Sustainable Development and Socially Responsible Investing: ABB 2000

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Sustainable Development and Socially Responsible
Investing ABB 2000

• Professor Doug Cerf
• Donald Bren Graduate School of Environmental
  Science and Management
• ESM 284-Spring 2005

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ABB

• A global 25 B maker of process automation
  equipment
• Has aggressively attempted to integrate
  environmental concerns into
• Strategy formulation
• Day-to-day management
• 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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Policies for Sustainable Development

• Sustainability is one of the 5 core elements of
  the companys strategy
• Steps to implement this core strategy
• Development of technologies and processes that
  enhance eco-efficiency
• Eco-efficiency is the creation of more goods and
  services while using fewer resources and creating
  less waste and pollution

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ABBs steps to implement Sustainability as a core
strategy

• Transfer environmentally friendly technologies to
  developing countries
• Contribution to collective initiatives such as
  voluntary reductions in green house gas emissions
• Reduction of the environmental impacts of ABBs
  own operations

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Socially Responsible Investing

• We are used to capital markets putting pressure
  on corporations related to financial results
• Exampleearning expectations, credit rating
  (risk)
• Capital markets might be used to put pressure on
  corporations to change behavior in the interest
  of non-investor (social) stakeholders affected by
  the business
• Is this a reality?
• To what degree?

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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
• EcoValue 21

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KLD- Kinder, Lydenberg, Domini

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

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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

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Domini Social Equity Fund
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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

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SAM update April 05

• 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

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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.
• Research results and the new composition of the
  DJSI World as well as the European DJSI STOXX
  will be announced on 7 September 2005.
• SAM will introduce the DJSI North America and
  DJSI United States September 2005.

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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

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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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Student Presentations of SRI Investment Vehicle

• Domini Social Bond Fund
• Winslow Green Growth Fund