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Gold , oil and m oney How Ethical Funds is e ngaging for c hange

Gold , oil and m oney How Ethical Funds is e ngaging for c hange. Robert Walker, Vice President Ethical Funds & ESG Services August 2012. Agenda. Investment thesis Engagement – Gold, Oil and Money Gold and Conflict Minerals Oil sands, Enbridge Executive pay Competitive advantages.

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Gold , oil and m oney How Ethical Funds is e ngaging for c hange

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  1. Gold, oil and moneyHow Ethical Funds is engaging for change

    Robert Walker, Vice President Ethical Funds & ESG Services August 2012
  2. Agenda Investment thesis Engagement – Gold, Oil and Money Gold and Conflict Minerals Oil sands, Enbridge Executive pay Competitive advantages
  3. Make Money. Make A Difference. Companies integrating best ESG practices will: Provide higher risk-adjusted returns for shareholders over the long term Contribute to creation of long term sustainable value for stakeholders Reduce risk in the funds (“make money”) Create better companies (“make a difference”)
  4. ESG services Robert Walker VicePresident, Ethical Funds & ESG Services Michelle de Cordova Director, Corporate Engagement & Public Policy Christie Stephenson Manager, ESG Evaluations & Research Rob Gross Manager, ESG Operations Jamie Bonham Manager, Extractives Research & Engagement Omar Dominquez ESG Analyst, health care, industrials, utilities Randy Evans ESG Analyst, consumer staples, consumer discretionary Genevieve St. Denis ESG Analyst, materials, information technology, telecommunications
  5. Our program Research Corporate Engagement Public Policy Evaluations Improve target company ESG policy and performance Structured engagements Solutions-oriented and sensitive to internal challenges Can involve use of shareholder proposals Material Risk Assessment Baseline Expectations Targeted Analytics Headline Risk Management Breach Investigations Create enabling regulatory regime Focus on corporate disclosure, transparency and the right to file proposals Address systemic risk Address other key areas of regulation Establish ESG program policies Refine evaluations Support corporate engagement and public policy
  6. TSX Composite Index: Sectors
  7. Engagement Corporate engagement The ESG Services team carries out engagement activity with the companies in the Ethical Funds portfolio on behalf of investors Each year about 50 companies (20% of our assets) are placed on our Focus List based on assessment of significance and severity of ESG risks and the extent of our portfolio exposure We engage in direct discussions on material ESG issues ranging from climate change to human rights to executive compensation This enables the team to gain insight into how management is addressing various risks to the business and encourage positive change where gaps exist
  8. Engagement Why not divest? You can’t change a company you don’t own We will divest if we see unacceptable risks and no chance to mitigate or if companies refuse to change Divestment fails to create positive change in a globalized world We focus on driving change at large corporations Consequentialist ethics – focused on outcomes
  9. The challenge of gold and conflict minerals Big part of our stock market TSX and Canadian mining companies are significant global players Mining companies contributing to severe human rights violations? Extraction of gold and other minerals not contributing to impacted communities Culpability of manufacturers of other products and consumers Mining companies at risk of losing their social license to operate
  10. Gold and conflict minerals strategy Goal Improve the human rights performance of the mining sector and ensure benefits are secured by communities Companies – Establish supply chain due diligence, human rights policies, due diligence procedures, and ensure you are benefiting impacted communities Government – Establish voluntary initiatives and where necessary regulation to advance human rights and ensure community benefits Multi-stakeholder initiatives – Human Rights Committee, Interfaith Center on Corporate Responsibility; National CSR Roundtables on Human Rights and the Extractives Sectors; Human Rights Working Group, Global Reporting Initiative
  11. Gold and conflict minerals progress Human rights standards for electronics, jewelry and mining Electronics Industry Code of Conduct, Global e-Sustainability Initiative, World Gold Council Conflict-Free Gold Standards, Responsible Jewelry Council systems underway Governments supporting key initiatives and legislation Extractives Industry Transparency Initiative, Mines Act (Ontario), SEC rules on Conflict Minerals and Revenue Transparency Corporate policies and performance improving Mining companies adapting to rapidly evolving expectations Recognition that mining must provide benefits and seek consent
  12. Goldcorp: Marlin Human Rights Assessment
  13. Today Goldcorp voluntarily increased royalty from 1% to 5% of gross revenues (interim measure until new mining law reform is complete) 80% flows to local communities for economic development Proposed mining law (supported by Goldcorp) includes 5% royalty, requirements for community consultation and closure bonds Of Marlin’s 1905 employees, 98% are Guatemalan and 60% are from the local communities Local sourcing – 70% of supplies equaling US$85 million in purchases in 2009 Local job stability has increased school enrollment by 82% (2002-2009) Sustainability Department is supporting more than 100 local projects (schools, sport fields, medical centre) Monthly roundtables (company, national government, local municipalities) will continue Local municipalities have asked for Goldcorp’s assistance in creating an economic development plan Guatemala has adopted Extractives Industry Transparency Initiative (March 2011)
  14. The challenge of oil Major part of our stock market and economy It will take decades to break our reliance on fossil fuels The search for oil is increasingly “difficult, dirty and dangerous” High country risk Extreme operating environments Heavier oil/unconventional extraction methods Alberta oil sands represent a significant resourcein safe jurisdiction Global controversy over oil sands; potential for restricted market access
  15. Oil sands strategy Goal Ensure the oil sands are developed as responsibly as possible Companies – R&D acceleration; reduce emissions; tailings pond reclamation; acceptance by First Nations; lobby responsibly Government – regional land-use plan; world class monitoring system; baseline studies; acceptance by First Nations; meaningful carbon regulation Multi-stakeholder initiatives – Boreal Leadership Council, CAPP Stakeholders
  16. Oil sands progress Accelerate innovation New tailings reclamation systems are operational and industry leaders have created Canadian Oil Sands Innovation Alliance (COSIA) Establish credible monitoring system A new jointly-operated monitoring system is in place Establish a comprehensive land use plan Government of Alberta has announced a land use plan that will include assessment of cumulative impacts and that increases conservation Address the challenges of climate change Leading oil sands companies are using carbon pricing scenarios for capital investments and are openly stating support for a meaningful price on carbon
  17. Enbridge: Northern Gateway Project
  18. Executive compensation challenge Links between pay and performance are often shaky Executive Compensation encourages short-term thinking Executive compensation design contributing to Global Financial Crisis Executive compensation quantum is contributing to income polarization
  19. Executive compensation strategy Goal Advance say on pay and communicate concerns Integrate ESG metrics into executive compensation design Initiate a dialogue on quantum Government – get the right to an advisory vote on executive pay Companies – file shareholder proposals to secure the vote Multi-stakeholder initiatives – advance say on pay at the CCGG Oil and gas companies – Focus on most obvious metrics such as safety and environmental performance Responsible investors – raise awareness of our work in this area and pressure others to begin to engage Banks – initiate a conversation about design and quantum
  20. Executive compensation progress Say-on-pay Say-on-pay is now the law in the US An increasing number of Canadian companies are now voluntarily adopting say-on-pay votes We are writing to companies to communicate where they are failing ESG Metrics Oil and gas companies are beginning to integrate ESG metrics Influencing other responsible investors We hosted opening plenary at SIO conference on executive pay Quantum We have written to five major banks asking for a vertical comparison between executive and employee pay
  21. Competitive advantage @ NEI Dedicated and sustained expertise Focus on material ESG issues revealing company-specific risks Active on government policy and standards-setting Responsive to real-time market and media events Procedures for assessing credibility of sources Takes the investment process from thought to decision to action
  22. Competitive advantage @ NEI A deliberate theory of change based on the learning firm Expertise in collaborative, interest-based negotiation Solutions-oriented and mindful of internal barriers to change Globally-recognized expert on key risks and strategies Impressive track record for driving change Robust, sophisticated, proven
  23. Make Money. Make A Difference. Reduce risk in the funds (“make money”) Avoid ‘black swans’ Enhance ESG risk management at the companies we own through Expand the investment universe for our portfolio managers Create better companies (“make a difference”) Companies implementing solutions to key problems Companies providing a rate of return to all stakeholders Setting regional, global and industrial standards to raise the bar
  24. AppendixESG Evaluation Methodology

  25. Evaluations Material risk Our evaluation methodology starts with an identification of sector-specific material ESG risks Material ESG risks are a function of the company’s sector, country exposure, ecosystem presence, or specific product and services mix ESG analysts assess these risks and identify mitigation best practices We use external panels and expert organizations to assist
  26. Evaluations Baseline expectations Baseline expectations specify ESG policies and performance tests that companies must fulfill in order to satisfy us that they are managing material ESG risks to industry standards Companies must fulfill baseline expectations in order to qualify
  27. Evaluations Monitoring – headline risk Companies we own are monitored constantly for Headline Risks Components Media coverage (national, regional, international) Credibility of source Country risk Sector risk Nature of controversy Name recognition An elevated headline risk score can trigger a management breach investigation
  28. Evaluations Monitoring – management breach Serious headline risk will trigger Management Breach Investigations if issue and company are not currently on the Focus List for corporate engagement Components of the investigation Severity Scope Management culpability Management response Duration and frequency Legality Results of investigation can lead to engagement, divestment or no action
  29. Evaluations Corporate Engagement Targeted analytics In many sectors, there are material ESG risks that few companies are addressing adequately at present (reclamation in the oil sands) In these cases, we identify targeted analytics that allow us to assess identify policy and management measures companies should take to mitigate risks Targeted analytics can also appear in the form of benchmarked performance tests (historic performance and compared to peer group). Targeted analytics are used as a foundation for engaging the companies we own to improve their ESG policies and performance
  30. Research Public Policy Research and public policy In some cases, material ESG issues are new and emerging In these cases, we conduct primary research in order to enhance our understanding of the issues and establish an internal position and action plan — before communicating with companies In other cases, we conclude that a regulatory response is required to incentivize companies to act We then engage policy-makers to adopt appropriate legislation and regulation
  31. Multi-Stakeholder Initiatives
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