Relevance of non-financial information for mainstream investors

Felix Schnella, CFAParis, 16 Nobvember, 2007

2

Ownership structure

Strong and supportive ownership

Boutique investment culture within strong and stable structure

Regional DistributionBrands

Global Investment Platform Brands

USA

Germany

Other Europe

Asia Pacific

Global Fixed Income

Global Equity

Corporate Brand

Asset Management Umbrella Brand

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Why do non-financial information matterExample: Discounted cash flows

Analysts estimate future cash flows utilising

- Current financial information (reporting)

- Industry information (e.g. market prices, market trends)

- Soft factors (e.g. perceived management strength, product quality)

- Additional company information is getting more important

- Traditional non-financial information (e.g. market shares)

- Environmental data (e.g. CO2 emissions for utilities or industrials, product energy efficiency)

- Social data (information on training & education or health and safety of products and employees)

- Information on governance (corruption, customer satisfaction)

Non-financial information become increasingly important for traditional investors

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How is information transformed into value

Cash

FlowCash

Flow

Cash

Flow

Cash

Flow

Cash

Flow

Financial data Financial dataFinancial dataNon-financial

data

Discount of cash flowsCompany

Value

?

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Current situation

Very broad set of non-financial information is being put into financial markets

Low level of structure of information

Convergence between sustainability and traditional valuation methods

Corporates demand guidance on which data are relevant to investors and analysts - request mainstream markets to specify which data should be provided

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DVFA* established Committee Non-Financials

Multi-stakeholder approach including

- Fund managers

- Equity Sell-Side Analysts

- Corporates (IR Managers, CR Managers)

- Auditors

- Scientific community

- Professional associations (issuers, communication, investment professionals, auditors)

- Selected NGOs

* DVFA is the Society of Investment Professionals in Germany

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Goals of the DVFA Committee Non-Financials

Defining requirements of mainstream investment professionals for non-financials

Selecting KPIs on non-financial issues

- are meaningful for investors and analysts

- can be reported by corporates (data available, consolidation possible etc.)

- can undergo meaningful verification (legal audit, assurance)

- Define no more than 50 KPIs in total to avoid data spamming!

Not defining (yet another) reporting scheme, rather: defining KPIs compatible with and useable in other formats such as G3

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Approach of DVFA Committee Non-Financials

STEP 1

Limit analysis and definition to three industries: Utilities, Airlines, Automotives;

Reduce long-list of 600 indicators gathered to 25 KPIs through multiple iterative process involving discussions with

- Mainstream investors, Mainstream financial analysts

- Corporates

STEP 2

Roadshow set of 25 KPIs to a wider circle of mainstream investment professionals in Europe consolidating findings

STEP3

Transfer results to European Committee within EFFAS finalising sectors and set of indicators

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Emissions,Effluentes

Resources

Waste

EnvironmentalCompatibility

EEnvironmental

Human Rights

SocietalPerformance

Training &Qualification

Product &Health/Safety

EmployeeManagement

SSocial

Compliance

Sustainability ofSuccess Factors

GGovernance

KPIsNon-Financials

3 Areas of Performance

Structure of Underlying Model

11 Categories of Measurement

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Structure of KPI’s

Examples include:

- Health & Safety of products- Training & qualification- Energy efficiency of products and processes

General KPI‘s

KPI‘s that are relevant to all companies regardless of the industry

Sector specific KPI‘s

KPI’s that are relevant to a limited number of industries only

Sector Airlines

EExample

Fuel consumption

Sector Automotives

EExample

Product Recalls

Sector Utilities

EExample

Share of investments

in renewables

Both general KPI’s and sector specific KPI’s provide key information

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Structure and Definition of Individual KPI

KPIs are typically described at a comprehensive level …

E-EM-1 CO2 Emissions

Emissions (t) by generation portfolio

Number and value of CO2 Certificates

Emissions of production sites - total

Emissions of production sites/output units

Emissions of aircrafts total

Emissions / passenger-kilometer

Emissions / ton-kilometer

Industry

Utilities

Automotive Manufacturers

Airlines

… and then defined at an industry-specific level!

Unique IdentifierKPI Ratio / ExplanationE-EM-1 CO2

EmissionsGreenhouse gas emissions are the main cause of climate change. This Indicator can be used to explain targets for regulations or trading systems at international or national levels. I t also provides insights into the potential cost implications of taxation or trading systems for reporting companies

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Investor Survey to identify relevanceBroad range of feedback

Equity Sell Side Analyst

32%

Equity Buy Side Analyst

22%

Bond Analyst4%

Institutional Investor/Asset

Manager24%

Asset Owner/Pensionfund

Manager2%

Others16%

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Investor Survey to identify relevanceBroad range of feedback

Germany48%

UK10%

Netherlands9%

France7%

Switzerland3%

Rest of Europe7%

USA15%

Others1%

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Perceived relevance of KPI‘s Overview

2,81

3,31

3,25

3,85

0 1 2 3 4 5

Environment(Emissions)

Environment (exEmissions)

Social

Governance

Investors perceive Governance KPI more important than social and environmental KPI’S

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Perceived relevance of KPI‘s Governance criteria

3,44

3,60

4,00

4,02

4,19

3,85

0 1 2 3 4 5

Number of Patents

Litigation Payments

R&D Expenses

Revenues from New Products

Customer Satisfaction

General

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Perceived relevance of KPI‘s Social criteria

2,55

2,96

3,16

3,20

3,30

3,39

3,59

3,64

3,67

3,25

0 1 2 3 4 5

Contributions to Political Parties

Human Rights

Complaints by Regulatory Bodies

Staff related Issues

Product Recalls for H&S Reasons

Health & Safety (H&S)

Handling of Corruption

Training & Qualification

Anti-trust, Monopoly Practices

General

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Perceived relevance of KPI‘s Environmental criteria (ex Emissions)

3,07

3,14

3,17

3,30

3,64

3,31

0 1 2 3 4 5

Waste

End of Life Cycle Impact

Environmental Compability

Deployment of Renewables

Energy Efficiency

General

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Perceived relevance of KPI‘s Environmental criteria (Emissions only)

2,44

2,64

3,11

2,81

0 1 2 3 4 5

UnburnedHydrocarbon

NO, SO, andthe like

Co2 Emission

General

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2,44

2,64

3,11

2,81

0 1 2 3 4 5

UnburnedHydrocarbon

NO, SO, andthe like

Co2Emission

General

2,77

3,13

3,48

3,11

0 1 2 3 4 5

Automotives

Airlines

Utilities

Co2General

Perceived relevance of KPI‘s Environmental criteria (Emissions only)

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Next steps

Continue development of sector specific KPI‘s

Continue to review the existing set of KPI‘s

Identify relevant sector specific and general KPI‘s

Issue recommendation to corporates

Foster scientific challenge to review relevance of KPI’s

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