ESG trends & performance

in Korea

TBLI Asia 2009

May 2009

ESG trends in Korea - TBLI 2009 2

Overview of presentation

• Short overview of the Korean ESG market & trends• ESG performance• Linkages and correlations between CSM (corporate

sustainability management), ESG research and financial performance

ESG trends in Korea - TBLI 2009 3

SolAbility

ESG research

• ESG research services• Company reports• Sector reports• Training & capacity building

Corporate sustainability services

• Analysis & benchmark of sustainability levels• Development of corporate sustainability

strategy• Specialized services: • Risk management• GHG services• Project-related sustainability analysis &

evaluation• Stakeholder engagement

Founded 2005Ltd since 2007Currently 7 full-time staff

ESG trends in Korea - TBLI 2009 4

Corporate sustainability: ESG-related reporting

Number of stand-alone Environmental and/or Sustainability Reports published in Korea

ESG trends in Korea - TBLI 2009 5

Drivers & status of corporate sustainability in Korea

• Comparable late introduction of CSM compared to global level

– … but fast catching up

• Government driven– Government drive under previous administration: government controlled

companies & agencies required to publish sustainability report

• International trends– Copying of international trends

– Inclusion of Samsung SDI (2004) and POSCO (2005) & SK Telecom (2008) in the DJSI increased awareness for sustainability management issues

• Compliance drive– Compliance with regulation & public perception

• Most recently: “Green growth”– Economic stimulus package officially label “80% green”; however: “green”

depends on the definition – Focus on selected technologies (energy efficiency, new renewable

technologies, materials)

ESG trends in Korea - TBLI 2009 6

Drivers & status of corporate sustainability in Korea

• Sustainability seen as must…– … in terms of reporting

• Little strategic integration of sustainability into core product/service development until recently

– Traditional approach: Improving governance systems, increasing environmental awareness and management systems

– low anticipation of business value of CSM management on top-management level

– But little strategic integration as of yet

– Ne development: seizing sustainable business opportunities without relevant management systems

ESG trends in Korea - TBLI 2009 7

ESG-related retail funds in Korea

Source: KOSIF, SolAbility

ESG/”SRI” retail funds and ESG related theme funds

0

5

10

15

20

25

30

35

May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

Korea ESG Global ESG Them funds (global)

ESG trends in Korea - TBLI 2009 8

ESG related AuM, cumulativ

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Assets under Management

ESG related AuM in Korea - cumulated

Source: KOSIF, SolAbility estimation

• National Pension Fund announces public bidding for U$ 300 ml ESG fund

• AMs launch SRI retail funds

• Launch of several thematic funds

• Decline of KOSPI following sub-prime crises

• Chinese gold rush

• Disappointing performance of thematic fund

• National Pension Fund increases ESG mandates

• Renewed interest in clean-tech investment

ESG trends in Korea - TBLI 2009 9

Latest ESG developments

• Public bidding by the NPS to managed assets against EGS criteria, 2006/2007

• Strong, but short rally of ESG-related retail funds, Summer 2007, however: enthusiasm dried quickly

Recent developments

• National Pension Service expected to sign to the UN PRI

• Public Sustainability Index on the KRX, Q4 2009

• Korea-specific DJSI Index, Q4 2009

• Korea-specific Accountability Rating, January 2009

• Sustainability ranking published by major newspaper

ESG trends in Korea - TBLI 2009 10

Backtracked performance

Backtracked performance 2002 -2009: 118% outperformance

Stock performance of the 50 most sustainable Korean companies

KOSPI, 62.64%KOSPI200, 70.11%

Sustainable 50, 180.48%

- 100%

0%

100%

200%

300%

400%

500%

600%

02/01/2002 02/01/2003 02/01/2004 02/01/2005 02/01/2006 02/01/2007 02/01/2008 02/01/2009

KOSPI KOSPI200 Sustainable 50

ESG trends in Korea - TBLI 2009 11

Performance since inception

Performance since April 2007: 10% outperformance

Performance of the 50 most sustainable Korean companies since inception

KOSPI200, - 22.65%

Sustainable 50, - 12.31%

- 60%

- 40%

- 20%

0%

20%

40%

60%

80%

02/04/2007 02/04/2008

KOSPI KOSPI200 Sustainable 50

Actual fund performance (actively managed): 16% outperformance

ESG trends in Korea - TBLI 2009 12

Are sustainable companies more profitable or …

…are profitable companies more sustainable?

Human Capital Human Capital

Management Vision &

Capability

Management Vision &

Capability

Corporate Sustainability

Corporate Sustainability

Cost and revenues

Profitability

Cost and revenues

Profitability

Human Capital Human Capital

Management Vision &

Capability

Management Vision &

Capability

Corporate Sustainability

Corporate Sustainability

Cost and revenues

Profitability

Cost and revenues

Profitability

Human Capital Human Capital

Management Vision &

Capability

Management Vision &

Capability

Corporate Sustainability

Corporate Sustainability

Cost and revenues

Profitability

Cost and revenues

Profitability

Human Capital Human Capital

Management Vision &

Capability

Management Vision &

Capability

Corporate Sustainability

Corporate Sustainability

Cost and revenues

Profitability

Cost and revenues

Profitability

ESG trends in Korea - TBLI 2009 13

Methodology: ESG linkages to financial bottom-line

Methodology characteristics:

• Two –step screening• Best-in-class• Positive screening• Pioneer-screening• MarketCap adjustment• Performance verification

ESG trends in Korea - TBLI 2009 14

In-depth analysis: 150 equities

ESG Investment universe

Starting universe•Total equities : 350- KOSPI: 260- KOSDAQ: 85- KOSPI200 : 175

SolAbility SRI 평가 대상기업 현황

Starting universe: 350 equities

ESG “pre-assessment”

ESG-in-depth Assessment

Investment portfolio

Financial analysis

ESG trends in Korea - TBLI 2009 15

Korean specific issues for ESG research

• Only limited number of Large Cap companies– Need to differentiate lower reporting levels of smaller companies

• Late absorber of corporate sustainability trends– however: catching up fast

• Governance structure– Historical & cultural differences

– Cross-ownership structure of large conglomerates

• Legislation – E.g. Korea not required to cap emissions under Kyoto – but probably

will be required under post-Kyoto agreement

• Aging society– Birthrate decreased dramatically over last 30 years

ESG trends in Korea - TBLI 2009 16

“Chaebol” Structure: Samsung

Samsung Group cross-ownership structure:

=> Founding family exerts full control with minority ownership (3%)

ESG trends in Korea - TBLI 2009 17

Indicator correlation – Corporate Governance

Corporate Governance

-

200

400

600

800

1,000

0 10 20 30 40 50 60 70 80 90

Score

Pe

rfo

rma

nce

Corporate Governance Linear (Corporate Governance)

ESG trends in Korea - TBLI 2009 18

Low energy efficiency

• High dependence on imported energy carriers• Low energy efficiency compared to OECD levels

ESG trends in Korea - TBLI 2009 19

Indicator correlation – resource efficiency

Environmental Performance

-

100

200

300

400

500

600

700

0 10 20 30 40 50 60 70 80 90

Score

Per

form

ance

Environmental performance Linear (Environmental performance)

ESG trends in Korea - TBLI 2009 20

Indicator correlation – HR development

HR Compensation

0

100

200

300

400

500

600

700

0 10 20 30 40 50 60 70

Score

Pe

rfo

rma

nce

HR compensation Linear (HR compensation)

All assessed companies: limited information

ESG trends in Korea - TBLI 2009 21

Indicator correlation – HR development

Compensation

0

100

200

300

400

500

600

700

0 10 20 30 40 50 60

Compensation Linear (Compensation)

Full information

ESG trends in Korea - TBLI 2009 22

Conclusions from criteria relations

• Visible correlation between sustainability performance and share price development

• However: low r-value-correlation, wide spread => high scores in ONE criteria does not necessarily mean good performance in all cases

• Financial performance is more closely related to sustainability score if a company scores high throughout all ESG factors/criteria

• Lack of information (insufficient reporting): affects research outcome

ESG trends in Korea - TBLI 2009 23

Sustainable companies are…

=> Sustainability = business Intelligence

• Not only “responsible”

• Do more than comply

• Have more than awareness

• Have a wider and longer horizon

Human Capital Human Capital

Management Vision &

Capability

Management Vision &

Capability

Corporate Sustainability

Corporate Sustainability

Cost and revenues

Profitability

Cost and revenues

Profitability

ESG trends in Korea - TBLI 2009 24

The future: climate change risks, resource constraints, etc…

=> Correlation between sustainability performance and financial performance is expected to increase in the future

Human Capital

Management Vision & Capability

Corporate Sustainability

Cost and revenues

Profitability

Climate Change

Environmental degradation

Aging population

Bottom of Pyramid markets

Changing perceptions

Resource scarcity

ESG trends in Korea - TBLI 2009 25

Thank You.

606 FloStar 756-1Janghang-dong, Ilsan-gu, Goyang-Si410-380 Gyeonggi-Do, South Korea

www.solability.com

contact@solability.com

Tel ++82 31 811 3578