Correlation of Sustainability Performance and Financial Performance

The Korean Case

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Talk given by Andy Gebhardt at TBLI Conference Asia 2008

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Correlation of Sustainability Performance and Financial Performance

The Korean Case

  1. 1. TBLI Conference Asia 2008 Correlation of Sustainability Performance and Financial Performance The Korean Case TBLI Conference Asia
  2. 2. Overview of presentation <ul><li>Short overview of the Korean ESG market & trends </li></ul><ul><li>ESG performance in Korea </li></ul><ul><li>Linkages and correlations of CSM (corporate sustainability management) and financial performance </li></ul>
  3. 3. ESG-related reporting
  4. 4. Drivers & status of sustainability management in Korea <ul><li>Government driven </li></ul><ul><ul><li>Government drive to increase sustainability </li></ul></ul><ul><li>Compliance driven: </li></ul><ul><ul><li>Compliance with regulation </li></ul></ul><ul><ul><li>Compliance with public perception </li></ul></ul><ul><li>“ Copy-Cat” </li></ul><ul><ul><li>Copying of international trends </li></ul></ul><ul><ul><li>Copying of leading Korean companies: inclusion of Samsung SDI (2004) and POSCO (2005) in the DJSI increased awareness for sustainability management issues </li></ul></ul><ul><li>Little strategic integration of sustainability into product/service development as of yet, low anticipation of business value of CSM management on top-management level </li></ul><ul><ul><li>Improving governance systems, increasing environmental awareness and management systems </li></ul></ul><ul><ul><li>But no strategic integration (e.g. eco-imagination) as of yet </li></ul></ul><ul><li>Comparable late introduction of CSM in Korea compared to global trends </li></ul><ul><ul><li>But fast catching up </li></ul></ul>
  5. 5. ESG related retail funds in Korea Source: SolAbility ESG retail funds and ESG related theme funds
  6. 6. ESG related AuM in Korea - cumulated Source: SolAbility <ul><li>National Pension Fund announces public bidding for U$ 300 ml SRI fund </li></ul><ul><li>AMs launch SRI retail funds </li></ul><ul><li>Launch of several thematic funds </li></ul><ul><li>Chinese gold rush </li></ul><ul><li>Disappointing performance of thematic fund </li></ul><ul><li>Stock decline </li></ul>
  7. 7. Korean specific issues <ul><li>Only limited number of global companies </li></ul><ul><ul><li>Need to develop assessment scheme considering medium-sized companies </li></ul></ul><ul><li>Late absorber of corporate sustainability trends </li></ul><ul><ul><li>however: catching up fast </li></ul></ul><ul><li>Chaebol structure of large conglomerates </li></ul><ul><li>Corporate Governance structure </li></ul><ul><ul><li>Historical & cultural differences in traditional </li></ul></ul><ul><li>Cultural & historical trends in social issues: </li></ul><ul><ul><li>citizenship, HR development </li></ul></ul><ul><li>Legislation </li></ul><ul><ul><li>E.g. Korea not required to cap emissions under Kyoto – but probably will be required under post-Kyoto agreement </li></ul></ul>
  8. 8. “ Chaebol” Structure: Samsung Samsung Group cross-ownership structure: => Founding family exerts full control with minority ownership
  9. 9. Cross-ownership: increased volatility risk: Samsung Electronics share price development 2004-2008 Announcement of investigation into private slash-funds used to bribe MPs, prosecutors Family members announce retreat from active management, re-organization of control structure
  10. 10. Analysis & Investment Process 370 companies 150 companies
  11. 11. Rational – ESG and the financial bottom-line
  12. 12. 5-year performance: strong outperformance The performance of the 50 most sustainable Korean corporations 2002 -2008: 390% outperformance Equally weighted, backtracked 4/30/2008: 550% KOSPI 4/30/2008: 160%
  13. 13. ESG-fund YoY performance Year-on-Year performance since inception (4.2007): 27% Benchmark: 12% => Outperformance: 15%
  14. 14. Are sustainable companies more profitable or … … are profitable companies more sustainable?
  15. 15. ESG linkages to financial bottom-line
  16. 16. Criteria correlation – Corporate Governance
  17. 17. Correlation – sustainability strategy
  18. 18. Criteria correlation – resource efficiency
  19. 19. Indicator correlation - OHS
  20. 20. Indicator Correlation - HR Limited information
  21. 21. Indicator correlation - HR Full information
  22. 22. Criteria correlation – risk management systems
  23. 23. Conclusions from criteria relations <ul><li>Visible correlation between sustainability performance and share price development </li></ul><ul><li>However: low r-value-correlation, wide spread => high scores does not necessarily mean good performance in all cases </li></ul><ul><li>Performance is more closely related if a company manages all relevant ESG factors/criteria </li></ul><ul><li>Lack of information in certain criteria affects research outcome </li></ul><ul><li>Full access to information increases accuracy and correlation of, and between, ESG research results and financial performance </li></ul><ul><li>Limited number of companies of global stature -> need for assessment scheme tailored to SME’s </li></ul><ul><li>Clear definition of criteria increases correlation – taking into account policies, management systems, AND performance </li></ul>
  24. 24. Sustainable companies are… <ul><li>Not only “responsible” </li></ul><ul><li>Do more than comply </li></ul><ul><li>More than awareness </li></ul><ul><li>Intelligent companies are more sustainable AND more profitable </li></ul>=> Sustainability = Business Intelligence
  25. 25. <ul><li>Thank You. </li></ul>Andy Gebhardt SolAbility Ltd. Seoul, Korea www.solability.com [email_address] Tel ++82 31 811 3578

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