Socially Responsible Investing: ABB 2000

1
Socially Responsible Investing ABB 2000

• Professor Doug Cerf
• Donald Bren Graduate School of Environmental
  Science and Management
• Corporate Environmental Management (ESM 281)
• Spring 2008

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Access to SRI Capital Markets

• How does a company become attractive to the
  Socially Responsible Investing Capital Markets?
• Interest socially responsible mutual funds and
  other institutional investors in their company

3
Case Objectives

• To understand the channels through which
  environmentally and socially "proactive" behavior
  might be rewarded in the capital markets
• Assess the likelihood that these rewards will
  actually materialize
• To understand the value propositions of firms
  that offer services relating to socially
  responsible investment
• Example Innovest

4
ABB

• A global 25 B maker of process automation
  equipment
• Has aggressively attempted to integrate
  environmental concerns into
• Strategy formulation
• Day-to-day management
• Sustainability balanced scorecard is an
  appropriate tool for this
• Divested
• Nuclear power engineering and heavy manufacturing
• Focus on
• Control systems and factory automation equipment
• Invested heavily in reducing environmental
  impacts of
• their own operations
• their customers operations

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Socially Responsible Business PracticesStrategy
formulation vs. day to day strategy

• Read paragraph 2 and 3 of the case with the class

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ABBs steps to implement Sustainability as a core
strategy

• Development of technologies and processes that
  enhance eco-efficiency
• Transfer environmentally friendly technologies to
  developing countries
• Contribution to collective initiatives such as
  required or voluntary reductions in green house
  gas emissions
• Reduction of the environmental impacts of ABBs
  own operations

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SRI Capital Markets

• We are used to capital markets putting pressure
  on corporations related to financial results
• Example earning expectations, credit rating
  (risk)
• Capital markets put pressure on corporations to
  change behavior in the interest of non-investor
  (social) stakeholders affected by the business
• This will also benefit stockholders from the
  value generation related to a sustainable
  strategy

8
SRI investment advisor case examples

• Describe the practices of each of the firms and
  their evaluation of ABB
• KLD- Kinder, Lydenberg, Domini and Domini Social
  Investments
• SAM Sustainability group
• Dow Jones sustainability group index
• Innovest Criteria
• environmental risk,
• Managements ability to manage environmental risk
• Managements ability to take advantage of
  environmental opportunities

9
KLD- Kinder, Lydenberg, Domini

• A leading source of social research for
  institutional investors
• Provides research for selection of the equities
  for the 1.6 Billion Domini social equity fund
• Amy Domini voted one of Time Magazines Top 100
  most influential people in 2005

10
Domini Social Index

• Starting with the SP 500
• Used both positive and negative screens to reduce
  to about 250 stocks
• Added about 100 other large firms to broaden
  industry representation
• Added 50 firms with exceptional social
  characteristics

11
SAM Sustainability Group

• Provided research services on firms
  environmental and social performance
• Joined forces with Dow Jones to develop Dow Jones
  Sustainability Group Index
• An index of equities chosen as sustainability
  leaders in their industry
• Identify early stage companies that are
  implementing sustainability
• They are not conventional socially responsible
  investors looking for environmental technology or
  eco-efficiency
• Focus on firms that are creating long term value
  by embracing opportunities and managing risks
  deriving from economic, environmental and social
  developments

12
SAM Sustainability Group

• SAM crosses 3 billion EUR mark in assets managed
  based on the DJSI
• Launch of new Dow Jones Sustainability Indexes
• variety of financial products
• mutual funds
• separate accounts
• structured products
• A financial instrument designed to meet specific
  investor needs by incorporating special,
  non-standard features

13
Annual assessment of companies included in the
DJSI

• Invitations sent to the biggest 2,500 companies
  worldwide including the biggest 600 companies in
  Europe to take part in its annual review for the
  indices.
• The assessment will score companies with regard
  to general as well as industry-specific
  sustainability trends based on economic,
  environmental as well as social criteria.
• Composition of the DJSI World as well as the
  European DJSI STOXX announced 2005.

14
Innovest value added advisors

• Developed rating model Eco Value 21
• Evaluated companies based on environmental
  performance
• Basic premise of Innovest environmental
  management acumen might serve as a proxy for
  management quality more generally and therefore
  out perform competitors financially
• If financial analysts were failing to take into
  account the information about management quality
  that environmental management skill provided then
  investors who used this information could
  systematically beat the market

15
Financial and competitive premium on superior
eco-efficiency

• Evidence indicates that a portfolio of
  eco-efficient companies can be expected to
  outperform its less efficient competitors by
  anywhere from 230 to 240 basis points/year (100
  basis points 1)
• This gap will widen in the future as the forces
  of tighter international environmental standards,
  tougher disclosure requirements and global
  competition combine to increase the financial and
  competitive premium on superior eco-efficiency

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Six types of environmental risk Categories not
necessarily mutually exclusive

• Market risk
• Regulatory bans, consumer boycotts, reduced
  consumer demand
• Balance sheet risk
• Remediation liabilities, tort claims
• Operating risk
• Product risks similar to those related to
  asbestos
• Capital Cost Risk
• Cost of product redesign or cost of pollution
  control equipment
• Transaction risk
• Delay of acquisitions and divestitures
• Eco efficiency and sustainability risk
• Cost and competitive disadvantage created by
  energy inefficiency

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SRI Analyst reports on ABB

• Exhibit 10 (Domini),
• Exhibit 12 (SAM Sustainability Group) and
• Exhibit 14 (Innovest)