The Business Case for Sustainability Indicators: What’s Missing? www.erm.com The Business Case for Sustainability Indicators: What’s Missing? Grace Barrasso, ERM 2nd National CSIN Conference Toronto, 2-3 March 2010 Delivering sustainable solutions in a more competitive world. 1

ERM is a leading global environmental consultant ERM is one of the world’s leading providers of environmental, health and safety, and social responsibility consulting Over 35 years of experience Completed projects in more than 160 countries 3,500 professional staff Worked closely with 60% of the Global Fortune 500 companies in the past five years 70% of our business is repeat Annual revenue of $695m (FY09) ERM has been rated as one of the TOP THREE all-environmental firms for the past 7 years by the Environmental Business Journal

ERM Sustainability Services Strategy & Systems Enterprise Operations Supply Chain Management Product Sustainability Assurance & Reporting Energy & GHG management Water management Material efficiency improvements Greening the built environment – buildings, operations, maintenance Workplace health and safety Competitor analysis and benchmarking Stakeholder engagement Sustainability strategy, framework & systems Opportunity identification and prioritization Risk management Metrics Education Social impact analysis Greener and more efficient transportation and distribution Life cycle efficiency Supplier engagement; partnerships for innovation and leadership level initiatives Product vulnerability screening Life Cycle Assessment Life Cycle Management; total performance strategies Product registration (e.g., REACH) and take-back strategies Greener packaging and packaging reduction strategies Third-party verification of metrics Assessment of sustainability strategy and programs Sustainability and Social Responsibility Reporting Multimedia internal and external engagement and promotion strategies Distill out reporting from communications strategy Need to separate internal vs external (market-based) reduction activities Removed “gap analysis” – too foundational Removed “biodiversity management” – too limited

Defining Sustainability To meet the needs of the present without compromising the ability of future generations to meet their own needs - Brundtland Commission Companies use different terms... Sustainability Sustainable Development Corporate Social Responsibility Corporate Responsibility Corporate Citizenship Operating business in a manner that meets or exceeds ethical, legal, commercial and public expectation that society has for business. - Business for Social Responsibility …that essentially mean the same thing; the “triple bottom line” of: A business approach to create long-term shareholder value by embracing opportunities and managing risks derived from economic, environmental and social developments. - DowJones Sustainability Group Index Economic Growth Environmental Stewardship Social Progress http://www.sustainability-index.com/07_htmle/sustainability/corpsustainability.html 1983

Sustainability as business strategy Globalization Business expansion - the world is changing Economic growth and liberalization Technological evolution (especially in communication) Increased transparency Rise of the multi-nationals Growing concerns over environmental degradation Increased sophistication and savvy of advocates Clash of cultures Wealth Scope Power and Influence Expertise New roles and responsibilities for business

Sustainability and responsible management Increasingly seen as the management approach of the progressive, responsible company This is a departure from early attempts to couch environmental action and philanthropy in very promotional terms – yea, look at us and the wonderful things we’re doing. Green washing was and is a concern. The new approach is much more humble. The “we are doing this because we should” approach is a sharper dig against competitors who are doing less; and also nods to the company’s more business minded shareholders.

Major Sustainability Issues Today Corporate ethics and governance Fair labor practices Responsible use of influence Climate change and energy security Water – availability and conservation Supply chain performance Product life cycle impacts

The return on investment ENERGY SAVINGS 30% CARBON 35% WATER USE 30-50% WASTE COST 50-90% Cost Average Green Building Cost Savings According to the Leadership in Energy & Environmental Design (LEED) Reputation Note multiple positive impacts of reputation – goodwill, recruitment & retention, facilitation of growth, company influence in external policy & regulation CDP – risk criteria Considers Climate Change to represent commercial risk and/or opportunities. Considers regulatory responses to climate change to represent potential financial risk. Recognizes climate change as physical risk to operations. Has developed products or services in response to climate change. Has allocated board-level responsibility for climate change issues. Emissions data disclosed. Emissions data related to supply chain and/or products and services disclosed. Implemented emission reduction programs with formalized targets. Considers formal emission trading framework relevant to operations. Total costs of energy consumption disclosed. Risk

Business Drivers for Environmental Stewardship Product Innovation Resource Efficiency Investment: <$50k Annual savings: $153k Compressed Air New project delays? Facilitation Through Engagement Brand Differentiation

Major Sustainability Trends Today Advocacy Life Cycle Assessment http://www.scienceinthebox.com/en_UK/sustainability/lifecycleassessment_en.html Volatile raw material and energy costs are adding extra incentive to redesign efforts. Wal-Mart predicted $3.5 billion in annual cost savings from its packaging redesign efforts. Cube utilization and general transportation factors account for 25% of Wal-Mart’s internal “packaging scorecard.” Wal-Mart worked with Unilever to increase the concentration of its laundry detergent (All) and redesign its bottle. It then required all detergent suppliers to do the same. Triple concentrating the detergent has resulted in an annual savings of 1.3 million gallons of diesel. P&G followed with their own concentrated detergent product and bottle redesign. Green Building

Major Sustainability Trends Today Holistic Approach http://www.cadbury.com/ourresponsibilities/ethicaltrading/Pages/fairtrade.aspx Unilever’s extensive water strategy has addressed its own water consumption, water associated with the use of its products, and advocacy for sustainable water practices.

Major Sustainability Trends Today Collaboration Innovative, large scope projects; CGI is working with: Microsoft to develop online tools for 40 of the world’s largest cities to monitor GHGs 1,100 US mayors, Walmart, and 25 manufacturers to encourage the use of green products The City of Chicago to green the Sears Tower and Merchandise Mart USGBC to establish a green schools programs that drive energy performance Microsoft: http://www.clintonfoundation.org/051707-nr-cf-cci-pr-clinton-foundation-microsoft-to-develop-online-tools-enabling-worlds-largest-40-cities-to-monitor-carbon-emissions.htm

Major Sustainability Trends Today Most organizations have values – most are lofty. How does that organization assure that its values are embedded into the way it does business?

Metric Evaluation… Do the metrics: Inform business decisions, promote learning and demonstrate the business case? Support the business strategy? Engage employees and external stakeholders? Respond to issues identified by stakeholders? Change the behavior of individuals? Help integrate sustainability thinking into the organization’s culture Reflect business values and yield high benefits? Source - GEMI

Implementing a Performance Based Program 1 2 3 4 5 Identify Environmental Aspects Baseline Performance Select Indicators Establish Tracking Systems Set Targets

Creating a path forward Have a process – respect it x Assessment: Impacts, Opportunities, Risks Strategy: Approach and Priorities x Mobilizing action: Levers and Leaders Every company and industry has issues unique to them that also may impact reputation. Know your material issues…know your impacts. Engage internally. Implementing Change Question for audience – find examples – pharma and access to health care; breweries and responsible drinking; apparel and responsible sourcing; consulting and discrimination

Creating a path forward Where do you want to be? Defensive Protecting the company License to Operate Extended supply chains Integrated with other efforts Risks and expectations Transformative Game-changing issue for the business model Requires relevance, timing, champions Focus on values, culture, world view Denial/ Discovery Defensive Offensive Transformative Offensive Energizing the company Create value for customers, shareholders, employees Can focus on efficiency or on growth/innovation Inject new content into existing business processes Denial/ Discovery Definitional confusion Report > actions Focus on Green Agenda (or just climate change) Difficult to move beyond learning MITSloan Management Review in collaboration with Knowledge Partner BCG Cultural Integration – Sustainability management is driven by core values; associates are encouraged to collaborate and empowered to innovate. Leadership initiatives result.

Creating a path forward Determine your initial scope While companies talk about the triple bottom line, many (initially) focus on the environmental dimension Economic Prosperity Environmental Stewardship Social Responsibility Return on equity Stock price growth Market share Profitability New market opportunities through innovative products and services Eco-efficiency Use of renewable resources and alternative fuels Addressing impacts and opportunities throughout the value chain Green technology and design Support of conservation efforts and biodiversity Worker and public safety Local economic impacts (job creation, tax base, other investments) Human rights and living wage Stakeholder engagement and accountability Strategic philanthropy

Creating a path forward Internal engagement Start with internal engagement Engage executives first Engage employees Educate Ask, don’t tell Customize your approach Engage individually Engage team functions Always be prepared It’s a bit backward to start with reporting, but some do…and some must Some are forced to report due to stakeholder or board pressure; some report first to give key stakeholders a scope of what they are doing, and what to inspire You’d be surprised how many people can put the cabash on your initiatives and why…. Sustainability Report

Governance Policy, Standards, Accountability, Assurance The alignment, systems, and accountability schemes that drive performance in other functions will drive performance in sustainability Integrate into the business Business Goals and Strategy Environmental Goals and Strategy Environmental Management System Critical Tools (including metrics) D R I V E R S E N A B L E R S http://www.nikebiz.com/responsibility/reporting.html These are recommendations Table of contents shows why cross-functional cooperation is necessary Small team – suggest leadership (e.g., not necessarily public affairs; types of skills/talents necessary

Governance Policy and Positioning Agree on a process Involve key decision makers Review relevant information and data Current company impacts and associated risks Potential scenarios (regulatory, advocates, customers) (associated risks and opportunities) Advocacy, leading and peer company activity Reach consensus, if not agreement Engage externally, as appropriate Create talking points for internal stakeholders Communicate broadly

Company Value “Iceberg” Balance Sheet Market Capitalization

Market Capitalization Balance Sheet Tangibles Financials Intangibles Nonfinancials - Brand Image Reputation - Stakeholder Relationships Moving forward, with a lot more time, we would like to get abetter iceburg and replace the triangle with a photo/graphic image and have the type superimposed on the ice Market Capitalization

Company Value “Iceberg”: 1981 Intangibles - Nonfinancials Balance Sheet 83% Tangibles - Financials Intangibles - Nonfinancials 17% Market Capitalization Arthur D. Little, The Business Case for Corporate Citizenship , 2002

Company Value “Iceberg”: 1998 Intangibles - Nonfinancials 29% Tangibles Financials Intangibles - Nonfinancials 71% Arthur D. Little, The Business Case for Corporate Citizenship , 2002

Sea of Demanding Stakeholders Financials Economists Trade Associations Employees Global Markets Media The Public Nonfinancials Investors NGOs Customers Banks Insurers Competitors Governments Scientists

Two-Part Business Case OPPORTUNITIES Financials Economists Trade Associations Employees Global Markets Media RISKS The Public Nonfinancials Investors NGOs Customers Banks Insurers Competitors Governments Scientists

Mega-Issue Storm Clouds Other … Pollution & Health Climate Crisis Water Crisis Pandemics Erosion of Trust Economists Trade Associations Employees Global Markets Media RISKS The Public Investors NGOs Customers Banks Insurers Competitors Governments Scientists

Awakened Public - Consumers The “Goracle factor” + Hurricane Katrina + Weird weather + Gas prices + IPCC reports + …(other awakeners) 70-80% of consumers say they are switching to “green” companies; 25% actually did in 2009 LOHAS (Lifestyles of Health and Sustainability) sector: $200B in 2007 $420B by 2010 $845B by 2015

Two-Part Business Case OPPORTUNITIES Financials Economists Trade Associations Employees Global Markets Media RISKS The Public Nonfinancials Investors NGOs Customers Banks Insurers Competitors Governments Scientists

GRI Indicators - 79 Social Environment Economic Materials Energy Water Biodiversity Emissions Effluents and Waste Products and Services Compliance Transport Society/Community Labor Practices/ Decent Work Human Rights Product Responsibility Social Environment Corporate Governance 40 KPIs Economic 30 KPIs Economic Performance Market Presence Indirect Economic Impact 9 KPIs

GRI Reporting Principles Materiality Does the information in the report cover topics and indicators that reflect the organization's significant economic, environmental, and social impacts? Stakeholder Inclusiveness Does the report identify its stakeholders and explain how it has responded to their reasonable expectations and interests? Sustainability Context Does the report present the organization's performance in the wider context of sustainability? Completeness Is the report boundary sufficient to reflect economic, and social impacts and enable stakeholder's to assess the organization's performance? Balance Does the report reflect positive and negative aspects? Comparability Are issues presented in a manner that enables stakeholders to analyze changes in the organization's performance over time, and support analysis relative to other organizations? Accuracy Does the report indicate data that has been measured? Timeliness Is the information disclosed while it is recent and relevant? Clarity Is the information understandable and accessible to stakeholders? Reliability Information and processes used in the preparation of a report should be gathered, recorded, compiled, analyzed, and disclosed in a way that could be subject to examination and that establishes the quality and materiality of the information. I’m just focusing on this first column

Characteristics of Sustainability Leaders Today Management systems processes to define, measure, monitor & assure performance Transparency complete and comprehensive Engagement stakeholders have input and influence Global perspective systems are global, impacts measured locally Performance balanced (triple bottom line), material, detailed, easily accessible Leadership raise the bar for their industry; set best practice; cited by 3rd parties Humility no “green washing” – sustainability portrayed as a challenge and a responsibility

Stakeholder Engagement – “New” Media Blogs are new but this use is…Intel CSR Leadership Team talks to the public, then waits for comments Think YouTube, FaceBook Reporting Indicators and Sustainability Strategic Philanthropy Environment Energy Supply Chain Management EHS Diversity

Concluding Remarks Sustainability indicators do not always provide the “whole picture” Important to monetize the value of stakeholders in order to determine who has the influence over new dynamics Sustainability reporting: can assist organizations to evaluate where they stand Transparent indicators and to include both traditional EHS indicators and external risk factors Importance of determining what is material to an organization is paramount Top level commitment Cross-functional team with collaborative leadership Extensive internal engagement Continuous benchmarking, emerging issue tracking, and sector analysis Foundational policy or positioning Strong alignment with business goals, values, and company culture Clear connection between each program and its specific business benefits Strategy built from the bottom up

THANK YOU FOR YOUR ATTENTION Grace Barrasso Senior Consultant Environmental Resources Management (ERM) www.erm.com +1 514 880 6663 Cell +1 416 646 3608 Telephone grace.barrasso@erm.com