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Sustainability Strategy 2020The Tata Group’s Vision for a Sustainable Future
> Executive Summary
2
• The dynamic global environment challenges companies to reassess balance between business and social priorities
• A sustainability strategy creates an opportunity to generate and capture economic value
• A strategic approach strengthens social impact and maximizes return on social investments through: • Targeted interventions• Innovation• Thought leadership• Public policy
• Effective implementation enables Tata to achieve its strategy, by making changes to:• Structure• Culture• Measurement• Communication
• The value generation potential is 2-3 % of net value
> A concerted sustainability strategy gives Tata a competitive advantage by generating social impact
3
• Create an opportunity for shared value
• Leverage unique capabilities
• Enable a measurable ROI
• Yield magnified returns with small investments
• Create opportunities in uncontested markets
• Reinforce Tata culture
• Increase social impact and return
• Influence the debate and minimize tensions
• Improve ability to conduct business
• `
• Set the standard and raise the bar
• Compel followers
• Reinforce brand with strengthened reputation
Targeted Interventions Innovation Public Policy Thought
Leadership
FOCUS
> An effective implementation is necessary to achieve sustainability goals
4
• Quantify social impact and translated to financial value creation
• Understand financial and non-financial costs of initiatives
• Prioritize and align strategies
• Appoint a Chief Sustainability Officer
• Form a permanent Sustainability Task Force
• Cultivate stakeholder relationships
• Exploit common initiatives
• Empower and align employees to new vision
• Incentivize and reward sustainability efforts
• Foster long-term talent recruitment and development
• Create brand equity and goodwill
• Motivate employees and community
• Enhance investor relationships• Communicate quantifiable impact
Coordination and integration Engrain sustainability mindset in the organization
Improve social impact measurement
Publicize Tata’s sustainability leadership
Structure Culture
Measurement Communication
> Tata can implement its sustainability plan to achieve its 10-year vision
5
Create Sustainability
Task Force
1 Define & Convey
Strategic Sustainability
Vision
2
Set strategic priorities
3
Define metrics for evaluating
impact
4Identify
partners to create greatest
impact
5Adjust
investments based on
impact
6
Demonstrate financial and social impact
7
Month 1 Month 2 Month 3 Month 4-6 Month 7 Quarterly Annually
Appoint sustainability
leader who sits on corporate
executive board, establish
sustainability task force
Define annual social, economic &
environmental initiatives in each region; Consider opportunities for shaping political
agenda
Develop relationships with
relevant NGOs, industry
associations, businesses, and
lobbyists
Announce quick wins that align
with new strategy
Strategy group becomes
responsible for innovation
Distribute report annually to
shareholders and employees,
beginning in Year Five
Demonstrates
global
commitment
to
sustainability
Reinforces
message that
sustainability
is key
component of
the business
Able to assess
strategic
investments
with greatest
impact on
ongoing basis
Instills
standardized
measurement
and reporting
to define social
impact
Allows group
to make
strategic
investments
regionally
Builds
relationships in
the community
while
delivering
impact
Signals value
to
shareholders
and
stockholders
Devise ways to measure and
quantify impact and to translate this impact into financial return
Reinforce linkage between
sustainability initiatives,
employee value and innovation
Phase 1:Identify Sustainability
Impact Levers
Phase 1:Identify Sustainability
Impact Levers
Phase 2:Determine Relevance for Tata
Phase 2:Determine Relevance for Tata
Phase 3:Quantify and Validate
Impact Estimation
Phase 3:Quantify and Validate
Impact Estimation
> The valuation framework incorporates analytical tools to surmount the traditional challenges faced in valuing sustainability
6
Theoretical Potential Impact
Theoretical Potential Impact
Impact Potential for Tata Group
Impact Potential for Tata Group Impact EstimationImpact Estimation
Stakeholder MappingStakeholder Mapping
Elements of ValueElements of Value
Business Model Relevance Grid
Business Model Relevance Grid
Geography FocusGeography Focus
“Sanity Check”“Sanity Check”1
2
3
4
5
6 8
7
How does sustainability translate into value
for a company?
How does sustainability translate into value
for a company?
To what extent do these value generating
opportunities apply?
To what extent do these value generating
opportunities apply?
What should be a reasonable impact target
for Tata Group?
What should be a reasonable impact target
for Tata Group?Valuation ChallengesValuation Challenges
Valuation FrameworkValuation
Framework
> The Theoretical Potential Impact Matrix summarizes how sustainability initiatives affect stakeholders and move the levers of a company’s value
7
Value Lever Customers /
Community Employees Value Chain Regulators / Watchdogs
Investors and Risk Assessors Future Generations
Brand (growth) Better understanding of customer needs
Ambassadors for growth – motivation for innovation
Communication on market opportunities
Access to markets Socially conscious capital
Expanding customer base in the future
Margins Higher willingness to pay
Reduced absenteeism and turnover
Reduced conflict, ease of negotiations
Reduced compliance costs
Lower reporting costs
Lower cost of acquisition
Cost of DebtLower volatility of revenues because of brand loyalty
Better use of cash flows
Cash flow optimization in the value chain
Lower threat of expropriation
Reduced volatility of cash flows
Stability of growth in the long term
Cost of EquityLower impact of market swings = lower beta
Reduced risks of employee conflict
Faster reaction to market swings –beta swings
Reduction of country risk and favorable regulation
Tension because of perception of sub-optimal investing
Reduced risk of environmental crisis
Program Cost Constant and costly engagement
Highest priority engagement
Marginal increased engagement
High level interaction
Reporting interaction
High cost, low level of market feedback
High impactLow impactTheoretical Potential Impact Matrix
Source: Team Analysis
> The consolidated estimated impact for the Tata Group is $3.6 Billion
8
Net Impact on Tata Group Value1
Note (1): Based on detailed value estimation for 4 largest companies and extrapolation for other 92 companies based on revenuesSource: Tata Case; Tata Group Companies Reports, Team Analysis
US$
Mill
ions
Impact Per Value Lever1
US$
Bill
ions
> Sustainability is a key component to Tata’s success
“A visionary company doesn't simply balance between idealism and profitability: it seeks to be highly idealistic and highly profitable.”
-Jim Collins, Built to Last: Successful Habits of Visionary Companies
9
APPENDIX
10
11
Measurement:• Standardize reporting framework to
measure impact of ROI• Harness stakeholder insights to identify
opportunities• Adjust and refine initiatives
Structure:• Be sustainability leader• Create sustainability
taskforce to foster integrated approach towards sustainability initiatives
• Exploit common initiatives between company holdings
Culture:• Engrain mindset of
sustainability in leadership
• Incentivize leaders & employees
• Attract top talent with core values
• Recruit & train future leadership class
Communication:• Disseminate brand• Address stockholders – ROI& EVA• Promote stakeholder dialogue to get
feedback on current initiatives
Context:• Post financial crisis
environment• Increasing social &
environmental awareness
• Growing Consumer base in emerging economies
• Public demands corporate responsibility
Vision: To be recognized as the undeniable global leader in corporate sustainability by reinforcing core
business operations while creating and capturing value for its shareholders
Corporate Strategy:• Conglomerate strategy• Market leader & expand
into global markets• Acquisitions in key
sectors• Strong social impact• Companies represent
the Tata brand
Sustainability Strategy Goals: • Address stakeholder demands
in each market• Generate new demand in
uncontested market space• Translate stakeholder value
into shareholder value• Collaborate with & leverage
company innovations• Invest in human capital for long
term change• Advocate core values in global
business practice• Expand philanthropic efforts in
markets where impact is greatest
Strategic Focus: • Revolutionize industry by raising
corporate citizenship standards• Prioritize key social & economic
investments to augment innovation
• Foster innovation in business• Shape public policy
> The Integrated Sustainability Plan & Implementation is a detailed approach to value creation and capture
> FOCUS: Tata must target interventions to maximize social impact and capture maximum value
12
Community Schools Technology CollegeEconomic
Value Captured
Social Value
CreatedEconomic
Value Captured
Social Value
Created
•Creates an opportunity for shared value; strengthens Tata’s competitiveness while adding social value
•Impact can be isolated and measured
•Value is difficult to capture- High social impact, but does not directly increase Tata’s competitiveness
•Impact is difficult to measure and translate into financial returns
> Tata Must Innovate to find opportunities for maximum impact
Minimum Contribution to Tata’s Net IncomeMaximum Social Impact
13
Impact Measurement
Publicity Value of Swach 1,620,000 search results
Assume access to the Swach can save lives at rate of 1% 16,360 lives saved
Assume access to the Swach can reduce absenteeism at rate of 1% 4,430,000 school days savedAssume access to the Swach can reduce estimated economic losses due to health spending, loss of productivity and labor diversions costs by 1% $ 284,000,000 saved
Economic Value
Captured
Social Value
Created
> Phase 3: The impact per company is derived by conservatively affecting the value levers to the extent that a sustainability strategy is relevant
14
LeverImpact Range(Change from original value)
Current Value(Estimated using Tata Financials)
New Value Impact on Valuation
% Increase in Valuation
Brand (short and long term growth
rates)+1%-1.5% 36.5% years 1-5
3.0% years 6 +37.0% years 1-53.0% years 6 + 629 MM 1.8%
Margins (Cash flow generation) +0%-0.5% 1,065 MM 1,087 MM 154 MM 0.4%
Cost of Debt -0%-0.5% 4.7% 4.7% 0 MM 0.0%
Cost of Equity +0.5%-0% 13.0% 13.0% -0 MM -0.2%
Program Cost (Capex + Opex) +30%-50% 11 MM 15 MM -36 MM -0.1%
Example: Tata Consulting Estimated Impact
Source: Tata Case; Tata Group Companies Reports, Team Analysis
> Phase 2: Tata Group’s ability to capture the potential for value generation depends on industry & geography focus for each company
Potential for Value Generation per Company - Tata Group’s Largest Market Cap. Companies -
Geographic Expansion
Bre
adth
of R
elev
ant S
take
hold
er G
roup
s
+--
+Higher Potential
Source: Tata Group Companies Annual Reports; Team Analysis
> Elements of Value
xVi = Σ Ct (1+gs) / (1+ki)t + Cx(1+gl)/((k-gl)(1+ki)(t+1)) t = 1
16
Short Term Component Long Term Component
Where:Vc = Value of the conglomerateVi = Value of one of the organizationt = Periodx = End year of short term period affected by short term growth rateCt = Operating after tax cash flow of the company in year tCx = Operating after tax cash flow of the company in year xgs = Short term growth rate of the cash flowsgl = Long term growth rate of the cash flowski = Cost of capital for organization i
nVc= Σ Vi i = 1
> Tata Group’s ability to capture the potential for value generation depends on industry & geography focus for each company
17
CompanyCustomers
/ Community
Employees Value Chain Regulators / Watchdogs
Investors and Risk
Assessors
Future Generations
Tata Consulting ✓ ✓ x x x x
Tata Steel ✓ ✓ ✓ ✓ ✓ ✓
Tata Motor ✓ ✓ ✓ ✓ ✓ ✓
Tata Power ✓ x x ✓ ✓ ✓
Business Model Relevance Grid Geography Focus
Local Revenue
International Revenue
Untapped Value
8% 92% High
17% 83% High
45% 55% Medium
90% 10% Low