“There is no question in my mind that business and the free enterprise systemare essential to making sustainability work. Our focus at Dow is on hard-wiringit into our company in the same way we have fully institutionalized environ-ment, health and safety into our culture and into our work and people processes.Our challenge is to make sustainability sustainable. Ultimately, the world willjudge our commitment to sustainability not by what we say, but by what we do."

William Stavropoulos, Chief Executive Officer, The Dow Chemical Company

“Environmental protection is a complex undertaking, but the laws of nature aresimple. We will provide leadership on the journey to an environmentallysustainable future, with efficient products and creative recycling systems."

Carly Fiorina, Chief Executive Officer, Hewlett-Packard Company

“Every corporation is under intense pressure to create ever-increasingshareholder value. Enhancing environmental and social performance areenormous business opportunities to do just that."

Gary Pfeiffer, Senior Vice President and Chief Financial Officer, DuPont

“These issues are no longer environmental and social issues but are nowrecognized as strategic business issues."

Linda Descano, Chief Operating Officer, Women & Co., Citigroup

Global Environmental Management Initiative (GEMI)One Thomas Circle, NW, Tenth Floor

Washington, DC 20005

Phone: 202-296-7449

Fax: 202-296-7442

e-mail: info@gemi.org

This document printed using 30% recycled paper and vegetable-based Ink.

W W W . G E M I . O R G

Business Helping Business Achieve Global Environmental,Health and Safety Excellence and Corporate Citizenship

Clear Advantage:Building Shareholder Value

E N V I R O N M E N T : V A L U E T O T H E I N V E S T O R

I

The mission of the Global EnvironmentalManagement Initiative (GEMI) is to supportbusiness helping business improve environment,health and safety (EHS) performance, shareholdervalue, and corporate citizenship. GEMI hasproduced a series of tools that demonstrate howexcellence in EHS can add shareholder value tocompanies. The GEMI "Value" journey began withEnvironment: Value to Business published in 1998and continued with Environment: Value to the Top Line published in 2001.

The purpose of Clear Advantage: BuildingShareholder Value, GEMI's latest tool in theseries, is to enable businesses to measure,manage and communicate EHS value to thefinancial community or, in the words of BobBrady, retired fund manager at Citigroup, to "turnthe intangibles into tangibles." EHS is among theintangible value drivers that are hidden sourcesof organizational power—from regulatorycompliance that prevents liabilities, toproactively managing risk. Leveraging EHSresources can help create additional value forthe enterprise through strategy execution,enhancing brand and reputation, boostinginnovation and leadership.

This tool is a resource and guide containing avariety of data and tools to assist managers inunlocking the value contained in activities theyare required to perform but frequently regard asa cost of doing business—rather than as anopportunity to better position the enterprise withcustomers, investors and lenders, alliance

partners and current or prospective employees.Case studies from GEMI members help illustratethese opportunities.

Clear Advantage provides compelling evidenceof the link between EHS activities andshareholder value. Because an enterprise's EHSfunction cuts across many areas of business,this report covers the EHS function as well asrelated organizational activities: communityinvolvement, stakeholder relations, governance,transparency, and business continuity. In aclimate of increased focus on corporategovernance and shareholder activism, theseissues will only increase in importance.

Utilizing the value drivers identified, this reportwill demonstrate that strengths in EHS can addvalue to the enterprise. Specifically, this reportwill show how companies can measure anddisclose the strategic contributions of EHS toenhanced market valuation and identify EHS-related indicators that are linked to intangiblevalue drivers.

The intended audiences for this tool are seniorcompany executives, including CEOs, CFOs, andInvestor Relations (IR) professionals; mainstreamfinancial analysts and fund managers; and EHSand other managers. It can also provide membersof the socially responsible investment com-munities with useful data, as well as guidancefor EHS executives on how to better advisemanagements with whom they are engaged.

PrefaceFebruary 2004

John Harris, Ashland Inc.Jim Thomas, Novartis Corporation

Co-Chairs, Environment: Value to the Investor Work Group

II

The Global Environmental Management Initiative (GEMI) is a non-profit organizationof leading companies dedicated to fostering environmental, health, and safety

excellence and corporate citizenship worldwide. Through the collaborative efforts of itsmembers, GEMI also promotes a worldwide business ethic for environmental, health

and safety management and sustainable development through example and leadership.

The guidance included in this document is based on the professional judgment of theindividual collaborators listed in the acknowledgements. The ideas in this document

are those of the individual collaborators and not necessarily their organizations.Neither GEMI nor its consultants are responsible for any form of damage that may

result from the application of the guidance contained in this document.

This document has been produced by the Global Environmental Management Initiative(GEMI) and is solely the property of the organization. This document may not be

reproduced nor translated without the express written permission of GEMI, exceptfor use by member companies or for strictly educational purposes.

3MAbbott LaboratoriesAltriaAnheuser-Busch Inc.Ashland Inc.Aventis Pharmaceuticals Inc.Bristol-Myers Squibb Co.BNSF Railway CompanyThe Coca-Cola CompanyConAgra FoodsDell Inc.The Dow Chemical CompanyDuke EnergyDuPontEastman Kodak CompanyEli Lilly and CompanyFedEx ExpressGeorgia-Pacific CorporationHalliburton CompanyHewlett-Packard Company

Hoffmann-La RocheIntel CorporationJohnsonDiversey, Inc.Johnson & JohnsonJohnson Controls, Inc.Koch Industries, Inc.Lockheed Martin CorporationMerck & Company, Inc.Mirant CorporationMotorola, Inc.Novartis CorporationOccidental Petroleum CorporationPfizer IncThe Procter & Gamble CompanySchering-Plough CorporationSmithfield Foods, Inc.Southern CompanyTemple-Inland Inc.Texas Instruments IncorporatedWyeth

Global Environmental Management InitiativeGEMI Member Companies:

About The Global Environmental Management Initiative

III

Section 1 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Section 2Making the Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2EHS Performance is Linked to Shareholder Value . . . . . . . . . . . . . . . .2EHS is an Intangible Driver of Market Value . . . . . . . . . . . . . . . . . . . .2How EHS-Related IntangiblesBecome Tangible Outcomes for Investors . . . . . . . . . . . . . . . . . . . . . .3Corporate Initiatives Reflect the Demandsof Global Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4A Growing Awareness in the Financial Community . . . . . . . . . . . . . .6Ten Intangible Value Drivers for Measuring EHS Performance . . . . .8

Section 3A Closer Look . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Leadership & Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Communication and Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . .13Brand Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15Environmental and Social Reputation . . . . . . . . . . . . . . . . . . . . . . . .16Alliances and Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17Technology and Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Human Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Section 4From Concept to Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Linkage Between EHS and IR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25The Clear Advantage Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Step 1 - Identify Key Value Drivers . . . . . . . . . . . . . . . . . . . . . . . . . .26Step 2 - Assess Potential Contributions . . . . . . . . . . . . . . . . . . . . . . .27Step 3 - Develop Value-Enhancing Strategy . . . . . . . . . . . . . . . . . . .29Step 4 - Implement Strategy and Measure Results . . . . . . . . . . . . .31Step 5 - Communicate to Management and Investors . . . . . . . . . .31Step 6 - Assure Continuous Improvement . . . . . . . . . . . . . . . . . . . . .32

Section 5Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

Appendix ADiscussion Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Appendix BBibliography and References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36Intangible Value Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36EHS and Business Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36Socially Responsible Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

Appendix CGlossary and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Appendix DFootnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

ContentsAdditional supporting

information and

resources, as well as an

electronic version of this

document, are available

on the GEMI website,

www.gemi.org.

IV

Acknowledgements

Contributing GEMI Environment: Value to the Investor Work Group Members

Carty of the National Investor Relations Institute(NIRI), Suzanne Fallender of InstitutionalShareholders' Services, Katie Fry Hester ofSustainAbility, Elizabeth McGeveran of ISIS AssetManagement and Marge Wyrwas of Knight Tradingparticipated in a meeting to provide input on thedraft document. Linda Descano of Citigroup, PeterWilkes of Innovest, Tim Smith of Walden AssetManagement, Stan Craig, formerly of Merrill Lynch,Tim Lankford of SAM USA Inc. and Peter Wall andMichael Gormley of FTSE4Good provided inputand guidance during the early, formative stages ofthis project.

Audrey Bamberger, Anheuser-Busch Inc.Gregg Belardo, WyethTanya Blalock, Southern CompanyLaura Bradford, Bristol-Myers Squibb CompanyDon Brown, Dell Inc.Carol Cala, Eastman Kodak CompanyMark Chatelain, Johnson Controls, Inc.Stan Christian, Motorola, Inc.Steve Dishion, The Procter & Gamble CompanyJeff Forgang, Duke EnergyElizabeth Fraser, Aventis Pharmaceuticals Inc.Elizabeth Girardi Schoen, Pfizer IncVeronica Gliebe, Aventis PharmaceuticalsColin Goddard, AltriaRich Guimond, Motorola, Inc.Alex Heard, Intel CorporationMitch Jackson, FedEx ExpressDavid Jacoby, Georgia-Pacific CorporationBen Jordan, The Coca-Cola CompanyJim Kearney, Bristol-Myers Squibb CompanyJohn Kindervater, Eli Lilly and CompanyKen Larson, Hewlett-Packard CompanyDavid Lear, Hewlett-Packard CompanyDavid Lowy, AltriaMayda Martinez, Merck & Company, Inc.Keith Miller, 3MDean Miracle, Southern Company/Georgia PowerGus Moffitt, Schering-Plough CorporationEd Mongan, DuPontLeslie Montgomery, Southern Company

Clear Advantage was developed in a collaborativeprocess by GEMI's Environment: Value to theInvestor Work Group. Jim Thomas of NovartisCorporation and John Harris of Ashland Inc. co-chaired the project. Jonathan Low and PamelaCohen Kalafut of Cap Gemini Ernst & Young, JosephFiksel of Eco-Nomics LLC and Karina Funk of theMassachusetts Technology Collaborative createdClear Advantage. Cover art and overall graphicdesign were created by Laura McGoff. GEMI staffcontributing to this document includedSteve Hellem and Amy Goldman.

Special thanks:During the course of the project Robert Brady ofCitigroup (retired), Mark Brammer of Innovest, Beth

For more information about this project, please contact GEMI at: 202-296-7449 or info@gemi.org.

Aldo Morrell, DuPontDennis Muscato, Hewlett-Packard CompanyGeorge Nagle, Bristol-Myers Squibb CompanyScott Noesen, The Dow Chemical CompanyHarry Ott, The Coca-Cola CompanyVivian Pai, Johnson & JohnsonElsie Rivera Palabrica, Abbott LaboratoriesMary Beth Parker, Mirant CorporationDon Radentz, ConAgra FoodsJames Reaves, Pfizer IncTed Reichelt, Intel CorporationWalt Rosenberg, Hewlett-Packard CompanyDavid Seep, BNSF Railway CompanyBert Share, Anheuser-Busch Inc.Robert Sherman, Halliburton CompanyLyle Staley, BNSF Railway CompanyAlan Stinchfield, Georgia-Pacific CorporationJohn L. Stein, Anheuser-Busch Inc. (retired)Richard Swan, Occidental Petroleum CorporationRobin Tollett, The Procter & Gamble CompanyDavid Townsend, Dell Inc.Lucian Turk, Dell Inc.Norm Varney, Lockheed Martin CorporationLara Wallentine, Texas Instruments IncorporatedTerry Welch, The Dow Chemical CompanyJeff Werwie, Johnson Controls, Inc.Robert Williams, Dell Inc.Carl Wirdak, Occidental Petroleum CorporationPat Wood, Georgia-Pacific Corporation

To succeed in today's global marketplace,companies must respond to the various marketforces that demand sound Environment, Healthand Safety (EHS) policies and practices. Themore successful companies will alsounderstand how these EHS policies contributeto shareholder value.

Experts have argued that, in effect, superiorEHS performance is a proxy indicator forsuperior management capability. As such,it can effectively communicate anorganization's ability to manage risk, reducevolatility, enhance transparency and buildstakeholder trust.

Risk management, transparency and trust areorganizational characteristics that marketsvalue, although they do not appear directly onfinancial statements. A substantial body ofevidence exists on how EHS practicescontribute to the bottom line, includingreductions in operating costs, insurancepremiums, and capital costs. It is thecontention of this document that EHSpractices contribute to shareholder value in abroader and more strategic way: by buildingcritical organizational capabilities. As such, themarkets value a company's EHS performanceevery day, whether it contributes to thatvaluation exercise consciously or not.

Thinking about EHS as merely a cost of doingbusiness is an opportunity lost. Organizationshave much to gain from measuring, managingand disclosing the positive impact of EHSperformance on shareholder value. Some ofthe facts, detailed below, suggest thatinvestors, senior executives and analystsconstitute a market for information related toEHS performance:

• 50 to 90% of a firm's market value can be attributed to intangibles like EHS.

• 35% of institutional investors' portfolio allocation decisions are based on intangibleslike EHS performance.

• 81% of Global 500 executives rate EHSissues among the top ten driving value intheir businesses.

This document provides a guide tocommunicating the value of EHS excellence.The document's goal is to show howcompanies can develop forward-looking toolsfocused on measuring the strategiccontributions of EHS to enhanced marketvaluation.

Section 1EXECUTIVE SUMMARY

Section 2, Making the Case, provides evidence to support the correlation between EHS performance

and financial outcomes. It may be of greatest benefit to Investor Relations Officers (IROs).

Section 3, A Closer Look, provides ten important EHS-related value drivers and related case studies

from GEMI member companies.

Section 4, From Concept to Practice, provides a methodology for EHS and IR colleagues to apply this

new knowledge and engage with senior executives in order to effectively measure, manage and disclose

the competitive advantage derived from superior EHS performance. Sections 3, 4 and the Appendices

are likely to be of value to all managers and EHS professionals.

1

INTANGIBLE DRIVERS, OFTEN INCLUDING EHS, ACCOUNT FORBETWEEN 50% AND 90% OF THE MARKET VALUE OF MOST FIRMS.3

Section 2MAKING THE CASE

EHS Performance is Linked toShareholder Value

The late 1990's and early 2000's were aturbulent period for the global investmentcommunity, with vast amounts of shareholderwealth being created and destroyed. Bothinstitutional and retail investors have learnedsome painful lessons, re-examined theirassumptions about what constitutes tangibleand intangible value, and broadened theirscope to consider characteristics that can leadto longer-term financial success.

One area of corporate performance that hasbegun to capture the attention of investmentprofessionals is environmental, health andsafety (EHS): a set of responsibilities thatcontributes directly to an organization's riskmanagement profile and is sometimes alsolinked with “corporate responsibility" or“sustainability." This report explores thelinkage between EHS performance andshareholder value creation. There isconsiderable evidence that EHS contributes toshareholder value in a variety of ways—notonly through “tangible" contributions such asrisk reduction and profitability improvements,but also through “intangibles" such as brandequity, human capital and strategy execution.In the words of one Chief Financial Officer(CFO):

“Every corporation is under intense pressure tocreate ever-increasing shareholder value.Enhancing environmental and socialperformance are enormous businessopportunities to do just that.”

Gary M. Pfeiffer,Sr. Vice President & CFO, DuPont

EHS is an Intangible Driver ofMarket Value

In order to understand the full potential forEHS value creation, it is first necessary toclarify the concept of intangible value drivers.The investment community increasinglyrecognizes the importance of intangibles in theshareholder value equation. Leadership,strategy execution, brand, human capitaland EHS performance are all currencies intoday's marketplace. A report on theIntangibles Economy to the EuropeanCommission noted that:

“Intangibles such as R&D, proprietary know-how, intellectual property and workforce skills,world-class supply networks and brands arenow the key drivers of wealth production whilephysical and financial assets are increasinglyregarded as commodities."1

The International Accounting Standards Boarddefines an intangible as an “identifiable, non-monetary asset without physical substanceheld for use in the production of goods orservices, for rental to others or foradministrative purposes."2 This report adopts abroader view: “Intangibles" describes thehuman, intellectual, social and structuralcapital of an organization. Thus, intangiblesinclude people, relationships, skills and ideasthat add value but are not traditionallyaccounted for on the balance sheet.

According to the Organization for EconomicCooperation and Development (OECD),investment by public companies in intangiblessuch as brand, R&D and training has exceededinvestment in tangibles like property, plant andequipment (PPE) since 1997.3

2

Figure 2-1 shows, further, that a company'smarket value has increasingly becomedecoupled from PPE and has increasinglybeen far outweighing companies’ tangibleasset bases.

Research shows that non-financial performanceaccounts for up to 35% of institutionalinvestors' portfolio allocation decisions.5

Further research in the U.S. and Europedemonstrates that between 50% and 90% of acompany's market value can be explained byintangibles.6 Yet, a majority of executives inevery industry studied believed that there weredisconnects between the value drivers they feltwere critical to the company's success andwhat was actually being measured andreported.

For the purposes of this report, a value driveris defined as a fundamental and persistentcharacteristic of a business enterprise thatinfluences its market value. The report focuseson the role of EHS in strengthening thesevalue drivers, with an emphasis on theimportance of measuring and monitoring thelinks between EHS activities and outcomes ofinterest to Investor Relations.

Adding confidence to the importance ofidentifying key value drivers and assessing theircontributions to shareholder value creation, a1996 study entitled Measures That Matterestablished that the correlation between

intangibles and a company's price-to-earningsratio varies according to industry. Figure 2-2depicts how a one unit change in a score foreach intangible can be related to both a short-term and a long-term percentage change in anindustry's price-to-earnings ratio.7

How EHS-Related Intangibles BecomeTangible Outcomes for Investors

Past efforts to characterize EHS valuecontributions have focused largely onretrospective estimation of financial returnsassociated with EHS initiatives. That type ofinformation may not be of interest to theinvestment community for several reasons:

• EHS financial returns are simply aggregatedinto common financial performance metrics(such as operating costs), and there is nobenefit in singling out the relativecontributions of specific departments.

• EHS contributions to the bottom line tendto be incremental in nature (such asconverting wastes into by-products), andare generally seen as tactical rather thanstrategic.

• The more strategic contributions of EHStend to be associated with non-financialvalue drivers, such as relationships andreputation, which provide a prospective,rather than retrospective, view ofshareholder value.

Figure 2-1

Market Cap v.PPE Over Time4

140

120

100

80

60

40

20

02.4

16.84.5

43.4

13.9

127.5

1981 1991 2002

Mar

ket

Cap/

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Rati

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op 1

00 M

arke

t Ca

p Fi

rms

For

Each

Yea

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Average

Maximum

35% OF INSTITUTIONAL INVESTORS' PORTFOLIO ALLOCATIONDECISIONS ARE BASED ON INTANGIBLES LIKE EHS5

3

In contrast with past efforts, this reportfocuses on how improvements in EHS andsocial performance can strengthen a company'sintangible assets in a number of ways that inturn lead to tangible shareholder valuecreation. The many pathways to shareholdervalue are illustrated in Figure 2-3; for example:

• Pro-active initiatives to address EHS issuescan lead to new product innovation,development of new markets, and improvedprocess technologies. For example, 3M andBristol-Myers Squibb have incorporatedproduct life cycle review into their newproduct development processes, resulting infaster times to market and reducedcompliance burdens.

• Differentiation of a company through a reputation for corporate responsibility canenhance brand equity and strengthen itslicense to operate. For example, Dow andDuPont have been recognized as industryleaders through their initiatives to reduce airand water emissions in their globaloperations.

Corporate Initiatives Reflect the Demandsof Global Capital Markets

The types of value creation opportunities citedabove have existed for many years. Onlyrecently, as a result of new forces in thebusiness environment, has a broader awarenessof these opportunities spread among leadingmulti-nationals, shareholders, regulatorybodies, non-governmental bodies andconsortia. The evidence of growing interest insustainability generally and EHS specifically isimpressive.

• 68% of the 100 largest global companiesissue EHS reports 9

• 487 companies published corporatesustainability reports in 2001, up from 194in 1995 and 7 in 199010

• 81% of Global 500 executives surveyed rateEHS issues among the top ten value driversfor their business11

These trends are partly attributable toincreasing regulatory pressures, especially in

81% OF GLOBAL 500 EXECUTIVES SURVEYED RATE EHSISSUES AMONG THE TOP TEN VALUE DRIVERS FOR THEIR BUSINESS11

4

Figure 2-2 Relationship between Intangibles and P/E by Industry8

0% 15%

Computer Industry Pharmaceuticals Food Industry Oil and GasNon-Financial Criteria

Quality of Management

Quality of Productsand Services

Level of CustomerSatisfaction

Strength of Corporate Culture

Quality of Investor Communications

Effectiveness of ExecutiveCompensation Policies

Effectiveness of NewProduct Development

Strength of Market Position

0% 15% 0% 15% 0% 15%

Influence on Price Short Term Long Term (Brand Value included)

Europe. In April 2003, the New York Timesreported that “the European Union is adoptingenvironmental and consumer protectionlegislation that will go further in regulatingcorporate behavior than almost anything theUnited States government has enacted indecades."12 However, it has become clear thatbeing proactive about EHS and sustainabilitymakes good business sense. In the words ofWilliam Stavropoulos, CEO of The DowChemical Company:

“There is no question in my mind thatbusiness and the free enterprise system areessential to making sustainability work. Ourfocus at Dow is on hard-wiring it into ourcompany in the same way we have fullyinstitutionalized environment, health andsafety into our culture and into our work andpeople processes. Our challenge is to makesustainability sustainable. Ultimately, the worldwill judge our commitment to sustainabilitynot by what we say, but by what we do."

Market demand for greater transparency,ethical behavior and corporate governance hasled to an increase in voluntary disclosure,endorsed by the major exchanges in Europe

and the U.S, as well as greater scrutiny frommajor investors. In addition to customers,shareholders and employees, there is a broadercollection of stakeholders that can influencethe success of a business and are interested inEHS performance. These include: suppliers andbusiness partners; regulators and governmentofficials at the local, state and federal levels;neighboring communities; religious groups,advocacy groups and other NGOs; academicand research organizations; and, of course, themedia. Many leading companies haveestablished stakeholder outreach programs,often including extensive dialogue sessions andformation of external advisory panels. Somecorporations have gone a step further byestablishing formal alliances with specificenvironmental or public interest groups—seepage 20 for an example of how FedEx Expressis working with Environmental Defense'sAlliance for Environmental Innovation.

In short, EHS and social performance matter tostakeholders, whether it is diversity in theworkforce to the labor markets, innovation andrisk management to the capital markets, orpollution prevention to stakeholders in the

Product and ProcessInnovation

Reduced Waste andEmissions

Efficient Use ofResources

Occupational Healthand Safety

StakeholderEngagement

EmployeeSatisfaction

EnvironmentalProtection

CommunityQuality of Life

IncreasedProfitability

Improved CapitalUtilization

ShareholderValue

CustomerSatisfaction

IntellectualCapital

License toOperate

Reputation andBrand Image

ReducedRisk

TangibleOutcomes

Value to Society

IntangibleAssets

Figure 2-3

Overview of PathwaysLinking EHS toShareholder Value

5

VOTES RECEIVED IN FAVOR OF SHAREHOLDER RESOLUTIONS ONCORPORATE GOVERNANCE IN 2002 WERE TWICE THOSE RECEIVED IN 200118

community. The growing environmental andsocial concerns of stakeholders present aunique opportunity for companies to betterleverage their EHS capabilities. This will enablecompanies to both measure and manage thecontribution of EHS and social performance toshareholder value.

A Growing Awareness in the FinancialCommunity

Despite the surge of interest in EHS andsustainability, the majority of companyfinancial officers, institutional investors andfund managers are reluctant to addressenvironmental and social performance.However, a growing minority of investmentprofessionals believes that it is worthwhile toconsider the relationship between market value,EHS and social performance. In particular,

there is a heightened awareness of thecontribution of non-financial performance tomarket value in such areas as corporategovernance, transparency and business ethics.

EHS Excellence is an Indicator of SuperiorManagement

Some analysts have argued that EHSperformance is correlated with financialperformance, and therefore that EHSexcellence can be used as a proxy indicator forshareholder returns. The underlying logic isthat effective management of EHS issues is asign of good management, which drives goodfinancial performance. For example, Innovestconstructed an EHS management rating indexcalled EcoValue21® as an investment analysistool, and claims that it distinguishescompanies with superior returns across a rangeof industries. Figure 2-4 illustrates how, in the

Figure 2-4

Analysis of PharmaceuticalIndustry Stock PerformanceBased on EcoValue21®Rating Index13

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

May-01 Jun-01 July-01 Aug-01 Sept-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02

Difference 0.0% 4.0% 3.7% 3.9% 7.1% 5.8% 5.2% 5.9% 9.0% 16.9% 16.5% 15.5% 17.2%

Top Half Average 0.0% -1.4% -0.2% -3.5% -1.5% -0.8% -2.3% -3.0% -8.3% -3.5% -4.7% -7.7% -8.2%

Bottom Half Average 0.0% -5.4% -3.9% -7.4% -8.6% -6.6% -7.5% -8.9% -17.2% -20.4% -21.2% -23.3% -25.4%

May

-01

Jun-

01

Jul-

01

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-01

Nov

-01

Dec

-01

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02

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-02

6

Chart courtesy of Innovest

pharmaceutical industry, companies with aboveaverage ratings have outperformed companieswith below average ratings by approximately17 percentage points (1700 basis points) sinceMay 2001.

Business Fundamentals go Beyond AuditedFinancials

The recent wave of accounting scandals in theU.S. has led investors and other corporatestakeholders to re-think their position on justwhat is “fundamental" to the valuation of acompany. There is mounting evidence of thefinancial risks associated not only withcorporate environmental liabilities, but ofglobal problems such as climate change.Although analysts may not always speak thelanguage of EHS and sustainability, Wall Streetis gradually becoming aware of the importanceof measurement and disclosure of non-financial elements of a business. For example,up to 86% of oil and gas industry analystssurveyed confirmed that company performancein regulatory compliance, employee health andsafety, community service and lawsuits doindeed impact the value of a firm (see Figure2-5).14

Concerns about global warming are alsomaking some of Europe's largest insurance

companies keenly interested in greenhouse gasemissions. Insurers claim that in the nextdecade, the annual cost of global warming willrise to $150 billion a year.15 In the absence ofU.S. government mandates, several groups haveformed, including the Energy Future Coalitionand the Pew Business Environmental LeadershipCouncil, to address the challenge of globalwarming. As financial executive Linda Descanoof Citigroup noted,

“These issues are no longer environmental andsocial issues but are now recognized asstrategic business issues."16

Shareholder Advocacy is Mounting

Shareholder advocacy interests have alsofocused on the issue of disclosure beyond thatrequired by law. A recent report by the RoseFoundation provides a thorough review of theevidence linking environmental performance tofinancial performance, and recommends thatfiduciaries of pension funds, foundations andcharitable trusts should take active steps toencourage disclosure of environmentalperformance information.17

There is mounting evidence that shareholderadvocacy can succeed through a variety ofmechanisms—the formal shareholder proxyprocess, private dialogue, public dialogue using

82%

RegulatoryCompliance

100

80

60

40

20

0

50%

36%

86%

EmployeeSafety

CommunityService

Lawsuits

Figure 2-5 Percent of oil and gas industry analysts who feel thatselected EHS indicators impact the value of a firm.14

SOCIALLY SCREENED INVESTMENT PORTFOLIOS TURN OVER 50% LESS THAN OTHER MANAGED FUNDS9

7

8

the media, or litigation as a last resort. TheNew York Times reports that “shareholdershave filed 31 global warming resolutions with23 companies in the United States in 2003 and5 in Canada. The companies include automanufacturers, electric power companies andoil companies."18 Over 800 resolutions werefiled in 2002 concerning corporate governanceissues. The votes received in favor of suchresolutions were twice those received in 2001.

The stakes are increasing as multinationals inthe finance community band together tosupport their arguments for EHS considerationsin their finance portfolios. For example, tenleading banks from around the worldannounced in 2003 a set of voluntaryguidelines called the “Equator Principles,"whereby they intend to meet the InternationalFinance Corporation's EHS guidelines in theirprojects in developing countries. This is aninteresting and unprecedented expectation:banking clients must adhere to theseprinciples, and this is relevant to allcorporations. Principle #8 states that if aproject goes out of environmental or socialcompliance, this constitutes grounds for adefault on the loan.55

In 2002, the Corporation of London, inpartnership with international financial servicesfirms, put forth a set of guidelines called TheLondon Principles designed to elucidate “therole of financial services in sustainabledevelopment." Given that London has 58% ofthe global foreign equity market and isarguably, after New York, the most importantfinancial center in the world, this document isextraordinary. In addition, the principles wereendorsed by British Prime Minister TonyBlair.19

The Growth of Socially Responsible Investing (SRI)

There are now over 200 mutual funds, run byover 800 portfolio managers and analysts,dedicated to socially or environmentallyresponsible investing. In sum, socially screenedportfolios are now more than $2 trillion, over10% of the $19.9 trillion assets currently

under management in the U.S.20 Differentinvestment styles have emerged among fundsusing socially responsible, ethical orenvironmental criteria.21 The majority of the$2 trillion figure consists of screenedinvestments, but credible organizations in thepast several years have been developing scoringand ranking tools that rate companiesaccording to environmental, social andeconomic criteria. The Dow JonesSustainability Index scores companies basedlargely upon their responses to extensivequestionnaires,22 while the FTSE4Good Indexanalyzes EHS and social responsibilityactivities, with the stated intent of promotinga stronger business commitment.23 Theseindexes have generally performed in line withor have outperformed the broader marketaverages.24

Ten Intangible Value Drivers for MeasuringEHS Performance

Identifying and improving upon a company'skey value creation opportunities is only asuseful as the ability to communicate these tointerested stakeholders. To communicate moreeffectively the hidden value of EHS, the EHScommunity should adapt itself to the languageand world-view of the investment community.In practice, the importance of specific EHSissues can vary greatly from company tocompany, and an EHS department needs tounderstand its company's business strategiesand value drivers, and to develop its prioritiesaccordingly. Effective communication betweenthe EHS and the investor relations perspectivecan help focus on specific EHS valuecontributions in terms that are clear toinvestors.

The book Invisible Advantage25 helps bothindividuals and companies better understandand communicate the profound degree towhich intangibles are defining corporate valuecurrently and revolutionizing the ways inwhich business is conducted. Key intangiblesvary according to industry, but measures

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related to management credibility,innovativeness, ability to attract talentedemployees and research leadership areconsistently highly correlated with marketvalue.26 The GEMI EVI Work Group hasidentified ten intangible value drivers thatreflect significant pathways for value creationthrough EHS and sustainability. These valuedrivers are listed in Figure 2-6, and form thebasis for the subsequent sections of this report.

Utilizing these value drivers, this reportdemonstrates that (a) strengths in EHS andsustainability can add value to the enterprise,and (b) these strengths can be quantified in

the form of an index that is relevant tocompany valuation. Specifically, this reportshows how companies can develop a forward-looking tool that focuses on measuring thestrategic contributions of EHS and socialperformance to enhanced market valuation.The identification of EHS-related indicatorsthat are linked to intangible value drivers is thesubject of the next section.

CUSTOMER The ability to develop customer relationships, satisfaction and loyalty.

Management capabilities, experience and leadership's vision forthe future.

Does management communicate honestly and openly? Are itscommunications believed and trusted? Does it hold itself accountable?

Strength of market position. The ability to expand the market,perception of product/service quality and investor confidence.

How the company is viewed globally with regard to environmentalconcerns, community concerns, regulators' concerns, inclusion in "mostadmired company" lists and triple bottom line.

Supply chain relationships, strategic alliances, partnerships.

Strategy execution, IT capabilities, inventory management, turnaroundtimes, flexibility, reengineering, quality, internal transparency.

Talent acquisition, workforce retention, employee relations,compensation, what makes a "great place to work."

The R&D pipeline, effectiveness of new-product development, patents,know-how, business secrets.

The ability to effectively manage the balance between potentialliabilities and potential opportunities.

LEADERSHIP ANDSTRATEGY

RISK

INNOVATION

TRANSPARENCY

BRAND EQUITY

ENVIRONMENTAL ANDSOCIAL REPUTATION

HUMAN CAPITAL

TECHNOLOGYAND PROCESSES

ALLIANCE ANDNETWORKS

Figure 2-6 The Measures that Matter

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Section 3A CLOSER LOOK

This section describes and illustrates each ofthe 10 intangible value drivers listed in Figure2-6, and suggests performance indicators thatcan be used to quantify their EHS aspects.

• Customer satisfaction with EHS performance• Extent of customer relationships across product life cycle• Collaboration with customers on EHS solutions

Value Driver Sample Performance Indicators

CUSTOMER

LEADERSHIP ANDSTRATEGY

TRANSPARENCY

BRAND EQUITY

ENVIRONMENTALAND SOCIALREPUTATION

ALLIANCES ANDNETWORKS

TECHNOLOGYAND PROCESSES

HUMAN CAPITAL

INNOVATION

RISK

• Commitment to EHS/sustainability principles and goals• Articulation and execution of EHS strategy• Expression of diverse EHS views at Board level• Level of reporting for EHS function

• Disclosure of governance policies & procedures• Stakeholder engagement• Timeliness of communications• Quality and depth of EHS/sustainability reporting

• Perception of brand as environmentally and socially responsible• Value-added due to product stewardship• Presence in environmentally or socially-screened investment funds

• Regulatory compliance record• Third-party recognition and awards• Participation in EHS/sustainability consortia• Community development and philanthropy

• Collaboration on EHS/sustainability throughout the supply chain• Partnerships with EHS/sustainability-oriented organizations• Participation in industrial ecology networks

• Inherent product or process hazards• Effectiveness of risk prevention and risk management• Effective response to challenges and opportunities.

• Leadership and patent position in EHS technologies• Cost savings through EHS/sustainability innovation• EHS-related product or service differentiation

• Leadership in EHS/sustainability technologies & business practices• Design for EHS/sustainability processes and results• Energy and material conservation• Ecosystem impact minimization

• Workforce diversity, employee benefits and compensation• Employee rights and empowerment• Perception and awards as a "great place to work"

Figure 3-1 Indicators that Contribute to EHS Intangible Value Drivers

These are summarized in Figure 3-1. The nextsection presents a process for companies toidentify, measure, communicate, and managethese drivers of shareholder value.

The ability to develop customer relationships, satisfaction, and loyalty

Meeting basic customer expectations is nolonger sufficient. When competitors are anarms-reach or a “click away,” fostering solidcustomer relationships is essential. Theserelationships extend beyond the product orservice transaction—many customers nowexpect environmental and social responsibilityas well. For example, the U.S. Federalgovernment, which purchases $200 billionannually in goods and services, has adoptedComprehensive Procurement Guidelines thatgive preference to energy efficient,environmentally effective, and bio-basedproducts. Many large manufacturers haveadopted similar EHS procurement criteria. Inthe European Union, “green" purchasing isbecoming more common among consumers,backed by a policy directive that promotessustainable consumption through reducedconsumer packaging and energy efficiency.

The Philippines as Satisfied Customer:Mirant Corporation

Mirant's Philippine operations and involvementin the Philippine rural electrification programhave earned the company many coveted

environmental performance and corporatecitizenship awards. They have also beenrecognized as a top employer in thePhilippines. These accomplishments andcorporate commitment have helped sustain apositive working partnership with thePhilippine government. In ensuring a license to operate through corporate citizenship,Mirant can be more certain of a license togrow in the market when additionalinvestments are warranted.

Measures related to EHS performance inenhancing customer relationships include:

• Extent of disclosure of the environmental/social impacts of products and processes

• Customer loyalty and price toleranceattributable to EHS differentiation

• Extent of customer relationships throughoutthe life cycle of the product

• Third-party feedback and customersatisfaction awards

• Collaboration with customers on EHS-relatedinnovations or customer solutions.

• Customer satisfaction with EHS performance• Extent of customer relationships across product life cycle• Collaboration with customers on EHS solutions

CUSTOMER

Customer Satisfaction throughEnvironmental Services: Ashland Inc.

Ashland Distribution Company, a division of AshlandInc., offers a one-source, ‘closed-loop’ process to notonly supply chemicals, plastics and other materials,but also to manage hazardous and non-hazardouswaste streams for customers. Ashland’s EnvironmentalServices group, leverages a value-added customerservice from the in-house expertise and capabilitiesgained while handling these issues for Ashland’s ownchemical businesses. It offers a range of processing

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and treatment options, compliance assurance andindustry-leading service throughout North America.

Key Intangibles:Customer, Technology and Processes

Sample Leading Indicators:• Customer cost of ownership for purchased

chemicals• Customer loyalty and retention• Revenue from environmental management

services

“Environmental protection is a complexundertaking, but the laws of nature are simple.We will provide leadership on the journey toan environmentally sustainable future, withefficient products and creative recyclingsystems."27

Carly FiorinaChairman and Chief Executive Officer, HP

The growing importance of transparency andcorporate responsibility has made EHS andsustainability commitment an essential elementof corporate leadership and governance. ChiefExecutives and Boards of Directors areincreasingly sensitive to the expectations ofshareholders, employees, and otherstakeholders.

Measures of EHS performance relevant toleadership and strategy include:

• Commitment and policies with regard to EHS/sustainability principles and goals

• Effectiveness of management in articulationand execution of EHS strategy, includingdialogue and engagement with externalstakeholders (see Transparency, page 13)

• Diversity and independence of the Board, including the number of outside Directors

• The level of reporting for the EHS/sustainability function.

• Commitment to EHS/sustainability principles and goals• Articulation and execution of EHS strategy• Expression of diverse EHS views at Board level• Level of reporting for EHS function

LEADERSHIP ANDSTRATEGY

One of the world's foremost proponents ofintegrating EHS issues into business strategy isChad Holliday, CEO of DuPont, who served as chairof the World Business Council for SustainableDevelopment (WBCSD). DuPont no longer viewsEHS and social performance as separate thrusts,but instead has woven them into its threecorporate strategic priorities:

• Knowledge intensity - creating products and services that deliver greater value to customers and shareholders with less physical mass

• Productivity - improving operating efficiency and capital utilization while reducing the supply chain environmental footprint

• Integrated science - seeking technological innovations that improve quality of life, e.g., by enhancing safety, recyclability, or nutrition.

DuPont has effectively bridged the communicationsgap between EHS performance and financialperformance by emphasizing the contributions ofEHS to key intangible value drivers, such asinnovation and technology.

Key Intangibles:Leadership and Strategy, Innovation

Sample Leading Indicators: • Shareholder value added per pound of product• Operating efficiency improvements attributable

to eco-efficiency• Percent of new products with differentiated

EHS/sustainability features

Management capabilities, experience, vision for the future

Integrating EHS into Business Strategy: DuPont

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Effective communication can be the linchpinof corporate reputations; negative impacts canbe dramatic when stakeholders are not giventhe information or ability to make an informedchoice.28 Transparency has become a criticalbusiness issue. The Sarbanes-Oxley Act is thelegislative incarnation of the spotlight thatinvestors, consumers, and employees now shineon the financial statements of a company.29

GEMI holds NGO transparency workshops andis developing a new tool to addresstransparency challenges.30

Indeed, companies may pay a price for notmanaging the disclosure of their information,given the ease with which consumers andregulators can now access information oncorporate practices. When the Toxic ReleaseInventory (TRI), a U.S. EPA database of wastemanagement activities, was first disclosed,shares of publicly-traded companies reportingdata markedly declined in the short-term.31

The implication is that investors updated theirexpectations of future returns for high TRIcompanies. This feedback from the marketprompted change: The firms with the largestdecline in market value subsequentlyresponded by reducing emissions more thantheir industry peers.32

Companies stepping up to this demand forinformation disclose not only credible financialstatements, but also their environmental andsocial policies and procedures. One recentstudy shows the relationship betweencompanies that disclose more detailedinformation about their governance and highershareholder return.33 Though this correlation isnot conclusive, it does underscore the validityof transparency in governance as a value driver.

Sample measures related to transparency andcommunication include:

• Disclosure of governance policies andprocedures, including:

� Disclosure of Director share ownership requirements

� Issuance of reports, policies, guidelines, andprocedures concerning EHS/Sustainability,dialogue meetings with stakeholders,disclosure of business process improvementinitiatives

� Stating how these policies relate to existinginternational standards

� Tying executive and employee compensationto meeting or exceeding internal standardsand guidelines

� “Continuous" reporting or book-keeping;timeliness of financial and non-financialinformation disclosure beyond quarterly orannual filings

• Extent of stakeholder engagement anddialogue:

� Number of community advisory panels at manufacturing sites

� Cooperation or alliances with non-governmental organizations (NGOs)

� Employee involvement in EHS/Sustainabilitypolicies and practices

• Timeliness of communications: e.g.,responses to unplanned incidents or releases

• Quality and depth of EHS/Sustainabilityreporting:

� Commitment to quantitative indicatorsand goals

� Adherence to international reporting standards

� Candidness about gaps and needed improvements

• Disclosure of governance policies and procedures• Stakeholder engagement• Timeliness of communications• Quality and depth of EHS/Sustainability reporting

COMMUNICATION ANDTRANSPARENCY

Does management communicate honestly and openly?Are its communications believed and trusted?Does management hold itself accountable?

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Bristol-Myers Squibb (BMS), a global manufacturerof pharmaceuticals, recently recognized that anincreasing number of clinical trials are beingconducted in developing nations. In keeping withits social responsibility commitment, the companyformed a Bioethics Committee and developedpolicies regarding ethical issues in clinical trials,such as readability of forms and informed consenton behalf of children or disadvantaged subjects.One important consideration is that clinicalresearch should be done in a population that willderive benefit from that research, implying that theresulting products should be available to thepatients in that region. Another example is theemerging area of protection of privacy inpharmacogenetics, which seeks to predict diseasevulnerability or treatability in specific geneticgroups. Since bioethics is an evolving area, thecompany continues to reconsider and refine itspolicies.

BMS was approached by the Calvert Group, asocially responsible investment firm, to learn moreabout its corporate responsibility and ethicsprograms. During a meeting between Calvert andBMS researchers, the bioethics policies werefeatured as an ethical research example. Calverthas lauded these policies as a pharmaceuticalindustry model. At their suggestion, rather thankeeping its bioethics policies confidential, thecompany has decided to make them available uponrequest to interested stakeholders.

The transparency dialogue between Calvert andBMS supported Calvert's decision to include thecompany in the Calvert Social Index, which is usedas a basis for inclusion into many of its mutualfunds. As a result of its transparency and leadershipin the area of ethical research policies, Bristol-Myers Squibb hopes to be recognized not only bythe investment community, but also by the globalpopulations that it serves. It is plausible to expectthat governments, research institutions, and civilsociety will acknowledge the company as a trustedpartner in the conduct of future clinical trials, andthat this will translate into competitive advantagein growing international markets.

Key Intangibles: Transparency, Environmental and Social Reputation

Sample Leading Indicators: • Inclusion in socially responsible funds• Penetration into international markets• Clinical trials conducted in developing nations

that will benefit from research

Transparency in Bioethics Policy: Bristol-Myers Squibb

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Many GEMI companies (such as Coca-Cola,Intel and Johnson & Johnson) are householdnames, and there have been many attempts tocalculate a monetary value of such brands. Forexample, these brand names consistently scorehigh on Interbrand's annual ranking of the“World's Most Valuable Brands."34 Somecompanies have successfully tied their brand toan environmentally-friendly image, and haveleveraged this image to improve consumerawareness and customer loyalty. 35

Measures of brand equity that relate to EHSand sustainability include:

• Perception of the brand as environmentallyand socially responsible—this can influence

customer loyalty, lender and investorscrutiny, cost of capital

• Value added due to product stewardship—thecommitment of a company to support thesafe and responsible use of its productsthroughout the life cycle

• Eco-labels and other certifications earned

• Inclusion of the company in environmentaland social responsibility investor screens,such as Dow Jones Sustainability Index orFTSE4Good.

• Perception of brand as environmentally and socially responsible• Value-added due to product stewardship• Presence in environmentally and socially-screened investment funds

BRAND EQUITY Strength of market position, the ability to expand the market,perception of product/service quality, investor confidence

The merger of Hewlett-Packard (HP) and Compaqunited two companies that had long pursued acommitment to EHS performance and sustainability."HP strives to develop programs that reduce ourenvironmental footprint, as well as those of ourcustomers and partners," said Walt Rosenberg, VicePresident, Corporate, Social and Environmentalresponsibility, HP Corporate Affairs. The companyhas incorporated "design for environment" methodsinto its product development processes and workedwith suppliers to reduce EHS impacts associatedwith its products.

The EPA has awarded its 2003 EnvironmentalAchievement Award for U.S. EPA Region 9 to HP’sproduct recycling solutions facility in Roseville,California.

HP is the only technology company to have its owncomputer hardware recycling facilities in the

United States. With its partners, HP operates one ofthe world's largest hardware recycling facilities.HP's environmentally sound management of end-of-life hardware turns unwanted products intovaluable commodities that can be reused toproduce new products, reducing the burden on theEarth's resources.36

Key Intangibles:Brand Equity, Environmental and Social Reputation

Sample Leading Indicators: • Reduction in emissions, waste, and energy

consumption per product unit shipped• Percent of product mass recovered and recycled

at end-of-life

Sizing Up the Footprint: Hewlett-Packard (HP)

A company's reputation for environmental andsocial responsibility can have an importantimpact on strategic issues, such as access tocapital and global markets. While the primarynegotiating levers for most businesses arebased on economics, concern for EHS andsustainability can be a differentiator. Somehost governments may even demand adherenceto sustainable development principles as aprice of entry. Measurement and reporting ofEHS performance and corporate citizenshipinitiatives also help to build better relationshipswith stakeholders, especially at the local level.

Measures related to sustainability reputationinclude:37

• Regulatory compliance record (e.g.,violations, penalties, incidents), as well asshareholder activism and public criticism

• Third party recognition and awards forcorporate citizenship or EHS excellence

• Participation in consortia that promote EHSand sustainability, such as GEMI or theWorld Business Council for SustainableDevelopment (WBSCD)

• Community development and philanthropy, including donations, local investments, andvoluntary in-kind assistance.

ENVIRONMENTALAND SOCIALREPUTATION

How the company is viewed globally in terms of environmentalconcerns, community concerns, regulators' concerns, inclusion in “mostadmired company" lists, triple bottom line

3M has a strong commitment to sustainabledevelopment through environmental protection,social responsibility and economic progress. Itssustainability policies and practices are directlylinked to its four fundamental corporate values:

• Satisfying its customers with superior quality and value

• Providing investors an attractive return through sustained, high-quality growth

• Respecting its social and physical environment• Being a company that employees are proud to

be part of

3M has been recognized as a sustainability leaderby the Dow Jones Sustainability Index and hasachieved high rankings for quality of managementand innovation. The Harris Annual ReputationSurvey ranked 3M as the tenth most reputable U.S.company in 2002. 3M believes that itssustainability reputation translates into shareholder

value by (a) demonstrating that 3M is a well-managed company that addresses both risks andopportunities, (b) enhancing brand preferenceamongst consumers, and (c) attracting andretaining a diverse and talented work force.

Key Intangibles:Environmental and Social Reputation, Brand Equity,Human Capital

Sample Leading Indicators:• Recognition as a sustainability leader by

government, NGOs and business groups• Inclusion in environmentally- or socially-

screened funds• Product preference by consumers

• Regulatory compliance record• Third-party recognition and awards• Participation in EHS/sustainability consortia• Community development and philanthropy

Building a Reputation for Sustainability: 3M

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Businesses over the years have come to acceptthe claim that “to build a company or acapability without regard for the chain inwhich it is embedded is a recipe for disaster."38

Scrutinizing a company's supply chain with anEHS lens can reveal the choices andopportunities a company has to cost-effectively improve performance. Raw materialsand new technological concepts, for example,may demand choices between higher-pollutingor cleaner-burning energy sources. Materialssourcing can lie squarely in the scope amongother strategic considerations. Manufacturerscan choose product designs that areupgradeable, with the potential for customerlock-in with a service relationship.

The Global Brand With a Local Reach: TheCoca-Cola Company

The network of local businesses that Coca-Colahas built is as impressive as its global brand.In over 200 countries, Coca-Cola operates withlocal partners. Even in geographies far fromits world headquarters such as in the MiddleEast, Coca-Cola employs 20,000 people directlyand 200,000 including retail and supply jobs.39

Their products are produced, sold, anddistributed by authorized local bottlingpartners, employing one million local citizens.

Zahi Khouri, chairman of the National BeverageCompany, a Middle Eastern bottler that is 15percent owned by Coca-Cola, said in aninterview with The Economist that Coca-Colastrongly supports local management ofoperations in other countries.39 Coca-Cola isthe second biggest corporate investor in theWest Bank region.

Measures that indicate leverage ofEHS/sustainability in alliances and networksinclude:

• Collaboration on EHS/sustainabilityimprovement through supply chainrelationships, including outsourcing,collaborative innovation, and procurementpolicies.

• Extent of outsourcing (e.g., cost of goods,materials, and services purchased)

• Percentage of suppliers that meet or exceedvoluntary environmental performancestandards

• Extent to which supplies are sourced locallyversus globally

• Number of alliances and joint ventures

• Explicit use of EHS and sustainability criteriain selection of suppliers and businesspartners

• Partnerships with EHS/sustainability-orientedorganizations, including NGOs, governmentsor other groups

• Participation in industrial ecology networks,in which waste byproducts of one companybecome feedstocks for another company.

GEMI's Supply Chain project is documentinghow collaborative relationships betweensuppliers and customers can improve overallsupply chain performance from both afinancial and EHS perspective. These types ofopportunities are also being explored by theSuppliers Partnership for the Environment (SP),a recently established automotive industryconsortium.

ALLIANCES ANDNETWORKS

Supply chain relationships, strategic alliances, partnerships

• Collaboration on EHS/sustainability throughout the supply chain• Partnerships with EHS/sustainability-oriented organizations• Participation in industrial ecology networks

17

In April 1999, Dow Chemical completed a two-yearcollaborative program with the Natural ResourcesDefense Council (NRDC) and five local activistgroups to voluntarily reduce waste and emissionsat the Michigan Operations site. The projectfostered broader efforts within Dow to shift fromtraditional environmental compliance to pollutionprevention and further integrate EHS concerns intobusiness decision making.

MSRI was a participatory process involving directcollaboration between Dow managers andenvironmental activists to first establish reductiontargets and then agree on pollution preventionactions. A full-time external expert was alsoretained by Dow to help identify the greatestopportunities for waste minimization and emissionreduction and to provide a credible technicalresource for the MSRI participants.

Results:

• EnvironmentalThe MSRI project set an aggressive goal of 35%reduction in waste and emissions. This goal wasactually exceeded—targeted emissions werereduced by 43%, and targeted wastes by 37%. Thetotal reductions achieved were over 10 millionpounds per year of wastes and about 1.5 millionpounds per year of air emissions, and some wastestreams, such as formaldehyde, were virtuallyeliminated. Consequently the TRI emissions fromthe Midland, Michigan site for 1998 were 41%lower than 1997.

• EconomicThe cost savings and process improvements thatMSRI delivered were exemplary. The reductions willbe paid for in less than one year, which translatesto an overall rate of return of 180%—a savings ofover $5.4 million per year with a total one timecapital expenditure of $3.1 million. Dow was thefirst company to harness the Six Sigmamethodology to directly improve EHS performance.

• SocialMSRI involved a multi-stakeholder, participatoryendeavor that enabled community participants togain an understanding of Dow's decision-makingprocess, and helped to establish common ground.Relationships with all stakeholders involved in theproject improved dramatically.

Key Intangibles:Alliances and Networks, Transparency

Sample Leading Indicators: • Measures of company's ability to prevent

pollution at its source, versus the capital required for pollution control

• Measures of the amount and quality of various stakeholder dialogues

• Environmental gains and competitive advantage due to process modifications

The Michigan Source Reduction Initiative (MSRI): The Dow Chemical Company

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The ability to exploit new practices is a criticalelement of sustained competitive advantage.40

In the past few decades, companies havebegun to introduce strategic frameworks andprocesses that take environmental costs andbenefits into account.

Design for Environment (DfE)41 is one suchtool, where environmental criteria are broughton board early in the product developmentstage. When combined with a Life CycleAssessment (LCA), these tools can not onlyimprove the environmental performance of aproduct during its use phase, but also simplifya product's end-of-life disassembly, reuse,recycling and disposal. Total cost assessment(TCA) has been another useful managementtool since the late 1980's, and when combinedwith environmental considerations can give acandid picture of total costs and benefits (seeSection 4 for further discussion on TCA).

Employing such tools at all levels of theorganization takes a commitment eitherthrough the provision of information about thetool or process, or by employing incentives andcompensation schemes. Companies that standout as leaders in organizational technologiesand processes will understand and quantify thebenefits of such tools, and provide acombination of information and incentives toimprove the measurable performance.42

Measures of superior technology and processperformance include:

• Leadership in EHS/sustainabilitytechnologies:

� Investment in alternative energy, bio-based products, etc.

� Adoption of sustainable process technologies

TECHNOLOGY ANDPROCESSES

Strategy execution; IT capabilities, inventory management, turnaroundtimes, flexibility, reengineering, quality, internal transparency• Leadership in EHS/sustainability technologies & business practices• Design for EHS/sustainability processes and results• Energy and material conservation• Ecosystem impact minimization

19

• Leadership in EHS/sustainability business practices:� Speed and quality of EHS due diligence� Incentives to develop “beyond compliance"

processes and technologies

• Design for EHS/sustainability processes and results:� Incorporation of EHS/sustainability criteria

into product realization processCollaboration with suppliers on life cycle impact reduction

� Materials and energy use reduction in product and process design

� Reductions in pollution, greenhouse gas emissions, hazardous wastes, etc.

� Improvements in product upgradeability, longevity, re-usability, etc.

� Reduction in product maintenance requirements and cost of ownership

• Energy and material conservation:� Initiatives to use renewable energy sources

and to increase energy efficiency� Percentage of the weight of products sold

that is reclaimable at the end of the products' useful life and percentage that is actually reclaimed

• Ecosystem impact minimization:� Brownfields re-development initiatives� Land use policies and habitat restoration� Ecological footprint reduction

Excellence in technology does not necessarilyrequire leading-edge innovation. In many casesit simply involves applying available expertiseand know-how to devise beneficial, cost-effective solutions. Moreover, technology doesnot refer only to the “hard" technologiesassociated with product design and processengineering; it also includes the “soft"technologies associated with business processesand decision-making.

FedEx Express, the Memphis, Tennessee-basedcompany that invented the express packagedelivery market, has been upgrading its ground-based delivery operations. In May 2003, FedExExpress announced it had agreed to purchase 20hybrid delivery trucks, the vanguard in a programthat has the potential to eventually replace its fleetof 30,000 medium-duty express delivery vans.FedEx Express is the first U.S. company to adapt thetechnology for diesel delivery vehicles on such alarge scale.

Hybrids, which combine a high-efficiency diesel orgas engine with an electric motor, have bothfinancial and environmental advantages. Theyrequire less maintenance because they run cleaner,and the braking systems last longer because themotor itself helps to decelerate the vehicle whilerecapturing kinetic energy. Through a combinationof fuel savings and lower maintenance costs, FedExExpress expects to recoup some of the higheracquisition costs of the hybrid vans. As productionlevels rise, these costs will come down (and savingsincrease). FedEx Express is working withEnvironmental Defense's Alliance for EnvironmentalInnovation to develop the environmentalperformance specifications for the new vehicles.

The scale of FedEx Express' commitment is likely totransform the economics of hybrid commercialvehicles, potentially enabling them to be mass-produced and more affordable for smallercompanies. Thus, FedEx Express is helping to jump-start a technology that could have widespreadeconomic and environmental benefits. In a recentreport, consumer consultant J.D. Power &Associates Inc. estimated there will be more than500,000 hybrid vehicles on the road by 2008 withtrucks accounting for 40% of that number.

Key Intangibles:Technology and Processes, Innovation, Alliances andNetworks

Sample Leading Indicators: • Percent of fleet utilizing alternative engine

technology• Life cycle operating and maintenance costs per

vehicle• Energy consumption per vehicle mile

Utilizing Advanced Technology: FedEx Express

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In a service-oriented economy, human capitalis critical to organizational success, whether acompany is product or service-oriented.Researchers have begun to quantify, in variousways, the effects of investment in humancapital. For example:

• A study of 405 public companies found thata well-managed workforce can add up to30% to a company's market value.43

• A study of 40 companies found thoseranking in the top half for trainingexpenditures per employee had higher netsales and higher gross profit per employeethan those in the bottom half; they also hada higher and faster-growing market-to-bookratio.44

• A study of 29 professional service firms in15 countries indicated that raising employeesatisfaction by 20% can boost financialperformance more than 40%.45

Measures of EHS contributions to humancapital include:

• Workforce diversity, employee benefits and compensation:� Composition of senior management and

governance bodies, including female/male ratio and other indicators of diversity asculturally appropriate.

� Net employment creation and average turnover

� Employee benefits beyond those legally mandated

� Clear organizational goals, incentives and performance measures

• Employee rights and empowerment:� Freedom of expression and tolerance for

individuality� Average training investment per employee

per year� Incentives for employee volunteerism,

education and career development� Culture of continuous improvement,

including employee health and safety.

• Perception and awards as a “Great Place to Work."

HUMAN CAPITAL Talent acquisition, workforce retention, employee relations,compensation, what makes a "great place to work"

Intel was ranked number three in Business Ethics2003 list of best corporate citizens. The magazineexplains that ethics at Intel "include carefulattention to employee safety—so much that CEOCraig Barrett insists he be sent an e-mail reportwithin 24 hours any time one of his firm's 80,000employees loses a single day of work to injury. 'Thispolicy allows us to look at the root causes of allaccidents and figure out what we can do toprevent them from occurring again,'” said DaveStangis, Intel's Director of Corporate Responsibility.In 2000, Intel's worldwide injury rate was just 0.27

injuries per 100 employees, compared to anindustry average of 6.7.

Key Intangibles:Human Capital, Environmental and SocialReputation

Sample Leading Indicators:• Awards and recognition• Employee satisfaction surveys• Employee health and safety statistics

Commitment to Employees: Intel Corporation

• Workforce diversity, employee benefits and compensation• Employee rights and empowerment• Perception and awards as a "great place to work"

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Service, product and process innovations canall improve EHS performance as well as addoverall value to a corporation. Devisinginnovative ways to meet or beat compliancetargets may not only help reduce costs; it hasalso helped steer environmental regulation in adirection beneficial to producers as well as tosocial/environmental well-being. 46

Measures of EHS/sustainability contributions toinnovation include:

• Leadership and patent position in EHS technologies:

� Level of R&D investment in addressing regulatory requirements

� Licensing revenues from EHS technologies

• Cost savings through EHS/sustainability innovations, including operating costs,capital costs, service and support costs, orproduct takeback costs

• EHS-related product or servicedifferentiation, e.g., ability to extract ahigher margin.

INNOVATION The R&D pipeline, effectiveness of new-product development, patents,know-how, business secrets

Johnson Controls, Inc. (JCI) is the world's largestmanufacturer of automotive interiors andautomobile batteries, and a global leader in controlsystems and commercial facility management. JCIhas achieved growth through innovation, whileremaining committed to its values, includingintegrity, customer satisfaction and EHS excellence.

JCI began decades ago to promote battery recyclingand develop a reverse logistics infrastructure.Today, the recycling rate of battery lead exceeds93%, far higher than any other commodity, and 48states require lead-acid batteries to be recovered.In addition, lead and plastic process wastes arerecycled for re-use in new batteries and otherproducts such as X-ray shielding. Continuinginnovations in battery technology include designfor disassembly and development of higher voltagebatteries to support electronic control systems thatwill improve fuel efficiency and reduce emissions infuture vehicles.

As a leader in facility management, JCI focuses onmaking commercial buildings more energy efficient,safe, secure and comfortable. For example, inbuilding control systems, JCI's mercury-freethermostats provide a competitive advantage inmany applications (e.g., schools, hospitals). Oneimportant innovation was the Energy SavingPerformance Contracting approach, in which energyefficiency upgrades are financed through JCI andrepaid through energy savings. This approach isprojected to achieve $95 billion in energy savingsand 1.3 billion tons of carbon dioxide emissionreductions between 1990 and 2020.

Key Intangibles:Innovation, Risk

Sample Leading Indicators: • Energy/materials use per consumer product unit• Competitive advantage in bidding for contracts• Reduced cost of ownership and liability risks for

customers

Innovation and Environmental Benefits: Johnson Controls, Inc.

• Leadership and patent position in EHS technologies• Cost savings through EHS/sustainability innovation• EHS-related product or service differentiation

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Proactive investing in environmental measuresbeyond those required by law can be good forthe bottom line, while limiting downside risk.47

Damages and hefty litigation fees are incentiveenough to manage proactively the risk ofunplanned incidents such as spills, workplaceaccidents or product-related injuries. Moreimportantly, such incidents may result in costlybusiness interruptions as well as adversepublicity that can compromise brand equityand reputation.

Risk management also has a positive aspect—the ability of a firm to pursue promisingbusiness opportunities that involve uncertainty.A company that is able to rapidly andeffectively discern potential obstacles orliabilities, e.g., through a due diligence processfor acquisition of new assets, is betterequipped to enhance long-term shareholderreturns. Likewise, a company that exercisesproduct stewardship, while advising customersand suppliers on how to minimize hazards intheir own operations, enhances both its ownrisk profile and its perceived value as abusiness partner.

Insurance Companies Re-think Risk Profiles

Swiss Re believes that companies that havepoor compliance records or are lacking in plansto mitigate climate change risks, are morelikely to attract shareholder lawsuits.Accordingly, the insurance giant has statedthat it may drop insurance for the directorsand officers of those companies who may bespecifically targeted by shareholders.

On the positive side, the effective riskmanagement program of Occidental PetroleumCorporation has been recognized by insurance

companies, resulting in Occidental beingoffered access to additional insurance capacityat preferred rates.

Measures related to effectiveness inEHS/sustainability exposure and risk include:

� Intrinsic product and process hazards, suchas presence of toxic constituents

� Effectiveness of risk prevention and risk management, including:

� Prevention of risks� Frequency of internal audits� Investment in meeting upcoming

regulatory requirements� Accrued environmental liabilities, fines,

warnings and penalties� Rate of worker days lost per 200,000

hours� Mitigation of impacts

� Crisis response and crisis management performance

� Waste recovery and recycling programs, whether in compliance with or in addition to regulatory initiatives

� Workers compensation case management costs

� Costs of unplanned business interruptions

� Effective responses to challenges and opportunities:

� Proactive policies to address regulatory initiatives and consumer preferences, e.g.,policies to prepare for climate change pressures, use of emissions trading schemes, product take-back regulations and consumerprivacy issues

� Proactive experimentation with environmental technologies such as joint implementation, emissions trading, pollution-prevention technologies

� Corporate citizenship and stakeholder engagement initiatives

RISK The ability to effectively manage the balance between potentialliabilities and potential opportunities• Inherent product or process hazards• Effectiveness of risk prevention and risk management• Effective response to challenges and opportunities

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Novartis is one of the world's leading healthcarecompanies. The company has had a long history ofrisk management, using a variety of tools to assessrisks associated with new projects and acquisitions,as well as ongoing operations. For example,Novartis sites are required to annually maintain a"risk portfolio," a matrix that screens various risksin terms of their potential impacts and level ofcontrol. This information is rolled up to the Grouplevel, and is used to improve managementawareness and support priority-setting in resourceallocation.

Novartis has initiated a new program thataddresses business continuity by assuring that allbusiness interruption risks are properly anticipatedand managed. Costly business interruptions canpotentially be triggered by a variety ofcircumstances, from an unintentional release ofhazardous materials to a failure of criticalinformation systems. The Health, Safety andEnvironmental Department has the responsibility todevelop a framework for assuring businesscontinuity, including risk identification, contingencyplanning, crisis management and disaster recovery.In addition, looking beyond the fenceline, Novartishas established a product stewardship program toanticipate potential risks associated with design,material acquisition, distribution and use of itsproducts; for example, the company might chooseto eliminate chemical constituents with undesirableproperties.

Assuring Business Continuity: Novartis

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Key Intangibles:Risk, Environmental and Social Reputation

Sample Leading Indicators: • Number of risks classified "high" for each

business unit• Percent completion of business continuity plans• Percent of product stewardship risk analyses

completed

Section 4FROM CONCEPT TO PRACTICE

Through identification of important EHS-related value drivers, companies can improvetheir competitive position and financialperformance over the long run. However, EHSvalue contributions are not meaningful to theinvestor unless they are properly articulatedand communicated.

Section 2 “Making the Case" and Section 3 “ACloser Look" are relevant for senior companyexecutives, mainstream financial analysts orfund managers, and investor relationsprofessionals. This section is intended as apractical primer for the EHS professional,working in collaboration with other corporatefunctions. This section, “From Concept toPractice" presents a step-by-step process foridentifying, measuring, communicating andmanaging these value drivers. The intent of theprocess is to help EHS professionals and theircompanies gain recognition for EHS excellencefrom their own internal investor relationsfunction, from the investment community andfrom other stakeholders.

Linkage Between EHS and IR

In its “Standards of Practice for InvestorRelations," the National Investor RelationsInstitute (NIRI) defines Investor Relations as:

“. . . a strategic corporate marketing activitycombining the disciplines of communicationsand finance that provides present andpotential investors with an accurate portrayalof a company's performance andprospect…Marketing in this context does notmean 'selling' a company's securities, butrather a process of identifying target audiencesand educating them about the present andpotential value of those securities."

The NIRI document further notes that theimportance of quality of management toinvestors suggests that those investors need toknow whether management can articulate avision and whether they have the resources to

accomplish that vision. To the extent that EHSexcellence can logically be understood to bepart of that vision, there is a clear role for EHSprofessionals to assist the Investor RelationsOfficer (IRO), the CFO and the company inachieving its goals.

The Clear Advantage Process

Communicating EHS excellence as part of acorporate vision requires a systematic processthat enables companies to recognize and takeadvantage of opportunities for value creation.This section presents the Clear Advantageprocess that has been developed to address theneeds of GEMI's participating membercompanies (see page II). The design of thisClear Advantage process is deliberately generic,so that it can be adapted by virtually anymanufacturing or service enterprise.

The Clear Advantage process, depicted in Figure4-1, consists of six cyclical steps, and followsthe familiar pattern of “plan, do, check, act"that underlies most contemporary businessprocess designs. Therefore, it will be simple forcompanies to incorporate the desirable featuresof Clear Advantage into their existing valuecreation processes.

It is recommended that the Clear Advantageprocess be carried out by a cross-functional“value creation team," under the guidance ofan “EHS value champion." The value championfor this type of initiative is frequently fromEHS management, although a champion fromanother senior management function (e.g.,CFO) could yield wider acceptance and greaterlegitimacy. In addition to EHS and IR, otherfunctions that may participate on this teaminclude strategic planning, new productdevelopment, marketing, operations, finance,engineering and human resources.

25

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STEP 1 - Identify Key Value Drivers

Identification of value drivers is the startingpoint for any effort to enhance shareholdervalue. As described in Section 2 “Making theCase," a value driver is defined as afundamental and persistent characteristic of abusiness enterprise that influences its marketvalue. Authentic value drivers are fundamentalin that they represent a strong, intrinsiccharacteristic of an enterprise. They arepersistent in that they will have a lastingimpact on value regardless of marketfluctuations.

The nature and relative importance of thesevalue drivers varies by industry, geography andeconomic setting. It is likely that the strategicplanning and/or investor relations groupswithin a company will be able to provide aninitial list of perceived value drivers.

The following are guidelines for identifyingyour company's value drivers and related EHScontributions:

Action Items✓ With the help of internal strategic planning,

investor relations, and other groups, develop agenerally accepted list of key value drivers foryour company. It is best to perform thisexercise without preconceptions about whereEHS improvements might contribute thegreatest value. The value drivers that have beenidentified by GEMI members in Figure 2-6 mayprovide a useful starting point. These are

believed to be the most common but the list isnot all-inclusive

✓ Based on the team's expertise and insights,evaluate how EHS activities contribute to thesekey value drivers

✓ Develop a generally agreed upon ranking orclustering of the list of key drivers in terms ofrelative importance. Two ways of achieving thisare through informal consensus or having teammembers rank the drivers and calculateaverages

✓ To the extent possible, develop anunderstanding of your company's strengths orweaknesses in these driver categories vis-à-viscompetitors. Are there particular value driversfor which improvement would be particularly advantageous?

For Your ToolkitPerform an Intangibles Assessment

It may be helpful to assess the relative strengthof your company's intangible assets throughsimple surveying techniques. There are a numberof approaches; one example is an existing toolcalled the “Invisible Advantage Diagnostic"(available at http://www.predictiv.net). Suchquestions may be adapted in order to help assessthe relevance of EHS to each intangible valuedriver. For example, the following hypotheticalquestion explores how EHS capabilities are linkedto the Innovation process.

Illustrative example of a diagnostic question

To what extent does your organization leverageits EHS capabilities to support product andprocess innovation?

Identify KeyValue Drivers

Assess PotentialContributions

Develop ValueEnhancing Strategy

Assure ContinuousImprovement

Communicate to Managementand Investors

Implement Strategy andMeasure Results

STEP1

Figure 4-1 The Clear Advantage Process

STEP2

STEP3

STEP6

STEP5

STEP4

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• EHS capabilities are not linked to theinnovation processes in a systematic way

• EHS considerations occasionally motivateadoption of new technologies aimed atemission control and/or waste reduction

• EHS knowledge is incorporated into facilityengineering to systematically improveoperating efficiency and safety, or

• EHS knowledge is applied systematically toencourage innovation in both facilityengineering and new product development

STEP 2 - Assess Potential Contributions

In order to identify the highest leverageopportunities, a company needs to movebeyond the qualitative identification ofintangible value drivers and develop anunderstanding of the relative magnitudeof each.

A variety of different conceptual frameworkshave been developed for characterizing thetangible and intangible assets that drive long-term performance. If a company has alreadyadopted one, then it makes sense to utilizethat framework to further explore EHSopportunities. The following Figures 4-2 and4-3 summarize two frameworks that are incommon use today.48

One of the most widely used frameworks is the“Balanced Scorecard," popularized by Kaplanand Norton,49 which proposes broadening

financial performance measurement to includethree major non-financial perspectives that areleading indicators of financial success:Learning and Growth, Internal Business ProcessExcellence, and Customer Relationships. Thisframework is illustrated in Figure 4-2.

Another important framework is the“intellectual capital" model developed byStewart50 and others, which includes thefollowing categories of intangible assets:

• Human Capital - skills and knowledge ofmanagement and employees

• Structural Capital - patents and proprietarydata, methodologies or processes

• Relationship Capital - bonds with customersand suppliers, and brand identity

Leading companies such as DuPont andGeneral Electric have systematically worked tosubstitute intellectual capital for physicalcapital in order to increase shareholder value—this is in line with a notion that intangibleassets are less expensive to maintain thantangible ones. The EHS value drivers in Section3 can be mapped into the intellectual capitalframework using an approach similar to theBalanced Scorecard example (see Figure 4-3).

While the frameworks discussed are extremelyrobust and flexible, they do not provideguidance to practitioners on what intangiblesneed to be emphasized within each of these

“If we succeed, how will we lookto our shareholders?”

CUSTOMER PERSPECTIVE

“To achieve my vision, how must Ilook to my customers?”

INTERNAL PERSPECTIVE

“To satisfy my customer, at whichprocesses must I excel?”

LEARNING PERSPECTIVE

FINANCIAL PERSPECTIVE

Figure 4-2 Balanced Scorecard Framework

STRATEGY

“To achieve my vision, how must myorganization learn and improve?”

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GEMI Intangible Value Drivers

Bala

nced

Sco

reca

rd F

ram

ewor

k

FinancialPerspective

InternalPerspective

LearningPerspective

CustomerPerspective

Transparency Openness of an organization with regard to sharing information about how it operates.

Risk The ability to effectively manage the balance between potential liabilities and potential opportunities.

Technology Strategy execution; IT capabilities; inventory management; turnaround and Processes times; flexibility; reengineering; quality; internal transparency.

Human Capital Talent acquisition, workforce retention, employee relations, compensation; What makes a “great place to work.”

Innovation The R&D pipeline; effectiveness of new-product development; patents; know-how; business secrets

Leadership and Strategy Management capabilities; experience and leadership’s vision forthe future.

Alliances and Networks Supply chain relationships; strategic alliances; partnerships.

Customer The ability to develop customer relationships, satisfaction, and loyalty.

Brand Equity Strength of market position. The ability to expand the market, perception of product/service quality, investor confidence.

Environmental and How the company is viewed globally such as: environmental concerns, Social Reputation community concerns, regulators’ concerns, inclusion in “most admired

company” lists, triple bottom line.

broad perspectives. In particular, they do notprovide explicit linkages between the strengthof a company's intangibles and the financialperformance of interest to investors. Step 3will focus on measurement of financial valuedrivers and account for the impact ofintangible assets.

For this step in the Clear Advantage process,EHS management should assess how it canmake the greatest contribution to value. This isultimately a creative exercise. The followingaction items are by no means exhaustive, butthey should help to articulate and assess themost promising opportunities.

Action Items✓ Create a set of hypotheses about areas of EHS

performance that represent significantopportunities for value creation

✓ For each hypothesis, identify the value driveror drivers from Figure 2-6 that can beimproved (e.g., customer satisfaction)

✓ State the specific contribution and valueoutcome (e.g., design changes to a product

line resulting in customer benefits such aslower cost, convenience, etc.)

✓ Repeat steps, this time starting with Figure 2-6and brainstorming the value drivers that can beaffected by EHS performance.

For Your ToolkitAssess Total Costs A helpful tool for identifying value creationopportunities is total cost assessment (TCA), amethod for quantifying all EHS costs, bothinternal and external, associated with a businessdecision.51 TCA is a comprehensive process toidentify potentially hidden environmental andhealth costs and to mitigate future risks andcontingent costs for industrial processes,products or facilities. Costs that may not havebeen previously considered are generallyassociated with allocated overhead chargesand/or potential future costs, including hiddenimpacts on the environment and human health,as well as internal intangible costs. For example,the potential future costs associated with carbondioxide emissions can be considered indeveloping a strategy for carbon management.

Figure 4-3 How GEMI Intangible Value Drivers Populate the Balanced Scorecard Framework

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STEP 3 - Develop Value-EnhancingStrategy

The next step in the Clear Advantage process isthe development of a strategy for capturingnew opportunities to enhance shareholdervalue. Given an initial set of hypotheses aboutvalue creation opportunities, it is important toconsider each in a strategic business context.The box below describes some frameworks thatattempt to do so by linking value-basedindicators to shareholder returns. Theintangible value contributions described in thistool may be considered in addition to othervalue-based management models.

EHS Intangibles as Leading Indicators

Steps 1 and 2 helped to identify and rank theimportant drivers for creating and sustainingvalue and competitive advantage. Theseinsights can then be applied to develop aunique model for an individual company. Asillustrated in Figure 4-4, many of the EHSperformance indicators discussed in Section 3can be configured as inputs to a company-specific model of intangible value creation.

It is likely that most public companies alreadyhave approximately 70 percent of theinformation required to begin constructingsuch a model. These data almost always reside

Value-Based Management and Intangibles ValuationThe 1990s saw a growing strategic emphasis on frameworks for value-based management - i.e., therealization of corporate value through identification, measurement and management of the drivers ofcustomer value and shareholder returns. These methodologies included economic value added (EVA)measures that are claimed to approximate shareholder returns, and strategic management accountingsystems that provide information concerning the current and expected states of strategic uncertainties.

EVA has been a popular value-based indicator—approximately 40% of Fortune 500 firms have used EVA orsome variant for strategic planning purposes.52 Other mechanisms like EBITDA (Earnings Before Interest,Taxes, Depreciation and Amortization) and pro forma statements of earnings have also gained widespreaduse. Research suggests that as many as 65 percent of Fortune 500 companies have experimented with suchmodels.53 All three approaches have supporters and detractors. They are mentioned here because of therecognition they enjoy, not because they are recommended.

The past two decades have also witnessed new experimentation with intangible asset valuation. Bothfinancial and non-financial value drivers were determined from organizational strategy and value chainanalysis and hypothetical models were created by fitting together these drivers and estimating their impacton one another. This enabled assessment of how changes in value drivers impact financial results andshareholder value. PriceWaterhouseCoopers, Cap Gemini Ernst & Young and New York University ProfessorBaruch Lev have all developed such models.

Intangible Assets and Hard Financial OutcomesAdding confidence to the importance of identifying key value drivers and assessing their potentialcontributions in Steps 1 and 2, Decisions That Matter, a study published in 2001, identified critical drivers oflong-term economic value from the point of view of senior corporate financial executives.54 The study alsoassessed the performance consequences of gaps between measures for internal decision-making andexternal reporting. More than 80% of executives surveyed perceived a gap between the information theyreceived from their own companies and what they actually believed was critical to measure. Moreover, thesize of gaps within companies (i.e., the difference between what companies measure and what they believeis important) was strongly correlated with stock price, market value and other "hard" performance data.

VALUE ENHANCING STRATEGY FRAMEWORK examples

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Stock Price

Earnings

Sales per Employee

Market Share

TangibleOutcomes

Inta

ngib

le V

alue

Dri

vers

Figure 4-4

ConceptualModel ofIntangible ValueCreation

Customer

Leadership andStrategy

Transparency

Brand Equity

Environmental/SocialReputation

Alliances andNetworks

Technology andProcesses

Human Capital

Innovation

Risk

in operational databases controlled at thebusiness unit or functional staff level, ratherthan in corporate financial databases. Bymining what is already known from a host ofqualitative evidence and quantitative measures,and seeking to identify indicators of EHSexcellence that cut across all their businessfunctions (procurement, supplier relations,product design, etc.), companies can obtain amore comprehensive view of EHS valuecreation. The model characterizes the potentialcontributions of EHS function to a spectrumof intangible assets, and thus shows how EHSresults are linked to financial outcomes.

The advantage of this sort of quantitativemodeling is that it permits more informedcommunication between EHS, InvestorRelations, Treasury and Chief Financial Officerstaffs about the expected impact ofinvestments in EHS activities, and underscoresthe linkage between the intangible valuedrivers and firm performance. It conducts thedialogue in the language of finance, which isfirst and foremost, in monetary terms.

Action Items✓ In a collaborative setting, consider the

opportunities selected in the first 2 steps andthen state goals for influencing particularvalue drivers

✓ Justify these goals in terms of expectedoutcomes (e.g., customer loyalty)

✓ Identify specific, measurable indicators ofimprovement for both the value drivers andanticipated outcomes

✓ Evaluate the costs, risks, and benefitsassociated with the strategy, in comparison tothe risks of maintaining status quo

✓ Develop an action plan, with clearaccountabilities, for realizing the proposedimprovements and assure compatibility withexisting business priorities.

For Your ToolkitDetermine MetricsMake a list of the types of information/data yourorganization is currently collecting to supportthose drivers, including where they reside in yourorganization. While many organizations collectdata to be used in the measurement andmonitoring of progress, most of it tends to reside

31

in disparate parts of the organization and isnever collectively compiled. What concepts areexplained well by current measurement systems?Where are they lacking? Chances are it is thedrivers of intangible value that are mostneglected.

Of available data, determine which can be usedas proxies to represent the EHS drivers. Theseproxies should be measurable, comprehensive,and generally accepted as reliable indicatorstoward the understanding of a particularconcept. Multiple measures should be gatheredfor each intangible driver to aid in its robustness.And, keep in mind that even if these measuresare less than ideal, they can likely be used as agood starting point to help you and other keymanagement understand where your organizationcurrently stands with regard to these valuedrivers.

STEP 4 - Implement Strategy and MeasureResults

The strategy developed in Step 3 provides abasis for launching implementation. Armedwith this sort of framework, a company canidentify, measure and begin to manage theways in which its EHS/Sustainability activitiesaffect other operations and outcomes. Used inconcert with cases, anecdotes and historicaltrend data, the quantitative model presents acomprehensive picture to senior executives,investment professionals and to all of anorganization's concerned constituencies. Itenables informed discussion of (a) how EHScan improve financial performance, and (b) themagnitude of financial improvements that canbe expected. Thus, a company can begin tomeaningfully analyze the return on itsinvestment in EHS resources.

Action Items✓ Identify and secure the needed resources,

including senior management endorsementand cross-functional collaboration

✓ Gather needed data to measure both theeffectiveness of internal process changes

designed to influence value and outcomes ✓ Expand the strategy previously developed to

assign detailed implementation responsibilitiesto value creation teams

✓ Convene periodic team meetings to evaluateprogress and adjust the ongoing action plansas appropriate

✓ Remain watchful for signals of change thatmay run contrary to previously conceivedstrategic assumptions and rationale.

For Your ToolkitBenchmark Your PerformanceOnce you have a baseline of strategicallyimportant EHS factors defined, it is important tounderstand where your company stands currentlyand benchmark against competitors. Startingwith a snapshot of your present organizationrelative to these factors, you can assess yourposition relative to your competitors. Once EHScontributions to market value are measured,organizations have a much better sense of wherethey stand and what needs to be changed inorder to improve.

STEP 5 - Communicate to Managementand Investors

Realization of shareholder value through EHSimprovements requires recognition of value bythe investment community. Therefore, effectivecommunication is an essential component ofthe Clear Advantage process. The subject ofintangible value drivers in general, and of EHScontributions in particular, is still relativelynew. Environmental and social performancemessages fall outside of mainstream investorcommunications. Accordingly, careful design ofthese value creation messages is needed toassure that they are both easily understoodand responsive to investor interests.

Apart from coordinating the Clear Advantageprocess, the EHS value champion (and/orinternal alliance, industry coalition, etc.) mustplay a critical advocacy role in bringing thevalue creation opportunities and results to theattention of internal management.

32

The format and language in which the valuecreation message is framed must be carefullychosen. In addition to assisting in theconstruction of these messages, the EHS valuecreation team may need to assist in thedevelopment of supporting materials forinvestor communication.

Action Items✓ Monitor quantitative and qualitative

implementation results to capture evidence ofsuccessful value creation

✓ Develop internal communications regardingsuccessful outcomes for presentation to seniormanagement and investor relations

✓ Advocate incorporation of the EHS valuemessage into investor communications

✓ Support development of investorcommunication materials as needed

✓ Establish a mechanism to record EHScontributions and to validate the long-termimpacts on value drivers and market valuation.

For Your ToolkitThe returns to transparency far outweigh thereturns to secrecy. Communicate the changesthat you are making both within theorganization and outside.

While information itself is of limitedcompetitive value, what you do with thatinformation can make a great difference toyour key stakeholders. Now, more than ever,companies need to help their stakeholders,both internal and external, rebuild a sense oftrust through the actions and commitments ofcorporate leaders. Transparent communicationto employees, customers, suppliers, industrygroups, investors and Wall Street analystsabout intangible valuation can have manypositive outcomes. After all, it is not justhaving particular information but rather whatyou do with it that is truly important. If youcan show why a certain EHS factor is critical,and if you can improve your company'sperformance in this area as well as measureits impact on performance outcomes, youwill gain critical credibility in the eyes ofkey stakeholders.

STEP 6 - Assure Continuous Improvement

The final step in the Clear Advantage processis, in reality, an ongoing process - assuringthat the initial promise of EHS value creation isrealized through systematic monitoring andcontinuous improvement. This can be designedand carried out by members of the EHS valuecreation team.

Action Items✓ Monitor the execution of the value creation

strategy and capture lessons learned✓ Promote regular evaluation and refinement of

the strategy, including selected value creationopportunities, goals, and mechanisms foraction

✓ Research and understand company experiencewith investor communications that addressEHS value creation and recommendimprovements

✓ Monitor changes in the competitive landscapeand company characteristics that might promptadjustment of the Clear Advantage process

✓ Monitor the selected company performanceindicators and remain alert for leadingindicators of significant changes

✓ Review and re-consider key value drivers,hypothesized pathways to value, and businessrationale, as appropriate

✓ Conduct periodic, informal surveys of internalstaff to assure that the Clear Advantageprocess is operating effectively and efficiently.

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Clear Advantage provides compelling evidenceof the link between EHS activities andshareholder value. Because an enterprise's EHSfunction cuts across many areas of business,this report covers the EHS function as well asrelated organizational activities: communityinvolvement, stakeholder relations, governance,transparency and business continuity. In aclimate of increased focus on corporategovernance and shareholder activism, theseissues will only increase in importance.

Risk management and trust are among thecharacteristics influenced by the organizationalactivities noted above. The capital marketsvalue them, although they do not appeardirectly on financial statements. A substantialbody of evidence exists on how EHS practicesspecficially contribute to the bottom line,including reductions in operating costs,insurance premiums and capital costs. It is thecontention of this document that EHSpractices contribute to shareholder value in abroader and more strategic way: by buildingcritical organizational capabilities.

This report also serves as a practical primer forthe EHS professional, working in collaborationwith other corporate functions, by providing astep-by-step process for identifying,measuring, communicating and managingvalue drivers. The intent of this process is tohelp EHS professionals and their companiesgain recognition for EHS excellence from theirown internal investor relations function, fromthe investment community and from otherstakeholders. Hopefully this enables companiesto recognize and take advantage ofopportunities to create a Clear Advantage fortheir company and Build Shareholder Value.

Section 5CONCLUSION

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Appendix ADISCUSSION GUIDE

These questions are intended to serve as guidelines in a discussion between staff members ofcorporate Environment, Health & Safety and Investor Relations.

1) Please rate your level of familiarity with the record of your company's Environmental, Health andSafety programs.(1 to 10 scale from "not at all" to "extremely").

NOT AT ALL EXTREMELY

1 � 2 � 3 � 4 � 5 � 6 � 7 � 8 � 9 � 10 �

2) If you answered 4 or above to Question 1, have you ever communicated this record to membersof the sell or buy side investment communities as part of your corporate IR strategy?

A � YesB � No

3) If yes, please describe the reaction you received.( 1 = indifference, 10 = great interest).

INDIFFERENCE GREAT INTEREST

1 � 2 � 3 � 4 � 5 � 6 � 7 � 8 � 9 � 10 �

4) If no, was it becauseA � You think the securities analysts and portfolio managers don't careB � You think the story is too negativeC � You think it is too risky to share this sort of informationD � Other stories about the company are more central to the corporate strategyE � You believe you need to know more yourself before disclosing this material

5) Would you be interested in learning more about the evidence of the positive correlation between EHSprograms and financial performance like stock price, P/E ratio?

A � YesB � No

6) If yes, what sort of information would you like?A � Quantitative dataB � Case studiesC � Narrative examplesD � Other, please explain

7) If no, why not?A � You think the securities analysts and portfolio managers don't careB � You think the story is too negativeC � You think it is too risky to share this sort of informationD � Other stories about the company are more central to the corporate strategyE � You believe you need to know more yourself before disclosing this material

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8) Please rate your level of interest in working with the EHS executives in your corporation to incorporate the value creation message into your company's IR strategy.(1 to 10 scale from "not at all" to "extremely" interested).

.NOT AT ALL EXTREMELY

1 � 2 � 3 � 4 � 5 � 6 � 7 � 8 � 9 � 10 �

9) If you answered 4 or above to Question 6, would you want to: A � Incorporate this material into a larger message about the effect of various intangible

on corporate value creation B � Focus solely on EHS or C � Both

10) To what degree do you think that socially responsible investing has a significant impact in investment decision-making?(1 to 10 scale from "not at all" to "extremely").

NOT AT ALL EXTREMELY

1 � 2 � 3 � 4 � 5 � 6 � 7 � 8 � 9 � 10 �

11) Over the next five years, to what degree do you think that socially responsible investment will become a more significant issue in investment decision-making?(1 to 10 scale from "not at all" to "extremely").

NOT AT ALL EXTREMELY

1 � 2 � 3 � 4 � 5 � 6 � 7 � 8 � 9 � 10 �

12) Would you like to learn more about what other companies are doing about disclosing this sortof information?

A � YesB � No

If yes, please describe your particular interests.

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Appendix BBIBLIOGRAPHY AND REFERENCES

Intangible Value DriversJ. Collins and J. Porras. Built to Last: SuccessfulHabits of Visionary Companies. New York: Harper,1997.

J.H. Daum, Intangible Assets and Value Creation,Wiley 2002.

R.S. Kaplan and D.P. Norton. The BalancedScorecard. Cambridge: Harvard Business SchoolPress, 1996.

Baruch Lev, Intangibles: Management, Measurementand Reporting, Brookings Institution Press, June2001.

Jonathan Low and Pamela Kalafut, InvisibleAdvantage, Perseus Press, 2002.

Thomas A. Stewart. Intellectual Capital: The NewWealth of Organizations. New York: Doubleday,1997.

EHS and Business ValueMatthew B. Arnold and Robert M. Day. “The NextBottom Line: Making Sustainable DevelopmentTangible," World Resources Institute, 1998.

The Aspen Institute, “Uncovering Value: IntegratingEnvironmental and Financial Performance," 1998.

Livio DeSimone and Frank Popoff. Eco-efficiency:The Business Link to Sustainable Development. TheMIT Press, 1997.

Marc J. Epstein and S. David Young. “Greening withEVA," Management Accounting, Jan. 1999.

Joseph Fiksel, “Revealing the Value of SustainableDevelopment," Corporate Strategy Today, Issue 7/8,2003.

Karina Funk, “Sustainability and Performance,"Sloan Management Review, Winter 2003.

P. Hawken, A. Lovins, and L.H. Lovins. NaturalCapitalism: Creating The Next Industrial Revolution.Rocky Mountain Institute, Snowmass, CO. 2001.

Andrew J. Hoffman, “Integrating Environmental andSocial Issues into Corporate Practice," Environment,June 2000.

C. Holliday and J.E. Pepper. Walking the Talk: TheBusiness Case for Sustainable Development. Geneva:World Business Council for SustainableDevelopment, 2001.

Adam B. Jaffe, Steven R. Peterson, Paul R. Portney,and Rovert N. Stavins. “Environmental Regulationand the Competitiveness of U.S. Manufacturing:What Does the Evidence Tell Us?" Journal ofEconomic Literature. Volume 33, pp. 132-163.March 1995.

Stephen Poltorzycki. Creating EnvironmentalBusiness Value. Crisp Publications, 1998.

Michael E Porter and Claas van der Linde. “Towarda New Conception of the Environment-Competitiveness Relationship." Journal of EconomicPerspectives. Vol. 9 No. 4, pps. 97-118. Fall 1995.

Forest Reinhardt. “Bringing the Environment Downto Earth." Harvard Business Review, pp. 149 - 157.July-August 1999.

Robert Repetto and Duncan Austin, Pure Profit: TheFinancial Implications of EnvironmentalPerformance, World Resources Institute, 2000.

SustainAbility and UNEP, “Buried Treasure:Uncovering the Business Case for CorporateSustainability," 2001.

Socially Responsible Investment S. Blake Goodman, J. Kron, T. Little, TheEnvironmental Fiduciary: The Case for IncorporatingEnvironmental Factors into Investment ManagementPolicies, The Rose Foundation for Communities &the Environment, Oakland, CA, 2002.

CERES, “Value at Risk: Climate Change and theFuture of Governance," April 2002.

Bruce R. Hutton et al. “Socially ResponsibleInvesting: Growing Issues and New Opportunities"Business and Society; Vol. 37 No.3 September,1998.

OECD, Corporate Responsibility: Private Initiativesand Public Goals, 2001.

Chris Laszlo, Dave Sherman, John Whalen.“Shareholder Value and Corporate Responsibility."Ethical Corporation Magazine. London: December2002.

U.S. Social Investment Forum, 2001 Report onSocially Responsible Investing Trends in the UnitedStates, SIF Industry Research Program, November28, 2001.

37

Appendix CGLOSSARY AND ACRONYMS

Analyst. Employee of a brokerage or fundmanagement house who studies companies andmakes buy-and-sell recommendations on theirstocks. Most specialize in a specific industry.

Balance sheet. Also called the statement of financialcondition, it is a summary of the assets, liabilities,and owners' equity.

Book value. A company's book value is its totalassets minus intangible assets and liabilities, such asdebt.

Brand equity. An intangible value-added aspect ofparticular goods otherwise not considered unique.

Business case. A rationale for making a businessdecision, usually involving quantitative analysis ofcosts, benefits and trade-offs.

Buy side analyst. A financial analyst employed by anon-brokerage firm, typically one of the largermoney management firms that purchase securitieson their own accounts.

Cash flow. Earnings before depreciation,amortization and non-cash charges (sometimescalled cash earnings).

Corporate citizenship. Company activities concernedwith treating the stakeholders of the firm ethicallyand in a socially responsible manner.

Corporate governance. The system by whichbusiness corporations are directed and controlled.The corporate governance structure specifies thedistribution of rights and responsibilities amongdifferent participants in the corporation.

Corporate Social Responsibility (CSR). Commitmentto uphold the rights of citizens and communities,behave according to accepted ethical standards, andcontribute to socio-economic development andquality of life.

Correlation. A statistical correspondence betweentwo or more variables.

Earnings Before Interest, Taxes, Depreciation andAmortization (EBITDA). An indicator of a company'sfinancial performance calculated as revenues lessexpenses, excluding tax, interest, depreciation, andamortization.

Earnings Per Share (EPS). A commonly usedfinancial indicator, calculated by dividing acompany's net income by its number ofoutstanding shares.

Eco-efficiency. A measure of the resource intensityof a company's operations, including the inputs ofmaterials and energy required to manufacture anddeliver a unit of output.

Environmental performance. The performance of abusiness or facility according to selected indicatorsof environmental impact.

Environment, Health and Safety (EHS). Aprofessional discipline concerned with protection ofthe environment, human health, and safety throughthe application of scientific, engineering, andmanagement methods.

Full disclosure. A policy under which publicly heldcompanies must disclose all material informationthat might affect investment decisions to allinvestors at the same time (implemented in SECRegulation FD—Fair Disclosure).

Generally Accepted Accounting Principles (GAAP). Atechnical accounting term that encompasses theconventions, rules, and procedures necessary todefine accepted accounting practice at a particulartime.

Global warming. Gradual increase in averagetemperatures at the earth's suface, believed to resultfrom the “greenhouse effect" due to increasedatmospheric concentrations of carbon dioxide andother gases.

Human capital. The set of skills which employeesacquire on the job, through training and experience,and which increase their value in the marketplace.

Income statement. A statement showing therevenues, expenses, and income (the differencebetween revenues and expenses) of a corporationover some period of time.

Institutional investor. An investor that is not anindividual and may be a foundation, endowment,pension fund, or the like.

Intangible asset. A non-monetary asset, includingpeople, ideas, networks, and processes, which is nottraditionally accounted for on the balance sheet.

Intellectual capital. Knowledge that can beexploited for some money-making or other usefulpurpose, including the skills and knowledge that acompany has developed about how to make itsgoods or services.

Investor Relations (IR). A strategic corporatemarketing activity, combining the disciplines of

38

communications and finance, that provides presentand potential investors with an accurate portrayal ofa company's performance and prospects.

Leading indicator. A predictive indicator ofanticipated performance that can be observed priorto the period of performance.

Liability. A financial obligation, or the cash outlaythat must be made at a specific time to satisfy thecontractual terms of such an obligation.

License to operate. The ability of a corporation orbusiness to continue operations based on ongoingacceptance by external stakeholder groups.

Market value. (1) The price at which a security istrading and could be purchased or sold. (2) Thevalue investors believe a firm is worth; calculated bymultiplying the number of shares outstanding bythe current market price of a firm's shares.

Net present value. The amount of cash today that isequivalent in value to a payment, or to a stream offuture cash flows minus the cost.

Non-financial performance. The performance of abusiness measured in terms of non-financial aspectssuch as environmental and social responsibility.

Performance. The percentage change in a portfolio'svalue over a specified period.

Price elasticity. A measure of price-sensitivity in themarketplace: the percentage change in the quantityof a product divided by the percentage change inthe price.

Price-to-Earnings ratio (P/E). The multiple ofearnings at which a stock sells, determined bydividing current stock price by current earnings pershare (adjusted for stock splits).

Proxy. Document intended to provide shareholderswith information necessary to vote in an informedmanner on matters to be brought up at astockholders' meeting.

Return on Investment (ROI). A measure of acorporation's profitability, equal to a fiscal year'sincome divided by common stock and preferredstock equity plus long-term debt. ROI measureshow effectively the firm uses its capital to generateprofit.

Risk. (1) The possibility of losing rather thangaining. (2) A measure of price fluctuation relativeto a broad market gauge. (3) The possibility of anadverse incident due to the presence of hazards oruncertainties.

Screened portfolio investing. The application ofsocial criteria to conventional investments, such asstocks, bonds, and mutual funds.

Sell side analyst. a financial analyst who works for abrokerage firm and whose recommendations arepassed on to the brokerage firm's customers.

Shareholder resolution. A recommendation orrequirement, proposed by a shareholder, that acompany and/or its board of directors take actionpresented for a vote at the company's generalshareholders' meeting.

Socially Responsible Investing (SRI). Theincorporation of an investor's social, ethical, orreligious criteria into the investment decision-making process.

Stakeholder. Any party that has an interest,financial or otherwise, in a firm - stockholders,creditors, bondholders, employees, customers,management, the community, and the government.

Supply chain. A sequence of suppliers andcustomers that add value in the form of materials,components, or services, ultimately resulting in afinal product.

Sustainability. Conditions or characteristicssupportive of sustainable development,encompassing the environmental, social, andeconomic aspects of a corporation.

Tangible asset. An asset whose value depends onparticular physical properties, including reproducibleassets such as buildings and non-reproducible assetssuch as land.

Transparency. Openness of an organization withregard to sharing information about how itoperates. Transparency is enhanced by using aprocess of two-way, responsive dialogue.

Triple bottom line. A framework for sustainabledevelopment that defines three fundamental aspectsof corporate performance—economic,environmental, and social.

Value creation. Activities that generate shareholdervalue for a company, e.g., value-basedmanagement.

Sources:New York Times Financial GlossaryInvestopedia.comInvestorWords.comSearchTechTarget.comEconomics.about.comEco-Nomics LLC, NIRI, OECDGlobal Environmental Management Initiative (GEMI).

39

Appendix DFOOTNOTES

16 Personal correspondence with Linda Descano.

17 S. Blake Goodman, J. Kron, T. Little, The EnvironmentalFiduciary: The Case for Incorporating EnvironmentalFactors into Investment Management Policies, TheRose Foundation for Communities & the Environment,Oakland, CA.

18 NYTimes 5/29/03, "Environmental Groups Gain AsCompanies Vote on Issues" by Katharine Q. Seelye.

19 The Principles are as follows:

1. Provide access to finance and risk managementproducts for investment, innovation and themost efficient use of existing assets

2. Promote transparency and high standards ofcorporate governance in themselves and in theactivities being financed

3. Reflect the cost of environmental and socialrisks in the pricing of financial and riskmanagement products

4. Exercise equity ownership to promote efficientand sustainable asset use and risk management

5. Provide access to finance for the developmentof environmentally beneficial technologies

6. Exercise equity ownership to promote highstandards of corporate social responsibility bythe activities being financed

7. Provide access to market finance and riskmanagement products to businesses indisadvantaged communities and developingeconomies.

20 Social Investment Forum Industry Research Program.November 28, 2001. 2001 Trends Report: 2001 Reporton Socially Responsible Investing Trends in the UnitedStates. Washington, DC. Social Investment Forum.

21 Distinct investment styles include environmentallyeffective investing (e.g., Winslow Management),socially responsible investing (e.g., companiesscreened by FTSE4Good Index), and sustainabilityinvesting (e.g., companies screened by Dow JonesSustainability Group Index or ranked by InnovestEcoValue'21).

22 More information athttp://www.sustainability-index.com/

23 More information athttp://www.ftse.com/ftse4good/index.jsp

24 Recent research reveals that there was no statisticallysignificant difference between the risk-adjustedreturns of socially responsible or ethical funds in theUS, Germany and the UK and those of conventionalfunds during the time period of January 1990 throughMarch 2001. See "International Evidence on EthicalMutual Fund Performance and Investment Style".

25 Low, Jonathan and Pamela Cohen Kalafut, "InvisibleAdvantage," Perseus Press, Cambridge, MA, USA(2002).

1 Eustace, Clark, “The Intangible Economy: Impact and Policy Issues." Report of the High Level Expert Groupon the Intangible Economy, Enterprise Directorate-General (Brussels: European Commission, October2000), 6-7.

2 Ramin, Kurt, “The Transparent Enterprise: The Value ofIntangibles." Presentation to European Commissionconference, Autonomous University of Madrid,November, 2002. also see Daum, Jurgen, "IntangibleAssets and Value Creation," Wiley & Sons, New York,2003.

3 Low, Jonathan and Pamela Cohen Kalafut, "InvisibleAdvantage," Perseus Press, Cambridge, MA, USA(2002).

4 Data: Top 100 greatest market cap firms for each yeardepicted, and total Plant, Property, Equipmentreported for same. Source: Compustat and CGEYanalysis.

5 Cap Gemini Ernst & Young's "Measures That Matter"study (1996), a survey of 300 sell-side analysts, 275buy-side analysts, as well as interviews with portfoliomanagers.

6 Low, Jonathan and Pamela Cohen Kalafut, "InvisibleAdvantage," Perseus Press, Cambridge, MA, USA(2002).

7 Cap Gemini Ernst & Young's "Measures That Matter"study (1996), a survey of 300 sell-side analysts, 275buy-side analysts, as well as interviews with portfoliomanagers.

8 Ibid.

9 Social Investment Forum Industry Research Program.November 28, 2001. 2001 Trends Report: 2001 Reporton Socially Responsible Investing Trends in the UnitedStates. Washington, DC: Social Investment Forum.

10 A. Cortese, "The New Accountability: Tracking theSocial Costs," New York Times, Sunday, March 24,2002.

11 Cap Gemini Ernst & Young's "Decisions That Matter"research study (1999), a survey of financial executivesat Global 500 corporations.

12 New York Times, April 14, 2003.

13 Source: Innovest Strategic Value Advisors.

14 Cap Gemini Ernst & Young's "Measures That Matter"study (1996), a survey of 300 sell-side analysts, 275buy-side analysts, as well as interviews with portfoliomanagers.

15 Webber, Martin. Monday, 14 October, 2002. TheEconomic Impact of Global Warming. World BusinessReview.

40

26 CGEY analysis of actual non-financial performance ascorrelated with market value revealed the followingvalue drivers: Innovation, Quality, Customer,Management, Alliances, Technology, Brand, Employee,Environment. Multiple, statistically independentmeasures are used as inputs for each driver in orderto ensure a robust model.

27 More information athttp://www.hp.com/hpinfo/globalcitizenship/environment/index.html

28 Low, Jonathan and Pamela Cohen Kalafut, "InvisibleAdvantage," Perseus Press, Cambridge, MA, USA(2002).

29 The SEC adopted the Sarbanes-Oxley Act in 2002,requiring CEOs and CFOs to certify the accuracy oftheir public reporting and to file federal forms in atimely manner so as to improve the accuracy ofinformation that is available to investors.

30 More information on the GEMI Transparencyworkgroup athttp://www.gemi.org/docs/workgroup.htm

31 See Hamilton, Kames T. 1995. "Pollution as News:Media and Stock Market Reactions to the ToxicsRelease Inventory Data." Journal of EnvironmentalEconomics and Management, vol. 28, pp. 98-113."Stockholders in firms reporting TRI pollution figuresexperienced negative, statistically significantabnormal returns upon the first release of theinformation."

32 Khanna, Madhu, Wilma Rose H. Quimio, and DoraBojilova. 1998. "Toxic Release Information: A PolicyTool for Environmental Protection." Journal ofEnvironmental Economics and Management, vol. 36,pp. 243-266. This article finds that the negative stockmarket returns following TRI disclosure had "asignificant negative impact on subsequent on-sitetoxic releases and a significant positive impact onwastes transferred off site, but their impact on totaltoxic wastes generated by these firms is negligible."The discrepancy with the Konar and Cohen (1997)findings is that the firm samples are different; Konarand Cohen analyze 130 publicly-traded firms fromseveral industries, while Khanna, Quimio and Bojilovaanalyze 40 firms from the chemical industry. In anyevent, there was a response by the firms in theirtreatment of waste, upon disclosure of TRI data.

33 Sibson Consulting, "A Study of Corporate GovernanceDisclosure Practices," Segal Company report, March2003.

34 "The 100 Top Brands." Business Week Special Report,August 4, 2003.

35 See for example Teisl, Mario F., Brian Roe, and RobertL. Hicks. "Can Eco-Labels Tune a Market? Evidencefrom Dolphin-Safe Labeling," Journal of EnvironmentalEconomics and Management, vol. 43, 339-359 2002.

36 http://www.hp.com/hpinfo/newsroom/press/2003/030422d.html

37 Many of these indicators are included in the GlobalReporting Initiative.

38 Fine, Charles. "Clockspeed: Winning Industry Controlin the Age of Temporary Advantage," Perseus Books,(1998).

39 The Economist, "Regime Change," October 31, 2002.

40 Teece D. and Pisano, 1994. The dynamic capabilities offirms: An Introduction. Industrial and CorporateChange 3(3): 537-556. In: Lennox, Michael andAndrew King. "Absorptive Capacity, InformationProvision and the Diffusion of Practice within Firms."New York University Stern School of Business WorkingPaper (submitted to Strategic Management Journal).

41 See for example Fiksel, J., Editor, "Design forEnvironment: Creating Eco-Efficient Products andProcesses", McGraw-Hill, New York, 1996.

42 See Lenox, Michael. January 2001. "OvercomingAgency and Information Problems in the Diffusion ofBest Practice within Firms." New York University SternSchool of Business (submitted to ManagementScience).

43 Drake Business Review, Amernik, Jerry. Watson WyattHuman Capital Index study (1999).

44 Low, Jonathan and Pamela Cohen Kalafut, "InvisibleAdvantage," Perseus Press, Cambridge, MA, USA(2002).

45 Ibid.

46 See for example Reinhardt, Forest L., "Bringing theEnvironment Down to Earth," Harvard BusinessReview (July-August 1999): 149-157.

47 Ibid.

48 Portions of this section are based on Joseph Fiksel,"Revealing the Value of Sustainable Development,"Corporate Strategy Today, Issue 7/8, 2003.

49 R.S. Kaplan and D.P. Norton. The Balanced Scorecard.Cambridge: Harvard Business School Press, 1996.

50 Thomas A. Stewart. Intellectual Capital: The NewWealth of Organizations. New York: Doubleday, 1997.

51 American Institute of Chemical Engineers' Center forWaste Reduction Technologies, Total Cost AssessmentMethodology, Washington, DC, 1999.

52 Low, Jonathan and Pamela Cohen Kalafut, "InvisibleAdvantage," Perseus Press, Cambridge, MA, USA(2002).

53 Cap Gemini Ernst & Young's "Decisions That Matter"research study (1999), a survey of Global 500financial executives.

54 Ibid.

55 More information athttp://www.equator-principles.com

“There is no question in my mind that business and the free enterprise systemare essential to making sustainability work. Our focus at Dow is on hard-wiringit into our company in the same way we have fully institutionalized environ-ment, health and safety into our culture and into our work and people processes.Our challenge is to make sustainability sustainable. Ultimately, the world willjudge our commitment to sustainability not by what we say, but by what we do."

William Stavropoulos, Chief Executive Officer, The Dow Chemical Company

“Environmental protection is a complex undertaking, but the laws of nature aresimple. We will provide leadership on the journey to an environmentallysustainable future, with efficient products and creative recycling systems."

Carly Fiorina, Chief Executive Officer, Hewlett-Packard Company

“Every corporation is under intense pressure to create ever-increasingshareholder value. Enhancing environmental and social performance areenormous business opportunities to do just that."

Gary Pfeiffer, Senior Vice President and Chief Financial Officer, DuPont

“These issues are no longer environmental and social issues but are nowrecognized as strategic business issues."

Linda Descano, Chief Operating Officer, Women & Co., Citigroup

Global Environmental Management Initiative (GEMI)One Thomas Circle, NW, Tenth Floor

Washington, DC 20005

Phone: 202-296-7449

Fax: 202-296-7442

e-mail: info@gemi.org

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