Sustainability Matters 2014 HOW SUSTAINABILITY CAN ENHANCE CORPORATE REPUTATION

Transcription

1 Sustainability Matters 214 HOW SUSTAINABILITY CAN ENHANCE CORPORATE REPUTATION

2 THE CONFERENCE BOARD creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. Working as a global, independent membership organization in the public interest, we conduct research, convene conferences, make forecasts, assess trends, publish information and analysis, and bring executives together to learn from one another. The Conference Board is a not-for-profit organization and holds 1(c)(3) tax-exempt status in the USA.

3 Sustainability Matters 214 How Sustainability Can Enhance Corporate Reputation RESEARCH REPORT R RR by Thomas Singer (Editor) Contents 4 Introduction: How Sustainability Can Enhance Corporate Reputation 8 Sustainability and Firm Performance Marc Bertoneche and Cornis van der Lugt 19 Principles for Generating Shared Value Dana Brown and Jette Steen Knudsen 25 The Link between Sustainability and Brand Value Bahar Gidwani 36 Communicating Sustainability to Enhance Corporate Reputation 36 Part I: Real vs. Perceived Sustainability Performance James Cerruti 41 Part II: A View by Industry James Cerruti 49 Part III: Learning from Absolute in Sustainability James Cerruti and Kathee Rebernak 58 The Role of CSR in Managing Reputation Daniel Diermeier 64 Measuring Corporate Reputation Grahame Dowling and Naomi Gardberg About the Authors 71 Related Resources from The Conference Board

4 measuring perception vs. reality for 1 prominent global brands Supported by Communicating Sustainability to Enhance Corporate Reputation Part I: Real vs. Perceived Sustainability Performance by James Cerruti Major companies across industrial sectors are putting more effort and investment into demonstrating good corporate citizenship on environmental, social, and related governance factors. However, research shows that it may be getting harder for companies to gain recognition for doing so. In 212, Brandlogic and CRD Analytics prepared the 212 Sustainability hip Report: Measuring Perception vs. Reality, marking the second year for the annual report and continuing our pioneering work in comparing real sustainability performance to the perceptions of key stakeholders. This follow-on study used the same methodology established for the inaugural report (see box for a summary). 1 Moreover, the follow-on study validated the methodology s usefulness as a management framework for making decisions about if and where to invest in sustainability, both on the operational and communications fronts. With a second set of data in hand, we are able to observe year-over-year movement. Overall, real performance on sustainability is rising, reflecting ongoing and intensifying corporate efforts to define and achieve sustainability goals. However, perceived performance, on average, is declining. The findings suggest that it is becoming more difficult to achieve differentiation among those audiences who are most attentive to sustainability, despite a better track record. This finding is both striking and surprising. Why is perception slipping despite an increasing volume of communications around sustainability? In what follows, we explore possible answers. 212 Sustainability hip Report About the Brandlogic Sustainability hip Report The rationale and methodology behind the annual Sustainability hip Report is described in detail in The Conference Board November 212 Director Notes, Charting a Path to Sustainability hip. In summary: 1 leading global brands were sampled across nine selected Global Industry Standard Classification (GICS) categories. Real reported performance ratings on 141 environmental, social, and governance factors were provided by CRD Analytics, the company behind the NASDAQ OMX CRD Global Sustainability Index sm. Brandlogic conducted the quantitative perception survey among three highly attentive audiences: investment professionals, purchasing/supply professionals, and graduating students who will soon be entering the workforce. These audiences were located in six countries, representing both mature and emerging economies: United States, the United Kingdom, Germany, Japan, China, and India. The two sets of data were aggregated and mapped to a pair of 1-point scores: the Sustainability Reality Score (SRS) and Sustainability Perception Score (SPS). These were plotted on a grid the Brandlogic Sustainability IQ Matrix allowing direct comparison of all surveyed companies. The Sustainability IQ Matrix comprises four quadrants: 1 Those who excel in both real and perceived performance 2 Promoters Those with relatively high perceived performance, but relatively low real performance 3 Challengers Those with good real performance but relatively low perception ratings 4 Laggards Companies that trail on both dimensions For a copy of the 212 Sustainability hip Report, visit 36 Research Report sustainability matters 214

5 212 Report Findings: A Story of Divergence The good news is that, in 212, real total environmental, social, and governance (ESG) performance rose for 93 of the 94 companies surveyed in both years of the report (six companies were replaced for various reasons pertaining to selection criteria). The increase suggests that businesses are taking sustainability seriously and making it a part of the business strategy. It also has an implication for rankings: better performance, generally, raised the mean by 9 points, making it more difficult for companies to rise into the quadrant of the Brandlogic Sustainability IQ Matrix. (See About the Brandlogic Sustainability hip Report for details on the quadrants found in the Sustainability IQ Matrix.) In a number of cases, these gains in real ESG performance were dramatic. Roughly one-fifth of companies increased their scores by more than 1 points. Seven of these saw increases of more than 24 points on the 1-point Sustainability Reality Score (SRS) scale. On the perception front, the story was very different. The mean Sustainability Perception Score (SPS) dropped from 47.2 in 211 to 44.5, and, of the 94 companies surveyed in both years, more than two-thirds (68) saw a decline in their score. Twenty-seven companies experienced declines of five points or more, with 12 of these dropping by more than eight points. Looking at the relationship of reality scores to perception scores also yielded some interesting findings. In almost every case in which a company s reality score was higher than its perception score (32 of 33 companies), the gap has widened. Given the general improvement in real performance and the decline in perceived performance, this is not surprising. Similarly, in all 26 cases in which the reverse situation exists the company s perception score was higher than its reality score the gap has narrowed. In 35 instances, the gap flipped direction, and, in all of these cases, the shift was from perception leading reality to the opposite. What s notable is how dramatic some of the changes were. In 211, 15 companies had a perception score that was higher than the reality score by more than 2 points. In 212, there were only two: Facebook and Amazon. Both had very low reality scores across all dimensions, Facebook performing worst on the social dimension (12.5 points) and Amazon struggling most on environmental (8 points). Bank of America also saw a marked shift. Its perception score remained stable, while its real performance score jumped 28 points after more than doubling its environmental score and almost doubling its social score. What the Findings Suggest It s clear from the divergence in the SRS and SPS scores that companies ability to deliver on sustainability is outstripping their ability to communicate their sustainability achievements effectively. But why? We know that the volume of communications, in the form of corporate responsibility reports and similar messaging, as well as in advertising and other brand communications, is on the rise. Brand reputation both positive and negative plays strongly here. For example, Apple has the highest perceived performance score, despite below-mean real performance and a relatively modest commitment to ESG factors. while, ExxonMobil has a high sustainability reality score, but, despite major efforts to communicate its sustainability commitments, the company can t seem to elevate perception. Its industry s poor reputation creates significant headwinds. This reinforces the long-term value of investing to build a positive brand image. Companies poor perception scores may also reflect increasing skepticism by key stakeholders, some of whom may not be seeing the benefits they expect from these companies sustainability practices. Part of the data that supports the SPS rankings is highly suggestive and supports this idea. Research Report sustainability matters

6 Chart 1 Year-over-year change in real and perceived corporate sustainability performance from Even as companies improved their real performance on sustainability perceptions among highly attentive stakeholders are slipping. Challengers IBM Reality up 9.3 points Goldman Sachs Dell UPS UBS Intel HP AstraZeneca BMW SAP Cisco Citi Johnson & Johnson Bank of America Volkswagen Nokia Deutsche Bank Merck Roche Abbott Labs HSBC GlaxoSmithKline ABB Allianz Nestlé BHP Billiton L Oréal 3M Siemens General Electric Shell ExxonMobil BP Nike Ford Novo Nordisk TI AXA Philips (electronics) PepsiCo Coca-Cola Chevron Bayer Accenture Microsoft Dow Chemical Samsung Colgate-Palmolive Walt Disney Vodafone EADS Danone Heineken Pfizer (Airbus) John Deere BT (British Telecom) (Dannon) DuPont Alcoa Caterpillar Walmart Barclays Deutsche Telekom (T-Mobile) BASF Starbucks Kellogg s Canon Sony Panasonic Adidas Apple AT&T Tesco Boeing McDonald s FedEx Xerox British Airways American Airlines Komatsu ArcelorMittal Fujitsu Honeywell Toyota Tata American Lufthansa Marriott H&M Express Honda 3 Michelin Nintendo ConocoPhillips Visa Zurich Google Avon Yahoo! Japan Airlines 2 Facebook Amazon 1 Laggards Perception down 2.7 points Key Promoters Copyright 212 Brandlogic Corp. Source: 212 Sustainability hip Report: Measuring Perception vs. Reality, Brandlogic, 212, p. 6. SRS greater than SPS Alignment gap > 2 points Alignment gap 1-2 points Alignment gap < 1 points SPS greater than SRS Alignment gap > 2 points Alignment gap 1-2 points Alignment gap < 1 points 38 Research Report sustainability matters 214

7 In both the 211 and 212 studies, graduating students provided the lowest overall ratings of corporations, perhaps reflecting a natural skepticism about corporate citizenship among younger people. Perceptions from the two other stakeholder groups changed significantly. As shown in Chart 2, in 212, downgrades in perceptions by purchasing professionals were twice to four times as large as those among investment professionals. Given that those directly involved in the supply chain are exposed to operational realities, while investors focus on financial results, it s easy to see why purchasing professionals may be less willing to buy into a company s sustainability story if it s not supported by what they see on a daily basis. There were also distinct differences in the magnitude of perception change between respondents in newly developed countries and those with more mature economies. Overall, environmental and social perception scores saw larger declines among newly developed countries, while governance perception scores for those countries held up better than the scores for developed countries. It should be noted that in the inaugural 211 study, perception ratings were much higher overall in newly developed countries; the changes shown in Chart 2 actually reflect a closer alignment between newly developed and developed countries, although perception scores are still higher in newly developed countries than in developed countries. It is possible that these differences are cultural in nature: those respondents in mature markets could be applying higher personal standards to corporate citizenship. Chart 2 Year-over-year change in perceived corporate sustainability performance by segment from The changing perceptions among stakeholder groups suggest that their points of view may be shifting as they gain experience with sustainability and what it means in the real world Investment professionals Purchasing professionals Source: Brandlogic, Graduating students Developed countries Environmental Social Governance Newly developed countries Why This Should Matter to You As a rule, consumers do not make choices based on perceptions of corporate citizenship, so if they don t care, why should you? The answer is that there are audiences for whom sustainability is vitally important and for whom corporate citizenship especially on social factors plays a large role in decision making. We refer to these audiences as highly attentive and they include: Investment professionals They base their decisions on all aspects of corporate performance. Purchasing managers Increasingly, their own organization s sustainability policies give preference to suppliers that also operate sustainably. Graduating university students They are in the process of deciding where they want to work, and the long-term sustainability of prospective employers is of great importance to them. Eighty-eight percent of respondents characterized as highly attentive state that corporations good corporate citizenship is either extremely or somewhat important in the decisions they make to invest in, partner with, or work for a company. Half say it is extremely important. Attracting investment, forging solid business relationships, and nurturing the talent pipeline are all critical to any company s long-term success ample reasons to make a serious commitment to both sustainability performance and communicating it Chart 3 Stated importance of good corporate citizenship in decision making The importance of good corporate citizenship to decision making is rated very differently, depending on which audience you re talking to. 88% a EXTREMELY OR SOMEWHAT IMPORTANT Highly attentives Source: Brandlogic, 212. Invest in Partner with Work for Purchase intent 2% b Consumers a 212 Sustainability hip Report: Measuring Perception vs. Reality, Brandlogic, 212. b Tom Zara, The New Age of Corporate Citizenship: Doing Strategic Good that Builds Brand Value, Interbrand, p. 4 ( IBNY_corporate_citizenship_1928.sflb.ashx). Research Report sustainability matters

8 Common Characteristics of Sustainability Treat sustainability as an integral part of business strategy, not just a compliance issue. Some build a corporate strategy that focuses on the value of adherence to key sustainability principles in terms of enhanced operations, finances, and relationships. They have evolved a clear business case for sustainability initiatives and see that it is possible to do well by doing good. Take responsibility for the impact of internal operations and those of associated entities, such as supply chain partners. Leading companies have issued formal codes of conduct for suppliers that define minimum performance standards on ESG and also hold suppliers responsible for the conduct of subcontractors. Having these codes shows an understanding that sustainability is not an isolated concept, but one that is based on understanding and managing interdependencies in the value chain of the business. Implement GRI standards for reporting and ensure that the materiality of sustainability issues is understood by all stakeholder groups. excel at meeting the GRI standards fully and transparently. Using recognized standards is essential because it helps ensure acceptance by stakeholders. In addition, highlighting the materiality of sustainability issues in a way that is meaningful for each stakeholder group sets the tone for both operational and strategic decisions across the enterprise. Integrate sustainability into the brand and client value propositions. Making sustainability a central part of the customer conversation can yield enormous benefits in terms of brand value, fundamentally changing how a company is viewed in the marketplace. Focus their operational initiatives and related communications on carefully selected themes tied to the core of the business. tend to use relevant themes to create varied, yet complementary, communications to key stakeholder groups. For specific examples of practices used by leading companies, see James Cerruti, Charting a Path to Sustainability hip, Director Notes, Vol. 4, No. 22, The Conference Board, November 212. An Opportunity for Action Whether the slip in perception ratings signals a trend or a one-time correction remains to be seen. It does, however, point to an important opportunity for companies across all industries. Facing greater skepticism across the board, it is important for companies to ramp up their efforts to communicate both their sustainability commitments and accomplishments in a way that resonates with their key audiences. Many do this in the form of a corporate sustainability report (CSR) that is prepared in parallel with their annual report. Others take an integrated approach and blend ESG data into their annual reports. However, these are not the only communications channels being leveraged. An increasing number of companies are moving toward integrating sustainability messages directly into corporate brand communications and customer value propositions, thus gaining the efficiencies of leveraging primary channels of persuasion. 2 Most of the in the 212 study have also become quite adept at incorporating sustainability into the presentations they use to engage directly with discrete stakeholder groups, whether an investor road show or a campus recruitment visit. As a whole, these initiatives are still relatively new and the quality of communications varies widely. It s worth the effort to sample what s available, whether in the form of a CSR, sustainability website, or other communications, and learn from it to guide your own strategy. 4 Research Report sustainability matters 214

9 Part II: A View by Industry by James Cerruti An analysis of real and perceived sustainability performance across and within industries highlights the importance of communications in helping to drive positive perception of the corporate brand. Grouping companies into their respective industry sectors provides a critical context that helps put sustainability performance in perspective (see Chart 4). This preliminary examination by aggregated GICS categories shows that, contrary to what might be expected, no company is a Laggard solely because of a negative industry halo effect, which is defined as a generalization that projects the perception of one or two poorly performing companies onto the whole industry or, more precisely, a kind of guilt by association. For example, the energy (oil & gas) and materials & mining sectors might be expected to score below average on both real and perceived sustainability performance. However, when the aggregated ESG dimensions are considered, these sectors rate as Challengers (i.e., they have good real performance with relatively low perceived performance), along with the financials and consumer staples industries. Challengers Chart 4 Industry average comparisons: total ESG Healthcare (pharmaceuticals) Energy (oil & gas) Financials Materials & mining Consumer staples Information technology Industrials & transportation Consumer discretionary Telecom & internet 4 Key SRS greater than SPS SPS greater than SRS Alignment gap > 2 points Alignment gap > 2 points Alignment gap 1-2 points Alignment gap 1-2 points Alignment gap < 1 points Alignment gap < 1 points Laggards Promoters Copyright 212 Brandlogic Corp. Source: Brandlogic, Research Report sustainability matters

10 Only two GICS categories were with both high real and high perceived performance: pharmaceuticals and information technology. Industrials & transportation, consumer discretionary, and telecom & internet were rated as Promoters (i.e., those with high perceptions but relatively low real performance). It is revealing that there is a wide range of real performance among sectors a 21-point span whereas perceived performance varied by only seven points. This highlights the importance of communications in driving corporate brand perception. A Closer Look at ESG In addition to aggregating the research data by GICS category, we can separately examine each category in terms of the three sustainability dimensions that make up ESG to show where each categories strengths and weaknesses are. For example, when the ESG dimensions are considered together, energy (oil & gas) companies are rated as Challengers, but when environmental factors are considered alone, these companies are rated Laggards (Chart 5). Looking at this dimensional information, two significant facts with differing implications emerge: For sectors that rate as Promoters and even Challengers based on aggregated performance, the real ESG dimension most in need of improvement is the environmental one. The environmental dimension, therefore, remains an operational investment imperative for all sectors. Even the arguable exceptions, the pharmaceuticals and information technology industries, have scores that fall far short of their full potential. The biggest negative misperceptions of performance versus reality tend to be on the social and governance dimensions. There is a clear need for improvement of communications regarding these dimensions for all of the industries except for the telecom & internet sector, whose relatively poor perceived performance reflects relatively poor real performance. Chart 5 GICS category sustainability performance broken down by ESG dimensions (Scores on 1 point real and perceived performance indices) Total ESG Environmental dimension Social dimension Governance dimension Real Perceived Real Perceived Real Perceived Real Perceived Consumer discretionary Consumer staples Energy (oil & gas) Financials Healthcare (pharmaceuticals) Industrials & transportation Information technology Materials & mining Telecom & internet Overall mean of 1 companies Key Exception to category total ESG performance 42 Research Report sustainability matters 214

11 It is interesting to note that all Challenger GICS categories are significant Laggards on at least one ESG factor. Financials perform as Laggards on the social dimension something readily seen in media coverage while consumer staples, materials & mining, energy (oil & gas) and telecom & internet are environmental Laggards. In fact, telecom & internet has not only the lowest real performance of all the industries on environmental factors, it also scores the lowest of all industries on real social and governance performance. What is more remarkable is that, despite low real performance scores across all three dimensions, this sector s perceived performance is essentially tied with the GICS category pharmaceuticals and information technology. How can this be? Variation within Industries As expected, performance within a given sector varies, both between individual companies and from the sector mean. Comparing the performance of true peers in similar businesses highlights the impact of halo effects and the effectiveness of communications strategies. DISTORTING PERCEPTION: THE HALO EFFECT The inefficiency of chosen communications channels and/ or the ineffectiveness of messaging content can contribute to a significant negative disparity between real and perceived performance for a majority of companies. Real performance outstrips perception. For and Promoters, however, the effectiveness of content delivered through the primary channels of persuasion (directly through major brand communications channels and customer value propositions) plays a prominent role in their high perception ratings. Intelligent use of these channels underpins the success of many in achieving credit for above-average real performance. It also seems to be driving positive misperceptions for certain companies or subsectors. These companies reap positive results even though the content they create to drive perceptions is often relatively narrowcast, focusing on one specific aspect of sustainability rather than the broader picture. What follows is a discussion of individual company performance within each of the nine industry sectors, along with the changes in ratings from 211 to 212. The industries are grouped by where they fall on the Sustainability IQ Matrix (, Promoters, Challengers, and Laggards). The high perception rating of the telecom & internet sector despite poor real performance highlights the power of the positive halo effect. A generally positive perception of this industry s products, technologies, and societalchange leadership, which is driven by experiential and communications influences, seems to have translated into a beneficial reputation that radically distorts perceptions of performance for the better on broader, comparative sustainability factors. The positive perceived sustainability performance in this case is achieved without any investment in sustainability brand messaging per se. The converse is arguably at play for a number of GICS categories in the Challengers quadrant, in which a negative reputational halo is preventing recognition for relatively high real sustainability performance, even in cases in which significant investment in sustainability-related brand communications is evident. A good example of this is ExxonMobil, which significantly improved its real performance from 211 to 212. Aided by a strong ad campaign calling for better math and science education, the company improved its perceived performance, although it was still below the study mean. Arguably, this may have been influenced by general negative perceptions of its industry. Research Report sustainability matters

12 Leader Sectors Numerous company comparisons in the IT sector drive home the significant difficulty faced by companies striving to align their real and perceived sustainability performance (Chart 6). For instance, IBM is exemplary in its integration of sustainability into its business strategies, its customer value propositions, and the brand messaging delivered through primary communications channels. The company s highly successful Smarter Planet campaign is an excellent example of brand messaging. IBM leads all 1 studied companies on real ESG performance and exceeds Apple s real performance by 28 points. Yet Apple surpasses IBM on perceived ESG performance, and, at 55.6 points for this dimension, leads all 1 companies in the study. Moreover, Apple s perception score has improved year over year, despite negative media coverage related to labor issues and lack of transparency about corporate governance and operations. (The company has taken steps on both issues of late.) Apple s perceptual sustainability ratings appear to derive partly from a positive halo effect from positive market reception of its products and from its well-received innovative brand communications. In the pharmaceuticals (healthcare) sector, the companies real and perceived ratings were similar, although J&J leads its peers slightly (Chart 7). The perceived performance of this sector as a whole declined from 211 to 212. Except for Roche, all of the pharma companies studied were in 211. However, only half remained in 212. With the exception of Merck, overall real performance improved, yet perception scores for this sector declined across the board. What caused the broad-based movement in the pharmaceutical category? One possible explanation may be that these companies stood out as leaders for more than a decade by defining corporate purpose as delivering social good (better health, better living, etc.). Today, these types of communications are no longer unique, and companies in all industries define themselves by and communicate similar messages. Another possible factor affecting this sector s reputation is the media s continuing association of pharmaceutical companies with excessive health care costs in a number of developed countries, which could be seen as contradicting these companies purpose statements. Chart 6 Industry peer comparison: information technology Challengers IBM Dell Intel HP SAP Cisco Texas Instruments (IT) Xerox Fujitsu Philips (electronics) Accenture Microsoft Samsung Canon Apple Chart 7 Industry peer comparison: healthcare (pharmaceuticals) Challengers GlaxoSmithKline AstraZeneca Johnson & Johnson Roche Merck Abbott Labs Novo Nordisk Bayer 212 Pfizer Nintendo Laggards Promoters Source: Brandlogic, 212 Laggards Promoters Source: Brandlogic, Research Report sustainability matters 214

13 Challenger Sectors The financial services category (Chart 8) yielded no in 211, despite high real sustainability performance by several firms (Allianz, AXA, Citi, Deutsche Bank, HSBC, and UBS). The most likely explanation for this is the negative reputational headwinds these companies faced during the Great Recession, along with the relatively low profile taken by most of these firms in sustainability communications. In general, sustainability does not feature prominently in their overall brand strategies. Two firms, AXA and Deutsche Bank, broke through to the Leader category in 212 by stepping up their profile on sustainability issues and enhancing their communications. Deutsche Bank released a study of studies in 212, and AXA made a concerted effort to embed sustainability in its brand messaging and investor communications. 3 This can be seen on the corporate website, where sustainability is a prominent part of the primary navigation. The financial services category also demonstrates a gap between real and perceived ESG performance due to an industry halo effect. For instance, Zurich, with a real performance score 23 points below AXA, received a perception score that is slightly higher than AXA s. Here again, a tendency by stakeholders to lump together sector peers appears to have benefited Zurich and may be making it difficult for AXA and Allianz to distinguish themselves. In consumer staples, Coca Cola and PepsiCo ranked almost identically on both real and perceived performance in 211 (Chart 9). In 212, both companies real performance advanced in tandem, but Coca Cola improved its perceived performance score relative to PepsiCo and the study mean and emerged as a new Leader. While it s difficult to say with any certainty whether there is a strict correlation, Coke is a good example of the potential impact of brand communications on stakeholder perception. In 212, Coca Cola began using its main channels of brand com munications, including television advertising, to convey a set of messages about the responsible consumption of sugar in beverages and foods. In consumer staples, Walmart and Tesco provide a revealing peer comparison. Both are Laggards that improved real performance year over year. Walmart s improvements reflecting, in particular, substantial commitments to and progress on reducing greenhouse gas emissions were significant enough to surpass Tesco significantly on real performance ratings. Despite its greatly improved real performance, Walmart s perceived performance declined, while Tesco s perceived performance rose. Here is a clear case where the choice of communications mode matters. Challengers Chart 8 Industry peer comparison: financials Citi Barclays UBS Bank of America Allianz HSBC American Express Goldman Sachs Visa AXA Deutsche Bank Zurich Challengers Chart 9 Industry peer comparison: consumer staples Walmart PepsiCo Heineken Kellogg s Tesco Nestlé Coca-Cola Colgate-Palmolive Danone (Dannon) Laggards Promoters Source: Brandlogic, 212 Laggards Promoters Source: Brandlogic, Research Report sustainability matters

14 Walmart uses press releases to highlight its ESG commitments and progress, and the company documents its various initiatives with formal reporting and separate descriptions. 4 These communications are available but relatively buried on the company s website. Contrast this with Tesco s use of primary communication channels. Tesco s website landing page includes an entire section devoted to lifestyle and community that invites customers to directly engage in Tesco s initiatives to save rain forests and support responsible farming. 5 Tesco also uses in-store messaging to convey commitments to healthy living and sustainable practices. From an engagement perspective, it may not be so surprising that Tesco is getting more credit from our highly attentive audiences for its ESG efforts than Walmart. Despite the fact that four of the five energy (oil & gas) com panies covered in the study demonstrated real performance above the study mean across the aggregate of GRI reporting categories, the energy (oil & gas) sector seems to be wearing a negative halo (Chart 1). This less-than-positive perception is undoubtedly due to the negative feelings toward the industry as a result of a number of catastrophic events that seriously affected the environment, employees, and communities. As a result, many assumed the sector s sustainable environ mental and social practices were inadequate. Chart 1 Industry peer comparison: energy (oil & gas) As shown previously by Zurich, the halo effect can cause positive distortions. At least one company in the energy sector seemed to benefit from the tendency by the public to lump peer com panies together perceptually. Conoco Phillips lags far behind all its peers on real performance, yet its perception score is higher than all of its industry peers except for ExxonMobil. While perception scores of most energy category players declined year over year, ExxonMobil s rose. This may be linked to the company s concerted effort to communicate a leadership position on social issues, and education especially, through the primary channels of brand advertising, notably in the form of its math and science education campaign. The materials & mining sector, like energy (oil & gas), is involved in extraction and heavy processing and bears a burden of the high environmental impact caused by its operations (Chart 11). In line with the majority of companies in the study, most of the companies tracked in this category saw their perception scores drop. Alcoa, BASF, and DuPont suffered some of the largest declines in perception and fell into the Laggard quadrant in 212. However, Dow and BHP Billiton recorded real performance above the study mean, casting doubt on the notion that the nature of the business prevents sustainability leadership. Dow bucked the sector trend by registering gains in perceived performance. Chart 11 Industry peer comparison: materials and mining Challengers Challengers Shell BP Chevron ExxonMobil BHP Billiton Dow Chemical DuPont Alcoa BASF ArcelorMittal 3 2 ConocoPhillips Laggards Promoters Source: Brandlogic, 212 Laggards Promoters Source: Brandlogic, Research Report sustainability matters 214

15 Promoter Sectors A comparison of competing brands in category subsectors reveals major disparities between real performance and perception. For instance, in consumer discretionary, L Oreal (Chart 12) (one of only six companies to advance to the Leader quadrant from 211 to 212) scored slightly below Avon on perception 45.3 points and 46.8 respectively yet L Oreal s real performance score exceeded Avon s by 3 points (.3 points versus 3). A similar gap exists in the automotive subsector. Promoters Toyota and Honda, with relatively low real performance scores, have perception scores similar to those of BMW, VW, and Ford. How can this be? One possible explanation is that both Toyota and Honda have been building reputations as leaders in fuel-efficient engines for years, and they have promoted this favorable sustainability reputation effectively through primary brand communications. As a result of their strong communication on a single area of good performance, stakeholders appear to project outperformance on other ESG dimensions. In contrast, BMW, VW, and Ford have largely directed broader-based communications of their high, real sustainability performance through secondary channels, and, as a result, these auto manufacturers have received less recognition from our highly attentive audiences. In the industrial & transportation sector, GE stands out on sustainability communications (Chart 13). It bucked the general trend of a year-over-year decline in perceived performance to become a Leader. GE used both its primary corporate brand (the ecomagination platform) 6 and secon dary channels of communications (reporting, CSR/Sustain ability sections on web site, PR etc.) to underscore its sustainability commitments and real performance and gain credit for them. 7 Other in the category especially ABB and Siemens make use of sustainability messaging in their customer value propositions and provide high-quality, detailed reporting of ESG performance through secondary channels. Chart 12 Industry peer comparison: consumer discretionary Chart 13 Industry peer comparison: industrials and transportation Challengers Challengers BMW UPS Nike Panasonic Adidas McDonald s H&M Michelin Ford Volkswagen L Oréal Starbucks Sony Marriott Honda Avon Walt Disney Toyota Caterpillar British Airways Tata Komatsu ABB Siemens 3M EADS (Airbus) General Electric (GE) John Deere Boeing FedEx American Airlines Honeywell Lufthansa Japan Airlines (JAL) Laggards Promoters Source: Brandlogic, 212 Laggards Promoters Source: Brandlogic, Research Report sustainability matters

16 In this category, a gap also exists between real performance and perception. One example is the comparison of FedEx and UPS. UPS achieved top-three real performance among all studied companies in 212, placing just behind IBM and Dell. The company s ESG reporting is robust, yet UPS remained in the Challengers quadrant. Through 212, UPS had not linked its sustainability messaging to its primary brand communications. In contrast, FedEx, which has a real performance score far below that of UPS, is perceived to be performing ahead of its key competitor. FedEx s approach, like the auto manufacturers mentioned earlier, seems to be the use of advertising and other main brand communications channels to convey strong performance in a single important category in this case, commitment to fleet fuel efficiency while limiting both its commitments to and reporting on the broader range of E, S and G GRI metrics. The airline subsector offers another example of the halo effect. JAL, though improving, had real performance in 212 well below its airline peers, including British Airways. Yet JAL s perception score was not far behind Lufthansa s and was significantly higher than that of British Airways. Finally, the telecom & internet category demonstrates the most extreme gap between real and perceived performance (Chart 14). At the macro level, the four internet companies covered (Amazon, Facebook, Google, and Yahoo!) all fall well below the telecom companies on real performance, yet they scored similarly to or ahead of the telecom players on perception. In fact, these internet companies all had real performance in the bottom 1 percent of the 1 companies studied. Despite poor real performance, three of the four scored above the study mean on perceived performance, and two (Amazon and Google) registered perception scores in the top 25. Amazon, Google, and Yahoo! all scored ahead of Leader Nokia on perception. It appears that, like Apple, the positive market reception of the companies products and brand communications are having a positive halo effect on their perceived sustainability performance. Chart 14 Industry peer comparison: telecom and internet Challengers Vodafone BT (British Telecom) AT&T Facebook Nokia Deutsche Telekom (T-Mobile) Yahoo! Google Amazon Laggards Promoters Source: Brandlogic, Research Report sustainability matters 214

17 Part III: Learning from Absolute in Sustainability by James Cerruti and Kathee Rebernak Having examined best practices, changes over time, and the difficulties of achieving recognition for ESG performance, this section takes a closer look at leading companies real and perceived performance on the disaggregated E, S, and G dimensions of performance. Also examined are the practices of seven companies that outperformed their peers on ESG factors overall and on a disaggregated basis. While the SPS and SRS are useful, they leave some questions unanswered. In particular: 1 Is it only the overall study that score as on each of the three E, S, and G dimensions when examined individually, or do other companies also achieve leadership when measured on the separate dimension indices? 2 Among those companies that score as Absolute (i.e., above mean performance on both the real and perceived indices on all three E, S and G dimensions individually as well as in aggregate) what patterns of practice do they employ, especially when it comes to real performance? The Story Told by Disaggregating E, S, and G In the 212 study, 32 companies ranked as Overall ; that is, they had above-mean scores on both real and perceived aggregated ESG performance. However, of these 32 companies, only 13 which are referred to as Absolute scored as on all three dimensions (Chart 15). The remaining 19 scored below the mean on at least one E, S, or G dimension on either real or perceived performance. For example, due to its high Environmental score, Ford ranked as an Overall Leader, despite perceived performance shortfalls in the Social and Governance dimensions. Accenture ranked as an Overall Leader, even though the company did not rank as a Leader in any of the disaggregated ESG dimensions. That is the result of aggregating the overall ESG index scores. Accenture s high real Environmental score offset the company s below-mean real scores on the Social and Governance dimensions, while its above-mean perception scores on both Social and Governance offset a below-mean perception score on the Environmental dimension. SRS Chart 15 SM Brandlogic Sustainability IQ Matrix 212 Overall and Absolute IBM Dell Deutsche Intel Bank Cisco BMW SAP Nokia Johnson & Johnson Volkswagon GlaxoSmithKline Abbott Labs ABB Nestlé Ford Sony GE 3M Novo Nordisk Siemens Coca-Cola Philips (electronics) Accenture AXA Samsung Colgate-Palmolive Microsoft Danone Walt Disney (Dannon) John Deere EADS (Airbus) Pfizer SPS Key SRS vs. SPS Gap Alignment gap > 2 points Alignment gap 1-2 points Alignment gap < 1 points Absolute Other Overall Research Report sustainability matters

18 The performance of the 19 Overall that did not rank as Absolute most often lagged behind their peers on the Social dimension. Twelve Overall trailed their peers in terms of Social scores, six trailed on Environmental, and four trailed on Governance (Table 1). For those companies with dimensional performance in the Challenger quadrant, the shortfall was on perception, not reality. For Promoters the opposite was true. Those with dimensional performance in the Laggards quadrant fell short on both real and perceived performance on that dimension. As previously noted, 32 companies in the 212 study were Overall based on aggregated scores. However, when the scores are disaggregated, 11 additional companies emerge as on one or two E, S or G dimensions. Table 1 Overall lagging on one or more dimension Environmental dimension Social dimension Governance dimension Environmental Performance: The Lowest Barrier to hip Of the three E, S and G dimensions, the lowest means for both real and perceived measures are on the Environmental dimension, creating a lower hurdle to leadership than for the other two dimensions. When considering Environmental performance alone, eight additional companies enter the top ranks along with 26 of the Overall (Chart 16). One company, UBS, scores second of all companies on real Environmental performance, just behind IBM. Another, Apple, achieved the fourth-highest score among all 1 companies on its perceived Environmental performance, just below SAP. While real performance improvements in the Environmental dimension is a challenge for companies across all industries, the challenge in the Social and Governance dimensions for most companies is better communicating actual performance. Challengers L Oréal Coca-Cola Ford Deutsche Bank Nestlé AXA GlaxoSmithKline Accenture Novo Nordisk Cisco Nokia Ford Promoters Colgate-Palmolive Walt Disney Danone (Dannon) UBS Chart 16 SM Brandlogic Sustainability IQ Matrix 212 on the environmental dimension IBM EADS (Airbus) Accenture John Deere Accenture Microsoft Laggards Pfizer Samsung BMW Nokia SAP AstraZeneca Intel Dell Volkswagon GlaxoSmithKline Apple Johnson Siemens & Johnson HP Nestlé Abbott Labs EADS ABB 3M (Airbus) Novo Nordisk Cisco Sony Microsoft Canon BASF GE Philips (electronics) Envir. Deutsche Telekom (T-Mobile) SRS Samsung John Deere Coca-Cola Danone Walt Disney Envir. SPS Key Ford Environmental SRS vs. SPS Gap Alignment gap > 2 points Alignment gap 1-2 points Alignment gap < 1 points Leader on environment, but not an Overall Leader Overall Leader Research Report sustainability matters 214

19 Social Performance: A More Exclusive Measure of hip Only 21 out of the 1 companies qualified as on the Social dimension, compared with 34 that qualified as on the Environmental dimension (Chart 17). Almost all of the 21 companies are also Overall ; only one, Nike, is a Leader on the Social dimension but not an Overall Leader. The Social dimension is also where many Overall struggle: 12 Overall are either Promoters or Challengers in Social performance. This is a much greater portion of the Overall Leader group than on either of the other two dimensions. Governance: A Strong Link to Overall hip An examination of scores on the Governance dimension reveals that nearly all of the Overall also scored as on this dimension. The four companies that did not were Accenture, which scored below the mean on real governance performance but above the mean on perceived governance performance; Danone, with real governance performance just below the mean and perceived governance performance above the mean; Ford, which had real governance performance well above the mean, but perceived governance performance slightly below the mean, and Samsung, which scored below the mean on both real and perceived governance performance. Five companies that were not among the Overall emerged as in Governance: American Express, Boeing, HP, Nike, and Zurich (Chart 18). Just as some Overall did not score as on one or more dimensions, two companies scored as on two dimensions but did not achieve an aggregate score high enough to place them among the Overall : HP, which scored as a Leader on Environmental and Governance, and Nike, which scored as a Leader on Social and Governance dimensions. Chart 17 SM Brandlogic Sustainability IQ Matrix 212 on the social dimension Chart 18 SM Brandlogic Sustainability IQ Matrix 212 on the governance dimension Dell Colgate-Palmolive Intel Abbott Labs L'Oréal Soc. SRS IBM SAP BMW 3M Nike Samsung ABB Siemens Deutsche Bank GE Philips (electronics) Volkswagon Pfizer Danone (Dannon) AXA Johnson & Johnson Volkswagon Dell Walt Disney Nokia Cisco GE Nestlé Intel BMW IBM HP Deutsche Abbott Labs Bank ABB Johnson & Johnson Coca-Cola Philips (electronics) Pfizer AEDS John Deere GlaxoSmithKline (Airbus) SAP Microsoft Colgate-Palmolive Siemens Nike 3M Boeing AXA Novo Nordisk Gov. L'Oréal Zurich SRS American Express Soc. SPS Key Social SRS vs. SPS Gap Gov. SPS Key Governance SRS vs. SPS Gap Alignment gap > 2 points Alignment gap 1-2 points Alignment gap < 1 points Leader on social, but not an Overall Leader Overall Leader Alignment gap > 2 points Alignment gap 1-2 points Alignment gap < 1 points Leader on governance, but not an Overall Leader Overall Leader Research Report sustainability matters

20 Perceptual Variance among Respondents in Developed and Newly Developed Markets Perceptions were not constant around the world or among audience segments. When comparing perception scores in developed countries (the United States, United Kingdom, Germany, and Japan) and newly developed countries (China and India), clear differences emerged. When Newly Developed country scores were disregarded, both perception scores and the perceptual mean were considerably lower. The gap across the disaggregated E, S, and G factors was fairly consistent, meaning that the relative rankings did not shift much. However, if the Newly Developed market respondents SPS scores were set aside, the remaining gap between real and perceived performance in Developed markets was much greater than indicated by the aggregated study results. The question remains, why should there be such variation in the perception of the same global companies in different markets? Does it have to do with the mental comparators used in judging a company for instance, local companies in India or China versus global players? Average perceived performance among respondents in developed versus newly developed markets Environmental Developed 34. Newly developed Social Developed 37.5 Newly developed Governance Developed 36.4 Newly developed 59.3 Or does it perhaps reflect a cultural phenomenon, to which other researchers may attest, that in Asia overall respondents are simply less willing to rate companies, products, or people at the lower end of the scale? A Closer Look at Absolute A closer examination of the Overall in the 212 study reveals a select group of Absolute, companies that excelled in both aggregated ESG performance and on E, S, and G dimensions individually (Table 2). These companies fell into just four of the nine Global Industry Classification Standard (GICS) categories covered in the study. Chart 19 Top real performance among Absolute, 212 Using an analytical model developed by management consultancy Framework LLC, 8 the practices of seven Absolute with the highest real performance scores were examined: BMW, Dell, IBM, Intel, Johnson & Johnson, SAP, and Volkswagen (Chart 19). Dell BMW Abbott Labs IBM Intel SAP Johnson & Johnson Volkswagon Table 2 Absolute Information Technology Industrial and Transportation Consumer Discretionary Healthcare (Pharmaceutical) Dell ABB BMW Abbott Labs IBM GE Volkswagen Johnson & Johnson Intel Philips Electronics SAP Siemens 3M SRS 45 Key ABB Siemens 3M GE Philips (electronics) SRS vs. SPS Gap Alignment gap > 2 points Alignment gap 1-2 points Top real performance Other Absolute Alignment gap < 1 points 52 Research Report sustainability matters 214