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Linking Corporate Sustainability and Financial Performance Don Reed, CFA Ecos Corporation October 20, 2002 SRI in the Rockies Copyright Ecos Corporation © 2002 Moral Imperative Approach The World’s Problems - poverty - hunger - loss of biodiversity - resource depletion - lack of basic freedoms - environmental degradation - climate change - inequity Corporate Sustainability - companies are essential to solving these problems - society can withhold their license to operate if they don’t Employees Happens to be Good for Business - statistical correlations - case studies of select companies SRI Social Responsibility TBL reporting Consumers Gov Copyright Ecos Corporation © 2002 Value Centered Sustainability Market Forces Same World Problems plus: - changing role of gov’t - increasing power of civil society - rise of market forces & corps - globalization - connectedness Changed Operating Environment - more complexity & risk - more opportunities - increasing expectations, scrutiny & pressure - good products are no longer enough Value at Stake Corporate Sustainability - value creation is the goal -sustainability integrated as business issue - plan, measure & report value from sustainability - create shareholder & societal value together - appeal to mainstream investors Copyright Ecos Corporation © 2002 Best Arguments for the Value Case for Sustainability • Empirical Evidence –event studies –regression studies –model portfolios • • • • Live Portfolios of Best-in-Class Financial Analysis Incorporating Sustainability Case Studies Logical Connections Copyright Ecos Corporation © 2002 How to Make Good Decisions: Screen for Value DRIVERS OF VALUE APPLICATION TO COMPANY Margin Improvement productivity, footprint reduction, product differentiation Risk Reduction safety, due diligence, licence to operate, directors and legal liability Growth Enhancement new product insight, preferred partner, and access to talent Capital Efficiency pursuit of knowledge intensity Copyright Ecos Corporation © 2002 Copyright Ecos Corporation © 2002 However, a Values Component is also Critical • Value is an essential component … • But it’s not sufficient to meet changes in societal & employee expectations • A values component is critical to success Safety is an ideal partner Copyright Ecos Corporation © 2002 Workplace safety is a vital subset of the sustainability challenge • 2.3 million deaths a year (5,000 a day) • This is far greater than the 650,000 deaths from warfare, and also exceeds deaths from alcohol and drugs combined • 355,000 of these deaths are from accidents & violence • For every fatal accident there are 1,000 non-fatal accidents Source: ILO Global Estimate of Fatalities 2002 Copyright Ecos Corporation © 2002 Workplace SafetySociety Fatalities Unsustainable – – Causes of 2.3 millionSafety deaths a year Workplace Other 2% Accidents & Violence 16% Communicable Diseases 27% Circulatory System Diseases 22% Malignant Neoplasms 27% Respiratory System Diseases 6% Source: ILO Global Estimate of Fatalities 2002 Copyright Ecos Corporation © 2002 Fatality Data for Selected Oil, Chemical Companies Deaths per 10,000 Employees & Contractors 2000 1999 Shell 6.7 4.9 BP 2.3 3.8 Conoco 1.7 0.6 Dow 0.5 1.3 DuPont 0 0 Sources: respective company EH&S reports Copyright Ecos Corporation © 2002 ‘SAFE COMPANIES’ TRAJECTORY The Safety-Sustainability Continuum SUSTAINABILITY – THE ASPIRATION POINT The positive footprint company – adds social, economic and environmental Sustainable market value and safety development Environmentally restorative products Zero ‘footprint’ (e.g. No and processes accidents, waste, pollution Safety enhancing products & processes SAFE/SUSTAINABLE GROWTH THE CHECKPOINT Closed loop production Safe communities Environmentally safe Safe products Precautionary principle to guide safe Eco-efficiency R&D Safe processes WORKPLACE SAFETY & HEALTH – THE ENTRY POINT Copyright Ecos Corporation © 2002 Sustainability as Investment Insight: Our Conclusions • CSR is not an adequate lens for investors • How companies are creating value through sustainability strategies is a good lens • Focusing on safety (and/or other core values) provides an entry point, and a crucial values framework for driving efforts • Failure to consider value creation through sustainability and safety can lead to investment disaster Copyright Ecos Corporation © 2002