CorporateSustainabil ity 4 8 07

Corporate Sustainability: 

Corporate Sustainability Social and Environmental Responsibility for Sustained Economic/Financial Prosperity Rev 4/7/07

What is “Sustainability”: 

What is “Sustainability” A whole-systems, cross-sector Issue “How can the present generation meet its needs in ways that are not only economically viable, environmentally sound and socially equitable but that also allow future generations to do the same” United Nations World Commission on Environment and Development (The Brundtland Commission), Our Common Future, 1987 “Company’s ability to achieve its business goals and increase long-term shareholder value by integrating economic, environmental and social opportunities into its business strategies.” “Symposium on Sustainability – Profiles in Leadership,” NYC, Oct. 2001.

Business Case for Managing Sustainably: Industrial Ecology: 

Business Case for Managing Sustainably: Industrial Ecology “In an increasingly interconnected world, social, environmental and governance issues are no longer just “soft” business concerns but are increasingly becoming material for long-term viability…because helping to build social and environment pillars makes the global marketplace stronger” Georg Kell, Director, UN Global Compact A partnership in which 2,400 firms from more than 80 countries (e.g., Bayer AG, BP, Daimler-Chrysler, Deloitte, DeutscheBank, EDF, Dupont, HP, Novartis, Pechney, Pfizer, Ricoh, Royal Shell, SAP, Statoil, Sumarco, Unilever, Volkswagen) are working with governmental, non-profit, and academic institutions to advance aspirational goals in the areas of human rights, labor standards, the environment and anti-corruption

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“There is a growing body of evidence that companies which manage environmental, social, and governance risks most effectively tend to deliver better risk-adjusted financial performance than their industry peers. Moreover, all three of these sets of issues are likely to have an even greater impact on companies’ competitiveness and financial performance in the future.” Jean Frijns Chief Investment Officer ABP Netherlands (Largest pension fund in the world) Managing Sustainably and Shareholder Wealth

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Sustainability Trends (Dow Jones)

Drivers of Sustainable Enterprises: 

Drivers of Sustainable Enterprises Pressure for corporate social responsibility is increasing Greater accountability for business ethics and governance Corporate role in human rights and widening economic gaps Accountability for the use of natural resources Pressure to seek economic growth in challenging emerging markets Competition increasingly between networks, rather than between individual firms New organizational collaborative models emerging across sectors (public-private partnerships & private-private “Coopetition”)

Top Sustainability-Related Drivers of Business Decisions Today –Worldwide Survey 2007 : 

Top Sustainability-Related Drivers of Business Decisions Today –Worldwide Survey 2007 Ensuring our workers’ health and safety wherever we operate Improving our reputation/brand image with shareholders and the public Effectively addressing regulatory restrictions wherever we operate Enhancing innovation for competitive advantage Meeting expectations of investors and lenders Attracting and retaining diverse top talent Improving employee morale engagement and commitment Providing products and services that are good for the world Enhancing current customer satisfaction and loyalty through sustainability initiatives Increasing security for our employees customers and the communities in which we operate Attracting new customers and developing new markets through sustainability initiatives Improving relations with community stakeholders including nongovernmental organizations (NGOs) and community activists Enhancing operational efficiency through energy and waste reduction AMA/HRI Sustainability Survey 2007

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Environmental, Social, and Governance Performance How Can Managing Sustainably Enhance Competitive Strategy & Returns?

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The “Triple Bottom line” Concept–People, Planet, Profits * Social Value Added Financial & Economic Value Added Slide adapted from Schanzenbaecher, Deutsche Bank, 2001 *Elkington, 1998, 2004

The Triple Bottom Line Sustainability Advantage “Business Case”*: 

The Triple Bottom Line Sustainability Advantage “Business Case”* Greater employee engagement Better recruitment & retention of talent Increased employee productivity Reduced operating expenses Reduced risk/easier financing Increased revenue/market share The “fortune at the bottom of the pyramid” Increased social/reputational capital *Esty & Winston, 2006; Savitz & Weber, 2006; Hitchcock & Willard, 2006

Sustainability & Talent Management: 

Sustainability & Talent Management “Better recruitment and retention of employees” is a prime benefit of adopting sustainability practices (Adams & Zutshi, 2004, pp. 3-5; Willard, 2002) The Good Search 2007 survey* 96% would like to work at a “successful company that also aspires to be good.” 64% strongly agreed, 32% somewhat agreed 92% “would be more inclined to trust a good employer” and “would feel better about themselves” by working for a socially responsible corporation. 68% believed it would hurt their careers if their resume indicated they had worked for a “bad” organization. Although working at a “good” company was seen as a plus, only 36% said they thought their company was good and had published CSR practices. *Talent search company based in Westport, CT. 188 respondents, 75% employed in managerial or higher positions. Similar results from recent PWC % McKinsey surveys.

“The Fortune at the Bottom of the Pyramid”*: 

“The Fortune at the Bottom of the Pyramid”* “Low-income markets present a prodigious opportunity for the world’s wealthiest companies – to seek their fortunes and bring prosperity to the aspiring poor.” “ This is a time for multinational corporations (MNCs) to look at globalization strategies through a new lens of inclusive capitalism. For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits, and incalculable contributions to humankind.” *C.K. Prahalad & Stuart L. Hart, 2004

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Intangible Value Tangible Value “Intangible” Corporate Value 1930 – Intangible value represented roughly 30% of the market value of major corporations 2000 – Intangible value represented 80-85%* 2005 – And beyond ? * Based on capital market valuations.

Sustainability Research Indices: 

Sustainability Research Indices Innovest Strategic Value Advisors. BWC Quality of Work-life Portfolio Sustainable Asset Management (SAM) and the Dow Jones Sustainability Index. IC Value: Science Based Conservation Investment.

Automotive Sector Correlation to Share Price Performance (Innovest EcoValue Index): 

Automotive Sector Correlation to Share Price Performance (Innovest EcoValue Index) 50 % outperformance - 7 years (12-96 to 06-05)

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Utilities Sector Portfolio- 1997-1999 (Innovest EcoValue Index) Inovest, Dixon (2001 Top Half

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Telecom Sector 1998-1999 (Innovest EcoValue Index )

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Products & Services Intellectual Capital Product Safety Stakeholder Capital Labour relations Regulators and Policymakers Local communities & NGOs Customer relationships Supply Chain Partnerships/alliances Human Capital Recruitment/retention strategies Employee Motivation Innovation Capacity Knowledge Development & Dissemination Health & Safety Progressive workplace practices IVA™ Sustainable Governance Strategic Scanning Capability Agility/Adaptability Performance indicators/ monitoring/reporting International “best practice” Emerging Markets Economic Development Human Rights Oppressive Regimes Innovest Intangible Value Assessment Social Research

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BWC FORTUNE 500 companies comprise a group of 45 $1000 invested in June 2001 would have become $1341 by end of April 2004 $1000 invested in the S&P 500 would have become $909 by end of April 2004 The BWC portfolio significantly outperformed the S&P index for this three-year period. BWC Best Work Places For Commuters (2001-2004)

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Dow Jones Sustainability Index – Criteria Average Scores for DJSI members and non-members in Assessment 2004 examples

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196% 145% DJSI World – USD Performance and Risk (December 1993 - November 2005, USD, Total Return Index

The IC Value “Iceberg” balance sheet: 

Four Key Intangible Value Drivers Financial Capital 30% Sustainable Governance Strategy Capability/ Adaptability Traditional governance practices Stakeholder Capital Regulators & Policymakers Local communities NGOs Customer relationships Alliance partners Supply chain Social benefits of products & services Human Capital Recruitment retention strategies Employee motivation Labor relations Innovation capacity Knowledge Development & Dissemination Health & Safety Progressive workplace practices Eco-Value Quality of environmental management Environmental risks & Eco-efficiency Strategic profit opportunities The IC Value “Iceberg” balance sheet Intangible Capital 70%

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ICValue Top Tier Financial Performance (2002-2005)

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Current Sustainability Leaders? Examples of companies that are well along the journey to sustainability include the following, listed by industry: Energy: BP, Conoco-Philips, Florida Power and Light, Royal Dutch Shell, PG&E Manufacturing: Alcoa, Alcan, BASF, Dell, DuPont, Eastman-Kodak, Electrolux, Epson, GE, GM, Herman Miller, Honda, HP, IKEA, Intel, Interface, Johnson Controls, Mattel, Nike, Philips NV, SC Johnson, Toyota, Volkswagen Food: Bon Appetit, The Coca Cola Co., Frito Lay, Heinz, Unilever Pharmaceuticals/Healthcare: Johnson & Johnson, Novartis Services: Bank of America, Continental Airlines, Goldman Sachs, Kaiser Permanente, Starbucks, Swiss Re

The SUSTAINABILITY PYRAMID: Qualities Associated with Highly Successful Sustainability Strategies: 

The SUSTAINABILITY PYRAMID: Qualities Associated with Highly Successful Sustainability Strategies COLLABORATIVE INTEGRATION Holistic Integration Broad Stakeholder Engagement TRACTION Alignment of Hard & Soft Organization Systems Metrics – Measurement & Reporting FOUNDATION Strategic Centrality Senior Management Support Deeply Embedded Values The Triple Bottom Line SUSTAINABLE ENTERPRISE ©Institute for Sustainable Enterprise, 2006

Top 12 Most Commonly Used Sustainability-Related Practices: 

Top 12 Most Commonly Used Sustainability-Related Practices Ensure the health and safety of employees Ensure accountability for ethics at all levels Engage collaboratively with community and nongovernmental groups Support employees in balancing work and life activities Encourage employee volunteerism Involve employees in decisions that affect them Provide employee training and development related to sustainability Reduce waste materials Highlight our commitment to sustainability in our brand Improve energy efficiency Work with suppliers to strengthen sustainability practices Get groups across organization that are working on sustainability-related initiatives to work more closely together AMA/HRI Sustainability Survey 2007

Factors That Modestly Hinder the Movement Toward Sustainability Practices : 

Factors That Modestly Hinder the Movement Toward Sustainability Practices Lack of demand from consumers and customers. Lack of demand from managers and employees. Lack of awareness and understanding. Lack of standardized metrics or performance benchmarks. Lack of specific ideas on what to do and when to do it. Lack of demand from shareholders and investors. Lack of demand from suppliers. Unclear or weak business case. Note: None of mean responses were more than 3.1 (on a 5-point scale) AMA/HRI Sustainability Survey 2007

Appendix: 

Appendix

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Exemplar Practice: Interface, Inc. –The Full Sustainability Pyramid Interface, Inc., one of the largest carpet and interior furnishings companies, is an exemplar of a range of sustainability and Triple Bottom Line practices. Ray Anderson, Founder, Chairman and CEO, is focused on finding innovative ways to cut waste, emissions and energy use, at the same time as he tries to convert other business leaders to follow suit. Since 1994, Interface has saved more than $300 million, with the intention of saving $80 million per year when they reach their goal of zero waste. “Our goal is to take nothing from the earth by 2020.” (Ray Anderson quoted in Newman, R., 2006). To accomplish these ambitious goals, the company is targeting various broad initiatives (e.g., zero waste, benign emissions, renewable energy) as a compass to guide them on their journey. These practices are far reaching and cover all aspects of the business: People (Customers, Employees, Suppliers, Community, Management), Product (Design, Packaging, Manufacturing, Marketing, Purchasing) Place (Facility and Operations) Interface has embraced “The Natural Step,” a frame of reference conceived by Dr. Karl-Henrik Robert of Sweden to define the system conditions for ecological sustainability (Anderson, 1998).

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Exemplar Practice: General Electric –Sustainability Strategy GE has taken the lead and embarked on a number of new initiatives to provide solutions to the world’s environmental ills, such as through its Ecomagination initiative. GE’s plans include significantly reducing its greenhouse gas emissions while stepping up its sales of renewable energy, efficient power generation, water purification, and so forth. GE has doubled its investment in R&D for environmental technologies to $1.5 billion, doubled its expected sales of environmental products from $10 billion to $20 billion in five years, and more. (www.ecomagination.com).

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Exemplar Practice: Unilever –Bottom-of-the-Pyramid Market Opportunities About 40% of Unilever’s revenue and much of its growth comes from developing nations. For example, in Brazil, in order to promote its soap and detergent, the company operates a free community laundry in a Sao Paulo poverty stricken area, helps finance tomato growers to adopt eco-friendly irrigation techniques, and focuses on recycling waste at a toothpaste factory. In Bangladesh, India, Unilever sponsors a floating hospital and helps women start micro-businesses so they can afford to buy soap and water. Unilever teaches people in Ghana how to reuse waste and bring potable water to communities in need. Their CEO Patrick Cescau sees the importance of “helping such nations wrestle with poverty, water scarcity, and the effects of climate change” as vital to staying competitive in the coming decades” (Engardio, 2007, p.52).

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Exemplar Practice: The Coca Cola Company –Strategy & Alignment The Coca Cola Company has committed itself to a vision of long-term sustainable growth, and it is beginning to align all of its external and internal systems in support of its strategic goals around creating: safe, healthy and productive workplaces; access to potable water; healthy, active children and adults; and growing local economies. The Company has begun to address all of these issues, both externally and internally. Externally, for example, The Coca Cola Company became a signatory to the UN Global Compact in 2005), and it “co-founded the Global Water Challenge with private and public sector partners to improve water access and sanitation in countries in critical need.” (The Coca Cola Company, 2006, p.7). The Company’s “Manifesto for Growth” integrates all five facets of the business – people, portfolio, profit, partners and planet. Its people around the world were introduced to its Manifesto through training and multi-day workshops, where they had the opportunity to discuss strategies for implementing its principles into their day-to-day work.

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Exemplar Practices: Electrolux –Metrics Swedish-based Electrolux, the home appliance company, is trying to play their part to fight global warming by offering among the most water- and energy- efficient appliances on the market, and encouraging consumers to switch to these products.” (“Our World,” 2005). The organization reportedly uses both corporate- and facility-level performance indicators based on The Natural Step, which is a program that helps guide organizations into sustainable practices. These indicators are designed with their sustainability goals clearly in focus and are also expressed in business terms such as “share of total sales” and “added value” so that they are understandable among top management for planning purposes. The performance indicator “share of total sales represented by environmentally leading products” measures the success of this strategy directly and can demonstrate, to even skeptical managers, the value of the company’s investment in its sustainability strategy. Electrolux reported in 1997 that environmentally leading products were demonstrably more profitable than other products.

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Exemplar Practice: Alcoa –Stakeholder Engagement In Iceland, Alcoa worked with the operator of the hydroelectric facility to design, build and maintain a smelter and hydroelectric project in such a way that “balances environmental, social and economic aspects,” according to the organization. The partners worked with a “coalition of external stakeholders” in order to generate sustainability objectives and metrics that can be used to measure performance. “An advisory group of 30+ stakeholders from Alcoa, Landsvirkjun (the operator of the hydroelectric plant), and numerous governmental, educational, and non-governmental organizations is the backbone of the Iceland Sustainability initiative,” notes Aloca on its website. “The group’s purpose is to ... develop indicators to measure the performance of the hydro facility and smelter against sustainability targets. Participants include project supporters and those opposed.” (“Defining,” 2007)

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6 4 3 2 Collection of Data From Companies - Annual Reports, 10Ks, Environmental Reports, websites From Government – EPA data, DOE data, other gov’t data From NGOs, other research organizations, and many other sources Overview of Sector Analyst reviews general information on the sector which is being analyzed Analyst determines major risks and opportunities of the sector, which will determine the focus of the analysis Preliminary Work on Rating Matrix Analyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector Reality Check Analyst defends final ratings in front of Managing Director of Research or CEO 1 Company Interview Analyst interviews each company, honing in on questions resulting from preliminary analysis 5 Completion of Rating Matrix Analyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector Innovest Rating Model

Innovest Rating Model: 

Innovest Rating Model A rating from AAA to CCC is assigned to company based on total Analyst assesses company against 100+ factors by assigning a score of 0 – 10 (10 = best in class) Model computes all scores to generate a normalized figure for the company Example: Pharmaceutical Sector Note: Figures in table above are indicative and not actual.

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Intangible Value Assessment – Final Product