1. WORKING DRAFT
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
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
BCCCC Presentation
DRAFT
3. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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
4. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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
McKinsey&Company 17
NJE-262616.044-20090318-ashoHR1
WorkingDraft-LastModified3/20/20097:02:13AMPrinted
|
Licensetooperate ▪Facilitateuninterruptedoperationsandentryinnewmarketsusinglocal ESGefforts and
communitydialoguetoengagecitizensandreducelocalresistance
Supplychain/securityof
supply
▪Secureconsistent,longterm,andsustainableaccesstosafe,highqualityrawmaterialsand
productsbyengagingincommunitywelfareanddevelopment
▪Mitigaterisksby complyingwithregulatoryrequirements, industrystandards,andNGOdemandsRegulatoryrisk
Reputational risk ▪AvoidnegativepublicityandboycottsbyaddressingESGissues
Workforceefficiency ▪ReducecostsgeneratedbyemployeeattractionandturnoverbyusingESGtobuildmorale
▪Developemployees’skillsandincreaseproductivity throughparticipationinESGactivities
▪Enablebottomlinecostsavingsthroughenvironmentaloperations andpractices(e.g.,energyand
waterefficiency,lessrawmaterialsneeded,etc.)
Operationalefficiency
Reputation/Pricepremium ▪DevelopreputationonESGthatgarnerscustomers’ willingnesstopaypriceincreaseorpremium
▪Gainaccesstonewmarketsandmarket sharethroughexposurefromESGprogramsNew markets
Reputation/differentiation ▪Fosterbrandloyalty,reputationandgoodwill withstakeholders byengagingwiththemon
ESGprograms
Innovation ▪Developcuttingedgetechnologyandinnovativeproductsandservicesforunmet socialor
environmentalneedsthat couldtranslatetobusinessuses,patents,proprietaryknowledge, etc.
New customers/marketshare
▪UseESGtoengageconsumersandbuildknowledgeof expectations andbehaviors
Newproducts ▪Createproductstomeetunmetsocial needsandincreasedifferentiation
ILLUSTRATIVE
SOURCE:Teamanalysis
Leadershipdevelopment ▪DevelopleadershipskillsandimproveemployeequalitythroughESGparticipation
Adaptability ▪Buildabilitytoadapttochangingpoliticalandsocial situationsbyengaginglocalcommunities
Longtermstrategicview ▪DeveloplongtermstrategyencompassingESGissues
Manage-
ment
quality
Risk
manage-
ment
Return
oncapital
Growth
CSR creates value along 4 business dimensions
6. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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
7. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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
9. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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
10. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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%-40%
-5%-5%
-40%-40%
-10%-10%
ESG program
Maximizing
value from ESG
Established
metrics to
monitor program
Converting
ESG metrics to
financial value
Communicate
ESG value to
CFOs, investors
11. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|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 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)
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
Management
quality
Risk
management
Return
on capital
Growth
12. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|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
efficiencyReturn
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
riskRisk
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
developmentManage-
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
13. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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
14. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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
g integrated corporate reporting
porate financial + ESG programs data)
tegrating information on ESG programs’
nancial value into corporate reports
Reporting data related to new markets or
customers reach through ESG programs
Reporting data related to employees
viding anecdotal evidence of
ow these programs create value
g regular business terminology
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
15. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
▪ 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
16. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|
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?
20. McKinsey & Company
NJE-262616.044-20090318-ash
WorkingDraft-LastModified4/14/200910:39:00PMPrinted3/25/20094:10:23AM
|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
Editor's Notes
Follow this slide by opening up to the group to share their specific pain points. Ask Kevin to discuss existing metrics
