On Corporate Strategy:Role of Corporate Environmental & Social Governance

as Drivers to Company Stock Value Growth

Presented at the TNC Board Members Meeting São Paulo, 05/05/2010

Jose Antonio ChavesP r o f e s s o r a t F u n d a ç ã o D o m C a b r a l

DBA Candidate at Business School LausanneChair of the Committee of Sustainability and Corporate Responsibility at

The Regional Council of Business Administration, MG, Brazil

I n st i tut ion a l Sup p or t in g

2003 2004 2005 2006 2007

DJI

E1SGI

Dow Jones Sustainabi l i ty Europe Composite Index versus Dow Jones Industrial Average Index

Source: Yahoo! Finance

Empirical evidences that ESG policies and strategies can influence Companies Stock Growth

Research Main Objective

L e v e l o f S t o c k Va l u e G r o w t h

Le

ve

l o

f C

or

po

rate

En

vir

on

me

nta

l &

So

cia

l G

ov

ern

an

ce

-E

SG

Hig

hL

ow

L o w H i g h

S & P 5 0 0

Targeted Industries

Selected from Industry 20 th

Largest Listed Companies byMarket Capitalization

First Quartile CompaniesRanked by Last Five-Year

Stock Growth %

Iron & Steel IndustryL e ader s Stoc k P r i c e G r owth (% )

Source: FreeStockC har ts .co m interact i ve p lat form

Mechel

Simec

Posco

Gerdau

S&P 500

Source: FreeStockC har ts .co m interact i ve p lat form

Metal & Mining IndustryL e ader s Stoc k P r i c e G r owth (% )

Vale

Southern

Alum China

Cameco

S&P 500

Source: FreeStockC har ts .co m interact i ve p lat form

Electric Utilities IndustryL e ader s Stoc k P r i c e G r owth (% )

S&P 500

CPFL

Sempra

Eletricidad

Enersis

Source: FreeStockC har ts .co m interact i ve p lat form

Oil & Gas Integrated IndustryL e ader s Stoc k P r i c e G r owth (% )

Petrobras

Hess

SuncorChina P&C

S&P 500

PetroChina

Early Findings

From credible ESG Surveys Consolidation

Some companies does not understand what sustainability is

Making sustainability work is the very challenge

Semiotic communication misleading sustainability undertanding

There is a visible gap between the sustainability strategy (when it exists) and its execution

Findings from ESG Surveys Consolidation

Managers at all levels don’t know about:

The correlations between sustainability risk and financial performance

How to track sustainability value from where it is created

How it sustainability initiatives are converted into shareholder value

How to measure return on sustainability strategy

Early Findings from the Research

Provided by Morphological Analysis

From the internal Perspective

From the external perspective

Managers at all level consider sustainability initiatives as part of their job;

Corporate strategy includes ESG goals and makes money from that;

Sustainability goals are detailed, quantified and monitored;

Sustainability performance is attached to financial performance;

Managers are rewarded for their sustainability performance;

Changing management terminology: accountability, environmental accounting, shareholder engagement; water and carbon footprint; etc.;

Company regularly partners with outside stakeholders;

New products originated from environmental and social initiatives.

Knowing a Sustainable Company from Looking Within

Improve and enhance accountability, transparency and investor trust;

Evolve risk-management to a corporate sustainability-risk perspective;

Develop new sources of competitive advantage in the entire value-chainby differentiation, from innovating in ESG product and service development;

Assure capital markets prime access by ESG achieving standards;

Outperform shareholder’s ROSS – Return on Sustainability Strategy;

Create visible, measurable, reportable ESG value for all stakeholders;

Measure ESG reputation in terms of cost of capital, exports revenue, etc;

Institutional shareholders are engaged in company’s environment-social governance.

Knowing a Sustainable Company from the External Perspective

Business

Strategy

Value-Creation

Goals MeasuringExecutive Compensation

Parameters

Financial

Strategy

ESG Strategy

Shareholder Engagement

Investor Strategy

Private EquityProject

FinanceIPO, M&A Divestiture

Cash Flow

Contribution

Research Perspective: Sustainability Value-Based Strategy

Return on Sustainability Strategy Framework

Sustainabilit y Value-B ased ROI

Net Profit & Dividend

Valuation Multiple

Free Cash Flow

Capturing Sustainability Value-Creation Drivers and Levers

Revenue GrowthCost of Capital

ReductionMargin

Improvement

ESG Innovation &Adaptability

Value-Chain ESG Risk &

Opportunities

ESG Long-Term

Strategic View

ESG Leadership Initiatives

ESG Performance

Standards. . .

Ecotech-Based Products

Social-Focused Products

Stakeholder Engagement

ESG Risk Mapping

& Strategy

ESG Accounting & Reporting

Public Support

ESG Capex-Opex

ModelingReputation

Branding

Image-Based Power Pricing

ESG Knowledge

Capital

Market Share Growth

Differentiation Price Premium

Risk Reputation Premium

Market Ratings Grade

New Market s Entry

Operation Cost & Productivity

Corporate Sustainability-Risk Framework

Value-Chain Sources of Sustainability Advantages

Company Infrastructure

Human Capital

Innovation andR&D Capital

LeadershipCapital

Upstream Logistic &

Supply Chain

Inbound Logistic &

Operations

Downstream Logistic & Channels

Marketing & Sales

End-Cycle Services

Primary Activities

Promptness and ability to convert Sustainability Strategy into Shareholders/Stakeholders Value; Stakeholder-Based Management Approach; Stakeholder Sustainability Education initiatives

Sustainability BI & analytics platform; Capex-Opex sustainability-based decisions; Corporate Sustainability Governance Structure

Environmental-based design; Clean technologies development; Environmental material specifications

Life-cycle process

Creating and internalizing a culture for sustainability; Developing capabilities on sustainability-based management ; Corporate Sustainability Education; Sustainability-oriented Compensation System

Responsible suppliers, Distributors & outsourcers

Carbon & Water Footprint

Corporate image & reputation

Stimulating ethical and anti-corruption competing practices, fraud prevention, striving for upstream-downstream ESG internationally acceptable standards adoption

Stimulating less-harmful material safe storage, transportation , packaging and waste disposal

C o r p o r a t e S u s t a i n a b i l i t y M a i n s t r e a m

Support Activities & Knowledge Capital

Corporate Sustainability Strategy Framework

Goals Setting

Goals’ Detailing & Metrics

Implementation & Monitoring

Stakeholder Engagement

SustainabilityCommunication

Sustainability Reporting

Financing-Based ESG Risk AssessmentCorporate Sustainability-Risk Strategic Mapping

ESG Legal & Compliance FrameworkProject Financing-Based ESG Assessment

Stakeholder-Based ManagementInvestor-Based Management

External Impacts Measuring and Accounting

Risk Strategy

Benchmarkin g

Investor-Based Management Goals

Corporate Finance Goals

Business Strategy Goals

Governance Framework

Competitive Scope

Business Drivers

Creating and Internalizing the Culture of Corporate Sustainability

Business

Strategy

Value-Creation

Goals MeasuringExecutive Compensation

Parameters

Financial

Strategy

ESG Strategy

Shareholder Engagement

Investor Strategy

Action Plan

Risk Strategy

Sustainability

Value-Based ROI

Balanced ScoreCard

Framework

Shareholder

Perspective

Finance

Perspective

Business

Perspective

Sustainability

Perspective

Detailing &

Métrics

Dashboarding

Shareholders

Engagement

Communication

Reporting

Stakeholders

Engagement

Responsible Investment Paradigm

We will incorporate ESG issues into investment analysis and decision-

making processes

We will be active owners and incorporate ESG issues into our

ownership policies and practices

We will seek appropriate disclosure on ESG issues by the entities in which we

invest

We will promote acceptance and implementation of the Principles within

the investment industry

We will work together to enhance our effectiveness in implementing the

Principles

We will each report on our activities and progress towards implementing

the Principles

Sh areh old er En g ag em en t

To Im prove In vest ee’s Sust ain ab ilit y Govern an ce

The Sustainabi l ity Challenge and the Corporate Strategy Planning of Brazi l ian Companies

2009’s Research

Findings from the FDC

T he C e ntr e for Sus ta i nab i l i ty and C or por ate R e s pons i b i l i ty

FDC’s Next Research

Shareholder Engagement Effectiveness: The Best Practices on Environmental & Social

Governance in the Investee Companies.

Targeted Public: Pension Funds and its Investee Companies.

Best Practices Paper

Publication

R e s p o n s i b l e I n v e s t m e n t P r o g r a m f o r

P e n s i o n F u n d s a n d A s s e t M a n a g e m e n t P r o f e s s i o n a l s

R e s p o n s i b l e I n v e s t m e n t P r o g r a m f o r I n v e s t e e

C o m p a n i e s ’ B o a r d M e m b e r s a n d C - S u i t e M a n a g e r s

Thank you!

Jose Antonio Chaves

Rua Carvalho de Almeida, 48 Conj. 23 – Cidade JardimCEP 30380-160 – Belo Horizonte – MG – Brazil

Phone: +55 31 3231-4688 - Mobile: +55 31 9312-4688 Email: jose.antonio.chaves@gmail.com