abn amro_slp consulting
TRANSCRIPT
SustainabilityMeasuring and incentivising ESEG
Consulting
Leon Spruth, Philip ter Meer, Sem de Moel
ConsultingAgenda
1. Benefits of Sustainability
2. Measuring ESEG performance
4. Communication3. Incentives
Benefits of superior ESEG performance
ESEG – also account for “G” ESEG risk and impact on
creditworthiness
Interest rate Sustainability certificates CSV competition
How ESE performance is currently measured
New ESEG performance evaluation approach
ESEG evaluation-Example: KLM
5. Summary
Communication of incentives Reporting benefits of ESEG
outcomes Feedback loops – Networking event
Summary
Benefits of Sustainability Benefits of superior ESEG performance ESEG – also account for “G” ESEG risk and impact on creditworthiness
1
ConsultingBenefits 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)
ConsultingESEG – 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
ConsultingESEG 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
…
…
…
…
ES
EG
Fac
tors
∆ Profitability
∆ Productivity
∆ Competitive position
∆ Future cash flows
∆ Cost of capital
Elements2)
Measuring ESEG performance How ESE performance is currently measured
New ESEG performance evaluation approach
ESEG evaluation approach:Example - KLM
2
ConsultingHow 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
ConsultingNew 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
ConsultingESEG 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 20113.45 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
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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
Incentives Interest rate Sustainability certificates CSV competition
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ConsultingIncentives I – Interest Rate
Reduction of interest rate• Final ESEG score used as basis for calculation of
potential interest rate reduction:
• 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
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)
ConsultingIncentives 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 YAwarded for top performance in ESEG Sustainability
Awarded for Best-in-Class in ESEG Sustainability
ConsultingIncentives III – CSV Competition
Bank
Donors1) 2)1. Proposals submitted to ABN AMRO –
3 best ideas per sector get to present2. 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 fundingDiscounted 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 forcorporate 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
Communication Communication of incentives Reporting benefits of ESEG outcomes Feedback loops – Networking event
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ConsultingCommunicating 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
ConsultingReporting 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 ratings2. Contact top 10% firms and establish willingness to
publish results3. Contact other firms privately giving feedback on how to
improve results4. 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
ConsultingFeedback 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 focusDevelopment Stage: Convince requirements will be fulfilled, make adaptations and identify future ESEG interestsLong-Term Stage: Establish ESEG bonds important to clients but difficult for competitors to imitateFinal 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)
Summary5
ConsultingSummary
Superior ESEG performance is a “triple-win”Benefits ABN AMRO, benefits clients, and benefits society
Communicate incentives and report benefits of ESEG outcomesEncourage feedback loops through network events, and use ESEG outcomes as marketing tool
Use monetary and non-monetary incentives to foster corporate sustainabilityInterest 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
Appendix6
ConsultingSASB Materiality Matrix
SASB Materiality Map identifies material sustainability issues across sectors/ industries
1) SASB, materiality matrix
ConsultingSASB 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
NoiseExpand activity while keeping noise emissions below 2005 levels
Local air qualityGround operations: Electrically powered equipment and APU use procedures
Waste100% of non-hazardous waste and 60% of hazardous waste recovered
mat
eria
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