DJSI 2017: Impact Measurement & Valuation Supply Chain Management October 2017

Transcription

1 DJSI 2017: Impact Measurement & Valuation Supply Chain Management October 2017

2 Agenda Impact Measurement & Valuation Rashila Kerai, Senior Sustainability Investing Analyst Supply Chain Management Melissa Spinoso, Sustainability Investing Analyst Q&A 2

3 2017 Methodology Impact Measurement & Valuation Review 3

4 Impact valuation is an emerging field Key concepts Impact: The consequences or resulting effect of company activities and outputs on society at large. Externality: A cost or benefit imposed on a party that did not choose to incur that cost or benefit. Value: The worth of that cost or benefit. Impact Valuation: Measure of the company s externalities on society at large. 4

5 Review of Environmental Externalities 5

6 Review of Social Externalities 6

7 Why does impact valuation matter? Company s perspective Investor s perspective Better insights into the value of one s impacts Improved decision making to minimize negative impacts and maximize positive impacts Deeper integration of sustainability into the long term strategy of the company Improved ability to communicate drivers of value creation Improved understanding of sources of long term value creation: the influence of social and environmental externalities on business value drivers (growth, profitability and risk) Financial and extra-financial information alongside each other Companies competitive advantage 7

8 Impact Valuation: average scores across GICS sectors Source: RobecoSAM Corporate Sustainability Assessment

9 Impact Valuation: performance across regions 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Asia Pacific Emerging Markets Europe North America Global Monetary impact valuation Quantitative or qualitative impact valuation Pilot project Source: RobecoSAM Corporate Sustainability Assessment

10 74% of companies report they conduct impact valuation 21% 2017 Methodology Review 5% 74% Yes In Progress No Source: RobecoSAM Corporate Sustainability Assessment

11 However, only 15% actually measure and value their impacts 15% 2017 Methodology 5% Review 59% 21% Yes, and Yes In progress No Yes, but No Source: RobecoSAM Corporate Sustainability Assessment

12 Impact Measurement & Valuation What we were looking for: Information that is active and current Coverage is broad, not limited to a single product, location, or business unit Some social or environmental externalities have been valued 2017 Methodology Some form of valuation (monetary, qualitative, quantitative) was conducted Review An explanation of the methodology or results of the analysis For companies in the process of developing impact measurement tools, we expected a clear description of the methodology being used or developed, a clear indication that testing has begun and an expected roll-out date of the valuation framework. 12

13 Impact Measurement & Valuation What we accepted include: Application of existing methodologies such as True Value, TIMM, etc. Participation in frameworks like the Natural Capital Protocol or Social Capital Protocol The value of the externalities clearly showed cost/benefit to society and environment and not simply the 2017 Methodology market price or direct financial costs incurred. Externalities were well described Review Positive: quality of life improvements from access to medication, improved social cohesion due to redevelopment of dilapidated buildings, increase in earning potential from skills training, improved ecosystems through restoration and rehabilitation Negative: environmental and health impacts caused by GHG or other air emissions, soil and groundwater pollution from landfilling waste, reduction in wellbeing due to injury or illness, decline in health from overconsumption of products containing sugar 13

14 Impact Valuation: acceptable examples Option 1: Yes, we conduct an environmental and/or a social profit & loss analysis. Company name: Akzo Nobel NV RobecoSAM industry: Chemicals (CHM) The company s response include: - Clear identification of the environmental and social externalities Source: Akzo Nobel NV - Monetization of environmental and social externalities - Clear information on the methodology - Broad coverage Public Link: 0e1ab5244fd095dbeb138ed6f973369e.ssl.cf3.rackcdn.com/akzonobel_3d_profit_and_loss_ accounting.pdf 14

15 Impact Valuation: acceptable examples Option 1: Yes, we conduct an environmental and/or a social profit & loss analysis. Company name: Kering RobecoSAM industry: Textiles and Luxury Goods (TEX) The company s response include: - Clear identification of environmental externalities - Monetization of environmental externalities - Clear information on the methodology - Broad coverage Public Link: Source: Kering 15

16 Impact Valuation: acceptable examples Option 2. We value our environmental and/or social impacts qualitatively or quantitatively, but they are not converted into monetary values. Example Company name: Unilever RobecoSAM industry: Personal Products (COS) The company s response include: Clear identification and qualitative measurement of the company s externalities: Reduce diarrheal and respiratory disease through handwashing Improve access to sanitation Improve oral hygiene - Identification of the beneficiaries of the initiatives - Broad coverage encompassing multiple products and countries Public Link: 16

17 Impact Valuation: acceptable examples Option 3: We are working on it or are pilot testing it. We accepted the company s answer when the following information was provided: - clear description of the methodology being used or developed - clear indication that testing of the methodology has begun - expected roll-out date of the valuation framework 17

18 Impact Measurement & Valuation What we did not accepted include (1/2): Information older than the two most recent fiscal years Information isolated to one example (one country, one product, one business unit) 2017 Methodology Direct Costs/Savings Review Direct savings to the company (medical savings, water savings, energy savings) Direct costs (fees paid for emissions or discharges) Using market price carbon (e.g European Union Emission Trading Scheme ) Environmental clean-up or remediation costs Investments to reduce company s environmental footprint (e.g. avoided/reduced emissions, material/energy efficiency, or CapEx/OpEx to improve environmental performance) Philanthropy donations or contributions 18

19 Impact Measurement & Valuation What we did not accepted include (2/2): Assessments Environmental and/or social impact assessments that are conducted typically for new locations, site expansions, permitting requirements or funding requirements Pure Life Cycle Analysis, Human Rights Assessment, or risk analysis Other Revenues from more sustainable products and services (e.g. recyclable, degradable, reduced raw materials, reduced hazardous substances, increased recycled or renewable content) Economic Value Add or Gross Value Add (e.g. economic benefit from jobs created, paying wages, dividends, taxes, contribution to GDP) Direct beneficiaries or number of people reached 19

20 Valuation Disclosure: This question applies only to companies that provided an acceptable answer to the Impact Valuation question For this question we expected companies to publicly disclose: Information that is current and active Coverage is broad, not limited to a single product, location, or business unit Some externality has been valued Some form of impact valuation (monetary, qualitative, quantitative) was conducted An explanation of the methodology used or results of analysis 20

21 Valuation Disclosure: performance across regions 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Asia Pacific Emerging Markets Europe North America Global Impact Valuation Public Disclosure Source: RobecoSAM Corporate Sustainability Assessment

22 Methodology Development for 2018 What worked: Increased awareness on Impact Valuation among companies participating to the CSA Encourages companies to integrate impact valuation into their operations Recognizes leadership of companies conducting Impact Valuation 2018 developments and improvements: Clarify expectations Improve the question, definition, guidance Provide additional insights on the qualitative or quantitative way to measure externalities 22

23 2017 Methodology Supply Chain Management Review 23

24 Supply Chain Management Financial relevance: Reputational risks, e.g. involvement in a big controversy due to suppliers violations of human rights, labor issues, environmental regulations etc. Operational risks, e.g. supply chain disruptions due to delays, poor production quality etc. Examples of risks: Economic risks, e.g. country risk, business ethics, corruption & bribery Environmental risks, e.g. hazardous substances, water scarcity, energy consumption Social risks, e.g. child labor, working conditions, talent attraction & retention Source: RobecoSAM Corporate Sustainability Assessment

25 Supply Chain Management Why did we update Supply Chain Management questions? Companies have been demonstrating a very good performance over time but there was little differentiation between good performers and sustainability leaders. Therefore, we raised the bar by: Increasing analysis depth (e.g. critical non-tier 1 suppliers, monitoring frequency, separate thresholds for new and existing suppliers) and focusing more on risk identification Going beyond tier-1 suppliers and expanding our scope to critical non-tier 1 suppliers Expecting companies to increase their transparency and report publicly about specific issues Introducing industry-specific issues (e.g. conflict minerals) Source: RobecoSAM Corporate Sustainability Assessment

26 Supply Chain Management - Questions Supplier Code of Conduct Awareness Risk Exposure Risk Management Measures ESG Integration in SCM Strategy Transparency & Reporting Conflict Minerals Source: RobecoSAM Corporate Sustainability Assessment

27 Not Applicable Industries Supply chain management criterion is not applicable to the following industries: Banks Chemicals Diversified consumer services Diversified financial services and capital markets Homebuilding Professional services (some questions) Software IT service and internet software and services Source: RobecoSAM Corporate Sustainability Assessment

28 Average Scores for Criterion Overall Performance Across Sectors Methodology 40 Review Average of Score 2016 Average of Score Source: RobecoSAM Corporate Sustainability Assessment participating companies 28

29 Average Scores for Criterion Overall Performance Across Regions Methodology 50 Review 40 Average of Score 2016 Average of Score AFR APA EUR LAM NAM Source: RobecoSAM Corporate Sustainability Assessment participating companies 29

30 Supplier Code of Conduct What we were looking for: A supplier code of conduct or policy that is publicly available RobecoSAM Expectations: What we accepted Issues that were supported by documentation Company s general code of conduct specifically mentioning that meeting the code/guidelines is a pre-requisite for forming business ties with its suppliers What we didn t accepted Text in sustainability report, annual report or website that refers to how suppliers are expected to act, but it is not part of a formal Police or Suppliers Code of Conduct Company s general code of conduct solely stating that guidelines are also applicable to suppliers Source: RobecoSAM Corporate Sustainability Assessment

31 Awareness Rationale An important first step in supply chain management is to understand supply chain risks and dependencies. Once companies have identified their critical suppliers, they can focus their supply chain monitoring and risk management efforts on suppliers with a high probability of causing an adverse impact RobecoSAM definitions: Critical suppliers : suppliers whose goods or services have a significant impact on the competitive advantage, market success or survival of the company. Reasons can be that these suppliers supply goods or services in high-volumes, that they provide critical components, or that they are not substitutable Critical non-tier 1 suppliers: suppliers that are considered critical (see definition above), and provide their products and services to the supplier at the next level in the chain (tier-2 suppliers and higher) Tier 1 suppliers: suppliers that directly supply goods or services to the company Tier 2 and higher: supplies that provide their products and services to the supplier at the next level in the chain (E.g. Tier- 2 supplies to Tier-1) Source: RobecoSAM Corporate Sustainability Assessment

32 Awareness What we were looking for: Critical suppliers identification RobecoSAM Expectations: Definition of critical suppliers Identification of critical tier 1 and non-tier 1 suppliers Supporting documents Source: RobecoSAM Corporate Sustainability Assessment

33 Awareness Percentage of companies reported supplier categories per sector 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total Tier 1 Critical Tier 1 Critical Non Tier 1 Average for Critical Non Tier 1 Source: RobecoSAM Corporate Sustainability Assessment participating companies 33

34 Risk Exposure What we were looking for: A formalized process in place to identify potential sustainability risks in the supply chain RobecoSAM Expectations: Formal risk identification process Sustainability risk assessment scope and targets Sustainability high-risk definition containing a set of relevant criteria used for the classification, the rationale for such criteria and the risk level identification process Share of high-risk suppliers Supporting documents Source: RobecoSAM Corporate Sustainability Assessment

35 Risk Exposure RobecoSAM definitions: Number of suppliers assessed in the last 3 years: the total number of the suppliers assessed in the last three years (Year 1 + Year 2 + Year 3) Percentage of suppliers assessed in the last 3 years: the number of suppliers assessed in the last three years divided by the total absolute number of suppliers in the current year (as provided in the awareness question) Target: there is no requirement in the way companies should define their targets HOWEVER an explanation on what the target refers to is needed (i.e. number of suppliers, % of suppliers etc.) High-risk supplier: the suppliers that have a high probability of causing an adverse impact on the organization due to social, environmental and/or economic misconduct. Source: RobecoSAM Corporate Sustainability Assessment

36 Risk Management Measures What we were looking for: A systematic approach to monitoring sustainability risks in their supply chain. Also, measures companies have taken in order to manage sustainability risks among their critical suppliers (tier 1 and non-tier 1) and their high sustainability risk suppliers RobecoSAM Expectations: Reporting of the percentage of suppliers assessed Frequency of assessment Scope Percentage assessed annually Percentage assessed at least once every 3 years (percentage of companies assessed every 2 or 3 years - companies assessed annually should not be included in this figure) Corrective action plans for suppliers Supporting documents Source: RobecoSAM Corporate Sustainability Assessment

37 Risk Management Measures Percentage of companies who demonstrated having corrective plans in place: 40% 60% Yes No Source: RobecoSAM Corporate Sustainability Assessment participating companies 37

38 ESG Integration in SCM Strategy What we were looking for: The main priorities of companies general supply chain management strategy as well as information on ESG objectives and how they are connected to the overall strategy. RobecoSAM Expectations: Description of general supply chain strategy and links to ESG objectives e.g. ESG Objectives: increasing sourcing efficiencies, waste reduction, carbon footprint reduction, etc. Integration of ESG factors into supplier selection through minimum quantitative/qualitative threshold i.e. certified management systems in place, requiring to replicate own standards down the supply chain, minimum score at ESG assessment, etc. Percentage weight allocated to ESG factors in supplier selection WE DID NOT ACCEPT: Generic statements such as we have established minimum standards for our suppliers without specifying which, or we expect our suppliers to comply with our code of conduct/relevant regulation, etc. Supporting documents Source: RobecoSAM Corporate Sustainability Assessment

39 Transparency & Reporting What we were looking for: Publicly reporting on aspects regarding supplier risk and performance RobecoSAM Expectations: PART: Supply chain management approach transparency Supply chain spend analysis: full assessment of the supply chain, including information on basic spend analysis information such as number of suppliers, category, spend value and geographical spread Supply chain awareness (identification of critical suppliers): disclosure around the definition and identification of critical tier-1 and non-tier 1 suppliers/ listing 2 or 3 factors considered when a supplier is defined critical Supply chain risk assessment and corrective actions: description of the sustainability assessment process for suppliers AND statement that corrective action plans are in place ESG integration in supply chain management strategy: minimum thresholds set or alignment of overall supply chain management strategy with ESG objectives Source: RobecoSAM Corporate Sustainability Assessment

40 Transparency & Reporting RobecoSAM expectations: PART: Reporting KPIs and targets: KPIs identified KPI values disclosed for at least 3 years Target figure and target year identified Progress on target to be reported publicly KPI and target in the same line to be linked Examples of KPIs: % of assessed suppliers or audited suppliers, KPIs related to the outcome of capacity-building activities, % of suppliers with contract clauses or with ISO14001, % of procurement spent with preferred suppliers, number of suppliers rejected for sustainability reasons, scope 3 emissions, suppliers' water use, % of procurement staffed trained on sustainability aspects, etc. Source: RobecoSAM Corporate Sustainability Assessment

41 Transparency & Reporting Percentage of companies reported: KPIs Targets KPI 0 TARGET 0 KPI 1 TARGET 1 KPI 2 TARGET 2 KPI 3 TARGET 3 0% 10% 20% 30% 40% 50% % 10% 20% 30% 40% 50% 60% 70% 80% Source: RobecoSAM Corporate Sustainability Assessment

42 Conflict Minerals Apply only to ARO, ATX, AUT, CMT, CTR, ELQ, IDD, IEQ, ITC, SEM, THQ Our concept of conflict minerals is in line with that of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: "Companies sourcing or using minerals in their operations are expected to ensure their supply chains are clean and transparent. Illegally exploited minerals include, but are not limited to, gold and those found in electronics equipment such as tin (used in laptops), tantalum (mobile phones, fiber optics) and tungsten (light bulbs)." Relevant regulations: The EU's new Conflict Minerals Regulation Securities and Exchange Commission - Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the use of conflict minerals Source: RobecoSAM Corporate Sustainability Assessment

43 Conflict Minerals Apply only to ARO, ATX, AUT, CMT, CTR, ELQ, IDD, IEQ, ITC, SEM, THQ What we were looking for: A comprehensive strategy in place to avoid contributing to conflict through its purchasing decisions and practices RobecoSAM Expectations: Conflict Minerals Policy that should : Commit to conflict-free sourcing Set clear expectations for suppliers and Commit to ongoing due diligence Risk identification process Risk management to mitigate or remediate risks E.g. supporting third party auditing through membership in CFSI or similar, implementation of capability modules for SORs or upstream suppliers through industry initiatives like CFSI, or third parties, contact SORs directly, visits to one or more SORs Labeling initiatives Source: RobecoSAM Corporate Sustainability Assessment

44 Example I For Supplier Code of Conduct : CECONOMY The company has a supplier code of conduct that is publicly available and covers issues such as environmental standards, human rights and ethics. Further, the company requires all its suppliers and their subcontractors or agents to follow the code. For ESG Integration in SCM Strategy some elements only covered: Cigna Corp - The company publicly reports on its four guiding principles for supply chain management: integrity, customer and marked focus, team collaboration, enterprise thinking. The company publicly reports on its requirements for suppliers in terms of ESG factors, which include human rights, business conduct and environment criteria Source: RobecoSAM Corporate Sustainability Assessment 2017

45 Example II For Transparency & Reporting: Royal Mail PLC The company publicly reports on three supply chain KPIs, including the values of these KPIs for three years, the respective targets, the target years, and the progress toward these targets. Furthermore, the company publicly reports on its supply chain spend analysis, its identification and assessment process of critical risks in the supply chain and how it integrates ethical, social and environmental topics in its suppliers selection and monitoring. Source: RobecoSAM Corporate Sustainability Assessment

46 2017 Methodology Upcoming Webcasts Review 46

47 More Information and Upcoming Webcasts Annual Scoring & Methodology Review Read up on this year s major changes: Webcasts Corporate Governance and Materiality - Thursday, November 9 at 2pm CET Human Capital Development and Operational Eco-Efficiency - Thursday, November 30 at 2pm CET Send us your questions in advance! assessments@robecosam.com 47

48 Questions? Contact us: RobecoSAM CSA Helpline Methodology Visit the CSA website: Review 48

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50 2017 Methodology Q&A Review 50