Baruch CollegeBaruch CollegeApril 2, 2008April 2, 2008

Sustainability: Costly Inconvenience or New

Business Paradigm?

Sustainability: Costly Inconvenience or New

Business Paradigm?

Daniel Mahler, PartnerNew York Office

2

The challenge: billions of people globally aspire the western standard of living but resources are limited

Today

Five planetsFive planetsOne planetOne planet

Future, 20xx

• Resource prices indicate that demand already exceeds supply

• Regardless of environmental impact developing countries strive to increase standard of living20%

80%

Resources

20%

80%

# People

7 bn. 100 (indexed)

90% 98%

Resources# People

10%

7 bn. +x 500

3

The Sustainability Challenge is re-shaping the environment for doing business

Key drivers of the sustainability challenge

• Increasing resource prices: from 20$ to 100$ per barrel oil in 5 years

• Global Warming premium: pricing in of CO2 cost in energy prices

• Vulnerable supply chains: 70% of iron ore in the hands of three global players

• Increased policy risk: - Australia bans incandescent light bulbs- San Francisco bans plastic bags

• …

Emerging participationof developing countries

• Increasing material aspirations• Competition for resources• Migration

Scarcity of natural resources

• Increasing demand for oil & gas

• Scarcity of water

Business threats…

Environ-mental & social

problems• Global warming• Environmental

degradation• Child labor; poor

social standards

… and opportunities• New markets: 50% of Global GDP growth will

come from developing markets• Growth opportunity:

- UK demand for Fair Trade products growing over 40%/year- US demand for organic products up 20+% for past 10 years- strong growth of final demand from developing countries

• Differentiation opportunity: superior access to capital and talent for sustainability leaders

• …

4

In recent times, major companies have engaged in a flurry of activities around “Sustainability”

2005

2006

2007

Wal-Mart commits to being more environmentally conscious

McDonald’s introduces healthier menu items

Michael Dell announces hewill enable customers to plant a tree for every Dell PC sold

Goldman Sachs commits to investing $1 billion in clean energy technologies

CVS offers walk-in clinics that provide low-cost basic healthcare

G.E. will invest $1.5 billion in environmental technologies by 2010

UPS truck fleet has 1500 alternative fuel vehicles

Leading companies form U.S. Climate Action Partnership

Wendy’s stops using trans-fats in fries and fried chicken

Tesco invests $990MM to reduce carbon footprint

Examples

5

Sustainability is about creating competitive advantage from aligning financial, social and environmental goals

A.T. Kearney’s Sustainability Framework

Economic Development

Financial Performance

Environmental Protection

Environmental Impact of

Business Activities

SocialWellbeing

Enterprise Impact on Society

"For the business enterprise,

sustainable development means

adopting business strategies and

activities that meet the needs of the

enterprise and its stakeholders today

while protecting, sustaining and

enhancing the human and natural

resources that will be needed in the

future."1)

Maximum Benefit

Focus Area

Creating a Competitive Advantage and a sustainable shareholder return

Growth vs. Environment

Efficiency vs. Social

Definition of Sustainable Development

1) Book: Business Strategies for Sustainable Development: Leadership and Accountability

Environment& Welfare

6

17%

21%

21%

33%

46%

50%

54%

Does Your Company Have a Corporate Sustainability Strategy?

CEOs and the Boardrooms are beginning to discover sustainability as a “top line” opportunity

Prominently Expressed Objectives for Corporate Sustainability Strategy (1)

Improve brand

Differentiate products

Efficiency

Compliance

Risk Mgmt..

Retention

Cost

Notes: (1) Multiple responses allowed

Total = 100%

xx%

No42%

Yes58%

Source: A.T. Kearney and Institute for Supply Management TM (ISM) Sustainability Management Survey, January 2007

7

• New Products (e.g., Hybrid, Solar,Organic)

• New Markets (e.g., Micro-Business model)

• Price Premium (e.g., „green features“)

• Carbon Tax• Exploding Commodity Costs• Sustainability Administration• Localization of Supply Chains

• Declining relevance of current product portfolio (e.g., SUV)

• Boycott (e.g., Nike)• Safety Disaster (e.g., Schering)

"Revenue Threat"

"Cost Peril"

"Growth Platform"

"Efficiency Booster"Amplifier

Reputation

But: sustainability is a challenge representing opportunities and risks

Sustainability can be a …

Revenue

Costs

Risk Opportunity

• Energy Efficiency (e.g., WalMart)• Product Specification Optimization

(e.g., Packaging design, material usage)

• Value Chain Optimization (e.g., manufacturing/network design, service levels)

8

Latest research indicates that companies excelling in all three dimensions command an evaluation premium

MSCI Index GS SustainCompanies

+25%

GS Sustain Companies

higher72%

28%

Companies good in all three dimensions…

….command a premium ….and outperform their peers more often

IndustryPeers higher

Shareholder Value Development (2003-2007)

Shareholder IncreaseGS Sustain vs. Industry Peers(2003-2007)

Source: Goldman Sachs, GS Sustain, May 2007, includes 120 companies from Energy, Mining, Food & Beverage, Pharmaceutical Industry

9

Understanding the longer term value challenge is pivotal in developing a sustainability strategy

Company Sustainability Value Challenge

Sha

reho

lde

r/

Com

pan

y V

alue

Cre

atio

nD

estr

uct

ion

“Do-Nothing Path”:Maxium Value

Destruction Scenario

“Sustainability Champion Path”

SVCSustainability

Value Challenge

“Growth Platform”

“EfficiencyBooster”

“CostThreat”

“RevenueThreat”

2010 2015 2020

Sustainability Strategy

Pro

tect

+

Win

“Evaluation Premium”*

Source: Goldman Sachs

Illustrative

10

Conclusion –

“Going Green”….

… should be more than a PR effort repackaging existing efforts

… is more than fighting “global warming” -- the underlying issues are larger

…, if done correctly, is not “another initiative”

…. but the long term survival, health and fitness program of a company