Transcript Valuing Corporate Social Responsibility and Sustainability

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
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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
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▪
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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
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
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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
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Printed
Risk
management
ILLUSTRATIVE
New markets
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▪
▪
▪
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
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▪
▪ 238 CFOs and investment
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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
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We examined a sample of ESG metrics, measurement,
and rating systems1
Categories of ESG
metrics, measurement
and ratings systems
Our sample
Examples
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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
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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)
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
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1
1.5
0.7
1.1
1.9
0.7
1.7
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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
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
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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%
Creating value
Communicating
value
-40%
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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
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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
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New markets
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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
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▪
Return
on capital
ILLUSTRATIVE
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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
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Facilitate markets entry
# and value of new
markets entered through
program
New geographical
markets
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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
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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
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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
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Impact business
drivers and create
financial value while
meeting
stakeholder and
societal needs and
turning them into
ESG opportunities
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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?
▪
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
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▪
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Appendix
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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
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Global trends
▪ Consumers
and
employees
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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
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