Korea ESG Performance

2010

Our future.
Your wallet.
Sustainable Investment.
Why Sustainable Investment?

Performance of Korea’s 50 most sustainable companies vs. KOSPI

SolAbility 50 KOSPI
20%
16.74%

15%

10.65%
10%

5%

0%

-5%

-10%
Dec-09 Feb-10 Apr-10 Jun-10 Aug-10

01/2010-10/2010: 7% outperformance against the KOSPI

SolAbility 50 KOSPI
120%
107.45%

100%

80%

60%

40% 35.09%

20%

0%

-20%

-40%
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

01/2006-10/2010: 72% outperformance against the KOSPI

Its’ the PERFORMANCE, stupid!

 Andy Gebhardt
Chief Executive Officer

Dear reader,

A lot of water has gone down the Han River since SolAbility’s first corporate sustainability
assessment of Korean corporations back in 2007 – but not only water. Following the
global financial/economic crisis and the Korean government’s subsequent declaration
of “green growth” in 2009 - albeit the “green” is subject to controversial discussions - we
have seen remarkable changes in the corporate perception of “sustainability” and as a
consequence, integration in corporate policies and management systems in a large
number of corporations. The changing environment has also resulted in a sharply
increasing number of sustainability publications and reports, making ESG research both
more interesting and challenging at the same time, requiring analytical focus on key
industry challenges and opportunities in order to identify outstanding sustainable value.

The results of SolAbility's 4th ESG assessment shows that the value of sustainable
companies outperforms the market, both short- and long term, by significant margins.
The performance of a portfolio of leading Korean sustainability companies also
outperforms sustainability benchmarks such as the KRX SRI and the DJSI Korea. While we
are naturally proud of outperforming such prestigious benchmarks, the failure of the
globally most recognized sustainability benchmark - indicating that Dow Jones is not
allocating sufficient resources to adapting its methodology to the development in
corporate sustainability - is of concern in the wider context of further advancing
corporate sustainability and sustainable investment. The results of SolAbility’s ESG
research is proof that the identification of sustainable value is possible.

While the changes observed - particularly since 2009 - are remarkable, only a few
company have completely integrated long-term sustainability thinking into strategic
decision-making and business development frameworks. It is also necessary to keep in
mind that the average corporate sustainability level until that point was considerably
below OECD level. In addition, Koreas’ economy is more energy-intensive than OECD
average, requiring further and stronger efforts to improve resource efficiency to
maintain competitiveness in light of the nation’s reliance on energy imports and the
looming prospect of rising energy costs. However, if the current trends of integrating
sustainability management is to continue, Korean corporations enjoy a decent
perspective to secure long-term competitiveness.

Yours sincerely,

Korea ESG Performance 2010

 SolAbility is a consultancy specialising
in sustainability management advice, founded in 2005.
Internationally know clients are trusting in SolAbility's
competence.

As a UN PRI signatory,
SolAbility also performs ESG research & assessment
on over 350 listed Korean companies and provides ESG
research to institutional investors

Contents

Highlights 1

SolAbility ESG model Characteristics 2

Tools & process 3

ESG performance Short-term 4

Long-term 5

ESG assessment review Corporate Sustainability 6

Management & Governance 8

Environmental Sustainability 10

Human & Society 12

Conclusions 14

Korea ESG Performance 2010 1

 2010 Highlights
SolAbility 4th Korea sustainability assessment,
based on an initial universe of 350
companies, reveals the financial bottom-line
benefits of integrated long-term sustainable
management thinking

Sustainable companies & portfolios outperform

Sustainable companies outperform

SolAbility’s yearly sustainability assessment clearly

shows that sustainable companies have a
significant better financial performance than less
sustainable companies - both short-term and
long term – and proofs that inclusion of
sustainability long-term management yields
financial bottom line benefits.

3 clients selected to the DJSI World

Three companies, for which SolAbility has designed

sustainability policies, management systems and
implementation strategy were selected to the DJSI
World - the most prestigious sustainability benchmark
around the globe.

Korea ESG Performance 2010 1

Methodology
Characteristics

Purpose : Identification of sustainable value

Best-practice based, adapted for Korean characteristics
Universe : 350 Korean companies (KOSPI and KOSDAQ)

SolAbility’s ESG methodology

™ Identification of key sustainability challenges/opportunities

for each industry sector
™ Strength/weakness analysis of global sustainability
benchmarks (DJSI, FTS4Good, GRI, UN PRI, Global
Compact, etc.)
™ Adaption to the characteristics and corporate culture of
the Korean economy
™ Strict analysis scheme and calculation of weightings based
on bottom-line (financial) implications in each industry
™ Taking into account company size
™ Yearly reviewed and refined based on experiences,
feedback, and new emerging trends
™ Analyst expertise

Korea ESG Performance 2010 2

Methodology
Tools

Systematic, IT-based assessment tools

Solving the puzzle: wide range of information sources
Unique experience

Assessment Processes

The SolAbility ESG assessment consists the application of three

tools:
1. Sustainability filter : screening large number of companies
according key sustainability indicators to eliminate laggards
for in-depth Assessment phase.
2. ESG Assessment tool : analyzing and evaluating
sustainability performance based on industry-specific
sustainability indicators
3. Verification : investigation of company cases related to
sustainability performance through media surveys and
government documents

Information sources

SolAbility acquires a wide range of information through a

variety of channels such as public announcements, websites,
annual reports, sustainability reports, questionnaires, lawsuit
records, stakeholder participation issues, media research,
etc.

Korea ESG Performance 2010 3

ESG portfolio
performance
Short-term

Starting universe:350 stocks

The leading 50 Korean companies of the starting universe show a significant
outperformance vs. the Korea Stock Performance Index

Short-term return of sustainable companies

A portfolio of the 50 most sustainable companies (market-cap weighted)

achieved a return of 16.74% from January 2010 to early October 2010. For
the same period, the KOSPI gained 10.65%, while KRX and DJSI Korea gained
roughly 8%.

KRX SRI DJSI Ko rea KOSP I So lA bility 50

20%

16.4%
15%

10% 10.4%
7.6%
5%

0%

-5%

-10%

-15%
12/31/2009 3/1/2010 4/30/2010 6/29/2010 8/28/2010

Data Sources: KRX, Dow Jones

Korea ESG Performance 2010 4

ESG portfolio
performance
Long-term

Long-term return of sustainable companies

Sustainable companies equally achieved high returns in the long-term. The

SolAbility 50 portfolio gained 107% over 5 years (01/2006-10/2010), over three
times higher than the Korea Stock Exchange Index (KOSPI), which gained 35%.

DJSI Ko rea KOSP I So lA bility 50

120%
106.6%
100%

80%

60%
47.7%
40%
33.9%
20%

0%

-20%

-40%
January- July-06 January- July-07 January- July-08 Decembe July-09 Decembe July-10
06 07 08 r-08 r-09

Data Sources: KRX, Dow Jones

Due to its global brand name and recognition, both the investment industry
and corporate managers observe the performance and composition of
globally recognized benchmarks. In this context, the failure to identify
outstanding sustainable value of the global benchmark is of concern and an
obstacle to further advance of corporate sustainability and sustainable
investment.
The SolAbility assessment proofs that sustainable value can be identified.

Korea ESG Performance 2010 5

 Corporate Sustainability
Performance
Developments

™ The overall sustainability level of Korean Overall Sustainability Performance

companies is improving every year.
However, top-performing companies 80 75
advance faster than the average, 69
72 72
implying that high-performing
companies have further strengthened 60
53
their sustainability level while a 45
48
51

considerable number of companies

40
are still reluctant to fully integrate
sustainability management beyond
compliance as a strategic 20
management framework.

™ The level of environmental reporting 0

2007 2008 2009 2010
has improved dramatically, while
economic reporting has been Best Av erage
stationary, and social reporting mostly
remains limited to the areas of Human
Resources Development and social
Development of dimension scores
contributions.

™ Visible improvements in terms of 60

sustainability performance are seen in
55
the environmental and social sectors.
The average environmental 50
performance has improved by 12%
compared to last year, and social 45

performance by 6%. On the other hand, 40

the economic performance has
improved by only 1%, but remains the 35
highest average performance.
30
2007 2008 2009 2010
™ While a significant number of Korean
corporations are now introducing Eco no mic Enviro nment So cial

sustainability management, the

proportion of sustainably managed
companies is still somewhat below
OECD levels.

Korea ESG Performance 2010 6

 Corporate Sustainability
Performance
Sector trends

™ SolAbility categorizes companies by 13 Sustainability Performance by

sectors (composed of 29 industries, Sector
according the main business line) to
allow for sector comparisons.
65
Electro nics
75
™ The industry scores of Electronic
companies are outstanding compared Co mmunicatio n
55

to other industries. The score gap

70

between Industry Best and Industry P arma & 54

Co smetics 64
Average has also narrowed.
54
Utilities
66
™ The most year-on-year improved
industry is the Construction & Industrials
54
66
Construction Materials sector, with the
performance improved by 8.5% Transpo rt
51
61
compared to last year.
Energy & 50
chemicals 66
™ On the other hand, industries such as
Holdings & Trading, Steel & Metal, Financials
50
64
Media, Leisure & Services are
characterized with low sustainability Co nstructio n & 50
materials 62
levels compared to other industries,
improved by only 1.4% from last year’s Co nsumer 49
go o ds 63
score.
Ho lding & 48
Trading 64
™ For Steel/Metal industries, there is a
large score gap between Industry Best M etals
48
69
and Industry Average, reflecting the
phenomena that leading companies Co nsumer 47
services 65
have been consistently improving their
performances while the companies not 0 20 40 60 80

or less exposed to global markets are

Best Company Industry Av erage
not actively involved in sustainability
management.

Korea ESG Performance 2010 7

 Management &
Governance
Developments

™ The sustainability level of the economic Economic Sustainability Performance

criteria has not shown any significant
changes, with a minor improvement of
75
1.53% compared to 2009 last year’s 80 71 72 74
performance.
60 51 52 54 54

™ The corporate governance score

40
remained at 2009 level, with the know C

weaknesses of Chaebol board

20
structure in terms of professionalism,
independence board effectiveness 0
still witnessed today. Transparency 2007 2008 2009 2010
has weakened due to the deregulation Best Av erage
of corporate disclosure requirements.

™ The majority of companies have E c o no mic C rit e ria pe rf o rm a nc e

established ethical management
system and reinforced monitoring, but 51
the number of non-compliances Co rpo rate 54
Go vernance 56
reported such as price fixing practice 55
has not dropped. 57
Ethical 59
™ Risk management performance has M anagement 63
65
improved, reflecting company’s efforts
41
to better predict future risks and turn Risk 41
them into business opportunities. management 44
48
Nevertheless, domestic company’s risk
management is still below global level. Sustainability
44
44
strategy 46
47
™ Korean companies have steadily
improved in the areas of R&D, brand B rand
48
52
management, and innovation. management 54
However, there is still room for 59

improvement in the areas of 20 40 60 80

integrating sustainability management
strategy in management thinking. 2010 2009 2008 2007

Korea ESG Performance 2010 8

 Management &
Governance
Sector trends

™ Communication, financial, and

Governance & Management by
electronic industries are associated
Sector
with high sustainability level compared
with other industries.
60.4
Co mmunicatio n
™ The industries with the greatest 75.3

improvement are Food & Beverages Financials

60.0
71.0
(+6.8%) and Construction/Materials
(+6.3%). Particularly in the Construction Electro nics
57.7
67.7
& Materials industry, a significant
number of companies have newly Utilities
56.9
63.7
published sustainability reports.
P arma & 56.1
Co smetics 62.7
™ Even though the industry averages of
Co nsumer 54.6
Holdings& Trading and Steel & Metal go o ds 64.6
have improved, the sustainability levels Co nsumer 53.9
are still low compared to other services 64.2
industries. Co nstructio n & 52.8
materials 59.7

52.7
Industrials
64.5

52.5
Transpo rt
58.8

51.2
M etals
73.9

Ho lding & 50.3

Trading 68.7

Energy & 47.4

chemicals 60.9

0 20 40 60 80
Best Company Industry Av erage

Korea ESG Performance 2010 9

 Environmental
Sustainability
Developments

™ Average environment performance Environmental Sustainability Performance

showed the largest increase, rising
by11.95% compared 2009, indicating
86
that Korean companies have woken 90
77
81 81

up to the challenge of global climate 80

change and the prospect of high 70

energy costs. 60
50
50 44
41
38
™ Average environment reporting 40

improved by 21.27% due to the 30

increased number of companies 20

disclosing environmental information. 10

0
2007 2008 2009 2010
™ Carbon Risk Management increased
Best Av erage
by 32.41% due to efforts to improve
energy efficiency and establishing
GHG inventories. Environmental criteria performance
However, considering Koreas 97%
reliance on energy imports and the
energy intensity of the economy Enviro nmental
27
27
31
(considerable above OECD average), repo rting 34
41
efforts undertaken so far are still highly
25
25
insufficient to secure future Carbo n risk 31
competitiveness. management 37
37
49

Chemical 61
™ Waste management improved by substance c
68
68
70
70
23.11%. Adapting LCA, waste management 72
72

minimization in the production stage Waste 49

and recycling account for this management 57
57
58
58
& recycling
development. 71

Green 30
30
33
33
™ Green business lines saw a surge of business
develo pment
41
45
10.15%, reflecting the fact that
companies are starting to develop new 20 30 40 50 60 70
70 80
80

business lines (products & services) 20102010 2009

2009 2008
2008 2007
2007
related to clean-tech and green
growth

Korea ESG Performance 2010 10

 Environmental
Sustainability
Sector trends

™ The assessment reveals Significant Environmental Managament &

differences between the different Performance
industry sectors in environmental
sustainability performance. While some 73
Electro nics
sectors improved by nearly 30% 86

compared to 2009 levels, other sectors 59

Industrials
remain at the same level of previous 72

years. 57
Utilities
78

™ High ranking sectors include Electronics, 55

M etals
Industrials, Utilities (manufacturing 70

industries and other industries subject to Energy & 54

environmental regulation). The waste chemicals 75

majority of Electronics, Industrial P arma & 54

companies are pursuing environment Co smetics 73

management, and invest to reduce Co nsumer 53

energy usage, green house gases, go o ds 65
water usage and waste. 53
Transpo rt
64
™ The construction & materials (+31.7%) 51
and Consumer goods industry (%28.7%) Co mmunicatio n
69
showed the highest progress rate year- Co nstructio n & 47
on-year. materials 60

Ho lding & 43
™ The Pharmaceutical & Cosmetics Trading 64
industries and service providers
37
improved only marginally. Within these Financials
66
sectors, only few companies implement
Co nsumer 31
environment management systems services 67
without regulatory requirements.
0 20 40 60 80
Best Company Industry Av erage

Korea ESG Performance 2010 11

 Human & Society
Developments

™ With an increase of 6.3%, societal

Societal Sustainability Performance
performance showed general
improvements across all sectors,
exhibiting a tendency of gradual 80
70 72
68 69
improvement.
60 52
47 49
41
™ HR development increased by 8.82% 40
year on year. This indicates the
corporate realization of the 20
importance of HR management to
improve global competitiveness by 0
attracting and retaining the best staff 2007 2008 2009 2010
and strengthening internal training. Best Av erage

™ Social activities and contributions

Social
Social criteria
criteria performance
remain at a similar state compared to performance
2009. While social activity rates are
generally increasing, companies may
not have a formulated strategy for HR lder
Stakeho
34 39
46
43
social activities and alignment of develo pment
engagement 42 50
47 54
strategic corporate citizenship activities
39
with core business capabilities HR 26
46
Incentive
develo pment 35 50
systems 38 54
™ Supply Chain Management and OHS 26
42

management exhibit gradual HR

co mpensatio n
35
38
42

development. In particular, the

So cial 44
42
engagament 44
manufacturing sector has been Co rpo rate
42
45
44
emphasizing “win-win” and “together citizenship 44
45 64
growth” as well as “green purchasing”. OHS- 70
64 71
M anufacturers
However, supply chain management OHS- 7074
M anufacturers 71
system at most companies are focused 52
74
on domestic suppliers at this point in Supply chain 5254
Supply chain
time and fail to recognize supply chain management 54
57
management 5760
risks in less developed markets 60
20 30 40 50 60 70 80
20 30 40 50 60 70 80
2010 2009 2008 2007
2010 2009 2008 2007

Korea ESG Performance 2010 12

 Human & Society
Sector trends

™ Sustainability performance of Society

criteria showed comparably equivalent
Human & Social Considerations
progress amongst industry sectors due
to improved management systems
related to HR development and Electro nics
65
72
incentive systems.
Co nstructio n & 57
materials 70
™ Again, the field is lead by Koreas most 57
Utilities
know export sector the electronics 69
industry. 56
Co mmunicatio n
71

™ Compared to 2009, significant P arma & 55

63
improvement were made in the Steel & Co smetics

Metals (+16.4%), Utilities (+14.8%), and Industrials

53
67
Industrials industries (+12.6%). This
indicates that more and more M etals 51
68
companies make active efforts to
Energy & 51
improve OHS performance and Supply chemicals 64
chain management Co nsumer 50
go o ds 60
™ Average Consumer Services and 49
Financials
Holding & Trading performance remain 63

at comparable low levels. Co nsumer 48

services 66

Ho lding & 48
Trading 59

46
Transpo rt
57

0 20 40 60 80

Best Company Industry Av erage

Korea ESG Performance 2010 13

 Conclusions
Corporate Sustainability

Increasing recognition of the business value of sustainability management

But – limited implementation in terms of strategic business development
Large differences between sectors, and within sectors

Increased recognition of sustainable management for business value

The increase In average ESG performance scores reflect the spread of interest and
recognition for sustainability in Korea following the financial crisis 2008/2009 and the
government’s strategic focus on “green growth”. The number of companies that have
actively reviewed their management systems in light of sustainability integration has
accelerated remarkably since 2009. Given that a large number of Korean companies
are currently undergoing internal sustainability reviews, further rise of the average
Korean sustainability performance is expected. Along with integration of sustainability
considerations in policies and management systems, the number of companies
disclosing sustainability performance and information has increased rapidly. However,
while the developments have been encouraging, only few companies have
formulated long-term strategies that integrate not only operational issues and
considerations, but also strategic, long-term business development considerations
based on sustainability trends.

Imbalance of sustainability levels amongst Industry sectors

Export-focused companies, namely in the manufacturing industry sectors such as

electronics, automobiles, and ship-builders are leading Korean companies in terms of
corporate-wide efforts to improve corporate sustainability level as a means of securing
future competitiveness. In contrast, industry sectors focused on domestic demand such
as finance and service sectors have been more reluctant in embracing sustainability
management until recently.

Korea ESG Performance 2010 14

 Conclusions
Sustainable Performance

Sustainable companies outperform the market

Sustainability needs to be integrated further to secure long-term competitiveness

High sustainability performance equals high financial returns and stability

SolAbility's ESG assessment results proof that sustainable companies achieve

significantly higher returns than the average investment over both short-term and long
term periods. Despite the sharp fluctuations in the stock markets during 2009-2010, it is
observed that the market value of sustainable companies was less elastic on the
downturn compared to other companies. This observation strongly supports the claim
that sustainability brings companies higher returns in times of prosperity and more
stability in times of depression. Considering the growing uncertainty in the domestic an
global economy, sustainability is now a MUST HAVE for a company’s long-term business
success.

Global sustainability benchmarks

While we are proud to outperform the global benchmark, the “SolAbility” brand carries
only limited weight. In the wider context of advancing corporate sustainability and
sustainable investment, it is paramount that the global benchmark is capable of
identifying outstanding sustainable value. The current failure to do so is an indication of
insufficient allocation of resources to adapt the research to the developments in
corporate sustainability and needs to be addressed urgently.

Sustainability management as core management principle

Despite all the positive developments, sustainability management is still only partially
recognised as a core management principle and strategic business development tool,
and is not fully reflected in corporate culture. Korean companies need to consider
sustainability issues from the highest decision-making levels in order to secure future
competitiveness.

Korea ESG Performance 2010 15

 Korea ESG Performance 2010

Questions?

Our future.
SolAbility Ltd. contact@solability.com
802 Meritwin 856 www.solability.com Your wallet.
Janghang, Ilsan, South Korea
Tel ++82 31 811 3578 Sustainable Investment.