ESG and Credit Risk Christopher GreenwaldHead of ESG Content Strategy

Agenda

• Introduction to ASSET4 ESG Data at Thomson Reuters

• Overview of ESG integration into Thomson Reuters

• Examination of ESG scores and CDS spreads

3

ASSET4 ESG Data Sources and Products

Annual Reports

CSRReports

CompanyWebsites

NewsSources

NGOWebsites

Stock Exchange Filings

ObjectiveESG Database

Data Collection

Negative Screening News Monitoring

assetmasterExecutive

Fixed IncomeCarbon Data & Estimates

assetmasterProfessional

Data Analysis

4

EconomicPerformance

Environmental Performance

SocialPerformance

Corporate Governance Performance

Pillars

Client Loyalty Performance Shareholders

Loyalty

Resource Reduction Emission Reduction Product Innovation

Employment Quality Health & Safety Training & Develop. Diversity Human Rights Community Product Responsibility

Board Structure Compensation Policy Board Functions Shareholders Rights Vision and Strategy

Categories

Overall performanceCompany overview

Link to public data sources (Raw Data)

Indicators More than 250 indicators (calculated from data point values)

ESG Data and Framework

More than 750 data pointsDataPoints

5

Integrating ASSET4 Data into Thomson Reuters Products

• Thomson Reuters CreditViews on Eikon– Ability to access ESG scores and integrate into

credit analysis

• ESG Datafeeds– Core feed of 23 levels of scoring

– Premium feed of 1000+ data items

• ESG in Datastream (Feb. 2011)– Core package (120 items) on Datastream

premium

– Upgrade with access to all data items

• Complete ESG data integration into Eikon (2011)

Source: Thomson Reuters Datastream

CO2 / Sales and Equity Price

2008 2009 20100.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0x 0.01

0

20

40

60

80

100

120

140

160

Geberit - CO2 Equivalents Emission Total/GEBERIT 'R' (FRA) - DWSLWartsila - CO2 Equivalents Emission Total/WARTSILA - DWSLDanone - CO2 Equivalents Emission Total/DANONE - DWSLDANONE - P (RH Scale)WARTSILA - P (RH Scale)GEBERIT 'R' (FRA) (RH Scale)

Danone

Wartsila

Geberit

ESG Ratings and CreditViews

ESG vs CDS Spread History

Access to Environmental News

9

ESG: a Proxy for Management Quality

• According to an Issue of The McKinsey Quarterly:

80% of CFOs and CIOs believe that ESG information can serve as a proxy for the quality of a company’s management.

Source: The McKinsey Quarterly, Feb. 2009

Average ESG Scores andCredit Downgrades/Upgrades

2003 2004 2005 2006 2007 2008 20090.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Downgraded Companies

Upgraded Companies

ESGScores

Examination of ESG performance and CDS spreads

• CDS Spreads measure the cost of ensuring against default and the riskiness of a bond

• Examined the relationship between CDS spreads and ESG scores – Segregated ESG performers into 4 quartile groupings

– 2005-2007

– 2008-present

• Hypothesis: Higher ESG performers should have lower CDS spreads

CDS Spreads vs. ESG Performance 2005-2007

0-25% 25-50% 50-75% 75-100%0

10

20

30

40

50

60

70

80

ESG Scores

CDSBPS

CDS Spreads and ESG Scores 2008-present

0-25% 25-50% 50-75% 75-100%0

50

100

150

200

250

300

350

400

450

ESG Scores

CDSBPS

Dramatic Change in Average CDS Spreads 2005 - 2007

0-25% 25-50% 50-75% 75-100%0

50

100

150

200

250

300

350

400

450

2008-present2005-2007

ESG Scores

CDSBPS

CDS Spreads by ESG Score / Region 2005 - 2007

0-25% 25-50% 50-75% 75-100%0

20

40

60

80

100

120

140

N. AmericaAsia PacificEurope

ESG Score

CDSBPS

CDS Spreads by ESG Score / Region 2008-present

0-25% 25-50% 50-75% 75-100%0

100

200

300

400

500

600

N. AmericaAsia / PacificEurope

ESG Scores

CDSBPS

ESG/CDS Correlation by Geography 2005-present

Europe Asia North America

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

2005-20072008-present

ESG / CDS Correlation by Pillar 2008-present

Environmental Social Governance

-0.23

-0.18

-0.13

-0.08

-0.03

0.02

ESG/CDS Correlation by Credit Rating

AA / AAA A+ / A A- / BBB+ BBB and BBB- BB and lower

-0.5

-0.45

-0.4

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

Correlation ESG/CDS for US Companies 2008-present

A+ to AAA BBB+ to A BBB and BBB- BB and lower Rank Correlation

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

Conclusions

• ESG a positive signal for credit risk– Negative correlation with CDS spreads

– Signal strongest as rank correlation with US companies

– Best used to aid in a risk profile of the company

• Environmental and Social pillars showed most positive signals– Likely due to dramatic differences in disclosure and performance

within regions

• ESG a stronger signal for companies with higher credit ratings– Short term financial risk less determinant of CDS spreads

– Useful in determining risks for companies with stronger risk profiles

• Can be useful as additional screening to financial analysis