Seite Workshop 11 - ESG Integration and Valuation Availability of Relevant Data, Validity of KPIs and Application by oekom Clients TBLI, London – November 2010
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Seite overview ESG 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
Seite 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 Seite 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
Seite example: BP Typical KPI: GHG Emissions 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)
Seite 20 April 2010 : the drilling rig 'Deepwater Horizon' caught fire in an explosion and two days later sunk in the Gulf of Mexico. example: BP Examples of rating topics relevant to BP‘s accident 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
Seite example: prominent crashes Lehman Brothers Enron Parmalat 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 . 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Seite challenges Interpretation 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 t/mUSD Number of own production facilities – Fujitsu: 5 – Dell: 1 Source: oekom research AG (2010) 61.1 471,328 Dell 57.7 1,692,900 Fujitsu Sales (in bn USD) GHG Emissions (in t)
Seite challenges Data 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. – Certified organic products food sales (%) Retail (e.g. Ahold, Carrefour) – SRI assets under management (%) Financials (e.g. Barclays, BBVA, HSBC) – Global average fleet CO2 emissions (only home market) – R&D budget on alternative drive systems and fuels Automobiles (e.g. BMW, Toyota, VW)
Seite challenges Data quality, comparability and availability Example: Investments to improve environmental performance (% sales) Definition Value Company 0.066% 0.0003% No official definition available. Finmeccanica „ ...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. ...“ MAN Definition Value Company USD 18bn EUR 23bn „ ...Products or services that improve customers' operating performance or value proposition and significantly and measurably improve customers' environmental performance. ...“ -> including nuclear power technology General Electric „ ...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 Siemens Example: Environmental product portfolio sales (total sales)
Seite application by oekom clients Investment 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) > 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 AG Goethestr. 28 D-80336 München Tel: +49/89/54 41 84-90 Fax: +49/89/54 41 84-99 Email: [email_address] Web: www.oekom-research.com kontakt Seite