A better perspective - Allianz Global Investors
Transcription
A better perspective - Allianz Global Investors
ESG matters Environmental, Social and Governance thought piece Issue 10 A better perspective: Beyond the short term 04 12 18 22 Combating drought: Drawing more from less by Jeremy Kent Fracking: Boom and burst by Marie-Sybille Connan The sharing economy: A problem shared is a problem halved by Robbie Miles The global gender gap: Changing course and discourse by Marissa Blankenship Understand. Act. The Global ESG Team LONDON Bozena Jankowska, Global Co-Head of ESG Marissa Blankenship, ESG Analyst Jeremy Kent, Portfolio Manager, ESG Analyst Robbie Miles, ESG Analyst Bozena Jankowska Global Co-Head of ESG PARIS David Diamond, Global Co-Head of ESG Marie-Sybille Connan, ESG Analyst Mathilde Moulin, ESG Analyst Dear reader FRANKFURT Henrike Kulmann, ESG Analyst Rainer Sauer, Proxy Voting Specialist Welcome to the 10th edition of ESG matters. We are pleased to have reached this milestone and hope to continue providing you with thought provoking articles for many editions to come. We have argued and demonstrated that (putting aside personal values) E, S and G issues can and do make an impact on investments, either as a result of addressing poor risk management or in presenting new opportunities. We are at a turning point, where ESG is gaining momentum among companies, investors and asset owners like never before. Where questions are being asked more broadly about the role of climate change, long-termism and stewardship. CONTACT DETAILS For any further information please contact: Bozena Jankowska Global Co-Head of ESG [email protected] +44 20 7065 1468 www.esgmatters.co.uk Editorial Emma-Louise Allen, Allianz Global Investors In this edition, we investigate a number of different issues from fracking in the USA to how to meet growing consumer demand in a world of finite resources. Our lead article was written by our Global CEO, Elizabeth Corley. She examines the importance of adopting a long-term lens in a world where businesses are becoming increasingly short sighted. Additionally, she highlights the role that asset managers play in providing stewardship and guidance to these investee companies. As always, we are happy to address any comments or questions that you may have about our ESG magazine. Design and Art Direction Susan Lane, Allianz Global Investors Imagery iStock Allianz Global Investors GmbH, UK Branch 199 Bishopsgate London EC2M 3TY www. allianzglobalinvestors.co.uk +44 20 7859 9000 Bozena Jankowska Global Co-Head of ESG 2 © 2015 Allianz Global Investors All rights reserved ESG Matters | Issue 10 EXECUTIVE PAY 04 08 12 Contents 18 22 04 Combating drought: Drawing more from less 08A better perspective: Beyond the short term 12 Fracking: Boom and burst 18The sharing economy: A problem shared is a problem halved 22The global gender gap: Changing course and discourse 3 Combating Drought/ Section 1 Combating drought: Drawing more from less The availability of fresh water is something that many of us take for granted. JEREMY KENT investigates the impact of drought in California and the measures being implemented to ensure the long term viability of the state. Jeremy Kent Portfolio Manager, ESG Analyst London 4 I venture back to California about once a year from my current home in London to visit friends and family, as well as trade a cold and wet spring day for a few warm and sunny ones. During the last visit, on the drive up the 101 freeway to Santa Barbara, I noted several signs overhead pleading motorists to help conserve water due to the severe drought. The sight of these signs, however, was not a tremendous surprise as they have become commonplace during the drought in the state now going on four years. It wasn’t until I reached the foothills of the Santa Ynez Valley, en route to the Fess Parker Winery, that the severity of the lack of water was brought to life. Hills and valleys that had previously appeared lush, green and alive now appeared arid, brown and dreary. Nearby Cachuma Lake, a primary source of water for Santa Barbara residents, held only 28% of its potential capacity, which has sent city officials and planners searching for solutions to adapt to the dilemma. Santa Barbara is not unique on this issue, reservoirs and dams across the state are running far below historical averages, as shown in the chart from the California Department of Water Resources, with the summer months still ahead. Residents ESG Matters | Issue 10 5 COMBATING DROUGHT/ SECTION 1 Current Reservoir Conditions Ending at midnight on 5 July 2015 4552 3538 3583 Trinity Lake 2838 2448 Lake Shasta 2400 2064 1355 977 913 Lake Oroville 2030 2163 791 416 Trinity Lake Lake Shasta 37% | 44% 48% | 60% Lake Oroville 38% | 48% 1607 1522 745 392 Folsom Lake 43% | 53% New Melones 16% | 26% Don Pedro Reservoir 37% | 46% Folsom Lake New Melones Don Pedro Reservoir 2041 Excheque Reservoir San Luis Reservoir Legend: Capacity (TAF) Total reservoir capacity Millerton Lake 715 742 Exchequer Reservoir 12% | 17% San Luis Reservoir 36% | 60% 1000 402 181 521 Millerton Lake 35% | 45% 662 252 Pine Flat Reservoir 25% | 38% Castaic Lake Storage level for date Perris Lake % of Capacity | % Historical Average Source: California Data Exchange Center, Department of Water Resources. and businesses in the state will need to adapt in order to survive as well as protect themselves from inevitable future water shortages. Drastic measures are being made to address this dire situation. For the first time ever in the history of California, the governor has ordered restrictions on urban users of water throughout the state. The mandatory restrictions came in to effect from June 1st requiring more than 400 cities to slash water use by 8% to 36% for an overall reduction of 25%. Governor Jerry Brown has threatened fines of USD 10,000 a day for water agencies that violate the order to cut water use. Individuals are also subject to fines from local authorities of up to USD 500 for certain violations. 6 1236 123 California Historic average level for date % of Capacity 1025 Pine Flat Reservoir 280 116 325 Castaic Lake 36% | 41% 106 131 47 Perris Lake 36% | 44% Social pressure is also being applied to corporate and individual users of water. ‘#Droughtshaming’ has become a popular topic on Twitter for naming and shaming (rightly or wrongly) of those that are perceived to be using excessive amounts of water. Pictures of sidewalks being sprayed with sprinklers, healthy green lawns of celebrities, and companies bottling water in the state have all been tagged. The risk of reputational damage and the employment of fines are indirect methods of putting a price on a resource that is not priced like other commodities available to users. The current mechanisms ESG Matters | Issue 10 for pricing water in parts of the US can be perverse, and actually encourage the use of water. Perhaps the most extreme example is the agriculture users of water who consume around 80% of the nation’s water. Farmers generally only pay for water when man made technology such as aqueducts provide for them, as water rights are granted where water is present on the property. The agriculture industry was originally exempted from the 25% water reduction target, but recently the State Water Resources Control Board has for the first time since the 1970’s forced senior water rights holders to limit use of their water resources. According to the Global Water Intelligence organization, individuals in US cities pay much less than other developed countries, and, as a result, tend to use much more water per person than countries such as Denmark where the price of water is much higher. The price of water for residential users is largely based on the cost to deliver the product to the end user, rather than actually pricing the resource itself. Water should be priced appropriately in order to ensure sustainable availability in the future. Some California cities are recognizing the need. Santa Barbara for example is increasing rates for single family residents by nearly 30% this summer to combat the water shortage issues. The risk of rising water prices compelling a reduction in demand has also been recognized by corporate users of water. Starbucks announced earlier this year that it would be moving the bottling of water for their Ethos brand out of the state due to the drought conditions. Rather than removing operations completely from the state, other companies are making investments in innovative solutions to support reduced water usage. Nestle recently committed to transforming a milk factory in California into a ‘zero water’ facility, meaning that no local freshwater resources will be used in the factory. The enhanced process will utilise water from the making of evaporated milk that can be treated and then reused throughout operations. The expected annual water savings is approximately 63 million gallons. Solution providers have also recognized the demand from corporates to increasingly incorporate water risks in future planning. Ecolab, a leader in water technology “ For the first time ever in the history of California, the governor has ordered restrictions on the use of water throughout the state on urban users of water. ” and services, recently partnered with Trucost, an organization that measures environmental impact, to develop a tool called the Water Risk Monetizer which helps businesses understand water related risks and quantify risks in financial terms. Adequate pricing of water should incentivise both demand cuts and investments in solutions to increase the supply of water available. One method of increasing the supply of water would be through desalination of seawater. This solution is often viewed as an expensive option for providing water supplies, but an adequate water price can make these projects viable. Santa Barbara is reactivating their desalination plant after more than 20 years as the economics now make sense. Another approach to increasing the supply of water would be to prevent freshwater lost through leakage. The Department of Water Resources estimates that on average 10% of water is lost through leakage with some cities losing more than 30%. The aging infrastructure will only deteriorate if repairs and expansions are not carried out. The American Water Works Association estimates that the costs of making the necessary investments in the US drinking water infrastructure will top USD 1 trillion over the next 25 years. While the short term expenses of moving to a more sustainable water supply seem significant, the long-term consequences of not making these changes would mean the population of California could not be supported in an environment to thrive or even survive. The last few miles approaching the winery continued to reveal the dry landscape, as bare trellising from the recently harvested grapes exposed the earth below. I expected the prospects for the wineries coming vintages to be bleak from the drought conditions. However, it turns out that grapes respond rapidly to the weather conditions and force the vines to dig deep and squeeze more flavour into the fruit, albeit with smaller berries and at much less quantities. A useful lesson from nature can be learned here. Citizens and corporates of water constrained regions need to adapt and innovate to bring more sustainable supply of water and use the supplies that we do have more effectively. 7 Governance/ Section 2 The world would be a “ better place if businesses stopped thinking so much about short term results and focused more on the long term. ” Adi Ignatius, Editor of Harvard Business Review 8 ESG Matters | Issue 10 A better perspective: Beyond the short term In a world where the ever faster flow of information can encourage short term thinking, ELIZABETH CORLEY opines on the benefits of businesses taking a longer term strategic perspective. She also looks at the role of asset management companies in providing effective stewardship to achieve this goal. Elizabeth Corley, CBE Chief Executive Officer, London “The world would be a better place if businesses stopped thinking so much about short term results and focused more on the long term” was the view of Harvard Business Review editor Adi Ignatius in January 2014. The same is sometimes said of asset managers and the investors they serve. A longer-term approach in investment practices can offer benefits for many market participants including improved longer term decision making by companies and consequentially better long term performance and sustainable development, as well as better alignment between asset owners’ liabilities and assets. Whilst a short term horizon is the essence of some activity, it can also lead to negative consequences including the distortion of prices and asset correlations, reducing wealth through churning, and undermining potential long term value creation for clients. Business models and investment strategies inevitably influence an asset manager’s incentive and ability to exercise corporate governance functions and therefore should be created with longterm perspective. The problem of short termism Whilst asset managers play a key role in the allocation of capital to those that need it, they should also fulfil a crucial function in promoting and encouraging the markets to take a longer term view and encouraging investee companies to have more sustainable business models. In 2010, the UK’s Financial Reporting Council published the first UK Stewardship Code directed at institutional investors, setting out key principles of effective stewardship, which would promote long term success of the investee companies in such a way that the ultimate providers of capital also benefit. Now over four years old, almost 300 organisations have publicly registered as signatories including more than 200 asset managers, representing 32% of the UK equity market.1 The up take of the However, in a world of ever faster information flow and interactions, it should not come as a surprise that businesses’ timeframes are shortening. Innovation and the ability to utilise technology in a data led marketplace has also inevitably enabled short term participants to exercise greater sway. An example of which is trading patterns. The increasing trading volumes of high frequency traders, the incentive structures and strategies of activist investors, restrictions on portfolio allocations driven by regulatory change and increasing pressures on short term performance by asset managers, has led to an increasing myopia, evidenced by steadily decreasing holding periods (Figure 1). Stewards of capital – the role of asset managers 9 GOVERNANCE/ SECTION 2 Figure 1: US equities holdings periods form 1975 to 2015 8 Number of Years 7 6 5 4 3 2 1 0 1975 1980 1985 Source: Thomson Reuters Datastream 1990 1995 2000 2005 2010 2015 Figure 2: Level of trust in industries in the UK 90 80 70 60 50 40 30 20 10 0 More trust 80 78 Less trust 77 75 2014 72 71 66 67 Consumer Automotive Entertainment Electronics Source: Edelman Trust Barometer 2015 Technology 67 Food and Beverage Over the past decades, there has been a seemingly inescapable shift by the industry towards quarterly reporting. To its credit, the FCA abandoned the rule in a move to encourage longer term thinking in the stock markets, however only a handful of public firms have so far begun to review the frequency of their reporting. Although welcomed by many investors, asset managers must proactively show support for the initiative, and for those companies brave enough to implement such changes. As one of Diageo’s top shareholders commented when the company announced its plans to drop quarterly reports “This is a very good thing. We do not want companies obsessing over the short term ups and downs of profit and 10 67 57 Code is an encouraging step forward in building a mass of investors willing and able to engage in active stewardship, however, asset managers must engage further in their role as stewards of capital. The quality of engagement is still perceived to be too low and some signatories appear not to be following through on their commitment to the Code, perhaps seeing it as a box ticking exercise.2 2015 57 Chemicals 53 54 Financial Services 54 53 Banks 52 51 Media sales…. (with) a clear long term strategy in place… profits and sales will follow”. 3 Promoting long term, responsible and sustainable investment mandates Policy makers and regulatory bodies must also address regulatory barriers and other obstacles that hinder a longer term perspective, such as accounting treatments of assets, as well as propose guidelines to promote long term horizons in governance and portfolio management. Here, the private sector can contribute ideas on new models. A recent example is the work instigated by the Cambridge Institute for Sustainable Leadership which focuses on long-term responsible investment in the context of mandates. The purpose is to develop a template for the optimal design and characteristics of an equity investment mandate that encourages long-term investment decisions and allows for improved monitoring. ESG Matters | Issue 10 However, to achieve real change the roles and approaches of all stakeholders in the investment chain need to be considered. Consultants, for instance, should be encouraged to also take a longer term view and question fund turnover and agency effects to a greater extent. Some do, but it is not yet common practice. Incentive schemes across the industry must better align rewards with the long term goals of clients. In addition, while not all asset managers will have sufficient resources to do so, more should be done to engage with investee firms on their governance and ensure the right skills and teams are brought together to align and achieve the long term, responsible and sustainable mandates asset managers are being encouraged to use. better governance standards and improved longer term outcomes. 1 Developments in Corporate Governance and Stewardship 2014, Financial Reporting Council, January 2015 2 Who Can Really Take on Short-Termism, Adi Ignatius, Harvard Business Review, 2014 3 UK asset manager calls for end to quarterly reporting, Financial Times, 8th June 2015 At a time where the financial services industry remains one of the less trusted industries in the UK (Figure 2), asset managers must play their part in rebuilding confidence in markets, thus encouraging investing for future growth and in turn jobs. This would lead to 11 Fracking/ Section 3 12 ESG Matters | Issue 10 Fracking: Boom and burst Marie-Sybille Connan ESG Analyst, Paris MARIE-SYBILLE CONNAN examines fracking in the US and raises questions about the economic and environmental impact of this technique for gas and oil extraction. For nearly a decade, we have been hearing that the US is poised to regain its role as a leading oil & gas producer thanks to the widespread use of horizontal drilling and fracturing, a process that made oil and gas extraction from shale formations economic. This shale boom was expected to change the US energy picture for decades, leading to energy independence and security, the re-birth of US manufacturing and to a much better environmental footprint thanks to the shift from coal to gas in power generation. This game changer would consequently influence climate policy, foreign policy and investments in alternative energy sources. However, stepping back a little, we should wonder whether this shale boom is sustainable and even desirable. There were key drivers and enablers of this revolution in the US: the combination of which is the best economic equation. 2. Population density is relatively low, limiting the risk of local resistance. Landowners also have mineral rights and as such are more likely to monetize their rights and permit drilling. 3. 1. Shale rock is present across the US, and most of the US major shale regions can produce both oil and gas, Regulation has been state, not federal driven, and actually struggled to keep pace with the entrepreneurial spirit of the Exploration & Production 13 FRACKING/ SECTION 3 Source: US Energy Information Administration (EIA) (E&P) industry. There is no equivalent outside the US in terms of equipment availability (drilling rigs, gasification facilities) and technical expertise. All the conditions were met to make the exploitation of shale formations an economic success. In fact the shale frenzy was credited as a key driver of the US economic recovery after the 2008 financial crisis. Shale definitely presents attractive opportunities but it comes with several challenges. Fracking is a water intensive technology. Shale formations are unfortunately located in water stressed areas, such as the Texas Eagle Ford and Barnett or the California Monterey Formation, and water use competes with agricultural and primary needs. Fracking also requires the use of chemicals and contaminants, and wastewater from the 14 fracking process needs treatment before disposal or re-use. There is a risk of groundwater contamination if there is a fault in the well construction. The most well-known concern, which has been highly publicized by the movie “Gas Land”, deals with potential methane emissions during the completion process as they have a much greater global warming effect than carbon dioxide (75 – 105 time greater over 100 years and 25 – 33 times greater over 20 years). Land communities are also concerned by land use, given the higher number of wells than for conventional oilfields, and road transport ation with heavy trucks transporting equipment, chemicals, sand, water and fuel for generators and compressors. As such, the US had to strike a fragile balance between the opportunity driven by the shale boom and the duty to limit its environmental and social impact. But beyond these pure sustainability considerations, more and more voices have started raising concerns on the underlying economic sustainability of fracking and the economic mirage in which Americans would be versed. The US could be left unprepared for a painful, costly and unexpected shock when the shale boom winds down sooner than expected because of declining production, unclear economics in a context of depressed oil prices and the flight to quality for investors who no longer want to fund the growth strategy of E&P’s. Among these voices, we heard the geoscientist David Hughes, who in October 2014 released a new report “Drilling Deeper: a reality check on US government forecasts for a lasting tight oil and shale gas boom”. This report brings a viewpoint to the table that is outside of the mainstream ESG Matters | Issue 10 Hydraulic fracturing or fracking is the process of injecting, at a high pressure, over a million gallons of water, sand and chemicals via a pipeline which contains small holes . Gas Well It is drilled deep into the earth – wells can reach 10,000 feet below ground – at around 9,000 feet it curves horizontally. Well The highly pressured mix causes cracks and fissures which are held open by the sand particles and the natural gas flows back up the pipeline to the wellhead. Acquifer\Water Table Upper casing of well is encased in cement Water mixed with Sand & Chemicals Gas Line turns horizontal Fissures caused by pressure inside well Shale rhetoric (brokers, companies, politicians) and deserves to be taken into consideration for the robustness of its methodology. The analysis is based on the potential production and shale depletion over time and does not take into account price assumptions. This worsens the picture given that tight oil (shale oil) production is viewed as costly and may not prove economic if oil prices remain depressed. The plays analyzed collectively are representative of the US potential and account for 89% and 88% of current tight oil and shale gas production respectively. The primary source for rosy forecasts of future oil & gas production is the US Department of Energy (DoE). Each year, the DoE’s Energy Information Administration (EIA) releases its ‘Annual Energy Outlook’ which provides a range of forecasts for energy production, consumption and prices. Hughes investigates whether the EIA’s expectation of long term domestic oil and gas production is founded, as policymakers, media, investors and more generally the public society take EIA assumptions for granted and this is despite their poor track-record. As an example, in 2011 the EIA was forced to cut its estimates of technically recoverable shale gas in the Marcellus play in Pennsylvania by 80% and in Poland by 99% after the US Geological Survey came out with much lower numbers. In 2014, the EIA slashed its estimate of technically recoverable tight oil from California’s Monterey Formation by a startling 96%. Hughes concludes are that gas and tight oil will peak before the next decade but that production will be more front-loaded. Production will also be far below EIA’s forecast by 2040: oil production rates from the Bakken and Eagle Ford will be less than a tenth of the EIA forecasts and shale gas production will be about one third! Meeting the shale gas forecasts of the EIA would require drilling some 130,000 additional wells by 2040 at a cost of nearly USD1trn. It would require a similar investment for a total of about USD2trn to meet tight oil forecasts. All in all, that is USD3trn that could be invested in more sustainable alternatives such as renewable energy and smart grids. A second study from the University of Texas came out in December 2014 with similar conclusions. Against this backdrop, it is clear that prices must remain considerably high to justify this level of capital expenditures but this is not the direction that oil prices took after the OPEC summit in November 2014, where quite the opposite outcome occurred. Oil prices actually plummeted by 44% as OPEC, 15 FRACKING/ SECTION 3 Figure 1: Falling cost of solar photovoltaics, solar PV “ A large number USD/MWH of new wells must 350 PV - Thin Film 300 PV - Crystalline-Silicon Tracking be drilled every PV - Crystalline-Silicon year in order to keep production at 250 least flat. 200 ” H2 2014 H1 2014 Q2 2013 Q1 2013 Q4 2012 Q3 2012 Q2 2012 Q1 2012 Q4 2011 Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 100 Q3 2009 150 Source: BNEF, Global LCOE xls, 14 August 2014 led by Saudi Arabia, decided against the output cut. The drop in oil prices has clearly impaired the shale lifecycle and revealed to the world its inherent weaknesses. Indeed, the business model of US E&Ps relies upon quick payback by drilling the sweet spots of shale plays. The issue is that depletion rates are much higher than with conventional wells (75% over the first three years against 15-20% for conventional wells). A large number of new wells must be drilled every year in order to keep production at least flat. The drilling treadmill gives rise to the capex treadmill but in a context of depressed oil prices, the weakest E&P companies (i.e. the least positioned and the most leveraged) cannot keep the momentum and fund the treadmill. WBH Energy and Quicksilver Resources filed for bankruptcy and while Whiting put themselves up for sale. Furthermore, well productivity in the topproducing counties of the Bakken and Eagle Ford is declining despite of the application of the best technology available. It is due 16 both to the saturation of the sweet spots within wells, the resulting move to lesser quality areas, and potentially to well interference as densely spaced wells cannibalize each other’s production, a phenomenon that should also only increase. Shale advocates use the technology argument to wave away the evidence of this steep decline rate for wells and plays. But technology improvements cannot achieve so much against this inexorable reality of geology. It may be a hazardous bet to take while renewables have significantly improved their economics (see figure 1). It was astonishing to hear at the recent Paris Finance Climate Week in May the Saudi oil minister and Chairman of Saudi Aramco, Al-Naimi, saying: “We recognize that eventually, one of these days, we’re not going to need fossil fuels. I don’t know when – 2040, 2050 or thereafter. So we have embarked on a program to develop solar and wind energy. Hopefully, one of these days, instead of exporting fossil fuels, we will be exporting gigawatts of electric power”. He also added: “I believe solar will be even more economic than fossil fuels”. Is it another example of the provocative attitude of a leader that in January 2015 declared that he would not care if the brent would go to USD 20 per barrel and had decided to challenge the high-cost US E&Ps? Or the statement of a visionary? We don’t know but the US would be wise to embrace a more sustainable energy policy going beyond the next election. Shale has undoubtedly been a gamechanger but its long term sustainability is questionable based on the pure geology. These concerns have come to the forefront in the current depressed oil price environment. The US is entering a new era of uncertainties. What would happen if the infrastructure investments already committed were based on flawed EIA forecasts? Only the future will tell us if the New York Times was right in 2011 when it made headlines in drawing a parallel between fracking operations and Ponzi schemes. ESG Matters | Issue 10 17 The Sharing Economy/ Section 4 The sharing economy: A problem shared is a problem halved ROBBIE MILES discusses the sharing economy as an alternative solution to meeting growing consumer demand while at the same time minimising the impact of this demand on the environment. Robbie Miles ESG Analyst, London The problem is demand and the solution is a social behavior that humans have evolved better than any other animal on the planet – sharing. Lord Stern has an uncanny skill in communicating the effects of our problem by taking the barrage of disorientating information and distilling from it the essential facts. Speaking at the Guardian’s divestment debate in May 2015, he set out our global challenge with sobering simplicity: • We have a budget of roughly 1000gt of carbon emissions before we warm the planet past 2°C and climate change ‘self-reinforces’, i.e. spirals out of control. • We currently emit 50gt of carbon per year. • This gives us just 20 years to transition to a completely sustainable economy. We can criticize the malevolence of the mining companies for digging, fossil fuel companies for 18 ESG Matters | Issue 10 drilling, industries for burning and the banks for funding but perhaps we should confront the source of the problem: consumer demand. As long as we aspire to have a car for every family, a variety of food flown in from abroad, a new smart phone every couple of years and a new wardrobe every season, the old system of extraction, which is jeopardizing life for all in as soon as 20 years, will continue to rumble on as usual. However does all this ‘stuff’ actually make us happy? Global Gross Domestic Product has increased over three times since 1950, whilst welfare, as estimated by the Genuine Progress Indicator, has actually decreased since 1978.1 Healthy ecosystems and the services they provide are more important for our long-term wellbeing than how much stuff we can consume. This is ancient wisdom. The aphorisms of Patanjali, written in India 1600 years ago, warn that, “taking more than we need, and wasting it, is a form of stealing from the rest of mankind.”2 In essence we must get better at sharing. The sharing economy provides access to things rather than ownership. It takes underutilised assets such as parked cars, empty bedrooms, unseen art, spare seats, dusty tools, etc. and puts them to work. Without the burdens of storage or maintenance, people enjoy all the utility (getting from A to B, entertainment, nourishment, shelter, etc.) for a fraction of the cost. It reduces our unsustainable demand without limiting lifestyle choices. Exploiting idle resources replaces the need to extend humanity’s destructive impact on the planet, removing the need to excavate virgin resources and convert them into goods, polluting land, water and air in the process. In social terms, sharing taps into our deep-seated desire to connect with others and be part of a community, as John Donne wrote ‘no man is an island’. Enabled by the internet, it is also convenient – allowing us access to things we perhaps couldn’t have afforded before and proving a lucrative way of utilising our spare space, things and time. 19 THE SHARING ECONOMY/ SECTION 4 The sharing economy in action The sharing economy life-cycle Niche Breakthrough Normalised Mature Book rental B&B and hostels Equipment rental Music and video streaming Car sharing Peer-to-peer accommodation Online staffing Peer-to-peer lending and crowdfunding Source: PwC analysis 20 Car rental Decline or rebirth DVD rental The sharing economy has been most successful in disrupting traditional housing and transport businesses. Take for example the average cost of running a car in the UK, estimated at GBP 3,453/year3, and compare that to the cost of a lift from London to Edinburgh approximately GBP 30, and Bristol to London approximately GBP 8, on the car sharing website ‘Bla Bla car’ Another example is the website ‘Airbnb’ through which I recently rented a room in Paris, 15 minutes walk from the Louvre, and for only GBP 30 per night. The cheapest hotel equivalent would have been at least double as much and, to my mind at least, half as fun. These businesses, and many others, are beginning to breach the ‘adoption gap’ and are becoming increasingly mainstream. The disruptive threat is so significant that even major car manufacturers are diversifying into sharing. BMW has launched ‘DriveNow’, a car-sharing application that has proved successful in Germany and is now being piloted in East London. Disintermediation of the finance industry has been another huge disruption. Funding Circle, a peer-to-peer (P2P) lending site, employs just 200 people whilst JPMorgan, a traditional loan provider, employs 30,000 people in regulatory jobs alone. This sort of huge cost base being cut out by P2P lending explains why this facet of sharing is expected to grow by 63% per year. The ramifications of such disruption however include a loss of jobs and the potential for increasing inequality as the rich squeeze more cash from their assets. These are the negative externalities that governments need to compensate for by tweaking taxes and retraining the affected workforce. After all, the transition to a low carbon economy is a huge employment opportunity. IRENA found that the global renewables industry added 1 million new jobs in 2014.4 The challenges For some, the perception of risk is a deterrent and a sceptic may think, ESG Matters | Issue 10 “ The disruptive threat is so significant that even major car manufacturers are diversifying into sharing. ” “Splendid, so I’ll just cross my fingers and jump into this stranger’s car and maybe even lend him my chainsaw?” The creation and preservation of trust has always been sharing’s biggest barrier. A problem that eBay, an ecommerce platform, is all too familiar with. In this context trust has been built over time by accumulating reputational capital via online reviews. Privacy and ease of sharing pose additional challenges. A new trade body, ‘SEUK’, has been set up to represent the UK’s sharing economy and overcome some of the obstacles that willing participants encounter. It is establishing a Code of Conduct and developing a kitemark for responsible sharing practices, which will provide helpful tools for verifying and protecting participants. And what about the likelihood of people mistreating stuff that isn’t theirs? Even that is more difficult to get away with in our technical savvy age, for example, cars these days have inbuilt sensors that can monitor depreciation of vehicles in real-time so that any wear and tear can be factored into the cost of renting. These monitoring technologies will help cause even greater efficiencies in our use of resources. The solution Benita Matofska, a champion of the sharing movement, has launched ‘Compare and Share’, a comparison site for the sharing economy. What is striking is the plethora of things that people are already sharing, for free and for profit. ‘Borrow my Doggy’, ‘Girl Meets Dress’, ‘Just Park’, ‘Nanny Share’ and hundreds more. The savvy among you may also notice the number of assets not currently listed on Benita’s site: jewellery, horses, freezer space… I’m not giving away all my ideas but you’ll see there are big opportunities for business here, without much initial investment required. The sharing economy is growing faster than Facebook, Google and Yahoo combined. Currently valued at USD 15 billion, PwC predict this to grow to USD 325 billion by 2025.5 68% of the global population are willing to share assets with 28% already doing so.6 Young digital natives have been the quickest demographic to embrace the movement. things, but sharing time. The cohesive effect of the sharing economy is perhaps akin to David Cameron’s failed vision of the Big Society. Social bonds are incrementally strengthened with each layer of trust built up by successful exchanges. On a crowded planet with limited resources, we need to fundamentally change our patterns of consumption to increase our resource efficiency and build resilient communities. By providing an opportunity to facilitate such change, the sharing economy is a savvy consumer’s dream, an entrepreneur’s playground and, to round off in a circular fashion, an environmentalist’s solution. 1 Beyond GDP: Measuring and achieving global genuine progress, www.sciencedirect.com. Communities are also collaborating in response to climate change and resource scarcity – becoming greener, more inclusive and more resilient. The ‘Transition Network’ engages local people to build collectively-owned renewable energy infrastructures and grow their own food. The 3,270 participants in Totnes, the world’s first transition town, have generated income of £861,000 from sharing locally grown veg, fruit and nuts, solar panels and their knowledge in the art of resilience.7 People are not only sharing 2 Yoga Aphorisms of Patanjali 400 CE. 3 Webuyanycar.com study, 2013. 4 IRENA, Renewable Energy and Jobs – Annual Review 2015. 5 The Sharing Economy, PwC analysis 2014-2015. 6 Sharing Economy Survey, Nielsen, 2014. 7www.transitionnetwork.org/ initiatives/totnes. 21 Global Gender Gap/ Section 5 The global gender gap: Changing course and discourse In ESG matters 8, I wrote an article entitled Women in the Boardroom – Why Europe is Winning the Race, without the background that this figurative race was actually unfolding outside of the boardroom in the run up to the 2015 Boat Race, the traditional annual rowing competition between Cambridge and Oxford Universities in the UK. 22 ESG Matters | Issue 10 MARISSA BLANKENSHIP examines how closing the gender gap can lead to important social, political, and economic outcomes including promoting diversity in corporate leadership. The world famous boat race is a treasured part of the UK sporting landscape. Until 2015, only the men’s race was fully sponsored and for the previous 69 races where women also participated, the race was even staged at different courses. However, four years ago, a plan was adopted to change the course so that both the men’s and women’s teams could row on The Tideway, River Thames and receive equal sponsorship. This new arrangement was hard fought by the CEO of Newton Investment Management, Helena Morrissey, who is not an oars women but is a Cambridge graduate, and is known for her global leadership role in gender diversity as the founder of the 30% Club, a collaborative and voluntary effort to achieve 30% of women on boards in the UK by 2015. Both Ms. Morrissey’s initiative and the UK’s Women on Boards voluntary, business led framework have shown remarkable gains. In March a progress report on the UK FTSE 100 showed that the 25% target by the end of 2015 is well within reach and significantly, there are no all-male boards in the FTSE 100.1 This voluntary regime was launched in 2011 to a mixed reception and in the shadow of the EU Directive on legislative quotas. However, it success can be measured with fewer than 20 new women appointments to go to reach its target. Marissa Blankenship ESG Analyst, London 23 GLOBAL GENDER GAP/SECTION 5 Figure 1: Women on boards: progress on FTSE 100 boards GDP per capita (constant 2011 international $’000) 30% 25% 20% 15% 10% 5% 0% 2010 2011 2012 2013 2014 2015 Q4 2015 Source: www.gov.uk/government/uploads/system/uploads/ attachment_data/file/415454/bis-15-134-women-on-boards -2015-report.pdf While the UK marches ahead, the 2012 Proposal for a Directive of the European Parliament on improving the gender balance among nonexecutive directors through quotas is still awaiting approval. Of the European Union 28 member states, the closest to meeting the quantitative objective of at least 40% representation for each gender by 2020 are France (31%), Finland (30%), Sweden (29%), and Germany (26%). 2 Until an EU system is in place, Italy’s regulation is perhaps the most stringent whereby if the less-represented gender does not hold at least one-third of board seats by 2015, the company risks fines of up to EUR 1 million and elected members could lose their office. Not surprisingly, Italy has made substantial progress with 22% women on the board as of 2014 up from only 6% in 2011. Germany has implemented a quota of 30% by 2016 for the 100 largest listed companies. They are close to achieving this having reached 26% as of 2014. Companies that fail to find suitable candidates will be obliged to leave those board seats vacant until a candidate is found. In other markets, such as Japan, little progress has been made since 2013 and meeting the target of 30% corporate leadership posts to be held by 2020 may be an improbable task from the current base of 3.1%. However, Ms. Morrissey’s 30% Club is in the early stages of setting up plans to launch in Japan which should provide a necessary catalyst for change following its successful expansion to other markets outside of the UK including Hong Kong, Malaysia, and Southern Africa.3 While progress on increasing female participation in management on a global basis is mixed, importantly, the discourse on gender is broadening in economic terms to include closing the gender gap, 24 Figure 2: GDP per capita vs. Global Gender Gap Index 2014 140 130 Qatar 120 110 100 90 Luxembourg Kuwait 80 Singapore 70 Norway 60 Ireland Switzerland Saudi Arabia 50 Sweden 40 New Zealand Iceland Finland 30 Russian Federation Brazil 20 Yemen India China Pakistan Philippines 10 Lesotho Nicaragua Chad Burundi 0 0.50 0.60 0.70 0.80 0.90 1.00 Global Index 2014 (0.00 - 1.00 scale) Source: Global Gender Gap Index 2014 and the World Bank's World Development Indicators (WDI) online database, accessed July 2014. Note: The Global Gender Gap Index has been truncated to enhance readability. measuring the investment case for diversity, and recognising women as growth generators as part of the labour force including the informal economy. The gender gap largely refers to the disparities between women and men in important aspects of equality including the economy, politics, health and education. The most impactful change of course on gender issues dates back 20 years to the 1995 Fourth World Conference on Women held in Beijing where 189 countries adopted the Beijing Declaration and the Platform for Action. One of the 12 critical areas in the declaration was ‘women in the economy’ which encompasses access to employment, appropriate working conditions, and control over economic resources. The outcome from the Platform for Action is that it has become a key global document influencing many of the policies and initiatives we are integrating today including Goal 5, achieve gender equality and empower all women and girls, of the forthcoming Sustainable Development Goals, the W20 (subset of the G20 charged with furthering the issue of gender-driven growth), and most recently the G7 commitment to female empowerment. Specifically, the G7 has recognized the role of female economic participation in reducing poverty and inequality, and have committed to reducing the gender gap in workforce participation in their countries by 25% by 2025.4 This commitment would bring more than 100 million women into the labour force and significantly increase global growth. It is particularly relevant for G7 member Japan who ranks 104th out of 142 countries having only closed 65% of the gender gap, ranking below Brazil at 71st (69%) and China at 87th (68%) according to the World Economic Forum’s Global Gender ESG Matters | Issue 10 Figure 3: MSCI ACWI Index (>$10bn market cap) “ The G7 has recognized the 180 160 role of female economic 140 120 participation in reducing 100 poverty and inequality, and 80 60 have committed to reducing 40 the gender gap in workforce World - No WoB World - > 1 WoB Sep 14 participation in their countries May 15 Jan 14 May 13 Sep 12 Jan 12 Sep 10 May 11 Jan 10 May 09 Sep 08 Jan 08 May 07 Jan 06 0 Sep 06 20 by 25% by 2025. US - > 1 WoB ” Source: Credit Suisse. Gap Index (Figure 2).5 The Nordic countries of Iceland, Finland, Norway, Sweden, and Denmark have each closed over 80% of the gender gap and make up the top five members of the index. At the company level, the proof statement for companies who have diversity high on their agenda, specifically at the management and board level, is to measure their investment performance versus peers who lack diversity. According to the Credit Suisse Gender 3000 research, where 15% of senior management is female, return on equity (ROE) in 2013 was 14.7% compared to 9.7% at companies with less than 10% female representation. Equally, companies in the MSCI All Country World Index (Figure 3) have demonstrated that since 2006 companies with at least one woman in management versus none have outperformed. This builds an interesting investment case for diversity although in order to reach parity in the boardroom and in corporate society as a whole, adding one woman to a management committee is not sufficient. To put all the data in perspective, these varied initiatives, targets and policies set by governments, international organisations, businesses and collaborative grassroots efforts have the collective power to lead to an increase in women in the economy which can lead to equality in the workforce including more women in management and women in the boardroom. Opportunities for women in the workforce can lead to a reduction in poverty and inequality at a minimum and for companies with greater diversity in corporate leadership, this can lead to outperformance. None of this will be possible, however, without equal consideration of the barriers which prevent women from entering, re-entering and remaining in employment including cultural and structural issues such as opportunities for promotion, assistance with child and elder care and achieving work-life balance. Closing the gender gap has been and will be a long-term effort and it appears that the change of course has been firmly set however just how quickly this pace of change may be achieved is an open ended question. While another 70 years per the Cambridge and Oxford rowing legacy is clearly unreasonable, using the framework of 2030 per the Sustainable Development Goals steers the many milestones from a country, company and society level down a productive path. 1www.gov.uk/government/uploads/system/uploads/ attachment_data/file/415454/bis-15-134-women-on-boards2015-report.pdf. 2http://ec.europa.eu/justice/gender-equality/files/gender_ balance_decision_making/boardroom_factsheet_en.pdf 3http://www.ft.com/cms/s/0/6b4460d0-1992-11e5-8201cbdb03d71480.html#axzz3ejLqjTvz. 4http://knowledge.allianz.com/?2975/7-surprising-outcomesof-the-G7. 5 http://reports.weforum.org/global-gender-gap-report-2014/ economies/ 25 ALLIANZGI AND ESG/SECTION 6 Please find below biographies of the contributors to this edition of ESG Matters: Elizabeth Corley, CBE Chief Executive Officer Elizabeth Corley is Chief Executive Officer of Allianz Global Investors, a global asset manager 100% owned by Allianz. Prior to joining Allianz in 2005, Elizabeth spent eleven years working at Merrill Lynch Investment Managers (formerly Mercury Asset Management). Before this, Elizabeth was consultant and then partner with Coopers & Lybrand, and prior to that worked for a number of years in the Life & Pensions industry. Having served for two terms as Chairwoman of the Forum for European Asset Managers (an industry grouping of CEOs), she now is a member of the Management Committee. In 2014 she was appointed to the European Securities and Markets Authority’s stakeholder group. Elizabeth is also an Advisory Council member of TheCityUK Ltd and a member of TheCityUK International Regulatory Strategy Group. Since April 2011 she has served as non-executive director on the Financial Reporting Council, the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. Since 2012 she also has served on the British Museum Investment Committee and is a member of the CFA Future of Finance Council. On 1 May 2014 she was appointed as an independent non-executive director of Pearson plc, the British multinational education and publishing company. In June 2014, Elizabeth was asked to chair a panel of market practitioners to contribute to the Fair and Effective Markets Review in the UK. Additionally, Elizabeth is an Advisory Council member for the AQR Institute of Asset Management at London Business School. Elizabeth was named ‘Most Influential Woman in Asset Management’ in 2009, CEO of the Year in 2011 and Most Influential Person in Asset Management in 2012 by Financial News. She is a member of the Committee of 200, a membership organization of the world’s most successful women business leaders. In addition, Elizabeth is a member of the Microloan Foundation Women’s Development Group. As well as being a fellow of the Royal Society of Arts, Elizabeth is a writer and has had five thriller novels published. Bozena Jankowska Global Co-Head of ESG, ESG Research Bozena Jankowska is a Director and the Global Co-Head of ESG with Allianz Global Investors, which she joined in 2000. Being the cohead of the firm’s Environmental, Social and Governance (ESG) team, Bozena is responsible for directing the firm’s global ESG research, engagement and proxy voting platform which supports both specialist SRI funds and ESG integration. Bozena also leads the firm’s efforts to provide insights into sustainability issues, and establishes and manages research partnerships within the firm and with external research institutes and academic institutions. In 2006, she was responsible for the design, launch and management of the Global Ecotrends Fund which became a significant global fund franchise reaching assets under management of EUR 1bn. Between 2012-2014 she was Chair of the UK SIF Analyst Committee and is representing Allianz Global Investors on the Cambridge Institute for Sustainability Leadership Investment Leaders Group. She previously worked at John Laing PLC as their business and environment advisor. Bozena has a B.Sc. in environmental science from the University of Sussex and an M.Sc. with distinction in Environmental Technology from the Imperial College of Science, Technology and Medicine. In 2009, she was named as a Financial News Rising Star in Fund Management. Biographies 26 ESG Matters | Issue 10 Jeremy Kent, CFA Portfolio Manager, ESG Analyst Jeremy serves as deputy portfolio manager for the Global Sustainability strategy and is an ESG analyst responsible for covering Industrials. Jeremy joined AllianzGI in 2008 through the graduate programme, starting an 18 month rotation of roles within the company which include investment management and research analysis. Jeremy graduated from California State University in 2007 with a BA in Entrepreneurial Management. Jeremy is a CFA charterholder and holds the IMC designation. Marie-Sybille Connan ESG Analyst Ms. Connan is an ESG analyst with Allianz Global Investors, which she joined in 2008. As a member of the firm’s Environmental, Social and Governance (ESG) team, she is responsible for the energy, media and telecom sectors. Ms. Connan was previously a fund manager and credit analyst with the firm. She has 16 years of investment-industry experience. Before joining the firm, Ms. Connan was a senior credit analyst at Fortis Investments and Aviva Investors; before that, she worked at Natixis AM as a fund manager and equity analyst, focusing on IT and software. Ms. Connan has a master’s in finance from the ESC Montpellier Business School. She is a member of the French Society of Financial Analysts and a graduate of the Centre de Formation des Analystes Financiers. Robbie Miles, ACA ESG Analyst Robbie is an ESG analyst with Allianz Global Investors, which he joined in 2014. He has analytical responsibilities on the Environmental, Social and Governance (ESG) Research team for the utilities and industrials sectors. He has three years of sustainable finance experience. Robbie qualified as a chartered accountant with PwC and holds a BA in Environment and Business from the University of Leeds. Marissa Blankenship ESG Analyst Marissa Blankenship is an ESG analyst with Allianz Global Investors, which she joined in 2011. As a member of the firm’s Environmental, Social and Governance (ESG) team, she is responsible for conducting sustainability research on the financial sector. Marissa has 14 years of investment-industry experience. Before joining the firm, she worked as an associate in the equity-strategies group at Hall Capital Management. Ms. Blankenship also conducted sustainability research on a wide range of sectors, companies and funds at Truestone Impact Investment Management and Incofin Investment Management. She has a BS in Economics from the University of California, Davis, an MSc in Latin American Economic Development from the University of London and is currently completing a Master’s in Sustainability Leadership from the University of Cambridge. Marissa holds the IMC designation. 27 Disclaimer Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. 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