6 March 2013 Business Case of Corporate Sustainability for Investors Dr. Thomas Streiff, Head Guilé Engagement Team

2 Definition of ESG Investment „ ESG investment is an investment approach which considers systematically – in the context of a comprehensive financial analysis - criteria from the area of natural Environment, Society and employees, as well as Governance. By considering these extra financial information new opportunities for generating ‚Alpha’ and for reducing of investment risks.“ Definition WestLB ‚ Alpha‘ is an indicator for the evaluation of the return of an investment (e.g. share, fund) compared to a benchmark (e.g. index)

3 Value of non-financial information Integrated Reporting Higher predictability Lower spread in forecasts Increased confidence Lower volatility Enables anticipation Financials only Lower predictability Higher spread in forecasts Lower confidence Company 2 Lower earningsHigher earnings Accuracy of forecast Higher spread Lower spread Company 1 Source: World Watch Issue 1 /2004, PwC; Schroders, Kirchoff Consultants, 2005

4 Impact of intangible values on market value: Growing importance of intangible values Analysis of the FTSE 250 share price index Source: Interbrand. Brand Value Management, 2006

5 Impact of intangible values on market value: The model Book Value Market Value Physical Assets Financial Capital Tangibles Intangibles Corporate Philanthropy Financial Capacity “Retrospective” Strategic Capability/ License to Operate “Prospective” Source: BHP, PricewaterhouseCoopers Compliance Intellectual Capital Customer Loyalty Employees Loyalty Risk Awareness Reputation -Trust -Credibility -Integrity Brand Main intangible value drivers influenced by corporate responsibility Value drivers

6 Impact of intangible values on market value: Increase relevance of non-financial reporting Source:  +400/y additional sustainability reporters since 2000

7 Connection between corporate responsibility / corporate sustainability and shareholder value: The model of the Dow Jones Sustainability Index Social, cultural, ecological and economic challenges Sustainability Criteria FCFF: Free Cash flow to the Firm WACC: Weighted Average Costs of Capital Market Value Source: Adapt. from SAM Sustainability Yearbook 2008

8 Example: Human Capital Development and FCFF Source: SAM Sustainability Yearbook 2009 ROIC = Return on Invested Capital

9 Companies view: Comparing embracers and cautious adopters on the basis of what they think are the top three benefits of sustainability. Source: MIT Sloan Management Review, Nov. 2011: Sustainability: The ‘Embracers’ Seize Advantage

10 Source: Financial Times, 02/03 March 2013, p. 12 $ 42.2 bn Cumulative accounting charge BP has taken in relation to the spill $ 8.5 bn Settlement agreed last year with private plaintiffs $ 1.7 bn Sum BP expects to spend on legal and administrative costs 4.1 m Estimated number of barrels = 652 m liter of oil that leaked into the Gulf of Mexico Costs of unsustainable business practices: The Deep Water Horizon disaster and consequences for BP

11 Source: Novethics. European Asset Owners: ESG Perceptions and Integration Practices Investors view: Higher financial performance not a main reason for ESG investment

12 What research says Study of Deutsche Bank based on the analysis of more than 100 academic studies and close examination of 56 research papers, 2 literature reviews and 4 meta studies concluded: companies with high ratings for CSR/ESG factors have lower cost of capitals in terms of debt (loans and bonds) and equity (100%); companies with high ratings for ESG factors exhibit market- based outperformance (89%) and accounting-based outperformance (85%); Governance (G) is the single most important macro factor; 88% of the studies concluded that SRI fund returns show neutral or mixed results mainly due to the composition of the analyzed funds (exclusionary screens) Source: Deutsche Bank: Sustainable Investing: Establishing long-term value performance ;June 2012

Negative screening / exclusion concerning e.g.  Sector (ex alcohol, armaments, tobacco etc.)  Countries (Myanmar, Sudan, Zimbabwe etc.) Positive screening, e.g.  Best in class  Pioneers Engagement = forward looking approach  Dialogue and joint activities  Voting rights 13 Different approaches of sustainability/ESG investment: From exclusion to engagement Increasing importance