SRI - Aberdeen Asset Management

aberdeen.asset.com

SRI - Aberdeen Asset Management

EQUITIES | FIXED INCOME | PROPERTY

Aberdeen’s Socially Responsible

Investment (SRI) capability

Placing ethical screens and engagement at the heart of our investments

October 2008

Once seen as a niche area, Socially Responsible Investment (SRI) has moved firmly into the mainstream. Aberdeen

has provided SRI services since 1988 and has become one of the UK’s leading SRI investors. Our SRI products

have been carefully designed for clients who want their investments to satisfy demanding social, ethical and

environmental criteria, without sacrificing the potential for excellent long-term capital growth.

FOR PROFESSIONAL USE ONLY - NOT FOR USE BY PRIVATE INDIVIDUALS


Why has SRI become increasingly

popular

Over the last two decades, Environmental,

Social and Governance (ESG) issues have

steadily risen to the top of global consumer

and political agendas.

Investors recognise that human rights

abuses and environmental degradation

can adversely affect a company’s bottom

line. Accounting scandals such as those

involving Enron, Worldcom and Parmalat

have highlighted the risks to investors of

poor corporate governance.

As a result, honesty, openness and clarity

in operating procedures and reporting are

now seen as key measures of corporate

effectiveness.

The media, and especially the internet,

has played a role in this shift in attitudes,

allowing organisations and individual

activists to bring issues of social

responsibility directly to the attention of

the public.

The benefits of SRI

The move towards SRI has also been driven

by a rising perception of its long-term

benefits, and especially:

• Opportunity for ethically-minded

investors to access a range of investments

that satisfy their personal beliefs.

• Performance. SRI can deliver improved

long-term value. For example, in

2007 the FTSE4Good Global Index

outperformed the FTSE All Share Index,

and similarly many SRI funds are

outperforming their conventional peers.

• Rigorous research. Investors are

recognising that the extra research and

the rigorous screening processes carried

out by pro-active ethical fund managers

can lead to investment decisions that are

better informed.

• Identification of future winners. SRI

criteria often provide yardsticks for

identifying strong company management

and forward-looking businesses.

Introduction

Socially Responsible Investment can no longer be dismissed as a peripheral

trend, of interest only to specialist investors. One study estimates that the

European SRI market rose in value from £240 billion in 2003 to around £750

billion in 2005 and could now account for 10-15% of total funds under

management 1 .

SRI investors are also changing. Twenty years ago the typical investor would

have been a charity or religious organisation keen to avoid profiting from

unethical businesses. Today there is increasing interest from pension funds,

private banks and family offices. This rapidly growing investment markeplace

has been matched by an expanding army of specialist research companies,

such as EIRIS and Trucost, as well as comparatively new measures of SRI

performance including FTSE4Good and the Dow Jones Sustainability Indexes.

Chart 1 - Growth in Aberdeen SRI funds under management since 2002 2

£m

700

600

500

400

300

200

100

0

SRI FUM

'02

The 2006 launch of the UN’s Principles for Responsible Investment (UNPRI) underlined

SRI’s growing status. The initiative, developed with the help of 20 pension funds, gives six

voluntary ESG principles that should be integrated into all investment decisions. Aberdeen

became a signatory to the UNPRI in December 2007, a move that commits us to reporting

on the ESG aspects going forward.

1

Source Eurosif, September 2006. Quoted figures converted from euro using HMRC

exchange rates for mid year (June) of 1.40 (2003) and 1.47 (2005).

2

Source: Aberdeen.

'03

'04

'05

'06

'07


Our approach - quality first

Aberdeen’s distinct and well-documented

investment process draws on proprietary

research of teams rather than star fund

managers to identify companies that are

most likely to perform well over time. The

quality of the business and the price or value

at which the investment can be made are

the most important drivers of each decision.

To determine the quality of each company

our fund managers must first meet with

company management. These interviews are

fundamental to understanding the experience

and direction of the management team,

the long-term sustainability of the business

and its revenues and the level of corporate

governance upheld.

When a company is deemed to be suitable

in terms of quality, the next step is to

understand its value through careful analysis

of its fundamentals. We are high-conviction

managers, so we only buy companies once

the price and value are thoroughly

understood. Furthermore we feel no

obligation to own stocks simply because

they feature in a benchmark: rather, as active

managers, we populate our portfolios from

the bottom up, stock by stock. Deviation

from an index is far less of a risk to us than

buying poor quality companies or over-paying

for good quality ones. Rigorous proprietary

research is, we believe, the best way of

avoiding such a scenario.

Ethical screen

Our SRI team has a wealth of experience

across a wide range of investment areas.

We believe that this – combined with a

disciplined and transparent approach –

gives us great ability to unlock value for

our clients and remain at the forefront

of a rapidly changing industry.

• Flexibility: Clients can select an approach

that meets their investment requirements

at the same time as addressing their

ethical concerns. We can implement

ethical screening approaches, engagement

approaches, or a combination of both.

• Dedicated researchers: Our team of

SRI analysts is an integral part of our

Edinburgh-based Global Equities Team and

allows us to base decisions on our own

research, instead of relying on third parties.

• Engagement: Close contact is the

cornerstone of our SRI approach, and

we spend a great deal of time building

close working relationships with the

businesses in which we invest. These

companies know Aberdeen well and they

value us as long-term shareholders.

Benefits of the this process

• Track record: Aberdeen has been running

SRI portfolios for over 20 years, delivering

strong long-term performance.

• Global resources: Our regional

investment teams, based in London,

Philadelphia, Singapore, Sydney and

Bangkok, all conduct rigorous research

and a rolling programme of meetings

with each company’s senior managers.

• Independence: Aberdeen has no ties

to other financial institutions – our

sole business is asset management

and our fortunes depend entirely on

how well we manage clients’ funds.

All this is backed by Aberdeen’s trademark

– independent thinking. We pay little

attention to consensus and we never

rely on the direction taken by our peers

or the benchmark. Instead we prefer

to trust our own research and take a

long-term view in everything we do.

Market outlook

With all the elements of a mature investment

class in place, and environmental and social

issues firmly at the top of consumer and

political agendas, SRI will continue to grow.

Furthermore, the boundary between SRI and

conventional equity investment looks set to

blur even further as investors recognise the

impact of ESG issues on economies and on

long-term shareholder values.

Comparative performance

1 year

(%)

3 years

(%)

5 years

(%)

Aberdeen SRI composite* 2.26 10.35 12.77

Aberdeen Global composite** 6.37 12.03 13.65

MSCI World (2.22) 6.04 7.65

* Inception: Jul 99

** Inception: Aug 98

Annualised performance to 31 August 2008

Total return, gross of fees, GBP

Source: Aberdeen Asset Management


The performance question

Many investors were resistant to SRI in the

early years, believing that it could restrict

opportunities for performance. However, as

the track records of SRI funds mature, this

scepticism is gradually evaporating. A recent

study conducted by Mercer in conjunction

with the UN concluded that investors who

factor in ESG issues do not have to sacrifice

returns 3 . In addition, investors now recognise

that examining a company from an SRI

perspective may add a further layer

of safeguards.

SRI at Aberdeen

Growth in AuM for SRI

Aberdeen has developed a structured and

thoughtful approach to SRI. Our clients have

invested more than £630 million in our

ethical equity strategies, benefiting from our

expertise and experience. We began offering

SRI back in 1988 and have grown to become

one of the UK’s leading SRI investors. Over

this time we have developed a thorough and

common sense approach, putting in place a

set of rigorous criteria.

Screening techniques

Our main strategy for building core SRI

portfolios is to subject the companies on our

buy-list to a second layer of research, filtering

out those who do not meet our standards.

Negative screening

With negative screening, we examine

companies to see if they are or have been

involved in what we determine to be “areas

of concern.” Trends in adverse behaviour

may suggest longer-term problems for an

organisation. Our active screens eliminate any

company that derives a significant amount

of its revenue from particular areas – alcohol,

tobacco, and gambling, for example – making

Aberdeen’s funds suitable for demanding

investors such as charities or religious

groups. We can also exclude companies

demonstrating poor records over a three year

period in areas such as business practices,

the environment, labour relations and human

rights. (This is an approach taken by the

Aberdeen Ethical World Fund).

Engagement approach

A second strategy we use for SRI is an

engagement approach. This is popular

with clients (like pension funds) who find

negative screening too limiting. Our funds

using this approach invest in well-managed,

solid companies with which we then

engage on matters pertaining to ESG, or

the environment, social (labour and human

rights) and corporate governance. Where our

research shows that companies fall short of

set standards, we engage directly with them

to encourage improvement in these areas.

The Hybrid -- engagement + negative

screening

A third approach we use for SRI is a hybrid

approach for screening purposes. With

this, companies must (as with the other

approaches) pass our first hurdle of financial

strength. Then we screen the companies

again to understand the relevant ESG issues

to discuss with our investments. On top of

this we place a third overlay: negative screens

for alcohol, tobacco, gambling, military,

pornography and weapons. Any company

with more than 10% turnover from activities

in these six areas will not be included in

the fund. (This is an approach taken by

the Aberdeen Responsible World Fund and

Aberdeen Responsible UK Equity Fund).

Aberdeen’s fifteen key screens of

socially responsible investing

• Alcoholic beverages

• Gambling

• Military

• Nuclear energy

• Pornography

• Tobacco

• Weapons

• Environment

• Labour

• Human rights

• Business practices

• Product quality

• Community involvement

• Corporate governance

• Animal testing

Stephen Docherty

Head of Global Equities

Aberdeen Asset Management

SRI investment is set to

increase over the next 10

years and Aberdeen is

positioned well to serve that

growing demand. Our SRI

investment process is well

tested and designed to offer

clients the opportunity to

invest in global companies

which have track records

of financial strength and

good corporate citizenship.”

3 Mercer/UN, October 2007


Taking stock – Aberdeen’s

investment process in action

The best way to illustrate the way

we approach the investments

we make is to look more

closely at one of the stocks we

hold. The Brazilian national oil

company, Petrobras, which we

hold in both our mainstream

equity and our SRI funds, has

experienced some turbulence

over the years, particularly over

its record for social responsibility.

It has, however, shown a huge

improvement over the last 4-5

years in every area of its business.

What makes the stock particularly

attractive is that unlike BP, for

instance, Petrobras actually owns oil

reserves in the region. In addition,

it has shown healthy dividend

growth and competitive price/

earnings ratios. It has also been

steadily improving its pollution

record and communicating

this with shareholders.

Petrobras

Key issues Previous problems Current position

Health and

safety

Environment

• Numerous breaches

• No decline in deaths and

serious injuries

• No published policies

• Numerous environmental

infractions

• Operating offshore platforms

without required permits

• No environmental reporting

• Health Safety & Environment Committee

• Guidelines follow OHSAS18001

• Fatal accident rate reduced significantly

since 2002

• In 2008 awarded the Carolita Kallaur

International Award in the Safety,

Environment and Health (SEH) category,

granted by the International Regulators

Forum in recognition of the high level

of performance the company and

its contractors achieved in maritime

installation operating safety

• Environmental reporting from 2003

• Social & Environmental report held out as

an example by UN Global Compact

• All international units ISO14001 certified

as are 84% of domestic units

Labour • No labour policies • Compliance with ILO guidelines

• Social & Environmental Responsibility

Committee

Summary

SRI has moved into the mainstream and can no longer be dismissed as a peripheral trend, of interest only to specialist investors

• Investors recognise that SRI can deliver real performance benefits, and rigorous SRI screening can help to identify future business winners

Aberdeen has provided SRI services since 1988 and is now one of the UK’s leading SRI investors, managing over £630 million in ethical

equity strategies

• We have a robust SRI screening process based on stringent ethical criteria. All companies are visited and thoroughly vetted before

inclusion in SRI portfolios

• We use both positive and negative screening criteria, and we also encourage active engagement with companies that fall short of set

standards

Aberdeen has a wealth of SRI experience backed by a global resource and a strong SRI research capability

• Our process lends itself to SRI. We are active, high-conviction investors and we are flexible – we can tailor an ethical strategy to your

specific needs.


Further information

For more information please contact:

Aberdeen Asset Managers Limited

One Bow Churchyard

Cheapside

London

EC4M 9HH

Telephone: +44 (0)20 7463 6000

Group Website:

SICAV Fund:

ICVC Fund:

aberdeen-asset.com

Aberdeen Global — Responsible World Equity Fund

Aberdeen — Ethical World Fund

Aberdeen — Responsible UK Equity Fund

We also offer SRI investment portfolios tailored for individual clients.

Visit Aberdeen.tv to watch the latest interviews from our fund managers, product owners and

business experts.

To receive timely monthly manager fact sheets on our global funds, as well as weekly and

monthly manager reports, make sure you register at aberdeen-asset.com.

• Select the factsheets you want delivered to your inbox every month;

• Be the first to see our fund manager interviews;

• Read exclusive fund manager views;

• Keep abreast of the market with our weekly Market Tracker;

• Get the latest news on all our products.

Important Information

The above is strictly for information purposes only and should not be considered as an offer, or solicitation, to deal in any of the

investments mentioned herein. Aberdeen Asset Managers Limited (‘the Manager’) does not warrant the accuracy, adequacy or

completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions

in such information and materials. Any research or analysis used in the preparation of this document has been procured by the

Manager for its own use and may have been acted on for its own purpose. The results thus obtained are made available only

coincidentally and the information is not guaranteed as to its accuracy. Some of the information in this document may contain

projections or other forward looking statements regarding future events or future financial performance of countries, markets or

companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/

her own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such

independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment. Any opinion or

estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither the

Manager nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of

the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly,

no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a

result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.

The Manager reserves the right to make changes and corrections to its opinions expressed in this document at any time, without

notice. Issued and approved by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Services

Authority.

05 2011_0908

More magazines by this user
Similar magazines