Correlation of Sustainability Performance and Financial PerformanceThe Korean Case
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Transcript of 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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 3
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 4
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 5
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 6
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 7
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 8
“Chaebol” Structure: Samsung
Samsung Group cross-ownership structure:
=> Founding family exerts full control with minority ownership
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 9
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 10
Analysis & Investment Process
370 companies
150 companies
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 11
Rational – ESG and the financial bottom-line
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 12
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%
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 13
ESG-fund YoY performance
Year-on-Year performance since inception (4.2007): 27%
Benchmark: 12%
=> Outperformance: 15%
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 14
Are sustainable companies more profitable or …
…are profitable companies more sustainable?
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 15
ESG linkages to financial bottom-line
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 16
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)
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 17
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)
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 18
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)
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 19
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)
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 20
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 21
Indicator correlation - HR
Compensation
0
100
200
300
400
500
600
700
0 10 20 30 40 50 60
Compensation Linear (Compensation)
Full information
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 22
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)
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 23
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
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 24
Sustainable companies are…
• Not only “responsible”
• Do more than comply
• More than awareness
• Intelligent companies are more sustainable AND more profitable
=> Sustainability = Business Intelligence
© SolAbilitySustainability & Financial Performance TBLI Asia 2008 25
Thank You.
Andy Gebhardt
SolAbility Ltd.
Seoul, Korea
www.solability.com
Tel ++82 31 811 3578