correlation of sustainability performance and financial performancethe korean case

TBLI Conference Asia 2008

Correlation of Sustainability Performance and Financial Performance

The Korean Case

TBLI Conference Asia

© SolAbilitySustainability & Financial Performance TBLI Asia 2008 2

Overview of presentation

• Short overview of the Korean ESG market & trends

• ESG performance in Korea

• Linkages and correlations of CSM (corporate sustainability management) and financial performance


ESG-related reporting

Number of ESG report

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008e

Ministries or government-controlled entities Private companies


Drivers & status of sustainability management in Korea

• Government driven– Government drive to increase sustainability

• Compliance driven:– Compliance with regulation

– Compliance with public perception

• “Copy-Cat”– Copying of international trends

– Copying of leading Korean companies: inclusion of Samsung SDI (2004) and POSCO (2005) in the DJSI increased awareness for sustainability management issues

• Little strategic integration of sustainability into product/service development as of yet, low anticipation of business value of CSM management on top-management level

– Improving governance systems, increasing environmental awareness and management systems

– But no strategic integration (e.g. eco-imagination) as of yet

• Comparable late introduction of CSM in Korea compared to global trends– But fast catching up


ESG related retail funds in Korea

Source: SolAbility

ESG Funds in Korea

0

5

10

15

20

25

Feb-06 Aug-06 Feb-07 Aug-07 Feb-08

Cummulative Additions

ESG retail funds and ESG related theme funds


ESG related AuM in Korea - cumulated

ESG related AuM, cumulativ

0

200

400

600

800

1000

1200

1400

1600

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Assets under Management

Source: SolAbility

• National Pension Fund announces public bidding for U$ 300 ml SRI fund

• AMs launch SRI retail funds

• Launch of several thematic funds

• Chinese gold rush

• Disappointing performance of thematic fund

• Stock decline


Korean specific issues

• Only limited number of global companies– Need to develop assessment scheme considering medium-sized

companies

• Late absorber of corporate sustainability trends– however: catching up fast

• Chaebol structure of large conglomerates

• Corporate Governance structure – Historical & cultural differences in traditional

• Cultural & historical trends in social issues: – citizenship, HR development

• Legislation – E.g. Korea not required to cap emissions under Kyoto – but probably

will be required under post-Kyoto agreement


“Chaebol” Structure: Samsung

Samsung Group cross-ownership structure:

=> Founding family exerts full control with minority ownership


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


Analysis & Investment Process

370 companies

150 companies


Rational – ESG and the financial bottom-line


5-year performance: strong outperformance

- 100%

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

KOSPI 50 most sustainable

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%


ESG-fund YoY performance

Year-on-Year performance since inception (4.2007): 27%

Benchmark: 12%

=> Outperformance: 15%


Are sustainable companies more profitable or …

…are profitable companies more sustainable?


ESG linkages to financial bottom-line


Criteria correlation – Corporate Governance

Corporate Governance

-

200

400

600

800

1,000

0 10 20 30 40 50 60 70 80 90

Score

Pe

rfo

rma

nce

Corporate Governance Linear (Corporate Governance)


Correlation – sustainability strategy

Sustainability Strategy

0

100

200

300

400

500

600

700

30 35 40 45 50 55 60 65 70

Score

Per

form

ance

Sustainability Strategy Linear (Sustainability Strategy)


Criteria correlation – resource efficiency

Environmental Performance

-

100

200

300

400

500

600

700

0 10 20 30 40 50 60 70 80 90

Score

Per

form

ance

Environmental performance Linear (Environmental performance)


Indicator correlation - OHS

OHS- Manufacturers

0

100

200

300

400

500

600

700

0 20 40 60 80 100 120Score

Per

form

ance

OHS-Manufacturers Linear (OHS-Manufacturers)


Indicator Correlation - HR

HR Compensation

0

100

200

300

400

500

600

700

0 10 20 30 40 50 60 70

Score

Pe

rfo

rma

nce

HR compensation Linear (HR compensation)

Limited information


Indicator correlation - HR

Compensation

0

100

200

300

400

500

600

700

0 10 20 30 40 50 60

Compensation Linear (Compensation)

Full information


Criteria correlation – risk management systems

Risk Management

0

100

200

300

400

500

600

700

0 20 40 60 80 100 120

Score

Per

form

ance

Risk management Linear (Risk management)


Conclusions from criteria relations

• Visible correlation between sustainability performance and share price development

• However: low r-value-correlation, wide spread => high scores does not necessarily mean good performance in all cases

• Performance is more closely related if a company manages all relevant ESG factors/criteria

• Lack of information in certain criteria affects research outcome

• Full access to information increases accuracy and correlation of, and between, ESG research results and financial performance

• Limited number of companies of global stature -> need for assessment scheme tailored to SME’s

• Clear definition of criteria increases correlation – taking into account policies, management systems, AND performance


Sustainable companies are…

• Not only “responsible”

• Do more than comply

• More than awareness

• Intelligent companies are more sustainable AND more profitable

=> Sustainability = Business Intelligence


Thank You.

Andy Gebhardt

SolAbility Ltd.

Seoul, Korea

www.solability.com

[email protected]

Tel ++82 31 811 3578

correlation of sustainability performance and financial performancethe korean case

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