The German Investment Community is well ahead in ESG issues

dvfa_logo_reflex_blue      Ralf-Frank-DVFA

 

The German Financial Analysts Society DVFA is one of the most respected analyst & investment professionals societies in Europe. The managing director Ralf Frank explains here the history of the association and its ESG (environment, social and governance) issues in Germany. The association is located in Frankfurt and this interview was made in the late of January 2015.

Managing director of the DVFA Ralf Frank could you briefly describe your society history and the main focus areas?

DVFA started in 1960 as a professional association of financial analysts i.e. equity sell-side analysts. Throughout the years the association grew into a network of investment professionals meaning that to an increasing extent fund managers and other functions such as Financial Engineering, M&A, Risk Management joined DVFA. Today, the organization hat 1,400 individual members. Employers i.e. banks or asset managers cannot become members of the association. Membership is reserved for individuals who have to commit to a code of conduct and provide evidence of their continuous development and training. DVFA operates its own training school with more than 5,000 alumni in the German market.

DVFA is also one of the forerunners in ESG integration in investment decision processes and asset management. How would you describe the situation in Germany and the stage of ESG analysis?

ESG is a niche topic in the German market. This is due to the fact that institutional investors allocate most of their AuM (assets under management)  into non-equity asset classes. As ESG is predominantly a topic geared to stock-listed companies, demand of ESG in general has been very low. This said the small but brave ESG community looked into modeling ESG into investment decisions very early and has produced some convincing approaches as to how to integrate ESG into investment modeling.

What areas do you find the most interesting ones for ESG in Germany?

In the course of the Japan nuclear power station Fukushima accident German government has prescribed an energy transition (“Energiewende”) to the German economy, aiming at increasing the proportion renewable energy sources and at the same time stimulating the industrial sector of so-called green energy technology. However, some of the most needed enablers of the energy transition are high-scale and big dimension projects such as smart grids, or storage technology. These require large scale financing which institutional investors could potentially embrace as part of their ESG strategy.

You have developed also an ESG education & training/ how do you see the situation in Europe in general?

We have seen over the last 8-10 years that many investment professionals got more and more interested in sustainability, but failed to see as to how to integrate ESG data into their investment calculations and models. Full-fledged ESG integration into, say, DCF models or  WACC calculations are commonly described as the “holy grail” of ESG. The training program which we developed for the European Federation EFFAS takes into account that there is no silver bullet, one way of integration of ESG into conventional investment decision-making but rather a way of building a firm judgment by approaching a potential investment from several avenues.

How integrated reporting and ESG fit together?

Integrated Reporting is an approach that seeks to integrate conventional financial performance data with ESG data. While as an idea it sounds convincing, conceptually, it is quite challenging. Unless companies want to simply staple their financial and CSR packages together (which would not qualify as an integrated report!), they are faced with the difficult task of determining a) which ESG factors to choose (materiality), and b) how to describe how ESG aspects do influence the economic performance of the company (connectivity).

You have also developed ESG KPIs for some industry and service sectors. Could you tell more about this as well?

DVFA developed “KPIs for ESG” in 2008 and subsequently received an endorsement by EFFAS (the European umbrella organization of investment professionals’ associations). KPIs for ESG follow an investment approach as KPIs for 114 subsections are being defined following the Stoxx Industry Classification Benchmark. This allows investment professionals to use the sets of proposed KPIs when selecting stocks for sector-based strategy. By the same token KPIs for ESG provide companies with sets for their specific sector activities including formulas as to how to calculate the KPIs. Stoxx, a leading builder of indices used the DVFA/EFFAS KPIs as a base for their ESG Leaders Family of Indices.

http://www.dvfa.de

See also this ESG education by European Federation of Financial Analysts Society (EFFAS):

http://effas.net/education-and-qualification/effas-certified-diplomas/effas-certified-esg-analysts.html

 

Finance

Sustainable strategy as an asset

Consumers and investors are nowadays looking at more information about the sustainable footprint of a company/product. When the Council of the European Union adopted the new Directive regarding non-financial information and reporting in late September this year, it was clear, that this was the start of new information flow.

According to this Directive large public and listed companies are required to report on environmental and social issues in their reporting period 2017-2018.

Why this is important also to your company?
Corporate Responsibility is about your future business and new growth opportunities. It is also risk management and reducing costs. But it is also brand management and employer branding. It is a question of your company´s competitive advantage and new business opportunities.For listed companies this means also that ESG-investors target your company better.

Altough the EU Directive is about company reporting, corporate responsibility is not. It is about changing your business strategy towards integrated business strategy. This is the only way to find the business opportunites what for example the climate change, urbanization and natural resources mean to your business.

ESG-investors interested of your strategy
Environmental, social and governance related investors are interested of your sustainable integrated business strategy. In the world they represent 45 trillion US dollars assets under management. And the trend is growing.

Investors are interested of different kind of sustainable themes; for example from climate change, energy efficiency, forest to water. So it makes sense to start rebuilding your business strategy, implement it, share & communicate it and finally report it. Sustainable business strategy is an asset for your company!

Päivi Härkönen

Business

London properties in focus

When I visited London a couple of weeks ago, I was surprised by the buzzing feeling and action there were. People were busy and the atmosphere was positive. Greetings also to the start-up and growth companies I met there!

This city is now a place where big real estate companies are heading. For example the India´s biggest real estate developer has announced that they are developing new buildings in London. And the real estate prices are showing upward trend. For example Financial Times reported that in Mayfair several luxury flats have been sold with new record prices. And new flats and blocks are on their way.

The reason why this is happening is partly because the pension funds are rising their asset allocation in real estates. Pension funds are seeking long-term investments and London properties are one of the metropolis in the world that are looking attractive for many investors. Also the oversees funds like Canadian pension fund Ontario Fund have landed to the European real estate market and they are expecting to invest several billion euros in the properties.

Investors are looking for good returns with third-party rating systems like LEED, which is widely used in office buildings globally. But there are also other systems and some banks have developed their own property rating methods. These systems analyse for example the technology level of the building, energy efficiency and environment issues as for example health and wellness issues.

The tightening energy efficiency legislation drives also investors to focus more on ESG issues. Green Buildings offer good rental yields, cost savings and higher premiums in sale. ESG-factors also help investors to mitigate regulatory, market and physical risks related to properties.

So, it is not surprise that investors also want to learn more about BIM (Building Information Modelling) in order to make better real estate investment decisions. This system helps all building stakeholders like architects, designers and project managers to work together. The costs savings in time and resources are remarkable.

And maybe we also see more modern wood houses and flats in the future. This is absolutely the trendiest thing at the moment.

Päivi Härkönen

Business Design

How to get started with corporate responsibility?

During the last month I have been following different kind of concepts and reports that take corporate responsibility into account. Some are parts of formal annual reporting, or CSR reports and some are marketing concepts talking about sustainability or corporate responsibility. And then there is the ESG world with financial institutions and their own reporting models as part of the UNPRI organization. So there are different kind of angles, reports and communication to this topic.

But what is the common thing for each of them? It is about the competitivness of the company. The channels, the target audience and the tools may be different, but the outcome should be the same. Corporate responsibility is the future key for business success, as Mr. Bruce Oreck, the US Ambassador in Finland, said a couple of years ago in Helsinki. And yes, corporate responsibility is one of the most important elements in corporate strategy framework.

And this integrated thinking is becoming more common, partly due to the legislation of corporate reporting of non-financial information but also due to the fact that investors and consumers are interested of these issues. And if you think about listed companies, the fact that ESG-investors are growing douple-digit in Europe, make the new investor target group interesting for many listed companies.

For coprorate management the big question is to make innovative corporate responsibility strategy which helps to determine the relevant business opportunities, targets, KPIs, risks but also for to create shared value in the long term. But it is also about gathering the data, collaborate with the value chain, manage the change and communicate it with different stakeholders. Much of the work is also analysing the outcomes and making needed adjustments.

There is no one size fits for all type thinking in this strategy work. But companies starting to make the big change, environmental issues are in the front line and carbon footprint might be the first question the investors are asking. And what is your impact in your value chain?

Päivi Härkönen

Business