Outperformance with Sustainable Development Key Performance Indicators
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 1
Outperformance with Sustainable Development Key Performance Indicators
(SD-KPIs)
Dr. Axel HesseSenior Consultant, SD-M
TBLI Conference Europe, 13 November 2008
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 2
Source: Upton, S., Chairman of the OECD Round Table on SD (2002), pp. 8-9.
„[…] we risk emptying sustainable development of content by seeking to extend it to everything.
[…] we should begin accepting that if sustainability is to have a meaningful, universally recognisable core,
many issues will have to be excluded. Otherwise, the cart will simply not move forward.”
Focus on Key Challenges of Sustainable Development (SD)
SD-M consults institutional investors, companies and politics regarding performance-enhancing management of global core challenges for SD.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 3
SD-KPIs in EU Account / Modernisation Directives
DIRECTIVE 2003/51/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCILAccount Directive 78/660/EEC is hereby amended as follows:The annual report shall include […]To the extent necessary for an understanding of the company's development, performance orposition, the analysis shall include both financial and, where appropriate, non-financial keyperformance indicators relevant to the particular business, including informationrelating to environmental and employee matters;
SD-KPIs are non-financial key performance indicators (KPIs) regarding a Sustainable Development (SD), which are relevant to the particular businessand which have to be disclosed in annual reports /management reports.
SD-KPIs
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 4
Investors remain the most important target group also for SD-KPIsin annual / management reports (empirical results for DAX-30 companies).
Source: Hesse (2006), p. 11.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 5
Demand of investors for relevant, sector-specific SD-KPIs
Source: Hesse (2007), 40 pages.
Empirical survey of seven relevant investors and analysts covering SD factors.
Open question:Which are the up to three most important sector-specific SD-KPIs for the business development, the position and the expected development of ten different industries?
A study by Dr. Axel Hesse (SD-M) for Deloitte and the German Federal Ministry of the Environment
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 6
Examples for SD-KPIs 1 with the highestimportance for the business‘ development, the position and the expected development
Automobile industry: Fleet consumption (7 out of 7 investors / analysts)
Utilities: Greenhouse gas intensity of energy production (6 out of 7)
Transport and logistics services: Energy and greenhouse gas efficiency (6 out 7)
Consumer goods and retail: Compliance to environmental and social standards in the supply chain (6 out of 7)
Pharmaceuticals: Access strategies to medicines for the poor (5 out of 7)
Naming of >40% of the investors/analysts necessary to define a SD-KPI
Results: Up to three most important SD-KPIs for ten sectors (SD-KPIs 1 - 3)
Source: Hesse (2007).
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 7
Dollar value of a single SD-KPI?Automobile industry: Fleet consumption
Fuel efficiency most important factor for the consumer‘s purchase decision!
And: 80-95% of CO2 emissions during the use phase
Standard&Poor’s:
600-3.000 Euros per vehicle to meet upcoming EU emissions standards
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 8
Dollar value of a single SD-KPI?Utilities: Greenhouse gas intensity of energy production
RWE: >1 billion Euro per year additional costsfor the purchase of emission rights from 2008 (2007: 100 million Euro)
Vattenfall Europe: 500 - 700 million Euro per year
Source: Handelsblatt, May 16, 2007, p. 14.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 9
Dollar value of a single SD-KPI?Banks: Sub-prime or predatory lending
Source: Hesse (2007), p. 11.
SD-KPI 2: Credit checks for SD risks and opportunities in retail banking
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 10
SD-KPIsof different sectors
Source: Hesse (2008), p. 6.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 11
SD-KPIsof different sectors
Source: Hesse (2008), p. 7.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 12
Source: Hesse (2008), pp. 33, 36, 40.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 13
Source: Hesse (2008), p. 43.
Best Practice for SD-KPIs Reporting
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 14
Automobile industry: BMW—not quite best practice
Source: BMW Group, Annual Report 2006, pp. 30–31.
• BMW reduced fuel consumption from 1990 until 2005 about 30%—relatively. • However, the most important information, the absolute amount of the emissions of the fleet,was not reported at all.
• The sales-weighted absolute amount of the brand BMW was 192 g CO2/km, the highest emission value of all European competitors (except for Porsche).
• Impending EU regulation (130 g CO2/km): BMW can expect price increases of between Euro 1500-3000 per automobile on average across its fleet.
• Investors do not receive these material information.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 15
Best Practice: Industrial goods—renewables: SolarWorld
• Climate protection adds value for the producer of low-emission renewable energy • Positive CO2 budget shows that the carbon dioxide emissions avoided by means of SolarWorld
products in 2006 exceed the emissions generated throughout the Group by a factor of more than 45• Simultaneously pursue economic and environmental goals• The Group´s CO2 emissions have therefore remained constant at around 41 (previous year: 41)
thousand tonnes of CO2 equivalents despite the increase in production in 2006 • Due to the solar power modules supplied by SolarWorld at the end of the value chain, the
environment is spared a total of around 1.9 (previous year: 1.2) million tons of CO2. • The environmental damage prevented in this way is worth around 130 (previous year: 84) million €
Sources: SolarWorld,Annual Report 2006, p. 42 + Hesse (2008).
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 16
Which of these approaches to sustainability research do you believe will lead to risk-adjusted out- or underperformance in the future?
Assets under Management:US$ 715 billion
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 17
Excursus: “Big Six”—the six most important SD challenges for the 21st century
Sources: UNEP (2000), p. 339.; Hesse (2002-2007).
freshwater
1
23
45
6
=> poverty
The "Big Six"-Concept is protected by copyright. Institutional Investors could use the „Big Six“ for thematic investments with
outperformance in the long term.
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 18
• From 2004 until now SD-M has elaboratedthe SD-KPIs-concept, which is protected by copyright.
• Easy data collection
• Easy communication
• Materiality (EU accounting law)
• Strong partners: Deloitte Prof. Baetge, #1 accounting prof in Germany15year-lasting competition „The Best AnnualReport“ of „manager magazine“
• „Standardization“: Stront interest ofKPMG and Ernst&YoungAssociation of Chartered CertifiedAccountants (ACCA)Fédération des Experts ComptablesEuropéens (FEE): organisation for theaccountancy profession in Europe
• Institutional Investors could use SD-KPIsfor Best-in-Class-Investments with highoutperformance in the long term from 2009.
SD-KPIs Concept—Highlights
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Dr. rer. oec. Axel Hesse, Senior Consultant, November 2008, Page 19
Thank you for your attention!
Contact: [email protected]
Tel +49 251 2394678Mobile +49 173 64 222 11