MATERIALITY OF ESG KPIs - SITAWI Finanças do Bem

MATERIALITY OF ESG KPIs

An investor initiative in partnership with UNEP Finance Initiative and UN Global Compact

A PERSPECTIVE FROM BRAZIL

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THE SIX PRINCIPLES

We will incorporate ESG issues into investment analysis and decision-making processes.1We will be active owners and incorporate ESG issues into our ownership policies and practices.2We will seek appropriate disclosure on ESG issues by the entities in which we invest.3We will promote acceptance and implementation of the Principles within the investment industry.4We will work together to enhance our effectiveness in implementing the Principles.5We will each report on our activities and progress towards implementing the Principles.6

This publication is intended to promote the application of Principles 1, 2, 3, and 6 of the Principles as they relate to fixed income investing. The PRI Initiative was launched by the United Nations in 2006 after former UN Secretary-General Kofi Annan brought together a group of the world’s largest institutional investors, academics and other advisors to draft a set of sustainable investment principles.

CREDITSAUTHORS:Gustavo Pimentel, Managing Director, SITAWI and Tanguy de Volder, Research Fellow, SITAWI

EDITORS:Justin Sloggett, Implementation Support Manager, PRI and Joy Frascinella, Head of PR, PRI

DESIGN:Alessandro Boaretto, Graphic Designer, PRI

The authors and editors would like to thank Frederico Seifert (SITAWI) and Pedro Galoppi (former South America Network Manager, PRI) for their valuable comments, as well as Cristóvão Alves (SITAWI) for support on data gathering and analysis.

The information contained in this report is meant for the purposes of information only and is not intended to be investment, legal, tax or other advice, nor is it intended to be relied upon in making an investment or other decision. This report is provided with the understanding that the authors and publishers are not providing advice on legal, economic, investment or other professional issues and services. PRI Association and the PRI Initiative are not responsible for the content of websites and information resources that may be referenced in the report. The access provided to these sites or the provision of such information resources does not constitute an endorsement by PRI Association or the PRI Initiative of the information contained therein. Unless expressly stated otherwise, the opinions, recommendations, findings, interpretations and conclusions expressed in this report are those of the various contributors to the report and do not necessarily represent the views of PRI Association, the PRI Initiative or the signatories to the Principles for Responsible Investment. The inclusion of company examples does not in any way constitute an endorsement of these organisations by PRI Association, the PRI Initiative or the signatories to the Principles for Responsible Investment. While we have endeavoured to ensure that the information contained in this report has been obtained from reliable and up-to-date sources, the changing nature of statistics, laws, rules and regulations may result in delays, omissions or inaccuracies in information contained in this report. Neither PRI Association nor the PRI Initiative is responsible for any errors or omissions, or for any decision made or action taken based on information contained in this report or for any loss or damage arising from or caused by such decision or action. All information in this report is provided “as-is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, expressed or implied.

PRI DISCLAIMER

MATERIALITY OF ESG KPIs | BRAZIL

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CONTENTS

FOREWORD

SITAWI FOREWORD

PRI FOREWORD

EXECUTIVE SUMMARY

BACKGROUND TO THE RESEARCH

METHODOLOGY

SCOPE OF THE STUDY

SURVEY

DATA SEGMENTATION

INTERPRETATION OF RESULTS

RESULTS

HIGH MATERIALITY/SMALL DISPERSION OF ESG INDICATORS

DIFFERENT KPIS FOR DIFFERENT INDUSTRIES

CROSS-SECTORIAL MATERIALITY

FINAL THOUGHTS

FURTHER RESOURCES

ANNEX A

ANNEX B

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FOREWORD

SITAWI FOREWORDThis publication is intended to disseminate the results of the work done by the PRI Brazil ESG Integration Working Group. Over a period of one year, several Brazilian PRI signatories – asset owners, investment managers and service providers – participated in sector surveys in an attempt to determine the materiality of different sustainability indicators for Brazil-based companies. The main objective was to study which ESG Key Performance Indicators (KPIs) are the most important for Brazilian investors and to what extent they are sector dependent.

We would like to thank all the Brazilian PRI signatories that participated in the online surveys. Particularly, we would like to thank the buy-side and sell-side analysts that devoted their time in assessing the materiality of each of the KPIs per sector.

It is worth noting that the number of respondents to the surveys does not allow us to view this document about the materiality of ESG KPIs as a reflection of the Brazilian market sentiment. Nevertheless, the study allows us to gain understanding of the unique aspects of the Brazilian market and sets the stage for further research opportunities in the future.

We hope that Brazilian and Non-Brazilian investors find this study interesting and in particular, we hope it proves useful when evaluating the risks and opportunities involved when investing in Brazil-based companies.

PRI FOREWORDWe are pleased to release this publication on the materiality of ESG key performance indicators (KPIs) in Brazil, in collaboration with the PRI Brazil ESG Integration Working Group. The promotion of public reporting of ESG KPIs is crucial to ensuring that ESG integration moves to the next level and whilst it is encouraging to see that it is being considered by more and more investors as good practice and a competitive advantage, ESG integration still has a long way to go to make a fundamental impact on the financial markets.

The study complements the reporting standards and ESG KPI guidelines already created by various reporting initiatives and investor associations. Whilst these standards and guidelines can be specific to certain regions and countries, this publication focuses on Brazil and provides useful insights on which ESG KPIs matter to investors when evaluating Brazilian companies across nine sectors.

We hope that the work of the PRI Brazil and South America Network inspires further studies in the area of ESG KPI reporting and also improves the standard of sustainability reporting within Brazil, South America and across the globe.

We would like to thank the Brazilian PRI signatories that participated in this study. Special thanks goes to SITAWI, who chair the Brazilian ESG Integration Working Group, for running the project and writing the report.


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EXECUTIVE SUMMARY

It is vital for companies and investors to choose the most appropriate Key Performance Indicators (KPIs) when assessing whether a company has performed well or badly, otherwise an inaccurate evaluation on progress could be formed.

Environmental, social and governance (ESG) KPIs can be used to assess commitment to long-term sustainable wealth creation and for this reason, the practice of sustainability reporting is becoming increasingly important to the investor community. To integrate ESG factors into their decision-making process, investors require sustainability information and KPIs that are likely to impact company valuations. Although there is a general consensus regarding the overall set of KPIs that can be used to measure ESG performance, taking stock of geography and sector differences is key for exploring materiality (defined in this study as the likelihood of affecting corporate financial performance) in depth.

In this paper, we look at the materiality of different sustainability indicators for Brazil-based companies as seen by leading Brazilian investors. Our aim is to understand how ESG KPI materiality differs from sector to sector across the region. For the purpose of this study, we considered nine sectors and used the KPIs from the publication “KPIs for ESG 3.0”, produced by the Society of Investment Professionals in Germany (DVFA) and the European Federation of Financial Analysts Societies (EFFAS).

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The PRI Brazil Network has been active since 2008 and is structured in Working Groups to reflect the needs and interests of local PRI signatories. The PRI Brazil ESG Integration Working Group (the working group) is chaired by SITAWI and consists of around 20 organisations out of Brazil’s 60+ signatories, including asset owners, asset managers and service providers. Since its creation, the working group has been active in areas such as benchmarking of ESG integration techniques, questionnaire fatigue experienced by companies, and creating incentives for ESG integration in sell-side research.

After identifying a knowledge gap amongst Brazilian investment professionals, the working group decided to embark on a project to raise awareness of ESG KPIs in the local market as a means to foster further integration. The project was implemented in late 2012 and ran until the end of 2013 with the following activities:

1. Sector by sector discussion of ESG KPIs with investment professionals;

2. Assessment of the financial materiality of each KPI in the context of Brazilian listed companies;

3. Presentation and discussion of the materiality survey results.

This report discusses the main findings from the surveys and complements the work undertaken by the reporting initiatives (GRI, IIRC and SASB), the Delphi Project, and also the SD-KPI guidelines by Dr. Axel Hesse.

SASB and the Delphi Project are in the process of creating sector-specific standards for ESG reporting, and Dr. Axel Hesse has produced “Sustainable Development Key Performance Indicators” (SD-KPIs) for the 68 industries of the “Global Industry Classification Standard” (GICS).

One of the objectives of this study was to find out if ESG KPIs are sector-dependent. We share SASB’s, Delphi’s and SD-KPIs’ view that it is necessary to consider a specific set of standards for each industry, as it is most likely that the impact of companies within the same industry on ESG issues can be measured using a common set of indicators.

BACKGROUND TO THE RESEARCH

SUMMARY OF KEY FINDINGS ■ Based on our surveys, 70% of ESG indicators are

moderately to highly material for Brazilian companies across sectors (see page 11).

■ The three indicator types (Environmental, Social and Governance) have relatively similar materiality scores, meaning they have roughly equal importance for Brazilian investors (see figure 6 on page 11).

■ Sensitivity to ESG indicators is sector-dependent. Food Products are most sensitive while Education are least sensitive (see page 12).

■ Sector-specific ESG KPIs are more material than cross-sectorial ESG KPIs (see page 14).

■ Current investor information requirements are not satisfied by simply disclosing Scope 1 KPIs since they do not consider important sector-specific considerations (see page 14).


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METHODOLOGY

SCOPE OF THE STUDYThe starting point of this study was to choose a list of KPIs for ESG issues related to companies’ operations. As the KPI lists were created by investors for investors, the working group’s chose to use the KPIs in the publication “KPIs for ESG 3.0”, which was written by the Society of Investment Professionals in Germany (DVFA) in conjunction with the European Federation of Financial Analysts Societies (EFFAS)1.

The DVFA and EFFAS collectively published lists of KPIs for each sub-sector as defined by the Dow Jones Industry Classification Benchmark (ICB). Some KPIs are present in every sub-sector list while others only apply to specific sub-sectors. This study focused on nine ICB sub-sectors, and the corresponding KPIs are used in this report. (To avoid confusion, we will refer to these “sub-sectors” as simply “sectors” throughout this report).

The sector lists categorise ESG KPIs into three groups: entry level (Scope I); mid-level (Scope II); high level (Scope III).

1 DVFA / EFFAS, September 2010, KPIs for ESG : A Guideline for the Integration of ESG into Financial Analysis and Corporate Valuation (Version 3.0)

FoodProducts

BroadlineRetail

ApparelRetail

GeneralMining

Home Construction

IntegratedOil & Gas

Iron& Steel

Specialized ConsumerServices

(Education)

TransportationServices

ICB

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From Scope I to Scope III, the KPIs increase in granularity and also become more sector-specific. Scope I relates to broad disclosures, such as total GHG emissions. Scope II and III KPIs provide more detailed and informative ESG data. For example, a Scope II KPI is “volume of CO2, NOx, SOx and VOC emissions in million tonnes” and a Scope III KPI is “top 2 components of emissions to air by environmental importance”.

Just as the KPIs vary from sector to sector, so does the scope. Mid-level and high level scope KPIs are not available for all sectors because the materiality of the ESG aspects among them is not equal, thus the necessity (and also the availability) of data is different.

We considered all three groups of KPIs during this project.

SURVEYIn order to gather information about the specificities of the Brazilian market, we created sector surveys to be completed by Brazilian PRI signatories (see figure 1). Each survey was available online for 4-5 weeks, which gave signatories enough time to consult internally with ESG and sector analysts to provide a single institutional response.

The surveys were conducted in batches of two or three sectors, with chosen sectors picked by working group members (see figure 2). After each batch, results were discussed during conference calls.

We asked participants to give their opinion regarding the degree of materiality of each KPI, using the following scale: null, low, medium, high. Materiality was defined as the likelihood of a given ESG KPI to affect financial performance of Brazil-based companies.

Asset Owners Asset Managers Service Providers

Banesprev BB Asset Management Austin RatingsCentrus Bradesco Asset Management Finanças SustentáveisFasern Caixa – Viter Gestão Origami

Funcesp CRP Key AssociadosInfraprev DLM Invista Liberum Ratings

Mongeral Aegon Fama Investimentos QuintessaPetros FIR Capital Rodarte NogueiraPrevi HSBC Investments (Brazil) SITAWIValia Itaú Asset Management Socopa

Santander Brazil Asset Management Trust9Stratus Via Gutenberg

Sulamerica InvestimentosVotorantim Asset Management

Victoire Brasil

Figure 1: List of respondents


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Sector Date of Inquiry # Respondents Examples of Companies

Integrated Oil and Gas November 2012 11 Petrobras, QGOG, HRTIron and Steel November 2012 14 Gerdau, CSN, UsiminasGeneral Mining April 2013 16 Vale, MMXHome Construction April 2013 19 Cyrela, MRV, PDGFood Products September 2013 21 JBS, BRF, MarfrigBroadline Retail September 2013 16 Lojas Americanas, Pão de AçúcarApparel Retail September 2013 15 Hering, Lojas RennerSpecialized Consumer Services (Education)

October 2013 9 Kroton, Estácio, Anhanguera

Transportation Services October 2013 9 CCR, Ecorodovias

Figure 2: Number of respondents by sector

DATA SEGMENTATIONThere are different ways to segment ESG KPIs. We chose four segmentation options for this project: scope; type; sub-type; KPI.

1. Scope: Each ESG indicator is classified as either Scope 1, Scope 2 or Scope 3 (see section 3.1 for an explanation of the different Scope levels).

2. Type: Each ESG indicator is labelled as either environmental, social or governance.

3. Sub-type: a sub-type is a KPI or a group of KPIs that relate to a particular ESG issue (see figure 3 for full list of sub-types). For example, sub-type “Suppliers”

consists of one KPI, which is “Supply Chain”, whereas sub-type “Transparency” comprises of several KPIs, including “Contributions to political parties”, “Corruption”, “Litigation Risks” and “Dimensions of pending legal proceedings” (see figure 4).

4. KPI: KPIs are groups of ESG indicators that assess a particular activity of a company. For example, the KPI “Supply Chain” will group the ESG indicators linked to suppliers, including “Total number of suppliers” and “Turnover of suppliers in percentage terms”.

The segmentation options “Scope” and “KPI” come from the DVFA and EFFAS report.

ENVIRONMENTAL

GOVERNANCE SOCIAL

Figure 3: Indicator types and sub-types

■ Transparency ■ Maket Practices

■ Natural Resources ■ Climate Change ■ Waste Management ■ Biodiversity and Land Use

■ Human Capital ■ Customers ■ Suppliers ■ Communities

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Figure 4 illustrates how the four segmentation options relate to each other, using sub-type “Transparency” as an example.

Figure 4: The hierarchy of sub-types and KPIs

TRANSPARENCY

SUB-TYPE

KPICONTRIBUTIONS TO POLITICAL PARTIES

SCOPE: 2

TYPE:GOVERNANCE

KPICORRUPTION

SCOPE: 1

TYPE:GOVERNANCE

KPILITIGATION

SCOPE: 1

TYPE:GOVERNANCE

KPIDIMENSIONS OF PENDING

LEGAL PROCEEDINGS

SCOPE: 2

TYPE:GOVERNANCE

INTERPRETATION OF RESULTSThe primary objective of the project was to raise awareness about ESG KPIs amongst Brazilian investment professionals to foster further ESG integration.

The surveys were sent only to Brazilian PRI signatories and there was no attempt to establish a representative sample of Brazilian investors or a control group of non-PRI signatories. The relatively low number of responses (from nine to 21, depending on sector) does not allow the use of more sophisticated statistical techniques to draw definitive conclusions. However, the surveys still provide an interesting snapshot on the reality of ESG integration from Brazil’s perspective.

We use two different methods to interpret the responses received.

The first method consists of looking at the proportion of “high”, “medium”, “low” and “null” responses for each indicator or group of indicators. This method enables us to have a good view of the distribution of the responses.

The second method uses a scoring technique to create numerical “materiality scores”. It allocates a value to each ESG indicator, starting with a 0 for the response “null”, 1 for “low”, 2 for “medium” and 3 for “high”. An average score is then calculated for each scope, type, sub-type and KPI.

Throughout the report, we will alternate the use of both techniques, depending on the type of analysis that is being made.


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RESULTS

HIGH MATERIALITY/SMALL DISPERSION OF ESG INDICATORSHIGH DEGREE OF MATERIALITY OF ESG INDICATORS OVERALLAcross all the ESG indicators, we noticed that only 30% have an average score below 2 (2 is the score attributed to a “medium” response), meaning that 70% of the indicators have a medium-to-high materiality in the eyes of the respondents. We also found that 33% of the indicators have at least 50% of “high” responses. This could be due to the fact that all respondents are PRI signatories and therefore naturally inclined to give a high importance to ESG indicators.

SMALL DISPERSION OF MATERIALITY SCORESAfter converting the responses to numerical materiality scores, we discovered that the dispersion of scores was small. 53% of the indicators have a materiality score between 1.9 and 2.2. The highest score for a single indicator is 2.85 and the lowest is 1.00.

EQUIVALENT MATERIALITY OF DIFFERENT INDICATOR TYPES (ESG)When looking at the materiality scores per type (environmental, social and governance), we observe very close results and all with a materiality score above 2. Environmental indicators had the highest score, then governance, then social (see figure 6).

Figure 5: Distribution of indicators by materiality score

0,00 to 0.25

0,26 to 0.50

0,51 to 0.75

0,76 to 1.00

1,01 to 1.25

1,26to 1.50

1,51 to 1.75

1,76 to 2.00

2,01 to 2.25

2,26 to 2.50

2,51 to 2.75

2,76 to 3.00

50%

40%

30%

20%

10%

0%0% 0% 0% 0%

2% 2%

9%

26%

40%

19%

2%0%

Figure 6: Materiality score per type

Environmental

Social

Governance

1.50 1.60 1.70 1.80 1.90 2.00 2.10 2.20

2.12

2.08

2.02

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DIFFERENT KPIS FOR DIFFERENT INDUSTRIES

In order to have a view on the materiality of ESG indicators per sector, we calculated and compared combined ESG materiality scores per sector (see figure 7):Figure 7: Combined ESG materiality scores per sector

1.60 1.70 1.80 1.90 2.00 2.10 2.20

2.25

2.20

2.19

2.17

2.17

2.11

1.94

1.90

1.86

2.30

Food Product

Iron & Steel

Apparel Retail

Transportation Services

General Mining

Broadline Retail

Home Construction

Integrated Oil & Gas

Specialised Consumer Services (Education

We can distinguish two groups in this chart. The combined ESG materiality score for the first six sectors is above the “medium” mark, while the scores for the last three sectors were below the “medium” mark. In order to understand what drives these results, we took a closer look at the scores per type, i.e. environmental, social and governance (see figure 8).

The first group achieved medium-to-high combined ESG materiality scores for the following reasons:

■ Food Products, Apparel Retail and Transportation Services obtained scores of more than 2 for each indicator type (i.e. environmental, social and governance types).

■ Iron & Steel and General Mining received scores of more than 2 for environmental indicators and governance indicators, although social indicators obtained a score of below 2.

■ Broadline Retail’s social indicators and governance indicators scored more than 2, whilst environmental indicators received a score of less than 2.

Low-to-medium combined ESG materiality scores were received by the second group due to the following reasons:

■ Education’s score of 1.58 for environmental indicators dragged the combined ESG materiality score below 2.

■ Integrated Oil & Gas received a score of less than 2 for social indicators and governance indicators, whilst environmental indicators received a score of more than 2.

■ The materiality scores for Home Construction were either at the medium mark or below the medium mark for the three indicator types.


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Figure 8: Materiality score per type across sectors

KPI Types

Specialized Consumer Services

(Education)


Home Construction

Broadline Retail

General Mining


Apparel Retail Iron & Steel Food

Product Grand Total

Environmental 1.58 2.23 1.86 1.93 2.38 2.17 2.09 2.44 2.27 2.11

Governance 1.91 1.77 1.94 2.26 2.27 2.11 2.24 2.17 2.42 2.08

Social 2.11 1.54 2.01 2.29 1.83 2.23 2.27 1.82 2.16 2.02

Grand Total 1.86 1.90 1.94 2.11 2.17 2.17 2.19 2.20 2.25 2.08

Lower Materiality Higher Materiality

By also analysing the materiality scores per sub-type (figure 9) and the materiality scores per KPI (Annex A), we discovered the key findings below. As outlined in section 3.3, a sub-type is a KPI or a group of KPIs.

ENVIRONMENTAL: ■ When analysing the sub-type materiality scores,

the highest score (2.57) and the lowest score (1.39) were rewarded to environmental sub-types. Iron & Steel received the highest score for sub-type natural resources and Education received the lowest score for sub-type climate change.

■ Environmental indicators are highly relevant to both the Iron & Steel and General Mining sectors. Both sectors received medium-to-high scores for all three environmental sub-types and they were also awarded the highest scores for an environmental KPI, which were 2.85 and 2.56 respectively for the KPI energy efficiency.

■ They are less relevant for Education and Home Construction.

GOVERNANCE: ■ The sector with the highest score for governance

indicators was Food Products. It also received the highest score for the KPI litigation risk, with General Mining achieving the second highest score.

■ Whilst Transportation Services only scored 2.11 for governance indicators, it did receive a medium-to-high score of 2.54 for sub-type transparency, due to an even higher score of 2.75 for the KPI corruption.

■ Home Construction received the second highest score of 2.42 for the KPI corruption, whereas the lowest score of 1.6 was achieved by Integrated Oil and Gas.

■ Integrated Oil and Gas also scored the lowest for governance indicators due to low-to-medium scores for sub-types transparency and market practice.

SOCIAL: ■ Broadline Retail and Apparel Retail have the highest

scores for social indicators and also give more importance to social indicators over governance and environmental indicators (as does Transportation Services), mainly due to KPIs linked to sub-types customers and suppliers, together with the KPI staff turnover.

■ Food Products also received medium-to-high scores for sub-types customers and suppliers.

■ Education has a low-to-medium score because of the sub-type suppliers receiving a score of 1.77. However, it did receive medium-to-high scores for sub-types customers and human capital and it was also rewarded the highest score for a social KPI, which was 2.67 for the KPI training & qualification.

■ Social indicators for Integrated Oil & Gas also received a low-to-medium score, suggesting that they are not as relevant to the sector as environmental indicators, with the exception of the KPIs safety of production sites and staff training.

■ General Mining received a low-to-medium score of 1.83, due to KPIs customer satisfaction, staff remuneration, staff turnover and training reducing the overall materiality score for social indicators.

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Figure 9: Materiality score per type across sectors

KPI Types and Sub-Types


(Education)


Home Construction Broadline Retail General

MiningTransportation

ServicesApparel Retail Iron & Steel Food

Product

Environmental

Biodiversity and Land Use 1.71 2.22

Waste Management 1.56 2.22 2.01 2.13 2.35 2.18 2.13 2.42 2.30

Climate Change 1.39 2.50 1.60 1.69 2.34 2.04 1.97 2.39 2.29

Natural Resources 1.61 2.20 1.86 2.03 2.48 2.56 2.10 2.57 2.33

Governance

Transparency 1.83 1.74 2.10 2.31 2.41 2.54 2.23 2.04 2.46

Market Practices 1.96 1.86 1.86 2.23 2.13 1.89 2.24 2.25 2.41

Social

Communities 1.88 2.21

Customers 2.29 2.17 2.47 1.56 2.33 2.37 2.00 2.43

Human Capital 2.25 1.58 2.05 2.18 1.85 2.21 2.06 1.80 1.99

Suppliers 1.77 1.46 1.81 2.44 2.49 2.36

Grand Total 1.86 1.90 1.94 2.11 2.17 2.17 2.19 2.20 2.25


CROSS-SECTORIAL MATERIALITYSATISFACTION TO THE MINIMUM DISCLOSURE REQUIREMENTS IS NOT ENOUGHTo find out if the materiality of ESG KPIs is sector-dependent, we took a closer look at the KPIs that we considered as cross-sectorial. Our definition of a cross-sectorial KPI is a KPI that is present in at least eight out of nine sectors that were investigated. They are all defined as Scope I by EFFAS (see figure 10).

We observed that the scores of this set of cross-sectorial factors did not feature amongst the highest materiality scores in this study. The first Scope I indicator only arrives in 39th position in the ranking of indicators.

This supports our view that the materiality of ESG KPIs is sector-dependent and that simply disclosing EFFAS Scope 1 KPIs and therefore cross-sectorial KPIs does not satisfy investor information requirements.


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Type KPI Specification Scope

Governance Litigation Risks Expenses and fines on filing, law suits related to anti-competitive behaviour, anti-trust and monopoly practices 1

Governance Corruption Percentage of revenues in regions with Transparency International corruption index below 6.0 1

Governance Innovation Total R&D expenses 1

Environmental GHG Emissions GHG emissions, total (scope 1, 2) 1

Environmental Innovation

Percentage of products or services for- increasing eco-efficiency of client applications or operations- developing and using clean technologies- offsetting climate change, carbon emissions, resource depletion- increasing fuel-efficiency- making ESG

1

Environmental Energy Efficiency Energy consumption, total 1

Social Maturity of workforce Age structure/distribution (number of FTEs per age group, 10-year intervals) 1

Social Training & qualification Average expenses on training per FTE p.a. 1

Social Remuneration

Key Performance Narrative (please answer the question in max. 500 words): Do you take ESG performance into account in your performance agreements? How do you integrate ESG principals within performance agreements in your company and to what extent do you

1

Social Staff turnover Percentage of FTE leaving p.a./total FTE 1

Social Remuneration Total number of FTEs who receive 90% of total amount of bonuses, incentives and stock options 1

Social Remuneration Total amount of bonuses, incentives and stock options paid out in €, $ 1

Figure 10: Cross-sectorial KPIs

Figure 11: Materiality scores per scope across sectors

Type Scope 1 Scope 2 Scope 3

Food Product 2.16 2.27 2.34

Iron & Steel 1.97 2.36 2.29

Apparel Retail 2.11 2.21 2.30

Transportation Services 2.14 2.37 2.07

General Mining 2.01 2.15 2.36

Broadline Retail 2.16 2.05 2.13

Home Construction 1.86 2.01 2.07

Integrated Oil & Gas 1.66 1.86 2.13

Specialized Consumer Services (Education) 1.96 1.72 1.92

Grand Total 2.00 2.08 2.20


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ESG indicators can be used by investors to assess the ability of companies to create long-term sustainable wealth. Accordingly to Brazilian PRI signatories who participated in this project, sector-specific ESG KPIs are more material than cross-sectorial ESG KPIs and therefore investors should, before making an investment decision, consider the top 3 KPIs per sector in figure 12, and the KPIs that receive at least 50% of “high” responses (found in Annex C).

The responses to the surveys say that environmental KPIs are the most material KPIs for the selected sectors, although the scores for environmental, social and governance are close.

Environmental KPIs are highly relevant to Iron & Steel and General Mining, especially indicators related to energy efficiency. They are less relevant for Education and Home Construction.

Governance KPIs are highly material to the Food Products industry due to high litigation risks arising from anti-competitive practices (as it is for General Mining) and large dependency on product innovation.

Corruption in the Transportation Services sector was of particular concern to respondent. They also believed that it is relevant for the Home Construction sector but surprisingly, corruption is not considered relevant to the Integrated Oil and Gas sector. This can be linked to the regulatory structure of the Brazilian market, where the Integrated Oil & Gas is regulated at the federal level whereas the Home Construction is regulated at municipal level, where the governance of institutions are more fragile.

Social KPIs are important to Broadline Retail and Apparel Retail, especially indicators linked to customers, suppliers and staff turnover. For these sectors and the Transportation Services sector, the respondents regard social KPIs as more material than environmental and governance KPIs. Unexpectedly, Education has a medium score because of a low scores for indicators related to Suppliers. However, it has a high scores for human capital indicators such as “Training & Qualifications” and “Maturity of Workforce”.

FINAL THOUGHTS

It is also surprising to find that General Mining received a low score of 1.83 for social KPIs. Whilst it received reasonably high scores for health and safety indicators, scores for customer satisfaction, staff remuneration, staff turnover and training reduced the overall materiality score.

Finally, we are keen to express our support of the sustainability reporting initiatives and the ESG KPI guidelines available; however we believe that they need some adaptation to cater for country and regional differences. Companies and research providers that understand this context are likely to better service the needs of their investors and clients.


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Food Products Transportation services

Litigation risks CorruptionCorruption Environmental CapEx

Customer satisfaction Energy efficiency

Specialized consumer services (education) Iron & steel

Training & qualification Energy efficiencyCustomer retention Water consumption

Customer satisfaction GHG emissionsIntegrated oil & gas Home construction

Accidental oil/gas spills CorruptionEmissions to water Fatalities & injuries

Remediation Health & safety aspects of productsGeneral mining Broadline retailLitigation risks Corruption

Waste (scope 3) Customer satisfactionWaste (scope IV) Litigation risks

Apparel retailCorruption

Customer satisfactionSupply chain

Figure 12: Top 3 KPIs by sector, based on receiving 50% or more of “high” responses

FURTHER RESOURCESLIST OF SUSTAINABILITY REPORTING INITIATIVESInternational Integrated Reporting Council (IIRC)Sustainability Accounting Standards Board (SASB) Global Reporting Initiative (GRI)

ESG KPI GUIDELINESSD-KPIsKPIs for ESG 3.0

OTHER RELATED INITIATIVESCarbon Disclosure Project (CDP)The Delphi Project

http://www.theiirc.org/

http://www.sasb.org/

https://www.globalreporting.org/Pages/default.aspx

http://www.sd-m.de/files/SD-KPI_Standard_2010-2014_V12d.pdf

http://www.effas-esg.com/wp-content/uploads/2011/07/KPIs_for_ESG_3_0_Final.pdf

https://www.cdp.net/en-US/Pages/HomePage.aspx

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ANNEX A

Three heat maps presenting the KPI materiality scores per sector:

ENVIRONMENTAL KPIS PER SECTOR

Environmental KPIs


(Education)


Home Construction

Broadline Retail

General Mining



ProductGrandTotal

Environmental

Expenditure for Veterinary Pharmaceuticals, Seeds, Herbicides, Pesticides and Other Drugs

2.34 2.34

Gene Modified Organisms 1.75 2.22 1.99

Sustainable, Organic & Fair Trade Products 1.69 2.00 1.84

Waste Management

Accidental oil/gas spills 2.53 2.53

Emissions to Air 1.97 1.50 2.27 2.31 2.29 2.13

Emissions to Water 2.21 2.34 2.53 2.43

Environmental Compatibility 2.06 2.06

Leakages 2.24 2.24

Remediation 2.44 2.38 2.42

Waste Scope 1 1.56 1.78 2.33 2.13 2.22 2.13 2.35 2.07

Waste Scope 2 1.56 2.17 2.25 1.99

Waste Scope 3 2.11 2.22 2.50 2.14 2.38 2.27

Waste Scope 4 2.47 2.26 2.36

Water consumption 1.83 2.44 2.38 2.22

Climate Change

GHG Emissions 1.00 2.50 1.26 1.81 2.38 2.22 1.80 2.54 2.16 1.96

Innovation 1.78 1.76 1.94 2.31 1.89 2.13 2.32 2.42 2.06

Refrigerant refill rate 1.31 1.31

Intermodality 2.00 2.00

Natural Resources

Building Certification 1.56 1.69 1.53 1.59

Direct Building Energy Consumption 1.84 1.94 2.02 1.92

Eco-design 2.06 2.06

Energy Efficiency 1.67 2.20 1.53 2.13 2.56 2.56 2.13 2.85 2.11 2.19

Packaging 1.46 2.18 2.29 1.97

Water consumption 1.44 1.91 1.88 2.46 1.93 2.48 2.40 2.20

Grand Total 1.58 2.23 1.86 1.93 2.38 2.17 2.09 2.44 2.27 2.12



19

GOVERNANCE KPIS PER SECTOR

Environmental KPIs


(Education)


Home Construction

Broadline Retail

General Mining



ProductGrandTotal

Environmental

Expenditure for Veterinary Pharmaceuticals, Seeds, Herbicides, Pesticides and Other Drugs

2.34 2.34

Gene Modified Organisms 1.75 2.22 1.99

Sustainable, Organic & Fair Trade Products 1.69 2.00 1.84

Waste Management

Accidental oil/gas spills 2.53 2.53

Emissions to Air 1.97 1.50 2.27 2.31 2.29 2.13

Emissions to Water 2.21 2.34 2.53 2.43

Environmental Compatibility 2.06 2.06

Leakages 2.24 2.24

Remediation 2.44 2.38 2.42

Waste Scope 1 1.56 1.78 2.33 2.13 2.22 2.13 2.35 2.07

Waste Scope 2 1.56 2.17 2.25 1.99

Waste Scope 3 2.11 2.22 2.50 2.14 2.38 2.27

Waste Scope 4 2.47 2.26 2.36

Water consumption 1.83 2.44 2.38 2.22

Climate Change

GHG Emissions 1.00 2.50 1.26 1.81 2.38 2.22 1.80 2.54 2.16 1.96

Innovation 1.78 1.76 1.94 2.31 1.89 2.13 2.32 2.42 2.06

Refrigerant refill rate 1.31 1.31

Intermodality 2.00 2.00

Natural Resources

Building Certification 1.56 1.69 1.53 1.59

Direct Building Energy Consumption 1.84 1.94 2.02 1.92

Eco-design 2.06 2.06

Energy Efficiency 1.67 2.20 1.53 2.13 2.56 2.56 2.13 2.85 2.11 2.19

Packaging 1.46 2.18 2.29 1.97

Water consumption 1.44 1.91 1.88 2.46 1.93 2.48 2.40 2.20

Grand Total 1.58 2.23 1.86 1.93 2.38 2.17 2.09 2.44 2.27 2.12

Environmental KPIs


(Education)


Home Construction

Broadline Retail

General Mining



ProductGrandTotal

Governance

Transparency

Contributions to political parties 1.67 1.83 1.75

Corruption 2.11 1.60 2.42 2.25 2.25 2.75 2.13 1.85 2.32 2.19

Dimensions of pending legal proceedings

2.11 2.11

Litigation risks 1.56 1.60 2.05 2.38 2.56 2.33 2.33 2.23 2.60 2.18

Market Practices

Environmental CapEx 2.18 1.83 2.44 2.56 2.50 2.35 2.31

Health & Safety Aspects of Products 2.33 2.33

Innovation 1.94 2.18 1.68 2.19 1.72 2.17 2.33 2.50 2.07

Revenues from new products 2.00 1.00 1.79 2.31 1.56 2.40 2.28 1.91

Utilisation 1.44 1.83 1.81 1.92 1.75

Grand Total 1.91 1.77 1.94 2.26 2.27 2.11 2.24 2.17 2.42 2.08


20

SOCIAL KPIS PER SECTOR

Social KPIs


(Education)


Home Construction

Broadline Retail

General Mining



ProductGrandTotal

Social

Communities

Sustainable, Organic & Fair Trade 1.88 2.21 2.04

Customers

Customer Retention 2.30 2.44 2.20 2.35 2.31

Customer Satisfaction 2.28 2.17 2.50 1.56 2.33 2.53 2.50 2.27

Health & Safety Aspects of Products 2.00 2.00

Human Capital

Certification of Facilities 2.22 2.19 2.15 2.40 2.24

Fatalities & Injuries 2.00 2.39 2.16 2.27 2.20

Maintenance & Safety 2.30 2.28 2.25 2.25 2.16 2.25

Maturity of workforce 2.44 1.22 1.68 1.75 1.44 2.00 1.53 1.17 1.32 1.62

Remuneration 2.00 1.28 1.72 2.23 1.69 2.19 2.13 1.63 1.95 1.87

Restructuring-related relocation of jobs 2.00 1.63 1.64 2.00 1.82

Staff turnover 2.38 1.11 2.32 2.44 1.56 2.22 2.33 1.25 2.11 1.97

Training & qualification 2.67 2.10 2.16 2.19 1.94 2.50 2.07 1.92 2.05 2.18

Local Staff 1.25 1.25

Supplies

Supply Chain 1.77 1.46 1.81 2.44 2.49 2.36 2.07

Grand Total 2.11 1.54 2.01 2.29 1.83 2.23 2.27 1.82 2.16 2.02



21

High Medium Low Null

ANNEX B

TOP KPIS BY SECTOR (A TOP KPI IS A KPI WITH AT LEAST 50% OF “HIGH” RESPONSES PER SECTOR)

Litigation risks 70%

58%

55%

55%

54%

53%

50%

50%

50%

50%

35%

35%

40% 10%

15%

15%

40% 10%

28% 19%

39% 7%

40%

30% 5%10%

5%

26% 5% 11%

25% 5%

Corruption

Customer Satisfaction

Environmental CapEx

Innovation

Expenditure for Agricultural products

Certi�cation of Facilities

Customer Retention

Water Scope 1

Water Consumption


FOOD PRODUCTS

IRON & STEEL


Energy E�ciency

50% 27% 23%

50% 33% 8% 8%

54% 31% 15%

54% 46%

55% 23% 23%

58% 33% 8%

63% 22% 12% 2%Water Consumption

GHG Emissions

Environmental CapEx

Innovation

Emissions to Water

Water Scope 3

Maintenance & Safety

Fatalities & Injuries

85% 15%

62% 31% 8%

22

SPECIALISED CONSUMER SERVICES (EDUCATION)

HOME CONSTRUCTION

GENERAL MINING

Training & Quali�cation

Customer Retention


Sta Turnover


78% 11% 11%

52% 33% 7% 7%

50% 33% 11% 6%

50% 38% 13%

High

High

High

Medium

Medium

Medium

Low

Low

Low

Null

Null

Null

Corruption

Fatalities & Injuries

Health & Safety Aspects of Products


Waste Scope 3

63% 21% 11% 5%

56% 28% 17%

56% 28% 11% 6%

50% 28% 22%

17% 6%28%50%

Litigation Risks

Waste Scope 3

Waste Scope 4

Corruption

Environment CapEx

Energy E�cency

Emissions to Air

GHG Emissions

Water Consumption

Emissions to Water


Innovation

Innovation

69% 19% 13%

63% 25% 13%

59% 28% 13%

56% 19% 19% 6%

56% 31% 13%

56% 44%

56% 21% 17% 6%

56% 25% 19%

55% 36% 9%

53% 28% 19%

50% 25% 25%

50% 31% 19%

50% 38% 13%


23

INTEGRATED OIL & GAS


Energy E�ciency

Water Consumption

GHG Emissions

Environmental CapEx

Innovation

Emissions to Water

76% 12% 12%

67% 11% 22%

67% 11%22%

65% 12% 18%6%

60% 30% 10%

50% 40% 10%


TRANSPORTATION SERVICES

Corruption

Environmental CapEx

Energy E ciency

Training & Quali�cation

Litigation Risks

GHG Emissions


75%

67%

67%

22% 11%

63%

56%

56%

22%

22%

22%

11% 11%

22%

25% 13%

11%

25%

Corruption


Litigation risks

Supply Chain

Stu turnover

Revenue from new products

63% 13% 13% 13%

63% 25% 13%

56% 25% 19%

56% 31% 13%

50% 44% 6%

50% 31% 19%

The PRI is an investor initiative in partnership withUNEP Finance Initiative and the UN Global Compact.

UN Global Compact

Launched in 2000, the United Nations Global Compact is both a policy platform and practical framework for companies that are committed to sustainability and responsible business practices. As a multi-stakeholder leadership initiative, it seeks to align business operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption, and to catalyse actions in support of broader UN goals. With 7,000 corporate signatories in 135 countries, it is the world’s largest voluntary corporate sustainability initiative.

More information: www.unglobalcompact.org

United Nations Environment Programme Finance Initiative (UNEP FI)

UNEP FI is a unique partnership between the United Nations Environment Programme (UNEP) and the global financial sector. UNEP FI works closely with over 200 financial institutions that are signatories to the UNEP FI Statement on Sustainable Development, and a range of partner organisations, to develop and promote linkages between sustainability and financial performance. Through peer-to-peer networks, research and training, UNEP FI carries out its mission to identify, promote, and realise the adoption of best environmental and sustainability practice at all levels of financial institution operations.

More information: www.unepfi.org

The Principles for Responsible Investment (PRI) Initiative

The PRI Initiative is a UN-supported international network of investors working together to put the six Principles for Responsible Investment into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices. In implementing the Principles, signatories contribute to the development of a more sustainable global financial system.

The Principles are voluntary and aspirational. They offer a menu of possible actions for incorporating ESG issues into investment practices across asset classes. Responsible investment is a process that must be tailored to fit each organisation’s investment strategy, approach and resources. The Principles are designed to be compatible with the investment styles of large, diversified, institutional investors that operate within a traditional fiduciary framework.

The PRI Initiative has quickly become the leading global network for investors to publicly demonstrate their commitment to responsible investment, to collaborate and learn with their peers about the financial and investment implications of ESG issues, and to incorporate these factors into their investment decision making and ownership practices.

More information: www.unpri.org

http://www.unepfi.org

http://www.globalcompact.org

http://www.globalcompact.org

http://www.unepfi.org

MATERIALITY OF ESG KPIs - SITAWI Finanças do Bem

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