Sustainability Pathways to Resilient, Profitable Companies

Impact Hub, NYC November 23, 2015

Presented By: William G. Russell, Principal Transitioning to Green, LLC

Transitioning to Green, LLC Your connection between sustainability and success.

We assist every organization we partner with to…

• Align corporate strategy and operations with financial resources, risks and profitability. – Adapting your Purpose for Prosperity.

• Responsibly manage supply chains, material resources, facilities and products.

– Respecting natural systems.

• Engage employee passions for creativity, innovation and inspired performance.

– Nurturing your people to thrive.

Introductions

Who’s in the Room?

Brief Introductions

• Name: ?

• Where from: ?

• Working: ? School: ?

• Industry or Company?

• Any expectations about this event?

Presentation Overview

Sustainability Context and Current Reality

Short Term Planning for Profitable Fragile Companies Longer Term Planning for Prosperous Resilient Companies Discussion

"The future is not some place we are going to but one we are creating. The paths are not to be found, but made, and the activity of making them changes both the maker and the destination." John Schaar, Professor Emeritus, UC Santa Cruz

Sustainability Context and Current Reality

Systems thinking

Core Sustainability Concepts

Intergenerational responsibility

Socio-economic justice

Enough … … for all … … forever.

Nested Interdependencies

Sustainability Context

Business Impacts

The Nests

Sustainability Context

Boomerang Impacts

Sustainability Context

Global Consumption is not Sustainable

www.footprintnetwork.org/en/index.php/GFN/page/world_footprint/

No throwing away. Where do wasted materials go?

• 200 billion pounds of plastic consumed each

year.

• 10% end up in the Oceans.

• Plastics break down, but remaining a polymer.

• Plastics absorb other hazardous chemicals and

both enter into our food chain.

Humanity’s unsustainable environmental footprint

http://phys.org/news/2014-06-humanity-environmental-footprint-sustainable.html

Hoekstra and Wiedmann

Exceeding the maximum sustainable footprint?

Global Risk Interconnections

World Economic Forum (WEF), “Global Risks 2015,” January 2015.

Precautionary Principle

“The precautionary principle or precautionary approach states that if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is harmful, the burden of proof that it is not harmful falls on those taking an action.”

http://en.wikipedia.org/wiki/Precautionary_principle

17

Short Term Planning for Profitable Fragile Companies

Company Sustainability

TRIPLE BOTTOM LINE

Environment Planet /

ESG

Environmental

Company Sustainability

ASSET MANAGEMENT

Natural Capital

Company Sustainability

Financial Quantification for Sustainable Planning

• Risks (Liabilities) and Opportunities (Benefits) to business

• Tangible

• Direct and indirect costs or revenues

• Low probability but high risk/returns

• Intangible (Brand risk?, Long term risks? Equity risks?)

• Externalities (Social cost shifting?, Supply chain risks?, Societal benefits?)

• Sustainability cost approaches and boundaries

• Direct costs and benefits

• Activity-Based Costing (ABC)

• Full Cost Analysis (FCA)

• Life Cycle Costs (LCC)

• Value Chain and Global Economy Implications

Financial Quantification for Sustainable Planning

Value Driver Model

Principles of Responsible Investment (PRI) and UN Global Compact, 2013.

CEOs Need A Business Case

The UN Global Compact-Accenture CEO Study on Sustainability 2013. Survey of 1,000 global CEOs, from 27 industries across 103 countries.

Have A Business Case?

David Kiron, Nina Kruschwitz, Holger Rubel, Martin Reeves and Sonja-Katrin Fuisz-Kehrbach, “Sustainability’s Next Frontier,” MIT Sloan Review, December 2013.

Drivers of Sustainability 2014

“Corporate Social Responsibility: Beyond Financials,” Grant Thornton, August 2014.

CFOs: Sustainability Is Linked To Financial Performance

Deloitte, “Sustainability: CFOs Are Coming to the Table,” December 2012.

Barriers To CFO Support

From a slide used by Valerie Chort, Partner at Deloitte, November 2013.

Profitability

Modeling

Profit could

drop by 16-36%

Profit could

increase by 51-81%

Revenue

PROFIT

4.Reduced materials

1. Increased revenue

2. Reduced energy

6.Reduced turnover

5. Increased productivity

7.R

educe

d r

even

ue

and

incr

ease

d e

xpen

ses

3. Reduced waste

Opportunities Risks Income Statement

10%

9%

50+%

25%

2%

20%

+51 to

+81%

-16 to

-36% E

xpen

ses

SUSTAINABILITY CAPITAL

RESERVE

Profitability Model

More revenue from a more sustainable brand 5%

New revenue from services and leasing

New revenue from green products 2%

2%

9%

Increased Revenue

+3.5%

in 5 yrs +12%

in 4 yrs

20-40%

20-80%

Savings on energy used for lighting

Revenue from selling excess energy back to the grid

Factor four (50+%) savings

Savings on energy from renewable energy substitutions

Savings on energy used for pumps and motors

Savings on energy used for IT

Savings on energy used for heating and cooling

Savings on energy used in new green buildings

Savings on energy from employee actions / behaviors

Savings on energy used in transportation

Revenue selling carbon credits

Reduced Energy Expenses

90%

50%

100%

Material Costs for Manufacturers

57%

Materials

Costs

13%

Other

5%

Depreciation,

leasing, rents

28%

Personnel

IMU Augsberg, “Flow Management for Manufacturing Companies,” 2003.

Waste Volume

Paul Hawken, Amory Lovins, Hunter Lovins, Natural Capitalism, 1999.

Materials

and Water

Waste

Product

93%

7%

Company

Waste Value

Waste

Product

30%

70%

Materials

and Water Company

“Environmental Management Accounting Procedures and Principles,”

United Nations Division for Sustainable Development, 2001.

Cost of materials purchased

but later wasted

Cost of waste treatment

and disposal

Cost of waste prevention and

environmental management

Cost of processing

materials before they

are wasted

Materials

and Water

Waste

Product

Company

Full Cost of Waste

Based on “Environmental Management Accounting Procedures and Principles,”

United Nations Division for Sustainable Development, 2001.

Recycle and reuse onsite waste

Product take-back / cradle-to-cradle / closed loop

Materials

and Water

Waste

Product

Company

Reduced Materials Expenses

• Companies with engaged employees

grew profits 3 X faster than competitors (Corporate Leadership Council)

• Highly engaged organizations have 87% less staff

turnover and 20% better performance than

average (Corporate Leadership Council)

• Operating income of companies with engaged

employees improved by 19% in one year vs. a

decline of 33% for companies with low levels of

employee engagement (Global survey by Tower Perrins-ISR,

involving an 664,000 employees in 50 companies)

• 59% of engaged employees say their job brings out

their most creative ideas vs. 3% for disengaged

employees

Engagement Drives Results

WBCSD, “People Matter – Engage: Inspiring Employees about Sustainability,” August 2010.

Increased employee productivity / innovation 2%

Less absenteeism

Reduced business travel

Telecommuting

Green buildings

Improved collaboration

Higher engagement

Increased Productivity

More time on the job

More productive while on the job

Costs 2.6% to 9% of payroll

Usually the first expense to be cut

40% could; 2% do; 80% want to

7% to15% productivity boost

2% to 10% productivity boot

10% to 200% productivity boost

25%

Percentage of departing personnel who would not leave

because they are attracted to the company's sustainability

reputation 25%

Equivalent percentage of an average salary needed to

cover direct and indirect costs incurred

• before the employee leaves,

• while the job is vacant,

• during the hiring and on-boarding process, and

• during the formal and informal training period

40%

Percentage of employees who voluntarily leave each year 12%

Reduced employee turnover expenses

Reduced Turnover

7 Climate Change Risks

1. Reputation with Customers: Backlash from consumers if do not

react / help; lost revenue if rivals develop climate-friendly products

and technologies first

2. Regulatory “Price on Carbon”: Carbon caps or taxes, as

recommended by economists; supply chain accountability

3. Threat to Market Value: Viewed as “material risk” by investors

and banks; difficult to access capital

4. Loss of Top Talent: Best people walk way

5. Physical Damage: To company’s assets from severe

weather events – or to suppliers’, or to customers’

6. Access to markets: Complex, different regulations

7. Litigation: Lawsuits for GHG pollution

Jonathan Lash and Fred Wellington, “Competitive Advantage on a Warming Planet,” HBR, March 2007.

Climate Change Risks

“Adapting for a Green Economy,” UN Global Compact, UN Environmental Programme, Oxfam, and World Resources Institute, 2010.

Revenue at risk

Risk from poor reputation on energy and carbon

management

Risk from poor reputation on water management

Risk from poor reputation on materials and waste

management

Risk from poor reputations of suppliers or customers

Risk from poor reputation on eco-system damages

Risk from less competitive prices

Risk from sudden disruptions in the value chain

5%

Potential Revenue Erosion % Rev.

at Risk

% Probability

within 5 yrs

5%

5%

2%

5%

5%

10%

25%

25%

20%

5%

10%

1%

10%

5%

Risks To Revenue

Commodity Prices Rising

Text

Slide used by Stefan Heck and Matt Rogers in a Corporate Eco Forum webinar, “Capturing the Resource Opportunity of the Century,” May 2014.

Potential increase in expenses

Risk of higher cost of energy

Risk of a price on carbon ($20/T x 300T/$1M Rev.)

Risk of higher cost of waste

Risk of higher cost of water and materials

Risk of higher cost of capital (Debt = 30% of Rev.)

Risk of higher employee voluntary turnover

Risk of lower employee productivity

10%

Potential Escalating Expenses %

Potential

Impact

% Probability

within 5 yrs

100%

5%

5%

0.60%

5%

75%

25%

70%

75%

75%

25%

11% to 31%

1% 10%

Impact on profit from revenue and expense risks -16% to -36%

Risk of Escalating Expenses

Revenue

PROFIT

4.Reduced materials

1. Increased revenue

2. Reduced energy

6.Reduced turnover

5. Increased productivity

7.R

educe

d r

even

ue

and

incr

ease

d e

xpen

ses

3. Reduced waste

Opportunities Risks Income Statement

10%

9%

50+%

25%

2%

20%

+51 to

+81%

-16 to

-36% E

xpen

ses

SUSTAINABILITY CAPITAL

RESERVE

Profitability Model Examples

Textile Rental Co.

47

Textile Rental Co.

48

Trucking and Warehousing Co.

49

Trucking and Warehousing Co.

50

52

Longer Term Planning for Prosperous Resilient Companies

Reporting and Disclosure Trends

“Let’s Talk: Sustainability,” EY, January 2014.

1. Disclose any conflict minerals in supply chain Must meet Dodd-Frank Act Section 1502’s SEC disclosure filing requirements by

June 2014; report on source of origin for tin, tantalum, tungsten, and gold (3TG)

in supply chain; are in almost all electronics.

2. Report on material non-financials / intangibles Follow GRI G4, IIRC, SASB, and INCR SSE

guidelines

3. Report on ESG in supply chains Especially social compliance in retail supply chains

4. ESG disclosures for listing on stock exchanges Led by INCR SSE with WFE and SASB with U.S. SEC; NASDAQ QMX and

NYSE are collaborating on these efforts; voluntary, so far

SASB Developing industry-specific standards to measure and disclose

ESG performance on the top 10 material sustainability issues for

89 industries in 10 sectors. for mandatory Form 10-K SEC filings

Industry Sectors Release

Health Care 07/2013

Financials O2/2014

Technology & Communications O4/2014

Non-Renewable Resources 06/2014

Transportation 09/2014

Services 12/2014

Resource Transformation O3/2015

Consumption I 06/2015

Consumption II 09/2015

Renewable Resources & Alternative Energy 12/2015

Infrastructure 03/2016

Materiality

Resilience in a Hotter World

• The Challenge – Global climate change and increasing constraints on resources will require

companies to fundamentally rethink their strategies, operations, and business philosophy in order to create new value and thrive.

• The Strategy – Firms must embrace a new vision by fighting short-termism, basing goals on

science, and pursuing radical innovation; they must place a value on natural capital (such as clean air and water) and redefine how they measure ROI; and they must engage in new forms of collaboration with governments, NGOs, peers and competitors, and customers.

• The Results – These strategies will create more resilient companies that can manage,

and profit from, extreme volatility. They will also help companies address society’s largest challenges and create a more prosperous world for all.

By Andrew Winston. Harvard Business Review, 2014

Pivot strategy: Embrace a New Framework

Indirect Method (Trade-off models)

Customer

Context

POS Materials

In-home

Ethnography

Home Packaging

Lifecycle

Visual

Equities

Shapes

Icons

Colors

Financial Quantification for Sustainable Packaging

Direct Method (Probabilities)

Financial Quantification for Sustainable Packaging

Example: Johnson & Johnson

Financial Quantification for Sustainable Packaging

Externality Values Include Ecosystem Services

Robert Costanza et al., “Changes in the global value of ecosystem services,” Global Environmental Change 26, May 2014.

Estimated global value of 17 ecosystem services,

1997 : $33T, annually, or $46T in 2007 $USD

(1997global GDP was $46T/yr in 2007 $USD)

2011: $125T (2011 global GDP was $75T/yr in 2007 $USD)

Between 1997 and 2011, there was

between $4.3T and $20.2T loss of

ecosystem services per year.

True Earnings (Including Externalities)

“A New Vision of Value: Connecting corporate and societal value creation,” KPMG, 2014..

Caring People - Circular Economy – Resilient Strategies

Ellen MacArthur Foundation, “Towards the Circular Economy, Vol. 1,” November 2012.

New Sustainable Business Models

Under development by the Strongly Sustainable Business Model Group (SSBMG).

See www.ssbmg.com/

Today’s Canvas

Alexander Osterwalder and Yves Pigneau, Business Model Generation, 2010.

Flourishing Business Options

Greener Finance at Corporate & Economy Levels

• Corporation and Communities have no “slack” – Positive cash flow and profits needed before pivoting

• Governments have no “will” – Unrealistic handling of debt; ambiguous missions; burden

shifting to future generations

• Valuing nature and ecosystem services is still a fatal flaw “blind spot” in the economy – Unintended consequences of neglecting short- and long-

term impact of natural systems and human consciousness

&

Discussion?

Thank You.

&

Happy Thanksgiving!

William G. Russell

Principal, Transitioning to Green, LLC

Phone: 646-345-8836

Email: wgrussell@transitioningtogreen.com

Visit our website: www.transitioningtogreen.com