Talk by Dominique Habegger

TBLI Europe 2006 Paris


Can extra-financial research complementfinancial research?

Moderator: Michael Jantzi , Jantzi Research/SiRi Company

Speaker: Dominique Habegger, VP of Research, ASSET4

What is the latest sell side research on SRI risk?

Are extra-financial issues relevant in company analysis?


Knowing. Not guessing.


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Short-term thinking has not proven to generate better long-term alpha.

Long-term risks have shown to materialize sooner than expected.

Transparency on extra-financial issues is on the rise.

Can extra-financial research complement financial research? YES

…But to add more value it sill needs

Better Information databases

Data track record (historical data)

More qualified (SRI)-analysts spending more time analyzing data rather than gathering it!


4

Companies start to think long-term!

2003 2004

With lack of quarterly guidance / reporting, ESG information will become mission critical

Source: Greenwich Associates / WSJ, 385 public quoted companies

55%72%

Percentage of US companies surveyed that provide earnings guidance to analysts


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Intangible Assets as Key Driversof Market Value

Source: Juergen H Dalum, Intangible Assets and Value Creation, John Wiley & Sons, 2002

62%

38%

16%

62%

84%

38%

0

0

0

1

1

1

1982 1992 1999

Market value

(S&P 500)

Intangible assets

Tangible assets


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ESG – risks are becoming real

Environmental risk:Hurricanes produced cost / losses of USD 170 bio in 2005; less than 50% were covered by an insuranceHistorical data for cost / losses: 1960: USD 4 bio1970: USD 7 bio1980: USD 24 bio1990: USD 113 bio2000-2005: USD 273 bio)Source: EarthPolicy.org

Social risk:Life span of CEO / top management less than 5 years

Corporate Governance risk:1‘200 public US companies had to restate financial results 2005 – lack of good management systems


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Extra-Financials Becoming a PriorityKey Trends

Risk Opportunities Reputation Performance

Whether you believe in it or not, you better start gaining knowledge on these issues:

Capital markets care about them – and external perception drives stock price, cost of capital and reputation.

Your clients want to feel more certain than ever about your integrated performance and decision-making process.

Knowledge-based decision making is essential for the long term.


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0

20

40

60

80

100

120

140

160

180

200

220

Jul-00Nov-00Mar-01

Jul-01Nov-01Mar-02

Jul-02Nov-02Mar-03

Jul-03Nov-03Mar-04

Jul-04Nov-04Mar-05

Jul-05Nov-05Mar-06

Jul-06

Price Returns EUR (in %)

Index upper 50%Index lower 50%

Weighted ASSET4 Algorithm

Most important aspects:

59.68%44.47%


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Who is ASSET4

Employees 150

Denmark, DK

HQ Zug, CH

India, IN

Mauritius, MU

Head Quarter Zug (CH)

Management (Zug) Peter Ohnemus, CEOHenrik Steffensen, MarketingWolfgang Kreft, SalesDominique Habegger, ResearchErik Troelsen, TechnologyTed Yarnell, Vice President AmericasSimon Rowell, Managing Director UKFabrice Fayd’herbe de Maudave, Data Service

Founded August 2003

Shareholders High Net Worth Individuals and Goldman Sachs

Products assetmasterProfessional, assetmasterExecutive

Market Financial Institutions (Buy-Side, Sell-Side Research, Asset Management, Quant, Risk, Marketing & Reporting)Insurance House, Pensions Funds, Specialized Funds, Corporations

Headquarter ASSET4 AG, Zug Switzerland

Partners International Institute for Management Development (IMD), GOE / Swiss Federal Institute of Technology (ETH); Copenhagen Business School (CBS)Suppliers Thomson Financial (financial data), LexisNexis (5000 news sources)

Offices New York (US), London (UK)Denmark (DK), Mauritius (MU), India (IN)

New York, USA

London, UK

Business statement ASSET4 is the world’s leading provider of comprehensive, integrated and transparent financial and extra-financial information, which is essential to understanding and managing the long-term performance and risk profile of today’s corporations. The ASSET4 IntegratedRatingTM framework supported by 120+ analysts, offers investment professionals the data and tools necessary to track, analyse and benchmark the practices and performances of their portfolios, funds and companies.


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IntegratedRating

Economic Performance

Environmental Performance

SocialPerformance

Corporate Governance Performance

Revenues / Client Loyalty

Margins / Performance

Profitability / Shareholders Loyalty

Resource Reduction

Emission Reduction

Product Innovation

Workforce / Employment Quality

Workforce / Health & Safety

Workforce / Training & Dev.

Workforce / Diversity & Opportunities

Society / Human Rights

Society / Community

Customer / Product Responsibility

Board of Directors / Board structure

Board of Directors / Compensation Policy

Board of Directors / Board Functions

Shareholders / Shareholders Rights

Integration / Vision and Strategy

The customer/product responsibility category measures a company's management commitment and effectiveness towards creating value-added products and services upholding the customer's security. It reflects a company's capacity to maintain its license to operate by producing quality goods and services integrating the customer's health and safety, and preserving its integrity and privacy also through accurate product information and labeling.

ASSET4 Framework of 18 CategoriesThe Extra-Financial Library

Example


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Driver Indicators

provide information on management quality, by looking at the different policies, means of implementation and control mechanisms a corporation has in place. They are lead indicators forecasting future outcome.

Outcome Indicators

give a picture of actual performance, performance improvements, transparency and areas with higher than average risk exposure.

Checks and BalancesAccording to the Balanced Scorecard


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ASSET4 Indicator Sample

Content for Johnson & Johnson

Does the company have a POLICY, code of conduct, procedure, programme, compliance mechanism or management system for--reducing the use of natural resources, such as raw materials, energy or water?AND--finding more eco-efficient solutions by improving supply chain management?

Value: Yes/YesRating: A (88%)


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How does it work?Choose out of 480 Measurements…Access to Medicine Accounting Compliance Accounting Controversies Accuracy Animal Testing Announced Lay-offsAnti-competition ComplianceAnti-competition ControversiesAnti-takeover DevicesAudit and Accounting FeesAudit Committee ExpertiseAudit Committee IndependenceAudit Committee Management’s IndependenceAuditor IndependenceAwardsBackground and SkillsBenefitsBiodiversity ControversiesBiodiversity ImpactBoard AttendanceBoard DiversityBoard MeetingsBoard Member CompensationBoard Member MandatesBoard of Directors / Board Functions Board of Directors / Board Structure Board of Directors / Compensation Policy Board’s OversightBonus PlanBrand ValueBribery, Corruption and FraudBusiness Ethics ComplianceCapital ExpenditureCash Flow GrowthCement CO2 EmissionsCement Energy UseCEO – Chairman SeparationChallenges and Trade-offChild LaborClient SatisfactionClinical Trials and Research ControversiesClinical Trials and Research GuidelinesCO2 ReductionCommercial Risks/Opportunities Due to Climate Change Compensation Committee IndependenceCompensation Committee Management’s IndependenceCompensation ControversiesConsumer ComplaintsCorporate Governance ReportCost InnovationsCredit RatingsCrisis ManagementCustomer / Product Responsibility Customer ControversiesDebt to EquityDevelopmentDischarge into Water SystemDiseases of the Developing WorldDiversity ComplianceDiversity ControversiesDividend Payout RatioDonations in CashDonations in General

Driver Board of Directors / Board Functions Driver Board of Directors / Board Structure Driver Board of Directors / Compensation Policy Driver Customer / Product Responsibility Driver Emission Reduction Driver Integration / Vision and Strategy Driver Margins / Performance Driver Product Innovation Driver Profitability / Shareholders Loyalty Driver Resource Reduction Driver Revenue / Client Loyalty Driver Shareholders / Shareholders Rights Driver Society / Community Driver Society / Human Rights Driver Workforce / Diversity and Opportunity Driver Workforce / Employment Health & Safety Driver Workforce / Employment Quality Driver Workforce / Training and Development Drug DelaysEarnings RestatementEmission Reduction 104Employee CostEmployee ProductivityEmployee SatisfactionEmployment AwardsEnergy Efficiency InitiativesEnergy FootprintEnergy UseEnvironmental Asset ManagementEnvironmental CitizenshipEnvironmental ComplianceEnvironmental ExpendituresEnvironmental Labels and AwardsEnvironmental PartnershipsR&DEnvironmental R&D Expenditures Environmental Supply Chain ManagementExcessive ConsumptionExperienced BoardExposure Board of Directors / Board Functions Exposure Environmental Project FinancingEnvironmental Quality ManagementEnvironmental Board of Directors / Board Structure Exposure Board of Directors / Compensation Policy Exposure Customer / Product Responsibility Exposure Emission Reduction Exposure Integration / Vision and Strategy Exposure Margins / Performance Exposure Product Innovation Exposure Profitability / Shareholders Loyalty Exposure Resource Reduction Exposure Revenue / Client Loyalty Exposure Shareholders / Shareholders Rights Exposure Society / Community Exposure Society / Human Rights Exposure Workforce / Diversity and Opportunity Exposure Workforce / Employment Health & Safety Exposure Workforce / Employment Quality Exposure Workforce / Training and Development Family FriendlyFDA Warning LettersFemale Male RatioF-Gases Emissions

Fleet CO2 EmissionsFleet Fuel ConsumptionFleet RecyclingFreedom of AssociationGlobal ReportingGMO freeGMO ResearchGreen BuildingsGreenhouse Gas EmissionsGRI ReportHarmful ProductsHazardous WasteHealth and Safety ComplianceHealth and Safety ControversiesHighest SalaryHIV-AIDS ProgrammeHuman Rights ControversiesImplementation Board of Directors / Board Functions Implementation Board of Directors / Board Structure Implementation Board of Directors / Compensation Policy

Implementation Customer / Product Responsibility Implementation Emission Reduction Implementation Integration / Vision and Strategy Implementation Margins / Performance Implementation Product Innovation Implementation Profitability / Shareholders Loyalty Implementation Resource Reduction Implementation Revenue / Client Loyalty Implementation Shareholders / Shareholders Rights Implementation Society / Community Implementation Society / Human Rights Implementation Workforce / Diversity and Opportunity Implementation Workforce / Employment Health & Safety

Implementation Workforce / Employment Quality Implementation Workforce / Training and Development Improvements Board of Directors / Board Functions Improvements Board of Directors / Board Structure

Fig. 3.3 - Indicator Overview

… see ASSET4 - Indicator List


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278 IndicatorsEconomic Environmental Corporate GovernanceSocial

Market Leadership

2001

2002

2003

Revenue Sustainability

INDICATOR WEIGHT

2004

Revenue Growth 20 %

Market Share 15 %

Consumer Complaints 10 %

Product Recalls / Withdrawals 15 %

Brand Value 10 %

Anti-Competition Controversies

10 %

100 %

… choose your desired indicators

Market Leadership

The ASSET4 assetmasterProfessional solution permits users to build their own themes. They choose any indicators they think are particularly important and weight them according to their preferences. In constructing these themes we suggest that they match financial indicators with extra-financials indicators to strengthen their analysis. Our system allows you to construct any theme of your interest, such as Management Ratings, Industry specific Ratings or Risks Ratings.

My Rating

tim

e

Fig. 2.1 - History Trend


2001 2002 2003 2004 years

100 %

0 %

Fig. 2.0 - Best in Class

Fig. 1.9 - Strength & Weaknesses

Benchmarking

Best in Class

Trend

RevenueGrowth

MarketShare

MarketLeadership

ConsumerComplaints

Product RecallsWithdrawals

BrandValue

Anti-CompetitionControversies


The Spiderweb Diagram shows you immediately strengths and weaknesses against the benchmark.

Best in Class is a quick view of a company's position within the industry.

Monitor performance over time.

Fig. 1.8 - Theme building

The ASSET4 assetmasterProfessional solution provides 278 financial and extra-financial indicators that can be individually selected to obtain an aggregate rating on specific themes. A direct benchmark analysis will provide a transparent comparison and best in class to the

respective peers.

Fig. 2.2 - Symbolic view of Indicators

…Create your own ratings or themes


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… choose your desired indicators

20012002

2003


INDICATOR WEIGHT

2004

Revenue Growth 20 %

Market Share 15 %

Consumer Complaints 10 %

Product Recalls / Withdrawals

15 %

Brand Value 10 %

Anti-Competition Controversies

10 %

100 %

Market Leadership

tim

e

…Build tailor made reports or exports

… ASSET4 - Indicator List

Industry Reports

Industry Report

Indicator Reports

Companies comparison on very specific indicators …

Client Satisfaction

20042003

Indicator – Category Revenues / Client LoyaltyEconomic Pillar

Client Satisfaction

20042003

Indicator – Category Revenues / Client LoyaltyEconomic Pillar

Category Reports

Category Report Resource Reduction …

Resource Reduction

Category Resource Reduction - Trends Environmental Pillar

Graph 2 - assetmasterProfessional

2004

200120022003

Trend

Benchmark 2004

Resource Reduction

Category Resource Reduction - Trends Environmental Pillar


2004

200120022003

Trend

Benchmark 2004

Driver versus Outcome

Driver versus OutcomeCategory Resource Reduction


2004DriverOutcome

Driver versus Outcome

Driver versus OutcomeCategory Resource Reduction


2004DriverOutcome

Data Reports

Data Report

… create tailored reports

Company Reports

Company Report

4 Pillars

Pillar Ratings


Benchmark

Economic

Environmental

Social

Corporate Governance

4 Pillars

Pillar Ratings


Benchmark

Economic

Environmental

Social

Corporate Governance

IntegratedRating D+

My Ratings The ASSET4 assetmasterProfessional solution allows building multiple personal ratings, such as management ratings,

industry specific ratings, risks ratings by selecting and weighting any item from the indicator list

My Reports assetmasterProfessional 2.4 will enable our users to define their own exporting formats (spreadsheets, or pdf reports) ASSET4 enables the generation of individually designed reports according to your needs (tables, graphs, data, etc.) With assetmasterProfessional, tailor made company reports and newsletters can be designed and automated to meet

your clients’ reporting expectations


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…Integrated in the Investment Process

Strategy Team

FocusAllocation Themes

Financial Analyst Research Buy-Side

Stock Picking + Valuations

Economics

Risk

Portfolio Manager

TechnicalAnalystQuant Analyst

100110101001010111100111110110111001111

SRI Analyst

Risk Monitoring

Alerts

Investment StrategyModel Portfolio

Client RelationshipManagement

Push - PullMandates

Reporting

Marketing

!

Profiling

Client

Politics…

Analyst Research Sell-Side

Research Reports

Corporations

Broker Stock

Exchange

ASSET4 – Investment Professionalism for Your Investment DecisionsDefinition Investment UniverseBottom-up Stock Selection / Definition of Products or PortfoliosRisk ManagementReportingIntegratedRatingsTM

EESG Rating / MyRating Company / Portfolio AnalysisData collectionAlgorithms

Institutional

Private

Country Exposure Currency Exposure Sector Exposure Environmental Exposure Extra – Financial Exposure …

Risk Models Performance Models Algorithm Optimisation Quantitative Research Correlation Studies

IntegratedRatingsTM

Raw Data Analysis Analysis / Benchmarking Reporting MyRatings EESG exposure of Stocks EESG exposure of Industries Alerts

Category Reports Portfolio Exposure Reports Risk Reports IntegratedRating Reports Indicator Reports (e.g. CO2)

Risk Exposure – EESG - Indicator Risk Reporting Alerts

Investment Universe Definition Industry versus EESG Exposure Country versus EESG Exposure

IntegratedRatingsTM MyRatings Stock Selection Raw Data Analysis EESG Analysis Benchmarking Reporting Best in Class

IntegratedRatingsTM

Stock Selection Products Definition - EESG Reporting Exposure / Ratings EESG Raw Data Analysis Optimisation with EESG Algorithms Scenario Analysis / MyRatings Alerts

Stock Picking, Best in Class IntegratedRatingsTM

Portfolio Management - EESG Risk Monitoring - EESG Alerts MyRatings Portfolio Construction

Profiling EESG Expertise

Investment StrategyProfiling Asset Allocation Monitoring Reporting

MSCI

Parameters

Universe

StockSelection

E EconomicE EnvironmentS SocialG Governance

M&A Cultural Synergies Risk Exposures

PortfolioManagement

Communication

Risk Management

EESG ValuationEconomic Environment Social Governance

Fig. 2.3 - ASSET4 in the Investment Process

Talk by Dominique Habegger

Economy & Finance

Transcript of Talk by Dominique Habegger