Corporate Sustainability and Main Stream Strategies

- Siddharth Setia

Objective of an Organization

Maximizing Shareholder’s wealthMaximizing Stakeholder’s wealthMaximizing value for ShareholdersMaximizing value for StakeholdersAccording to Nestle’s Shared Value report

– For a business to be successful in the long term it has to create value, not only for its shareholders but also for society

How Do you create Long term Value

• Topic of discussion today– Mainstreaming Corporate responsibility and

sustainabilityOr

– CSR + corporate sustainability + organizational strategies = Long Term Profits

FEW NON-TATA EXAMPLES

•Steve Jobs has written an open letter about Apple's sustainability initiatives.

•He notes, that among many other things, they have cut way back on lead and heavy metals and recycle almost three times as much e-waste as HP and Dell.

•According to bill gates, Every company needs a plan for integrating sustainability into its marketing3 P’s – People, Planet and Profits

GREEN PROFITS“Money Does Grow on Trees”

Corporate Sustainability

Mainstream Strategy CSR

OBJECTIVE ANALYSIS

LONG TERM PROFITS

Strategy

The Strategic Growth

Strategies

Strategic Management

GREEN PROFITS“Money Does Grow on Trees”

Corporate Sustainability

Mainstream Strategy CSR

OBJECTIVE ANALYSIS

LONG TERM PROFITS

CSR is about how companies manage the business processes to produce an overall positive impact on society.

What is

Decide where to focus your efforts and resources

X 5~10

Ecological Footprint

GREEN PROFITS“Money Does Grow on Trees”

Corporate Sustainability

Mainstream Strategy CSR

OBJECTIVE ANALYSIS

LONG TERM PROFITS

Measuring CSR and Corporate Sustainability

• Understanding CSR and Sustainability beyond words

Corporations that address social, environmental, and economic

issues…

Are more likely to have good

management…

Which may result in superior

financial performance.

Measuring CSR and Corporate Sustainability

• SRI – Social Responsible Investing• Corporate Sustainability Indices

The Might of SRI

The 2007 report on SRI Trends identifies $2.71 trillion in total assets undermanagement that uses SRI investment strategies. More than two times India’s GDPMutual Funds The largest share of socially and environmentally screened

funds are mutualfunds, with $171.7 billion in total net assets

ETF Eight socially and environmentally screenedexchange-traded funds (ETFs) with $2.25 billion in total net assets

Closed Ended Funds Three socially and environmentally screened closed-end funds with assets of $850 million

Alternate Investment Funds

An estimated $5.3 billion in capital were identifiedunder the management of 46 different socially or environmentally screened alternative investmentvehicles, such as social venture capital, double- and triple-bottom-line private equity, and hedge funds

Source: 2007 report on socially responsible investment trends in US

SRI Models

Source: Henderson, M. Fox 2003

SRI Model Description Firms Characteristics

SRI Funds Firms that offer institutional and/or retail SRI funds and employ in-house SRI teams to conduct non-financial research.

Calvert, CIS, Jupiter, Morley, Henderson and Sustainable Asset Management

Branded SRI Retail FundsProprietary Investment CriteriaSeparation of financial and SRI research

SRI Research Providers

Firms that provide research and indices on social, environmental, and corporate governance issues

KLD Analytics, Ethibel, and InnovestAlso: EiRIS, TruCost and CoreRatings

Conduct no financial researchEmploy social and environmental analysts

Traditional Financial Institutions New To SRI

Typically global financial institutions serving a broad base of clients focused singularly on performance who view SRI as a value-add

Fidelity Investments, HSBC Investment Bank, Merrill Lynch Investment Managers, U.S. Trust, and participants in UNEP

* No Branded SRI Retail FundsEstablished traditional investment managersNew to SRI

4 common investment criteria as a competitive differentiator:

- Negative screening driven by client values

- Thematic investing in businesses with direct social or environmental benefit

- Shareholder engagement to alter company behavior

- Sustainability analysis to establish a business case for SRI

SOURCE: Team analysis, Mckinsey and Company

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 yearsOperational

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 risk

Risk 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 development Manage-

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

HOW DOES SRI Strategies increase in Profitability

VIDEO

• Verizon

Source: social investment forum

27

Sustainability IndicesCategories of ESG metrics, measurement and ratings systems Examples

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

Source: www.sustainabilityindices.com

S&P ESG India Index provides an opportunity to invest in 50 best stocks as rated by their ESG practices

Number of companies 50

Total Market Cap ($,Billion) 337.56

Company Size ($ Billion)

Average 6.75

Smallest 0.15

Largest 48.45

% Weight of Largest Company 2.88

Top 10 holdings (Index weight) 26.10

•Conventionally CSR practices are perceived as a moral or legal obligation which deviates the organizations from it’s purpose of creating profits for the shareholders. •The modern day concept :- compliance based CSR to Need based best practices which increases operational efficiency by reducing risk and creating a sustainable competitive advantage

•An index will lead to•Linking company’s performance to stock market performance•Creating an incentive for companies to improve their ESG practices

ESG India Index is weighted by ESG scores irrespective of the market capitalization

ESG India index is weighted by ESG scores and not by market capitalizationThis will ensure that a company with smaller market cap but better practices in terms of operational risk, stakeholders relations and sustainable competitive advantage

Reliance Industries weight in index is 9th despite maximum market cap

SBM Mutual Fund

Corporate Sustainability

Mainstream Strategy CSR

OBJECTIVE ANALYSIS

LONG TERM PROFITS

4 CR Model

SBM Mutual Fund

Corporate Sustainability

Mainstream Strategy CSR

OBJECTIVE ANALYSIS

LONG TERM PROFITS

OBJECTIVE ANALYSIS

1.VIDEO ON ENVIRONMENT SUSTAINABILITY AT IIM Indore

• Speaker: Gardner at the Campus lawns

2.VIDEO ON Social Responsibility • Speaker: Aamal Amrit Mishra from Pragati

IIM INDORE EFFORTS (1996-2006)

Proposed chemical Hub at Nandigram

• 28 December 2006 – SEZ notice by Haldia Authority

• Chemical hub for Salem group -4,000 hectares

Demographics

• Nandigram is situated in Midnapore district in Westbengal.

• A majority of the inhabitant in Nandigram were farmers

• Paddy, potatoes and other vegetables were being cultivated in its fertile lands.

Corporate: Salim group, Indonesia

• Controversy - Govt. of West Bengal proposed to acquire those lands

• Governments intention was to boost up foreign investment.

Resistance

• BUPC

– formed to protest against forced eviction.

– consisted of political activists as well as common people of Nandigram.

Violation of Human rights

• Mass Killing• Forced evictions• Widespread violence against women• Denial of access and information to the media

and human rights organizations.

Reactions

• Gopalakrishna Gandhi, Governor, described the situation as a “civil war” and quoted“armed recapture is unlawful and unacceptable.

• India’s National Human Rights Commission (NHRC) sought a report from the Government of West Bengal

• NHRC chairperson Justice Rajendra Babu has stated, in a reply to CPI-M members of the Indian parliament that human rights abuses on a mass scale took place at Nandigram.

Environmental Impact on Nayachar

• Nayachar falls under the core area of Coastal Regulation Zone-i (CRZ-i).

• The centre has banned industries in such zones.

• According to Geological Survey of India (GSI) the land is vulnerable to earthquakes, cyclones and tsunami.

• Effluents from chemical factories polluting the delta and affecting marine life.

Major stakeholders in a sustainable development process

• State Authority(Government)

• Companies (Corporates)

• Society / community

Questions

• Was the intended process of development sustainable?

• Is Salim Group morally obliged to cease its venture?

Nestle Case

History

• Found in 1860 by Henri Nestle• First product :-A mix of milk sugar and wheat

flour for babies• Diversified into condensed milk in 1870’s• During first half of 20th century, diversified

into chocolate, instant coffee and tea• After second world war forayed into prepared

foods, pet foods, cosmetics,

Scope of Nestle

• Headquartered in Vevey

• Factories in 86 countries

• By 2003 had sold 65bn worth of goods

• Decentralized management structure

Decentrslised Management Structure

• Divided into 3 zones - each zone has a MD• SBUs organised on the basis of product lines• SBUs part of Nestec – responsible for entire

matrix of organization

Strategy and marketing

• Sought to deepen consumer trust of company and its product

• Strengthen customer loyalty toward its product

• Safety and quality could not be deemphasized• Differentiation on the traditional line of taste

and covenience

Nestle in controversy

• Introduced infant formula in third world countries

• Activists against it as water contaminated in these areas

• Company accused of contributing to infant mortality

Nestle’s Reaction

• Changed its marketing strategy• Started working with governments and NGOs

to develop an international code of marketing breast milk substitutes

• Published ‘Nestle’s corporate business Principles’

Malthus and Sustainable Development

• Malthus predicted population growth will outgrow food supplies

• Neo – Malthsusians predict a shortage of resources like land, water, energy, fertilizers etc..

• Sustainable development has its roots in Neo – Malthusian concerns

Nestle initiative for sustainable Agriculture

• 1930:-waste water treatment plant• 1992:-established formal environmental policy• 1995:-Environmental management system to

track environmental expenditures and result• 1998:-devote about 100 million swiss francs a

year to environmental investments

Sustainable agriculture Initiative Nestle(SAIN)

• SAIN started in 2000• To ensure sustainability and competitiveness

in supply of raw materials• To minimize existing risks in raw material

sourcing• Also intended to focus on traditional business

fundamentals

• VIDEO

Case Situation

• Hans Joehr – corporate head of agriculture required to come up with a sustainable agriculture model

• Proposes SAIN for coffee, Milk and Cocoa• Benefits

1. competitive costs for raw material2. better communication with growers, consumers,

politicians

Issues regarding SAIN

• Relationships between the firm’s overall strategy and its activities in the sustainability arena

• Decide which department’s behavior to be changed and how

• Decide how fast to expand the projects the initiatives covered

Present situation

• Farmers trained through capacity-building programmes

• Reduction of packaging weight over 5 years • Sites audited through CARE programme (since July

2005) • Reduction of indirect CO2 emissions • Reduction of waste over 10 years

EXTRA SLIDES

Principles for responsible Investment

UN led initiative encouraging institutional investors to more actively factor ESG issues into their investments.

180 signatories representing $8 trillion in AUM

An organization representing 284 institutional investors with AUM = $41 trillion which requests 2400 largest companies in world by market cap to provide investment related disclosures concerning risks and opportunities due to climate change

International collaboration aimed at encouraging investment research taking account of ESG and other non-financial factors on long term investment. AUM=$ 2.4 trillion

Voluntary code of conduct sponsored by UN which has 2900 signatories from business in over 100 countries

Carbon Disclosure Project

Enhanced Analytics Initiative

UN Global Impact

The Might of SRI

WHY is SRI Important

• Access to capital - appropriate ESG disclosure can help companies to get access to funds

• Equity pricing– investors integrate material ESG issues it their stock selection

• Shareholder engagement – long term investors engage with investee companies on ESG issues

• Access to markets, license of operate • Increasing demands for disclosure• Reputation• Source: PRI report 20 Jan 2009,Bangkok

CSR + Corp Sustainability + MainStream Strategy

Environmental Strategy

Environmental Strategy

Resource StrategyResource Strategy

Networking Strategy

Networking Strategy

Corporate Responsibility

Strategy

Corporate Responsibility

Strategy

Knowledge Management

Strategy

Knowledge Management

Strategy

Stakeholder Strategy

Stakeholder Strategy

Financial and Responsibility Performance

Financial and Responsibility Performance