Metrics for Measuring Sustainability Performance- Latest Developments in the Financial and Higher Education Sectors

John L. CusackPresident President Gifford Park AssociatesGifford Park Associates914-527-3085 914-527-3085 91 Middle Road91 Middle [email protected]@att.net Eastchester NY 10709 USAEastchester NY 10709 USA

2007 Triple Bottom Line ConferenceParis France

16 November 2007

Metrics for Measuring Sustainability Performance- Latest Developments in the Financial and Higher Education Sectors

Where My Perspective Comes From…

- 20+ years staff & senior executive experience in the financial, environmental & energy industries with firms such as Innovest Strategic Value Advisors, Marsh, Con Edison, Combustion Engineering, and Asea Brown Boveri (ABB)

- President, Gifford Park Associates (consulting)

- P/T Executive Director- the NJ Higher Education Partnership for Sustainability (NJHEPS)

- Adjunct professor at Iona College Hagan School teaching a course in Environmental FinanceGIFFORD PARK ASSOCIATES

Measuring Sustainability Performance: Agenda

- Definition of Sustainability- Environmental, Financial & Social Issues- Sustainability Measurement as a Risk

Management Tool- Financial Sustainability Measurement- Higher Education Sustainability Measurement- Emerging Trends/Conclusions

GIFFORD PARK ASSOCIATES

Sustainability:A Practical Definition

“Integrating Environmental, Social & Economic Principles into

Investment Decision-Making Processes and Analysis”

Much like “Continuous Improvement”, Sustainability is a constantly changing process, not an end result, and therefore

measuring the “Sustainability” of a firm is difficult.


Sustainability:Why it is Important

These “intangible” issues are becoming increasingly important to stakeholders, including:

Employees, Clients, Investors, Financial Regulators, the Public, and yes, even Colleges & Universities.

They can directly affect company success and the

perceived value of organizations.

No Place to hide in today’s information-rich world!


Emerging Financial & Corporate World’s Thoughts of Sustainability

“Sustainability without a real business case is mere philanthropy; without measurement, mere whimsy; without meaningful reporting to shareholders, mere public relations. Today’s best-run companies – and smartest investors – are seeing sustainability for what it truly is: a strategic business driver that will separate the winners from the losers in the next decade. Companies seeking to establish strong, successful sustainability programmes will need the active participation of their CFOs.”

-Andrew Savitz, former PWC partner, in 25 Oct 05 issue of the Financial Times


TANGIBLE VALUETANGIBLE VALUE

INTANGIBLE VALUEINTANGIBLE VALUE Knowledge Capital

Speed & Agility

Innovation capacity

Structural Capital (external)

Stakeholder management

Social & environmental performance – “sustainability”

The Iceberg of Intangible Value Drivers:

In 1930, intangible value represented roughly 30% of the market value of major corporations

In 2000 it was 85%

In 2010 and beyond ???


Unknown Business Case Strong Business CaseLittle or No Data Quantitative DataIndividual Views on the Issues General Agreement on the Issues

Ethical Issues

EnergyEfficiency

LaborRelations

Stake-holder

Relations

Social Issues

Environmental Issues

AlcoholTobaccoGambling

Neg

ative Screen

ing

Characterization and Evolution of Sustainability Issues

Source: InnovestGIFFORD PARK ASSOCIATES

Sustainability:Why it is Important

Organizations Ignoring the Financial Implications of Sustainability can lead to:

- Poor execution & late delivery of projects/products - Costs over budget- Under-budget revenues- Increased risks and uncertainty- Unhappy clients and customers- Unhappy stakeholders/shareholders- Unexpected career change for executives


Sustainability:Environmental Issues

- Many companies & managers are aware of the impact of environmental issues on their firm, but generally only from a legal compliance view.

- Need to go beyond current compliance and look at future regulatory trends and anticipate what will be environmental issues through the next decade and product life cycles.

- For example, the interaction of the environment, climate change and energy is, and will continue to be, a major financially-material business issue, according to 75% of CEO’s of the 500 largest global publicly-traded companies.


Sustainability:Financial Issues

Environmental and social issues were looked upon as non-financial issues in the past.- These issues were looked upon as the primary responsibility of government, not business.- Collapse of government’s ability to deliver public services created a vacuum that industry had to fill to operate effectively (e.g., rebirth of company towns).- Traditionally, financial institutions only thought sustainability issues affected their clients, but did not affect the financial firms themselves.


Sustainability:Financial Issues (cont.)

Sustainability role of banks, insurers and investment managers are rapidly changing however…

- Goldman Sachs, Citigroup, Chase, B of A, HSBC, etc. all have adopted environmental policies and commitments - AIG and other insurance companies adopting climate change and social responsibility policies that cover both their risk management and investment businesses- Pension funds, hedge funds & institutional investors leading push for clean technology & carbon investments- Analytic research approaches have been developed to quantify financial impacts of Sustainability issues


Sustainability:Social Issues

Around the World, social issues are increasingly major political, societal and financial concerns of governments, businesses and citizens:

- Socially-responsible Investing (SRI) growing rapidly, and SRI funds control 10+% of market value of US companies.- Post-Enron, distrust of corporations by the public has led to greater regulations, like Sarbanes-Oxley, that require more disclosure of material financial information- Ironically, poor correlation of social issues with returns- Many institutional investors now consider sustainability issues financially relevant and a fiduciary responsibility


Sustainability Measurement:A Risk Management Tool

- As companies decentralize and expand, sustainability risks sometimes fall “between the cracks” of corporate management structures- As investors demand better disclosure of social/environmental liabilities more corporate understanding of sustainability risks is required- Firms need to have a comprehensive system to identify, assess, measure & mitigate sustainability risks and understand their financial impacts


Sustainability:Financial Measurement Methods

Well-Known Global Research Firms:

- Innovest Strategic Value Advisors (ISVA)- Sustainable Asset Management (SAM)- Light Green Advisors (LGA)- KLD Analytics (KLD)- Trucost Ltd.- Asset4

Others (over 65 assessment firms have been identified):

FTSE; Oekom; EIRIS; Arese; Ethibel; ISS/IRRC; Avanza; etc.

Note: traditional financial rating agencies just starting to look at these issues (e.g.,Fitch is incorporating into energy industry ratings)


Sustainability Assessment: The Innovest Approach

Franchise Value

Sales/ Market Share Growth

Cost Containmen

t

Stakeholder

Satisfaction

Innovation

Capacity

Shareholder

Value

COMPETITIVE ADVANTAGE

CRITICAL VALUE DRIVERS

Dividends

Share Price

Earnings Quality

SUSTAINABILITY OUT-PERFORMANCE

Sustainability Assessment: The Innovest Approach

Historical Contingent Liabilities:- Superfund- State and hazardous waste sites- RCRA- Toxic torts

Historical Contingent Liabilities:- Superfund- State and hazardous waste sites- RCRA- Toxic tortsOperating Risk Exposure:- Toxic emissions- Product risk liabilities- Hazardous waste disposal- Waste discharges- Supply chain management risk

Operating Risk Exposure:- Toxic emissions- Product risk liabilities- Hazardous waste disposal- Waste discharges- Supply chain management riskEco-Efficiency and Sustainability Risk:- Energy intensity and efficiency- Raw materials & natural efficiency and intensity- Product life-cycle durability/ recyclability- Exposure to shifts in consumer values

Eco-Efficiency and Sustainability Risk:- Energy intensity and efficiency- Raw materials & natural efficiency and intensity- Product life-cycle durability/ recyclability- Exposure to shifts in consumer values

EcoVALUE ‘21RATING

Managerial Efficiency Capacity- Strategic corporate governance capability- Environmental management systems strength- Environmental audit/accounting capacity- Supply chain management- Training capacity and intensity- Generic environmental management protocols- Relationships with stakeholders- Industry-specific protocols

Managerial Efficiency Capacity- Strategic corporate governance capability- Environmental management systems strength- Environmental audit/accounting capacity- Supply chain management- Training capacity and intensity- Generic environmental management protocols- Relationships with stakeholders- Industry-specific protocols

Strategic Profit Opportunities- ability to profit from environmentally-driven industry and market trends

Strategic Profit Opportunities- ability to profit from environmentally-driven industry and market trends

Financial Risk Efficiency Capacity- Balance sheet strength - Insurance cover adequacy

Financial Risk Efficiency Capacity- Balance sheet strength - Insurance cover adequacy


Value at Risk From a Sustainability Issue Such as Climate Change:

Results of recent benchmarking exercise in the US energy sector...

Source: Value At Risk, CERES/Innovest, 2002


- LGA is a asset management firm focused on creating value through systematic analysis of financially-material corporate environmental & sustainability management.- LGA does not use an exclusionary approach toward

sustainability investing, as practiced by most SRI funds- Analogy to carbon offset markets which transform progress

in emissions reductions by “brown” industries into a recognized “green” added-value asset

- LGA is a leader in building the market for environmental equity allocations in the US and EU markets- Advised on early EU environmental/sustainability products- Built first US “best-of-class” unit trust, as well as first

active, index & hedged market neutral E-investment products

Sustainability Assessment Approach:Light Green Advisors


Over the last six years, the LGA Eco Performance Portfolio™ has added value relative to S&P 500 Index and competitive social and sustainability benchmarks:- 7.74% in excess return relative to S&P 500- Annualized alpha was 1.61% - Outperformed the Domini Social Index by >15% and the Dow

Jones – Sustainability (SAM) Index by >10%- Won $50m mandate for sustainability investing by CalSTRS

in December 2006 using this investment approach

New product just launched for retail market in late 2006; The Claymore/LGA Environmental Unit Trust (GRN)

Investment Results:Light Green Advisors


Dow Jones Sustainability Index (DJSI)

- Research by Sustainable Asset Management (SAM), a Swiss-based research group- SAM licenses the Dow Jones name for DJSI and use Dow Jones Global Index (DJGI) as their benchmark- Model is based on choosing the “most sustainable” 10% of the DJGI to be in the DJSI- Looks at environmental performance, social performance, and economic performance equally- Roughly 200+ sustainability leaders in portfolio- More popular in Europe than North America


Dow Jones Sustainability Index (DJSI)

- DJSI did very well in back tests in 1990’s as they tilted their investments towards “clean” computer & IT sectors- Has underperformed the DJGI since 2000, due to those sectors being hard hit in stock market crash- Excellent visibility due to Dow Jones name- SAM also manages mutual funds based on DJSI- Several billion dollars managed using DJGI as screen- Interesting that in the US, most underweighted sector is Insurance, not Oil/Gas or Utilities sectors.


- TruCost believes most firms do not "internalize" all of the true costs of doing business. - Companies have been able to avoid internalizing these external costs not only because governments and accounting systems allow it, but also due to the lack of methods for calculating the financial cost of some externalities. - TruCost, a UK-based investment research group, have devised an empirical methodology for calculating the financial cost of externalities. The model can assess impacts on both profit & loss and balance sheets.- Called “True Economic Value Added”, or “TRUEVA”, the protocol measures companies' sustainability externalities against their ability to bear these costs through surplus revenues as expressed through Economic Value Added, or EVA.

TruCost:Case Study for Full Cost Accounting


- Trucost applied TRUEVA to the US electric utility sector. - Measured by SEC rules, 33, and by EVA 26, of the 33 utilities appear to be “profitable”. But when taking their externalized environmental costs into account, the picture changes drastically.-By this measure only 4 US electric power companies were adding value to the economy, i.e., the damages they imposed were less than their profits.-The biggest externalizers were American Electric Power and Southern Company, which imposed net costs on society which were not included in their balance sheet or P&L statement of $4.85 billion & $3.35 billion each. -- Exelon and PG&E were among the handful of companies generating positive TRUEVA scores ($225 million and $497 million, respectively)--meaning their surplus revenues (or EVA) outweighed their externalizations.

TruCost:Case Study for Full Cost Accounting


- Asset4 has an excellent system of reviewing publications and identifying key economic, environmental, social, governance data points from 900 sources about corporations, and summarizing into 250 ESG indicators.- Tremendous amount of data generated and processed on 3,000 companies.- However, some potential problems:

- Data is not filtered to determine value of the data, as data is equal-weighted. Client has to do own weightings/ratings (may not have expertise).

- What is definition of “Objective” data? “Values” vs. “value” issue is clouded by giving all ESG factors equal weight, but not all ESG factors may affect bottom line directly, or equally (or yet). -Good news is that ASSET4 now has:

- Goldman Sachs as both a client and investor- Merrill Lynch and Bank Sarasin also are clients.- Committed with partners as part of the 2007 Clinton Global Initiative to prove the link between corporate environmental performance and financial performance by 2009, using their data.

Asset4:Getting the Most Complete Dataset


Sustainability:A Risk Management Tool

Types of Sustainability Risk:

- Financial risk- Reputation risk- Environmental risk- Supply Chain risk

However, every risk is also an opportunity…


Sustainability:A Risk Management Tool

Climate change as an Example:

Even if you are not a major carbon-emitting company, you need to be worried…


Sustainability:Climate Change Risk

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

$0 $500 $1,000 $1,500 $2,000 $2,500

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: Insurance Information Institute

Total Value of Insured Coastal Exposure (2004, $Billions)

Note 5 of top 10 states are in New

England or Middle Atlantic states!

Sustainability:Climate Risk is Real

Climate Change will have a variety of Financial Impacts:

Health Insurance- “Climate change will lead to a resurgence in infectious disease unseen since the 19th century”- Paul Epstein,

Harvard Medical School

Property Insurance- “World-wide economic losses due to natural disasters appear to be doubling every ten years, & have reached $1trillion over the past 15 years” - Munich Re (2002)

Impact on Profits- “Companies will incur significant, & differing, material increases in operating costs due to increases in energy prices and GHG effects on suppliers” - Martin Whittaker, Mission Point Capital Partners


Sustainability:Climate Risk Management

Climate Change & the Financial World:

- Climate Change is a long term financial problem and financial markets are worried that firms are managing it poorly

- Energy efficiency and costs are highly related to operating costs, and thus will directly affect financial results

- Investors/insurers want to see more disclosure of how firms plan to assess, manage & mitigate potential climate change liabilities

- Alternative energy will take a long time to have an impact

- There will be winners and losers within industries, & across sectors

- Climate Change will present opportunities as well as problems


Sustainability:A Financial Innovation Tool

Climate Change as an Opportunity:

- General Electric and Ecomagination(sm)

- Global greenhouse gas emission credit trading market will soon be larger & more valuable than the grain market- Consortium of pension funds have committed over $1.4b to investments in clean technology -Major companies like S.C. Johnson and Ricoh are making sustainability core to their business strategy- Bank of America and HSBC using their voluntary GHG emissions reduction commitments to make money


Sustainability:Using It for Competitive Advantage

Patagonia- Their target is customers who want to buy clothing produced in a sustainable mannerST Microelectronics- Made investments in energy savings to meet Kyoto Protocol requirements but which also reduce operating costs by >$100m/yr.Dupont- Invested $120m to reduce greenhouse gas emissions by 70%, reducing operating costs by $240m/yr and accumulating >$300m of potential carbon creditsIBM- Recycles computers/parts for use in leasing business- added $2 b in sales in < 3 years at >50% profit margin


Measuring Higher Education Sustainability:The College Sustainability Scorecard

- Approach developed by Mark Orlowski and the Sustainable Endowments Institute; released Jan ‘07- Looked at the sustainability of colleges & universities with the 100 largest endowments- These schools represent about $258b of assets and about 75% of all endowment assets in the USA (‘06)- Schools include 66 private schools and 34 public schools, and have about 2.3m registered students- Schools range from Harvard to Macalester


Measuring Higher Education Sustainability:The College Sustainability Scorecard

- Looks at 7 sustainability factors:- Administration, Food & Recycling, Green Building, Climate Change & Energy, Investment Priorities, Shareholder Engagement and Endowment Transparency

- Gives grades from A through F for each category- Created “Leaders” list (A- or above) for all categories (4 schools), the 4 campus categories (26 schools) and the 3 endowment categories (1 school)- Criticized for not looking at impact of curriculum & being too focused on endowment rather than operations


35

Columbia University B $5.9 billion

Administration B The university established the office of environmental Stewardship in 2006 and will be setting up a Sustainability advisory Committee of students, staff, and faculty to supplement the previously established environmental Stewardship task Force. Columbia is known for strong academic research and programs on earth and environmental sciences, including the earth institute.

Climate Change & Energy B Columbia is examining purchasing renewable and alternative energy credits for a portion of its energy needs, and participating in a demand response program. nearly all buildings owned by the university are undergoing an energy audit to look for potential savings and increased energy efficiency. Meters and submeters at two campuses will be added and updated to collect data on real energy patterns, and the university is developing programs to reduce and monitor energy consumption based on these new data. a biodiesel program is also being developed.

Food & Recycling A Housing and dining services prioritize local, organic, and fair-trade certified purchasing, and a successful organic student co-op was opened in one dining hall. a seasonal menu is planned based on the availability of local produce, and dining services is working with green Forest, a sustainability consultant, to develop a better recycling program. a composting program is also being developed. all the dining halls’ unused food is sent to City Harvest, a nonprofit dedicated to ending hunger in new york City.

Green Building C Columbia is a new member of the u.S. green building Council and is utilizing leed strategies as a planning tool, with the intention of registering new construction for leed certification. The university has been upgrading its lighting systems for the past 15 years and has retrofitted its water infrastructure in order to maintain more efficient facilities.

Endowment Transparency B The university makes its proxy voting record available to members of the university community, such as faculty, staff, students, and alumni, and is accessible on the university website with password protection. only publicly-traded holdings are made available to the university community and are accessible with presentation of university identification. other information, such as privately held companies, is only available to trustees and senior administrators.

Investment Priorities C The university prioritizes investing to maximize profit and has not investigated investing in renewable energy funds or community development loan funds.

Shareholder Engagement A at community hearings, the advisory Committee on Socially Responsible investing, formed in 2000, receives input from the university community on a variety of issues including the environment and human rights. The CSRI then advises the trustees Subcommittee on Shareholder Responsibility to make decisions on proxies.

Sample “College Sustainability Scorecard”:

GIFFORD PARK ASSOCIATES Source: Sustainable Endowments Institute

Higher Education Sustainability Measurement Trends:

- Campus Sustainability Scorecard will do more schools and more factors in new 2007-08 ratings- Association for the Advancement of Sustainability in Higher Education (AASHE) has formed STARS committee to develop sustainability ratings of colleges & universities- big debate on methodology!- The Presidents Climate Commitment will require GHG inventories and a plan on how to become carbon neutral within 2 years (400+ schools signed)- NYU developed internal relative rating vs. goals


Sustainability:Points to Consider/Emerging Trends

What is the next step in ratings?

Where is more research needed?

What are the next rating trends?

Who will be the winners and losers?

With whom does responsibility lie to be sustainable? Who is in charge in Supply Chain?


However, major changes are needed in the ways we measure, assess, manage and assign responsibility for sustainability issues in management/investment

Sustainability issues do have direct material financial impact, and are being used as indicators of good management and future financial performance

Businesses and yes, even higher education, may have to face up to people measuring their sustainability…

However, major changes are needed in the ways we measure, assess, manage and assign responsibility for sustainability issues in management/investment

Sustainability issues do have direct material financial impact, and are being used as indicators of good management and future financial performance

Businesses and yes, even higher education, may have to face up to people measuring their sustainability…


Summary- Measuring Sustainability Can Materially Affect Your Bottom Line

and Society in a Positive Fashion

Economy & Finance

Metrics for Measuring Sustainability Performance- Latest Developments in the Financial and Higher Education Sectors