Lara Abrams Communications

Overview | Macro Trends and Industry Challenges | SAM Corporate Sustainability Analysis™ | Determination of Sustainability Fair Value

In a market economy the competitive position held by any market participant determines his or her share of overall value added. Macro trends may change this framework as well as contribute to competitors challenging a market participant’s competitive position. Sustainable companies embrace this change by seizing the opportunities and by managing the risks that the macroeconomic developments impose on each industry. The first step of sustainability research is thus to identify all shareholder value relevant macro trends and the challenges they present to each industry. Not all of the trends are economic in nature. They stem from different sources; some relate to market developments with in the given framework, some relate to the framework itself.

Demographics – Changes in consumption and savings patterns will lead to an increase in investments and potential growth of income, thus changing the risk-return ratios that can be earned.

Globalization and market liberalization – Falling costs of information and transportation services increase competition in product markets and make market flexibility a competitive advantage. Democracy spreads, spreading the value placed on human rights and improving conditions for market-based economies.

Environmental change – Global climate change, whether man-made or not, imposes market and legislative pressure on carbon intense industries and suppliers of fuels, a challenge intensified by the demographic developments in emerging economies. Water scarcity increases in sensitive areas globally, partly due to demographic developments.

Mistrust in production along the food chain – Linked partly to the transparency trend, challenges along the food chain emerge for the majority of food producers and food retailers. Agriculture is the basis of many developing economies but may threaten the ecosystems upon which it depends.

Call for transparency – Driven both by regulation and investor pressure the degree of transparency demanded from companies is increasing. The trend is aided by the steep fall in the costs of transmitting information.

Human capital management – Human capital is a key resource in an information based society where innovation drives competition.

Reputation and brand management – Preserving a monopoly niche requires management of intangible assets, including the reputation resting on adequate alignment of interests and of checks and balances regarding management and shareholders.

SAM interprets mega trends and global challenges into industry trends and challenges. These trends and challenges describe the context for each player within an industry. They describe the current situation and the likely future pattern of development, thereby indicating the opportunities that must be embraced and the risks that must be managed in the creation of sustainable value.

Industry challenges can differ from industry to industry, affect more than one industry, or affect all industries and sectors alike. Examples for challenges affecting all industries include the need for a workable solution to the principal-agent problem, i.e. incentives and checks and balances needed to align management’s interest with shareholder’s interest, and the need to find a way to manage human capital effectively and efficiently. Best practices are very similar across industries. Industry specific challenges depend on the industry’s characteristics. The challenges will differ for industry characteristics such as the degree of regulation, supply and demand structures, and barriers to entry. Example given, challenges for the oil & gas industry are closely related to a general perception of energy resource scarcity and green house gas emissions. Innovations have to be developed for the time when oil and gas resources cease to meet rising demand. New technologies need to be deployed to get the most out of existing reserves.

Overview | Macro Trends and Industry Challenges | SAM Corporate Sustainability Analysis™ | Determination of Sustainability Fair Value

Industry challenges are the background against which companies are analyzed to identify those that are best positioned to generate shareholder value. This analysis is conducted in three parts, Screening, Assessment, and Focused Analysis.

The objective of the first part of the SAM Corporate Sustainability Analysis™ – the Screening – is the identification of leading companies with regards to sustainability in all industries on a global basis. The initial universe of approximately 3000 companies world wide is reduced to approximately 500. These 500 Sustainability Leaders comprise SAM’s basic investment universe, the Qualifier List. The Qualifier List comprises all standardized and customized sub-universes, including the Dow Jones Sustainability Indexes (DJSI) and regional portfolios such as the Sustainability Leaders Australia Fund. The questionnaire covering general criteria can be downloaded here.

The analysis of the sustainability performance of companies is performed using SAM’s Online Questionnaire. SAM Research has developed 60 industry specific questionnaires covering economic, environmental and social criteria. These criteria are developed based on general as well as industry specific trends and challenges that are derived from economic, environmental and social current as well as future developments. In addition to the analysis of the questionnaire, a Media & Stakeholder Analysis is performed to verify the companies’ involvement and behavior in critical situations.

The second part – the Assessment – is conducted on all members of the Qualifier List and designed to spot weaknesses with regard to critical industry-specific Sustainability issues and with regard to financial stability. The assessment procedure identifies companies that are burdened with a short-term risk of not being able to deliver on their shareholder value promise. The resulting "Investment List" forms the eligible universe for active mandates.

The third part – the Focused Analysis – is designed to identify the industry and technology leaders within each industry. Each company’s strategic position and strategic goals are analysed with regards to the industry’s opportunities and challenges. The company’s competences to maintain its strategic position or achieve its strategic goals are evaluated. The resulting "Focus List" comprises approximately 100 companies that are most likely to turn sustainability into shareholder value. It forms the eligible universe for focused mandates.

Overview | Macro Trends and Industry Challenges | SAM Corporate Sustainability Analysis™ | Determination of Sustainability Fair Value