hiroshi miyai

September 15, 2011

Hiroshi Miyai, CMASenior Executive Managing Director

ESG Factors in Corporate Valuation-from the research by the SAAJ's Working Group-

TBLI CONFERENCE ASIA 2011

Workshop 9 – TBLI Research and Innovation

Copyright NIKKO FINANCIAL INTELLIGENCE, Inc. All right reserved.

Contents

1. How financial analysts in Japan adopt ESG factors in their corporate valuation?

2. Study of the relationship between ESG factors and the corporate performances

3. How long term investors reflect the research on ESG factors into their investment process?

2


Northern Europe18.6%

Europe35.4%

North America14.3%

South America

6.8%

Oceania19.0%

Africa0.8%

Others1.3%

Japan2.1%

Asia exclude Japan1.7%

April,2006 May,2008

PRI

Signatories33 institutions

Assets under

management

$2 trillion

362

$4.3 trillion

Asset owners ：133

Investment Managers ：152

Professional service

partners ：77

Distribution of asset owners

Aug.,2011

929

$22 trillion

(as of Jun, 2010)

237

528

164

(1)Present situation of responsible investments in the world


3

(Source) UNPRI Home Page


CFA Institute launched “Environmental, Social, and

Governance Factors at Listed Companies: A Manual for

Investors” on July 8, 2008.

EFFAS(European Federation of Financial Analysts

Societies) has been studying the KPIs(key performance

indicators) for ESG and published 3.0 version on September

2010.

The Securities Analysts Association of Japan(SAAJ) formed

a “Working Group on ESG Factors in Corporate Valuation”

in April 2009 and published the report on June 2010.

(2)Activities of world analysts associations to promote ESG factors

4



(Source) Quoted by NFI from the report of SAAJ

5

Awareness Survey of ESG Factors by the Financial

Analysts in Japan.

Method : Online via website

Subjects : 17,086 SAAJ’s chartered members

Period : 28 October – 9 November, 2009

Number of Respondents : 599(among which 236 or

39.4% are engaged in corporate

valuation)

①Overview of the survey

(3)Awareness survey on ESG factors



②Recognition of the ESG related words


6

(Source) Drawn by NFI based on the report of SAAJ

10.9%

12.5%

14.2%

15.4%

20.0%

23.7%

23.9%

33.6%

88.1%

98.8%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Millennium Development Goals

CSP(Corporate Social Performance)

Materiality

Global Compact

UNEP-FI(UNEP Financial Initiative)

PRI(UN Principles for Responsible …

CDP(Carbon Disclosure Project)

COP15

SRI(Socially Responsible Investment)

CSR(Corporate Social Responsibility)



③Recognition of the ESG related terminologies by PRI recognition / non-recognition members


7


24.6%

22.5%

35.2%

41.5%

63.4%

44.4%

59.9%

6.6%

9.4%

7.7%

7.2%

6.6%

17.5%

25.4%

0% 10% 20% 30% 40% 50% 60% 70%

Millennium Development Goals

CSP(Corporate Social Performance)

Materiality

Global Compact

UNEP-FI(UNEP Financial Initiative)

CDP(Carbon Disclosure Project)

COP15

PRI Non-Recognition Members

PRI Recognition Members


Copyright NIKKO FINANCIAL INTELLIGENCE, Inc. All right reserved.8

Recognition to be important to consider ESG factors in a different time frame work

Reasons to consider ESG factors by a different time frame work

(3)Awareness survey on ESG factorsMore than 80% respondents recognize the importance of ESG factors in their corporate valuation analysis

ESG factors are more referred by those who evaluate corporations in a medium to long term

Short term

(<1 year)

Medium term

(1～3 years)

Long term

(>3 years ～)

Evaluation term 9% 51% 39%

ESGs are important 86% 77% 87% 86%

ESGs are not important 14% 23% 13% 14%

Short term

(<1 year)

Medium term

(1～3 years)

Long term

(>3 years ～)

Sustainable growth 53% 56% 66%

Identifying risk 60% 68% 60%

Request from clients 23% 19% 18%





What do you think is necessary to increase the use of EGS factors in corporate valuation?

9

④ESG factors in corporate valuation(3)Awareness survey on ESG factors

5.3%

15.0%

25.7%

64.6%

68.6%

0% 10% 20% 30% 40% 50% 60% 70% 80%

others

Enhanced ESG research function in the organizations

Increased demands of investors for ESG considerations

Improved corporate disclosure of ESG issues

Proven relationship between ESG factors and corporate performance



Hypothesis : The higher the ESG score, the higher the

corporate profitability.

Method : Regression analysis were conducted as follows,

iiiiiii IDYDDLogSCSPCFP 54321 ＋＋

CFPi：Financial data (ROA, Labor share, Labor productivity, Corporate value)CSPi：ESG score (JRI scores*)Si : Market capitalizationDi ：Interest-bearing debt ratioYDi ：Yearly dummy variableIDi :TSE 33 sector dummy variable

10

(1)How to analyze ESG factors

2. Study of the relationship between ESG factors and corporate performances

*Scores are given based on responses to the survey conducted by Japan Research Institute, Limited(JRI).JRI provides “overall”, “environmental”, “social”, “governance”, and “social and governance” scores by its own methodology.


●Hypotheses : β1＜０, statistically significant

→ high CSP score stocks have low CFP ⇒ ESG may be cost to corporate

β1＞０, statistically significant

→ high CSP score stocks have high CFP ⇒ ESG may contribute to

corporate profitability

β1 , not statistically significant

→ CSP score dose not show the relationship b/t CSP and CFP

●Results :

CFP level ： β1 ＜０, statistically significant ⇒ ESG is a cost factor

CFP increasing rate ： β1 ＞０, some statistically significant ⇒ ESG may

contribute to improve profitability

Stock return volatility : β1 ＜０, statistically significant ⇒ ESG may contribute

to reduce volatility of return


(2)Results of the Analysis

2. Study of the relationship between ESG factors and corporate performances

11

Copyright NIKKO FINANCIAL INTELLIGENCE, Inc. All right reserved.12

Long term investors need long term valuationResearch for long term valuation needs long term dataSAAJ’s Working Group continues to study on “ESG Factors

in Corporate Valuation” as one of the important topics to celebrate SAAJ’s 50th anniversary(October, 2012).

(1)ESG factors for long term investment

year

1 2 3 4 5

Short Medium Long

Corporate Financial Data

=ROA, PER, Sales, etc.Corporate Social Data

= ESG data

3. How long term investors reflect research on ESG factors into their investment process?


Information Sources of CorporateESG Activities・Information Vendors・Surveys to Companies・Corporate Annual Reports・Corporate CSR Reports・Corporate Websites

Global Information Sources ofCorporate ESG Initiatives・GC (Global Compact)・CDP (Carbon Disclosure Project)・GRI (Global Reporting Initiative)

Global Agreements・ILO Conventions・Framework Convention on Climate Change・Ottawa Treaty on Anti-Personnel Landmines・Others

ESG

Scores

Investors・Investment

ManagementFirms

・Banks・Pension

Funds・Other

ESG ratingagency’s ownmethodology

Viewpoint of

corporateproductivity

andsustainablegrowth isrequired

(2)How to use ESG valuations

(Source) Drawn by NFI using various sources.

ESG Rating Agencies

Survey analysis・Classification ・Weighting ・Correlation between factors

Analysis of ESG data by investors by themselves is also important

13

+



Risk Management

Res

earc

h

Individual

Stock

Selection

Tra

din

g

Po

rtfo

lio

Co

nst

ruct

ion

Sector

Allocation

Po

rtfo

lio

Man

agem

ent

Domestic Equity Portfolio Construction Process

Investment Philosophy

・Small Cap/Large Cap

・Value/Growth

・Others

Inv

estm

ent

Un

iver

se

Inv

esta

ble

Sto

cks

ESG Factors

・Environmental

・Social (Human Resources)

・Governance

・Benchmarks・Risk scores of ESG Factors

(a)Screen (b)Evaluate

(c)Control

(3)How to incorporate ESG factors into their investment Process

14

(Source) Drawn by NFI using various sources.



Com

pan

y

Ass

et O

wn

ers

(Pen

sio

n

Fu

nd

s, I

nsu

rance

Co

mp

anie

s)

(PR

I S

ignat

ori

es)

①In-house Investments / Engagements

Ass

et M

anag

ers

(PR

I S

ign

ato

ries

)

Outsource

Investment

ESG

Rating

Agencies③Data Data

Information

(venders)

④Data

⑤Data⑥Data(Indexes)

・Interviews

・Survey

・CSR reports

・Websites

②Asset Manager with specialized ESG Analysts

(4)How Company provide ESG Data

15

(Source) Drown by NFI using various sources.



Nikko Financial Intelligence (Corporate Profile)

Corporate Name Nikko Financial Intelligence, Inc.

Established December 1, 1970

Capital 1.0 billion YEN

Shareholder SMBC Nikko Securities Inc. 100%

Registration Financial Instruments Business Operator

Investment Advisory / Agency Business,

Director of Kanto Financial Bureau Registration No.915

A member of the Japan Securities Investment Advisors Association

Address 8-1, Nihonbashi Kabuto-cho, Chuo-ku,Tokyo,

103-0026, Japan

TEL ：+81-3-5644-1600

FAX ：+81-3-5644-1698

http://www.nikko-fi.co.jp/

Number of Staffs 36（as of August 2011）

All the data and information in this material is provided for information purpose only, and shall not be construed

as an attempt to encourage, arrange, intermediate, recommend, or advise any transaction related to sales of

financial products or services.

All the data and information in this material was based on responsible sources but NFI provides no guarantee for

accuracy, completeness, timeliness, or non-violation of intellectual property rights.

16




hiroshi miyai

Business

esg factors esg factors

importance of esg factors

esg factorsrecognition

esg factorsoverview

esg factorsmore

andgovernance factors

innovationesg factors

esg research function