Haci Ömer Sabanci Holding A.S. (SAHOL) Earnings Call Transcript & Summary

Hello, everyone. Welcome to Sabanci Holding ESG. Today, we have Kerem Tezcan, Head of Investor Relations; Yesim Özlale Önen, Human Capital and Sustainability President; and Derya Özet Yalgi, Sustainability Director on stage. Unfortunately, our CFO, Orhun Kostem, couldn't make it to the event today because of a minor health issue. Now first, Kerem will go through how the Sabanci Group's portfolio has been transforming towards a new sustainable economy, followed by Yesim Onen, who will talk about group's sustainability performance. We will have a Q&A session at the end of the presentation. Before I hand over to Kerem, please pay attention to our usual disclaimer, which you find in the presentation right now. And please also note that this day will be recorded and uploaded to the Investor Relations website. With that, I will hand over to Kerem.

Thank you, Sule. Welcome, everyone. Thanks for joining the ESG Day. Let's start with our first slide. As per our higher value purpose, we [indiscernible] and the world for a sustainable life with leading enterprises. In other words, we emphasize our aim to support SGDs, the importance of connecting different markets to each other and our role on paving the way for others in leading technologies and initiatives. All these aspects are also inherent to address the global trends on the transition to a sustainable and digital economy. In these slides, I will explain how we translate our higher purpose, which addresses the twin transition into our capital allocation strategy. Today, energy, materials and royalty constitutes 3 highest emitting sectors contributing to 34%, 21% and 19% of total emissions, respectively. If we transform the existing assets in these areas and groove them in better technologies, then we would address the majority of SGDs that you see on the right-hand side. That's why we invest in energy and climate technologies and enabling infrastructure, all of which are key in decarbonizing the economy. In Advanced Materials Technologies for energy materials and mobility are also major drivers of sustainable growth. Such technologies, decoupled materials use and growth, increased efficiency and decarbonize the value chains. On the other hand, Digital Technologies by itself are fostering innovation, efficiency and access to information. Therefore, they contribute to the faster and more effective achievement of SGDs. These are 3 areas not only contribute to SGDs, but they are also the strongest magnets of policy support, therefore, key sectors for growth. To put into perspective, at present, $3.7 trillion or 65% of our total spending goes annually towards high emissions assets such as vehicles with internal combustion engines. In the net 0 scenario of network for greening the financial system, $9.3 trillion is needed annually for a net 0 transition over the next 30 years. This is $3.5 trillion higher than today, and the increase is equal to half of corporate profits and 1 quarter of total tax revenue of 2020. $6.5 trillion or 70% of total spending would be on low-emission assets reversing today's strengths. These sector groups, mobility, power and buildings would account for approximately 75% of total spending on physical assets in this net 0 scenario. The amount is equivalent to about 7.5% of GDP from 2021 to 2050. The required spending would be front audits rising from 6.8% of GDP today to about 9% of GDP between 2026 and 2030, before falling. These figures represent a scenario in which 1.5 degree limit is not exceeded, which many stakeholders believe is out of reach. However, in the conservative existing policy scenario in which the transition is not desired levels, the shift towards clean technologies present massive opportunities. On the other hand, decarbonization of these 3 sectors are also building blocks of the new industrial policies such as EU Green deal industrial plan and U.S. Inflation Reduction Act, both of which were worth $640 billion. IRA alone is estimated to be translated into $1 trillion in investments when blended with private finance. These policies are a significant sign of political motivations, which go from now to go policies in a bit to attract green investments and maintain industrial competitiveness. What we see in other countries is a similar trend in which the same teams are supported like in Turkey. This tendency is not only triggered by the sustainability concerns but also by the concerns on energy and material security. In parallel to all 3 developments, the digital economy makes up more than 15% of global GDP and has grown 2.5x faster over the previous 10 years than the GDP of the physical world. And even today, digitally transformed enterprises account more than half of GDP -- nominal GDP and are likely to increase in the coming years. In these 3 sectors: energy, materials and mobility, digital technologies offer enormous potential to cut emissions through the use cases that can create both climate benefits and business value. What is more interesting according to analysis done by an investment house, last year, companies with very high environmental performance trades at much higher valuations than those failing on this metric. The companies that lack environmental performance trade at 17x today, last 12-month earnings. However, companies with high performance on environmental metrics were trade at 25x earnings. 5 years ago, this wasn't the case. In the future, the gap between the best and diverse performance, especially in industries that we focus on may widen further. To sum up, all these figures showcased that our growth platforms enable us to capitalize on the growing demand on a sustainable economy while making us future proof in terms of rising ESG regulations and other market forces. As we have been addressing in the past 2 years, we are aiming to double our investments in the medium term. As you can see, we are progressing in our CapEx, and we are in the right direction to reach our medium-term targets as CapEx to nonbank sales reached 10%. In terms of breakdown, in the past 3 years, we spent 77% of this CapEx to the new economy. And out of new economy investments, Energy and Climate Technologies has the highest share because, first, energy is the most urgent topic to be transformed. And second, there are plenty of incentives that has been provided for related transformation investments. But of course, this breakdown will change as we move forward with our investments. Now I will hand over to Yesim to speak more details on sustainability performance. Yesim?

Thank you very much, Kerem. Thank you again for joining us. It's a pleasure to host you at our ESG Investor Day. It has always been very exciting for us to talk about our ESG agenda. At Sabanci, we strongly believe that the new economy areas hold significant potential for us, not only from a financial perspective, but also from a transformation perspective. Our ESG approach goes hand-in-hand with our strategy, both in terms of our new investments and existing operations. We are very aware that our industries play a critical role in addressing some of the most pressing environmental and societal challenges of our time. Therefore, we continuously work to transform our portfolio into a more sustainable one. Now let me give you a brief update on our strategic initiatives and the progress we have made so far towards this target. In 2021, our GHG emissions were at 11.2 million tonnes for Scope 1 and 2, and 11.6 million tonnes for Scope 3. We managed to reduce our emissions intensity of our revenues as we grow our business. What we aim for, however, was to achieve reductions in absolute terms based on size-based targets. This was when we decided to launch a group-wide decarbonization program. The purpose of this program was to encourage our portfolio companies to assess their operations to reduce GHG even further. The effort paid out. In 2022, we managed to decrease our GHG emissions to 9.95 million tonnes for Scope 1 and 2, and 10 million tonnes for Scope 3. This impressive achievement demonstrated our commitment to our environmental footprint. 2022 was a great year for us since we also achieved a 27% utilization of renewable electricity. We envisage that we will reach 80% renewable energy utilization rate across all our operations by 2030. Our dedication to Clean Energy production is equally remarkable. In 2020, our CO2-free electricity production rate was 42%. And in 2022, it went up to 45.5%. We have high ambitions going forward. In 2030, we target 78.5%. And eventually, in 2050, we promised to have 100% Clean Energy production at a global level. Beyond our environmental commitments, Akbank, one of our group companies has pledged TRY 200 billion in sustainable finance. They have made substantial progress already, achieving 30% of their targets in 2022. We have also demonstrated our dedication to sustainability with innovation activities. In 2022, we have reached 53% SDG-linked R&D investment ratio. Our aim is to exceed 70% in the coming years. At Sabanci, we have made a big commitment to invest USD 5 billion in SDG-related areas between 2022 and 2027. And this excludes our digital investments. Our pledge for SDG-related investments is progressing steadily with 10% achievement in 2022. We are determined to achieve 100% in 2027 showing our commitment to allocate capital to sustainable areas. Here, on behalf of Sabanci Holding, I'm telling you a very ambitious story of focusing and dedicating our efforts to sustainability, continuously improving ourselves to do more and achieving our commitments with persistence. We will continue to reduce our environmental footprint, invest sustainably and innovate for a better future. Our vision is clear. Our goals are ambitious. We are committed and responsible. I should admit that it was very hard work to achieve this progress. We had set very challenging targets at the beginning. We aim to be net 0 by 2050. We commit to reducing Scope 1 and 2 carbon emissions by 15% in 2025 and 42% by 2030. Our 42% reduction target is in line with the expectation of SBTI for similar companies. One of the greatest initiatives we've had in achieving our targets was the comprehensive decarbonization program across our entire group, as I told you before. This program includes 15 key initiatives such as grid decarbonization switching to alternative fuels, et cetera. That will take us to our 2030 decarbonization goals. As you can see from the slide, we managed to reverse an increasing trend in our GHG footprint. We believe that more than 40% reduction is possible in 2030 compared to 2021, although the emissions may fluctuate due to external factors. We are dedicated to aligning our efforts with globally recognized sustainability benchmarks. Due to these efforts, we observed a substantial increase in our number of our portfolio companies pledging to the SBTI in 2022. Currently, 60% of the holding Scope 1 and 2 GHG emissions are either determined or in the approval process under the SBTI framework. As you see, we set challenging targets, putting a lot of effort to ensure the sustainable transformation of our portfolio and showed huge progress over a very short period of time. We managed to reduce our carbon footprint while expanding our business. Our latest results show that economic growth and mature responsibility are not mutually exclusive. By making conscious choices in our portfolio, we have not only protected our planet, but also enhanced the long-term resilience and profitability of our business. Our achievements like reducing Scope 1 and 2 emissions and our energy and water consumption, our testament store commitment to delivering value to our shareholders. Our vision goes beyond carbon reduction. Our goal is to transition our low carbon commitment into a broader nature commitment. Our aim is to perform at the same ambition level across the group, focusing on biodiversity, circularity and water targets. This holistic approach will enable us to manage not only our impact on nature but also our dependencies on nature. This will make our business sustainable for future. We are also committed to evolving our governance structure with global governance strengths. These principles have guided our actions and highlighted our commitment to be a responsible business and the driver of positive change. Now let me tell you about a few critical actions we have taken so far to make this happen. We have established robust and transparent governance that allows us to respond swiftly to crisis. This ensures our resilience and adaptability in challenging times. We have actively developed strategies to fast track innovation and entrepreneurship. We ensure the right balance of risks and opportunities. We're nurturing a culture of innovation, while keeping an eye on managing both risks and opportunities effectively. Our audit and control mechanisms have been enhanced to maintain consistency in meeting our ESG commitments. We're increasing transparency in ESG and holding ourselves accountable to our stakeholders. It's a testament to our dedication. We have good practices at the Board level that strengthen governance. There is a nonexecutive chair, ensuring an independent perspective at the highest level. Our Board has industrial and functional expertise and experience and diversity. This enriches our decision-making with a wide range of perspectives. The Board continuously evaluate its own performance to ensure that it operates at its best. Diversity is not just a commitment, it's a reality. 44% of the Sabanci Holding Board of Directors are women, surpassing the EU target for women nonexecutive directors by 2026. We're very proud to say that our Boards of Holding at Akbank are chaired by women, promoting gender diversity and women's empowerment in leadership. We are dedicated to having diversity across all group companies, ensuring at this one woman board member. There is a sustainability committee at the Board level to keep a dedicated focus on ESG-related topics. Regular self-evaluation of board performance is done, which is crucial for maintaining effectiveness. We have also introduced mechanisms to in-house governance at the executive level. There is an up to 20% ESG weight integrated into executive management remuneration emphasizing our commitment to ESG. Our investments are aligned with our X plus 5 strategy with nearly 80% focusing on the new economy. We believe in leveraging our ecosystem. We build ecosystems through innovation and collaboration programs that create synergies among our group companies. This further enhances our sustainability efforts. ESG has become a key theme in all our innovation and CVC programs at the holding level. We have integrated ESG expertise within key committees. ESG principles are at the core of our decision-making processes. We have developed key policies to enhance our ESG performance, reinforcing our commitment to responsible and sustainable business practices. Our dedication to ESG is not just a corporate responsibility. It is a smart business strategy. These developments are not merely milestones. There are steps toward a more sustainable portfolio. Our journey is not limited to the path we are standing on today. As the Chief DI Officer of Sabanci Holding, I'm very proud to say that we're committed to being a future-ready and resilient organization. And we're fully aware of the role, diversity, equity and inclusion play in our success. We have set ambitious targets in this area as well. We aim to have a 50% women representation in our leadership programs and talent pools. By 2030, we aim to achieve a 50% women management ratio at Sabanci Holding, reflecting our dedication to fostering women leadership. We are determined to achieve a 50% total ratio women in STEM and revenue-generating positions. As of 2022 year-end, our actual numbers are already very impressive. 41% women management ratio, 44% rate of women in revenue-generating roles, 33% rate of women in stamp positions. Sabanci Holding is the only holding company in Turkey to be globally recognized by Bloomberg Gender Equality Index for our commitment to gender equality. Our new human resources strategy is a commitment to shaping not only the future of our organization, but the future of our employees, fostering a culture of performance, inclusion and sustainability. We're dedicated to creating an environment where everyone can thrive, feel strong and capable and achieve their full potential. We will definitely continue to strive for excellence and innovation as we march towards our goals. Each initiative we undertake in the ESG domain significantly enhances our position in crucial international ESG-related indices and ratings. This remarkable performance include 2 specific highlights in sight. Our MSCI performance has continuously improved with our efforts upon SDG-linked areas. We have succeeded in a 3-notch increase in 3 years, and we are targeting beyond. We have been listed in the Bloomberg Gender Equality Index, 2 years in a row as the holding -- only holding company operating in Turkey. And when we compare ourselves with local and global peers, we're usually ranked in the first place locally and in the top 3 among our global peers. As we come to the end of the presentation, I kindly ask for a few more minutes of your time to wrap up the key teams and messages that we covered in today's meeting. Firstly, as my colleague explained, we will leverage the opportunities in the new economy through our capital allocation strategy. All new investments must comply with our responsible investment policy and be part of the solution in reaching the SDGs. Secondly, there is a lot going on in the sustainability arena in terms of regulations, standards, new industrial policies and the like. At Sabanci Holding, we have the right governance mechanisms and expertise to make our group companies future proof in a very complex environment. Thirdly, our latest results show that economic growth and responsibility towards nature are not mutually exclusive. By making conscious choices in our portfolio, we have not only protected our planet, but also enhance the long-term resilience and profitability of our business. This is showcased in our improved ESG ratings, which go hand-in-hand with our financial performance. Thank you very much for being with us today and for listening to Sabanci Holdings ESG journey. It's accomplishments to date and its future ESG-focused road map. We express our gratitude for your presence and attention. And now I would like to leave the floor to Kerem to take your questions if you have any.

Thank you Yesim. Now we can go ahead and type your questions for the Q&A section of the zoom so that we can go ahead and answer your questions. Thank you.

We have 2 questions on the line. Let me start with the first one. Could you please provide specific details regarding the $5 billion investments you have committed?

Thanks, Sule. So maybe I can take that question. So first of all, the USD 5 billion commitment will happen between beginning of 2022 and 2027. So this is a 6-years commitment. And also, the majority of the investments that we envisage will be on climate and renewable energy technologies and the surrounding, let's say, value chain. The rest of it will be on teams like sustainable chemicals, which is also touching [indiscernible] economy principles.