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Thursday, 03 September 2015 Engaging The Board Making CR a boardroom priority Rachel Pickering

Slide 3 Overview CR within Board Functions Linking CR to the board’s objectives Using the right language Combining top-down and bottom-up approaches

Slide 4 What do boards want? The leadership of a company seeks to stand out in at least 1 of the following areas: Financial results Risk management Leadership Values

Slide 5 The Challenge The Business Case in Context Embedding CR into a company requires buy in from The Board It also requires the correct management at the operational level Operations are where the improvements in CR actually happen The challenge is in aligning Operational with Corporate CR requirements and making them relevant CR Buy In at Board Level CR Improvement at Operational Level Management CR Performance

Slide 6 CR within Board Functions Board Functions with explicit CR impact: –Policies and Strategy –Monitoring of Management Performance –Framework for Accountability, Control and Risk Management CR needs Board Level buy in, but The Board needs convincing of the value of CR

Slide 7 The link between CR and board objectives Direct Financial Benefits Shareh. Value Revenue Cheaper Capital Costs Reduction Financial Drivers Areas that CR can directly influence Areas that CR can indirectly influence

Slide 8 e.g. Risk Management Source: Bob Willard,The Sustainability Advantage.NSP Canada 2002

Slide 9 Production Output Resource Inputs e.g. Variable Cost Reduction

Slide 10 Where does corporate responsibility fit in? The good news: Corporate responsibility can have an impact where it matters The bad news: The language of corporate responsibility does not convey this What is needed is to translate corporate responsibility into ‘board speak’ Reducing CO2 emissions Reducing costs Licence to Operate Regulatory & Market Approval Stakeholder Engagement Risk Management Workplace Conditions Productivity Reducing resource use Reducing costs

Slide 11 Why is financial valuation difficult? Valuation of sustainability remains the holy grail, but there is a consensus among sustainability and finance professionals that it is not possible to precisely value sustainability projects There is no established way of measuring sustainability performance, with the exception of environmental performance –How does one measure human rights performance? –How does one measure stakeholder engagement? –How does one measure macro-economic contribution? The direct contribution of sustainability to business performance is often hard to assess –Many variables at play –Impact on intangibles is harder to measure Asset managers and insurers have gone furthest in trying to convert qualitative indicators into comparable indicators Slide 11

Slide 12 Making it real: Can the value of CR be calculated? Purpose Advantage Disadvantage Determine project/ business contribution to NPV or other monetary calculation Provides exact figure that can be directly incorporated in any project assessment Difficulties in valuing SD performance and financial contribution of intangibles Assess impact of a project on financial sustainability of project/business Scores the contribution of a project/ business allowing decisions based on rational arguments Can not be directly incorporated into a financial calculation. Does not necessarily allow for comparisons. Compare projects/businesses to help determine most financially attractive Allows clear comparisons between various options to give clear decision- making options Only gives a measure of relative contribution to financial sustainability Cash value Rating Benchmark

Slide 13 Cash value: Impact on EBIT Potential Impact Of Carbon Constraints For Discounted EBIT (2003–2015) Based On Value Exposure And Management Quality Assessments Source: Changing Drivers, WRI & SAM Slide 13

Slide 14 Relative Rating: ABN AMRO approach Absolute performance is too hard to assess –When is performance ‘good’ or ‘bad’? Relative performance can help make informed decisions –Comparing the performance of companies in the same sector does help decision-making Relative CSR Scoring: ABN AMRO Equities Rating of CSR business risk Source: Pharmaceuticals & SRI, ABN AMRO Slide 14

Slide 15 Benchmark: The GS Energy Environmental & Social Index Source: Global Energy, Goldman Sachs Slide 15

Slide 16 Recommendations Ensure that CR is closely integrated with business strategy –More buy-in of CR –Better leverage of CR benefits Convey CR messages in language the company leadership is aligned with Where possible provide a valuation of CR projects, even if it is an subjective rating

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Slide 18 What Drives the Board? Shareholder Value Cost of Capital Capital and Variable Cost Revenue Short term profits Long term growth R.O.I. Market Risk Operational Risk Capital Cost Risk Balance Sheet Risk Natural Resources Human Resources Energy Infastructure Increased Competition Market Growth Innovation Market Share

Slide 19 The Business Case in context Input Prod n Line 1 Prod n Line 2 Prod n Line 3 Site B Site A Operational Targets Prod n Line 1 Prod n Line 2 Prod n Line 3 CR Management ? £ $ € ¥ Energy & Materials Natural Capital Human Capital Financial Capital Community Investment Corporate targets Operational Targets ?