of the General Standard, which is regulated by law. The German Prime Standard is made of the DAX30, TecDAX and MDAX. The DAX30 is a blue chip stock market index consisting of the 30 major German companies (by market capitalisation) trading on the Frankfurt Stock Exchange. The TecDAX stock index tracks the performance of the 30 largest German companies from the technology sector. The MDAX includes the 60 Prime Standard shares from sectors excluding technology that rank immediately below (by market capitalisation) the 30 companies included in the DAX index.

← 7. Shareholder rights are used to represent governance through data from the Investor Responsibility Research Center surveys of investor rights and takeover protection on a sample of American companies between 1990 and 1999.

← 8. https://www.beehive.govt.nz/release/default-kiwisaver-changes-support-more-responsible-investment.

← 9. https://www.nbim.no/contentassets/aaa1c4c4557e4619bd8345db022e981e/spu_responsible-investments-2019_web.pdf.

← 10. The results of a survey by State Street Global Advisors show that 41% of pension funds declared that viewing ESG as a fiduciary duty was the main reason for adopting ESG principles in investments (State Street Global Advisors, 2019[14]).

← 11. https://www.federalregister.gov/documents/2015/10/26/2015-27146/interpretive-bulletin-relating-to-the-fiduciary-standard-under-erisa-in-considering-economically.

← 12. The 201888 amendment and modification of UK pension fund regulations can be found at http://www.legislation.gov.uk/uksi/2018/988/made/data.pdf.

← 13. http://www.iopsweb.org/iops-supervisory-guidelines-esg-factors.htm.

← 14. https://www.eiopa.europa.eu/browse/sustainable-finance_en?source=search#EIOPA%E2%80%99sprojectsinsustainablefinance.

← 15. The EU regulation on disclosure for financial market participants can be found at https://eur-lex.europa.eu/eli/reg/2019/2088/oj ; the Israeli regulation can be found at Section 9(a)12 of https://www.mof.gov.il/hon/Documents/%D7%94%D7%A1%D7%93%D7%A8%D7%94-%D7%95%D7%97%D7%A7%D7%99%D7%A7%D7%94/Codex/Gate5_Part2_Chapter4.pdf.

← 16. UN PRI signatories, both in responses to the OECD ESG survey and in the UN PRI data, have reported to be fully aligned with its guidelines and to already integrate ESG criteria in their investment decisions, apart from those that only recently joined the UN PRI and are still implementing the integration of these criteria in their decision-making process.

← 17. EIOPA plans to launch a similar stress test to assess ESG risks in the insurance sector, starting 2020.

← 18. NEST is the national employment savings trust, i.e. the occupational pension provider set up by the United Kingdom government to ensure all employers are able to offer their employees an occupational pension in line with regulatory requirements. NEST covers over 880 000 employers, over 8.6 million members, and GBP 10 billion of retirement assets https://www.nestpensions.org.uk/.

← 19. Detailed ESG rating methodologies are generally not publicly available. The FTSE4Good Index inclusion criteria of 2016 included a parameter linked to the distance between the highest responsibility for ESG and sustainability topics and the board, https://blog.metu.edu.tr/sascigil/files/2016/02/FTSE4Good_Inclusion_Criteria.pdf.

← 20. https://www.allianz.com/en/sustainability/strategy-governance/governance.html.

← 21. The UN SDGs address global challenges, including poverty, inequality, climate change, environmental degradation, peace and justice. The Paris Agreement includes the target of reducing global warming to well below 2 degrees Celsius. Other initiatives include the UN Asset Owner Alliance, which is formed of investors who aim net zero emissions in their portfolios by 2050.

← 22. https://www.bnpparibas-am.com/en/sustainability/.

← 23. https://english.pfa.dk/news-archive/2020/02/02/19/54/introduces-climate-focused-pension-solution/.

← 24. https://www.ipe.com/news/atp-resorts-to-dkk13m-divestment-after-mexican-mining-giant-fails-to-engage/10043476.article.

← 25. However, it should also be noted that other passive investors see engagement as an important tool for promoting ESG as they cannot easily divest from certain companies. https://www.blackrock.com/uk/individual/blackrock-client-letter.

← 26. https://www.ft.com/content/9b228d14-1c34-11ea-97df-cc63de1d73f4.

← 27. https://www.otpp.com/investments/investment-teams/teachers-infrastructure-and-natural-resources/greenfield-investments-and-renewables, https://www.unisuper.com.au/investments/investment-options-and-performance/super-performance-and-option-holdings/global-environmental-opportunities, https://www.swissre.com/dam/jcr:acec5faf-4ea3-46f9-9605-ef8299fb885b/SwissRe-ESG-highlights.pdf.

← 28. https://www.generali.com/our-responsibilities/our-commitment-to-the-environment-and-climate.

← 29. https://www.australiansuper.com/campaigns/socially-aware.

← 30. https://www-axa-com.cdn.axa-contento-118412.eu/www-axa-com/cf61ff6c-ee1d-4dcb-92ba-ed243ae7f2fb_2018+tcfd+full+report+-+final+-+b.pdf.

← 31. https://www.asrnl.com/-/media/files/asrnederland-nl/investor-relations/jaarverslagen/2019/2019-annual-report-asr-nederland.pdf?la=en.

← 32. Some of the larger institutional investors have in-house investment teams that perform ESG analysis internally (e.g. CPPIB, GPIF).

← 33. https://www-axa-com.cdn.axa-contento-118412.eu/www-axa-com%2Fcf61ff6c-ee1d-4dcb-92ba-ed243ae7f2fb_2018+tcfd+full+report+-+final+-+b.pdf.

← 34. The OECD Guidelines for Multinational Enterprises are adhered to by 49 countries. National Contact Points for responsible business conduct are established by adhering countries to promote the Guidelines and handle cases of alleged non-observance of the Guidelines by companies. The list of countries can be found at http://mneguidelines.oecd.org/ncps/.

← 35. The UN Global Compact involves 12 840 active signatories in over 160 countries. https://www.unglobalcompact.org/participation on 20 May 2020.

← 36. https://www.iso.org/standards.html.

← 37. ACSI’s members include 41 Australian and international asset owners and institutional investors, collectively managing over AUD 2.2 trillion in assets, and owning on average 10 per cent of each of the 200 largest Australian listed equities by market capitalisation (S&P ASX200 index). https://acsi.org.au/.

← 38. The Red Line Voting campaign is based on the ten principles of the United Nations Global Compact, and on the UK Corporate Governance Code. http://redlinevoting.org/what-is-red-line-voting/.

← 39. Examples of such initiatives include the Global Reporting Initiative, the Carbon Disclosure Project, the GreenHouse Gas Protocol, the Climate Disclosure Standard Board, and the International Integrated Reporting Council. https://www.globalreporting.org/Pages/default.aspx, https://www.cdp.net/en, https://ghgprotocol.org/, https://www.cdsb.net/, https://integratedreporting.org/.

← 40. https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/ documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf.