HomeMy WebLinkAboutSLO ESG Investment Criteria_09.2020_FinalCity of San Luis Obispo
Environmental, Social, and Governance Investment Criteria
PFM Asset Management LLC
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San Francisco, CA 94111
415.982.5544
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September 2020
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Agenda
ESG Investment Criteria
Appendix – PFM’s Fixed Income ESG Investment Solution
ESG: Environmental, Social, and Governance
Measuring ESG Risk Exposure
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Where We Are
Introduction to ESG Investment
Determine ESG investment parameters. Incorporate ESG investment criteria into the Investment Policy Statement
Execute an amended investment advisory agreement
Integrate ESG into the management of the City’s investment portfolio
Identify eligible investments based on the City’s ESG investment parameters
Monitor ESG risk
Review, discuss, and refine ESG investment criteria as needed
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SLO Portfolio as of August 31, 2020
Constituent ESG Risk Ratings and Subindustry Rankings
Source: Sustainalytics. Based on ESG risk assessments on August 31, 2020.
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Measuring ESG Risk Exposure
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Who is Sustainalytics & What is the ESG Risk Rating?
A firm dedicated to independent ESG and corporate governance research, ratings, and analysis
Supports investors around the world with the development and implementation of responsible investment strategies, as it has done for over 25 years
Continuously conducts in-depth research and analysis on over 16,000 public and private companies
Sustainalytics’ ESG Risk Ratings enable investors to evaluate different organizations, using a consistent methodology, by quantitatively defining a company's material ESG risk on a scale
of 0-100
Lower scores = lower ESG risk
ESG Risk Rating Scale
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How is the ESG Risk Rating Determined?
The ESG Risk Rating measures economic value at risk based on exposure to unmanaged ESG Risks
An organization’s ESG risk assessment is based on two primary factors:
ESG Risk Exposure – Determined at the subindustry level with adjustments for company-specific risk exposure levels
Management of ESG Risk Exposure – Based on policies, programs, quantitative performance, controversies, and corporate governance
Source: Sustainalytics
ESG Risk Rating = Unmanageable ESG Risk + Management Gap
Unmanageable
Industry-specific risks
(carbon for oil companies)
Manageable
ESG Risk that is not being managed
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ESG Risk Rating Decomposition
Source: Sustainalytics
ESG Risk
Rating
Total Exposure is the starting point for a company’s exposure to material ESG issues
Some companies have Unmanageable Risks, e.g. an oil company will always face risks related to carbon until it changes its business model
Of the Manageable Risk, a portion is managed through a company’s policies, programs, management services, etc.; the remainder is considered unmanaged (Management Gap)
The ESG Risk Rating measures unmanaged ESG risk
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ESG Risk Rating Example Calculation – Apple Inc.
Source: Sustainalytics. Last updated August 31, 2020. Illustration not drawn to scale.
Manageable
Risk
36.5
Management Gap
20.6
Managed
Risk
15.9
Managed
Risk
15.9
Total
Exposure
39.5
Unmanageable Risk
3.0
Total Possible Rating = 100
ESG Risk
Rating
23.6
(Medium ESG Risk)
Unmanaged
Risk
23.6
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Unmanaged
Risk
34.9
ESG Risk Rating Example Calculation – 3M Co.
Source: Sustainalytics. Last updated August 31, 2020. Illustration not drawn to scale.
Manageable
Risk
54.8
Management Gap
29.1
Managed
Risk
25.6
Managed
Risk
25.6
Total
Exposure
60.6
Unmanageable Risk
5.8
Total Possible Rating = 100
ESG Risk
Rating
34.9
(High ESG Risk)
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Governance
8.2
(23%)
Social
13.6
(38%)
Environment
13.2
(39%)
ESG Risk Rating Decomposition Example Calculation
Source: Sustainalytics. Last updated August 31, 2020. Illustration not drawn to scale. MEI scores might not add up to ESG breakdown scores due to rounding.
Apple Inc.
ESG Risk Rating 23.6 (Medium)
Governance
10.6 (45%)
Social
11.8 (50%)
Environment
1.2 (5%)
Material ESG Issue Scores
ESG Breakdown
3M Co.
ESG Risk Rating 34.9 (High)
Material ESG Issue Scores
ESG Breakdown
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Sustainalytics Industry Categories
Sustainalytics has categorized each rated organization into 42 different industries and 138 subindustries
ESG criteria may include an exclusionary component with exclusions based on specific industries and subindustries
Source: Sustainalytics. The highlighted industries are part of the industry exclusion approach.
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ESG Investment Criteria
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SLO Portfolio as of August 31, 2020
Constituent ESG Risk Ratings and Subindustry Rankings
Source: Sustainalytics. Based on ESG risk assessments on August 31, 2020.
Please note that no issuers in City’s portfolio are in the recommended industry exclusion list, as detailed on page 16.
Amazon vs Adobe
Amazon has a relatively higher ESG risk rating mainly due to it’s
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Our Understanding of the City’s SRI & ESG Objectives
SRI
Approach #1
SRI
Approach #2
SRI & ESG Approach #3
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ESG Investment Approach Summary
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Example Application of ESG Investment Parameters
The example below assumes both issuers meet the City’s investment policy requirements
Applying the example ESG investment parameters, only one issuer below is an eligible investment
Sources: PFM Approved Issuer list as of 12/31/19. Sustainalytics; based on ESG risk assessments on or prior to August 31, 2020.
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ESG Portfolio Investment Universe
1. As of April 2020. Excludes issuers in the Treasury, Supranationals, Federal Agency sectors, and “BBB” rated issuers.
2. Industries as defined by Sustainalytics. The chart only includes issuers in industries that are impacted by the application of the ESG investment criteria.
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PFM’s Fixed Income
ESG Investment Solution
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What is ESG Investing?
ESG investing is a sustainable investment approach
More inclusive than Socially Responsible Investing (exclusionary approach)
Broader in scope than thematic and impact investing
Incorporates measurable non-financial ESG factors into an investment analysis
Climate Change
Air Pollution
Deforestation
Water Pollution
Board
Composition
Bribery &
Corruption
Lobbying
Executive
Compensation
ENVIRONMENTAL
How a company limits its environmental impact and carbon footprint
SOCIAL
How a company treats its employees, customers, community, and other companies it interacts with
GOVERNANCE
How a company is led and managed, including executive pay and any internal controls
Data Protection
Human Rights
Gender &
Diversity
Community
Relations
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A Customizable & Flexible Approach
Investment strategies
Investment management
Measurement & Reporting
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Sustainalytics is a leading independent ESG and corporate governance research, ratings and analytics firm that supports investors around the world with the development and implementation
of responsible investment strategies. For more information, visit www.sustainalytics.com.
PFM employs our proven investment process and leverages Sustainalytics’ ESG data and analytics to implement and manage ESG fixed income investment solutions
ESG Risk Ratings & Rankings
Alerts (“Controversies”)
Screening Tools
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Disclosures
This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy,
completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as
to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct
as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily
reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.
Sample portfolio is provided for illustrative purposes only and is not a recommendation.
As economic and market conditions may change in the future, so may PFM’s recommendations as to the sale and purchase of securities in the portfolio.
There is no guarantee the investment objectives will be achieved as the investment portfolio will only include holdings consistent with the applicable Environmental, Social, and Governance
(ESG) guidelines. As a result, the universe of investments available will be more limited. ESG criteria risk is the risk that because the investment portfolio ESG criteria excludes
securities of certain issuers for nonfinancial reasons, the investment portfolio may forgo some market opportunities that would be available to investment portfolios that do not apply
ESG criteria.
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