CG Watch 2016 Ecosystems matter
Shaun Cochran, Jamie Allen
November 2016
For important disclosure information please refer to the last page of this presentation. Top-down and bottom-up conclusions are broadly in-line
CLSA versus ACGA scores by market Bottom-up and top-down scores indicate Australia as a clear leader
79
Australia 74
Singapore 69
64 Hong Kong Japan Taiwan
59 India Thailand 54 Malaysia
ACGA CGScores ACGA 49 Korea
44 China
39 Philippines Indonesia 34 40 50 60 70 80 90 CLSA CG scores
Source: CLSA, ACGA
Page 2 Hong Kong and Singapore continue to score well bottom up while Philippines, Indonesia and Korea are always lagging
CLSA historical market rankings vs 2016 Japan show a big jump this year on regulatory reform and elimination of some technical questions Country 2005 2007 2010 2012 2014 2016 Ranking
1 Thailand Thailand Thailand Australia Australia Australia
2 Hong Kong Hong Kong Hong Kong Singapore Hong Kong Japan
3 Taiwan Taiwan Singapore Hong Kong Singapore Singapore
4 Malaysia Malaysia India Japan Thailand Hong Kong
5 Singapore India Malaysia Taiwan Taiwan Taiwan
6 India Singapore Taiwan Malaysia Japan Thailand
7 Korea Philippines Philippines Thailand Malaysia India
8 Philippines Korea Korea India India Malaysia
9 China China China China China China
10 Indonesia Indonesia Indonesia Korea Indonesia Philippines
11 Philippines Philippines Indonesia
12 Indonesia Korea Korea Source: CLSA 2001-16 CG Watch Survey
Page 3 Government reform contributed to better governance in Japan
Abenomics contributing to change in board diversity Starting in 2013 when Abenomics started board diversity is trending upward 100 (%) % of companies with at least one outsider directors
90 % of companies with at least two outsider directors % of companies with at least one woman on board 80
70
60
50
40 Start of Abenomics 30
20
10
0 2008 2009 2010 2011 2012 2013 2014 2015 Source: CLSA, ISS
Page 4 Governance is difficult to link to share-price performance but where the index moved sideways, top CG companies outperformed
Asia ex-Japan performance by CG quintiles Asia ex-Japan index performance Trying to link governance to historical performance Governance outperforms after 2011 gave mixed results 800
Discipline 700
Governance outperforms FinalScore 600
Independence 500
400 Responsibility Since 2011
Since 2005 300 TransperancyTransparency
200 Fairness 100
ESG 0
(12) (10) (8) (6) (4) (2) 0 2 4
Annualised relative return: top - bottom quintile stocks (%)
Jan 12 Jan Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 13 Jan 14 Jan 15 Jan 16 Jan
Source: CLSA, evalu@tor, Microstrategy Source: CLSA
Page 5 EQRS & BQRS data also show clear links with governance rankings
Median CG Score by EQRS & BQRS basket Companies in the top 2 quintiles of EQRS & BQRS tend to have higher median CG scores 68 (CG Score) (Count) 300 66 (CG Score) (Count) 350 Median CG score Count (RHS) Median CG score Count (RHS)
64 300 66 250
62 250 64 200
60 200
62 150
58 150
60 100 56 100
58 50 54 50
56 0 52 0 0/5 1/5 2/5 3/5 >=4/5 0/5 1/5 2/5 3/5 4/5 EQRS BQRS Source: CLSA, evalu@tor, Microstrategy
Page 6 Companies who understand cost of capital outperform those that don’t on ROEs delivered, governance matters
ROE comparison of companies who do and don’t prioritise cost of capital Companies who answered Yes to Q2 had 2.5ppt higher ROEs than the ones answered No 17.5 (%)
17.0
16.5
16.0
15.5
15.0
14.5
14.0
13.5
13.0 Q2 YES - Roe 5yr trl Q2 NO - Roe 5yr trl Source: CLSA
Page 7 Appendix
For important disclosure information please refer to the last page of this presentation. However, proprietary CLSA data does suggest a much clearer relationship between fundamental and CG factors
Difference on fundamental factor performance by governance quintiles Most of the fundamental factors are higher for top governed companies (x) 3.5 Top 20% vs bottom 20% based on CG score
3.0
2.5
2.0
1.5
1.0
0.5
0.0
PEG
PSG
Size
Beta
ROIC
Sustg
Sls rev Sls
Divyld
PB(trl)
Payout
FCF yld FCF
Recrev
EPS rev EPS
Gearing
PE(fwd)
Cash/TA
FCF conv FCF
ROE(L3Y)
ROE(N2Y)
Earnscert
EPSg(N2Y)
Pmom(3M)
DPSg(N2Y) Pmom(12M)
Source: CLSA, evalu@tor, Microstrategy
Page 9 It is perhaps no surprise where analysts have the strongest and weakest access channels; this is a critical cultural indicator
Percentage of companies assessed as providing access by country Korea and Taiwan stands out with weaker company access 0 10 20 30 40 50 60 70 80 90 100
Australia (%) Singapore
Japan
Thailand
Philippines
Indonesia
Hong Kong
China
Malaysia
India
Korea
Taiwan
Source: CLSA
Page 10 Fairness and transparency scores outperform. Discipline produces middling scores while responsibility and independence underperform
CLSA overall CG scores and by market by category for companies (2016) Japan is strongest in all categories but independence ex-Australia (%) Discipline Transparency Independence Responsibility Fairness E&S Overall CG
Australia 76.1 93.3 77.2 86.2 93.9 67.2 83.5
China 46.2 58.7 47.1 49.2 70.4 63.3 55.2
Hong Kong 66.4 71.6 49.2 61.0 84.3 64.4 66.3
India 55.7 73.0 35.7 55.2 84.7 65.4 61.3
Indonesia 53.6 68.8 19.3 30.9 77.9 57.8 50.9
Japan 71.2 86.9 35.5 84.8 87.3 68.0 72.6
Korea 39.5 59.8 19.4 45.8 57.3 62.5 46.2
Malaysia 57.7 67.1 38.3 57.1 85.4 63.1 61.3
Philippines 59.1 58.1 27.9 35.5 66.1 65.9 51.0
Singapore 58.6 86.1 51.3 52.8 85.7 62.0 66.4
Taiwan 66.0 60.5 49.8 73.1 76.4 67.3 65.4
Thailand 56.6 85.0 63.7 38.0 83.7 64.7 65.4
Average 58.9 72.4 42.9 55.8 79.4 64.3 62.1
Average ex-Aus 57.3 70.5 39.7 53.0 78.1 64.0 60.2
Max-Min range (ex-Aus) 31.6 28.8 44.4 53.9 30.0 10.2 26.5
Note: Boxes highlighted leader (brown) and laggard (gold) ex-Australia Source: CLSA
Page 11 Country neutralisation fails to confirm CG’s performance contribution
Asia ex-Japan performance by CG quintiles (country neutral) Top quintile slightly outperforms bottom quintile since 2011 but not since 2005
Discipline
FinalScore
TransperancyTransparency
Independence
Since 2011 ESG
Since 2005 Responsibility
Fairness
(8) (6) (4) (2) 0 2 4 6 Annualised relative return: top - bottom quintile stocks (%) Source: CLSA, evalu@tor, Microstrategy
Page 12 Analysts are focused on company’s ability to manage their cost of capital and show a wide range of answers by country
Are you confident cost of capital is a key input to management thinking? We suspect Japan’s score will improve in the 2018 survey given their recent governance reforms
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
Australia (%)
Thailand
Singapore
Taiwan
Malaysia
Hong Kong
Philippines
China
Japan
India
Korea
Indonesia
Source: CLSA
Page 13 Half of markets in Asia have most companies reporting within 60 days
Does the company publish its full-year results within two months? Two regions had entire coverage reporting within 60 days
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 (%) Australia
Thailand
Japan
India
Singapore
Malaysia
Korea
Indonesia
Taiwan
Hong Kong
China
Philippines
Source: CLSA
Page 14 Traditional governance leader’s edge disappears on board diversity
Does the board composition reflect an attempt to bring diversity? Not surprising to see Australia top this category or Korea to rank last
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
Australia
(%) Malaysia
Thailand
Hong Kong
India
China
Singapore
Japan
Philippines
Taiwan
Indonesia
Korea
Source: CLSA
Page 15 Related-party transactions remain a structural problem in Asia
Has the company avoided related-party transactions that harm minorities? Concentration of ownership plays the key role
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
Australia (%) Japan
Singapore
Malaysia
Taiwan
China
India
Hong Kong
Philippines
Korea
Indonesia
Thailand
Source: CLSA
Page 16 India is strong on board-related share transactions and placements due to stricter regulation on insider trading and disclosure norms
Are board members’ share trading and company placements fair and transparent? Korea has seen a cluster of harmful issues across multiple sectors in past two years
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
Australia (%)
India
Thailand
Malaysia
Indonesia
Hong Kong
Singapore
Japan
Taiwan
China
Philippines
Korea
Source: CLSA
Page 17 US companies typically engage with large shareholders or institutions
US company engagement experience as a benchmark Which type of investors are you most likely to engage with? 0 10 20 30 40 50 60 70 80 90
(%) Large shareholder (regardless of type)
Institution
Any shareholder
Domestic shareholders only
Depends on the issue
Note: multiple answers allowed Source: CLSA, ISS
Page 18 Market maturity and ownership structures heavily impact governance
Percentage of companies free from government interference by country Government interference is still prevalent in some markets 0 10 20 30 40 50 60 70 80 90 100
Hong Kong (%) Japan
Australia
Philippines
Taiwan
Malaysia
India
Indonesia
Thailand
Singapore
Korea
China
Source: CLSA
Page 19 Voter data is spotty with a wide range but voter turnout improving
AGM voter turnout by market China data is less encouraging with only slightly over half showing up to the AGM to vote 0 10 20 30 40 50 60 70 80 90
Japan (%)
India
Taiwan
Hong Kong
Singapore
Thailand
China
Source: CLSA, ISS
Page 20 Interviewees agree on speaking to both management and the board of directors to cross validate company strategy and its execution
Typical engagement model in Asia Governance issues are mainly for board and business issues are mainly for management
Board Management Governance issue Business issue Cross validating •Oversight process strategy & •Strategic update •Executive remuneration execution •Capital management •Identifying red flags •Competitive position •Corporate culture •Product portfolio •Succession planning •Balance sheet strength
Source: CLSA
Page 21 It is important to remember the percentage of resolutions that get voted down is extremely low, we need more, but when done it’s heard
Failure ratio of resolutions by market Highest failure ratio is 0.7% in Korea 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
Korea (%)
Taiwan
China
Singapore
Malaysia
Hong Kong
Thailand
India
Indonesia
Japan
Philippines
Source: CLSA
Page 22 We changed the question on director independence and Korea drops from the top to the bottom of the range, Asia still needs improvement
Percentage of companies believe to have genuinely independent directors Less than 50% of entire Asia coverage is not assessed to have genuinely independence directors 0 5 10 15 20 25 30 35 40
Australia (%) Thailand
Taiwan
Indonesia
China
Singapore
Hong Kong
Korea
Malaysia
Japan
India
Philippines
Source: CLSA
Page 23 Beyond the choir ESG enters the Asian mainstream
Charles Yonts Head of Sustainable Research
September 2016
For important disclosure information please refer to the last page of this presentation. Billions and trillions
Top ESG fund assets up 70% since 2013 UN-PRI has over 1,500 signatories 40 (US$bn) Top-10 global ESG fund total assets 1,600 Assets under management (US$tn) 70
1,400 60 35 1,200 50
1,000 30 40
800
30 25 600
20 400 20 10 200
15 0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun
Dec 14 Dec Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 15 Dec Source: CLSA, Bloomberg Source: UN-PRI, CLSA
Page 25 It’s so hot right now
Temperatures off the charts Pollution fines are growing in China 4.5 (Rmbbn)
4.0 31% Cagr over the past two years
3.5
Source: NASA You really don’t want one globe 3.0
2.5
2.0 2013 2014 2015 Source: Morningstar Source: Xinhua, CLSA
Page 26 Because it works
ESG and performance links across regions Characteristics analysis: Asian stocks with high 70 (%) Positive Negative 65.4 ESG scores vs low ESG scores 60 (x) High ESG scores (top-20%) versus low ESG scores 3.0 (bottom-20%) 50 2.0 42.7 38 40 33.3
30 26.1
20 14.3
8 7.7 10 7.1 5.8 1.5
0 North Developed Developed Developed Emerging America Europe Asia/AUS/NZ (total) Markets
E,S and G categories in relation to performance 1.0 70 (%) Positive Negative 58.7 60 55.1 52.3 50
40 35.3
30 0.5
20
PEG
PSG
Size
Beta ROIC
9.2 Sustg
7.1 Payout
10 5.1 yld FCF PB (trl) PB
4.3 rev EPS
Gearing
Cash/TA
PE (fwd) PE
FCF conv FCF
DY (fwd) DY
PCF (fwd) PCF
Earns cert Earns ROE (L3Y) ROE
0 (N2Y) ROE
Pmom(3M) EPSg (N2Y) EPSg
E S G E, S & G Pmom(12M) combinations Note: Universe is broader Asia Pacific ex-Japan universe with market cap greater than Source: Friede, Busch, Bassen via (ESG & Corporate Financial Performance: US$500m and more than three analysts coverage. Current CLSA ESG score is used. Mapping the global landscape) Source: CLSA, FactSet
Page 27 Because it works (2)
Global ESG thematic strategy outperformed Material issues - ESG momentum and performance since 2013 6 (OPF index against MSCI AC World)
MSCI ACWI ESG cumulative outperformance 5
4
3 Source: Mozaffra Khan, George Serafeim and Aron Yoon, Corporate Sustainability: First evidence on Materiality, The Accounting Review 2 SSE180 returns 2.0 (%) SSE180 Carbon Efficient accumulative return SSE 180 Carbon Efficient 1 1.5 SSE 180 accumulative return 1.0 SSE 180
0 0.5
0.0
(1) (0.5)
Jun 16 Jun Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun
Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec
3-Jul-13
4-Feb-15
8-Nov-14 4-Nov-15
8-Aug-14 1-Aug-15
8-May-15
28-Jan-16
29-Apr-16
27-Jun-14 19-Jun-15
15-Feb-14
27-Sep-13 20-Sep-14 16-Sep-15
27-Dec-13 20-Dec-14 16-Dec-15
17-Mar-16 29-Mar-14 25-Mar-15
15-Nov-13 14-Aug-13 Note: US$ total return. MSCI Asia Pacific ESG index outperformance is calculated 15-May-14 from Aug 2013. Source: CLSA, FactSet Source: Wind, Trucost
Page 28 Inside the sausage factory
E/S scores at CLSA Bridging the gap in coverage CL exclusive coverage Mutual coverage 100 Min Max Mean Top/Bottom Q (%) External exclusive coverage None coverage 100 90
90 80 38 41 53 70 60 86 80 50 40 30 62 58 47 70 20 10 13 0 60 Sustainalytics ISS CDP ESG ESG Rank Governance Perfomrance Disclosure Quickscore Score Score 50 Note: Market-cap weighted and as of 19 Aug 2016. Source: CLSA, Bloomberg No. of ESG reports increased sharply 40 12,000 (no. of reports)
10,000 30 Non GRI GRI Total
8,000 20 6,000
4,000
Autos
Media
Power
Internet Property
Materials 2,000
Telecoms
Transport
Consumer
Insurance
Healthcare Technology
Petro/Chems 0
Infrastructure
Conglomerates
Hotels & & Leisure Hotels
Financial services Financial
2014 2015 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: CLSA Source: GRI, CLSA
Page 29 Inside the sausage factory (2)
Sustainability and stock exchange 2012 2013 2014 2015 2016 2017 2018 Japan Japan Stewardship Corporate Code (V) Governance Code (M)
Malaysia Listed companies with market cap >RM2bn to issue sustainability report by FY16 AR (M)
China 2016: Mandatory environmental disclosure for all listed companies (recommended)
Taiwan CSR Reporting for TSE: Listed companies with capital select companies (M) >NT$10bn to issue CSR report by FY17 AR (M)
South Korea 2016: Corporate Governance Guideline by KSE and FSC (planned) Stewardship Code (planned)
Singapore By 2018, primary-listed companies to report (M) four core requirements, including board responsibility and relevant reporting framework (CE)
Hong Kong Implementation of From 2017, listed companies to report ESG Guide (CE) Environmental KPIs (CE)
Note: Mandatory=(M), voluntary=(V), comply or explain=(CE). Source: Bloomberg, exchanges, CLSA
Page 30 Asian E/S themes - Spoiled for choice
Village destroyed by failing tailing dam Thai fishing boat
Source: Senado Federal (Bento Rodrigues, Mariana, Minas Gerais) [CC BY 2.0, via Wikimedia Commons] Source: Flickr Chinese textile factories CP’s share price relative to Thai indices 10 (%) MSCI Thailand SET Index
0
(10) USA and UK companies' crackdown (20)
(30)
(40) EJF produces report exposing Thai fishing industry
(50)
Oct 13 Oct 14 Oct 15
Apr13 Apr14 Apr15 Apr16
Jun14 Jun13 Jun15 Jun16
Feb 13 Feb 14 Feb 15 Feb 16
Dec 12 Dec 13 Dec 14 Dec 15
Aug13 Aug14 Aug15 Source: Impactt Source: Bloomberg, CLSA
Page 31 Key themes - Palm oil
Fire in central Kalimantan
Source: Ground Fire by Bjorn Vaughan, reproduced with permission Leaders/laggards in the palm-oil sector Sime Darby Kuala Lumpur Kepong IOI Corporation Wilmar United Plantations Golden Agri-Resources Bumitama First Resources London Sumatra Astra Agro Lestari Genting Plantations Felda Global Ventures IndoAgri (index, 100 = good)
0 10 20 30 40 50 60 70 80 90 100 Source: CLSA, Asia Research and Engagement
Page 32 Quantifying water risk
Coal, mining, water mismatch Water crisis in India
Water risk is material
Source: China Water Risk Source: Greenpeace
Page 33 Important notices
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