ESG & Sustainable Investment Performance - the case of Korea

8/8/2019 ESG & Sustainable Investment Performance - the case of Korea

1/20

Korea ESG Performa nc e2010

Our future.Your wa llet .

Susta ina b le Investm ent.
http://www.solability.com/


2/20

Performanc e o f Korea s 50 most sustainable c om panies vs. KOSPI

01/2010-10/2010: 7% outpe rforma nc e a ga inst the KOSPI

01/2006-10/2010: 72% outperforma nc e aga inst the KOSPI

107.45%

35.09%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

SolAbility 50 KOSPI

16.74%

10.65%

-10%

-5%

0%

5%

10%

15%

20%

Dec-09 Feb-10 Apr-10 Jun-10 Aug-10

SolAbility 50 KOSPI

Why Susta ina b le Investm ent?

Its the PERFORMANCE, stup id!


3/20Korea ESG Performa nc e 2010

Andy GebhardtChief Exec utive Offic er

Dear rea de r,

A lot o f wa ter has go ne d own the Han River since SolAb ilitys first c orpo rate sustainabilityassessment of Korean corporations back in 2007 but not only water. Following theglob al financ ial/ ec onom ic c risis and the Korean go vernments subsequent dec larationof green g rowth in 2009 - albe it the green is subjec t to c ontrove rsial disc ussions - w ehave seen remarkable changes in the corporate perception of sustainability and as aconsequence, integration in corporate policies and management systems in a largenumbe r of corpo rations. The c hanging environment has also resulted in a sharp lyinc reasing num be r of sustaina bility pub lica tions and repo rts, making ESG resea rch b othmore interesting and challenging at the same time, requiring analytical focus on keyindustry challenges and opportunities in order to identify outstanding sustainable value.

The results of SolA bility's 4 th ESG assessment shows that the value of sustainablecompanies outperforms the market, both short- and long term, by significant margins.The pe rforma nc e o f a po rtfolio o f lead ing Korean sustainab ility c om pa nies alsooutperforms sustainability benc hmarks suc h as the KRX SRI and the DJSI Korea. While weare naturally proud of outperforming such prestigious benchmarks, the failure of theglobally most recognized sustainability benchmark - indicating that Dow Jones is notallocating sufficient resources to adapting its methodology to the development incorporate sustainability - is of concern in the wider context of further advancingc orpora te sustainability and sustainable investment. The results of SolAbilitys ESGresea rch is proo f that the identifica tion of sustainable va lue is possible.

While the changes observed - particularly since 2009 - are remarkable, only a fewcompany have completely integrated long-term sustainability thinking into strategic

de c ision-mak ing a nd b usiness developme nt fram eworks. It is also nec essary to kee p inmind that the average corporate sustainability level until that point was considerablybe low OECD leve l. In add ition, Korea s ec onomy is mo re energy -intensive than OECDaverage, requiring further and stronger efforts to improve resource efficiency tomaintain competitiveness in light of the nations reliance on energy imports and thelooming prospect of rising energy costs. However, if the current trends of integratingsustainability management is to continue, Korean corporations enjoy a decentpe rspe c tive to sec ure long- term c om pe titiveness.

Yours sinc erely ,


4/20Korea ESG Performa nc e 2010 1

SolAb ility is a c onsulta nc y spec ialisingin susta inab ility ma nage me nt a dv ic e, found ed in 2005.

Inte rnat iona lly know c lients a re trusting in SolAb ility'scompetence.

As a UN PRI signatory,SolAb ility a lso p erforms ESG resea rch & a ssessment

on o ver 350 liste d Korea n c om panies and prov ides ESGresea rc h to institutiona l inve stors

Contents

Highlights 1

SolAbility ESG model Cha rac teristic s 2

Tools & proc ess 3

ESG performanc e Short-term 4

Long-term 5

ESG asse ssment review Corpora te Susta inab ility 6

Managem ent & Governance 8

Environm ental Susta inability 10

Human & Soc iety 12

Conclusions 14



2010 Highlights

SolAb ility s yea rly susta ina b ility a ssessment c lea rlyshows that sustainable companies have asignificant better financial performance than lesssustainable companies - both short-term andlong term and proofs that inclusion ofsustainability long-term management yieldsfinanc ia l bot tom line b ene fits.

SolAbility 4 th Korea sustainability assessment,b a sed on a n initia l universe of 350c om pa nies, reve a ls the fina nc ia l b ot tom-lineb enefits of integ ra ted long -te rm susta ina b lemanagement thinking

Three c omp anies, for whic h SolAb ility ha s d esignedsusta inab ility policies, mana gem ent systems a ndimp lem enta tion stra teg y were selec ted to the DJSIWorld - the most p restigious susta inab ility b enc hma rka round the glob e.

Sustainable c ompanies & portfolios outperform

3 c lients selec ted to the DJSI World

Sustainab le com panies outpe rform

1



SolAb ilitys ESG method ology

Identification of key sustainability challenges/opportunitiesfor eac h industry sec tor

Streng th/ wea kness a na lysis of globa l susta inab ilitybenc hm a rks (DJSI, FTS4Good , GRI, UN PRI, Glob a lCompa c t, etc.)

Adaption to the characteristics and corporate culture ofthe Korea n ec onom y

Stric t a na lysis sc hem e a nd c a lc ula tion o f weightings ba sedon botto m-line (financ ia l) imp lic a tions in e a c h industry

Ta king into a c c ount c om p a ny size

Yearly reviewed and refined based on experiences,feedb ac k, and new emerging trends

Ana lyst expe rtise

2

Methodology

Purpose : Ident ific a tion of susta inab le va lueBest-prac tic e ba sed , ad ap ted for Korean c harac teristic s

Universe : 350 Korean c om panies (KOSPI and KOSDAQ )

Characteristics



Assessment Proc esses

The SolAb ility ESG a ssessment c onsists the a pp lic a tion of threetools:

1. Sustainability filter : screening large number of companiesaccording key sustainability indicators to eliminate laggardsfor in-depth Assessment phase.

2. ESG Assessment tool : analyzing and evaluatingsustainability performance based on industry-specificsusta inab ility indic a to rs

3. Verification : investigation of company cases related tosustainability performance through media surveys andgovernment doc uments

Information sources

SolAb ility a c q uires a wide rang e o f informa tion throug h ava riety of c ha nnels suc h as pub lic a nnounc em ents, websites,annual reports, sustainability reports, questionnaires, lawsuitrecords, stakeholder participation issues, media research,e tc .

Syste ma tic , IT-based a ssessment to olsSolving the p uzzle: wide rang e o f informa tion sourc es

Unique e xperienc e

3

Methodology

Tools



Starting universe:350 stoc ksThe lead ing 50 Korea n c om pa nies of the starting universe show a significa nt

outpe rforma nce v s. the Korea Stoc k Performance Inde x

Short-term return of sustainable c om panies

A portfolio of the 50 most sustainable companies (market-cap weighted)

achieved a return of 16.74% from January 2010 to early October 2010. Forthe sa me p eriod , the KOSPI ga ined 10.65%, while KRX a nd DJSI Korea ga inedroug hly 8%.

Data Sources: KRX, Dow Jone s

4

ESG portfolioperformanceShort-term

7.6%

10.4%

16.4%

-15%

-10%

-5%

0%

5%

10%

15%

20%

12/31/2009 3/1/2010 4/30/2010 6/29/2010 8/28/2010

KRX SRI DJSI Korea KOSPI So lAbility 50



Data Sources: KRX, Dow Jone s

Long -term return o f sustainab le c om panies

Susta ina b le c om p a nies eq ua lly ac hieved high returns in the long -term. TheSolAb ility 50 p ortfo lio g a ined 107% ove r 5 yea rs (01/ 2006-10/ 2010), over threetime s higher tha n the Korea Sto c k Excha ng e Index (KOSPI), whic h g a ined 35%.

Due to its global brand name and recognition, both the investment industrya nd co rp ora te ma nag ers ob serve the p erforma nc e a nd co mp osition ofglobally recognized benchmarks. In this context, the failure to identifyoutstanding sustainable value of the global benchmark is of concern and anobstacle to further advance of corporate sustainability and sustainableinvestment.The So lAbility a ssessmen t p roofs tha t susta inab le va lue c an b e ide ntified .

5

ESG portfolioperformanceLong-term

47.7%

33.9%

106.6%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

January-06

July-06 January-07

July-07 January-08

July-08 December-08

July-09 December-09

July-10

DJSI Korea KOSP I SolA bility 50



Development of dimension scores

30

35

40

45

50

55

60

2007 2008 2009 2010

Economic Environment Social

Overall Sustaina bility Performanc e

6972 75

45 4851 53

72

0

20

40

60

80

2007 2008 2009 2010

Best Av erage

The overa ll susta inab ility level of Korea ncompanies is improving every year.However, top-performing companiesadvance faster than the average,implying that high-performingcompanies have further strengthenedthe ir susta inab ility leve l while aconsiderable number of companiesare still reluctant to fully integratesustainability management beyondcompliance as a strategicma nag ement fram ework.

The level of environm ent a l rep ortinghas improved dramatically, whileeconomic reporting has beenstationary, and social reporting mostlyremains limited to the areas of HumanResources Development and socialcontributions.

Visible improvements in terms ofsusta inab ility performa nc e a re see n inthe environmental and social sectors.The ave ra ge environme ntalperformance has improved by 12%compared to last year, and socialpe rforma nc e b y 6%. On the othe r hand ,the economic performance hasimproved by only 1%, but remains thehighe st ave rag e p erformanc e.

While a significant number of Koreancorporations are now introducing

sustainability management, theproportion of sustainably managedcompanies is still somewhat belowOECD levels.

Corporate SustainabilityPerformance

Developments

6



Sustaina b ility Performa nce b ySector

65

69

64

63

62

64

66

61

66

66

64

70

75

47

48

48

49

50

50

50

51

54

54

54

55

65

0 20 40 60 80

Consumerservices

M etals

Ho lding &Trading

Consumer

goods

Construction &materials

Financials

Energy &chemicals

Transport

Industrials

Utilities

Parma &Cosmetics

Communication

Electronics

Be st C om p a n y In d ust ry Av e ra g e

SolAb ility c a tego rizes c om p anies b y 13sectors (composed of 29 industries,according the main business line) toallow for sector comparisons.

The industry sc ores of Elec troniccompanies are outstanding comparedto other industries. The sc ore ga pbetween Industry Best and IndustryAverag e ha s a lso na rrow ed .

The most yea r-on-yea r improved

industry is the Construction &Construction Materials sector, with theperformance improved by 8.5%c om pa red to last year.

On the other hand, industries such asHold ings & Trad ing , Steel & Me ta l,Me d ia, Leisure & Servic es arecharacterized with low sustainabilitylevels compared to other industries,improved by only 1.4% from last yearsscore.

For Ste el/Me ta l ind ustries, the re is alarge score gap between Industry Bestand Industry Average, reflecting thephenomena that leading companieshave been consistently improving theirpe rforma nc es while the c om p anies notor less exposed to global markets arenot actively involved in sustainability

management .

Corporate SustainabilityPerformance

Sec to r trend s

7



Economic Sustainability Performanc e

71 7475

51 52 54 54

72

0

20

40

60

80

2007 2008 2009 2010

Best Av era ge

C

Econo mic Criteria performance

59

47

48

65

55

54

46

44

63

56

52

44

41

59

54

48

44

41

57

51

20 40 60 80

Brandmanagement

Sustainabilitystrategy

Riskmanagement

EthicalM anagement

CorporateGovernance

2010 2009 2008 2007

Management &GovernanceDevelopments

The susta inab ility leve l of t he e c onom iccriteria has not shown any significantchanges, with a minor improvement of1.53% compared to 2009 last yearsperformance.

The c orporat e go vernanc e sc orerem a ined a t 2009 leve l, with the knowweaknesses of Chaebol boardstructure in terms of professionalism,indep ende nce bo ard effec tivenessstill witnessed today. Transpa renc y

has wea kened due to the de regulationof c orpo ra te d isc losure req uirem ents.

The m ajority of c om panies haveestablished ethical managementsystem and reinforced monitoring, butthe number of non-compliancesreported such as price fixing practicehas not dropp ed .

Risk management performance hasimproved, reflecting companys effortsto better predict future risks and turnthem into business opportunities.Nevertheless, domestic companys riskma nage me nt is still below glob a l leve l.

Korea n c om panies have stea d ilyimproved in the areas of R&D, brandmanagement, and innovation.However, there is still room for

improvement in the areas ofintegrating sustainability managementstrate gy in m ana ge me nt thinking.

8



Governanc e & Ma nag ement by

Sector

60.9

68.7

73.9

58.8

64.5

59.7

64.2

64.6

62.7

63.7

67.7

71.0

75.3

47.4

50.3

51.2

52.5

52.7

52.8

53.9

54.6

56.1

56.9

57.7

60.0

60.4

0 20 40 60 80

Energy &chemicals

Ho lding &Trading

M etals

Transport

Industrials


Consumerservices

Consumergoods

Parma &Cosmetics

Utilities

Electronics

Financials

Communication


Management &Governance

Sec to r trend s

Communication, financial, andelec tronic ind ustries a re a ssoc ia tedwith high sustainability level comparedwith other industries.

The industries with the grea te stimprovement are Food & Beverages(+6.8%) and Construction/Materials(+6.3%). Particularly in the Construction& Materials industry, a significantnumber of companies have newlypublished sustainability reports.

Even though the industry averages ofHold ing s& Trad ing and Ste el & Met a lhave improved, the sustainability levelsare still low compared to otherindustries.

9



Environmental Sustainability Performance

7781

86

3841

4450

81

0

10

20

30

40

50

60

70

80

90

2007 2008 2009 2010

Best Av erage

Environmental c riteria performanc e

45

71

72

49

41

41

58

70

37

34

33

57

68

31

31

30

49

61

25

27

20 30 40 50 60 70 80

Greenbusiness

development

Wastemanagement

& recycling

Chemicalsubstance

management

Carbon riskmanagement

Environmentalreporting

2010 2009 2008 2007

c

Environ mental criteria performanc e

45

71

72

49

41

41

58

70

37

34

33

57

68

31

31

30

49

61

25

27

20 30 40 50 60 70 80

Greenbusiness

development

Wastemanagement

& recycling

Chemicalsubstance

management

Carbon riskmanagement

Environmentalreporting

2010 2009 2008 2007

Average environment performanceshowed the largest increase, risingby11.95% compared 2009, indicatingthat Korean companies have wokenup to the challenge of global climatechange and the prospect of highene rgy c osts.

Average environment reportingimp rove d by 21.27% due to theincreased number of companiesdisclosing environmental information.

Carbon Risk Management increasedby 32.41% due to efforts to improveenergy efficiency and establishingGHG invento ries.However, considering Koreas 97%reliance on energy imports and theenergy intensity of the economy(considerable above OECD average),efforts undertaken so far are still highlyinsufficient to secure futu recompetitiveness.

Waste management improved by23.11%. Adapting LCA, wasteminimization in the production stageand recycling account for thisdevelopment.

Green business lines saw a surge of10.15%, reflecting the fact that

c om pa nies are sta rting to de velop newbusiness line s (p rod uc ts & services)related to clean-tech and greengrowth

EnvironmentalSustainability

Developments

10



Environmental Ma nag am ent &Performance

67

66

64

60

69

64

65

73

75

70

78

72

86

31

37

43

47

51

53

53

54

54

55

57

59

73

0 20 40 60 80

Consumerservices

Financials

Ho lding &Trading


Communication

Transport

Consumergoods

Parma &Cosmetics

Energy &

chemicals

Metals

Utilities

Industrials

Electronics

Be st C omp a ny Ind ust ry Av e ra ge

EnvironmentalSustainability

Sec to r trend s

The a ssessment reve a ls Significa ntdifferences between the differentindustry sec to rs in environmentalsustainability performance. While somesectors improved by nearly 30%compared to 2009 levels, other sectorsremain at the same level of previousyears.

High ranking sec to rs inc lude Elec tronics,Ind ustria ls, Utilities (ma nufac turingindustries and other industries subject to

environme nta l regulation). The wastemajority of Electronics, Industrialcompanies are pursuing environmentma nage ment, and invest to reduc eenergy usage, green house gases,wa ter usa ge a nd w aste.

The c onstruc tion & ma te ria ls (+31.7%)and Consumer goods industry (%28.7%)showed the highest progress rate year-on-year.

The Pha rma c eutic a l & Co sme tic sindustries and service providersimproved only marginally. Within thesesec to rs, only few c om p anies imp lem entenvironment management systemswithout reg ula to ry requirem ents.

11



Soc iet a l Susta ina b ility Performa nc e

68 7072

4147 49

52

69

0

20

40

60

80

2007 2008 2009 2010Best Av e ra ge

Social criteria performance

60

74

45

42

54

47

57

71

44

38

50

42

54

70

44

35

46

43

52

64

42

26

39

34

20 30 40 50 60 70 80

Supply chainmanagement

OHS-M anufacturers

Corporatecitizenship

HRcompensation

HRdevelopment

Stakeholderengagement

2010 2009 2008 2007

Soc ial criteria performance

60

74

45

42

54

57

71

44

38

50

54

70

44

35

46

52

64

42

26

39

20 30 40 50 60 70 80

Supply chain

management

OHS-M anufacturers

Socialengagament

Incentivesystems

HRdevelopment

2010 2009 2008 2007

Human & Soc ietyDevelopments

With an increase of 6.3%, societalperformance showed generalimprovements across all sectors,exhibiting a tendency of gradualimprovement.

HR development increased by 8.82%yea r on ye a r. This ind ica te s thecorporate realization of theimp orta nc e of HR ma nag em ent toimprove global competitiveness by

attracting and retaining the best staffand streng thening inte rna l tra ining.

Soc ia l ac tivities and c ontributionsremain at a similar state compared to2009. While social activity rates aregenerally increasing, companies maynot have a formulated strategy forsocial activities and alignment ofstrategic c orpo ra te c itizenship ac tivitieswith core business capabilities

Supp ly Chain Mana ge me nt and OHSmanagement exhibit gradualdevelopment. In particular, themanufacturing sector has beenemphasizing win-win and togethergrowth as well as green purc hasing .However, supply chain managementsystem a t most c om panies a re fo c usedon domestic suppliers at this point in

time a nd fail to rec og nize supp ly c hainrisks in less deve lop ed markets

12



Human & Social Considerations

57

59

66

63

60

64

68

67

63

71

69

70

72

46

48

48

49

50

51

51

53

55

56

57

57

65

0 20 40 60 80

Transport

Ho lding &Trading

Consumerservices

Financials

Consumergoods

Energy &chemicals

Metals

Industrials

Parma &Cosmetics

Communication

Utilities


Electronics


Human & Soc ietySec to r trend s

Susta ina b ility performa nc e of Soc ietyc riteria showe d c om pa rab ly eq uivalentprogress amongst industry sectors dueto imp roved ma nag eme nt system srelated to HR development andincentive systems.

Again, the field is lead by Koreas mostknow export sector the electronicsindustry.

Compared to 2009, significant

imp rovem ent w ere m ad e in the Stee l &Me ta ls (+16.4%), Utilities (+14.8%), a ndIndustrials industries (+12.6%). Thisindicates that more and morecompanies make active efforts toimp rove OHS performa nc e a nd Supp lychain mana gement

Ave ra ge Consumer Service s andHolding & Trad ing p erforma nc e rema inat c om pa ra ble low levels.

13



Increa sing recog nition of the business va lue of sustainab ility manage ment

But limited imp lementa tion in terms of stra teg ic business de velopm entLarge differenc es betwe en sec tors, and within sec tors

Increased rec og nition of sustainab le m ana geme nt for business va lue

The inc rea se In average ESG p erforma nc e sc ores reflec t the sp read of inte rest a nd

recognition for sustainability in Korea following the financial crisis 2008/2009 and thego vernment s strate gic foc us on green g rowt h . The numb er of c om pa nies that haveactively reviewed their management systems in light of sustainability integration hasac c elerat ed rem arkab ly sinc e 2009. Given tha t a large numb er of Korea n c om pa niesare currently undergoing internal sustainability reviews, further rise of the averageKorean susta ina b ility p erforma nc e is expe c ted . Along with integ rat ion o f susta inab ilityconsiderations in policies and management systems, the number of companiesd isc losing susta inab ility p erforma nc e and informa tion ha s inc rea sed rap id ly. How eve r,while the developments have been encouraging, only few companies haveformulated long-term strategies that integrate not only operational issues andconsiderations, but also strategic, long-term business development considerationsba sed on susta inab ility trend s.

Imbalance of sustainability levels amongst Industry sectors

Export-focused companies, namely in the manufacturing industry sectors such aselectronics, automobiles, and ship-builders are leading Korean companies in terms ofc orpo rat e-wide efforts to imp rove c orpo ra te susta ina b ility level a s a me ans of sec uringfuture c om pe titivene ss. In c ont ra st, industry sec tors foc used on d om estic dem and suc h

as finance and service sectors have been more reluctant in embracing sustainabilityma nag em ent until rec ently.

14

Conclusions

Corp ora te Susta ina b ility



High sustainab ility performa nc e equals high financ ial returns and stab ility

SolAb ility's ESG assessment results p roof tha t susta inab le c om pa nies ac hievesignific a ntly higher returns tha n the av erag e investment ove r bot h short-term a nd long

term periods. Despite the sharp fluctuations in the stock markets during 2009-2010, it isobserved that the market value of sustainable companies was less elastic on thedow nturn com pared to othe r comp a nies. This ob servation strong ly supports the c la imthat sustainability brings companies higher returns in times of prosperity and moresta b ility in times of dep ression. Considering the g row ing unc ertainty in the d om estic ang loba l ec onom y, susta inab ility is now a MUST HAVE for a c om pany s long -term b usinesssuc c ess.

Global sustainab ility be nc hma rks

While w e a re p roud to outp erform the globa l benc hma rk, the SolAbility brand c arriesonly limited weight. In the wider context of advancing corporate sustainability andsustainable investment, it is paramount that the global benchmark is capable ofidentifying o utsta nd ing susta inab le value. The c urrent fa ilure to do so is an ind ic a tion ofinsufficient allocation of resources to adapt the research to the developments inc orpo ra te susta inab ility and ne ed s to b e a dd ressed urge ntly.

Sustainab ility ma nagement as c ore ma nage ment princ iple

Despite all the positive developments, sustainability management is still only partiallyrec og nised a s a c ore ma nag em ent p rinc iple a nd strate gic business de velopm ent to ol,and is not fully reflected in corporate culture. Korean companies need to considersustainability issues from the highest decision-making levels in order to secure futurecompetitiveness.

15

Conclusions

Susta ina b le Performa nc e

Sustainable c om pa nies outpe rform the m arket

Sustainab ility need s to be integrated further to sec ure long -term c om petitiveness


20/20

Korea ESG Performa nc e 2010

Our future.Your wallet.

SolAb ility Ltd .802 Me ritwin 856

Questions?

c onta c t@solab ility.c omwww.solability.com
mailto:[email protected]:[email protected]://www.solability.com/

ESG & Sustainable Investment Performance - the case of Korea

Documents

Transcript of ESG & Sustainable Investment Performance - the case of Korea