outperformance with sustainable development key performance indicators

Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008,

Outperformance with Sustainable Development Key Performance Indicators

(SD-KPIs)

Dr. Axel HesseSenior Consultant, SD-M

TBLI Conference Europe, 13 November 2008


Source: Upton, S., Chairman of the OECD Round Table on SD (2002), pp. 8-9.

„[…] we risk emptying sustainable development of content by seeking to extend it to everything.

[…] we should begin accepting that if sustainability is to have a meaningful, universally recognisable core,

many issues will have to be excluded. Otherwise, the cart will simply not move forward.”

Focus on Key Challenges of Sustainable Development (SD)

SD-M consults institutional investors, companies and politics regarding performance-enhancing management of global core challenges for SD.


SD-KPIs in EU Account / Modernisation Directives

DIRECTIVE 2003/51/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCILAccount Directive 78/660/EEC is hereby amended as follows:The annual report shall include […]To the extent necessary for an understanding of the company's development, performance orposition, the analysis shall include both financial and, where appropriate, non-financial keyperformance indicators relevant to the particular business, including informationrelating to environmental and employee matters;

SD-KPIs are non-financial key performance indicators (KPIs) regarding a Sustainable Development (SD), which are relevant to the particular businessand which have to be disclosed in annual reports /management reports.

SD-KPIs


Investors remain the most important target group also for SD-KPIsin annual / management reports (empirical results for DAX-30 companies).

Source: Hesse (2006), p. 11.


Demand of investors for relevant, sector-specific SD-KPIs

Source: Hesse (2007), 40 pages.

Empirical survey of seven relevant investors and analysts covering SD factors.

Open question:Which are the up to three most important sector-specific SD-KPIs for the business development, the position and the expected development of ten different industries?

A study by Dr. Axel Hesse (SD-M) for Deloitte and the German Federal Ministry of the Environment


Examples for SD-KPIs 1 with the highestimportance for the business‘ development, the position and the expected development

Automobile industry: Fleet consumption (7 out of 7 investors / analysts)

Utilities: Greenhouse gas intensity of energy production (6 out of 7)

Transport and logistics services: Energy and greenhouse gas efficiency (6 out 7)

Consumer goods and retail: Compliance to environmental and social standards in the supply chain (6 out of 7)

Pharmaceuticals: Access strategies to medicines for the poor (5 out of 7)

Naming of >40% of the investors/analysts necessary to define a SD-KPI

Results: Up to three most important SD-KPIs for ten sectors (SD-KPIs 1 - 3)

Source: Hesse (2007).


Dollar value of a single SD-KPI?Automobile industry: Fleet consumption

Fuel efficiency most important factor for the consumer‘s purchase decision!

And: 80-95% of CO2 emissions during the use phase

Standard&Poor’s:

600-3.000 Euros per vehicle to meet upcoming EU emissions standards


Dollar value of a single SD-KPI?Utilities: Greenhouse gas intensity of energy production

RWE: >1 billion Euro per year additional costsfor the purchase of emission rights from 2008 (2007: 100 million Euro)

Vattenfall Europe: 500 - 700 million Euro per year

Source: Handelsblatt, May 16, 2007, p. 14.


Dollar value of a single SD-KPI?Banks: Sub-prime or predatory lending


SD-KPI 2: Credit checks for SD risks and opportunities in retail banking


SD-KPIsof different sectors



Source: Hesse (2008), pp. 33, 36, 40.



Best Practice for SD-KPIs Reporting


Automobile industry: BMW—not quite best practice

Source: BMW Group, Annual Report 2006, pp. 30–31.

• BMW reduced fuel consumption from 1990 until 2005 about 30%—relatively. • However, the most important information, the absolute amount of the emissions of the fleet,was not reported at all.

• The sales-weighted absolute amount of the brand BMW was 192 g CO2/km, the highest emission value of all European competitors (except for Porsche).

• Impending EU regulation (130 g CO2/km): BMW can expect price increases of between Euro 1500-3000 per automobile on average across its fleet.

• Investors do not receive these material information.


Best Practice: Industrial goods—renewables: SolarWorld

• Climate protection adds value for the producer of low-emission renewable energy • Positive CO2 budget shows that the carbon dioxide emissions avoided by means of SolarWorld

products in 2006 exceed the emissions generated throughout the Group by a factor of more than 45• Simultaneously pursue economic and environmental goals• The Group´s CO2 emissions have therefore remained constant at around 41 (previous year: 41)

thousand tonnes of CO2 equivalents despite the increase in production in 2006 • Due to the solar power modules supplied by SolarWorld at the end of the value chain, the

environment is spared a total of around 1.9 (previous year: 1.2) million tons of CO2. • The environmental damage prevented in this way is worth around 130 (previous year: 84) million €

Sources: SolarWorld,Annual Report 2006, p. 42 + Hesse (2008).


Which of these approaches to sustainability research do you believe will lead to risk-adjusted out- or underperformance in the future?

Assets under Management:US$ 715 billion


Excursus: “Big Six”—the six most important SD challenges for the 21st century

Sources: UNEP (2000), p. 339.; Hesse (2002-2007).

freshwater

1

23

45

6

=> poverty

The "Big Six"-Concept is protected by copyright. Institutional Investors could use the „Big Six“ for thematic investments with

outperformance in the long term.


• From 2004 until now SD-M has elaboratedthe SD-KPIs-concept, which is protected by copyright.

• Easy data collection

• Easy communication

• Materiality (EU accounting law)

• Strong partners: Deloitte Prof. Baetge, #1 accounting prof in Germany15year-lasting competition „The Best AnnualReport“ of „manager magazine“

• „Standardization“: Stront interest ofKPMG and Ernst&YoungAssociation of Chartered CertifiedAccountants (ACCA)Fédération des Experts ComptablesEuropéens (FEE): organisation for theaccountancy profession in Europe

• Institutional Investors could use SD-KPIsfor Best-in-Class-Investments with highoutperformance in the long term from 2009.

SD-KPIs Concept—Highlights


Thank you for your attention!

Contact: [email protected]

Tel +49 251 2394678Mobile +49 173 64 222 11

outperformance with sustainable development key performance indicators

Economy & Finance