© SD-M® GmbH, 2012, Page 1

TBLI and Standardization of Key Performance Indicators

SD-KPI Standard 2010-2014: How to Systematically Integrate Relevant ESG Factors for Financial Performance (Fiduciary Duty)

Zurich, 8 November 2012

Dr Axel HesseManaging Director, SD-M® GmbHHesse@SD-M.de; www.SD-M.de

The SD-KPI Standard 2010-2014 and all its aspects are protected by copyright. All rights are reserved. Any commercial use of any aspects of the SD-KPI Standards for financial products/services of any kind, e.g. for investment funds or stock indexes/benchmarks, research, engagement or information services is subject to the prior consent of Dr. Axel Hesse (SD-M® GmbH) and/or licensing of the registered trademarks SD-KPIndex® or SD-KPInvest® from Dr. Axel Hesse (SD-M® GmbH). Any unauthorised use of the SD-KPI Standard will be prosecuted under copyright and criminal laws. However, companies are permitted and encouraged to use the SD-KPI Standard for their management and reporting systems at no charge. The use of the registered trademarks SD-KPIndex® or SD-KPInvest®, however, in any case remains subject to a license from Dr. Axel Hesse (SD-M® GmbH).

© SD-M® GmbH, 2012, Page 2

EU accounting directives78/660/EEC, consolidated version2009-07-16:

SECTION 9Contents of the annual reportArticle 461 (b) To the extent necessary for an understanding of the company's development, performance or position, the analysis shall include bothfinancial and, where appropriate, non-financial key performance indicators (KPIs) RELEVANT to the particular business, includinginformation relating to environmental and employeematters;

Two faces of the same coin: Fiduciary duties of institutional investors and RELEVANT sustainability indicators in annual reports of companiesFreshfields Bruckhaus Deringer, A legal framework for the integration of environmental, social and governance issuesinto institutional investment, October 2005:

CONCLUSIONSConventional investment analysis focuses on value, in the sense of financial performance. As we note above, the links between ESG factors and financial performance are increasingly beingrecognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions. […] Provided that all RELEVANT considerations have been taken into account, the weight that the decision-maker gives to eachconsideration or category of consideration is left to the discretion of the investment manager alone.

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Automobiles: Fleet consumption (SD-KPI 1)KPMG: Fuel efficiency the most important factor for the consumer‘s purchase decisionStandard&Poor’s: € 600-3.000 per vehicle to meet upcoming EU emission standards

Energy utilities: Greenhouse gas intensity (SD-KPI 1)S&P downgraded RWE from A- to BBB+ (July 2012)€ 2 billion costs per year for the purchase of emission rights from 2013Proportion of renewables (SD-KPI 2): Energy transition after Fukushima

Pharmaceuticals: Access to Medicine Index (SD-KPI 1): Meeting demand for basic medicines, a huge potential market

Oil & Gas: Emissions of hazardous waste and toxic materials or oil spills (SD-KPI 3, published January 2010):BP lost US$ 67 billion of market capitalisation (1 June 2010)

Banks: Sub-Prime risks integrated in SD-KPI 2 in October 2006published January 2007: Hesse, A., “Sustained Added Value”, edited by Deloitte

Examples for the relevance of SD-KPIs for the financial performance

A study by Dr. Axel Hesse (SD-M) for Deloitte and the German Federal Ministry of the Environment

2006 2007

2008

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A global reporting and investment standard: SD-KPI Standard 2010-2014

SD-KPIs: 3 most relevant SD-KPIsfor the financial performance of thenext five yearsfor 68 industrieson behalf of the German Environment Ministry: SD-KPIs “minimum reportingrequirement” in annual reports (2009) consensus among global investorsand analysts who influence sustainableassets of € 2 trilliontransparent reporting andinvestment standard (weightingaccording to the relevance for thefinancial performance)database for evaluation of SD-KPIs formore than 3000 companies worldwidefinished at the end of 2011 „Big Four“-accounting firms Deloitte,Ernst&Young and KPMG use SD-KPIs

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Focused sustainability research will lead to risk-adjusted outperformance

Survey of leading

European pensions

funds

Assets:€ 460 billion

ABPAP1AP4

BTPS(Hermes)

EthosERAFP

FRRMetallRente

PGGMUSS

Source: Hesse (2008).

Outperformance

Under-performance

Return and performance goals are more important than sustainability goals

1= very important unimportant = 6

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Option 1: SD-KPInvest®: SD-KPI-usage for conventional actively managed mandates

In conventional actively managed mandates (specialised funds) components1. can be selected from the investment universe as usual and2. be over- or under-weighted according to their SD-KPI-Performance

Moderate over-/under-weighting e.g. according to this transparent system:SD-KPI-performance 0% - 20% ---> red ---> underweighting 10%SD-KPI-performance 20% - 40% ---> light red ---> underweighting 5%SD-KPI-performance 40% - 60% ---> yellow ---> no change SD-KPI-performance 60% - 80% ---> light green ---> overweighting 5%SD-KPI-performance 80%-100% ---> green ---> overweighting 10%

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Option 2: SD-KPInvest®: SD-KPI portfolio analysis and regrouping of specialised funds

return

risk

SF1/5 SF2/6

SF4/8

SF3/7

benchmark

financial performance = risk-return-relation(Sharpe ratio)

SD-KPI-performance

SF1

SF2

SF4SF3

benchmark

SF5

SF6

SF8SF7

risk / return position of several conventional specialised funds (SF)

optimisation path

financial performance / SD-KPIperformance position of several conventional specialised funds (SF)

first-order optimisation path (conventional)

second-order optimisation path(more sustainable)

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Option 3: SD-KPInvest®: SD-KPI integration in mainstream research / portfolio analysis

The asset manager can:

• integrate only the three SD-KPIs, which are most important for the financial performance and the mainstream research

• analyse the impact of particular SD-KPIs on the financial performance

• use SD-KPIs in quant analysis for the generation of long-term alpha

The asset owner can:

• evaluate the SD-KPI performance of investees companies via a portfolio check. This also shows the SD-KPI performance compared with that of peers.

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Option 4: Passive investment/benchmark (Comparison of three sustainability indices)

+(components are 0%/5%/10% over- or

under-weighted according to SD-KPI-Performance)

--Focus on the most relevant KPIs for the financial performance

+ conventional option/futures useable--Derivatives

+o-Transparency for indicators/weightings

3 SD-KPIsc. 40-50c. 100Number of indicators used per sector

+ SD-KPI Standardso KPIs for ESG-Based upon a standard

ownership rights for 98%-100% of the components of the conventional indices; focused engagement regarding SD-KPIs possible

ownership rights for the 16,5% “ESG leader-”components of the conventional index

ownership rights for the 14% “best-in-class”-components of the conventional index

Voting/ Engagement

0-2% of leading conventional financial indices: 20-30 exclusions: production anti-personnel mines cluster bombs

83,5% (297 out of 1800 components)

86% (342 out of 2500 components)

Reduction in the investment universe

Enhanced-β-SD-KPIndex®, e.g. STOXX Global 1800 SD-KPIndex®, STOXX Europe 600 SD-KPIndex®, EURO STOXX 50 SD-KPIndex®, STOXX Europe 50 SD-KPIndex®, MSCI World SD-KPIndex® (customized)

STOXX ESG LeadersDJSI World

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Performance-Entwicklunga) Über-/Untergewichtungen von -10% bis +10%

+0.49%

-60%

-50%

-40%

-30%

-20%

-10%

0%

+10%

Sep07

Dez07

Mrz08

Jun08

Sep08

Dez08

Mrz09

Jun09

Sep09

Dez09

Mrz10

Jun10

Sep10

Dez10

Mrz11

Jun11

Sep11

Dez11

Mrz12

-30%

-25%

-20%

-15%

-10%

-5%

0%

+5%

SD-KPI Portfolio Vgl.-Portfolio SD-KPI Portfolio vs. Vgl.-Portfolio (rechte Achse)

Tracking Error: 0.34% p.a.

Backcasting: „Buy and Hold“ EuroStoxx50 vs. EuroStoxx50 SD-KPIndex®

5/10% over-/underweighted according to SD-KPI performance

Performance development a) over-/underweighting from -10% until +10%

SD-KPI Portfolio vs. EuroStoxx50 Portfolio (right axis)

EuroStoxx50 Portfolio

SD-KPI Portfolio

Source: SD-M GmbH and HSBC

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Performance-Entwicklungc) Über-/Untergewichtungen von -50% bis +50%

+2.57%

-60%

-50%

-40%

-30%

-20%

-10%

0%

+10%

Sep07

Dez07

Mrz08

Jun08

Sep08

Dez08

Mrz09

Jun09

Sep09

Dez09

Mrz10

Jun10

Sep10

Dez10

Mrz11

Jun11

Sep11

Dez11

Mrz12

-30%

-25%

-20%

-15%

-10%

-5%

0%

+5%

SD-KPI Portfolio Vgl.-Portfolio SD-KPI Portfolio vs. Vgl.-Portfolio (rechte Achse)

Tracking Error: 1.74% p.a.

Backcasting: „Buy and Hold“ EuroStoxx50 vs. EuroStoxx50 SD-KPIndex®

25/50% over-/underweighted according to SD-KPI performance

Source: SD-M GmbH and HSBC

Performance development b) over-/underweighting from -50% until +50%

SD-KPI Portfolio vs. EuroStoxx50 Portfolio (right axis)

EuroStoxx50 Portfolio

SD-KPI Portfolio

© SD-M® GmbH, 2012, Page 12

Thank you for your attention!

SD-M® GmbHDr Axel HesseManaging DirectorHesse@SD-M.dewww.SD-M.deTel +49 511 6968 4581Mobile +49 173 64 222 11