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Last Modified 4/14/2009 10:39:00 PM Pacific Standard Time

Printed 3/25/2009 4:10:23 AM India Standard Time

Valuing Corporate

Social Responsibility

and Sustainability

March 2009

CONFIDENTIAL AND PROPRIETARY

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Objectives of the research

▪ Focus on financial link between ESG

activities and financial value creation

▪ Develop understanding of what it

takes to:

– Create value through ESG

activities

– Develop more sophisticated

metrics to capture the financial

value

– Build better tools and methods to

communicate that value to internal

and external stakeholders

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Key findings

▪ ESG activities create value along the four

areas traditionally valued by the market:

– Growth

– Return on Capital

– Risk Management

– Management Quality

▪ Investors and CFOs believe ESG activities create

value, but are not fully taking it into account

▪ Many companies create real value from ESG

activities, but most do not measure that value,

and even fewer communicate the value

▪ There is a real opportunity for ESG professionals

to fill this gap

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Research methodology

▪ Examination of ESG

programs today, the

challenge of measuring

value, and methods for

assessing and

communicating value

▪ Examined existing metric

systems

▪ 238 CFOs and investment

professionals

▪ 127 ESG professionals and

socially responsible

institutional investors

through BC CCC

▪ Range of industries

and regions

▪ 135 interviews across

20 companies

▪ 11 industries

▪ U.S. and Europe

▪ Range of functions: ESG

professionals, human

resources, environment,

strategy, finance, and

investor relations

▪ Tie ESG to value along

4 dimensions typically used

by market: growth, return on

capital, risk management,

management quality

▪ Develop 10 best practices

for designing strategic ESG

programs

Initiative white paper, with analysis of ESG

measurement issues and recommendations

CFO, Investor, ESG Professional

McKinsey Quarterly survey

Company interviews and case studies

Framework for linking ESG activities

to Value Creation

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

community dialogue to engage citizens and reduce local resistance

Supply chain/security of

supply

▪ Secure consistent, long term, and sustainable access to safe, high quality raw materials and

products by engaging in community welfare and development

▪ Mitigate risks by complying with regulatory requirements, industry standards, and NGO demandsRegulatory risk

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

Workforce efficiency ▪ Reduce costs generated by employee attraction and turnover by using ESG to build morale

▪ Develop employees’ skills and increase productivity through participation in ESG activities

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

water efficiency, less raw materials needed, etc.)Operational efficiency

Reputation/Price premium ▪ Develop reputation on ESG that garners customers’ willingness to pay price increase or premium

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

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

ESG programs

Innovation ▪ Develop cutting edge technology and innovative products and services for unmet social or

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

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

New products ▪ Create products to meet unmet social needs and increase differentiation

ILLUSTRATIVE

SOURCE: Team analysis

Leadership development ▪ Develop leadership skills and improve employee quality through ESG participation

Adaptability ▪ Build ability to adapt to changing political and social situations by engaging local communities

Long term strategic view ▪ Develop long term strategy encompassing ESG issues

Manage-

ment

quality

Risk

manage-

ment

Return

on capital

Growth

CSR creates value along 4 business dimensions

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

Meeting the demands of existing

metric systems

Getting adequate resources,

traction and integration internally

Establishing and monitoring metrics

to assess impact of program

Getting recognition from the

market for effective ESG

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We examined a sample of ESG metrics, measurement,

and rating systems1

Categories of ESG

metrics, measurement

and ratings systems Examples

Our sample

Indices developed

by financial index

companies

ESG Initiatives and

learning networks

Reputation indices

produced by media/

polling/PR firms

Rankings and data

produced by SRI

information providers

ESG-related

standards

1 Analysis of ESG metrics systems based only on information publicly available on relevant websites

SOURCE: McKinsey Analysis

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1.7

0.7

1.9

1.1

0.7

1.5Captures opportunities

Distinguishes financially

material issues

Avoids the problem

of ‘noise’

Covers the full range of

ESG issues

Financially quantifiable data

Sensitive to different types

of companies

SOURCE: Team analysis

A major “pain point” is the existing metrics and indices that evaluate a

company’s ESG programs, but do not take financial value into account

Average score of the range of metrics systems assessed against 6 criteria

Points (score 0-3 points on each issue)

1

2

3

4

5

6

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How much do you think that ESG activities add

to shareholder value?

Add between 2 and 5%

Add more than 5%

Don’t know

Add less than 2%

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1 Environmental, social, and governance

2 Excluding any changes stemming from the current economic crisis

SOURCE: S. Bonini, N. Brun, and M. Rosenthal, “Valuing corporate social responsibility,” The McKinsey Quarterly,

February 2009

Percentage of respondents

Effect of ESG programs on organization’s

shareholder value in typical times2

Value

add

Investors and CFOs also believe ESG¹ drives value

22

6

21

18

19

10

4

27

7

10

13

27

5

11

53

0

9

10

15

7

6>11

6-10

2-5

<2

No effect

Don’t

know

Reduced

value

▪ A large majority of ESG

professionals think that

ESG programs create

value in the short and

the long term

▪ CFOs and investors

professionals are more

likely than ESG

professionals to see the

long term benefit of

these activities

Complementary findings

from the survey

CFOs, n = 84

Investment

professionals, n = 154

ESG professionals,

n = 87

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Although many companies create value from ESG, very few assess the

financial value creation and even fewer communicate that to the markets

Creating value Assessing value Communicating

value

Percent of companies interviewed = 100%

-40%

-5%

-40%

-10%

ESG program

Maximizing

value from ESG Established

metrics to

monitor program

Converting ESG

metrics to

financial value

Communicate

ESG value to

CFOs, investors

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| 10 SOURCE: Team analysis

Pathway to value from ESG along four dimensions

Leadership development ▪ Develop leadership skills and improve employee quality through ESG participation

Adaptability ▪ Build ability to adapt to changing political and social situations by engaging local communities

Long-term strategic view ▪ Develop long-term strategy encompassing ESG issues

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

community dialogue to engage citizens and reduce local resistance

Supply chain/security of

supply

▪ Secure consistent, long-term, and sustainable access to safe, high quality raw materials and

products by engaging in community welfare and development

▪ Mitigate risks by complying with regulatory requirements, industry standards, and NGO demands Regulatory risk

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

Workforce efficiency ▪ Reduce costs generated by employee attraction and turnover by using ESG to build morale

▪ Develop employees’ skills and increase productivity through participation in ESG activities

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

and water efficiency, less raw materials needed) Operational efficiency

Reputation/price premium ▪ Develop reputation on ESG that garners customers’ willingness to pay price increase or premium

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

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

programs

Innovation ▪ Develop cutting edge technology and innovative products and services for unmet social or

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

New customers/

market share ▪ Use ESG to engage consumers and build knowledge of expectations and behaviors

New products ▪ Create products to meet unmet social needs and increase differentiation

Management

quality

Risk

management

Return

on capital

Growth

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| 11 SOURCE: Team analysis

4 dimensions Sub-dimensions Examples

▪ Invested $1 billion over 10 years to reduce its energy consumption

and improve its efficiency and has saved $7 billion in last 5 years

Operational

efficiency Return

on capital

▪ Engaged with local stakeholders and built trust with local

communities by being responsive to community needs. Has

allowed Intel to be proactive about managing concerns, avoiding

zoning delays and fines, and benefiting from tax incentives

Reputational

risk Risk

manage-

ment

▪ Developed “Corporate Service Corps” to send emerging leaders to

work pro bono in emerging markets to foster economic growth. Has

led to improvements in five areas: global leadership skills, cultural

intelligence and global awareness, employee retention and

commitment to IBM, new knowledge and skill contribution to IBM,

and intrapersonal growth

Leadership

development Manage-

ment

quality

▪ Novo Nordisk: Engaged in emerging economies like India, China,

and Bangladesh to help build clinics, national diabetes programs,

systematic education for doctors, nurses and patients, and

comprehensive patient support initiatives. As a result, in China,

Novo Nordisk has earned market leadership (e.g., market share

above 70%)

▪ Verizon: Launched a new product for elderly and disabled to meet

social needs of population. Has resulted in increased sales and

100,000 new customers

New customers/

market share Growth

Illustration of how companies can create value from ESG ILLUSTRATIVE

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Indirect impact

Direct financial impact

ESG programs can have direct and indirect financial

impacts, depending on the business drivers they target

ILLUSTRATIVE

Trust & reputation

New geographical markets

Innovation

Human efficiency

Operational efficiency

Business driver

ESG

program

Strengthen reputation, goodwill and loyalty with stakeholders

Facilitate markets entry

Expand the number of patents

Develop cutting edge technology/products

Enable bottom line costs saving

Improve talent attraction, morale and retention

Improve skills (e.g. leadership,…)

Effect on business driver

Favourability ratings evolution, # meetings with stakeholders

# and value of new markets entered through program

# and market value of new patents developed

# and value of new products developed and sold

Water, energy and raw materials uses reduction

Employee retention, Cost of training new employees

# employees with new skills from experience

Examples of metrics

Increase revenue through increased sales

Increase revenue from patents

Increase revenue through increased sales

Decrease cost of hiring and training new employees

Increase revenue per person

Increase revenue indirectly through goodwill

Decrease cost

Financial impact

SOURCE: McKinsey analysis

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Improved communication about the value of ESG

activities is needed

21

31

32

36

33

44

62

32

23

41

24

24

38

55

36

23

42

19

28

56

54

Offering integrated corporate reporting

(corporate financial + ESG programs data)

Integrating information on ESG programs’

financial value into corporate reports

Reporting data related to new markets or

customers reach through ESG programs

Reporting data related to employees

Providing anecdotal evidence of

how these programs create value

Using regular business terminology

to communicate about such programs

Reporting data related to innovation

Percentage of respondents2, multiple choice answers

SOURCE: S. Bonini, N. Brun, M. Rosenthal, “Valuing corporate social responsibility”, McKinsey Quarterly, February 2009

Ways to improve the effectiveness of communication about the performance of

ESG programs3

1 Environmental, social, and governance

2 Respondents who answered “other”, “none of the above” or “don’t know” are not shown

3 Excluding any changes stemming from current economic crisis

ESG1 professionals, n = 87

CFOs, n = 84

Investment professionals, n = 154

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▪ Growth

▪ Return on

capital

▪ Risk

management

▪ Management

quality

Pathway to value created by ESG programs

Industry

issues

Stakeholder

needs

Business

drivers

Metrics Communication Creation of ESG

Program

Meet stakeholder expectations and ensure their

support in managing ESG opportunities while

creating value for the company

Turn socio-political issues into ESG opportunities

by meeting stakeholder needs and creating

financial value along the business drivers

Impact business

drivers and create

financial value while

meeting

stakeholder and

societal needs and

turning them into

ESG opportunities

Develop few

relevant metrics

to capture the

financial value

of the program

Set clear message

depending on the

targeted audience

and provide informa-

tion that the audience

is looking for

Design ESG

program resulting

from industry issues,

stake-holders

needs and business

drivers

Pathway to

value

SOURCE: McKinsey analysis

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Questions for discussion

▪ What are the biggest obstacles to integrating better metrics into

ESG work?

▪ What are the direct benefits to the company of better metrics?

▪ How might using better metrics change what companies do

on the ground in terms of project level impact of ESG?

▪ How can ESG professionals begin to apply a more financial

mindset/language to the design, measurement, and

communication of ESG programs?

▪ How can ESG practitioners facilitate conversations about the

value of ESG activities within their own companies?

▪ How can ESG practitioners begin to create quantitative, financial

metrics for ESG activities to allow for seamless communication

between ESG professionals, CFOs and investors?

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Appendix

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Business Formal

contract

Semi-

formal

contract

Frontier

expecta-

tions

Society

Business operates within an overall social contract

Global trends

▪ Consumers

and

employees

▪ Globalization

ESG issues

▪ Environ-

mental

▪ Social

▪ Governance

Growth and

opportunity

License

to operate

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Participants of the research

20 companies from across industries and geographies

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| 19 SOURCE: Team analysis

We see 10 best practices for creating value from ESG

Utilize core competencies

Take a long-term perspective

Create opportunities and manage risks

Strategy

Organization

Implementation

Fundamentals

Ensure strong leadership support

Embed into the strategy, organization, and culture

Select appropriate partners

Set clear goals and manage like a business

Align with core business strategy

Identify and engage stakeholders

Address key issues facing the industry

Best practices

4

5

6

7

8

3

2

1

9

10

Examples