6 march 2013 business case of corporate sustainability for investors dr. thomas streiff, head guilé...
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6 March 2013
Business Case of Corporate Sustainability for Investors
Dr. Thomas Streiff, Head Guilé Engagement Team
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Definition of ESG Investment
„ESG investment is an investment approach which considers systematically – in the context of a comprehensive financial analysis - criteria from the area of natural Environment, Society and employees, as well as Governance. By considering these extra financial information new opportunities for generating ‚Alpha’ and for reducing of investment risks.“Definition WestLB
‚Alpha‘ is an indicator for the evaluation of the return of an investment (e.g. share, fund) compared to a benchmark (e.g. index)
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Value of non-financial information
Integrated Reporting• Higher predictability• Lower spread in forecasts• Increased confidence• Lower volatility• Enables anticipation
Financials only• Lower predictability• Higher spread in
forecasts• Lower confidence
Company 2
Lower earnings Higher earnings
Acc
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Higher spread
Lower spread
Company 1
Source: World Watch Issue 1 /2004, PwC; Schroders, Kirchoff Consultants, 2005
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Impact of intangible values on market value:Growing importance of intangible valuesAnalysis of the FTSE 250 share price index 1978-2006
Source: Interbrand. Brand Value Management, 2006
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Impact of intangible values on market value:The model
BookValue
MarketValue
Physical Assets
Financial Capital
Tan
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Corporate Philanthropy
Financial Capacity“Retrospective”
Strategic Capability/License to Operate
“Prospective”
Source: BHP, PricewaterhouseCoopers
• Compliance• Intellectual Capital• Customer Loyalty• Employees Loyalty• Risk Awareness
• Reputation- Trust- Credibility- Integrity
• Brand Main intangible value drivers influenced by corporate responsibility
Value drivers
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Impact of intangible values on market value:Increase relevance of non-financial reporting
Source: www.corporateregister.com
+400/y additional sustainability reporters since 2000
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Connection between corporate responsibility / corporate sustainability and shareholder value:The model of the Dow Jones Sustainability Index
So
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SustainabilityCriteria
FCFF: Free Cash flow to the FirmWACC: Weighted Average Costs of Capital
Market Value
Source: Adapt. from SAM Sustainability Yearbook 2008
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Example: Human Capital Development and FCFF
Source: SAM Sustainability Yearbook 2009
ROIC = Return on Invested Capital
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Companies view: Comparing embracers and cautious adopters on the basis of what they think are the top three benefits of sustainability.
Source: MIT Sloan Management Review, Nov. 2011: Sustainability: The ‘Embracers’ Seize Advantagehttp://c0426007.cdn2.cloudfiles.rackspacecloud.com/MIT-SMR-BCG-sustainability-the-embracers-seize-advantage-2011.pdf
10Source: Financial Times, 02/03 March 2013, p. 12
$ 42.2 bnCumulative accounting charge BP has taken in relation to the spill $ 8.5 bn
Settlement agreed last year with private plaintiffs $ 1.7 bn
Sum BP expects to spend on legal and administrative costs
4.1 mEstimated number of barrels = 652 m liter of oil that leaked into the Gulf of Mexico
Costs of unsustainable business practices: The Deep Water Horizon disaster and consequences for BP
11Source: Novethics. European Asset Owners: ESG Perceptions and Integration Practices. 2010
Investors view: Higher financial performance not a main reason for ESG investment
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What research says
Study of Deutsche Bank based on the analysis of more than 100 academic studies and close examination of 56 research papers, 2 literature reviews and 4 meta studies concluded:
•companies with high ratings for CSR/ESG factors have lower cost of capitals in terms of debt (loans and bonds) and equity (100%);•companies with high ratings for ESG factors exhibit market-based outperformance (89%) and accounting-based outperformance (85%);•Governance (G) is the single most important macro factor; •88% of the studies concluded that SRI fund returns show neutral or mixed results mainly due to the composition of the analyzed funds (exclusionary screens)
Source: Deutsche Bank: Sustainable Investing: Establishing long-term value performance ;June 2012
• Negative screening / exclusion concerning e.g. Sector (ex alcohol, armaments, tobacco etc.) Countries (Myanmar, Sudan, Zimbabwe etc.)
• Positive screening, e.g.
Best in class Pioneers
• Engagement = forward looking approach Dialogue and joint activities Voting rights
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Different approaches of sustainability/ESG investment: From exclusion to engagement
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