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TBLI and Standardization of Key Performance Indicators
SD-KPI Standard 2010-2014: How to Systematically Integrate Relevant ESG Factors for Financial Performance (Fiduciary Duty)
Zurich, 8 November 2012
Dr Axel HesseManaging Director, SD-M® [email protected]; www.SD-M.de
The SD-KPI Standard 2010-2014 and all its aspects are protected by copyright. All rights are reserved. Any commercial use of any aspects of the SD-KPI Standards for financial products/services of any kind, e.g. for investment funds or stock indexes/benchmarks, research, engagement or information services is subject to the prior consent of Dr. Axel Hesse (SD-M® GmbH) and/or licensing of the registered trademarks SD-KPIndex® or SD-KPInvest® from Dr. Axel Hesse (SD-M® GmbH). Any unauthorised use of the SD-KPI Standard will be prosecuted under copyright and criminal laws. However, companies are permitted and encouraged to use the SD-KPI Standard for their management and reporting systems at no charge. The use of the registered trademarks SD-KPIndex® or SD-KPInvest®, however, in any case remains subject to a license from Dr. Axel Hesse (SD-M® GmbH).
EU accounting directives78/660/EEC, consolidated version2009-07-16:
SECTION 9Contents of the annual reportArticle 461 (b) To the extent necessary for an understanding of the company's development, performance or position, the analysis shall include bothfinancial and, where appropriate, non-financial key performance indicators (KPIs) RELEVANT to the particular business, includinginformation relating to environmental and employeematters;
Two faces of the same coin: Fiduciary duties of institutional investors and RELEVANT sustainability indicators in annual reports of companiesFreshfields Bruckhaus Deringer, A legal framework for the integration of environmental, social and governance issuesinto institutional investment, October 2005:
CONCLUSIONSConventional investment analysis focuses on value, in the sense of financial performance. As we note above, the links between ESG factors and financial performance are increasingly beingrecognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions. […] Provided that all RELEVANT considerations have been taken into account, the weight that the decision-maker gives to eachconsideration or category of consideration is left to the discretion of the investment manager alone.
Automobiles: Fleet consumption (SD-KPI 1)KPMG: Fuel efficiency the most important factor for the consumer‘s purchase decisionStandard&Poor’s: € 600-3.000 per vehicle to meet upcoming EU emission standards
Energy utilities: Greenhouse gas intensity (SD-KPI 1)S&P downgraded RWE from A- to BBB+ (July 2012)€ 2 billion costs per year for the purchase of emission rights from 2013Proportion of renewables (SD-KPI 2): Energy transition after Fukushima
Pharmaceuticals: Access to Medicine Index (SD-KPI 1): Meeting demand for basic medicines, a huge potential market
Oil & Gas: Emissions of hazardous waste and toxic materials or oil spills (SD-KPI 3, published January 2010):BP lost US$ 67 billion of market capitalisation (1 June 2010)
Banks: Sub-Prime risks integrated in SD-KPI 2 in October 2006published January 2007: Hesse, A., “Sustained Added Value”, edited by Deloitte
Examples for the relevance of SD-KPIs for the financial performance
A study by Dr. Axel Hesse (SD-M) for Deloitte and the German Federal Ministry of the Environment
A global reporting and investment standard: SD-KPI Standard 2010-2014
SD-KPIs: 3 most relevant SD-KPIsfor the financial performance of thenext five yearsfor 68 industrieson behalf of the German Environment Ministry: SD-KPIs “minimum reportingrequirement” in annual reports (2009) consensus among global investorsand analysts who influence sustainableassets of € 2 trilliontransparent reporting andinvestment standard (weightingaccording to the relevance for thefinancial performance)database for evaluation of SD-KPIs formore than 3000 companies worldwidefinished at the end of 2011 „Big Four“-accounting firms Deloitte,Ernst&Young and KPMG use SD-KPIs
Option 1: SD-KPInvest®: SD-KPI-usage for conventional actively managed mandates
In conventional actively managed mandates (specialised funds) components1. can be selected from the investment universe as usual and2. be over- or under-weighted according to their SD-KPI-Performance
Moderate over-/under-weighting e.g. according to this transparent system:SD-KPI-performance 0% - 20% ---> red ---> underweighting 10%SD-KPI-performance 20% - 40% ---> light red ---> underweighting 5%SD-KPI-performance 40% - 60% ---> yellow ---> no change SD-KPI-performance 60% - 80% ---> light green ---> overweighting 5%SD-KPI-performance 80%-100% ---> green ---> overweighting 10%
3 SD-KPIsc. 40-50c. 100Number of indicators used per sector
+ SD-KPI Standardso KPIs for ESG-Based upon a standard
ownership rights for 98%-100% of the components of the conventional indices; focused engagement regarding SD-KPIs possible
ownership rights for the 16,5% “ESG leader-”components of the conventional index
ownership rights for the 14% “best-in-class”-components of the conventional index
Voting/ Engagement
0-2% of leading conventional financial indices: 20-30 exclusions: production anti-personnel mines cluster bombs
83,5% (297 out of 1800 components)
86% (342 out of 2500 components)
Reduction in the investment universe
Enhanced-β-SD-KPIndex®, e.g. STOXX Global 1800 SD-KPIndex®, STOXX Europe 600 SD-KPIndex®, EURO STOXX 50 SD-KPIndex®, STOXX Europe 50 SD-KPIndex®, MSCI World SD-KPIndex® (customized)