materiality tool for impactful business projects

Materiality Tool for Impactful Business Projects

May, 2017

Bangkok, Thailand

Agenda

Sustainability Failure RateWhy this matters

IndustriesCompanies

How do they failRoot causesExamples

Mitigation strategies6 capitals modelExamples

Putting it into practiceCase Study

Sustainability Failure Rate

Bain Achieving Breakthrough Results in Sustainability, 2017

2%

…..of Corporate Sustainability efforts achieved or exceeded the expectations that were set….

Agenda


IndustriesCompanies




746.4

593.9

513.1

428.8

415.2

404.3

334.6

330.4

300.3

281.1

271.4

264.8

257.8

245.2

238.8

Apple

Google

Microsoft

Amazon

Facebook

Berkshire Hathaway

Exxon Mobil

Johnson & Johnson

Chase

Alibaba Group

Sustainability Industry

Wells Fargo

General Electric

AT&T

Bank of America

#11 in global ranking

http://dogsofthedow.com/largest-companies-by-market-cap.htm

Why this matters: Industry

Why this matters: Industry

• Assuming the 2% success rate

• Scaling for the total spend

• The total investment with no material benefit is larger than the total market capitalization of General Electric

-265

5.4

-300

-250

-200

-150

-100

-50

0

50

Loss Gain

The reputation of a company has a significant contribution to its market capitalization

Why this matters: Company Value

26%

39%

12%

S&P500 (avg) S&P500 (Large) S&P500 (Small)

http://www.world-economics-journal.com/The%20Impact

http://www.mckinsey.com/business-functions/risk/our-insights/are-you-prepared-for-a-corporate-crisis

Number of media headlines signaling corporate reputation risk is increasing

130

570

1030

1990-99 2000-09 2010-16

Why this matters: Company Reputation Risk

Agenda


IndustriesCompanies




Failure: root causes

http://calleam.com/WTPF/?page_id=2213

Market & Strategy

Analysis

Organizational & Planning

Leadership and Governance

Quality

Risk

Competency

Engagement


Market & Strategy

Analysis



Quality

Risk

Competency

Engagement

1

2



Market & Strategy

Analysis



Quality

Risk

Competency

Engagement

1


Failure: root causes - marketW

HA

Tyo

u d

o

HOW you do it +

+

--

Failure: root causes - marketW

HA

Tyo

u d

o

HOW you do it +

+

--

TobaccoFast Fashion

Modern Forestry

Consulting

Media

http://www.independent.co.uk/news/world/americas/kentucky-coal-museum-harlan-county-solar-panels-install-save-money-renewable-energy-green-fossil-a7676086.html

Failure: root causes - market

Agenda


IndustriesCompanies




Mitigation Strategies


Market & Strategy

Analysis



Quality

Risk

Competency

Engagement

2


Understand

What kind of company are you?(1.0 vs 2.0 vs 3.0)


3.02.0

Company focuses on using their products and processes to mitigate impacton society

Company efforts on the benefits of sustainability to increase efficiencyand decreaserisk

1.0

Company efforts largely focused on marketing

Firm typologies:


Understand


Define

What kind of company do you

want to be


Understand


Map

Map your stakeholders

Define


want to be


http://www.michelin.com/eng/sustainable-development/performance-and-responsibility/Materiality-Analysis

Firm-Level Materiality (Michelin)


Understand


Map


Define


want to be

Develop

Create your sustainability programme


Understand


Map


Create

Develop impactful

sustainability work

Define


want to be

Develop

Create your sustainability programme



Clear commitments with quantitative

targets

Leadership Engagement

Business case for change

Process and incentive changes

Key success factors

Mitigation Strategies - Reminder


2%

…..of Corporate Sustainability efforts achieved or exceeded the expectations that were set….



62%

…..of respondents cited public reputation as the primary business rationale for sustainability programs—nice to have, but not essential to the business


not Material=“…not essential to the business…”


SEC Staff Accounting Bulletin No. 99: Materiality

Definition: “A matter is material if it is substantially likely that the information will affect decisions of a reasonable person”

Agenda


IndustriesCompanies




6 Capitals Tool

Accounting Financial

6 Capitals Tool

Accounting

Sustainability

Labor

Financial

Financial Natural Capitol

Local Community

https://www.greenbiz.com/blog/2014/01/28/materiality-drives-sustainability-reporting

6 Capitals Tool

• In business using different screening tools can lead to richer analysis and results

http://www.accountingtools.com/questions-and-answers/types-of-financial-analysis.html

Horizontal analysis

Vertical analysis

Short term analysis

Multi-company comparison

Industry comparison

6 Capitals Tool

• Different tools to measure sustainability project materiality

o ESG: Environment, Social and Governance

o GRI: Global Reporting Initiative

o 6 Capitals

6 Capitals Tool

Financial Capital Human Capital

Intellectual Capital Natural Capital

Social CapitalManufactured

Capital

6 Capitals Tool

https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2014/CorpFin/6-types-of-Capital.jsp

Type Example

Financial Capital Pool of financial assets available

Manufactured CapitalThese assets include physical distribution networks, products and

services, and how these goods and services are delivered to customers

Intellectual Capital Intangible assets, such as trademarks, patents, and brand equity

Human Capital Costs of employee turnover, retraining, and on-boarding new employees

Social Capital Productive relationships with external stakeholders

Natural CapitalEnvironmentally friendly buildings, alternative energy facilities, and the

integration of such practices into organizational supply chains

GOOD FOR:

6 Capitals Tool

• Evaluation of projects

• Evaluation of investments

• Evaluation of programmes

NOT GOOD FOR:

• Full-firm sustainability assessments

• Stakeholder impact evaluation

6 Capitals Tool

Note:• In addition to the 6 Capitals tool, users are advised to

employ the financial measurements most commonly used in their company

• For the purposes of the class – we are going to simplify and just use the 6 Capitals tool without financial measurements

Case Study: H&M

Materiality Assessment: Conscious Collection

Case Study: H&M


Programme:

• H&M collects used garments at its stores and uses the resulting material to create the next generation of clothing in their “conscious collection”

• €0.02 per kilo of donated clothing is donated to local charities

Case Study: H&M


Financial Materiality Will the sales of the Conscious Collection clothing have a net positive effect on the bottom line?

Factors:• Hurdle Rate• WACC• Risk / Yield curve• Financing Mix• etc

Case Study: H&M


Sustainable Materiality Will the sales of the Conscious Collection clothing have a net positive effect on the bottom line?

Factors:• Financial Capital• Manufactured Capital• Intellectual Capital• Human Capital• Social Capital• Natural Capital

Case Study: H&M

Recycle: As of Feb 2017, 23,072 tons of clothing collected.

Donation: As of Feb 2017, €833.062 has been donated to local charity.


Case Study: H&M

Type ReminderMaterial

Yes No

Financial Capital financial assets

Manufactured Capital physical distribution

Intellectual Capital trademarks, patents

Human Capital employee turnover

Social and Relationship Capital external stakeholders

Natural Capitalenvironmentally

friendly

Case Study: H&M




Case Study: H&M


Materiality: Current technology = 276 years to use all of this this material


Materiality: This is 0.00353%of annual sales


Case Study: H&M


Yes No







friendly

Case Study: H&M

“Sin” Example

Hidden trade-offs narrow set of attributes eg recycled paper

Lack of prooflack of tangible evidence eg % of post consumer

waste

Vague claims eg all natural

Irrelevant claims Ex: CFC free products

The lesser of two evils organic cigarettes

Outright lies false claims, eg energy rating

6 “Sins” of Greenwashing

http://sinsofgreenwashing.com/index6b90.pdf

Case Study: H&M

6 Capitals Tool - Practice

Materiality Assessment: Nestlé

Nestlé pledged to reduce water withdrawals per ton of product by 35% in 2020, compared with 2005 levels

http://www.nestle.com/csv/water/water-efficiency



Yes No







friendly


Materiality Assessment: Nestlé

Nestlé pledged to reduce water withdrawals per ton of product by 35% in 2020, compared with 2005 levels

Results (2016):• €29.53m annual savings (0.13% of COGS vs 0.05% COGS investment)

• 1500 Olympic-sized swimming pools of water per year

http://www.nestle.com/csv/water/water-efficiencyhttp://www.nestle.com/asset-library/documents/library/documents/half_yearly_reports/2016-half-yearly-report-en.pdf


Materiality Assessment: Walmart

Walmart committed to doubling the fuel efficiency of its vehicle fleet. $1 billion in annual savings and significant reduction in greenhouse gas emissions



Yes No







friendly


Materiality Assessment: Walmart

Walmart committed to doubling the fuel efficiency of its vehicle fleet. $1 billion in annual savings and significant reduction in greenhouse gas emissions

Additional Info: • This project was originally presented to “reduce Walmart

greenhouse gas footprint” and failed to secure funding

• Project later reformatted to be more Material to the business, and was funded

Agenda


IndustriesCompanies




CASE STUDY

• Background:• Value Chain – Who cares and why• Supply Chain Sustainability• Special Features• Deep Dive: Child Labor

• The case of Allophone

Value Chain – Who cares and why

Reminder

• Definition “A matter is material if it is substantially likely that the information will affect decisions of a reasonable person”

• Business Materiality = Sustainability Materiality

SEC Staff Accounting Bulletin No. 99: Materiality


Blume & Keim Institutional Investors and Stock Market Liquidity

Retail, 33%

Index Funds, 17%

Institution (ST), 25%

Institution (LT), 25%

75% of US Equities are held by Long Term Investors

25% of US Equities are held

by Short Term Investors


McKinsey and Aspen Institute panel of Long Term investors

Sharp decline in employee

satisfaction

Material change in asset base

Questionable supply chain practice

(human rights or environmental)

35% 39% 63%

Survey of long-term investors responding “most concerned”


Summary:

The majority owners, of the majority of the US equity market indicate that “Questionable supply chain practice” has them Most Concerned


Source: National Bureau of Statistics; Ernst & Young analysis

8%

5%

7%

12%

10%

5%

53%

Services

Tax

Labor

Capital

Raw Materials

Energy

Intermediate Goods

Manufacturing

18%

5%

16%

29%

1%

5%

26%

Services


65%

17%

5%4%

9%

Average Corporate Cost(S&P500)

Cost of Goods Sold SG&A

Interest & Taxes Depreciation and Other

Operating income

http://www.businessinsider.com/breakdown-of-sp-500-costs-since-1994-2014-3?IR=T

• On average - COGS represents the largest portion of retail prices and corporate cost structure

• In other words – the company supply chain

CASE STUDY



Supply Chain Sustainability

Sustainability

Social

Environmental

Community

Financial

Company Employees1

2 Supply Chain Partners A Child Labor

B Fair Wage

C Working Hours

D Benefits

E Association Rights

F EHS

F Forced Labor

Supply Chain Sustainability

Conduct audits in relevant factories

Training to prevent future

recurrence

Close open issues found in

the audit

Identify

CASE STUDY



Special Features

UNIQUE FEATURESSupply Chain Sustainability has a number of unique features that differentiate it from traditional Supply Chain Management

Emotional Content

Observers have preexisting views

01

Transmitability

SCS issues can transmit risk to other parts of the supply chain or Company

02

Complexity

Underlying issues can be far more complex than traditional business issues

03

Special Features

Standard Risk model

• Risk = Magnitude x Probability

• Translation: How big a problem is this x what is the likelihood of it happening?

• Example: • What happens if my company burns down?

• Who is effected?

• How can we prevent it?

https://en.wikipedia.org/wiki/Risk_assessment

Sustainability Risk model

• Risk = Hazard + Outrage

• Translation: How big a problem is this x what is the likelihood of it happening x what is the public perception?

• Example:• What happens if my product poisons someone's family

pet?

Peter M. Sandman: Outrage Management Index

Special Features

Sustainability Risk model

• Risk = Hazard + Outrage

• Translation: How big a problem is this x what is the likelihood of it happening x what is the public perception?

• Example:• What happens if my product poisons someone's family

pet?

• What happens if my product poisons an investment banker?

Peter M. Sandman: Outrage Management Index

Special Features


Emotional Content


01

Transmitability


02

Complexity


03

Special Features

1%

Special Features

“ 5%? That’s not so bad….”

https://upload.wikimedia.org/wikipedia/commons/6/65/Fredmeyer.jpg

https://upload.wikimedia.org/wikipedia/commons/6/65/Fredmeyer.jpg

“…mostly poison free…”

http://www.couponclippingcook.com/wp-content/uploads/2011/07/3-small-candies-in-bowls.jpg

Your Company

..... ..... .....Tier 2

..... ..... .....Tier 3

..... ..... .....Tier 4

..... ..... .....Tier 1

Customer Customer Customer

Commodity A Commodity B Commodity C

Traditional View

Q: Is this realistic?

A: Rartely

Q: Is this realistic?

A: Rarely

Realistic View

Your Company

Troubled Supplier

Your Company

Realistic View

Your Company

Troubled Supplier

Realistic View

Troubled Supplier

Your Company

Realistic View

Supply chain context


Emotional Content


01

Transmitability


02

Complexity


03

Special Features

Special Features

Sustainability

Social

Environmental

Community

Financial

Company Employees1

2 Supply Chain Partners

B Fair Wage

C Working Hours

D Benefits

E Association Rights

F EHS

F Forced Labor

Child LaborA

http://www.movestheneedle.com/wp-content/uploads/2014/08/Lemonade-Stand.jpg

http://img2.timeinc.net/people/i/2015/news/150907/harry-potter-01-1024.jpg

https://s3-us-west-1.amazonaws.com/labs.theguardian.com/unicef-child-labour/imgtest/00173185.jpg

CASE STUDY



15 18

Child Juvenile Adult

0

http://www.ilo.org/global/about-the-ilo/media-centre/issue-briefs/WCMS_206127/lang--en/index.htm

Generally accepted definition:

Topic Deep Dive: Child labor


https://en.wikipedia.org/wiki/East_Asian_age_reckoning

Country Age at birth Child Age Changes

Europe, UK, USA, Australia

0 Annually on date of birth

Cambodia 1 Sometime in the month of January

China 1 (depending on Province) February 4th or 5th

Korea 1 Beginning of the year

Mongolia 1Girls: number of full moons since conceptionBoys: number of new moons since birth

Vietnam 1 Early February


64

42

29

1

Agriculture

Manufacturing

Mining

Other

https://www.dol.gov/ilab/reports/child-labor/list-of-goods/

number of sub-sectors

In total there are 136 High Risk sectors

http://www.ilo.org/global/topics/child-labour/lang--en/index.htm

78.0

59.0

13.09.2

Asia Pacific Sub-Saharan Africa Latin America Middle East & N Africa

employment (mils)


Child Labor on the decline (Source: International Labor Organization)http://singularityhub.com/2016/06/27/why-the-world-is-better-than-you-think-in-10-powerful-charts/


246

222215

168

134

107

2000 2004 2008 2012 2016 2020 (proj)

Total employment (mils)

-40%

-25%

Girls

Boys

Since 2000

Despite the obvious risk, most social compliance professionals in the manufacturing sector rate the risk of Child Labor in China as “low”

Why?



94.00%

75.00%

35.00%

20.00%

2.00%0.05% 0.03%

Working Hours Wages Worker Safety Discrimination Juvenile Labor Forced Labor Child Labor

% of social audits with finding

Age 0

Perception by media & public

View of subject matter experts

15 18

Child Juvenile Adult


CL example

Perceived Labor Risk

Actual Labor Risk

http://seeingredinchina.com/2011/04/27/how-poor-are-chinese-farmers/

5,919

19,500

Rural Urban

Average Annual Wage(renminbi)

http://economix.blogs.nytimes.com/2012/02/24/the-ieconomy-how-much-do-foxconn-workers-make/?_r=0//

3.2x


Simple, fast process:

1) Get a fake ID2) Apply at a high turnover factory3) Build your work experience4) Get a new job in 18 - 24 months


http://www.globaltimes.cn/Portals/0/attachment/2011/dff54b7e-bb85-4111-8512-38c74b8061c3.jpeg

http://cache.boston.com/universal/site_graphics/blogs/bigpicture/recess_03_18/r14_18219891.jpg

http://static01.nyt.com/images/2012/01/22/business/apple/appple-articleLarge.jpg

http://cdn1.i-scmp.com/sites/default/files/styles/980x551/public/images/methode/2016/03/28/38bb97d0-f4ae-11e5-91e4-cb0759506578_1280x720.jpg?itok=jEtObqSI

https://tailgrab.org/u/2009/03/edward-burtynsky-china-manufacturing.jpg?1754ad

CASE STUDY



One of your classmates, Sam Li, has just landed a great job at the new, cool, startup allophone.

As we all know, allophone are coming up with the next best handheld device…..

http://www.digitaltrends.com/mobile/polytron-unveils-clear-cell-phone/

…..the Air. A transparent phone

The microlithography patent for the technology

to make the Air is owned by allophone.

MegaCom have been contracted to assemble the device

Only MegaCom, the worlds largest phone

manufacturer, can make the Air at the required

quantity and shipping dates

MegaCom Factory, Shanghai

Two days before the launch of the Air your

friend Sam calls you with a problem

has agreed to carry the phone in Thailand only after a social compliance audit of MegaCom, Shanghai

The audit had some disturbing findings

The MegaCom, Shanghai audit found that 12 out of the 13,000 employees at the factory were found to be underage.

The 12 employees were all 15 years old

Due to your experience you have been called in to advise Allophone and MegaCom on strategy

They are considering the following strategic options:

Options Under Consideration

Option Detail Negatives

Delay the launch

Continue with MegaCom after they fix the situation

-Market share loss-Time loss-Increased costs

Admit faultDe-source MegaCom and find another, more socially compliant, factory

-Technology “lock in”

Ignore the press

Look for other phone carrier in Thailand. Wait for the media storm to pass

Does allophone have the reputation assets to spend?

Questions

What is your preferred option?

Why?

Is the Child Labor content of the phone Materialto your decision?

MATERIAL41,653,137 kg

23072 tons23.07 thousands (tons)

12 years per ton of material276.86 years to use all material

CHARITY 223,000,000,000 SEK in 2015 sales

€ 23,588,198,313.53 2015 in euro sales€ 833,062.00 charity

0.00353% % of sales

http://hm.charitystar.com/en/home/

https://qz.com/662031/is-hm-misleading-customers-with-all-its-talk-of-sustainability/http://www.rapidtables.com/convert/weight/kg-to-ton.htmhttp://sustainability.hm.com/content/dam/hm/about/documents/masterlanguage/CSR/2015%20Sustainability%20report/HM_SustainabilityReport_2015_final_com_5.pdf

H&M Calculations