correlation of sustainability performance and financial performancethe korean case
DESCRIPTION
Talk given by Andy Gebhardt at TBLI Conference Asia 2008TRANSCRIPT
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
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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
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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
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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
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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
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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
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“Chaebol” Structure: Samsung
Samsung Group cross-ownership structure:
=> Founding family exerts full control with minority ownership
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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
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Analysis & Investment Process
370 companies
150 companies
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Rational – ESG and the financial bottom-line
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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%
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ESG-fund YoY performance
Year-on-Year performance since inception (4.2007): 27%
Benchmark: 12%
=> Outperformance: 15%
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Are sustainable companies more profitable or …
…are profitable companies more sustainable?
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ESG linkages to financial bottom-line
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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)
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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)
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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)
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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)
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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
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Indicator correlation - HR
Compensation
0
100
200
300
400
500
600
700
0 10 20 30 40 50 60
Compensation Linear (Compensation)
Full information
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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)
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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
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Sustainable companies are…
• Not only “responsible”
• Do more than comply
• More than awareness
• Intelligent companies are more sustainable AND more profitable
=> Sustainability = Business Intelligence
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Thank You.
Andy Gebhardt
SolAbility Ltd.
Seoul, Korea
www.solability.com
Tel ++82 31 811 3578