THE INAVAL PROJECT

1. THE INAVAL PROJECT Jan-Olaf Willums Chairman, InSpireInvest

2. Thea Intangible Asset Valuation ProjectINAVAL A collaborative research effort to “better understand the materiality of intangible values and associated risks on corporate performance”. Launched in 2004 by • IDEAM (part of Credit Agricole in France), • DNV (the global risk assessment and certification group) • InSpire Invest (a SRI / Corporate Governance research entity and former owner of CoreRatings), • Foundation for Business and Society, an independent grant-making foundation, member of the Bellagio Forum. (originally set up by WBCSD) For 2006, in Phase II, INAVAL is being expanded to include • Mistra (Swedish research foundation, member of Bellagio Forum) • Innovest (leading Research house)

3. Reason for launching INAVAL Project • "The traditional accounting system is focused on transactions and historical costs. To determine the future value of a company, you don't look at past history. You need new measures to project forward.” (Sharon Oriel, director of intellectual asset management for Dow Chemical) • Today only 20 percent of a company’s market value is reflected in its accounting system. The largest portion of companies’ economic activities, with which they create value for stockholders and stakeholders, is no longer captured systematically. Accordingly, it is not transparent internally or externally.

4. What do we want to achieve? • develop better techniques to capture a firm’s intangible values and risks related to social, environmental and governance issues. • help assess relationships between non-financial assets and the future value of corporations. • estimate the risk premium that is used in valuation of firm for different industry sectors. • Suggest new/ better indicators and evaluate their relevance for asset management. The project aims to encourage academic input from academia: Sofar cooperation with HEC (Paris), NSM (Oslo) MIT (USA), KTH (Sweden) While the general findings are being published, the models and test results are proprietary to the participating members.

5. Research Mandate Original Mandate in 2004 was to • Understand the relevance and economic impact of specific social, environmental or ethical issues for individual industry sectors. (Materiality) • Suggest better indicators for measuring social, environmental and governance aspects of companies. • Evaluate how to test the sensitivity of predicted financial performance to various SRI indicators when combined with mainstream financial models. This is being expanded in Phase two (2006-) to include • Develop a transparent RISK-OPPORTUNITY methodology to intangible value assessment, (“third generation analysis method”). • Use Delphi and scenario techniques to identify future risks andissues of concern, and their relevance for performance drivers. • Evaluation and test the importance of “weak signals”. • Run mainstream financial models to determine materiality and sensitivity of prioritized indicators. • Explore new ideas to help assessing future value of companies.

6. Risk picture gets more and more complex. Consequences are difficult to quantify. Risks are difficult to measure or calculate. Risk perceptions are not simply determined by individual characteristics but linked to a social and cultural context. A partnership between IDEAM and DNV as a global risk specialist can therefore contribute substantially to the risk understanding of the financial sector. “I am horrified that a scientific study which took so much time and analysis to prepare should be overturned in a few hours by a group of terrorists appealing not to reason, but to ignorance and emotional blackmail” British Nobel prize winner Key in the Inaval Approach:Understanding Risk Management

7. What have we done so far in INAVAL:Mapping Industry issues to find Risks and Intangible Asset Drivers • Reviewed existing approaches to risk evaluation and economic impact of environ- mental, social and governance issues, and the key intangible asset drivers. Findings: • In traditional valuation the focus is on financial value drivers, their historic performance and regression analysis as a basis for forecasting. • There are many competing frameworks for classifying and categorizing these assets. A Gap in the methodology • CSR issues, Governance, and other intangible assets are a general challenge for analysts: A Gap in Communication • There are competing methodologies as to how these assets should be incorporated into mainstream valuation. Conclusion: • Find a transparent way to assess intangible values and the risks/opportunities associated with them. • Separate the analysis of issues /sector risks and the performance of companies in managing/ addressing these risks: • use Delphi and Scenario Techniques to understand what is relevant, • test it out with sensitivity analysis to identify the most important drivers. • Adapt and simplify a “traditional” way to identify the impacts on the company performance: • use sensitivity analysis to gain better understanding of materiality.

8. Steps in the Analytical Framework • Define Drivers and Trends • Identification of most relevant global ESG macro-trends potentially affecting a range of business sectors • For this we have used Delphi techniques and will strengthen this with summaries of scenario studies to highlight potential key issues. 2. Materiality • Assessment of their relevance for different sectors • Identification of generic and sector-specific ESG issues within each macro-trend that can be expected to materially impact companies. 3. Impact on Company Level • Choice of a valuation model, • discounted cash flow (DCF) or WACC – Beta model • Test priority (weighting) of indicators through sensitivity analysis and comparing with information from Innovest data base.

9. Separating the understanding of the drivers from the corporate performance

10. WHAT IS MATERIAL?How can we capture the experience and insight of experts and make it transparent?

11. DNV experimented with modelto capture the dynamics ofIntangible Value Drivers

12. Model applied to Value Drivers

13. Environment Use of natural resources Emissions Climate change Social Society & Community Human rights Product safety Marketplace Employment Diversity Working conditions Recruitment & Retention Strategic positioning Ethical issues Business ethics Ethical issues Value drivers Brand value Intangible value Collateral reputation Regulatory obligations Liability to legal actions Long term access to skills Maintenance of competitive advantage “The Firm” – Internal drivers - 1% Administration - 5% Accidents Sick leave Recruitment + 3% + 4% Absenteeism Employee costs # Employees Training 43 Average salary Non-compliance + 1,5% Marketing costs Costs COGS R&D Company response Policy development Policy implementation Validation and assurance Performance monitoring Transparency and disclosure - 0,75% Profits 1568 Revenue