4. Consulting
Benefits of superior ESG
performance
1. Financial Performance
• Improvement of corporate accounting & stock performance1)
• Lower volatility in corporate earnings2)
2. Cost of Capital
• Firms exhibit lower risks arising from reputational, financial or
litigation concerns (partly affecting credit rating) leading to3):
a) Lower cost of debt: “firms with CSR concerns
pay on average 7-8 bp more”4)
b) Lower cost of equity5)
3. Investors
• Larger investor base as firms get included in potential investment
universe of SRI investors & more dedicated long-term investors6)
4. Management
• ESG relevant from a corporate strategic management perspective to Create Shared Value (CSV)7)
Firms have incentive to improve corporate sustainability as it benefits bottom-line & brand image
Academic findings on effects of superior corporate ESG performance
1) Eccles et al. (2013); Edmans (2011,2012);
Derwall et al. (2005); Gompers et al. (2003)
2) Breckinridge Report (2015)
3) Clark, Viehs (2014)
4) Goss, Roberts (2011); Chava (2011); Bauer, Hann (2010)
5) El Ghoul et al. (2011); Dhaliwal et al. (2011); Derwall and Verwijmeren
(2007); Ashbaugh-Skaife et al. (2004)
6) Serafeim (2015); Derwall (2011)
7) Porter, kramer (2006, 2011)
High ESG performers have lower earnings volatility2)
5. Consulting
ESEG – also account for “G”
Corporate lending1)
“When providing loans to clients, we incorporate ESE criteria in the credit approval process.”
Investment services1)
“We apply ESG criteria to assess potential investment opportunities for our clients.”
Also account for ESG criteria for corporate lending ESEG
1) ABN Amro Sustainability Report 2014, 2) Clark, Viehs (2014), 3) Lo (2015)
ABN AMRO’s incorporation of sustainability metrics for lending/investing
• Governance has strong impact on firm performance and corporate risk2)
• Gordon Gekko Effect3): Corporate culture matters as it might transmit negative values
• Poor governance can lead to spectacular corporate failures which might not only affect
shareholders but also bondholders (e.g. Enron, rogue traders, Lehman Brothers) and
eventually reduces credit ratings
“G” also matters
6. Consulting
ESEG risks and impact on
creditworthiness
∆ Creditworthiness2) 3)
Creditworthiness is a function of multiple elements linked to ESEG factors
Consumer boycotts
Employee satisfaction
Brand value
Environ. regulations
Exposure to fraud
ESEG Examples
∆ Credit ratings
∆ Breach of covenants
∆ Volatility
∆ Bond yield
∆ Default
1) SASB materiality map 2) PRI Corporate bonds: Spotlights on ESG risks 3) Center for International Environmental Law, (Mis)Calculated Risk and Climate Change, 2015
Environment1)
Social1)
Ethical1)
Governance1)
GHG emissions Air quality Energy management Fuel management
Human rights Customer welfare Data security Fair disclosure
Diversity & inclusion Compensation Employee health Fair labor practices
Competitive behavior Systematic risk mgt Accident & Safety Regulations
…
…
…
…
ESEGFactors
∆ Profitability
∆ Productivity
∆ Competitive position
∆ Future cash flows
∆ Cost of capital
Elements2)
7. Measuring ESEG
performance
How ESE performance is currently measured
New ESEG performance evaluation approach
ESEG evaluation approach:
Example - KLM
2
8. Consulting
How ESE performance is currently
measured1)
Medium
sustainability
risk
High
sustainability
risk
Above PAR
performance
On PAR
performance
Below PAR
performance
Monitoring
level
Client’s are checked against the ABN AMRO
Exclusion List
1a. Exclusion List Check
Sustainability risk is determined based on:
• Country of operations
• Sector
• Relationship Manager adjustment
1b. Sustainability Risk Determination
Low
sustainability
risk
Tailored questionnaire for medium- and high-risk
transactions:
• Compliance: legislation compliance
• Commitment: sustainability policies and initiatives
• Capacity: sustainability policy implementation
• Track Record: client and/or sector bad press
2a. Sustainability Questionnaire Generation
Every 3 years Every 2 years Every year
Dynamic monitoring plan
Improvement measures
1) ABN AMRO, Overview of sustainability risk framework
Suggestions: 1) Also evaluate low sustainability risk companies 2) Not only self-evaluation 3) ESEG
9. Consulting
New ESEG performance evaluation
approach
• Determine sector and industry based on
SICS™ classification
• Pre-specified material topics based on SASB
1. Evaluation of corporate ESEG risks based
on SASB materiality map1)
1 point: issues likely
material for <50% of
industries in sector
2 points: issues likely
material for >50% of
industries in sector
Survey questions on material topics:
2. Industry-specific questionnaire
0 points:
not involved
5 points: small
achievements
10 points: large
achievements
Company needs to back-up achievements on material topics
3. Provision of proof
ABN AMRO’s CSR department
evaluates material topics
4. Internal Evaluation
Scores add up to max. 100
CSR Hub (SASB approach)
evaluates material topics
4. External Evaluation2,*)
1) SASB, materiality map, 2) SASB, research & insights
• Integrated-/ sustainability reporting? (+)
• CSV; are material topics integrated in the strategy? (+)
• Ratings (KLD, ASSET4, Sustainalytics, Novethic…) (+/-)
5. Incorporation of additional sustainability indicators (~30%)
Final score
10 20 30 40 50 60 70 80 90 100
Eligible for interest reductionIneligible for interest reduction
*) Depending on size of companies and availability of prior research
Sophisticated ESEG evaluation approach mitigates the risk of gaming the system
10. Consulting
ESEG evaluation -
Example: KLM
SASB materiality map for airlines 5 highly material issues in airline sector ≙ 20 points
• Issues likely material for <50% of industries in sector (0 x 1 Point)
• Issues likely material for >50% of industries in sector (5 x 2 Points)
• 100 points ≙ 5 (topics)* 2 (materiality) *10 max. points (achievement)
• Each highly material topic ≙ 20 max. points
0 points:
not involved
5 points: small
achievements
10 points: large
achievements
GHG emissions1)
Fuel management1)
Labor relations1)
Accident and safety1)
Competitive behavior2)
Final score KLM3): 84 (incl. addition aspects)
86 g CO2 / passenger 6.7% reduction
compared to 2011
3.45 liters fuel / passenger / 100 km, Fuel
saving in 2014: 50 million liters
88 collective labor agreements signed
Number of workplace accidents: +2%,
Frequency rate: +5%, Severity rate: -1%
Extensive competition law compliance
18
17
15
10
13
1) KLM CSR Report 2014, 2) AIR FRANCE and KLM Competition Law Compliance Manual, 3) Based on SLP calculation based on KLM CSR Report, 2014
Additional aspects Integrated reporting (+), CSV (+), ESG score: (+)+11
E
S
E
G
12. Consulting
Incentives I – Interest Rate
Reduction of interest rate
• Final ESEG score used as basis for calculation of
potential interest rate reduction:
𝐹𝑖𝑛𝑎𝑙 𝐸𝑆𝐸𝐺 𝑆𝑐𝑜𝑟𝑒
100
∗ 10% ∗ 𝑓𝑖𝑟𝑚′
𝑠 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑝𝑟𝑒𝑎𝑑
• Max. interest reduction of 10% of firm‘s credit spread
• Firms with total ESEG score >70 eligible for interest
rate reduction
Monetary & non-monetary incentivesCredits Spreads1)
Credit Rating – KLM2)
Evaluate potential interest rate reduction for a 7 yr
corporate loan for KLM:
ESEG Score: 84 Credit Spread: 335bp
84
100
∗ 10% ∗ 335bp =28bp
KLM is eligible for a 28 bp interest reduction
Incentive example: KLM
Rating 1 yr 3 yr 5 yr 7 yr
10
yr
30
yr
Aaa/AAA 21 38 53 55 76 121
Aa2/AA 30 42 65 72 121 114
A2/A 43 71 88 92 147 141
Baa2/BBB 96 132 153 160 253 200
Ba2/BB 172 331 343 335 361 -
US Treas. Yield 0.23 0.89 1.36 1.70 2.04 2.87
Rating 1 yr 3 yr 5 yr 7 yr
10
yr
30
yr
Ba2/BB 172 331 343 335 361 -
US Treas. Yield 0.23 0.89 0.89 1.36 2.04 2.87
1) Reuters Corporate Spreads for industrials (in basis points)
2) Inferred from corp. Bond (ISIN FR0010814459)
13. Consulting
Incentives II - Certificates
2) Best-in-Class Certificate
Eligibility Criteria
10 20 30 40 50 60 70 80 90 100
Awarded “ESEG
Sustainability Certificate”
Ineligible ESEG Certificate
1) ESEG performance final score:
2) Company with highest ESEG performance score in each industry
awarded „Best-in-Class Certificate“
1) ESEG Sustainability Certificate
Company X Company Y
Awarded for top performance
in ESEG Sustainability
Awarded for Best-in-Class
in ESEG Sustainability
14. Consulting
Incentives III – CSV Competition
Bank
Donors1) 2)
1. Proposals submitted to ABN AMRO –
3 best ideas per sector get to present
2. Each company outlines business case to integrate
material ESEG issues into a profitable business
plan
3. Judged by committee of ABN AMRO& sustainability
experts (research professors, Sustainalytics)
4. Best idea in each sector awarded “leader in
sustainability” award
5. Winners get project specific loan at discounted
interest rate (10% discount on credit spread)
CSV Competition
Case Outline
Share project insights
Competition funding
Discounted interest rate
1) RVO, Sustainable Water Fund (FDW), 2016 2) IDH The Sustainable Trade Inititative, What we do 3) Porter & Kramer, Creating Shared Value, HBR, 2011
• Introduce sector-specific CSV project competition for
corporate clients
• “Creating Shared Value”3) = Practises that enhance
business competitiveness as well as economic and
social conditions in the community
• Only material investment projects linked to core
business are eligible for competition
• Project with greatest benefit for firm and society in
each sector wins
16. Consulting
Communicating Incentives1)
1) YEC, Three Ways To Improve Your Communication With Clients, 2013
• Communicate the positive link between superior ESEG performance and firm performance (academic findings)
• Contact corporate clients privately about new ESEG program and communicate CSV competition before making it public
• Clearly highlight financial & non-financial benefits of programs (reduced corporate loan interest rates, sustainability
certificates, and project-specific interest rates reductions)
1. Share valuable information before clients realize it themselves
• Give valuable feedback on ESEG performance evaluation score/CSV competition
• Communicate potential actions to firm on how to improve on ESEG aspects and guide corporate client to achieve
eligibility for interest rate reduction & sustainability certificates
2. Give feedback
• Surprise clients with: 1) Networking events 2) New academic findings 3) Communicate with clients how much they saved
on interest rate reductions
3. Surprise corporate clients with regular updates
Increase Corporate Client Satisfaction, Foster ESEG Involvement
17. Consulting
Reporting ESEG outcomes
GSRI Ratings Outcomes
Top ESEG ranked firms:
…
…
…
Become part of our networking event!
Best-
in-class
Env.
leader
Social
leader
1. Determine ranking of all firms in ESEG ratings
2. Contact top 10% firms and establish willingness to
publish results
3. Contact other firms privately giving feedback on how to
improve results
4. Publish approved firm results
To gain new customers
• Integrated Reporting1): Outlines commitment of board to
ESEG. IR attracts longer-term investors
• Adaptive marketing2): Market to particular client need. i.e.
environmental/social interests
To established customers
• CSV Competition
• Certificates
Establishing leaders in ESEG
ESEG results as marketing tool for ABN AMRO
1) Knauer, Regulation and Capital Markets, 2014
2) Bowthorpe, The 10 Fundamentals of Adaptive Marketing, 2012
18. Consulting
Feedback Loops
Sector workshops on material issues in their industry
• Leading ESEG companies per industry invited to present
• Other corporate clients invited to participate in event
• Large networking event per industry discussing relevant
material issues to improve ESEG performance of firms -
knowledge transfer
Early Stage: Determine level of ESEG interest, clients
customer base to determine area of focus
Development Stage: Convince requirements will be fulfilled,
make adaptations and identify future ESEG interests
Long-Term Stage: Establish ESEG bonds important to
clients but difficult for competitors to imitate
Final Stage: Solidify relationship through financial and
social bonds
ABN AMRO “Networking Event”
Feedback loops through PRLC1)
1) Zineldin, "Bank‐corporate client “partnership” relationship: benefits and life cycle", International Journal of Bank Marketing, 1996
Partnership-relationship life cycle (PRLC)1)
20. Consulting
Summary
Superior ESEG performance is a “triple-win”
Benefits ABN AMRO, benefits clients, and benefits society
Communicate incentives and report benefits of ESEG outcomes
Encourage feedback loops through network events, and use ESEG outcomes as marketing tool
Use monetary and non-monetary incentives to foster corporate sustainability
Interest rate reduction based on ESEG score and credit spread, sustainability certificates, and CSV competition
Implement comprehensive ESEG measuring approach based on SASB Materiality Map™
Tool to prevent gaming of the system
23. Consulting
SASB Materiality Matrix
1) SASB, materiality matrix
KLM’s Materiality Matrix
KLM is doing a good job at accounting for material topics / integrating them in strategic planning in line with SASB
Carbon footprint (GHG emission)
Reduce CO2 emissions by 20%
compared to 2011 (tons/km)
Biofuels (Fuel management)
Operate regular flights powered by
sustainable biofuel
KLM’s corporate objectives
Noise
Expand activity while keeping noise
emissions below 2005 levels
Local air quality
Ground operations: Electrically powered
equipment and APU use procedures
Waste
100% of non-hazardous waste and 60%
of hazardous waste recovered
material
