6 March 2013

Business Case of Corporate Sustainability for Investors

Dr. Thomas Streiff, Head Guilé Engagement Team

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Definition of ESG Investment

„ESG investment is an investment approach which considers systematically – in the context of a comprehensive financial analysis - criteria from the area of natural Environment, Society and employees, as well as Governance. By considering these extra financial information new opportunities for generating ‚Alpha’ and for reducing of investment risks.“Definition WestLB

‚Alpha‘ is an indicator for the evaluation of the return of an investment (e.g. share, fund) compared to a benchmark (e.g. index)

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Value of non-financial information

Integrated Reporting• Higher predictability• Lower spread in forecasts• Increased confidence• Lower volatility• Enables anticipation

Financials only• Lower predictability• Higher spread in

forecasts• Lower confidence

Company 2

Lower earnings Higher earnings

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Higher spread

Lower spread

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Source: World Watch Issue 1 /2004, PwC; Schroders, Kirchoff Consultants, 2005

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Impact of intangible values on market value:Growing importance of intangible valuesAnalysis of the FTSE 250 share price index 1978-2006

Source: Interbrand. Brand Value Management, 2006

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Impact of intangible values on market value:The model

BookValue

MarketValue

Physical Assets

Financial Capital

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Corporate Philanthropy

Financial Capacity“Retrospective”

Strategic Capability/License to Operate

“Prospective”

Source: BHP, PricewaterhouseCoopers

• Compliance• Intellectual Capital• Customer Loyalty• Employees Loyalty• Risk Awareness

• Reputation- Trust- Credibility- Integrity

• Brand Main intangible value drivers influenced by corporate responsibility

Value drivers

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Impact of intangible values on market value:Increase relevance of non-financial reporting

Source: www.corporateregister.com

+400/y additional sustainability reporters since 2000

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Connection between corporate responsibility / corporate sustainability and shareholder value:The model of the Dow Jones Sustainability Index

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SustainabilityCriteria

FCFF: Free Cash flow to the FirmWACC: Weighted Average Costs of Capital

Market Value

Source: Adapt. from SAM Sustainability Yearbook 2008

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Example: Human Capital Development and FCFF

Source: SAM Sustainability Yearbook 2009

ROIC = Return on Invested Capital

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Companies view: Comparing embracers and cautious adopters on the basis of what they think are the top three benefits of sustainability.

Source: MIT Sloan Management Review, Nov. 2011: Sustainability: The ‘Embracers’ Seize Advantagehttp://c0426007.cdn2.cloudfiles.rackspacecloud.com/MIT-SMR-BCG-sustainability-the-embracers-seize-advantage-2011.pdf

10Source: Financial Times, 02/03 March 2013, p. 12

$ 42.2 bnCumulative accounting charge BP has taken in relation to the spill $ 8.5 bn

Settlement agreed last year with private plaintiffs $ 1.7 bn

Sum BP expects to spend on legal and administrative costs

4.1 mEstimated number of barrels = 652 m liter of oil that leaked into the Gulf of Mexico

Costs of unsustainable business practices: The Deep Water Horizon disaster and consequences for BP

11Source: Novethics. European Asset Owners: ESG Perceptions and Integration Practices. 2010

Investors view: Higher financial performance not a main reason for ESG investment

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What research says

Study of Deutsche Bank based on the analysis of more than 100 academic studies and close examination of 56 research papers, 2 literature reviews and 4 meta studies concluded:

•companies with high ratings for CSR/ESG factors have lower cost of capitals in terms of debt (loans and bonds) and equity (100%);•companies with high ratings for ESG factors exhibit market-based outperformance (89%) and accounting-based outperformance (85%);•Governance (G) is the single most important macro factor; •88% of the studies concluded that SRI fund returns show neutral or mixed results mainly due to the composition of the analyzed funds (exclusionary screens)

Source: Deutsche Bank: Sustainable Investing: Establishing long-term value performance ;June 2012

• Negative screening / exclusion concerning e.g. Sector (ex alcohol, armaments, tobacco etc.) Countries (Myanmar, Sudan, Zimbabwe etc.)

• Positive screening, e.g.

Best in class Pioneers

• Engagement = forward looking approach Dialogue and joint activities Voting rights

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Different approaches of sustainability/ESG investment: From exclusion to engagement

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