1. Diego Valero CEO and Chairman Novaster Professor Universidad de Barcelona 1 “PENSION FUNDS AND THE VALUATION OF SRI” MISTRA WORKSHOP ON SUSTAINABLE INVESTMENT RESEARCH

2. CRISIS? WHAT CRISIS? 2

3.  SRI integration in risk management  Best practices and standards  Spanish pension funds approach to SRI Conclusions drawn from SPAINSIF UN-PRI Novethic survey: state of the art 3 AGENDA

4.  Spanish pension funds are discovering non financial risk in the global concept of risk management. Moreover financial risks are non financial risks which can become financial risks. To sum up, it deals with incorporating long term risk and improving long term value through SRI (Sethi, 2005)  There is a common believe among trade unions that asset owners have the responsability of where their funds are invested  Companies believe that if they adopt corporate responsibility policies, pension funds sponsored by them can’t avoid following ASG principles. Other experiences (Cox et al., 2004) prove that institutional investors prefer over-proportionally hold top responsibility ranked companies  Moreover, companies that manage their social, environmental and governance risk better have demonstrated better performance in the medium/long-term with the subsequent impact on their financial profitability (de Groot and Churet 2009)  Implementing SRI policies allow pension fund managers to protect their image against damage to their reputation caused by companies that are involved in unethical activities or behave in an unethical manner (Valero and Monterde, 2001) 4 SRI INTEGRATION WITHIN RISK MANAGEMENT

5.  IOPS/OECD good practices for pension funds risk management systems  Investment policy  UN-PRI (analyzed later for Spanish approach) 5 BEST PRACTICES AND STANDARDS

6. 6 Good Practice 4: Investment / Market Risk Control 4.2 An investment policy is a key mechanism for identifying and managing investment risk. Pension funds should have a written policy in place, covering at a minimum strategic asset allocation, performance objectives, any broad decisions regarding tactical asset allocation, and trade execution. The use of external managers and establishing mechanisms for monitoring the costs of their services. A socially responsible investment policy may also be added to the overall investment strategy, outlining how the pension fund intends to consider environmental, social and governance risks OECD/ IOPS GOOD PRACTICES FOR PENSION FUNDS’ RISK MANAGEMENT SYSTEMS (OECD 2011)

7.  A comprehensive investment policy would normally contain the following elements Investment objectives Asset allocation Diversification Liquidity need Foreign exchange exposure / covering Valuation methodology Use and monitoring of derivatives Asset Liability Matching targets (where appropriate) Performance measurement, monitoring and benchmarking Control procedures, including risk tolerances / risk monitoring procedures Reporting format and frequency Investment in alternative assets Leverage of fund (where appropriate) 7 INVESTMENT POLICY

8.  Conclusions drawn from SPAINSIF  UN-PRI  Novethic survey: state of the art  Legal framework 8 SPANISH PENSION FUNDS APPROACH TO SRI

9.  Source: Informe sobre la Inversión Socialmente Responsable en España. Estudio 2010. Carried out by Novaster for SPAINSIF  Three groups Exclusion approach (by values and rules). Ethical criteria followed (in general, only bad attitude within the following sectors, not directly excluded)  Alcohol  Arms  Dangerous chemical products  Gambling  Genetically modified products used in food or for animals  Mines and cluster bombs  Nuclear energy  Sexual and pornographic industry  Tobacco Exclusion only arms, child labour, social and environmental matters. Focused on best-in-class and engagement Some simple exclusion and absence of an explicit SRI policy  On the whole, 91% of the assets are invested in the euro zone, 70% in bonds (less risk regarding ESG) 9 CONCLUSIONS DRAWN FROM SPAINSIF

10.  Relevance in Spain  Main reference to follow ESG principles  Standard in occupational pension funds (31.23 bill euros in 2010) 10 UN-PRI

11. 8 pension funds and 5 pension fund managers are signatories of UN-PRI 11 Source: own calculation from Inverco and UN-PRI data OCCUPATIONAL PENSION FUNDS ASSETS UNDER UN-PRI

12.  Understanding SRI in Spain  Drivers to promote SRI in Europe/Spain  SRI financial issues valuation  Legal implications of SRI 12 NOVETHIC SURVEY: THE STATE OF THE ART (NOVETHIC 2010)

13. 13 Source: Novaster for Novethic Survey 2010 UNDERSTANDING SRI IN SPAIN 13

14. 14 Source: Novethic Survey 2010 DRIVERS TO PROMOTE SRI IN EUROPE 14

15. 15 Source: Novaster for Novethic Survey 2010 DRIVERS TO PROMOTE SRI IN SPAIN 15

16. 16 Source: Novaster for Novethic Survey 2010 SRI FINANCIAL ISSUES VALUATION 16

17. 17 Source: Novaster for Novethic Survey 2010 LEGAL IMPLICATIONS OF SRI 17

18.  No legal references  The modification of Pension Funds Law to require disclosure about SRI is currently being in discussion: “complain or explain”. Based on the Amendment to the 1995 British Pension Act (Renneboog et al. 2008) 18 LEGAL FRAMEWORK

19.  Cox, P., S. Brammer and A. Millington (2004). "An Empirical Examination of Institutional Investor Preferences for Corporate Social Performance." Journal of Business Ethics, 52 (1): 27-43  de Groot, W. and Churet, Ch (2009). “Alpha from Sustainability”. White paper, july. SAM  Novethic (2010). “European Asset Owners: ESG perceptions and Integration Practices”. Available in http://www.novethic.com/novethic/v3_uk/upload/ESG_Survey_2010.pdf  OECD/IOPS (2011). Good practices for pension funds’ risk management Systems. OECD Publishing  Renneboog, L., J. ter Horst and C. Zhang. (2008) "Socially Responsible Investments: Institutional Aspects, Performance, and Investor Behaviour." Journal of Banking & Finance, 32 (9): 1723-1742  Sethi, S. P. (2005) "Investing in Socially Responsible Companies is a Must for Public Pension Funds - Because There is no Better Alternative." Journal of Business Ethics, 56 (2):99-129  SPAINSIF (2010) “Informe sobre la inversión socialmente responsable en España. Estudio 2010”. Available in http://www.spainsif.es/estudios/propios  Valero, D. and Monterde, A. (2011), “Managing investment risk in Chilean pension funds”. OECD forthcoming 19 REFERENCES