The sustainable future: Promoting growth through sustainability

The sustainable future: Promoting growth through sustainability

A research report sponsored by Enel

February 15, 2010

Aviva Freudmann

Research Director

Continental Europe, Middle East and Africa

Economist Intelligence Unit

2

Objectives of the research

• Last year’s report, “Managing for Sustainability”, found that sustainability is moving into the business mainstream

• This study broadens the inquiry to Environmental, Social and Governance (ESG) sustainability …

• … and compares developing and developed regions in terms of commitment to sustainability

• This report also considers the relationship between commitment to sustainability and financial performance…

• …and shows how companies manage and measure performance on sustainability

• Sustainability is defined as “operating in a way that ensures long-term viability”

About the research

The research had three main components:

Desk research

An online survey of 284 executives conducted in December 2010 and January 2011

• High level: Over 50% are CEOs, presidents and managing directors• Strategic thinkers: Around 74% are responsible for strategy and business development• Global: All regions of the world represented• Business cross-section: All major industries represented• Both rich and poor: More than half (53%) are based in developing countries• Both large and small: 43% represent large companies (more than US$500m in annual revenue)

Nine in-depth interviews with senior executives and industry experts• Campbell Soup (US)• Global Reporting Initiative (Netherlands)• INSEAD (France)• Impahla Clothing (South Africa)• KPMG (Russia)• Novo Nordisk (Denmark)• SLN Tekstil (Turkey)• Solvay (Belgium)• Vale (Brazil)

Key findings

• Corporate focus on sustainability is spreading from developed to developing countries

• Customers are the most influential drivers of companies’ commitment to sustainability goals and practices

• Short-term financial pressures are the main obstacle to a corporate focus on sustainability practices

• Sustainability reporting is not widespread—but is growing fast, particularly in emerging markets

• Senior executives are divided on the benefits of integrated (financial and sustainability) reporting

• Companies are inconsistent about integrating sustainability considerations into risk management

• The relationship between ESG sustainability practices and long-term financial results is becoming clearer

Key finding 1: Sustainability’s growth path

A sharpening focus on sustainability worldwide…

• Globally, 57% of respondents say sustainability has been important for their firms over the past three years…

… while 78% say sustainability practices will be important for their companies in the next three years.

n = 281

78 %

n = 281

Key finding 1: Sustainability’s growth path

… with developing countries showing fastest growth in awarenessHow important has ESG sustainability been to your company in the past three years?

How important will ESG sustainability be to your company in the next three years?

n = 151

26 %

n = 131

22 %

n = 148

n = 131

Emerging markets: Awareness grows over time from 60% to 85%

Developed markets: Awareness grows over time from 53% to 70%

One driver of this growth: Suppliers in poor countries see ESG as a bridge to better ties with clients, investors in rich countries

Example: Puma’s supply chain

Key finding 1: Sustainability’s growth path

Sustainability’s growth path in emerging markets

Voices in favour…

• 54 % of executives say customers have the strongest influence on their ESG policies—more than any other stakeholder

• Business customers are more likely than individual consumers to exert influence

• The influence of regulators and investors is rising, interviewees say

Key finding 2: Agents of change

n = 270

… and voices opposed

• 44% of executives say urgent, immediate financial goals block a focus on sustainability

• Only 14% of managers see a link between sustainability and short-term profit, even though some ESG initiatives pay off in under a year

Key finding 3: Internal barriers

“The biggest obstacle is market short-termism. Executives are still committed to showing their results on a quarterly basis.”

Ernst Ligteringen, CEO, Global Reporting Initiative

n = 284

Keeping quiet…

• Only 18% of firms surveyed publish ESG targets and performance yearly

• Fully 40% have no plans to publish their sustainability practices and goals

Key finding 4: Telling the world

How, if at all, does your company report its performance in ESG sustainability? Select all that apply.

40 %

11 %

19 %

11 %

7 %

18 %

0 % 10 % 20 % 30 % 40 % 50 %

Publish ESG at least once a year

Publish ESG on an ad hoc basis

Publish an integrated report regularly

Plan to publish in the next 2 years

Separate commnication strategy for ESG

No plans to publish

n = 284

Separate communication strategy for ESG

… but a bit less quiet in developing countries

Key finding 4: Telling the world

How, if at all, does your company report its performance in ESG sustainability? Select all that apply.

Do not currently publish ESG

• In developing countries, 45% of those who do not currently publish say they plan to do so in the next two years, versus 19% in developed countries

n = 151n = 132

• In general, large companies are more likely to publish integrated reports than small ones

• But even in large firms, integrated reporting has yet to catch on. In large firms, 35% report ESG information annually, yet only 18% publish an integrated report

• Some interviewees argue that targeting information to specific groups is more effective than creating omnibus, integrated reports

Key finding 5: Integrated financial/ESG reporting

How, if at all, does your company report its performance in ESG sustainability? Select all that apply.

n = 88

• Only 22% say sustainability is a fundamental part of their risk management programmes; 35% take an ad hoc approach

• While the focus on sustainability is growing, just 22% of respondents expect to include it in their risk management in future

Key finding 6: Sustainability and risk management

n = 282

An occasional appearance

Best practice example:

• Campbell Soup: Using ESG thinking to manage global risks

• 76% of executives agree that sustainability is a pre-requisite for long-term growth

• However, only 14% see a strong link between their company’s short term financial performance and its commitment to ESG

• These findings suggest that executives see ESG as a long term play, and therefore sometimes fail to grasp short-term opportunities of sustainability

• Some companies report short-term payoffs from sustainability oriented practicesExample: Novo Nordisk

Key finding 7: Sustainability and the bottom line

To what extent do you agree that ESG sustainability strategy is a pre-requisite for your company’s long-term

growth?

n = 248

Key finding 7: Sustainability and the bottom line

Companies have varied motives for focusing on sustainability:

• Doing the ‘right thing’ ethically • Ensuring long-term profitability• Complying with laws

“Interest in sustainability policies is stronger among companies with a long-term investment horizon, for example in mining and energy.”

Ernst Ligteringen, CEO, Global Reporting Initiative

Financial considerations are not the only ones

Conclusions

• Companies worldwide increasingly focus on ESG sustainability

• The link between ESG and long-term corporate growth is becoming clearer to executives

• Developing countries are overtaking developed ones in their focus on ESG

• There is room for improvement in many areas, including reporting ESG goals and results

• Some companies find profit opportunities in sustainability even in the short term

• There are pros and cons to integrating financial and ESG sustainability reporting

“Companies that are going to survive will have to work in a sustainable way.”

Vânia Somavilla, director of environment and sustainable development, Vale