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					WORKING DRAFT                                                                                       DRAFT
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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
                                                      NJE-262616.044-20090318-ashoHR1


Objectives of the research




        ▪   Focus on financial link between ESG




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            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




                                                       McKinsey & Company      | 1
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Key findings


    ▪   ESG activities create value along the four
        areas traditionally valued by the market:
        –   Growth




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        –   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


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Research methodology
  Initiative white paper, with analysis of ESG   CFO, Investor, ESG Professional
  measurement issues and recommendations         McKinsey Quarterly survey

                 ▪ Examination of ESG                                                                                                                                                                                                                        ▪ 238 CFOs and investment
                     programs today, the                                                                                                                                                                                                                         professionals
                     challenge of measuring                                                                                                                                                                                                                  ▪   127 ESG professionals and




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                     value, and methods for                                                                                                                                                                                                                      socially responsible
                     assessing and                                                                                                                                                                                                                               institutional investors
                     communicating value                                                                                                                                                                                                                         through BC CCC
                 ▪   Examined existing metric                                                                                                                                                                                                                ▪   Range of industries
                     systems                                                                                                                                                                                                                                     and regions



                                                 Framework for linking ESG activities
  Company interviews and case studies            to Value Creation

                 ▪ 135 interviews across                                                                                                                                                                                                                     ▪ Tie ESG to value along
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                                                 CSR creates value along 4 business dimensions                                                                                   ILLUSTRATIVE


                                                                 New markets                  ▪ Gain access to new markets and market share through exposure from ESG programs


                     20 companies                  Growth
                                                                 New products

                                                                 New customers/market share
                                                                                              ▪ Create products to meet unmet social needs and increase differentiation
                                                                                              ▪ Use ESG to engage consumers and build knowledge of expectations and behaviors                                                                                    4 dimensions typically used
                 ▪
                                                                 Innovation                   ▪ Develop cutting edge technology and innovative products and services for unmet social or


                     11 industries                                                                                                                                                                                                                               by market: growth, return on




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                                                                                               environmental needs that could translate to business uses, patents, proprietary knowledge, etc.

                                                                 Reputation/differentiation   ▪ Foster brand loyalty, reputation and goodwill with stakeholders by engaging with them on
                                                                                               ESG programs




                 ▪
                                                                 Operational efficiency       ▪ Enable bottom line cost savings through environmental operations and practices (e.g., energy and


                     U.S. and Europe                                                                                                                                                                                                                             capital, risk management,
                                                                                               water efficiency, less raw materials needed, etc.)
                                                   Return
                                                              Workforce efficiency            ▪ Reduce costs generated by employee attraction and turnover by using ESG to build morale
                                                   on capital                                 ▪ 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


                     Range of functions: ESG                                                  ▪ Mitigate risks by complying with regulatory requirements, industry standards, and NGO demands
                                                                                                                                                                                                                                                                 management quality


                                                                                                                                                                                                       Printed
                                                                 Regulatory risk

                                                                 License to operate           ▪ Facilitate uninterrupted operations and entry in new markets using local ESG efforts and



                                                                                                                                                                                                                                                             ▪
                                                   Risk                                        community dialogue to engage citizens and reduce local resistance
                                                   manage-                                    ▪ Secure consistent, long term, and sustainable access to safe, high quality raw materials and

                     professionals, human                                                                                                                                                                                                                        Develop 10 best practices
                                                                 Supply chain/security of
                                                   ment          supply                        products by engaging in community welfare and development

                                                                 Reputational risk            ▪ Avoid negative publicity and boycotts by addressing ESG issues

                                                                                              ▪ Develop leadership skills and improve employee quality through ESG participation

                     resources, environment,                                                                                                                                                                                                                     for designing strategic ESG
                                                                 Leadership development
                                                   Manage-
                                                   ment          Adaptability                 ▪ Build ability to adapt to changing political and social situations by engaging local communities
                                                   quality
                                                                 Long term strategic view     ▪ Develop long term strategy encompassing ESG issues


                     strategy, finance, and      SOURCE: Team analysis                                                                                                McKinsey & Company | 17                                                                    programs
                     investor relations

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What are your “pain points” as an ESG practitioner?


                         Getting adequate resources,
                         traction and integration internally




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                         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
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We examined a sample of ESG metrics, measurement,                                                                     Our sample
and rating systems1
Categories of ESG
metrics, measurement
and ratings systems                   Examples
  Indices developed
  by financial index




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  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
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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)




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          1    Captures opportunities                                1.5

               Distinguishes financially
          2                                          0.7
               material issues

               Avoids the problem
          3                                                  1.1
               of „noise‟

               Covers the full range of
          4                                                                       1.9
               ESG issues

          5    Financially quantifiable data         0.7

               Sensitive to different types
          6                                                                1.7
               of companies



SOURCE: Team analysis                                                       McKinsey & Company      | 6
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How much do you think that ESG activities add
to shareholder value?




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                    Add less than 2%


                    Add between 2 and 5%


                    Add more than 5%


                    Don‟t know




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Investors and CFOs also believe ESG¹ drives value                                                                       CFOs, n = 84
Percentage of respondents                                                                                               Investment
                                                                                                                        professionals, n = 154
       Effect of ESG programs on organization’s                                                                         ESG professionals,
                                                                                                                        n = 87
       shareholder value in typical times2
                                           4
                      >11                            11                                                  Complementary findings




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                                               6                                                         from the survey
                                                    10
                      6-10                  5                                                            ▪   A large majority of ESG
       Value                                    7                                                            professionals think that
       add                                                19                                                 ESG programs create
                      2-5                                         27
                                                        15                                                   value in the short and
                                                         18                                                  the long term
                      <2                              13                                                 ▪   CFOs and investors
                                                     10                                                      professionals are more
                                                           21                                                likely than ESG
                      No effect                      10
                                                    9                                                        professionals to see the
                     Reduced                   6                                                             long term benefit of
                     value                     7                                                             these activities
                                       0
                      Don‟t                                  22
                                                                  27
                      know                                                                  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,
                                                                                                                     McKinsey & Company      | 8
        February 2009
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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%

                                                                     Communicating
        Creating value                     Assessing value              value

ESG program        -40%




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                                    -10%
                Maximizing
                value from ESG
                                  Established
                                  metrics to
                                                     -40%
                                  monitor program


                                                                       -5%

                                                    Converting ESG
                                                    metrics to      Communicate
                                                    financial value ESG value to
                                                                    CFOs, investors


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Pathway to value from ESG along four dimensions


                  New markets                  ▪ 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/
  Growth          market share
                                               ▪ Use ESG to engage consumers and build knowledge of expectations and behaviors




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                  Innovation                   ▪ Develop cutting edge technology and innovative products and services for unmet social or
                                                environmental needs that could translate to business uses, patents, proprietary knowledge, etc.

                  Reputation/differentiation
                                               ▪ Foster brand loyalty, reputation and goodwill with stakeholders by engaging with them on ESG
                                                programs

                  Operational efficiency       ▪ Enable bottom line cost savings through environmental operations and practices (e.g., energy
                                                and water efficiency, less raw materials needed)
  Return                                       ▪ Reduce costs generated by employee attraction and turnover by using ESG to build morale
                  Workforce efficiency
  on capital                                   ▪ 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
  Risk                                          community dialogue to engage citizens and reduce local resistance
  management      Supply chain/security of     ▪ Secure consistent, long-term, and sustainable access to safe, high quality raw materials and
                  supply                        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
  Management
                  Adaptability                 ▪ Build ability to adapt to changing political and social situations by engaging local communities
  quality
                  Long-term strategic view     ▪ Develop long-term strategy encompassing ESG issues


SOURCE: Team analysis                                                                                                     McKinsey & Company        | 10
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Illustration of how companies can create value from ESG                                                         ILLUSTRATIVE

4 dimensions Sub-dimensions       Examples
                 New customers/   ▪   Novo Nordisk: Engaged in emerging economies like India, China,
                 market share         and Bangladesh to help build clinics, national diabetes programs,
  Growth                              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%)




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                                  ▪   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      ▪   Invested $1 billion over 10 years to reduce its energy consumption
  Return         efficiency           and improve its efficiency and has saved $7 billion in last 5 years
  on capital



                 Reputational     ▪   Engaged with local stakeholders and built trust with local
  Risk           risk                 communities by being responsive to community needs. Has
  manage-                             allowed Intel to be proactive about managing concerns, avoiding
  ment                                zoning delays and fines, and benefiting from tax incentives


                 Leadership       ▪   Developed “Corporate Service Corps” to send emerging leaders to
  Manage-        development          work pro bono in emerging markets to foster economic growth. Has
  ment                                led to improvements in five areas: global leadership skills, cultural
  quality                             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      | 11
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                                                                                                          ILLUSTRATIVE
ESG programs can have direct and indirect financial
impacts, depending on the business drivers they target                                              Indirect impact
                                                                                                    Direct financial impact

             Business driver       Effect on business driver     Examples of metrics         Financial impact

                                                                  # and value of new
              New geographical                                    markets entered through     Increase revenue
                                    Facilitate markets entry
              markets                                             program                     through increased sales




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                                    Develop cutting edge          # and value of new          Increase revenue
                                                                  products developed and
                                    technology/products                                       through increased sales
                                                                  sold
              Innovation
                                    Expand the number of          # and market value of       Increase revenue from
                                    patents                       new patents developed       patents

                                                                  Employee retention,         Decrease cost of hiring
  ESG                               Improve talent attraction,
                                                                  Cost of training new        and training new
program                             morale and retention          employees                   employees
              Human efficiency
                                    Improve skills (e.g.          # employees with new        Increase revenue per
                                    leadership,…)                 skills from experience      person

                                    Strengthen reputation,        Favourability ratings
                                                                                              Increase revenue
              Trust & reputation    goodwill and loyalty with     evolution, # meetings
                                    stakeholders                  with stakeholders           indirectly through goodwill


              Operational           Enable bottom line costs      Water, energy and raw
                                                                  materials uses reduction    Decrease cost
              efficiency            saving


SOURCE: McKinsey analysis                                                                       McKinsey & Company      | 12
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Improved communication about the value of ESG                                                                   ESG1 professionals, n = 87
                                                                                                                CFOs, n = 84
activities is needed
Percentage of respondents2, multiple choice answers                                                             Investment professionals, n = 154

    Ways to improve the effectiveness of communication about the performance of
    ESG programs3

        Offering integrated corporate reporting                                                                                            62
                                                                                                                                    55
        (corporate financial + ESG programs data)




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                                                                                                                                    54
        Integrating information on ESG programs‟                                                                         44
                                                                                                                    38
        financial value into corporate reports                                                                                        56
        Reporting data related to new markets or                                                              33
                                                                                                   24
        customers reach through ESG programs                                                             28
                                                                                                                36
        Reporting data related to employees                                                         24
                                                                                              19
        Providing anecdotal evidence of                                                                       32
                                                                                                                        41
        how these programs create value                                                                                 42
        Using regular business terminology                                                                 31
                                                                                                 23
        to communicate about such programs                                                       23
                                                                                                21
        Reporting data related to innovation                                                               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
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Pathway to value created by ESG programs

 Impact business
 drivers and create                             ▪ Growth
 financial value while      Design ESG          ▪ Return on                             Set clear message
 meeting                    program resulting     capital            Develop few        depending on the
 stakeholder and            from industry       ▪ Risk               relevant metrics   targeted audience




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 societal needs and         issues, stake-        management         to capture the     and provide informa-
 turning them into          holders needs and   ▪ Management         financial value    tion that the audience
 ESG opportunities          business drivers      quality            of the program     is looking for



                             Creation of ESG     Pathway to
                                                                     Metrics               Communication
                             Program             value

    Business
    drivers
                                     Industry
                                     issues      Turn socio-political issues into ESG opportunities
                                                 by meeting stakeholder needs and creating
                                                 financial value along the business drivers



                   Stakeholder                   Meet stakeholder expectations and ensure their
                   needs                         support in managing ESG opportunities while
                                                 creating value for the company

SOURCE: McKinsey analysis                                                                  McKinsey & Company      | 14
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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?




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   ▪   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?


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                                  Appendix
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Business operates within an overall social contract




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 Global trends
                                                                               ESG issues
 ▪ Consumers
   and                                     Semi-      Frontier                 ▪ Environ-
                                Formal
   employees         Business              formal     expecta-   Society         mental
                                contract
                                           contract   tions
 ▪   Globalization                                                             ▪   Social
                                                                               ▪   Governance




License                                                                            Growth and
to operate                                                                         opportunity

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Participants of the research




     20 companies from across industries and geographies




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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




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                        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