WORKING DRAFT Last Modified 4/14/2009 10:39:00 PM Pacific Standard Time Printed 3/25/2009 4:10:23 AM India Standard Time Valuing Corporate Social Responsibility and Sustainability BCCCC Presentation March 2009 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited DRAFT NJE-262616.044-20090318-ashoHR1 Objectives of the research Focus on financial link between ESG activities and financial value creation ▪ Develop understanding of what it takes to: – Create value through ESG activities – Develop more sophisticated metrics to capture the financial value – Build better tools and methods to communicate that value to internal and external stakeholders Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM ▪ McKinsey & Company | 1 NJE-262616.044-20090318-ashoHR1 Key findings ▪ ESG activities create value along the four areas traditionally valued by the market: Growth Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM – – – – Return on Capital Risk Management Management Quality ▪ Investors and CFOs believe ESG activities create value, but are not fully taking it into account ▪ Many companies create real value from ESG activities, but most do not measure that value, and even fewer communicate the value ▪ There is a real opportunity for ESG professionals to fill this gap McKinsey & Company | 2 NJE-262616.044-20090318-ashoHR1 Research methodology Initiative white paper, with analysis of ESG measurement issues and recommendations CFO, Investor, ESG Professional McKinsey Quarterly survey ▪ Examination of ESG programs today, the challenge of measuring value, and methods for assessing and communicating value Examined existing metric systems Company interviews and case studies ▪ 135 interviews across ▪ Framework for linking ESG activities to Value Creation ▪ Tie ESG to value along NJE-262616.044-20090318-ashoHR1 CSR creates value along 4 business dimensions Growth ▪ Gain access to new markets and market share through exposure from ESG programs New products ▪ Create products to meet unmet social needs and increase differentiation New customers/market share ▪ Use ESG to engage consumers and build knowledge of expectations and behaviors Innovation ▪ Develop cutting edge technology and innovative products and services for unmet social or Reputation/differentiation ▪ Foster brand loyalty, reputation and goodwill with stakeholders by engaging with them on Operational efficiency ▪ Enable bottom line cost savings through environmental operations and practices (e.g., energy and Return Workforce efficiency on capital Management quality environmental needs that could translate to business uses, patents, proprietary knowledge, etc. ESG programs water efficiency, less raw materials needed, etc.) ▪ Reduce costs generated by employee attraction and turnover by using ESG to build morale ▪ Develop employees’ skills and increase productivity through participation in ESG activities Reputation/Price premium ▪ Develop reputation on ESG that garners customers’ willingness to pay price increase or premium Regulatory risk ▪ Mitigate risks by complying with regulatory requirements, industry standards, and NGO demands License to operate ▪ Facilitate uninterrupted operations and entry in new markets using local ESG efforts and Supply chain/security of supply community dialogue to engage citizens and reduce local resistance ▪ Secure consistent, long term, and sustainable access to safe, high quality raw materials and products by engaging in community welfare and development Reputational risk ▪ Avoid negative publicity and boycotts by addressing ESG issues Leadership development ▪ Develop leadership skills and improve employee quality through ESG participation Adaptability ▪ Build ability to adapt to changing political and social situations by engaging local communities Long term strategic view ▪ Develop long term strategy encompassing ESG issues SOURCE: Team analysis McKinsey & Company | 17 Printed Risk management ILLUSTRATIVE New markets W orking Draft - Last Modified 3/20/2009 7:02:13 AM ▪ ▪ ▪ 20 companies 11 industries U.S. and Europe Range of functions: ESG professionals, human resources, environment, strategy, finance, and investor relations ▪ professionals 127 ESG professionals and socially responsible institutional investors through BC CCC Range of industries and regions ▪ 4 dimensions typically used by market: growth, return on capital, risk management, management quality Develop 10 best practices for designing strategic ESG programs McKinsey & Company | 3 Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM ▪ ▪ 238 CFOs and investment NJE-262616.044-20090318-ashoHR1 What are your “pain points” as an ESG practitioner? Getting adequate resources, traction and integration internally Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM Establishing and monitoring metrics to assess impact of program Meeting the demands of existing metric systems Getting recognition from the market for effective ESG McKinsey & Company | 4 NJE-262616.044-20090318-ashoHR1 We examined a sample of ESG metrics, measurement, and rating systems1 Categories of ESG metrics, measurement and ratings systems Our sample Examples Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM Indices developed by financial index companies Rankings and data produced by SRI information providers Reputation indices produced by media/ polling/PR firms ESG-related standards ESG Initiatives and learning networks 1 Analysis of ESG metrics systems based only on information publicly available on relevant websites SOURCE: McKinsey Analysis McKinsey & Company | 5 NJE-262616.044-20090318-ashoHR1 A major “pain point” is the existing metrics and indices that evaluate a company’s ESG programs, but do not take financial value into account Average score of the range of metrics systems assessed against 6 criteria Points (score 0-3 points on each issue) Captures opportunities 2 Distinguishes financially material issues 3 Avoids the problem of ‘noise’ 4 Covers the full range of ESG issues 5 Financially quantifiable data 6 Sensitive to different types of companies SOURCE: Team analysis Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM 1 1.5 0.7 1.1 1.9 0.7 1.7 McKinsey & Company | 6 NJE-262616.044-20090318-ashoHR1 How much do you think that ESG activities add to shareholder value? Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM Add less than 2% Add between 2 and 5% Add more than 5% Don’t know McKinsey & Company | 7 NJE-262616.044-20090318-ashoHR1 Investors and CFOs also believe ESG¹ drives value CFOs, n = 84 Investment professionals, n = 154 ESG professionals, n = 87 Percentage of respondents Effect of ESG programs on organization’s shareholder value in typical times2 4 6 6-10 Value add Complementary findings from the survey 11 5 10 ▪ 7 19 2-5 15 18 13 10 21 10 9 <2 No effect Reduced value Don’t know 0 27 ▪ 6 7 22 27 A large majority of ESG professionals think that ESG programs create value in the short and the long term CFOs and investors professionals are more likely than ESG professionals to see the long term benefit of these activities 53 1 Environmental, social, and governance 2 Excluding any changes stemming from the current economic crisis SOURCE: S. Bonini, N. Brun, and M. Rosenthal, “Valuing corporate social responsibility,” The McKinsey Quarterly, February 2009 McKinsey & Company | 8 Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM >11 NJE-262616.044-20090318-ashoHR1 Although many companies create value from ESG, very few assess the financial value creation and even fewer communicate that to the markets Percent of companies interviewed = 100% Creating value Communicating value -40% Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM ESG program Assessing value -10% Maximizing value from ESG Established metrics to monitor program -40% -5% Converting ESG Communicate metrics to financial value ESG value to CFOs, investors McKinsey & Company | 9 NJE-262616.044-20090318-ashoHR1 Pathway to value from ESG along four dimensions Growth ▪ Gain access to new markets and market share through exposure from ESG programs New products ▪ Create products to meet unmet social needs and increase differentiation New customers/ market share ▪ Use ESG to engage consumers and build knowledge of expectations and behaviors Innovation ▪ Develop cutting edge technology and innovative products and services for unmet social or Reputation/differentiation ▪ Foster brand loyalty, reputation and goodwill with stakeholders by engaging with them on ESG Operational efficiency ▪ Enable bottom line cost savings through environmental operations and practices (e.g., energy environmental needs that could translate to business uses, patents, proprietary knowledge, etc. programs and water efficiency, less raw materials needed) Return on capital Risk management Management quality Workforce efficiency ▪ Reduce costs generated by employee attraction and turnover by using ESG to build morale ▪ Develop employees’ skills and increase productivity through participation in ESG activities Reputation/price premium ▪ Develop reputation on ESG that garners customers’ willingness to pay price increase or premium Regulatory risk ▪ Mitigate risks by complying with regulatory requirements, industry standards, and NGO demands License to operate ▪ Facilitate uninterrupted operations and entry in new markets using local ESG efforts and community dialogue to engage citizens and reduce local resistance Supply chain/security of supply ▪ Secure consistent, long-term, and sustainable access to safe, high quality raw materials and Reputational risk ▪ Avoid negative publicity and boycotts by addressing ESG issues Leadership development ▪ Develop leadership skills and improve employee quality through ESG participation Adaptability ▪ Build ability to adapt to changing political and social situations by engaging local communities Long-term strategic view ▪ Develop long-term strategy encompassing ESG issues SOURCE: Team analysis products by engaging in community welfare and development McKinsey & Company | 10 Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM New markets NJE-262616.044-20090318-ashoHR1 Illustration of how companies can create value from ESG 4 dimensions Sub-dimensions Growth New customers/ market share Examples ▪ Risk management Management quality Novo Nordisk: Engaged in emerging economies like India, China, and Bangladesh to help build clinics, national diabetes programs, systematic education for doctors, nurses and patients, and comprehensive patient support initiatives. As a result, in China, Novo Nordisk has earned market leadership (e.g., market share above 70%) Verizon: Launched a new product for elderly and disabled to meet social needs of population. Has resulted in increased sales and 100,000 new customers Operational efficiency ▪ Invested $1 billion over 10 years to reduce its energy consumption and improve its efficiency and has saved $7 billion in last 5 years Reputational risk ▪ Engaged with local stakeholders and built trust with local communities by being responsive to community needs. Has allowed Intel to be proactive about managing concerns, avoiding zoning delays and fines, and benefiting from tax incentives Leadership development ▪ Developed “Corporate Service Corps” to send emerging leaders to work pro bono in emerging markets to foster economic growth. Has led to improvements in five areas: global leadership skills, cultural intelligence and global awareness, employee retention and commitment to IBM, new knowledge and skill contribution to IBM, and intrapersonal growth SOURCE: Team analysis McKinsey & Company Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM ▪ Return on capital ILLUSTRATIVE | 11 NJE-262616.044-20090318-ashoHR1 ESG programs can have direct and indirect financial impacts, depending on the business drivers they target ILLUSTRATIVE Indirect impact Direct financial impact Business driver Effect on business driver Examples of metrics Financial impact Increase revenue through increased sales Develop cutting edge technology/products # and value of new products developed and sold Increase revenue through increased sales Expand the number of patents # and market value of new patents developed Increase revenue from patents Improve talent attraction, morale and retention Employee retention, Cost of training new employees Decrease cost of hiring and training new employees Improve skills (e.g. leadership,…) # employees with new skills from experience Increase revenue per person Trust & reputation Strengthen reputation, goodwill and loyalty with stakeholders Favourability ratings evolution, # meetings with stakeholders Increase revenue indirectly through goodwill Operational efficiency Enable bottom line costs saving Water, energy and raw materials uses reduction Decrease cost Innovation ESG program Human efficiency SOURCE: McKinsey analysis McKinsey & Company | 12 Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM Facilitate markets entry # and value of new markets entered through program New geographical markets NJE-262616.044-20090318-ashoHR1 Improved communication about the value of ESG activities is needed ESG1 professionals, n = 87 CFOs, n = 84 Investment professionals, n = 154 Percentage of respondents2, multiple choice answers Ways to improve the effectiveness of communication about the performance of ESG programs3 55 54 62 Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM Offering integrated corporate reporting (corporate financial + ESG programs data) 44 Integrating information on ESG programs’ financial value into corporate reports 38 56 33 Reporting data related to new markets or customers reach through ESG programs 24 28 36 24 Reporting data related to employees 19 32 Providing anecdotal evidence of how these programs create value Using regular business terminology to communicate about such programs Reporting data related to innovation 41 42 31 23 23 21 32 36 1 Environmental, social, and governance 2 Respondents who answered “other”, “none of the above” or “don’t know” are not shown 3 Excluding any changes stemming from current economic crisis SOURCE: S. Bonini, N. Brun, M. Rosenthal, “Valuing corporate social responsibility”, McKinsey Quarterly, February 2009 McKinsey & Company | 13 NJE-262616.044-20090318-ashoHR1 Pathway to value created by ESG programs Design ESG program resulting from industry issues, stakeholders needs and business drivers Creation of ESG Program ▪ Growth ▪ Return on capital ▪ Risk management ▪ Management quality Pathway to value Develop few relevant metrics to capture the financial value of the program Metrics Set clear message depending on the targeted audience and provide information that the audience is looking for Communication Business drivers Industry issues Stakeholder needs SOURCE: McKinsey analysis Turn socio-political issues into ESG opportunities by meeting stakeholder needs and creating financial value along the business drivers Meet stakeholder expectations and ensure their support in managing ESG opportunities while creating value for the company McKinsey & Company | 14 Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM Impact business drivers and create financial value while meeting stakeholder and societal needs and turning them into ESG opportunities NJE-262616.044-20090318-ashoHR1 Questions for discussion What are the biggest obstacles to integrating better metrics into ESG work? ▪ What are the direct benefits to the company of better metrics? ▪ How might using better metrics change what companies do on the ground in terms of project level impact of ESG? ▪ How can ESG professionals begin to apply a more financial mindset/language to the design, measurement, and communication of ESG programs? ▪ How can ESG practitioners facilitate conversations about the value of ESG activities within their own companies? ▪ How can ESG practitioners begin to create quantitative, financial metrics for ESG activities to allow for seamless communication between ESG professionals, CFOs and investors? McKinsey & Company Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM ▪ | 15 NJE-262616.044-20090318-ashoHR1 Appendix Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM | 16 McKinsey & Company NJE-262616.044-20090318-ashoHR1 Business operates within an overall social contract ▪ Globalization License to operate Business Formal contract Semiformal contract Frontier expectations Society ESG issues ▪ Environmental ▪ ▪ Social Governance Growth and opportunity McKinsey & Company | 17 Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM Global trends ▪ Consumers and employees NJE-262616.044-20090318-ashoHR1 Participants of the research 20 companies from across industries and geographies Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM McKinsey & Company | 18 NJE-262616.044-20090318-ashoHR1 We see 10 best practices for creating value from ESG Best practices Examples 1 Address key issues facing the industry Fundamentals 2 Identify and engage stakeholders Working Draft - Last Modified 4/14/2009 10:39:00 PM Printed 3/25/2009 4:10:23 AM 3 Align with core business strategy 4 Utilize core competencies Strategy 5 Take a long-term perspective 6 Create opportunities and manage risks 7 Ensure strong leadership support Organization 8 Embed into the strategy, organization, and culture 9 Select appropriate partners Implementation 10 Set clear goals and manage like a business SOURCE: Team analysis McKinsey & Company | 19
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