Module 6

ESG integration in research

The European
Federation of
Financial Analyst
Societies
Sophienstraße 44,
60487 Frankfurt am Main
office@effas.com
www.effas.com
Learning objectives

§ Understand that integrating ESG information into investment decisions is about evaluating the business model vs. ESG
risks/opportunities in order to consider the financial materiality of sector specific ESG KPIs:
§ Learn how to identify ESG value drivers and material challenges, based on global megatrends.
§ Learn how to conduct a qualitative analysis of corporate governance, particularly board effectiveness.
§ Understand how to analyze sector-specific environmental and social issues on a qualitative basis.
§ Based on the analyses performed, learn how to conclude by assessing consistency with the business model.

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Agenda

6.1. Investment decisions – an overview

6.2. Identification of ESG value drivers
6.3. Analysis of Governance
6.4. Analysis of Environmental and Social: sector-specific
6.5. Analysis of controversies and ESG risk litigations
6.6. Consistency with the business model

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6.1. Investment decisions – an overview

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6.1. Investment decisions – an overview
ESG Integration in investment decisions

Step 1: Qualitative analysis Step 2: Quantitative analysis Step 3: Investment decision

§ Gathering of relevant § Assessment of the § The analysis performed
information from impact of material in stage 1 and stage 2
multiple sources financial factors on will lead to a decision:
(including, but not securities in their § Buy (or increase
limited to company portfolio(s) and weighting),
reports and third-party investment universe § hold (or maintain
investment research) § Adjustment of financial weighting), or
§ Identification of material forecasts and/or § sell (or decrease
factors affecting the valuation models weighting).
company. appropriately.

Module 6 Module 7 Module 8

Source: A practical guide to ESG Integration for equity investing. PRI (2016).

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6.1. Investment decisions – an overview
ESG Integration in investment decisions: example: Wafra Asset Management

Source: SASB. ESG Integration Insights (2020)..

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6.2. Identification of ESG value drivers

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6.2. Identification of ESG value drivers
ESG global megatrends affecting companies ESG topics affecting companies

Source: Espas, Eea.

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6.2. Identification of ESG value drivers
ESG global megatrends affecting companies

Energy and ecological

Digital transition Sociological transition
transition

New technologies Climate Change Ageing population

Cyber security Energy Transition Global retirement savings gap
Data security Clean energy Growing population
E-Commerce Control of pollution Social inequalities
Automation and artificial Conservation of biodiversity Urbanisation
intelligence Waste management Changing consumer preferences
Machine learning Circular economy Fair taxation
Nanotechnologies Resource scarcity Epidemics and pandemics

Risks and opportunities for

companies and their
stakeholders
Source: Espas, Eea.

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6.2. Identification of ESG value drivers
ESG global megatrends – A common approach

Sustainable Development Goals of United Nations – 169 goals and targets by 2030

Source: https://www.un.org/sustainabledevelopment/.

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6.2. Identification of ESG value drivers
Global megatrends – SDGs reported by companies

Most often prioritized SDGs:

§ SDG 8 -Decent Work and Economic Growth

§ SDG 13 -Climate Action
§ SDG 12 -Responsible Consumption & Production.

§ Few companies prioritize the SDGs that focus on biodiversity: SDG

14 –Life Below Water and SDG15 –Life on Land.

Source: The Time has come. KPMG (2020).

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6.2. Identification of ESG value drivers
ESG drivers – setting priorities : 2 methods

1. Assessing sector-based ESG drivers (ESG Global trends and ESG topics)
- Is the sector impacted by one or more megatrends (risk or opportunity)?
- Can the sector have influence on one or more megatrends (risk or opportunity)?

Then apply sector-based ESG drivers to all companies in the sector

E.g. : banks vs. digitalization of commercial channels

A possible source of information : Global Risk Report from the World Economic Forum

https://www.weforum.org/reports

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6.2. Identification of ESG value drivers
ESG drivers – setting priorities : 2 methods

2. Assessing ESG value drivers regarding a specific business model (ESG Global trends and ESG topics)

Identify the ESG drivers that have a material impact on :

§ Production processes
§ Competitive positioning
§ Business opportunities
§ Level of risk
§ Profitability
§ Growth
§ Reputation
§ … (non exhaustive list)

E.g. : In a service company, a good employer brand image allows it to hire motivated people who compose the main asset of
the company

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6.2. Identification of ESG value drivers
ESG drivers – setting priorities : identification of material issues
❶ ❷ Analysis of ❸ ❹
Identification of ESG
a) the impact on the
value drivers Analysis of risks and
company’s activities
that have an impact on opportunities resulting Identification of KPIs for
(Financial
the company or are from identified ESG value monitoring and for
Materiality)
impacted by the drivers for the company
b) or how the ESG value mitigating risks and
company’s activities leveraging opportunities
driver is impacted by
a) Sector Based a) Short-term
the company’s
b) Business Model b) Long-term
activities (Impact
Based
Materiality)

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6.2. Identification of ESG value drivers
ESG drivers – setting priorities : example: automotive sector

Digital transition Energy and ecological transition Sociological transition

§ CO2 emissions (international
Identification of
§ Car electrification norms): motor efficiency § Urbanisation (traffic jams)
ESG global
§ Autonomous cars § NOx, SO2 emissions: filters § Risk aversion, judicialization
trends that have
§ Fine particles emissions: § Different approach of
a material
« Dieselgate » ownership: car-sharing
impact on:
§ Recyclability: circular economy § Change in customer
business models demand

Identification of New entrants Dieselgate : risks or opportunities Less volumes

resulting risks Empowerment of suppliers depending on car manufacturers; More value-added vehicles
and with good technologies a long-term risk that became a
opportunities: short-term game changer

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6.2. Identification of ESG value drivers
ESG drivers – setting priorities: automotive sector – example using SDG
Global megatrends that impact

Energy and ecological transition

§ Climate change (efficiency motor CO2 emissions)
§ Recyclability: circular economy business models
§ Car electrification

Risks / opportunities
§ New entrants
§ Empowerment of suppliers with good technologies
§ Dieselgate : risks or opportunities depending on car manufacturers;
increase in CO2 emissions with more gasoline cars
§ Less volumes : new business models to enable transformation

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6.2. Identification of ESG value drivers
ESG drivers – setting priorities: automotive sector – example using SDG and integration of
KPIs (Business indicators)
§ Mapping of existing KPIs against the SDGs.
§ Similar map of existing KPIs against ESG values drivers.

Source: https://sdgcompass.org/business-indicators/, accessed 11.08.2021.

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6.2. Identification of ESG value drivers
ESG drivers – setting priorities: automotive sector – Sector KPIs SASB

Source: SASB. Automobiles Sustainbility Accounting Standard (2018).

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6.3. Analysis of Governance

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6.3. Analysis of Governance
Things to consider before the governance analysis (1/2)

What is corporate governance?

§ Corporate governance is not a legally defined term
§ The term corporate governance refers to all control mechanisms that an organization adopts to prevent or dissuade
potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and
stakeholders
Components of corporate governance:
§ Management
§ Monitoring system consisting of at least:
§ Board of directors to oversee management
§ An external auditor to express an opinion on the reliability of financial statements
§ Their relationships to other stakeholders (especially shareholders)
à It might be necessary to apply a special point to companies which are family-owned, for instance.

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6.3. Analysis of Governance
Things to consider before the governance analysis (2/2)

Different Frameworks/ Statutory requirements

§ OECD GC Principles
§ Different country-specific Corporate Governance Codes
§ Different country-specific Stewardship Codes
As the economic environment is constantly changing, amendments must be taken into account in the corporate governance
guidelines
§ Revision of the UK Stewardship Code
§ Reform of the German Corporate Governance Codex
§ Firms often voluntarily and proactively set up company-specific regulations as an attempt to signal trustworthiness
to capital markets.

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6.3. Analysis of Governance
Corporate governance analysis – Evaluation board effectiveness

❶ ❷ ❸ ❹ ❺ ❻ ❼ ❽

Board
Leadership Reporting Annual
composition Corporate Risk Shareholder
and Remuneration and general
and culture oversight rights
Independence audit meeting
nomination

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6.3. Analysis of Governance
What is expected from an effective board? (I)

With regard to leadership and independence:

1 Chairperson should be independent. Clear role distinction

2 Lead independent director, if chairperson is not independent
3 Formal disclosure of succession plans
4 Disclosure of independence
5 Senior management on the board. Effectiveness of discussions
6 Separate meetings of the independent directors, without executive directors

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6.3. Analysis of Governance
What is expected from an effective board? (II)

With regard to composition and nomination:

§ Majority of non-executives. Majority of independent directors. Competences and capabilities.
§ Public policy and objectives on diversity - diversity as an issue of improved decision-making.
§ Length of mandate supervised by committee
§ Public process disclosing what motivates nomination or re-election. Shareholder voice to propose candidates
§ Accountability: annual re-election. Separate voting for each candidate.
§ Annual evaluation: board, committees, CEO, chairperson, individual directors.
§ Non-executive, majority of independent directors in the nomination committee. Board skill map, leadership
of nomination process, shareholder dialogue.

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6.3. Analysis of Governance
What is expected from an effective board? (III)
1
With regard to corporate culture: 6 Definition and
oversight of the
Due control in ethics compliance and
and compliance ethics model
Supervision of the
Oversight of corporate culture has been
Definition and publicly
oversight of the communicated 2 one of the main
rules of conduct
Culture policies and responsibilities of boards
5 and capital procedures on
markets. Conflicts anti-bribery and of directors since, at least,
of interest. corruption
the Cadbury Code of 1992.
Lobbying policy Oversight of the hotline and
whistle-blowing procedure

3
4

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6.3. Analysis of Governance
What is expected from an effective board? (IV)

With regard to risk oversight: 6

Proactive supervision Due control in
1 ethics and
Periodic revision of the risk model and its links to strategy
compliance
Comprehensive approach Definition 2
2
Includes ESG risks –including ethics risks- and
andtheir reputational consequences.
5 oversight
Risk culture of the rules
3 of conduct
Open culture where discrepancies are tolerated and encouraged.
un capital
Oversight of the
markets.Lobbying
Dynamic process hotline and
4 Conflictspolicy
of
Board responsibility to ensure risks are properly considered. whistleblowing
3
interest.
procedure
Risk committee 4
5
Periodic revision of the risk model and its links to strategy
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6.3. Analysis of Governance
What is expected from an effective board? (V)

With regard to remuneration:

§ Alignment between management remuneration and owners’ long-term interests.
§ Performance linked to risk and sustainable value creation. Claw-back.
§ Disclosure of public formal remuneration policy.
§ Share ownership of the management team and rest of directors. Objectives in terms of size and holding
period.
§ Say on pay.
§ Employee incentives risk adjusted.
§ No performance related pay for non-executive directors.
§ Non-executives in the remuneration committee. Mainly independent.

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6.3. Analysis of Governance
What is expected from an effective board? (VI)

With regard to reporting and audit:

§ Full disclosure
§ Materiality
§ Confirmation of the annual report
§ Confirmation of a robust analysis of material risks, including liquidity and solvency. In-depth reporting on
risks.
§ Extra-financial information
§ Supervision of an effective internal control model.
§ Independent audit and audit fees. Audit committee approves non-audit services. Disclosure on fees paid.
§ Non-executive. Independent

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6.3. Analysis of Governance
What is expected from an effective board? (VII)

With regard to the annual general meeting:

Shareholder ID
Owners or voting-rights holders.
Information
Website.
Voting timetable
Elimination of constraints on the exercise of voting rights.
Voting mechanisms
In person or remote
Voting disclosure
If an issue receives a significant % of votes against it, the company must disclose its views.

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6.3. Analysis of Governance
What is expected from an effective board? (VIII)

With regard to shareholders rights:

§ Departure from the principle “one share, one vote” should be justified.
§ Safeguard the right to express a vote on relevant issues. Oversight of policies, procedures and controls on
conflicts of interest
§ Disclosure of the oversight process of related party transactions. Committee to deal with significant ones.
§ Shareholder approval of related party transactions
§ Right to ask questions. Right to include issues in the agenda and propose resolutions.
§ Right to call meetings
§ Equal treatment of minority shareholders

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6.3. Analysis of Governance
A quick and dirty test

Does the board have Does the board receive Do the board and Is the board and Does the board have
the skills and the information it needs the committees committees' culture proper processes?
competences the to, for instance, guide have an effective adequate?
company needs? Is it strategy and supervise leadership?
independent enough? risk?

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6.3. Analysis of Governance
Nine issues to consider:

1 Do all shares have equal

voting rights? 6 Is the board on top of strategy,
risk and compliance issues?

7
Does the board have the skills Does the board evaluate
2 and competences needed? regularly its effectiveness?

3 Is the board independent

and diverse enough? 8 disclosed and linked to sustainable-value
Is the remuneration policy properly

creation?
Are committees only comprised of non-
4 executive directors and chaired by
independent directors?
9 Is the chair independent?
5 Does the board supervise ESG issues?

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6.3. Analysis of Governance
Evaluating board effectiveness

Evaluating the performance requires doing it not only against the recommendations of the regulator (letter), but also to
assess the consistency and rigor of the processes of analysis, deliberation and decision (spirit). It means being able to assess
to what extent we are protecting the board from problems in the processes.

Internal evaluation External evaluation External evaluation Improvement

QUESTIONNAIRE / PEERS CONCLUSION

INTERVIEWS BENCHMARK REPORT

Self-assessment assisted Analysis of practices Review of practices in Result of the different

on the basis of a against policies / three relevant analysis and
predefined questionnaire perception of relevant comparable subjects recommendations for
about structure, third parties. improvement as a
responsibilities and Documentary / result of the analysis.
performance. interviews Action plan

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6.3. Analysis of Governance
Evaluating board effectiveness

The directors’ view

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6.3. Analysis of Governance
Evaluating board effectiveness

The directors’ view

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6.3. Analysis of Governance
Evaluating board effectiveness

The investors’ view

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6.3. Analysis of Governance
Evaluating board effectiveness

The investors’ view

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6.3. Analysis of Governance
Practical illustration for an industrial company

The goal is to analyse a company that:

§ has a board consisting of 5 dependent and 2 independent directors, and the average age is above 65 years
§ has no women serving on the board
§ has newly-linked board remuneration to ESG performance
§ has issued an ESG report for the first time, which is not assured by an external third party

Example of a global automotive manufacturer

We will analyse this company regarding the board effectiveness

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6.3. Analysis of Governance, controversies and ESG risk litigations
Corporate governance analysis – Evaluation Template
❶ ❷ ❸ ❹ ❺ ❻ ❼ ❽
Leadership
Board Reporting Annual
and Corporate Risk Shareholder
composition and Remuneration and general
Independence culture oversight rights
nomination audit meeting

Negative Negative Negative Negative Negative Negative Negative Negative

elements: elements: elements: elements: elements: elements: elements: elements:
§ No external § No answering § No answering
§ CEO is also § No female § No disclosure § Risk § No disclosure assurance of of
chairman board regarding management of § No disclosure shareholders shareholders
member KPIs of anti- considers no performance how material questions questions
§ Ratio of § Average age corruption ESG risks pay-link with topics are
independent above 65 policies non-financial identified
directors is information
low Positive elements: Positive elements: Positive elements: Positive elements: Positive elements: Positive elements:
§ remuneration § first year ESG § Online AGM
§ Presence of § New adopted is linked to reporting
Sustainability code of non-financial
Officer and conduct and measures
Technology anti- § Adoption of
Officer corruption say-on pay in
policies AGM

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6.4. Analysis of Environmental and Social: sector- specific

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6.4. Analysis of Environmental and Social: sector-specific
Introduction – Methodology

§ Governance analysis is cross-sector

§ The remaining pillars are sector-specifics: Environment, Social / Societal
§ For each of these E and S value drivers:
§ Has the business model of the company been adapted to these challenges?
§ Is the company taking good strategic decisions?
§ Does the company put in place the right means and resources?

§ A dynamic mode analysis

§ A risk and opportunity analysis
§ A medium- / long-term analysis

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6.4. Analysis of Environmental and Social: sector-specific
Introduction – Methodology – 4 steps

1. Which global megatrends are faced by the company?

§ Please refer to Module 6.2 Identification of ESG Value drivers
§ Consider impacts on the business model and on the stakeholders (materiality analysis)
2. For Social, societal and environmental pillars, determine the operational ESG value drivers of the company
also in the context of identified megatrends.
3. List the approach, policy initiatives that have been announced and actions taken
§ Given that management has identified these ESG value drivers as significant, what actions (strategies,
investments..) is management addressing?
4. Analyse relevant KPI’s for each challenge
§ Considering its positioning, actions and results, is the company at risk or a recipient of global megatrends ?
§ Short-term, medium-term?
§ Please consider not only the financial impact, but also the environmental and social value creation /
destruction.
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6.4. Analysis of Environmental and Social: sector-specific
6.4.1. Social / societal pillar analysis

Social challenges are about:

a. Social : internal relationship

b. Societal : extra-organizational networks

* Source : IIRC

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6.4. Analysis of Environmental and Social: sector-specific
6.4.1.a. Social pillar, Part 1 analysis

Internal social challenges can be summarised in 5 themes

§ Internal organization
§ Talent management
§ HR efficiency
§ Diversity
§ Health and security

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6.4. Analysis of Environmental and Social: sector-specific
6.4.1.a. Social pillar, Part 1 analysis

Internal Organization Talent management HR efficiency Diversity Health and safety

§ Innovation support § Attractiveness § Productivity § Age distribution § Injury rates
(R&D spending, (External recognitions, (staff costs / EBITDA, § Gender balance (% of § Injury severity rates
pending ts, turn-over, number of EBITDA + Staff costs / women) § Unsafe sites (number,
disruptive culture, resignations…) Headcounts) § Societal balance type…)
business incubator…) § Internal mobility (rate) (ethnical data…) § Hazardous situations
§ Social climate § Training (hours of § International balance (age of machines…)
(absenteeism rate, training, % of sales, (breakdown of § Safety audits
days of strike, training topics…) nationalities…) § HSE employee training
employee
satisfaction…)
§ Links with unions
(agreements…)

Material challenges are not the same if the company mainly employs executives or white-collar workers, more or less
subcontractors, or if it is an industrial company or a service company.
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6.4. Analysis of Environmental and Social: sector-specific
6.4.1.a. Social pillar, Part 1 analysis

Implication for analysis : some questions to ask

§ Is the company an industrial or a service company?
§ Does the company mainly employ executives or white-collar workers?
§ Is the company facing a structural change of its business model or needs to dramatically change its
employees’ profile ?
§ What is the geographic distribution of employees? Are there specific rules in countries considered at risk
regarding Human Rights?
§ Health and safety : are the standards homogeneous in all geographies and business lines of the company?
§ Internal organization : does it allow the company to manage all transitions and increase the company’s
resilience?

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6.4. Analysis of Environmental and Social: sector-specific
6.4.1.b. Social pillar, Part 2 analysis

The European Commission is focusing on due diligence requirements to identify, prevent, mitigate and account
for abuses of Human Rights, including Children’s Rights, as well as fundamental freedoms, serious bodily injury
or health risks, environmental damages, including those related to climate.

Societal challenges can be summarised in 3 themes:

§ Suppliers / partners relationships

§ Client relationships
§ Society relationship

Publications Office of the EU: “Study on due diligence requirements through the supply chain”
https://op.europa.eu/en/publication-detail/-/publication/8ba0a8fd-4c83-11ea-b8b7-01aa75ed71a1/language-en

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6.4. Analysis of Environmental and Social: sector-specific
6.4.1.b. Social pillar, Part 2 analysis

Client relationships Suppliers/ partners relationships Society

relationships
§ Brand image § Outsourcing rate § Providers of financial capital
§ Data security § Typology of suppliers § Supranational organizations
§ Product safety (complexity of the value chain, § States
§ New consumption practices degree of interdependence) § Regulators
(recycling, millennial…) § Balance of power § NGOs, associations, unions
§ Hidden costs § Local communities
§ Geographical risk (geo.
breakdown, distance)

Material challenges depend on the size of the company, on the nature of its activities or its value chain.

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6.4. Analysis of Environmental and Social: sector-specific
6.4.1.b. Social pillar, Part 2 analysis

Implication for analysis : some questions to ask

§ Is the company adapting itself to new expectations from its customers?
§ Is the company aware of the purpose and impact of its products?
§ Is the sector a very regulated one? What is the degree of influence of partners?
§ Is the company exposed to many controversies?
§ To what extent does the company favour dialogue with its stakeholders and has action plans to proactively
answer identified expectations (clients, NGOs…)?

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6.4. Analysis of Environmental and Social: sector-specific
6.4.1.b. Social pillar, Part 2 analysis

Supply chain : some questions to ask

§ What is the degree of complexity in the value chain ?
§ Are relationships direct or indirect?
§ Does the company have a comprehensive assessment of its supply chain?
§ What are the practices and program reviews related to its sustainable procurement? Does it release and
monitor ESG KPI (including protection of Human Rights)? Is there a sustainability rating of the supply chain
by a third party provider?
§ Is the company facing a rebalancing of power with digitalisation/urbanisation/outsourcing…?
§ Has the company set up a new assessment of risks in relation to Covid-19, climate change, etc?

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis

Environmental assessment can be based on the following themes:

Climate Change Use of natural Waste

remediation Pollution Biodiversity
resources management
and adaptation

Sustainable innovation

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis

Climate change Use of natural Pollution Waste Biodiversity

remediation and resources management
adaptation
§ (from 2022) Activities § Raw materials (scarce § Air (Greenhouse § By type and disposal § % of sites in, or
that meet the criteria resources, renewables Gases, Acid Rain, method, hazardous adjacent to, protected
for substantially %) Eutrophication and and non-hazardous areas and areas of
contributing to § Water (sites in water- Smog Precursors…) § Water bodies affected high biodiversity value
mitigation of or stressed areas…) § Water (Nutrients and by water discharges outside protected
adaptation to climate § Energy (type, intensity, Organic Pollutants, and/or runoff / areas
change as set out in renewable or not…) Metal emissions to emissions to water § Nature of significant
EU taxonomy § Recycled resources (%) water) § Transport of direct and indirect
(Turnover % , CAPEX § Land (Pesticides and hazardous waste impacts on
and OPEX) Fertilizers, Acids and § Significant spills biodiversity
Organic Pollutants…) § Habitats protected or
restored
§ Deforestation

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis

Implication for analysis - some questions to ask:

§ Does it tackle the challenge of climate change (reduction of greenhouse gas emissions, waste or pollution)?
Biodiversity loss?
§ What is the level of available information and the credibility of data regarding input assumptions, climate-
related targets over time, etc.?
§ How does the company track and report its progress against its targets? Under which reporting framework
does it do so? Perhaps aligned with the TCFD, SBTis criteria, etc.?
§ What are the implications of different climate-change and transition scenarios on the sustainability of the
business model? What is the scope and distribution of mitigation solutions?

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis

Sustainable innovation
§ Inputs (resource from waste: from “Cradle to Grave” to “Cradle to Cradle”, product
conception…),
§ Operations (sustainable manufacturing, clean transportation…)
§ Products (extended product lifespan, sustainable packaging…)
§ Technological, non-technological innovation, partnerships
§ Eco-solutions, green energy, carbon capture, nature-based solutions, water, plastics,
etc.
§ % of R&D dedicated to green innovations?
§ % of eco-designed products? Underlying criteria?
§ Measurement tools regarding circular economy performance?
§ How does the company shape incentives and foster collaboration, internally &
externally, in order to develop sustainable innovation?

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis: focus on carbon footprint (I)

Scope 1, 2 and 3 standards for

corporate GHG emissions

Source : www.ghgprotocol.org.

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis: focus on carbon footprint (II)

Global warming challenge: achieving the goal of limiting global warming to 2°C implies that world GHG emissions should decrease from 40
to 70% by 2050, compared to 2010. (Source : GIEC)

European regulation: The aim of the agreement reached in Paris in 2015, at the end of COP21, is to keep a global temperature rise this
century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5
degrees Celsius.

The European Union adopted in 2014 a set of binding legislation to ensure the EU meets its climate and energy targets by 2030. The
package sets three key targets (updated in 2021):

§ At least 55% cuts in greenhouse gas emissions (from 1990 levels)

§ At least 40% share for renewable energy

§ At least 36%-39% improvement in energy efficiency

These goals imply an energy transition towards carbon neutrality by 2050.

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis: focus on carbon footprint (III)

Illustration of a company’s reporting (Telefonica 2020):

Company’s emissions targets are validated by the Science Based Targets initiative (SBTi) and meet the 1.5C scenario.

Source : https://www.telefonica.com/en/web/responsible-business/environment.t

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis: focus on carbon footprint (IV)

Scope 1, 2, 3 : examples:

Automotive Oil company Airline Cement Technology

company company producer services
Scope 1 4% 1% 82% 82% 1%
Scope 2 4% NS NS 5% 17%
Scope 3 92% 99% 18% 13% 82%

*Source : www.cdp.net – Figures are orders of magnitude. They may vary, especially considering the comprehensiveness
of disclosure for Scope 3 . In services, scope 3 can be big in percentage but quite small in absolute value (business travel,
commuting…)

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6.4. Analysis of Environmental and Social: sector-specific
6.4.2. Environmental pillar analysis: focus on carbon footprint (V)

Implication for analysis : questions to ask:

§ Is the company a big emitter of GHG?
§ Directly (by its processes)

§ Indirectly (in purchasing electricity, heat or cooling)

§ Through its products lifecycle, supply chain, employees transport…?

§ Compared to its peers?

§ Is the company a solution provider for a low-carbon economy (sustainable taxonomy)? If
not, how is it mitigating or adapting its activities to climate change?

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6.4. Analysis of Environmental and Social: sector-specific
6.4.3. Practical illustration for an industrial company

The goal is to analyse a company that:

§ Is industrial
§ Is polluting, but can also be a provider of green innovations
§ Blue collar workers, poorly qualified
§ Average age of workers : 50
§ Presence in emerging countries
Example of a global automotive manufacturer
We will analyse this company in four steps :
1) Define what megatrends are affecting the company
2) Determine the Environmental, Social and Societal issues to analyse
3) List the approach and policy initiatives that have been announced and the actions that have been taken
4) Analyse the results

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6.4. Analysis of Environmental and Social: sector-specific
6.4.3. Practical illustration for an industrial company

Methodology:

1. Which megatrends are affecting the company?

Digital transition Energy and ecological transition Sociological transition

§ Car electrification § Climate change (efficiency § Urbanisation (traffic jams)

§ Autonomous cars motor CO2 emissions) § Risk aversion, judicialization
§ NOx, SO2 emissions: filters § Different approach of
§ Fine particles emissions: ownership: car-sharing
« dieselgate »
§ Recyclability: circular
economy business models

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6.4. Analysis of Environmental and Social: sector-specific
6.4.3. Practical illustration for an industrial company

2. Use the overview tables provided in slides 46, 49 and 52, 53, 56 to determine which ESG issues should
be analysed
Environmental Pillar
§ Resource consumption: the focus is on CO2 emissions and the supply of materials such as metals; developing
renewable energies and recycled materials is key
§ Pollution: reduction of air (NOx, SO2 …) and water pollutants is subject to stricter legislation
§ Waste management: water consumption vs. recycling and optimisation of its cycle
§ Biodiversity: the exploitation of raw materials is often related to serious direct intrusions into ecosystems and
habitats.
§ Climate transition: the ability to produce new products respecting environmental regulations are key to keep or gain
market shares; watch the management of hazardous and/or environmentally harmful materials needed for batteries
§ Sustainable Innovation: the interest in growing hybrid, electric and autonomous vehicles are potential ESG
opportunities for car manufacturers today

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6.4.3. Practical illustration for an industrial company

Social Pillar Part 1

§ Internal Organisation: social Climate must be looked at, as the majority of workers are poorly
qualified and the average age of workers is 50, whereas the company needs new qualified
talent to support its technological change.
§ Talent management : attractiveness and training is key, again as the company needs qualified
skills.
§ HR efficiency : social, but also financial impacts of reorganisation should be a focus of attention
§ Diversity: age distribution should be analysed in light of talent management and HR efficiency
§ Health and safety: as an industrial company, health and safety indicators must be carefully
examined; absence of reporting is a major issue

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6.4.3. Practical illustration for an industrial company

Social Pillar Part 2

§ Clients’ relationships: product safety (product recall may have an important financial impact on
the company’s results), and new consumption practices: level of emissions, vehicle
electrification, autonomous car, car-sharing…
§ Supply/partners relationship: looking at the typology of suppliers, the audits and monitoring
systems for the supply chain and the % of operations in high corruption index countries is a key
part of the analysis
§ Regulator relationships: regulation has a wide impact on automotive industry (emissions,
safety…)

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6.4. Analysis of Environmental and Social: sector-specific
6.4.3. Practical illustration for an industrial company – Company’s positioning and strategy:
Social pillar Part 1 – relations with internal stakeholders (Employees)
Internal organisation Talent management HR efficiency Diversity Health and safety

Positive elements Positive elements Positive elements Positive elements Positive elements
§ Pursue sustainability § The company has § A reorganisation period § Lower injury rate
as an organization- identified the issue as is coming to an end : than peers
wide mission a key one. better margins &
improvement of social
climate expected
(internal survey).

Negative elements Negative elements Negative elements Negative elements Negative elements
§ But need to § But not much § However the company is § Lack of gender § No reporting for one
demonstrate information is not publishing any more and age diversity of its key & growing
progress disclosed regarding turnover indicators. is not credibly geographical markets
training and addressed
attractiveness

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6.4.3. Practical illustration for an industrial company – Company’s positioning and strategy:
Social pillar Part 1 – relations with external stakeholders
Clients relationships Suppliers / partners relationships Society relationships

Positive elements Positive elements Positive elements

§ No product recall § Engagement with suppliers § Regulators’ relationships : active
§ Policy on anti-competitive through a code of conduct, audits regulatory monitoring ;
practices & no controversies on § The level of conformity with their transparent lobbying
anti-competitive behaviours code of conduct is disclosed and
improving

Negative elements Negative elements Negative elements

§ Frequency and corrective § Conflict of interest declared with
measures taken post audits? NGO; may use an external
mediator to help resolve the issue

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6.4. Analysis of Environmental and Social: sector-specific
6.4.3. Practical illustration for an industrial company – Company’s positioning and strategy:
Environmental pillar
Resource Pollution Waste Biodiversity Climate transition Sustainable
consumption management Innovation
Positive elements Positive elements Positive elements Positive elements Positive elements Positive elements
§ Work in progress § Issues on air § Improvement in § Increased use of § Growth in hybrid
on optimizing pollutants waste logistics renewable energy & electric vehicles
water, energy addressed and § Improvement in § Proportion of EVs is (on track with
and the quantified; Good water growing plan of +15% p.a.)
consumption of relative ranking management; § Work on process § Increase in R&D
other resources measured and circularity in one key investments
monitored market (+10% vs LY)

Negative elements Negative elements Negative elements Negative elements Negative elements Negative elements
§ Reduction goal § No KPI on water § Need to further § The impact on
of resources pollutants reduce biodiversity is
consumption is hazardous waste not addressed
not quantified

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6.4. Analysis of Environmental and Social: sector-specific
6.4.3. Practical illustration for an industrial company

3. Regarding the ESG value drivers, which approach/policy initiatives are announced, or what actions are
taken?
§ Environmental pillar
§ Environmental footprint:
§ Products: it has identified its key issues (reduction of the level of emissions, development of natural
gas, hybrid and electric vehicles)
§ Green innovation: increase in R&D investments
§ Resource consumption: the company is saying that it is taking into account the level of water, energy and
other resources consumption in their process
§ Social pillar, Part 1
§ Talent management: the company has identified the issue as a key one.
§ HR efficiency: a reorganisation period is coming to an end.
§ Social pillar, Part 2
§ Clients´ relationships: policy on anti-competitive practices
§ Suppliers’ relationships: engagement with suppliers through a code of conduct, audits
§ Regulators’ relationships: active regulatory monitoring ; transparent lobbying
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6.4.3. Practical illustration for an industrial company

4. Regarding these ESG value drivers, which results have been obtained?
§ Environmental pillar => neutral assessment
§ Environmental footprint:
§ Process: Products: not enough information on the new products
§ Green innovation: increase in R&D investments (+10%)
§ Resource consumption: no reduction goal of the level of water, energy and other resources consumption
§ Social pillar, Part 1 => lack of transparency, negative assessment
§ Talent management: even though the issue is identified, not much information is disclosed regarding
training and attractiveness
§ HR efficiency: better margins after the end of the reorganisation period. Improvement of the social
climate is to be expected (better internal survey). However, the company is not publishing any more
turnover indicators.
§ Societal pillar, Part 2 => positive assessment
§ Clients’ relationships: no product recall, no controversies on anti-competitive behaviours
§ Suppliers’ relationships: the level of conformity with their code of conduct is disclosed and improving
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6.4.3. Practical illustration for an industrial company: ESG risk and opportunities

Social Pillar Environmental pillar Governance

Social pillar Part 1 => negative assessment Environmental pillar => neutral assessment Governance pillar: Board effectiveness =>
§ Lack of transparency on material issues § Need to take further measures. resource negative
(training to support innovation, gender consumptions, water pollutants & § Need to increase board independence
and age diversity, KPI organisation, hazardous waste and composition
health & safety in one key geographical § Biodiversity not addressed § The ability/knowledge on the board
market) § Opportunities in climate should be used to integrate ESG into risk
Societal pillar Part 2 => positive assessment transition/green innovation, company is management
§ Credible measures towards better on track with its ambitious plan § Shareholder rights are not addressed
engagement with stakeholders
Business Ethics Controversy => negative
§ Need to implement recently adopted
anti-corruption policy and to report
credible measures
Important: A final assessment should always consider a) a peer group comparison and b) in a next step an assessment (quantification) of
the financial materiality (Module 7).

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6.4. Analysis of Environmental and Social: sector-specific
6.4.4. Practical illustration for a service company

Goal : analysing a company type that

§ Is a service company
§ Employs mainly young executives
§ Sees its business model challenged by the digital transition (physical sales > online business)

Financial Services

We will analyse this company in four steps :

1) Define the megatrends affecting the company
2) Determine the Environmental, Social and Societal issues to analyse
3) List the approach and policy initiatives announced and actions taken
4) Analyse the results

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6.4. Analysis of Environmental and Social: sector-specific
6.4.4. Practical illustration for a service company

Methodology

1. Which megatrends are affecting the company?

Digital transition Energy and ecological transition Sociological transition

A major change in the traditional Financing the energy transition Digital customer experience
finance services business
Measuring the environmental Financial services industry
New operators, pressure on impacts of the financed projects reputation
margins

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6.4. Analysis of Environmental and Social: sector-specific
6.4.4. Practical illustration for a service company

2. Use the overviews provided in slides 46, 49 and 52, 53, 56 to determine which ESG issues should be
analysed
§ Social pillar, Part 1
§ Internal organisation: to support digital innovation
§ Talent management: new digital skill needed, importance of training
§ HR efficiency: impact of reorganisation
§ Social pillar, Part 2
§ Data security: key for consumer trust
§ Clients: importance of digital services
§ Environmental pillar
§ Financing the energy transition: “Green Innovation” with Green financial products
§ Measuring the environmental impact of the financed projects: exclusion of certain activities
with high environmental impact (coal...)
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6.4.4. Practical illustration for a service company

3. Regarding the ESG value drivers, which approach/policy initiatives are announced, or what actions are
taken?
§ Social pillar, Part 1
§ Internal organisation: creation of an online bank
§ Talent management: key issues are identified
§ HR efficiency: reorganisation through internal mobility and retirement departure (no forced
departure) because of the closure of bank branches
§ Social pillar, Part 2
§ Data security: no specific policy published
§ Clients: ambition to become the first French financial services regarding customer satisfaction
§ Environmental pillar
§ Financing the energy transition: “Green Innovation” with Green financial products: financing
through direct loans and a green bond policy
§ Measuring the environmental impact of the financed projects: sector-based policies
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6.4.4. Practical illustration for a service company

4. Regarding these ESG value drivers, what results have been achieved ?
§ Social pillar, Part 1 => positive assessment
§ Internal organisation: one of the main French online banks, strong digital strategy
§ Talent management: 150M€ on training until 2020
§ HR efficiency: strong level of transparency on their planned workforce reduction
§ Social pillar, Part 2 => positive assessment
§ Data security: no controversies but no specific policy
§ Clients: regular measurement of customer satisfaction, the company has defined a challenging
number of new clients until 2020
§ Environmental pillar => neutral assessment
§ Financing the energy transition: amount of green loans and green bonds is still low compared to
peers
§ Measuring the environmental impact of the financed projects: only new coal mines cannot be
financed anymore.
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6.4. Analysis of Environmental and Social: sector-specific
Conclusion: Which topics to look at?

1. Relevance 3. Control
§ Is the issuer assessing the ESG value drivers including § Are the actions steered by relevant KPIs and goals ?
the global challenges it faces? § Is the perimeter of the KPIs relevant?
§ Does it address them speaking about opportunities § Are the data certified and is the control process
AND risks? reliable?

4. Reporting
2. Management § Is the reporting relevant?
§ Is the board discussing these global challenges with § Are the important facts and figures not lost in a
the relevant attention? complex flood of information?
§ What are the policies announced? Are they relevant?
§ What are the actions taken?
§ Are the means deployed commensurate with the
objectives?

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6.4. Analysis of Environmental and Social: sector-specific
How external providers look at ESG topics: example: MSCI

https://www.msci.com/what-if-esg-disclosures-become-standardized

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How external providers look at ESG topics: example: Sustainalytics

Source: Sustainalytics. ESG Risk Ratings- Methodology Abstract (2021).

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6.5. Analysis of ESG controversies and ESG risk litigations

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6.5. Analysis of ESG controversies and ESG risk litigations
Key categories of ESG controversies and ESG risk litigation

Environmental Social Governance

§ Climate change § Health & Safety
§ Environmental discrimination § Labor § Corruption
§ Environmental pollution § Security § Bribery
§ Abuses
§ Development & poverty Example: NEW YORK/FRANKFURT (Reuters) -
Example: In January 2020, several French NGOs § Discrimination Deutsche Bank will pay a $150 million fine from a
New York regulator for allowing disgraced financier
and local authorities filed a lawsuit against oil § Groups (e.g., Indigenous people) Jeffrey Epstein to make payments to Russian
company Total in France, based on the duty of
models and withdraw suspicious amounts of cash
vigilance law, in an attempt to force the company Example: In 2019, IRAdvocates, a US-based NGO, during five years as a client. (Source: reuters.com)
to dramatically reduce its greenhouse gas filed a class-action lawsuit against Apple, Google,
emissions. They allege that Total did not include Tesla, Alphabet, Microsoft, and Dell alleging these
enough detailed information in its vigilance plan to corporations profited from child labour in their Example: (Reuters) - Airbus faces a record USD$4
reduce emissions. Total declared that its plan cobalt supply chains in the Democratic Republic of billion fine and lower 2019 profits after unveiling a
complies with the duty of vigilance law. (Source: Congo. Plaintiffs are either guardians of children preliminary deal with French, British and U.S.
business-humanrights.org) killed in cobalt mining tunnels or of children who authorities, following a crippling three-year probe
were maimed while working in the mines. (Source: into allegations of bribery and corruption over
business-humanrights.org). jetliner sales. (Source: reuters.com)

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6.5. Analysis of ESG controversies and ESG risk litigations
Practical illustration for an industrial company

The goal is to analyse a company that:

G
O
V ü has a board consisting of 5 dependent and 2 independent directors, and the average age is above 65 years
E
ü has no women serving on the board
R
N ü has newly-linked board remuneration to ESG performance
A
N ü has issued an ESG report for the first time, which is not assured by an external third party
C
E Additional Information: has presence in emerging countries and faces recent litigation due to bribery

Example of a global automotive manufacturer

We will analyse this company regarding the ESG controversies and ESG risk litigation

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6.5. Analysis of ESG controversies and ESG risk litigations
Practical illustration for an industrial company

ESG Controversies and Litigations

Negative elements:
§ Presence in emerging markets which is more prone to bribery
and corruption
§ recent corruption cases

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6.6. Consistency with the business model

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6.6. Consistency with the business model
6.6.1 Conclusion of ESG analysis

§ To conclude the ESG analysis, it is important to understand the potential mismatches

between:
§ the key issues of the company and the ESG strategy in place
§ the key ESG drivers and the impact on the company’s economic performance

§ For that, analysts should look at:

§ Business model vs. ESG risks/opportunities, in order to consider the financial
materiality of sector specific ESG KPIs

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6.6. Consistency with the business model
6.6.1 Conclusion of ESG analysis: business model vs. ESG risks/opportunities

§ Assessment of material ESG risks and opportunities by the company

§ Follower / forerunner / pioneer
§ Driver for value creation / defensive attitude
§ Proactive behaviour / protective behaviour (lobbyism…)
§ Flexibility of the business model
§ High/low capital intensity
§ Corporate culture (agility of decision-making)
§ Operational efficiency

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6.6. Consistency with the business model
6.6.1 Conclusion of ESG analysis: business model vs. extra costs/revenues

§ Extra costs
§ Capacity and costs to finance the transition
§ R&D
§ Costs of adapting employees' skills
§ …
§ Extra revenues
§ Acquisition of technologies, of know-how
§ Improved procurement and waste management
§ Optimised employee productivity
§ ….
§ Sustainable value creation : extra revenues > extra costs

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6.6. Consistency with the business model
Practical illustration for an industrial company

Steps of analysis of the business model Example

Material risk/challenge Climate transition and Green Innovation

Assessment of material risks and opportunities Started to invest in R&D and training; maybe more aggressive approach; all
other car manufactures have electric cars already in place; electric car more
of a transitional technology
Flexibility of the business model Old workforce maybe issues new products restructuring
high investments needed

Extra costs/Investments Internal organization and talent management (acquisition),

high investments in R&D, as well as high CAPEX for production facilities of
electric cars
Extra Revenues Gain in market share, higher productivity with more talented and trained
workforce
è Sustainable value creation Yes, overall the company needs to follow on-going trends

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Takeaway

§ Assessing ESG value drivers including ESG global megatrends and ESG relevant topics.
§ Global megatrends will have, sooner or later, an impact on business models.
§ Materiality reflects a risk/opportunity approach.
§ A long-term issue may become a short-term game changer.
§ Reconsider the business model in light of ESG criteria:
§ Reconsider the risks : macro and micro, transition risk in a resource-constrained world, inconsistencies vs.
stakeholders’ expectations…
§ Reconsider the opportunities : new products, new clients, improved social cohesion, competitive advantage,
strength of the brand…
§ Reconsider the alignment of the environmental and social investments with the strategy : growth, level of
profitability, level of investment, financial costs…
§ Integrating ESG information into the investment process is about to evaluate the business model vs. ESG
risks/opportunities to incorporate the financial and impact materiality of sector specific ESG KPIs.

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SASB’s Materiality Map®

“SASB’s Materiality Map® identifies

sustainability issues that are likely
to affect the financial condition or
operating performance of
companies within an industry.”

https://materiality.sasb.org/

Source: SASB Materiality Msp. The SASB Foundation (2018).

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Annex: Analysis Tools

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Identification of ESG value drivers
ESG Global Megatrends

Digital transition Energy and ecological transition Sociological transition

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Governance analysis
Corporate governance topics

❶ ❷ ❸ ❹ ❺ ❻ ❼ ❽
Leadership
Board Reporting Annual
and Corporate Risk Shareholder
composition and Remuneration and general
Independence culture oversight rights
nomination audit meeting

Negative Negative Negative Negative Negative Negative Negative Negative

elements: elements: elements: elements: elements: elements: elements: elements:

Positive elements: Positive elements: Positive elements: Positive elements: Positive elements: Positive elements: Positive elements: Positive elements:

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Company’s positioning and strategy
Social pillar, Part 1 – Internal Stakeholder (employees)

Internal organisation Talent management HR efficiency Diversity Health and safety

Positive elements Positive elements Positive elements Positive elements Positive elements

Negative elements Negative elements Negative elements Negative elements Negative elements

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Company’s positioning and strategy
Social pillar, Part 2 – external stakeholders

Clients relationships Suppliers / partners relationships Society relationships

Positive elements Positive elements Positive elements

Negative elements Negative elements Negative elements

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Company’s positioning and strategy
Environmental pillar

Resource Pollutions Waste Biodiversity Climate transition Sustainable

consumption management innovation

Positive elements Positive elements Positive elements Positive elements Positive elements Positive elements

Negative Negative Negative Negative Negative Negative

elements elements elements elements elements elements

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ESG risks and opportunities
Identified ESG value drivers and controversies

Social Pillar Environmental pillar Governance

Positive / negative assessment Positive / negative assessment Positive / negative assessment

following company’s positioning and following company’s positioning and following company’s positioning and
strategy strategy strategy

Social Controversies and litigation risk: Environmental Controversies and Business Ethics Controversies and
litigation risk: litigation risk:

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Consistency with the business model

Steps of analysis of the business model

Material risk/ challenge

Assessment of material risks and opportunities

Flexibility of the business model

Extra costs/Investments

Extra Revenues

è Sustainable value creation

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