sou · GWB3107 · 2008-11-28 00:00:00 — The aim is to give an indication of their size and development over the last ten years. The market capitalization for global equity was ,9006 billion by the end of 2007. Since 2002 equity markets have seen a steady growth. Emerging markets have nearly doubled their relative share of the global equity market. Market Capitalization - Markets 6Market cap for MSCI World was bn. MSCI state they cover of the market. /gives our estimate of the global market cap. MSCI World Index – membership countries (defined as developed markets) SOU 2008:107 Bilaga 4 Mercer MSCI Emerging Markets – membership countries By the end of 2007, global debt securities market totalled just under trillion according to (). From having represented over of the bond issuances in 1998, governments have fallen back to represent only of the market today. In 2007 financial institutions were the most frequent issuer of bonds. In nominal terms the government related bonds have increased from a value of trillion in 1998 to trillion in 2007. That equals a rise of almost . In the mean time, financial institutions issued bonds for a value worth trillion in 2007. That corresponds to a growth of nearly compared to the trillion in 1997. According to IPD the value of global real estate (22 most developed markets) was trillion by the end of 2007. The markets defined by IPD as the most developed are: Compared to the MSCI world equity developed market index the global real estate index adds South and South while , and falls out. and Steers7 presents the following numbers with regards to real estate securities. Real estate securities 2007 Real estate securities 1997 The charts show that non-REITs have seen a strong development over the last decade. These securities have grown from a market cap of billion () in 1997 to billion () in 2007. Total value of real estate securities market by year end 2007 was ,114 according to and S&P/Citigroup. According to a report8 the global private equity assets under management (AuM) is estimated to be trillion by year end 2006. The largest group of investments is leveraged buyout funds (LBO) followed by mezzanine and venture capital. 7In cooperation with S&P/Citigroup World Property Broad Market Index. 8The New Brokers: , , and are Shaping our Capital Markets, October 2007. 2000 and 2006 were the periods with the strongest capital inflows to private equity (see chart below). Funds raised means the money investors have committed to private equity funds in each year. () states the hedge fund market contained trillion in . Net asset flows to hedge funds continue to grow. During 2007 investors allocated 194.5 billions to the industry and that is more than . there has only been one year with negative net asset flows to hedge funds. That was in 1994 and ever since then hedge fund strategies have increased in popularity among the worlds investors. According to McKinsey9, the number of registered hedge funds has increased steadily over the years. The growth is 1,when hedge funds have exploded from around 500 in 1990 to over 7,000 in 2007. As noted earlier, for the purpose of this report we do not consider hedge funds an individual asset class but an alternative investment vehicle. Hedge funds are in this regard to be seen as investors in the other asset . 19971998 19992000 20012002 200320042005 9 The New Brokers: , , and are Shaping Capital Markets, October 2007 By the end of 2006 the total value of globally managed pension assets reached trillion. In the past five years the pension assets have seen a steady growth which could be explained by an expansion in funding, pension reforms and a recovery in equity markets.10 According to the pension capital can be divided into three different categories: – life and insurance companies Book reserves and other retirement products The first category, the autonomous pension funds, constitutes two thirds of the total global pension volume and has done so over the past six years. Pension insurance stands for one fifth of the assets. The allocation has not changed much during the 21st century. 10 , Pension Markets 2008. 4 Size of Institutional Investors11 4.1The Hundred Largest Institutional Investors The chart below presents the distribution of size amongst the 100 largest institutional investors by the end of 2006. 100 Largest Institutional Investors Assets (Billon US$) 11 If not mentioned otherwise, all statistics in this section comes from , The worlds 300 largest pension funds – year end 2006. The graphs and tables are reconstructions of information in that report. AP-funds 1-4 qualify within the top 100 with assets around billion each. In the table below you can see the exact placement of all the AP-funds. With aggregated assets the AP-funds would climb significantly in the ranking and place as the 11th largest institutional investor. Two other Swedish institutions are included in the report referred to earlier; (36) and (59). These two are not included in the AuM in the chart below. 100 Aggregated by Country The AP-funds compared to other countries US investors have AuM which totals ,070 billion. That makes the the largest institutional investor without compe- tition. But if you put the assets in relation to the number of investors, the US is beaten by both and the . Bilaga 4 Mercer SOU 2008:107 Assets ($bn)/ , , , , , , , , , , , South , , lists 23 sovereign pension funds (SPF). We have included AP 6 in the report as well. The bigger part of the funds has a volume between billion. This is also the range where we find AP-funds 1 4. Assets (billion US$ ) It is worth noting that is the only country with more than one SPF. In the chart below all AP-funds assets are added together to make a more fair comparison to the other countries. manages the largest SPF. assets amounted to billion by the end of 2006. The table below lists the ten largest SPFs. ($ bn) Fondo de Reserva Seguridad In the last few years we have seen the emergence of some very large sovereign wealth funds. When these funds have not been dedicated to manage pension assets they have been left out of this report. For many of the sovereign wealth funds it is difficult to get clear evidence of their assets under management. An increase in total responsible investment (RI) assets under management (AUM) is evident in all the key markets including Europe, the US, , and . In Europe, RI investing is estimated to represent 17.6%12 of all funds under management with the two most investor communities being those of the UK and the . Institutional investors continue to lead the way on responsible investment. One of the key themes emerging in the public conscience and among institutional investors is climate change. An increasing number of asset owners are examining how they might better address the risks and investment opportunities across their asset and investment horizon. Social criteria are also emerging as an area of concern and most investors globally remain focused on corporate governance issues, especially but not exclusively executive compensation. Public equity investments remain the key focus for ESG integration however other asset – including alternatives – are increasingly considered valid subjects for ESG review, though using approaches and tools that are tailored to the asset class in question. Much of the work on responsible investment continues to be coordinated globally through and encouraged by collaborative initiatives. For the most part, these initiatives are growing in terms of assets under management, number of signatories, and volume of interaction and joint actions. 12 Eurosif (2008) European SRI study 2008. Data as at 31/12/2007. 5.2Defining responsible investment (RI) Responsible investment is a growing and changing field. Broadly defined, it incorporates an consideration of environmental, social, and corporate governance (ESG) factors within investment decision making and ownership. This is driven by growing recognition among investors that responsible corporate behaviour with respect to ESG issues can have a positive influence on the financial performance of companies, particularly over the long term. Unlike ethical or socially responsible investors, responsible investment describes investors who address ESG factors not on ethical grounds, but because they believe these factors can affect the performance of underlying investments. They therefore include these factors into the investment process as an element of risk management. Throughout this section, we present data on the RI market in a common format. We distinguish between core and broad RI – the former includes ethical exclusions, positive screening and a combination of ethical exclusion and positive screening while the latter includes simple screening, including norms-based screening, engagement and integration13. This typology is used by most national social investment industry groups. Strong returns, new inflows into existing products, and the addition of pension funds integrating ESG analysis drove substantial growth in the RI market in 2007. A large part of the growth in the region is due to integration of ESG issues by mainstream institutional investors, most notably in 2007 a change in course for the AU$13.3 billion Superannuation Fund.14 13For a more detailed explanation to these segments, please see Eurosif (2008) European SRI study 2008. Data as at 31/12/2007. 14Superannuation is a synonym for pension, used in the UK and /. All three fund categories tracked by Australasia () – Australian, Foreign, and Balanced Growth funds – outperformed passive benchmarks and the average mainstream fund over one, three, and five years (to 2007). Size of SRI market as at 30/06/07 charitable trusts, environ- Corporate Engagement and ESG Integration (according to ). Australian large cap equities are most often conducted with an No specific shareholder resolutions that related to an issue of environmental or social responsibility in in 2007. Climate change is the over-riding issue. Reform Act 2001 All investment funds ) are required by law to disclose to what extent ESG factors are taken into consideration in the selection, retention or realisation of an investment. Ethical funds are required to set out their criteria for what is and what is not an ethical investment. AMP Capital Investors and , provide a public report on their ownership practices. Actions of leading asset VicSuper also leads the way in terms of RI implementation and Three of the four largest fund managers in and New Zealand have signed up to the UN PRI: , AMP 15 The information in this table is from the following reference unless otherwise noted: Australasia () and in (ASrIA) FINAL.pdf Europe continues to be the leading region for RI strategies and, as Eurosif reports, some strategies will soon be considered accepted mainstream investment practice in several member nations. In recent years, the greatest growth has been in the area of engage- ment and integration strategies, compared to screening strategies. The key targets for engagement strategies remain climate change and carbon disclosure. Screening is most prevalent in the with 436 billion managed using ethical exclusions, best-in class and simple screening. Screens targeting the trade in armaments represent over half of all screening in Europe. Adjusting for overall growth in European markets between 2005 and 2007, Eurosif reports an real market growth rate for the total SRI market over the two year period. Composition of SRI market as at 31/12/07 was institutional assets and retail. This composition breakdown remained the same as 2005, although the 2007 figures take into account the Nordic SRI market (not including ) which was not included in the previous Eurosif report. Bilaga 4 Mercer SOU 2008:107 Size of SRI market Institutional Investors, largely pension funds. Engagement and ESG integration. Emphasis remains on public equities (of total AUM). bonds increased and now represent of total SRI AUM. investors are ahead of their peers with regards to Engagement is practiced almost equally at both domestic and international level. Direct private engagement is the most common method Climate change is the over-riding issue. National SRI regulations in place in the UK, , , , , , and . Soft legislation or ethical guidelines (the and European Parliament is currently in discussions regarding the possible introduction of mandatory transparency laws. mandates, which is stated was partly due to the fact that the managers were not signatories to the PRI. ABP has extended its commitment Actions of leading asset investing by allocating an (50m) to PGGM the Dutch pension fund, issued what is believed to be the first large emerging markets equity mandate to explicitly place environmental, social and corporate governance (ESG) factors at the heart of the investment 16 The information in this table is from the following reference unless otherwise noted: Eurosif (2008) European SRI study 2008. Data as at 31/12/2007. The SRI market in continues to be driven by large institutional investors, namely pension funds. This is partly due to a government directive from 2001 stating that pension funds must consider ethical and environmental aspects without giving up their priority goal of a high return on investment. There has been an increasing number of smaller pension funds selecting investment funds with SRI characteristics. The main SRI method adopted by Swedish companies is negative screening; with approximately of SRI assets being managed using ethical exclusions or simple screens. The visibility of the Swedish Government within the SRI space is likely to continue influencing the integration of ESG factors by investors within . Size of SRI market Institutional Investors, mainly pension funds. Market is dominated by investments in equities, namely Engagement is growing, primarily practiced amongst large Climate change is the over-riding issue. National SRI regulations require pension funds to consider ethical and environmental aspects without giving up their priority goal of a high return on investment. Swedish Parliament appointed a committee to evaluate the implementation of ethical and environmental criteria in the investment process of the AP-funds. 17 The information in this table is from the following reference unless otherwise noted: Eurosif (2008) European SRI study 2008. Data as at 31/12/2007. Bilaga 4 Mercer SOU 2008:107 The AP national pension buffer funds (AP1, AP2, AP3 and AP4) have disinvested from nine companies that are involved in the sale of cluster bombs. Pensionskassa, the Swedish Church Actions of leading asset , has allocated 26.3m in new global equities to () and increased its investments with Swedish ethical manager . The Swedish AP7 fund recently announced that it will invest more than 300 million over the next 3 years via two or more clean tech private equity fund-of-funds18. The Scandinavian region represents a large section of the SRI market within Europe. For the purpose of this report, as a region includes , and . The main driver in the region is demand from institutional investors who continue to be influenced by the Norwegian Governments adoption of SRI practices. In , engagement is the most commonly applied method, with 151 billion SRI AUM using this approach. SRI is steadily gaining momentum in the Danish and Finnish markets after initially making slow progress. growth can be linked to the integration of ESG factors into fixed income asset , namely bonds, whilst lack of an institutional leader in the SRI space had hindered earlier uptake in the country. In and SRI is mainly practiced through ethical exclusions and negative screening. 18 Source: Responsible and Update, issue number 6, published spring . SOU 2008:107 Bilaga 4 Mercer Size of SRI market Institutional Investors, also has a considerable SRI screening and ethical exclusions are most commonly applied in and . in is engagement (150.8 billion). The majority of SRI investments are in equities and bonds.. Engagement is the most widely applied strategy in broad SRI market. Engagement occurs at a much lesser extent in and although this is Most common method is direct engagement. Focus is on climate change. The Norwegian Government is currently reviewing its ethical guidelines for the government pension fund which were approved in 2004. The guidelines require the fund to screening of companies producing certain categories of weapons (such as biological weapons and cluster bombs). While there is a lack of strict regulations, public pressure plays an important role in influencing change in the Collaboration of largest Norwegian companies to form the Sustainable Value Creation, an initiative developed to Actions of leading asset companies to incorporate long-term pension, the pension fund for , has adopted a new ethical investment policy which will be published in the third quarter. Assets in all types of socially and environmentally screened funds – including mutual funds and exchange-traded funds (ETFs) – rose to billion in 260 funds in 2007, a 13 percent increase over the billion in the 201 tracked in 2005. Eight socially and environmentally screened exchange-traded funds (ETFs) with billion in total net assets were available through the end of 19 The information in this table is from the following reference unless otherwise noted: Eurosif (2008) European SRI study 2008. Data as at 31/12/2007. 2006 – the first time SRI-focused ETFs have been a factor in a Trends report. At more than trillion in assets, socially screened separate accounts managed for institutional investors and high net worth individual clients constituted the bulk of SRI assets tracked in 2007, up 28 percent from trillion in 2005. Institutional investors have also used the stock they hold to increasingly participate in shareholder resolutions. Size of SRI market High net worth individuals and other retail investors, defined contribution retirement plans, public and faith-based pension Screening, advocacy, community investing. Primarily domestic large-cap equity but expanding into other asset ; real estate, hedge funds, etc. Shareholder resolutions more popular than in others regions. The average level of shareholder support for resolutions on social and environmental issues increased 57 percent from 9.8 percent in 2005 to 15.4 percent in 2007, a record high. Climate change is the over-riding public issue. executive compensation controversies continue to generate more shareholder actions. US government passed the Sarbanes- Oxley Act (2002), including new requirements that should serve to significantly enhance corporate governance. 2003 requirement by the SEC that mutual funds disclose their proxy voting policies and actions.22 Some state laws on renewable energy standards or other environmental regulations, and forthcoming carbon legislation. 20The information in this table is from the following reference unless otherwise noted: . 2007 Report on Socially Responsible Investing Trends in the . 5, 2008, 21The US SIF does not give a breakdown between core and broad SRI categories. 22As of 31 2004, mutual funds and registered investment advisors must disclose both their proxy voting policies and how votes are cast. Actions of leading asset owners Teachers and made allocations to governance/activist funds which seek to improve financial performance through engagement strategies.23 Leading US & European institutional investors, with over trillion AUM, have signed a climate change action plan to increase pressure for environmental disclosures by companies as well as greater direct investment in energy efficiency and cleantech.24 Principles for ()25 The PRI is an investor-led initiative which was launched in partnership with Initiative and the UN Global Compact. As of 2008, the signatories included 135 asset owners, 168 investment managers, and 75 service providers with over US$13 trillion in assets under management. (CDP)26 The CDP is an independent not-for-profit organisation aiming to create a lasting relationship between shareholders and corporations regarding the implications for shareholder value and commercial operations presented by climate change. As of 2008, there were 385 CDP signatories with AUM of trillion. Public equities have traditionally been the focus for the SRI community and 2007 saw the continuing growth of new products targeting this asset class. The Responsible Investor 2007 survey27 of 84 institutional asset owners, managing over trillion in assets, 23Global Proxy Watch, February 1, 2008. 27Responsible Investor (2008) RI Landscape 2008: Asset Owners. Retrieved from /reports/reports_page/ri_landscape_2008_asset_owners/ found that public equities continue to be the most important asset class for RI investments. Figure 1 Percentage of AUM invested using responsible investment criteria allocated to different asset classes28 Real estate and infrastructure However, as more investors become interested in and committed to ESG integration, more attention is being paid to other asset . We see the development of responsible investment strategies for other asset , including alternatives, as an important trend for 2008 and beyond. A number of introductory studies examining the application of RI to diverse asset class have been published. Of particular note, the Handbook on across Asset , published by in 2007, is an excellent resource regarding the broader application of responsible investment.29 Fixed Income: Systematic consideration of ESG issues with regards to risk and opportunity within fixed income portfolios is still relatively uncommon though there are a number of products available. Fixed income investment vehicles that employ a traditional SRI screening approach are more common, but still 28Responsible Investor (2008) RI Landscape 2008: Asset Owners. Retrieved from /reports/reports_page/ri_landscape_2008_asset_owners/ (2007). Handbook on across Asset . form a very small part of the fixed income market. In February 2007, JPMorgan and Innovest Strategic Value Advisors launched the JPMorgan Environmental Index – Carbon . The high grade US corporate bond index is based on the JPMorgan US Liquid Index and is tilted in favour of companies that have relatively lower risk due to climate change. : Public equities are expected to remain the most important asset class in the RI space in the foreseeable future. The last years has seen an increasing interest in emerging market equities. For example, Mercer has worked with the large Dutch pension fund, PGGM, in this area. Focusing on emerging markets, we developed a framework to combine our assessment of manager integration of ESG with Mercers traditional manager research process. The ESG assessment was conducted after the short-list of managers was determined.30 : tracks private cleantech investments around the world. For 2007, they counted US$5.18 billion in North and Europe, up from billion in 2006 and billion in 2005.31 The top five categories by financing activity in 2007 were energy generation, energy storage, transportation, energy efficiency, and recycling and waste. , the Chairman and co-founder of the is based in . /Property: Energy conservation strategies have become an accepted focus for most if not all property developers, tied in no small part to projected and actual increases in energy prices. There are, however, other ESG-related considerations that are gaining a higher profile. Examples include concerns about labour standards, environmental remediation, and the fit between development projects and broad urban planning trends. : 2007 saw the launch of some environmentally themed funds, but the consideration of ESG factors by most hedge fund managers is likely limited. Notable exceptions included , launched in . focuses on water and clean technology with long/short strategies (2007).