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NIRI ESG Presentation January 2009

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One of my earlier ESG presentations to an Investor Relations Officers' ( #IRO ) association called the National Investor Relations Institute ( #NIRI ). This was in 2009 while I was running my own consultancy #WallacePartners and representing clients like #Trucost

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NIRI ESG Presentation January 2009

  1. 1. ©2009 Wallace Partners. All Rights Reserved. Green is the New Black: Why Environmental, Social and Governance Issues Should Be Part of Your Company’s Story in 2009 Mike Wallace, President Wallace Partners Direct: 626.403.6921 Cell: 415.810.9095 Email: mike@wallacepartners.net
  2. 2. ©2009 Wallace Partners. All Rights Reserved. Why should you care?
  3. 3. ©2009 Wallace Partners. All Rights Reserved. Who is interested?
  4. 4. ©2009 Wallace Partners. All Rights Reserved. So what in the hell is a carbon footprint?
  5. 5. ©2009 Wallace Partners. All Rights Reserved. Comparing Carbon Disclosures 0.03%3.02124611,703536,000PG&E 0.46%71.1528582115,35712,609,867Exelon 0.73%124.644991,28917,13222,089,040Constellation Energy Group 1.05%14.33571,8681,3602,540,117AVISTA Corp 1.13%139.975601,99612,43024,805,542Public Service Enterprise Grp 1.13%78.453141,9976,96313,904,081WPS Resources Corporation 1.27%32.571302,2432,5735,771,509Puget Energy Inc. 1.63%128.525142,8837,89922,777,035Nisource Inc. 1.80%182.237293,19610,10632,295,775Entergy Corp 1.89%39.201573,3452,0776,947,618PNM Resources, Inc. 2.13%255.941,0243,78311,98945,359,808FirstEnergy 2.26%267.171,0693,99711,84647,349,255FPL Group 2.63%163.806554,6686,21929,029,910PPL Corporation 2.67%80.413224,7343,01014,250,000Teco Energy Inc. 2.70%282.131,1294,79110,43750,000,000TXU 2.85%276.481,1065,0459,71249,000,000Reliant Energy Inc. 3.11%118.494745,5043,81621,000,000Wisconsin Energy Corporation 3.24%327.601,3105,74410,10858,059,820Progress Energy Inc. 3.75%361.091,4446,6489,62563,993,950Xcel Energy Inc. 4.69%140.255618,3192,98824,856,860Pinnacle West Capital Corp 5.70%773.023,09210,10813,554137,000,000Southern Company 6.59%84.6433911,6741,28515,000,000DPL Inc. 6.82%826.433,30612,09412,111146,464,960American Electric Power % of Turnov er Cost of 25% reduction at $22.57 ($Mn) Cost of carbon priced at $22.57 (EU ETS Average for 2005) in $Mn Carbon Intensity (tCO2/$Mn) Revenue ($Mn) Emissions disclosed (tonnes) Company
  6. 6. ©2009 Wallace Partners. All Rights Reserved. Sector Study: Electric Utilities 265  42% of Electric Utilities answered the questionnaire  30% provided quantified emissions data  67% of companies that are members of the EU ETS provided emissions data Response rates were low. The Electric Utilities sector is very carbon intensive (25% of global CO2 emissions).
  7. 7. ©2009 Wallace Partners. All Rights Reserved. Who really cares?
  8. 8. ©2009 Wallace Partners. All Rights Reserved. Shareholder Initiatives & Coalitions  Principles for Responsible Investment (PRI)  Started 2006  Currently represents over $15 Trillion in investment capital  235 signatories  Investor Network on Climate Risk (INCR)  Started 2003 with 10 members representing $600 Million  Currently represents over $7 Trillion in investment capital  68 members  Carbon Disclosure Project (CDP)  Started 2002 with 35 signatory groups representing $4.5 Trillion  Currently represents over $57 Trillion in investment capital  385 signatory groups  Institutional Investors Group on Climate Change (IIGCC)  Started 2001  Currently represents $5.4 Trillion in investment capital  42 members  Interfaith Center on Corporate Responsibility (ICCR)  Started 1972  Currently represents over $100 Billion  275 members
  9. 9. ©2009 Wallace Partners. All Rights Reserved. Investor Network on Climate Risk  California  Connecticut  Florida  Iowa  Illinois  Kentucky  Maine  Maryland  New Mexico  New York  New Jersey  Nevada  North Carolina  Oregon  Pennsylvania  Rhode Island  Vermont  Wisconsin 68 members representing over $7 Trillion in investment dollars State Pension Plans with a position on carbon
  10. 10. ©2009 Wallace Partners. All Rights Reserved. Latest Shareholder Initiatives  Launched in December 2008  First voluntary, global sector-wide framework for financial services (banks and insurers) to address climate change.  Corporate banks will:  Assess the climate-related risks in their loans and investments  Engage significant suppliers on climate change issues  Wide Scope for Principles:  Asset management  Retail banking  Insurance and re-insurance  Project finance  Investment and corporate banking
  11. 11. ©2009 Wallace Partners. All Rights Reserved. Latest Shareholder Initiatives 385 Signatory Investors representing over $57 trillion in assets Announced Strategic Partnerships in September 2008  "CDP data on Bloomberg allows users to access information about carbon emissions of companies, helps investors to assess the potential regulatory impact on their investments, and creates greater transparency and more tools for Bloomberg customers to participate in the emissions trading markets."  “Companies need to measure and report their carbon emissions and be clear about how they are managing them. Unless they do so, they risk losing sight of the impact of climate change on the long-term financial health and future prospects of their business.”
  12. 12. ©2009 Wallace Partners. All Rights Reserved. Latest Shareholder Initiatives Investors push for corporate responsibility pledge Reuters 27 October 2008  52 investors representing more than $4.4 trillion worth of assets  Letters to CEOs of 9,000 listed companies urging them to sign up to key corporate responsibility principles  Calling on companies to sign the Global Compact - a set of international standards on anti- corruption measures, human rights and the environment United Nations Initiatives
  13. 13. ©2009 Wallace Partners. All Rights Reserved. But these are just the radicals . . . Californian’s . . . . Politicians . . . . Activist Shareholders . . . . Europeans . . . . . . . . right?
  14. 14. ©2009 Wallace Partners. All Rights Reserved. Who else is interested?
  15. 15. ©2009 Wallace Partners. All Rights Reserved. Who is analyzing sustainability?
  16. 16. ©2009 Wallace Partners. All Rights Reserved. Social Investment in the Future Environment ES Management Corporate Governance Auditfees, Option expensing CEO/Chair separation, IndependentBoardCommittees, CEO compensation Block holdings, Protectionof minority shareholders ES Reportingand Assurance Leadership diversity,Leadership compensationlink toES performance LeadershipES responsibility Fatalities,Injury rates, Payrollper employee Number ofemployees andcontractors, Employeediversity atalllevels,Employee health,recruitmentpolicy,labour rights andtraining Humanrights and security,Business ethics andtransparency Resourceuse,Hazardous spills anddischarges GHG emissions andtrading,Waste management,Investmentingas assets Renewable andalternative energy,Biodiversity and ecosystem management R&Dand Capex versus returns to capitalproviders,Growthversus maintenance capex Community investment Access to (high quality) resources, brand, new products, advertising, intellectual property, supply chain Returns, earnings growth, dividend growth, capital structure Stock market performance Day to day... ... Vision...Medium term...Day to day... ... Vision...Medium term... Economy - Markets - Exchange rates - Interest rates - Commodity prices - Globalisation - Energysupply / demand - Emerging markets - BRICs Society - Communities - Population growth - Health, disease pandemics - Consumers - Suppliers - NGOs, lobbygroups - Education - Government policy, taxes, regulations Industry - Innovation, technological advances - New competition - Substitutes - New regions, new markets, new products - Costs, incl. taxes - Market share - Public image - Regulations Environment - Water - Land - Animals, plants - Air - Weather patterns - Climate change - Biodiversity - Agriculture Industry Themes and Company Valuation R&Dinvestment Methodology at Goldman Sachs
  17. 17. ©2009 Wallace Partners. All Rights Reserved. What is ESG?
  18. 18. ©2009 Wallace Partners. All Rights Reserved. What is ESG?  CSR - Corporate Social Responsibility  SD – Sustainable Development  CC - Corporate Citizenship  BE – Business Ethics  CG – Corporate Governance  ESG – Environmental, Social and Governance  Footprint – Environmental & Carbon Transparency, Materiality, Accountability, Balanced Reporting, Stakeholder Engagement Like any good industry we need some lingo . . .
  19. 19. ©2009 Wallace Partners. All Rights Reserved. Sustainability: Definitions & Perceptions “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” ~U.N. Brundtland Commission, 1987  “The business of business is business, not sustainability.”  “Sustainability seems to encompass everything under the sun. It’s just more tree-hugger mumbo jumbo.”  “Sustainability is about good citizenship and public relations. We’re already doing that. There’s nothing more we need to do.”  “Mushy”  “Berkeley-esque”
  20. 20. ©2009 Wallace Partners. All Rights Reserved. Changing Perceptions Economist 2004: CSR is philanthropy at a corporation’s expense. 2008: CSR is just good business.
  21. 21. ©2009 Wallace Partners. All Rights Reserved. Are companies taking this seriously?
  22. 22. ©2009 Wallace Partners. All Rights Reserved.  More than 90% of CEOs are doing more than they did 5 years ago to incorporate environmental, social, and governance issues into strategy and operations:  72% of CEOs: corporate responsibility should be embedded fully into strategy and operations  59% of CEOs: corporate responsibility should be embedded into global supply chains How are companies responding?
  23. 23. ©2009 Wallace Partners. All Rights Reserved. How is the market evolving? Global Report Output by Year
  24. 24. ©2009 Wallace Partners. All Rights Reserved. How is the market evolving? Global Report Output by Type
  25. 25. ©2009 Wallace Partners. All Rights Reserved. Global Reporting Initiative  Reporting guidelines include reporting principles, standard disclosures of on management systems and 47 core (and 32 “additional”) performance indicators  Over 1,000 organizations (both private and public sector) across 60 countries report using some version of the GRI Guidelines
  26. 26. ©2009 Wallace Partners. All Rights Reserved. Who’s involved in the GRI? GRI Organizational Stakeholders GRI Reporters
  27. 27. ©2009 Wallace Partners. All Rights Reserved. UN Global Compact  Promotes responsible corporate citizenship so that business can be part of the solution to the challenges of globalization.  Over 6,000 organizations - businesses, NGOs, and other stakeholders are signatories
  28. 28. ©2009 Wallace Partners. All Rights Reserved. Who’s on the UN Global Compact?
  29. 29. ©2009 Wallace Partners. All Rights Reserved. CorporateRegister.com  18685 CSR reports across 4748 companies as of November 3, 2008  Quick references to GRI, UN Global Compact and other CSR affiliations
  30. 30. ©2009 Wallace Partners. All Rights Reserved. Sustainability Reporting KPMG Study (October 2008)  74% of top 100 US companies published corporate responsibility (CR) information in 2008 either as part of their annual financial report or as a separate document  Doubled since 2005 - up from 37%  80% of Global Fortune 250 companies now release CR data  Up from 64% in KPMG’s 2005 International analysis  Now driven by economical concerns, rather than ethical  Reasons cited:  70% cited ethical considerations as primary driver for CR disclosures  50% cited economic concerns as the leading reason
  31. 31. ©2009 Wallace Partners. All Rights Reserved. Why should you care?
  32. 32. ©2009 Wallace Partners. All Rights Reserved. Who is interested?
  33. 33. ©2009 Wallace Partners. All Rights Reserved. Employees – Attraction & Retention “It is one of the soft things that many companies don’t understand but it is crucial in the retention and moral of employees . . . It is amazing how the highest talented people will grill you about your sustainability practices in job interviews. … We’ve seen a lot more interest in it, so it really does matter.” Larry Vertal, senior strategist at AMD
  34. 34. ©2009 Wallace Partners. All Rights Reserved. Employees – Attraction & Retention Survey of 759 graduating MBAs at 11 top business schools reveals that the future business leaders rank corporate social responsibility high on their list of values, and they are willing to sacrifice a significant part of their salaries to find an employer whose thinking is in synch with their own. STANFORD GRADUATE SCHOOL OF BUSINESS June 2008
  35. 35. ©2009 Wallace Partners. All Rights Reserved. Customers – The Wal-Mart Effect October’s headlines: - Wal-Mart Suppliers Face Energy, Other Mandates – WSJ - Wal-Mart to seek greener supply chain – FT - Wal-Mart aims to go green with global supply chain makeover – NYT  Global Responsible Sourcing Initiative  CEOs from more than 1,000 suppliers convened in Beijing  Wal-Mart CEO sets out a range of objectives for the company's supply chain and for its Chinese retail operations, which will include targets for the reduction of water and energy usage, reductions in packaging, and commitments to develop more sustainable products. Some of those impacted: Procter & Gamble FedEx Kimberly-Clark Lenovo Coca-Cola Newell Rubbermaid
  36. 36. ©2009 Wallace Partners. All Rights Reserved. Customers – Industry Initiatives Collaborating to Help Ensure Safe Conditions, Worker Rights and Environmental Responsibility in the Global Electronics Supply Chain EICC sets forth performance, compliance, auditing and reporting guidelines across five areas of social responsibility:  Labor  Health and Safety  Environmental  Management System  Ethics
  37. 37. ©2009 Wallace Partners. All Rights Reserved. How does this relate to performance & governance?
  38. 38. ©2009 Wallace Partners. All Rights Reserved. Who’s measuring what & how?
  39. 39. ©2009 Wallace Partners. All Rights Reserved. Sustainability Criteria  Corporate Environmental Policy  Stakeholder Communication  Strategic Planning  Code of Conduct  Reduction Targets  Environmental Management Systems  Corporate Citizenship / Philanthropy  Labor Practice Indicators  Human Capital Development  Social Reporting  Talent Attraction and Retention  Corporate Environmental Policy  Environmental Management  Monitoring and Reporting  Social and Stakeholder Criteria  Human Rights Criteria  Supply Chain Labor Standards Criteria  Countering Bribery Criteria  Environmental Management  Beneficial Products and Services  Pollution Control and Prevention  Hazardous Waste  Regulatory Problems  Substantial Emissions  Community  Diversity  Employee Relations  Human Rights  Product EnvironmentalSocial
  40. 40. ©2009 Wallace Partners. All Rights Reserved. A quick snapshot: The Tech Sector AAXToshiba GAXNEC GA/AAXXMicrosoft GA/AAXXIBM GA/AAXXXIntel GA/AAXXXHP GAXFujitsu AAXEMC GA/AAXXDell AAX Computer Associates AAXApple Fortune’s Most Admired Business Ethics - Top 100 FTSE4GoodDJSI
  41. 41. ©2009 Wallace Partners. All Rights Reserved. A GHG Focus on Tech (2006 data) Environmental / CSR Report114.003,870,617.292,258.275.6053,763.08Diversified IndustrialsToshiba Environmental / CSR Report76.491,972,684.661,155,049.0840,892.71Computer HardwareNEC Environmental / CSR Report16.64703,681.4333,347.3044,282.00SoftwareMicrosoft Previous Year42.243,196,249.88665,360.5991,424.00Computer ServicesIBM Environmental / CSR Report159.844,590,525.271,065,062.1035,382.00SemiconductorsIntel Environmental / CSR Report42.683,507,308.10404,890.1091,658.00Computer HardwareHP Exact (Communicated)51.721,669,306.84431,146.6240,608.66Computer HardwareFujitsu Environmental / CSR Report45.00461,560.9640,429.0811,155.09Computer HardwareEMC Previous Year31.821,385,131.31393,802.4055,908.00Computer HardwareDell Estimated17.5750,794.8215,904.253,796.00SoftwareCA, Inc. Estimated41.43463,959.80336,180.8519,315.00Computer HardwareApple GHG Data Source Total CO2 Intensity (tonnes / $m revenue) Indirect Quantity CO2 (tonnes) Direct Quantity CO2 (tonnes) Revenue ($Millions) ICB SubsectorCompany
  42. 42. ©2009 Wallace Partners. All Rights Reserved.  Covering six sectors - energy, mining, steel, food, beverages, and media - the companies that lead in implementing environmental, social, and governance (ESG) policies have outperformed the general stock market by 25% since August 2005.  In addition, 72% of these companies have outperformed their peers over the same period. Is there a positive correlation?
  43. 43. ©2009 Wallace Partners. All Rights Reserved. An investors Perspective City National Bank
  44. 44. ©2009 Wallace Partners. All Rights Reserved. How do companies deal with this?
  45. 45. ©2009 Wallace Partners. All Rights Reserved. Who are we helping?
  46. 46. ©2009 Wallace Partners. All Rights Reserved. What does this mean to IROs?  There are dozens of organizations rating, ranking, and publicly judging the sustainability performance of thousands of companies  A wide variety of sustainability performance indicators are being used by the world’s most influential financial institutions  Increased voluntary reporting, coupled with enhanced researching capabilities creates a new level of transparency and comparability  Quantified data and analysis is becoming more readily available and reliable  Not reporting on sustainability sends its own message  Inconsistent reporting creates legal, financial, reputational and governance risk  Every company – large/small, public/private - is faced with increasing sustainability expectations The Challenges:
  47. 47. ©2009 Wallace Partners. All Rights Reserved. Extra Benefits  Human Capital  Customers/Consumers – Sales  Shareholders/Financiers/Insurers  Reduced operational costs In 2009:  Increased Public Funding
  48. 48. ©2009 Wallace Partners. All Rights Reserved. Capital & Reputational Benefits  Opportunity to validate your firm as a sustainability leader within industry  Opportunity to attract a growing subset of investors  Attractive indices for pensions and institutional funds (Many of whom lead Investor Coalitions on Sustainability)  Multi-faceted PR opportunity
  49. 49. ©2009 Wallace Partners. All Rights Reserved. Business Integration Process  Establish a Governance Council  Who owns the success of this initiative?  Which stakeholders are most affected?  Benchmarking / Market Analysis  Where do you sit amongst your peers?  Where are your future opportunities?  Internal Assessment  Where do you sit in your own eyes?  Who do you believe are your stakeholders?  External Assessment  What do key stakeholders think of you?  Who else is a key stakeholder?  Gap Analysis  What’s the difference between the inside and outside?  What is being measured, and what does the market want measured?
  50. 50. ©2009 Wallace Partners. All Rights Reserved. Case Study: Genentech  Benchmarking – CSR Performance Matrix  Engagement  Internal Assessment  External Assessment  Gap Analysis  Optimization – measure, manage, report & engage  Monitoring & Continuous Improvement
  51. 51. ©2009 Wallace Partners. All Rights Reserved. Industry Review of Sustainable Practices  Biotechnology  Pharmaceuticals  Companies studied by…  Market capitalization  Growth profiles  52 companies selected  43 sustainability reports found  Evaluated these companies for…  Sustainability definition  Sustainable Governance structure  Environmental, social, & economic indicators  Sustainability goals & progress  Industry-specific issues  Scope & format of report
  52. 52. ©2009 Wallace Partners. All Rights Reserved. Definitions of Sustainability  Johnson & Johnson  “We define sustainable growth as achieving economic viability while promoting social equity & environmental protection.”  Pfizer  “Citizenship defines our role in local & global communities and how we strive to conduct business responsibly in a changing world.”  Genzyme  “We are driven, first and always, by our commitment to patients… The talents, energy, & determination of each employee enables us to do this important work… Our commitment also extends to the environment and the communities where we operate.”  Roche  “We are committed to sustainability and thus to running our business in a way that is ethical, responsible and creates long-term value. And, since it takes up to 12 years to bring a new drug to market, our business model inevitably has a long-term focus. We must be responsive to developments in science and society, generate a level of resources that ensures our independence and be willing to take calculated risks.”  Baxter  “We use the term “sustainability” to describe our long-term approach to balancing our business priorities with our social, economic & environmental responsibilities. These efforts align with and support the company’s higher purpose of saving & sustaining lives.”
  53. 53. ©2009 Wallace Partners. All Rights Reserved. Sustainability Reporting Focus: BiopPharma Sustainability Reporting Scope of Biotech/Pharma Companies based on size of company 0 2 4 6 8 10 12 Below $5B Between $5B and $20B Over $20B numberofcompanies EHS + Beyond + GRI EHS + Beyond EHS only no report
  54. 54. ©2009 Wallace Partners. All Rights Reserved. Sustainability Indicators & Goals  Example: Greenhouse Gas (GHG) Reduction Goals  Calculation methodologies of great interest… J&J199020107 NovoNordisk2004201410 AstraZeneca2005201012 Lonza2000201025 Company Base Yr. Target Yr. % Red. ‘Absolute’ BMS Bayer Merck Lily Pfizer Company Sales2001201010 Prod2005201510 Sq. Ft.2004200825 Sales2003201033 Sales2000200735 Norm. By Base Yr. Target Yr. % Red. ‘Normalized’ vs.
  55. 55. ©2009 Wallace Partners. All Rights Reserved. Potential Sustainability Issues Pharma Specific Issues Economic Issues Environmental IssuesSocial Issues * Not specifically covered by DJSI Climate strategy Eco-efficiency (energy / water) Forest products* Pharma in the Environment* Public policy / lobbying R&D Corporate Governance Risk Management Workplace Diversity Occ Health & Safety Employee welfare and benefits Philanthropy Supplier management Community Involvement Bioethics Animal Testing Access to Medicine Genetically Modified Organisms* Clinical Trials/Product Safety Ethics/ Marketing Intellectual Property Rights* Framework: Dow Jones Sustainability Index
  56. 56. ©2009 Wallace Partners. All Rights Reserved. Internal Stakeholders  Recognizing industry trends…  We then needed to look internally for ‘Value’ & ‘Guidance’  20 people selected for 1:1 sustainability discussions  Interview checklist developed  Stakeholders  Who’s important for our focus?  Sustainability issues  Issues of strength, opportunity, & value?  Perceptions of our sustainability goals  Overall business value of sustainability  Time spent for conducting and compiling this was invaluable
  57. 57. ©2009 Wallace Partners. All Rights Reserved. BioPharma External Sensing  Besides the industry study and internal interviews, we spoke with…  SAM  Key partner  Certification body  CA Climate Action Registry  Recurring themes:  Bio / pharma’s “impact” on climate issues not significant, although many stakeholders track this issue closely  Water is important  Supplier management  Access to medicine is key bio / pharma issue  PIE - to watch
  58. 58. ©2009 Wallace Partners. All Rights Reserved. Sustainability at Genentech “Our current programs are focused on reducing our environmental impacts and assuring personnel safety & health. We understand that sustainability is a broader concept that encompasses not only the environmental, but also the social and economic aspects of our business. As a bio-pharmaceutical company, the social element is important. In fact, Genentech has strong and award-winning programs for the management of a variety of business issues, such as access to medicine, innovation in research, clinical trial practices, and employee welfare and benefits.” Source: 2007 Sustainability Report
  59. 59. ©2009 Wallace Partners. All Rights Reserved. GNE Sustainability Governance  During 2007, a number of changes were made to strengthen sustainability governance processes.  Sustainability Committee  Senior Mgmt. Focused  ‘Strategic’  Environmental Sustainability Team  Middle Mgmt.  ‘Tactical’  Green Genes Club  Employee-based  Activities & Communication Green Genes Employee Club Sustainability Committee Env Sustainability Team

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