Charity Investment:  Adding value to the mission  Presentation to  New Zealand Council for Socially Responsible Investme

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Centre for Australian Ethical Research (CAER). Independent not-for-profit organisationResearch environmental, social and corporate governance issuesProvide tailored, independent, quality research services to organisations and fund managersPart of the Ethical Investment Research Services Ltd (EIRI

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Charity Investment: Adding value to the mission Presentation to New Zealand Council for Socially Responsible Investme

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1. Charity Investment: Adding value to the mission Presentation to New Zealand Council for Socially Responsible Investment 13 October 2006 Auckland Duncan Paterson Chief Executive Officer Centre for Australian Ethical Research (CAER) www.caer.org.au

2. Centre for Australian Ethical Research (CAER) Independent not-for-profit organisation Research environmental, social and corporate governance issues Provide tailored, independent, quality research services to organisations and fund managers Part of the Ethical Investment Research Services Ltd (EIRIS) worldwide network of research organisations providing information to the FTSE4Good index Licensed to distribute Ethical Portfolio Manager (EPM) through London-based partners EIRIS

3. Approaches to SRI Brief discussion of terms used – ethical, SRI, sustainability, CSR Broadly speaking, two approaches to SRI Values-based investing: – considers whether or not an investor wants to be associated with a particular activity Risk-based investing: – seeks to identify investment risks and opportunities arising from non-financial criteria

4. Approaches to SRI (cont) Values investors more likely to base a policy on negative and positive screens Materiality an issue for this group Risk investors more likely to use ratings, best-of-sector approaches and engagement overlays Communication/credibility an issue for this group Sources: - S&P/ASX for all market statistical data - EIRIS, CAER’s UK partners for many of the diagrams - CAER research for industry involvement

5. Investing Responsibly: A practical introduction for charity trustees Step-by-step guide to developing and implementing an SRI policy Helps Trustees know what questions to ask Useful for all investors, not just charities Sponsored by the UK’s National Council for Voluntary Organisations (NCVO) Jointly published with EIRIS and the UK Social Investment Forum (UKSIF)

6. Step One: review and fact find Review the charity’s current position and resources. Factors to be reviewed include: the current investment assets and where they are invested whether the charity’s governing document includes any restrictions the expertise available and what competencies current fund managers can offer what other charities (especially peers) are doing.

7. Step Two: set aims Clarify why the charity should invest responsibly and what it should seek to achieve from doing so. It may be at this stage that the trustees decide it is inappropriate for the charity to implement Responsible Investment. Consider how it links to the charity’s objects, strategy, investment approach and risk assessment. Be able to explain why the charity is adopting Responsible Investment Be able to articulate the aims set for Responsible Investment Consult with beneficiaries and stakeholders

8. Step Three: agree policy Identify any investments which directly contradict the charity’s objects Decide if there are other investments you would be keen to avoid. Give clear reasons and find a sufficient range of viable financial alternatives Be aware of how many companies will be excluded from the portfolio Identify any investments you would like to promote as positively furthering the objects of the charity and decide if they are financially justifiable Be aware of the possibilities and resources required for engagement Decide on style of policy and agree resource allocation Consider how Responsible Investment affects the overall investment policy Produce a written policy document which lays out aims, content and focus

9. Step Four: implement policy The UK’s Charity Commission advises that ‘Trustees are unlikely to be criticised for adopting a particular policy if they have considered the correct issues, taken appropriate advice and reached a rational result’. Given most charity investors will use Fund Managers, a list of useful questions to ask them would include: What Responsible Investment services do they provide? Do they engage with companies (if so which ones and on what issues). Are they able to exercise voting rights in accordance with trustees’ instructions? What resources do they employ for research and engagement? Do they charge an additional fee for a Responsible Investment service? How do they incorporate social, environmental and ethical matters into their risk management framework and investment process? How do they assess and report their Responsible Investment performance?

10. Step Five: report and review Reporting on the policy and its impact presents an opportunity for charities. For charities with reputational risk concerns or where stakeholder consultation occurred, reporting may bolster image: Decide on criteria through which trustees will assess and review the policy Decide whether those delegated to have performed as mandated Determine whether Responsible Investment has achieved its aims and, if not, identify the reasons and where improvements can be made Ensure that the policy and its impact is reported to relevant stakeholders Ensure that regulatory reporting requirements are met – in the UK trustees are required to report on ‘the extent (if any) to which social, environmental or ethical considerations are taken into account’ within their investment policy.

11. Worked example: Gambling The following slides provide practical examples of the sorts of issues a charity fund manager would deal with when using: Values-based investing and negative screens Risk-based investing and ratings or best-of-sector The Australian gaming industry is considered.

12. Negative screens for gambling Values-based investors may wish to screen out companies involved in gambling, for all the reasons provided in the previous presentation Most obvious step – screen out the relevant industry sector The Global Industry Classification System (GICS) has a number of different levels to describe industry sectors: - Sector - Industry - Sub-Industry

13. Negative screens for gambling (cont) ‘Casinos & Gaming’ is a Sub-Industry, and falls into the ‘Hotels Restaurants & Leisure’ Industry, and ‘Consumer Services’ Sector 4 companies in this Sub-Industry (based on the S&P/ASX100): - Aristocrat Leisure Limited - Tabcorp Holdings Limited - Tattersall's Limited - UNiTAB Limited Together these companies comprise 2% of market cap in the S&P/ASX100 (see following slide)

14. The above information is easy to access you could get it from most brokers. The above information is easy to access you could get it from most brokers.

15. Increasing sophistication Given the Australian obsession with gambling, it is not surprising that a closer look finds other companies involved Obvious example: - Publishing & Broadcasting Ltd – owns the Burswood & Crown casinos Including PBL in our screen would increase the % of the S&P/ASX100 screened out to just over 3% of market capitalisation

16. Increasing sophistication (cont) Less obvious: - Coles Myer – “It is estimated Coles Myer owns up to one in 10 poker machines in Queensland hotels.” – Courier Mail, 8 September 06 - Woolworths – “Roger ‘sugar daddy’ Corbett has created a corporate governance nightmare with 10 per cent and more of Woolworths' earnings coming from a profitable liquor and poker machine joint venture with zero transparency.” – AFR, 27 October 05 If we include CML & WOW in our screen, we lose a total of 7.6% of market capitalisation on the S&P/ASX100

17. Constructing a policy This slide shows how a client can select different materiality thresholds to determine what companies they’re concerned about.This slide shows how a client can select different materiality thresholds to determine what companies they’re concerned about.

18. Reviewing the portfolio This slide shows what the client would see if they chose a relatively mild screen – ie screening out only companies that generated 10% or more of revenue from gaming-associated activitiesThis slide shows what the client would see if they chose a relatively mild screen – ie screening out only companies that generated 10% or more of revenue from gaming-associated activities

19. The risk-based approach Large and/or index-based fund managers may not feel able to lose over 7% of available market capitalisation Is there a case for adjusting the portfolio for risks associated with gambling? 1. Regulation – as noted in the previous presentation, gaming is associated with a range of negative social outcomes – a clear target for regulators 2. Growth – we’ve seen considerable consolidation in the gaming industry. This is driven by a range of factors, but one important factor is the number of available poker machine licenses. Given governments are likely to resist issuing licenses for new machines, there has to be a risk to growth in this sector.

20. The risk-based approach (cont) 3. Reputation – gaming is exposed to serious risks associated with crime and money laundering: “PBL has been given the green light by local regulators to operate casinos in the gaming haven of Macau.” - The Age, 12 September 06 “"Macau's international gambling industry remains particularly vulnerable to money laundering," the report says.” – Hong Kong Standard, 10 March 06 4. Associated risk – smoking bans: “Smoking bans are hitting clubs and pubs hard across Australia, initially cutting gaming revenue by up to 30 per cent in Queensland establishments, where there is now a total ban on smoking indoors.” – AFR, 19 September 06

21. Negative weighting on gaming

22. Positive weighting on other criteria

23. Numerical result allows rankings

24. Incorporating the results Using rankings of this sort allows the risk-based investor to identify those companies who are more exposed to industry risks than others This data can be used to under-weight those companies, select them for engagement or manage a best-of sector investment approach

25. Values and value – changing the paradigm To draw my thoughts together and in setting out an agenda for the next five years will draw on some work that has come out of the USA The model in the slide is developed from the Jessie Noyes Foundation. The Foundation found that there was a cultural barrier – dubbed an Iron Curtain - between the parts of the Foundation that make money and the bits that give it away. Further work has shown this cultural barrier which is often marked by a lack of communication between finance committees and grant-makers has been accepted by many Foundations. One commentator, Jed Emerson, captures it as a dividing wall between “doing good” and “doing well” I think that this analysis is applicable to the UK and also can be extended beyond grant-makers [despite the many differences between the sectors in the two counties. It is strange that for many UK endowments, only 3% or 4% of their total resources are used to “further the purposes of the trust”. This analysis can also be extended beyond grant-makers to all charities that use investments to fund part of their work or activities]To draw my thoughts together and in setting out an agenda for the next five years will draw on some work that has come out of the USA The model in the slide is developed from the Jessie Noyes Foundation. The Foundation found that there was a cultural barrier – dubbed an Iron Curtain - between the parts of the Foundation that make money and the bits that give it away. Further work has shown this cultural barrier which is often marked by a lack of communication between finance committees and grant-makers has been accepted by many Foundations. One commentator, Jed Emerson, captures it as a dividing wall between “doing good” and “doing well” I think that this analysis is applicable to the UK and also can be extended beyond grant-makers [despite the many differences between the sectors in the two counties. It is strange that for many UK endowments, only 3% or 4% of their total resources are used to “further the purposes of the trust”. This analysis can also be extended beyond grant-makers to all charities that use investments to fund part of their work or activities]

26. Values and value – changing the paradigm In challenging the cultural barrier, some US Foundations have moved towards a new paradigm. As the diagram illustrates, Mission and Fiduciary Responsibility are now regarded as key elements of the charity’s purpose. Activities and asset management become mutually reinforcing instruments of change. For example, Rockefeller Foundation argues that proxy voting (ie engagement) can boost philanthropic mission in 2 ways Supports action to strengthen company management, protecting long-term shareholder value and value of foundation endowments Has potential to strengthen a foundation’s mission by using proxy voting to support its social and environmental goals. This new paradigm explains how charities can benefit from the value and values which drive Responsible Investment. It allows us to reflect that charities exist to make a difference and pursue some common good. This is why Responsible Investment is pertinent to charities – it allows charities not only to pursue the maximum financial return from their investments, but also to use their investment assets to further non-financial goals and ultimately their objects Ref the NSW government and tobacco company investmentIn challenging the cultural barrier, some US Foundations have moved towards a new paradigm. As the diagram illustrates, Mission and Fiduciary Responsibility are now regarded as key elements of the charity’s purpose. Activities and asset management become mutually reinforcing instruments of change. For example, Rockefeller Foundation argues that proxy voting (ie engagement) can boost philanthropic mission in 2 ways Supports action to strengthen company management, protecting long-term shareholder value and value of foundation endowments Has potential to strengthen a foundation’s mission by using proxy voting to support its social and environmental goals. This new paradigm explains how charities can benefit from the value and values which drive Responsible Investment. It allows us to reflect that charities exist to make a difference and pursue some common good. This is why Responsible Investment is pertinent to charities – it allows charities not only to pursue the maximum financial return from their investments, but also to use their investment assets to further non-financial goals and ultimately their objects Ref the NSW government and tobacco company investment

27. Thank you

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