Relevance of non-financial information for mainstream investors
Felix Schnella, CFAParis, 16 Nobvember, 2007
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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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