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Incorporating ESG and human capital into company analysis and valuation 3 June 2014
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Incorporating ESG and human capital into company analysis and valuation
3 June 2014
Deborah Gilshan, FCIS
Corporate Governance Counsel, RPMI Railpen Investments
ENABLING POSITIVE FUTURESUK CFA event
03/06/2014
OLD MUTUAL AT A GLANCE -2014
Investment
Savings
Insurance
Banking
Established in South Africa in 1845
£293.8bn1 Group Funds under Management
1.Core operations As at 31 December 2013
POPULATION
World population from 1800 to 2100
(UN 2004 projections & US Census Bureau historical estimates)
6.93 bn - 2010
9 to 11 bn by 2050 ?
2.6 bn - 1945
CONSUMPTION
The Great Acceleration Will Steffen’s 2004 Planet Under Pressure
PLANETARY BOUNDARIES
Source: 2010 Stockholm Environment Institute - System limits to Growthhttp://www.weforum.org/
SUSTAINABILITY SCENARIOS
Source : Global Footprint Network
“Sustainability means living off the earths ecological interest not its capital”
INDUSTRY / GOVERNMENT RESPONSE
Govt Response
OUR CUSTOMERS MOST TRUSTED PARTNER
RESPONSIBLE TO OUR CUSTOMERS
RESPONSIBLE INVESTMENT
RESPONSIBLE TO OUR EMPLOYEES
RESPONSIBLE TO OUR COMMUNITIES
RESPONSIBLE ENVIRONMENTAL MANAGEMENT
EVIDENCE ? / WARNINGS ?
Forward looking risk analysis
Correlation Studies
See Annex A for references
FOCUSING OUR RI EFFORTS
RI VERSUS INVESTING IN SUSTAINABILITYWhich asset classes give you best exposure to
these investment themes?
Level of Influence
Expo
sure
to S
usta
inab
ility
Them
es
Indirect Direct
Ind
irect
Dire
ctProperty
Fixed Income Private Equity
Listed Equity
Investing in Sustainability• Job Creation • Poverty alleviation • Education • Healthcare • Agriculture• Public transport • Infrastructure • Water• Low carbon energy • Affordable housing• Low carbon mobility• Food • Waste
ESG INTEGRATION – LISTED EQUITY
Peer 2 Peer Rating used to as an assessment of management/ strategy / support conviction / guide engagement
Qualitative Input
ESG Country Risk Profile
ESG Sector Risk Profile
ESG Company Rating
Rank countries based on ESG risk profile
Rank Sectors based on ESG risk profile
Based on ESG score rank companies in a
sector
Quantitative Input
Governance risks
Social / Safety Risks
Environmentrisks
Corruption, Competition fines, License issues etc
Lost production from safety issues, social
action, human capital, class action settlements
Carbon Tax, extended producer liability,
environmental fines, water cost, water
licenses, electricity costs
ESG factors used to interrogate cash flow analysis
ESG INTEGRATION – UNLISTED EQUITY
THE FUTURE What's the issue? Green Growth Differentiator Risk Focused
Int 1
Int 2
Int 3
Int 4
Int 8
Int 7
Int 6
Int 5
Int 9
ZAR 1
ZAR 2
ZAR 4
ZAR 3 Int 11
Int 13
Int 12
Int 10
Int 14
ANNEX A - LINKS TO RESEARCH REPORTS
http://www.mercer.com/climatechangehttp://www.towerswatson.com/en/Insights/IC-Types/Survey-Research-
Results/2012/09/Sustainable-investing-we-need-a-bigger-boathttp://www.actuaries.org.uk/research-and-
resources/documents/research-report-resource-constraints-sharing-finite-world-implicati
http://www.hbs.edu/faculty/Publication%20Files/12-035.pdfhttp://www.msci.com/products/esg/integrating_esg_into_the_investme
nt_process.htmlhttps://www.allianz.com/media/responsibility/documents/rcmsustainab
ilitywhitepaper2011.pdf
“Shaping an investment industry that serves the greater good”
Understanding value creation and risk from human capitalAn introduction to Organization Maturity Ratings
Improve your Organization’s MaturityIncrease your Organization’s ValueEnhance your Societal Impact & Reputation
• Why is Toyota’s market capitalization c.3 x the size of GM?• Why can’t all banks produce value per head like Goldman Sachs?• Why hasn’t Rolls Royce made money on aero engines?• Why are BP & other oil majors still at risk of large scale disaster?• How did mis-selling arise at Lloyd’s after PPI & 5 years post GFC? • How does Costco stock consistently trade at a premium to Walmart?• How can Ryanair make even more profit and be a ‘nice’ company too?• How is a 40 year old clothing firm more interested in saving the planet
making so much money?
Key Human Capital Questions need convincing answers:
Value orientation – short, long term; narrow or broad
based?
“
”
The paradox is that by not pursuing profitability to the
exclusion of all else, the Great Engine companies in their
Golden Age would achieve enormous increases in
value...whereas, by single-mindedly pursuing profit...these
same companies and their successors actually created less
genuine, lasting wealth; indeed, they would often destroy it.
(The Puritan Gift, Kenneth & William Hopper)
DefinitionOrganizational & HR Maturity is the extent to which anorganization realizes its’ human potential such that it maximizesthe value it can create. Human potential in this context relates notjust to an organization’s people, but to all people connected withthe development, production and supply of an organization’sgoods and services. Value relates to value generated by referenceto the organization itself (i.e. productivity, quality, financial, efficiency)and value generated by the organization in a societal context (e.g.economic, well-being, environmental).
OMR© is an assessment of the extent to which an organization is designed around the goal of maximizing its value, while controlling risk, with emphasis on its ability to manage its human capital to best advantage.
Profit is critical for a healthy organisation but value is much broader, cleaner and sustainable
Stage 2Good ProfessionalPractice
Stage 3Effective Management
Stage 4Human Capital becomes integral to business operations
Stage 5Transition: operationalto strategic focus
Stage 1PersonnelAdministration
Board & Executives resistant/unaware of people & human capital value up to
this point
Stage 6Organisation becomes a whole system
Stage 0No ConsciousPeopleManagement
Maturity spectrum:OMR ‘AAA’ Scales
LONG TERM - STABILITYSHORT TERM - UNSTABLE
A+ to A
A-
AA
A
BB
B to
ABB
B-
BB
+
BB
C B
OMR
THE TEN ‘PILLARS’
Value Motive
Whole system
Learning Organization
Improvement philosophy
People risk
Human capital ethos
Trust, engagement, cooperation
Performance system
Communication
Business/people strategy
Measuring or rating maturity
26
Maturity in practice: value outcomes
Early indicators
Exec expectations of human capital & value now aligned across the business Organization now adopting a new language around HCM 10 Pillars embedded into assessment of planned HC activitiesMaturity provides new framework for value based assessments and decision makingMature thinking becomes conscious & senior execs now lead on HC initiatives Practically NSW HR team now focused on the business rather than blindly adopting "best practice”
How Maturity Pillars can predict value creation & destruction
Value vs supply chain orientation
Embedded societal value &
responsibility
Truly inclusive workplaces
Best/sustainable resource use
Learning, knowledge &
innovation
High trust, cooperation &
informed decision making
Maturity drives higher value, lower risk & ‘good’ outcomes
“social, economic, environmental, and ethical factors directly affect business strategy—for example, how companies attract and retain employees, how they manage the risks and create opportunities from climate change, a company’s culture, corporate-governance standards, stakeholder-engagement strategies, philanthropy, reputation, and brand management.” –David Blood 2007
Reaching Your Potential
The perfect, virtuous circle is one where the best values of your people
are reflected in the way you do business. This means you provide the
greatest value to all your stakeholders and to society, who in return
generate the greatest value for you.
Maturity is about everyone aligning with the purpose of the organization;
wanting to realise its full potential and wanting to be around in the long
term.
Maturity & Value creation
Thank you
Improve your Organization’s MaturityIncrease your Organization’s ValueEnhance your Societal Impact & Reputation
Maturity: Beyond Credit Ratings
Credit ratings provide strong benefits for different players
• For investorso Simple and fast idea of credit
qualityo Complement to their own
models
• For issuerso Better access to financial
marketso Qualified independent view of
their weakness and strengths
• For counterpartieso Simple and fast idea of credit
qualityo Know with whom you are
dealing
• For regulators/societyo Complement their worko Improve market information &
transparencyo Improve corporate
governance
Excellent historical performance
• Default and transition studieso Extremely good performance: high correlation between initial rating and
default after 10+ years
o Much better than most other credit assessment models
• Subprime crisiso Mostly related to structured finance deals (directly) and structured finance
related firms (Lehman Brothers. AIG, monoliners)
o Also sovereign ratings
But credit ratings have limitations
• Focus on debt
• Focus on financial/business profiles
• What about organization/HR/other stakeholders?
• Maturity: the missing link
Why OMR?• Key complement to credit ratings: focus on value
o Broadens ratings scopeo Enhance information for all stakeholders
• For issuers: increase firm’s value
• For investors: focus on valueo Better overall informationo Better insights: is the company leveraging the HK of all stakeholders?
• For counterpartieso Enhance information
• For regulators/society: focus on valueo Societal valueo Societal value = stability
Long term view: Integration of credit ratings and OMR?
CO
RPO
RA
TE VALU
E R
ATIN
GS?
FINANCIAL PROFILE
BUSINESS PROFILE
MATURITY PROFILE
ANNUAL CONFERENCE 2014 12th June 2014, 12PM – 5.30PM America Square Conference Centre, EC3N 2LB
DELIVERING VALUE IN A CHANGING WORLD – Sweating the big stuff
Register now: www.cfauk.org/annualconference2014
Confirmed speakers include: Stephanie Flanders, chief market strategist- UK & Europe for J.P. Morgan Asset Management Helena Morrissey, CBE, FSIP, CEO of Newton Avinash Persaud, chairman of Intelligence Capital, co-chair of the OECD Emerging Market Network, Jonathan Tepper, co-author of the NY Times bestseller Endgame and the Wall Street Journal bestseller Code Red Michala Marcussen, CFA, managing director and global chief economist, Societe Generale Corporate & Investment Banking Philip Middleton, leads the speciality finance research team at Bank of America Merrill Lynch
CFA UK’s 7th annual conference will provide attendees with insights into:
• The outlook for global growth • Exiting QE and the return of the rate cycle • The future of asset returns • Systemic stability and instability • The profession’s stakeholders, legitimacy and
right to operate, and • The prospect for profitability
CFA UK Member
Non-Member £195 £390
Join us at the most prestigious event in the CFA UK calendar
Conference kindly sponsored by:
