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Workshop 11 - ESG Integration and Valuation

Availability of Relevant Data, Validity of KPIs and Application by oekom Clients

TBLI, London – November 2010

2

about us

Experience

Expertise

Customized services

Independence

– Corporate & Country Research– universe covers the most important stocks and bonds– highest quality standards

– total staff of 38– experienced and multi-disciplinary team of 27 analysts– Scientific Advisory Board

– partner of various asset managers and inst. investors– clients primarily from AT, CH, DE, DK, FR, IE, IT, JP– advising funds and mandates with a total volume

of EUR 90bn (June 2010)

– commercial experience since 1993– independence– spin-off from publishing house oekom

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overviewESG KPIs: increasing importance

The integration of ESG issues into corporate valuation and asset management is becoming

mainstream. (e.g. Eurosif‘s European SRI Study 2010)

The materiality of certain ESG issues has increased (e.g. GHG emissions).

There is an increased awareness of the economic impact of ESG issues.

A set of ESG KPIs is available that fits into existing valuation models.

Important step towards a more

comprehensive and balanced

risk assessment

Important stimulus for

companies to improve their

sustainability performance

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challenges

A limit of one, two or three – easy to integrate – ESG KPIs (such as GHG emissions) for the assessment of ESG risks and opportunities can be a first step, but does not tap the full potential ESG research has for an improved risk analysis.

Selection of KPIs

ESG issues that can be illustrated by quantitative data and, therefore, fit into existing valuation models are not always the most material ones.

Some ESG issues have a mid- or long-term impact on a company‘s economic performance. They reveal their materiality in the future. In this respect, (qualitative) ESG research can act as an early-warning system for corporate risk analysis.

The selection of appropriate KPIs is a major challenge, a balance has

to be found between comprehensiveness and relevance.

example: BP

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20 April 2010: the drilling rig 'Deepwater Horizon' caught fire in an explosion and two days later sunk in the Gulf of Mexico.

Source: Bloomberg (2010)

Development of BP‘s stock price

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example: BPTypical KPI: GHG Emissions

GHG Emissions

0,0

50,0

100,0

150,0

200,0

250,0

2005 2006 2007 2008 2009

year

kg/boe

Statoil

BP

MOL

Exxon

Shell

Suncor

• Compared to its peers, with 45 kg of GHG per boe (barrel of oil equivalent) in 2009, BP shows a good performance regarding its specific GHG emissions.

• This KPI is important to assess the company‘s economic risk regarding regulatory changes, e.g. regarding a GHG trading system.

• But it would not have contributed to an early indication regarding BP‘s problems relating to environmental and safety standards.

Source: oekom research AG (2010)

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20 April 2010: the drilling rig 'Deepwater Horizon' caught fire in an explosion and two days later sunk in the Gulf of Mexico.

example: BPExamples of rating topics relevant to BP‘s accident

1,0

1,5

2,0

2,5

3,0

3,5

4,0

Jan06

Jan07

Jan08

Jan09

Jan10

year

rating

A

C

D

B

2006 2007 2008 2009 2010

Prime Threshold

Source: oekom research AG (2010)

• BP has a history of major safety and environmental accidents: e.g.

– March 2005: 15 people died and 180 were injured in an explosion at BP's Texas City refinery

– March 2006: major oil spill at Prudhoe Bay oil field in Alaska

• During the last years, BP‘s performance in relevant rating topics indicated major risks relating to the company‘s H&S, environmental and overall ESG risks.

• During all these years, the company infringed oekom‘s exclusion criterion “controversial environmental practices“.

Health & Safety Performance

Environmental Performance in Core Business

overall oekom Corporate Rating

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example: prominent crashes

Lehm

an Bro

thers

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Enro

n

Parm

alat

Worldcom

At the time of their crashes, all of the companies had an oekom overall assessment/

rating which was well below the best in class threshold.

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challengesInterpretation of data

The uncritical usage of ESG KPIs implies inherent risks: due to the complexity of certain ESG areas, data has to be thoroughly interpreted in order to draw proper conclusions and make informed decisions.

Example: GHG efficiency of production

GHG Emissions

(in t)

Sales

(in bn USD)

Fujitsu 1,692,900 57.7

Dell 471,328 61.1

0,0

5,0

10,0

15,0

20,0

25,0

30,0

Fujitsu Dell

t/mUSD

Number of own production facilities

– Fujitsu: 5

– Dell: 1Source: oekom research AG (2010)

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challengesData quality, comparability and availability

Data quality and comparability are in many cases low, which makes meaningful benchmarking and ‘apples-to-apples‘ comparisons difficult.

Examples of typical KPIs for which data is not or only partly available

Up to now, social and environmental performance data is not well-established in corporate controlling: the sustainability management generates a lot of data, but its impact on a company‘s business success remains vague.

Automobiles

(e.g. BMW, Toyota, VW)

– Global average fleet CO2 emissions (only home market)– R&D budget on alternative drive systems and fuels

Financials

(e.g. Barclays, BBVA, HSBC)

– SRI assets under management (%)

Retail

(e.g. Ahold, Carrefour)

– Certified organic products food sales (%)

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challengesData quality, comparability and availability

Example: Investments to improve environmental performance (% sales)

Company Value Definition

MAN 0.0003% „ ...These investments focused on production and research facilities, and to a lesser extent on decontamination. As well as promoting the ecologically and economically efficient operation of production facilities, these investments were principally directed towards the environmentally sensitive further development of all MAN products. ...“

Finmeccanica 0.066% No official definition available.

Company Value Definition

Siemens EUR 23bn „ ...To qualify for inclusion in the environmental portfolio, a product must reduce greenhouse gas emissions or, as an environmental technology, help combat water and air pollution. ...“ -> excluding nuclear power technology

General Electric USD 18bn „ ...Products or services that improve customers' operating performance or value proposition and significantly and measurably improve customers' environmental performance. ...“ -> including nuclear power technology

Example: Environmental product portfolio sales (total sales)

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application by oekom clientsInvestment styles of oekom clients

oekom research‘s clients have a clear focus on Core SRI strategies*, i.e. norms- and values/ethical-based exclusions and positive screening (mainly Best-in-Class).

* according to Eurosif definition, in contrast to Broad SRI (e.g. integration, engagement)

0

10

20

30

40

50

60

70

80

Core SRI Others

> 80%

< 20%

in %

Others include:

– investors who integrate a reduced set of oekom indicators into their own ESG assessment models

– investors who govern their engagement process on the basis of oekom‘s research

– the integration of ESG data into traditional financial analysis (e.g. UniCredit)

Source: oekom research AG (2010)

Matthias Bönning

oekom research AGGoethestr. 28D-80336 München

Tel: +49/89/54 41 84-90Fax: +49/89/54 41 84-99

Email: info@oekom-research.comWeb: www.oekom-research.com

kontakt

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