Jvan gaffuri 120424 stock markevalueofsustainability

Stock Market Value of Sustainability: the Dow Jones Sustainability Index

Jvan GaffuriSantiago de Chile, 24.04.2012

2

Content

• SAM

• Sustainability Investing

• SAM Corporate Sustainability Assessment (CSA)

• Developments in Corporate Sustainability

3

SAM - Overview

• Investment boutique focused exclusively on Sustainability Investing since 1995

• Offering complementary capabilities to Sustainability Investing

• Powering Dow Jones Sustainability Indexes since 1999

• Member of Robeco, part of the Rabobank Group (with the highest credit rating of all privately owned banks, awarded by rating agencies Moody’s, Standard & Poor’s, Fitch and DBRS)

• EUR 11.3 billion total assets (as per 30.06.2011)

• Servicing a global and diversified client base

• Approximately 100 employees based in Zurich, Switzerland

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SAM - Research & Dow Jones Indexes

SAM Research – Sustainability Methodology Development

• Analysis of scoring results for improvements

• Development of new criteria, modification of questions

• Ensuring validity of company responses & supporting evidence

• Verifying consistency of comments and public disclosures

• Generation of sustainability scores

• Dow Jones Indexes• Responsible for index calculation

• Companies are compared within their respective sectors

• Selections based on Dow Jones Indexes Sector Classification System

• Index components chosen according to pre-defined rules Index Guidebook

5

Content

• SAM




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Sustainability Investing - Indexes, Raters and Research

83 88 95 99

EIRIS Research

Sustainable Asset Management (SAM)

Innovest Strategic Value Advisors

Launch of Dow Jones Sustainability Index (DJSI)

Formation of oekom research AG through spun-off from ökom GmbH

Formation of Risk Metrics Group through spun off from J.P. Morgan

KLD Research

90

Domini Social Index

00

Launch of Carbon Disclosure Project (CDP)

Calvert Social Index

9896

Formation of Global Reporting Initiative (GRI)

9792

United Nations Environment Programme Finance Initiative (UNEP FI)

Source: SAM Research AG

777

01 02 04 0908

Sustainability Investing - Indexes, Raters and Research

Source: SAM Research AG

03 06 0705 10

Launch of the Dow Jones STOXX Sustainability Index

JSE SRI Index

Launch of the Dow Jones Sustainability Index North America

Launch of UNPRI

Bovespa Corporate Sustainability Index

Launch of the Ethibel Sustainability Index

Launch ASPI

Goldman Sachs Sustain Focus List

Launch of the Dow Jones Sustainability Index Asia Pacific, and Korea

Thomson Reuters acquired ASSET4

Bloomberg launched ESG Data Service

RiskMetrics acquired KLD Research and Innovest

First Chinese Sustainability Index

S&P EGX ESG Index (Egypt)

MSCI acquired RiskMetrics Group, Inc.

S&P ESG India

7

Foundation of Glass, Lewis & Co.

vigeo Research

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Sustainability Investing - Evolution

Beta

Alpha

Norm-based / ethicalinvesting

with exclusions

ShareholderActivism

Norm-based / ethicalinvesting with

best-in-class and thematic screens

SAM Indexes

Dow Jones Sustainability Index

SAM Asset Management

(Core & Themes)

Robeco SAM Private Equity

(Cleantech PE)

Time

Strategyfocus

Negativescreening

Engagement& voting

Positivescreening

Integration

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99

Sustainability Investing – Link to Corporate Sustainability

Corporate sustainability ...

... is a business approach to create long-term shareholder value by seizing the opportunities and managing the risks that stem from sustainability trends and challenges.

Sustainability investing ...

... is a long-term investment approach that integrates economic,environmental and social considerations in the selection and retention of investments.

The aim of sustainability investing is creating performance

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Sustainability Investing - Which information do investors consider?

“We don’t like their sound, and guitar music is on the way out”

Decca Recording Co. rejecting the Beatles, 1962

“The horse is here to stay but the automobile is only a novelty - a fad”

Michigan Savings Bank,

advising Henry Ford’s lawyer, 1903

111111

Sustainability Investing - Investors are closing the gap

Adaptation to Sustainability

Time

COMPANIES

INVESTO

RS

“93% of CEOs believe thatsustainability issues will becritical to the future success oftheir business.”UNGC- Accenture (2010): „A new Era ofSustainability“, p. 15.

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“We believe that companies whichtake environmental, social andgovernance issues into account intheir operations will benefit from thisin the longer term“Tomas HildebrandtSenior Portfolio ManagerEvli Investment Management Co. Ltd.

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Sustainability Investing - Alpha from Sustainability

• SAM’s sustainability data has predictive power for stock-selection, reflected in the positive information ratio (0.5) of the portfolio consisting of sustainability leaders*

• Added value is generated by selecting sustainability leaders and avoiding sustainability laggards

• Value creation is consistent and stable for the entire time period*Slight changes were applied to the universe and methodology for the period between 2009 and 2010 (e.g. Canadian stocks are included in this period).

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Sustainability Investing – HBS: Early movers are outperforming in the long-term

• Companies that adopted sustainability policies many years ago are showing long-term financial outperformance (both stock market & accounting performance) compared to companies that have very low adoption rates of such policies

• Comparison of adoption levels of Environmental & Social Standards for Suppliers of “High Sustainability Firms” with “Low Sustainability Firms” shows that HSF have significantly higher adoption rates

Type of Standard High Sustainability Firms Low Sustainability Firms

EMS 50.0% 18.2%

Data availability 12.3% 0.0%

Human Rights 17.4% 5.7%

Labor Standards 18.6% 8.1%

OHS Standards 62.9% 25.7%

Source: Eccles, Ioannou & Serafeim (2011): The Impact of a Corporate Culture of Sustainability on Corporate Behavior and

Performance. Harvard Business School, based on data provided by SAM.

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Value of Sustainability – HBS: Sustainability Leaders Outperformance

• Leading Sustainability Companies out-performed significantly over the long term

• Sustainability Leaders out-performed on ROE and ROA during the time period

Source: R. G. Eccles, I. Ioannou, G. Serafeim, The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, HBS Working Paper 12-035, 2011.

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Economic Criteria- corporate governance- risk & crisis management- brand management- etc.

Revenues

Environmental Criteria- operational eco-efficiency- climate strategy- environmental reporting- etc.

Social Criteria- human capital development- stakeholder engagement- supply chain management- etc.

Costs

Investments

Capital Structure

Cost of Capital

Earnings

InvestedCapital

Weighted Ave.Cost of Capital

Return on Invested Capital

SA

M F

air Valu

eSustainability Investing - Integrating Sustainability Into Financial Models

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Market Value Fair Value

ROIC 10.0%WACC 5.0%

ROIC 10.2%WACC 4.8%

ROIC +0.2%WACC -0.2%

Company Valuation -Discounted Cash Flow (DCF)

SAM Corporate Sustainability Assessment

SAM Fair Value

Legend:ROIC Return on Invested CapitalWACC Weighted Average Cost of Capital

SAM Fair Value Impact range of + 10% - 15%

+

-

&

Sustainability Investing – Integration

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Content

• SAM




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SAM CSA - Unique Model: Company-Sourced Data

Data

Sustain-ability

Services

Methodology & Guidance

Feedback

& Insight

Data Provided

Directly by Companies

Corporate Participation via the DJSI Questionnaire

SAM Research (20 Sector Analysts)

SIMS3 Data Base

Unique insights from companies are essential

The limitations of financial materiality must also be recognized

19191919

SAM CSA - Sustainability CriteriaG

eneral C

riteria (50%

)Economic Dimension

• Corporate governance

• Codes of conduct & corruption

• Risk & crisis management

• Customer Relationship Management

• …

Social Dimension

• Labour practice indicators

• Human capital management

• Talent attraction & retention

• Corporate citizenship & philanthropy

• Social reporting

• ….

Environmental Dimension

• Environmental reporting

• Environmental Policy/Management systems

• Climate Strategy

• Product Stewardship

• Operational Eco-Efficiency

• ….

Over 130 cross- and industry-specific criteria and dimension weights

Dimension weights may deviate from the ones stated above for each of the 58 different market sectors analyzed by SAM.

Sector SpecificCriteria

57%

GeneralCriteria

43%

33% 33%

33%

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SAM CSA - Extra-financial Indicators (559)

Social Dimension • Access to Insurance/ Other Social Value Added 1• Access to Water

3• Addressing Cost Burden

2• Bioethics

3• Business Risks

2• Code of Ethics for Advertising

1• Controversial issues, dilemmas in lending/financing 3• Corporate Citizenship and Philanthropy

5• Digital inclusion

12• Editorial policy

1• Enabling local development

7• Ethical Conduct

2• Financial Inclusion/Capacity Building

1• Health Outcome Contribution

6• Healthy living

1• Human Capital Development

3• Human Rights & Corruption

2• Impact of Telecommunication services

3• Labor Practice Indicators

3• Local Impact of Business Operations

2• Mine Closure

4• Noise

1• Occupational Health and Safety

16• Partnerships Towards Sustainable Healthcare 2• Promoting Responsible Gaming

5• Protection of Children

1• Responsibility for Alcoholic Products

4• Responsible Marketing Policies

4• Security Forces

1• Service to Patients

2• Social Impacts on Communities

9• Social Integration

2• Social reporting

4• Stakeholder Engagement

8• Standards for Suppliers

11• Strategy to Improve Access to Drugs or Products 4• Talent Attraction & Retention

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Environmental Dimension • Biodiversity

10• Building Materials

5• Business Opportunities Financial Services/Products 2• Business Risks and Opportunities

4• Business Risks Large Projects / Export Finance 3• Climate Change Governance

7• Climate Change Strategy

6• Climate Strategy

21• CO2 from Logistics

2• Electricity Generation

4• Electro Magnetic Fields

5• Emission Products

2• Environmental Policy/Management System

31• Environmental reporting

4• Fleet Age

1• Fuel Efficiency

2• Fuels for Tobacco Curing

2• Genetically Modified Organisms

5• Hazardous substances

5• International Production Standards

1• Landfilling and alternatives

3• Local Air Quality

1• LowCarbStrategy

4• Manufactured Gas Plants

2• Mineral Waste Management

8• Packaging

3• Product Impact

1• Product Stewardship

30• Raw Material Sourcing

5• Recycling Strategy

2• Refining/Cleaner Fuels

2• Releases to the Environment

2• Renewable Energy

2• Resource Conservation and Resource Efficiency 5• Risk Detection

3• Route network

1• Sustainable Fibre and Pulp Sourcing

5• Sustainable Management of Forests

6• Transmission & Distribution

3• Transport and Logistics

4• Volatile Organic Compounds (VOCs) and hazardous

substances in supply chain1

• Water Related Risks7

Economic Dimension• Anti-crime policy/measures

4• Antitrust Policy

4• Brand Management

8• Codes of Conduct/Compliance/Corruption&Bribery 6• Combating Smuggling

3• Compliance with applicable export control regimes 2• Corporate Governance

10• Customer Relationship Management

19• Diversification

3• Ecosystem Services

1• Efficiency

1• Exploration & Production

4• Food safety

2• Gas portfolio

5• Grid Parity

6• Health & Nutrition

7• Innovation Management

12• IT Security

6• Lobbying activities

1• Market Opportunities

5• Marketing Practices

6• Materiality

2• Non-financial Project Evaluation

2• Piracy

2• Price Risk Management

5• Privacy Protection

7• Product Quality and Recall Management

3• Reliability

1• Research and Development

5• Risk & Crisis Management

18• Scorecards/Measurement Systems

2• Service development

2• Software-as-a-Service

2• Stakeholder Engagement

3• Strategy for Emerging Markets

6• Supply Chain Management

5• Transparency

1• Water Operations

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212121

SAM CSA - Media & Stakeholder Analysis (MSA)

• MSA helps to verify a company’s involvement and management of critical economic, social and environmental issues or crisis situations

• Cases identified in the MSA can lead to exclusion of the DJSI anytime during the year

• MSA can add up to 50% of the weighting in an individual criteria

• Impact analysis revealing potential risks of reputation, financial liabilities

• Assessment of materiality based on: Media, direct contacts with company, NGOs, consumer organizations, websites of public authorities, governments, international organizations

• Issues covered:

Various data sourcesIndex-based search

utility Continuous monitoring

Potential issue

Management response to the issue

(e.g. transparency,measures taken)

Effectiveness of management

response

Materiality:• Low• Medium• High• .....

Integration in corporate

sustainability performance

Economic-crime illicit commercial practices Human rights issues

Workforce conflicts Large disasters or accidents

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SAM CSA – Output: Scorecard

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Participation of Companies in DJSI has been Constantly Increasing Over the YearsParticipation of Companies in DJSI has been Constantly Increasing Over the Years

SAM CSA - Participation

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SAM CSA: Companies in the DJSI Indexes 2011 – Latin America

• Banco Bradesco S/A Pref

• Companhia Energetica de Minas Gerais – CEMIG

• Embraer S.A.

• Fibria Celulose S.A. Ord.

• Itau Unibanco Holding S.A. Pref.

• Itausa-Investimentos Itau S/A Pref.

• Petroleo Brasileiro S/A Pref

• Redecard S/A Ord

• Ecopetrol S.A.

• Grupo de Inversiones Suramericana S.A.

• Grupo Nutresa S.A.

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SAM CSA: Examples of companies recently added in the DJSI Indexes – Latin America

• Ecopetrol (2011)

• Grupo de Inversiones Suramericana S.A. (2011)

• Grupo Nutresa S.A. (2011)

• Embraer – Empresa Brasileiras de Aeronautica (2010)

• Redecard S/A Ord (2009)

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Content

• SAM




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Demographics, Resource Scarcity, Pollution, Climate Change

• Governance• Anti-trust regulations• Consumer protection

• Co-creationcapabilities

• Innovation Management

• Resource efficiency• Innovative materials• Agribusiness

• Stressed Ecosystem• Reconstruction• Infrastructure• Health

• Scarcity skilled workforce

• Health costs• Nutrition

Regulation Innovation Scarcity natural resources

Climate Change Population growth

Developments: Long-term trends impacting competitive advantage

Source: SAM Research

Competitive advantage of companies

Impact on value chains within / across sectors

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Developments - Club of Rome 1972: Limits to Growth

Fate or Choice?

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Developments - Methods to Accelerate Aging

Source: Max Planck Institute, 2008

Wrong Partner

High Blood Pressure

Depression

Being Uneducated

Smoking

Being Male

Inaccurate Medication

High Vitamin Dosage

Passive Smoking

Wine > ½ liter per day

+ 10

+ 9 to 10

+ 8

+ 6

+ 10 to 15

+ 3

+ 3

+ 2

+ 2

+ 1 to 3

Years

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Developments - Predictions often underestimate…

“I think there is a world market for maybe five computers”

Thomas J. Watson, Chairman of IBM, 1943

"Where a calculator […] weighs 30 tons, computers in the future may have only 1,000 vacuum tubes and weigh only 1.5 tons"

Popular Mechanics, 1949

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Developments - “Wait and See” may not be good enough

Photo: www.losapos.com

Witnesses for the perished culture of the Easter Islands

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Developments - Long-term trends impacting competitive advantage




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Developments - HDI and Ecological Footprint

Innovation is required to enable human development by using less biocapacity

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Developments - Sustainability Drivers as Innovation Triggers

Developing New Business Models

Meeting demands differently, i.e. new delivery techno-logies, services

Stage 4

Creating Next-Practice Platforms

New knowhow platforms and technologies, new applications

Stage 5

Designing Sustainable Products and Services

New methods for product develop-ment or ecofriendly packaging

Stage 3

Making Value Chains Sustainable

Efficient production, new sources of materials,reuse and recycling

Stage 2

Viewing Compliance as Opportunity

First mover advantages for early implementers

Stage 1

Source: R. Nidumolu, C.K. Prahalad and M.R. Rangaswami (2009), Why Sustainability Is Now the Key Driver of Innovation, Harvard Business Review, September 2009, U.S. and Canada.

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Developments - Innovation Management

DJSI 2011 Company Assessments - Innovation Managment

43

4948

56

28

47

52

59

0

10

20

30

40

50

60

70

80

Average 2010 Average 2011

Sc

ore

North America Europe Asia / Pacific Rest of World

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Developments – Innovation Management

The results of the SAM Corporate Sustainability Assessment show an increasing number of companies tracking environmental innovation (product, processes and revenues), highlighting the importance of sustainability within the innovation process.

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Developments - Long-term trends impacting competitive advantage




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SAM CSA - DJSI 2012 - Supply Chain Management: Why are investors interested in how companies are managing their supply chain?

• Currently, companies are not only outsourcing production, services and business processes but also corporate responsibilities and reputational risks

• The dilemma of combining lower cost, faster deliveries with improved sustainability performance and product quality

• SAM therefore wants:

• to identify companies that have a lower supply chain risk profile (due to e.g. supply chain characteristics, appropriate management of these risks etc.)

• to identify companies that are using sustainable supply chain management as an opportunity to improve their financial performance in the long term

Working conditionsHuman Rights

Toxic substancesGuidance for

subcontracting

Product quality

Recall risk

Costs

Transfer of mismanaged sustainability issues into actual costs

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Developments – Supply Chain: link between the overall management of sustainability issues and the management of supply chain risks

• Strong correlation between overall corporate sustainability performance and the supply chain performance (based on results of the SAM‘s Corporate Sustainability Assessment 2011)

• Sample: 1269 companies (87.9 % of total) were asked questions about Standards for Suppliers as part of SAM‘s Corporate Sustainability Assessment 2011

• 72.4 % of the top 20 % scoring companies overall are also amongst the top 20 % scoring companies in the Standards for Suppliers criteria

Score Correlation y = 0.9263x + 3.419

R2 = 0.7519

0

20

40

60

80

100

120

0 10 20 30 40 50 60 70 80 90 100

Total Score

Sta

nd

ars

fo

r S

up

plie

rs

4040

SAM CSA – DJSI 2012 - Supply Chain Management: New Framework

Strategy

Exposure & awareness

Measuring Performance

Transparency

OpportunitiesSupplier Selection

Risk Management Measures

& Capacity Building

Training and incentives for staff

Awareness of both risks & opportunities is the foundation for SAM’s new analytical framework for sustainable supply chain management

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Where are we going?

Photo: http://metroroute66club.blogspot.com/

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Stock Exchanges demand ESG Disclosure

Stock exchanges are increasingly adopting listing requirement on ESG disclosure evidencing the enormous shift towards the importance of ESG issues in the financial arena. They can play a pivotal role in enhancing the ESG disclosure and transparency of listed companies.

Country Stock Exchange Listing Requirement on ESG Disclosure

Australia Australian Securities Exchange (ASX)

Disclosure on extent to which the companies have followed its Corporate Governance Principles and Recommendations which includes sustainability-related issues

China Shanghai Stock Exchange (SSE)

Governance standards in Corporate Governance code and Environmental standards under “Green IPO” policy for initiating an IPO or obtaining refinancing from banks for 14 most polluting industries

Norway Oslo Børs Companies applying for listing should define and disclose the guidelines for corporate social responsibility

Malaysia Bursa Malaysia Mandatory disclosure on CSR information in the annual reports

South Africa

Johannesburg Stock Exchange (JSE)

Integrated sustainability reporting and third party assurance under King Code on Corporate Governance III

Taiwan Taiwan Stock Exchange (TWSE)

CSR reporting in the corporate governance statement with information on company’s CSR system, measures adopted and performance

US NYSE Euronext Mandatory disclosure of governance practices including the availability of a code of business conduct

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Methods to Decelerate Aging („Downaging“)

Source: Max Planck Institute, 2008

1 Aspirine per day

Folic Acid (daily)

High HDL Level

Washing Hands (daily)

Good C Reactive Protein

Good Sleep

Wine < 1/3 liter per day

Sports (2500 kcal/week)

Periodical Sex

Good Social Contacts

Years

- 0.9

- 1

- 2

- 2

- 2

- 3

- 3

- 3.4

- 4

- 6

- 7 OPTIMISM

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SAM Sustainability ServicesJosefstrasse 218

8005 ZurichSwitzerland

Phone: +41 44 653 1240Fax: +41 44 653 1050

[email protected]

www.sam-group.com/services www.sustainability-indexes.com

Jvan GaffuriSr. Manager Sustainability Services

In industry since 1997; with SAM since 2006

Edoardo GaiHead Sustainability Services


Matthias NarrManager Sustainability Services


Sustainability Services - Contact

Cornelia WickiJunior Manager Sustainability Services


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Disclaimer

No warranty This publication is derived from sources believed to be accurate and reliable, but neither its accuracy nor completeness is guaranteed. The material and information in this publication are provided "as is" and without warranties of any kind, either expressed or implied. SAM Group Holding AG and its related, affiliated and subsidiary companies disclaim all warranties, expressed or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose. Any opinions and views in this publication reflect the current judgment of the authors and may change without notice. It is each reader's responsibility to evaluate the accuracy, completeness and usefulness of any opinions, advice, services or other information provided in this publication.Limitation of liability All information contained in this publication is distributed with the understanding that the authors, publishers and distributors are not rendering legal, accounting or other professional advice or opinions on specific facts or matters and accordingly assume no liability whatsoever in connection with its use. In no event shall SAM Group Holding AG and its related, affiliated and subsidiary companies be liable for any direct, indirect, special, incidental or consequential damages arising out of the use of any opinion or information expressly or implicitly contained in this publication.Copyright Unless otherwise noted, text, images and layout of this publication are the exclusive property of SAM Group Holding AG and/or its related, affiliated and subsidiary companies and may not be copied or distributed, in whole or in part, without the express written consent of SAM Group or its related, affiliated and subsidiary companies.No Offer The information and opinions contained in this publication constitutes neither a solicitation, nor a recommendation, nor an offer to buy or sell investment instruments or other services, or to engage in any other kind of transaction. The information described in this publication is not directed to persons in any jurisdiction where the provision of such information would run counter to local laws and regulation.

Jvan gaffuri 120424 stock markevalueofsustainability

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