1. Disruptions and
ESG integration
January 16, 2018
Jukka Honkaniemi
Julian Beer
Anssi Kiviniemi

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3. Contents
3
1 Why are we here today ? 3
2 ESG integration in the investment process, and the concept of materiality 7
3 Company specific ESG valuation: SSAB example 16

4. 4
Regression of corporate market value on earnings and book (equity) value
Increased role of non-financial data in explaining value and risk
Source: End of Accounting and the Path Forward for Investors and Managers. 2016, Baruch Lev & Feng Gu

5. 5
Disruptions
Source: Global Footprint Network
Environment
Photovoltaics cost curve
Source: Deutsche Welle
Source: Wikipedia
Cobalt

6. 6
Project: Framing Stranded Asset Risks in an Age of Disruption
• Framework for evaluation of disruptions in creating
stranded assets risks.
• Create non-linear future scenarios
• Test for spiralling negative dynamics
• Translate to asset-type implications
Conventional of Stranded Assets risk

7. Contents
7
1 Why are we here today ? 3
2 ESG integration in the investment process, and the concept of materiality 7
3 Company specific ESG valuation: SSAB example 16

8. 8
0
2
4
6
8
10
12
2006 2008 2010 2012 2014 2016
Europe(EUR tn1))
0
2
4
6
8
10
2006 2008 2010 2012 2014 2016
USA(USD tn1))
• Around 30% of all equities and bond funds now classified as “responsibly invested”
• Multiple strategies used:
- Exclusions, Norms-based screening, Engagement, ESG integration, Best-in-class, Sustainability Themed
Emergence of “responsible investment” commitment by asset managers
To qualify as socially responsible investment funds, asset managers have to fulfill one or more defined criteria
Source: EUROSIF, USSIF
1) Assets under management at the beginning of the year

9. 9
0,1 0,4
1,9
3,3 3,6
6,9
0,1 0,5
2,6
4,3
5,1
10,2
0
2
4
6
8
10
12
Sustainability
Themed
Best in Class ESG integration Engagement &
Voting
Norms-based Exclusions
2014 2016
Source: EUROSIF
1) Assets under management at the beginning of the year
MAINLY RETURN DRIVEN MAINLY ETHICALLY DRIVEN
(EUR tn1))
Responsible investment strategies
Ethical strategies have led; return-based strategies becoming more common as correlation to ESG issues emerges

10. COMMON
SECTOR EXCLUSIONS
(responsible and ethical funds)
COMMON
SECTOR EXCLUSIONS
(sustainability funds)
10
controversial weapons
adult entertainment
COMMON
SECTOR EXCLUSIONS
(most responsible funds)
controversial weapons
adult entertainment
alcohol
tobacco
gambling
controversial weapons
adult entertainment
alcohol
tobacco
gambling
coal mining/powergen
oil and oil products
oil production equipment
? next … GHG emitting product
sectors
Exclusions: entire sectors excluded, varying according to type of fund
For asset owners like pension funds, some are excluding these sectors based on stranded asset risks, not ethics

11. ESG: many complex issues, with varying relevance depending on sector
ESG evaluation can be used both to examine responsibility of companies, and to improve quality of financial analyses
11
• GHG emissions
• Air quality
• Energy management
• Fuel management
• Water and wastewater management
• Waster and hazardous materials
management
• Biodiversity impacts
• Human rights and community relations
• Access and affordability
• Customer welfare
• Data security and customer privacy
• Fair disclosure and labeling
• Fair marketing and advertising
• Labour relations
• Fair labour practices
• Employee health, safety and wellbeing
• Diversity and inclusion
• Compensation and benefits
• Recruitment, development and retention
• Lifecycle impacts of products and services
• Environmental, social impacts on assets &
operations
• Product packaging
• Product quality and safety
• Systemic risk management
• Accident and safety management
• Business ethics and transparency of
payments
• Competitive behaviour
• Regulatory capture and political influence
• Materials sourcing
• Supply chain management
• ESG integration into corporate strategy
• Materiality of ESG targets / goals
• Ability to adapt to disruptions / climate
transition
Environment
Social Capital
Human Capital
Business Model and Innovation
Leadership and Governance

12. Quantitative ESG analysis – value focussed
A contemporary addition to the conventional suite of financial analysis considerations
12
1. Independent of (but complementary to) ethical / responsibility screening
2. Focus only on issues that are most material from a value perspective
3. Forward looking, and considers megatrend, policy and customers driven
disruptions
4. Cash flow based (and also cost of capital based for equity value assessment)

13. • Poor reputation, ethics or environmental impact leading to lender / investor aversion
• Lack of management engagement with ESG challenges, leading to lender / investor aversion
Examples of ESG issues that may impact value or valuation
Could lead to positive or negative forecast adjustments, depending on company’s specific attributes and capabilities
13
• Effect of customer focus on emissions or energy efficiency on demand and pricing of the
company’s products
• Growing aversion of customers to buy from a company with poor environmental or other ethical
track record
Revenue themes
(Growth)
• Forecasting increases in carbon emissions costs and other emissions penalties
• Effect of climate or other megatrend disruptions on cost of raw materials
• Cost of transitioning to new products or revamped designs to remain compliant with policy
• Cost of fines and penalties relating to poor ethics and regulations (= governance)
Cost themes
(Cost)
Cost of capital / RRR
issues
(Control)

14. SEB Equity Research’s SAFE – SEB’s Adjustment for ESG
Quantitative ESG analysis led to adjustments to fair value estimates; most material issues varied from sector to sector
14
Source: SEB

15. Key materiality varies from sector to sector
The MOST material issues (from a value perspective) vary from sector to sector
15
Green House Gas Emissions
AUTO
OEM
BRANDED
CONSUMER
GOODS
STEEL
Toxic Emissions
Energy / Emissions Saving Products
Protectionism
Changing customer preferences
Product quality
Digitisation
Supply chain sustainability
Company specific ethics

16. Contents
16
1 Why are we here today ? 3
2 ESG integration in the investment process, and the concept of materiality 7
3 Company specific ESG valuation: SSAB example 16

17. 17

18. • Increasing direct carbon costs relating to policy actions
• Impact on valuations as carbon concerned investors migrate to low emission exposures
Green House Gas
Emissions
• Fines, capital costs and charges from non-compliance with legislation
• Pressure on valuations as investors disinvest from companies with poor waste disposal policy
Toxic Emissions
• Increasing market share or margins for light weight but strong innovative steel products
Energy / Emissions
saving products
• Steel is a global industry, and new trade policies could substantially change sector
profitability
Protectionism
• E.g. poor relations with labour leading to stoppages; history of corruption, market fixing
Company specific
ESG issues
18
Material issues for ESG analysis of steel sector companies
Generated by SEB steel sector equity research analysts

19. In absolute terms, we argue ESG issue reduces SSAB’s value
Based on our ESG analysis, we estimate there should be SEK 6.0bn negative adjustment for SSAB’s market value
19
53
2 -1
-7
0 -1 1
47
40
42
44
46
48
50
52
54
56
58
60
Share price
before SAFE
adjustment
(SEK)
PRO FADE COST LAW SIZE TIME Share price after
SAFE
adjustments
(SEK)
SSABshareprice(A-class,SEK)
Source: SEB

20. In relative terms, SSAB is a top quality steel company
Both from an economic perspective (products, margins), and also from an emissions intensity perspective
20
90
100
110
120
130
140
150
SSAB EU average NAFTA Russia China India
CO2 efficient steel production - indexed
+200,000 cars
driven 20,000km each
Source: Stahl-Zentrum
CARBON EMISSIONS
INTENSITY PER
TONNE OF STEEL
PRODUCED (INDEX,
SSAB=100)

21. Does relative ESG score correlate with valuation?
That correlation cannot be found among large steel companies currently
21
Source: SEB, Thomson Reuters, MSCI
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Company A Company B Company C Company D Company E Company F
ESG score (LHS) 2018E P/E valuation multiple (RHS)
Relative ESG
SCORE, major
listed steel
companies
2018
PRICE/EARNINGS
RATIO

22. Inflection points mean that there will be an absolute change
We estimate there could be some SEK 650m extra costs coming from SSAB’s emission deficit in the future
22
Source: SEB
0%
25%
0%
5%
10%
15%
20%
25%
30%
2017E 2030E
Yearly CO2 emission right costs for SSAB (% of 2017E pre-tax profit)
%ofSSAB's2017Epre-taxprofit(%)

23. The future of steelmaking?
“HYBRIT” – joint venture with LKAB and Vattenfall to solve steel industry’s carbon dioxide challenge
23
Source: SSAB