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Wednesday 19 April 2023

Engaging The Board

Making CR a boardroom priority

Rachel Pickering

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Overview

• CR within Board Functions

• Linking CR to the board’s objectives

• Using the right language

• Combining top-down and bottom-up approaches

 

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What do boards want?

The leadership of a company seeks to stand out in at least 1 of the following areas:

• Financial results

• Risk management

• Leadership

• Values

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The Challenge

The Business Case in Context• Embedding CR into a company requires buy in from The Board

• It also requires the correct management at the operational level

• Operations are where the improvements in CR actually happen

• The challenge is in aligning Operational with Corporate CR requirements and making them relevant

CR Buy In at Board Level

CR Improvement at Operational Level

Man

ag

emen

t

CR

Per

form

anc

e

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CR within Board Functions

• Board Functions with explicit CR impact:

– Policies and Strategy– Monitoring of Management Performance– Framework for Accountability, Control and Risk Management

• CR needs Board Level buy in, but The Board needs convincing of the value of CR

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The link between CR and board objectives

Risk Managemt. Direct Financial

Benefits

Shareh. Value

Revenue

CheaperCapital

CostsReduction

FinancialDrivers

Customer Attraction

Licence toOperate

Brand Value

& Reput.

EmployeeAttraction

Employee Productiv.

Innovation

Areas that CR can directly influence

Areas that CR can indirectly influence

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e.g. Risk Management

Source: Bob Willard,The Sustainability Advantage.NSP Canada 2002

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Production Output

Res

ourc

e In

puts

e.g. Variable Cost Reduction

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Where does corporate responsibility fit in?• The good news: Corporate responsibility can have an impact where it matters

• The bad news: The language of corporate responsibility does not convey this

• What is needed is to translate corporate responsibility into ‘board speak’

Reducing CO2 emissions Reducing costs

Licence to Operate Regulatory & Market Approval

Stakeholder Engagement

Risk Management

Workplace Conditions Productivity

Reducing resource use Reducing costs

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Why is financial valuation difficult?• Valuation of sustainability remains the holy grail, but there is a consensus among sustainability and finance professionals that it is not

possible to precisely value sustainability projects

• There is no established way of measuring sustainability performance, with the exception of environmental performance– How does one measure human rights performance?– How does one measure stakeholder engagement?– How does one measure macro-economic contribution?

• The direct contribution of sustainability to business performance is often hard to assess– Many variables at play– Impact on intangibles is harder to measure

• Asset managers and insurers have gone furthest in trying to convert qualitative indicators into comparable indicators

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Making it real: Can the value of CR be calculated?

Purpose Advantage Disadvantage

Determine project/ business contribution to NPV or other monetary

calculation

Provides exact figure that can be directly

incorporated in any project assessment

Difficulties in valuing SD performance and financial contribution of intangibles

Assess impact of a project on financial

sustainability of project/business

Scores the contribution of a project/ business

allowing decisions based on rational arguments

Can not be directly incorporated into a

financial calculation.Does not necessarily

allow for comparisons.

Compare projects/businesses to help determine most financially attractive

Allows clear comparisons between various options to give clear decision-

making options

Only gives a measure of relative contribution to financial sustainability

Cash value

Rating

Benchmark

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Cash value: Impact on EBIT

Potential Impact Of Carbon Constraints For Discounted EBIT (2003–2015)

Based On Value Exposure And Management Quality Assessments

Source: Changing Drivers, WRI & SAM

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Relative Rating: ABN AMRO approach• Absolute performance is too hard to assess

– When is performance ‘good’ or ‘bad’?

• Relative performance can help make informed decisions– Comparing the performance of companies in the same sector does help decision-making

Relative CSR Scoring: ABN AMRO Equities

Rating of CSR business risk

Source: Pharmaceuticals & SRI, ABN AMRO

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Benchmark: The GS Energy Environmental & Social Index

Source: Global Energy, Goldman SachsSlide 15

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Recommendations• Ensure that CR is closely integrated with business strategy

– More buy-in of CR– Better leverage of CR benefits

• Convey CR messages in language the company leadership is aligned with

• Where possible provide a valuation of CR projects, even if it is an subjective rating

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What Drives the Board?

Shareholder Value

Cost of Capital Capital and Variable Cost

Revenue

Short term profits

Long term growth

R.O.I.

Market Risk

Operational Risk

Capital Cost Risk

Balance Sheet Risk

Natural Resources

Human Resources

Energy

Infastructure

Increased

Competition

Market Growth

Innovation

Market Share

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The Business Case in context

Input

Prodn Line 1

Prodn Line 2

Prodn Line 3

Site B

Site A

Operational Targets

Prodn Line 1

Prodn Line 2

Prodn Line 3

CR Management

?

£ $ € ¥

Energy & Materials

Natural Capital

Human Capital

Financial Capital

Community Investment

Corporate targets

Corporate targets

Operational Targets

Operational Targets

Operational Targets

Operational Targets

Operational Targets

?