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WORKING DRAFTLast Modified 4/14/2009 10:39:00 PM Pacific Standard TimePrinted 3/25/2009 4:10:23 AM India Standard Time
Valuing Corporate Social Responsibility and Sustainability
March 2009
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
BCCCC Presentation
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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Key findings
▪ ESG activities create value along the four areas traditionally valued by the market:
– Growth
– 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
▪ Examination of ESG programs today, the challenge of measuring value, and methods for assessing and communicating value
▪ Examined existing metric systems
▪ 238 CFOs and investment professionals
▪ 127 ESG professionals and socially responsible institutional investors through BC CCC
▪ Range of industries and regions
▪ 135 interviews across 20 companies
▪ 11 industries▪ U.S. and Europe▪ Range of functions: ESG
professionals, human resources, environment, strategy, finance, and investor relations
▪ Tie ESG to value along 4 dimensions typically used by market: growth, return on capital, risk management, management quality
▪ Develop 10 best practices for designing strategic ESG programs
Initiative white paper, with analysis of ESG measurement issues and recommendations
CFO, Investor, ESG Professional McKinsey Quarterly survey
Company interviews and case studiesFramework for linking ESG activities to Value Creation
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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 products by engaging in community welfare and development
▪ Mitigate risks by complying with regulatory requirements, industry standards, and NGO demandsRegulatory risk
Reputational risk ▪ Avoid negative publicity and boycotts by addressing ESG issues
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
▪ Enable bottom line cost savings through environmental operations and practices (e.g., energy and water efficiency, less raw materials needed, etc.)
Operational efficiency
Reputation/Price premium ▪ Develop reputation on ESG that garners customers’ willingness to pay price increase or premium
▪ Gain access to new markets and market share through exposure from ESG programsNew markets
Reputation/differentiation ▪ Foster brand loyalty, reputation and goodwill with stakeholders by engaging with them on ESG programs
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.
New customers/market share ▪ Use ESG to engage consumers and build knowledge of expectations and behaviors
New products ▪ Create products to meet unmet social needs and increase differentiation
ILLUSTRATIVE
SOURCE: Team analysis
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
Manage-ment quality
Risk manage-ment
Return on capital
Growth
CSR creates value along 4 business dimensions
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What are your “pain points” as an ESG practitioner?
Meeting the demands of existing metric systems
Getting adequate resources, traction and integration internally
Establishing and monitoring metrics to assess impact of program
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 Examples
Our sample
Indices developed by financial index companies
ESG Initiatives and learning networks
Reputation indices produced by media/ polling/PR firms
Rankings and data produced by SRI information providers
ESG-related standards
1 Analysis of ESG metrics systems based only on information publicly available on relevant websites
SOURCE: McKinsey Analysis
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1.7
0.7
1.9
1.1
0.7
1.5Captures opportunities
Distinguishes financially material issues
Avoids the problem of ‘noise’
Covers the full range of ESG issues
Financially quantifiable data
Sensitive to different types of companies
SOURCE: Team analysis
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 criteriaPoints (score 0-3 points on each issue)
1
2
3
4
5
6
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How much do you think that ESG activities add to shareholder value?
Add between 2 and 5%
Add more than 5%
Don’t know
Add less than 2%
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1 Environmental, social, and governance2 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
Percentage of respondents
Effect of ESG programs on organization’s shareholder value in typical times2
Value add
Investors and CFOs also believe ESG¹ drives value
22
6
21
18
19
10
4
27
7
10
13
27
5
11
53
0
9
10
15
7
6>11
6-10
2-5
<2
No effect
Don’t know
Reduced value
▪ 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
Complementary findings from the survey
CFOs, n = 84
Investment professionals, n = 154
ESG professionals, n = 87
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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
Creating value Assessing valueCommunicating
value
Percent of companies interviewed = 100%
-40%-40%
-5%-5%
-40%-40%
-10%-10%
ESG program
Maximizing value from ESG
Established metrics to monitor program
Converting ESG metrics to financial value
Communicate ESG value to CFOs, investors
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|SOURCE: Team analysis
Pathway to value from ESG along four dimensions
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
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
products by engaging in community welfare and development
▪ Mitigate risks by complying with regulatory requirements, industry standards, and NGO demandsRegulatory risk
Reputational risk ▪ Avoid negative publicity and boycotts by addressing ESG issues
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
▪ Enable bottom line cost savings through environmental operations and practices (e.g., energy and water efficiency, less raw materials needed)
Operational efficiency
Reputation/price premium ▪ Develop reputation on ESG that garners customers’ willingness to pay price increase or premium
▪ Gain access to new markets and market share through exposure from ESG programsNew markets
Reputation/differentiation ▪ Foster brand loyalty, reputation and goodwill with stakeholders by engaging with them on ESG programs
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.
New customers/market share ▪ Use ESG to engage consumers and build knowledge of expectations and behaviors
New products ▪ Create products to meet unmet social needs and increase differentiation
Management quality
Risk management
Return on capital
Growth
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|SOURCE: Team analysis
4 dimensions Sub-dimensions Examples
▪ Invested $1 billion over 10 years to reduce its energy consumption and improve its efficiency and has saved $7 billion in last 5 years
Operational efficiencyReturn
on capital
▪ 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
Reputational riskRisk
manage-ment
▪ 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
Leadership development Manage-
ment 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
New customers/ market share
Growth
Illustration of how companies can create value from ESG ILLUSTRATIVE
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Indirect impact
Direct financial impact
ESG programs can have direct and indirect financial impacts, depending on the business drivers they target
ILLUSTRATIVE
Trust & reputation
New geographical markets
Innovation
Human efficiency
Operational efficiency
Business driver
ESG program
Strengthen reputation, goodwill and loyalty with stakeholders
Facilitate markets entry
Expand the number of patents
Develop cutting edge technology/products
Enable bottom line costs saving
Improve talent attraction, morale and retention
Improve skills (e.g. leadership,…)
Effect on business driver
Favourability ratings evolution, # meetings with stakeholders
# and value of new markets entered through program
# and market value of new patents developed
# and value of new products developed and sold
Water, energy and raw materials uses reduction
Employee retention, Cost of training new employees
# employees with new skills from experience
Examples of metrics
Increase revenue through increased sales
Increase revenue from patents
Increase revenue through increased sales
Decrease cost of hiring and training new employees
Increase revenue per person
Increase revenue indirectly through goodwill
Decrease cost
Financial impact
SOURCE: McKinsey analysis
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Improved communication about the value of ESG activities is needed
21
31
32
36
33
44
62
32
23
41
24
24
38
55
36
23
42
19
28
56
54
Offering integrated corporate reporting
(corporate financial + ESG programs data)Integrating information on ESG programs’
financial value into corporate reportsReporting data related to new markets or customers reach through ESG programs
Reporting data related to employees
Providing anecdotal evidence of
how these programs create valueUsing regular business terminology
to communicate about such programs
Reporting data related to innovation
Percentage of respondents2, multiple choice answers
SOURCE: S. Bonini, N. Brun, M. Rosenthal, “Valuing corporate social responsibility”, McKinsey Quarterly, February 2009
Ways to improve the effectiveness of communication about the performance of ESG programs3
1 Environmental, social, and governance2 Respondents who answered “other”, “none of the above” or “don’t know” are not shown3 Excluding any changes stemming from current economic crisis
ESG1 professionals, n = 87
CFOs, n = 84
Investment professionals, n = 154
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▪ Growth▪ Return on
capital ▪ Risk
management▪ Management
quality
Pathway to value created by ESG programs
Industry issues
Stakeholder needs
Business drivers
Metrics CommunicationCreation of ESG Program
Meet stakeholder expectations and ensure their support in managing ESG opportunities while creating value for the company
Turn socio-political issues into ESG opportunities by meeting stakeholder needs and creating financial value along the business drivers
Impact business drivers and create financial value while meeting stakeholder and societal needs and turning them into ESG opportunities
Develop few relevant metrics to capture the financial value of the program
Set clear message depending on the targeted audience and provide informa-tion that the audience is looking for
Design ESG program resulting from industry issues, stake-holders needs and business drivers
Pathway to value
SOURCE: McKinsey analysis
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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?
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Appendix
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BusinessFormal contract
Semi-formal contract
Frontierexpecta-tions
Society
Business operates within an overall social contract
Global trends
▪ Consumers and employees
▪ Globalization
ESG issues▪ Environ-
mental
▪ Social
▪ Governance
Growth and opportunity
License to operate
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Participants of the research
20 companies from across industries and geographies
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|SOURCE: Team analysis
We see 10 best practices for creating value from ESG
Utilize core competencies
Take a long-term perspective
Create opportunities and manage risks
Strategy
Organization
Implementation
Fundamentals
Ensure strong leadership support
Embed into the strategy, organization, and culture
Select appropriate partners
Set clear goals and manage like a business
Align with core business strategy
Identify and engage stakeholders
Address key issues facing the industry
Best practices
4
5
6
7
8
3
2
1
9
10
Examples
top related