Korea-specific Characteristics of Corporations and Implications for SRI/ESG Research
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Transcript of Korea-specific Characteristics of Corporations and Implications for SRI/ESG Research
ESG trends & performance
in Korea
TBLI Asia 2009
May 2009
ESG trends in Korea - TBLI 2009 2
Overview of presentation
• Short overview of the Korean ESG market & trends• ESG performance• Linkages and correlations between CSM (corporate
sustainability management), ESG research and financial performance
ESG trends in Korea - TBLI 2009 3
SolAbility
ESG research
• ESG research services• Company reports• Sector reports• Training & capacity building
Corporate sustainability services
• Analysis & benchmark of sustainability levels• Development of corporate sustainability
strategy• Specialized services: • Risk management• GHG services• Project-related sustainability analysis &
evaluation• Stakeholder engagement
Founded 2005Ltd since 2007Currently 7 full-time staff
ESG trends in Korea - TBLI 2009 4
Corporate sustainability: ESG-related reporting
Number of stand-alone Environmental and/or Sustainability Reports published in Korea
ESG trends in Korea - TBLI 2009 5
Drivers & status of corporate sustainability in Korea
• Comparable late introduction of CSM compared to global level
– … but fast catching up
• Government driven– Government drive under previous administration: government controlled
companies & agencies required to publish sustainability report
• International trends– Copying of international trends
– Inclusion of Samsung SDI (2004) and POSCO (2005) & SK Telecom (2008) in the DJSI increased awareness for sustainability management issues
• Compliance drive– Compliance with regulation & public perception
• Most recently: “Green growth”– Economic stimulus package officially label “80% green”; however: “green”
depends on the definition – Focus on selected technologies (energy efficiency, new renewable
technologies, materials)
ESG trends in Korea - TBLI 2009 6
Drivers & status of corporate sustainability in Korea
• Sustainability seen as must…– … in terms of reporting
• Little strategic integration of sustainability into core product/service development until recently
– Traditional approach: Improving governance systems, increasing environmental awareness and management systems
– low anticipation of business value of CSM management on top-management level
– But little strategic integration as of yet
– Ne development: seizing sustainable business opportunities without relevant management systems
ESG trends in Korea - TBLI 2009 7
ESG-related retail funds in Korea
Source: KOSIF, SolAbility
ESG/”SRI” retail funds and ESG related theme funds
0
5
10
15
20
25
30
35
May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09
Korea ESG Global ESG Them funds (global)
ESG trends in Korea - TBLI 2009 8
ESG related AuM, cumulativ
Apr-0
6
Jul-0
6
Oct-06
Jan-
07
Apr-0
7
Jul-0
7
Oct-07
Jan-
08
Apr-0
8
Jul-0
8
Oct-08
Jan-
09
Apr-0
9
Assets under Management
ESG related AuM in Korea - cumulated
Source: KOSIF, SolAbility estimation
• National Pension Fund announces public bidding for U$ 300 ml ESG fund
• AMs launch SRI retail funds
• Launch of several thematic funds
• Decline of KOSPI following sub-prime crises
• Chinese gold rush
• Disappointing performance of thematic fund
• National Pension Fund increases ESG mandates
• Renewed interest in clean-tech investment
ESG trends in Korea - TBLI 2009 9
Latest ESG developments
• Public bidding by the NPS to managed assets against EGS criteria, 2006/2007
• Strong, but short rally of ESG-related retail funds, Summer 2007, however: enthusiasm dried quickly
Recent developments
• National Pension Service expected to sign to the UN PRI
• Public Sustainability Index on the KRX, Q4 2009
• Korea-specific DJSI Index, Q4 2009
• Korea-specific Accountability Rating, January 2009
• Sustainability ranking published by major newspaper
ESG trends in Korea - TBLI 2009 10
Backtracked performance
Backtracked performance 2002 -2009: 118% outperformance
Stock performance of the 50 most sustainable Korean companies
KOSPI, 62.64%KOSPI200, 70.11%
Sustainable 50, 180.48%
- 100%
0%
100%
200%
300%
400%
500%
600%
02/01/2002 02/01/2003 02/01/2004 02/01/2005 02/01/2006 02/01/2007 02/01/2008 02/01/2009
KOSPI KOSPI200 Sustainable 50
ESG trends in Korea - TBLI 2009 11
Performance since inception
Performance since April 2007: 10% outperformance
Performance of the 50 most sustainable Korean companies since inception
KOSPI200, - 22.65%
Sustainable 50, - 12.31%
- 60%
- 40%
- 20%
0%
20%
40%
60%
80%
02/04/2007 02/04/2008
KOSPI KOSPI200 Sustainable 50
Actual fund performance (actively managed): 16% outperformance
ESG trends in Korea - TBLI 2009 12
Are sustainable companies more profitable or …
…are profitable companies more sustainable?
Human Capital Human Capital
Management Vision &
Capability
Management Vision &
Capability
Corporate Sustainability
Corporate Sustainability
Cost and revenues
Profitability
Cost and revenues
Profitability
Human Capital Human Capital
Management Vision &
Capability
Management Vision &
Capability
Corporate Sustainability
Corporate Sustainability
Cost and revenues
Profitability
Cost and revenues
Profitability
Human Capital Human Capital
Management Vision &
Capability
Management Vision &
Capability
Corporate Sustainability
Corporate Sustainability
Cost and revenues
Profitability
Cost and revenues
Profitability
Human Capital Human Capital
Management Vision &
Capability
Management Vision &
Capability
Corporate Sustainability
Corporate Sustainability
Cost and revenues
Profitability
Cost and revenues
Profitability
ESG trends in Korea - TBLI 2009 13
Methodology: ESG linkages to financial bottom-line
Methodology characteristics:
• Two –step screening• Best-in-class• Positive screening• Pioneer-screening• MarketCap adjustment• Performance verification
ESG trends in Korea - TBLI 2009 14
In-depth analysis: 150 equities
ESG Investment universe
Starting universe•Total equities : 350- KOSPI: 260- KOSDAQ: 85- KOSPI200 : 175
SolAbility SRI 평가 대상기업 현황
Starting universe: 350 equities
ESG “pre-assessment”
ESG-in-depth Assessment
Investment portfolio
Financial analysis
ESG trends in Korea - TBLI 2009 15
Korean specific issues for ESG research
• Only limited number of Large Cap companies– Need to differentiate lower reporting levels of smaller companies
• Late absorber of corporate sustainability trends– however: catching up fast
• Governance structure– Historical & cultural differences
– Cross-ownership structure of large conglomerates
• Legislation – E.g. Korea not required to cap emissions under Kyoto – but probably
will be required under post-Kyoto agreement
• Aging society– Birthrate decreased dramatically over last 30 years
ESG trends in Korea - TBLI 2009 16
“Chaebol” Structure: Samsung
Samsung Group cross-ownership structure:
=> Founding family exerts full control with minority ownership (3%)
ESG trends in Korea - TBLI 2009 17
Indicator 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)
ESG trends in Korea - TBLI 2009 18
Low energy efficiency
• High dependence on imported energy carriers• Low energy efficiency compared to OECD levels
ESG trends in Korea - TBLI 2009 19
Indicator 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)
ESG trends in Korea - TBLI 2009 20
Indicator correlation – HR development
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)
All assessed companies: limited information
ESG trends in Korea - TBLI 2009 21
Indicator correlation – HR development
Compensation
0
100
200
300
400
500
600
700
0 10 20 30 40 50 60
Compensation Linear (Compensation)
Full information
ESG trends in Korea - TBLI 2009 22
Conclusions from criteria relations
• Visible correlation between sustainability performance and share price development
• However: low r-value-correlation, wide spread => high scores in ONE criteria does not necessarily mean good performance in all cases
• Financial performance is more closely related to sustainability score if a company scores high throughout all ESG factors/criteria
• Lack of information (insufficient reporting): affects research outcome
ESG trends in Korea - TBLI 2009 23
Sustainable companies are…
=> Sustainability = business Intelligence
• Not only “responsible”
• Do more than comply
• Have more than awareness
• Have a wider and longer horizon
Human Capital Human Capital
Management Vision &
Capability
Management Vision &
Capability
Corporate Sustainability
Corporate Sustainability
Cost and revenues
Profitability
Cost and revenues
Profitability
ESG trends in Korea - TBLI 2009 24
The future: climate change risks, resource constraints, etc…
=> Correlation between sustainability performance and financial performance is expected to increase in the future
Human Capital
Management Vision & Capability
Corporate Sustainability
Cost and revenues
Profitability
Climate Change
Environmental degradation
Aging population
Bottom of Pyramid markets
Changing perceptions
Resource scarcity
ESG trends in Korea - TBLI 2009 25
Thank You.
606 FloStar 756-1Janghang-dong, Ilsan-gu, Goyang-Si410-380 Gyeonggi-Do, South Korea
www.solability.com
Tel ++82 31 811 3578