Role of Corporate Environmental & Social Governance as Drivers to Company Stock Value Growth

1. On Corporate Strategy:
Role of Corporate Environmental & Social Governance
as Drivers to Company Stock Value Growth
Presented at the TNC Board Members Meeting
São Paulo, 05/05/2010
Jose Antonio Chaves
Professor at Fundação Dom Cabral
DBA Candidate at Business School Lausanne
Chair of the Committee of Sustainability and Corporate Responsibility at
The Regional Council of Business Administration, MG, Brazil
I n st i t u t i o n a l S u p p o r t i n g

2. Empirical evidences that ESG policies and strategies
can influence Companies Stock Growth
E1SGI
DJI
2003 2004 2005 2006 2007
D o w J o ne s S us t a i na b i l i t y E ur o p e C o m p o s i t e Ind e x v e r sus D o w J o ne s Ind us t r i a l A ve r a g e Ind e x
S o ur c e : Y a ho o ! F i na nc e

3. Research Main Objective
Level of Corporate Environmental
& Social Governance - ESG
High
S&P 500
Low
Low High
L e v e l o f S t o c k Va l u e G r o w t h

4. Targeted Industries
Selected from Industry 20 th
Largest Listed Companies by
Market Capitalization
First Quartile Companies
Ranked by Last Five-Year
Stock Growth %

5. Iron & Steel Industry
Leaders Stock Price Growth (%)
Gerdau
Posco
Mechel
Simec
S&P 500
So u r c e : F r e e S t o c k C h a r t s . c o m i n t e r a c t i v e p l a t f o r m

6. Metal & Mining Industry
Leaders Stock Price Growth (%)
Vale
Southern
Cameco
Alum China
S&P 500
So u r c e : F r e e S t o c k C h a r t s . c o m i n t e r a c t i v e p l a t f o r m

7. Electric Utilities Industry
Leaders Stock Price Growth (%)
CPFL
Eletricidad
Enersis
Sempra
S&P 500
So u r c e : F r e e S t o c k C h a r t s . c o m i n t e r a c t i v e p l a t f o r m

8. Oil & Gas Integrated Industry
Leaders Stock Price Growth (%)
Petrobras
Hess
Suncor
China P&C
PetroChina
S&P 500
So u r c e : F r e e S t o c k C h a r t s . c o m i n t e r a c t i v e p l a t f o r m

9. Early Findings
From credible ESG Surveys Consolidation

10. Findings from ESG Surveys Consolidation
Some companies does not understand what sustainability is
Making sustainability work is the very challenge
Semiotic communication misleading sustainability undertanding
There is a visible gap between the sustainability strategy (when it exists) and its execution
Managers at all levels don’t know about:
The correlations between sustainability risk and financial performance
How to track sustainability value from where it is created
How it sustainability initiatives are converted into shareholder value
How to measure return on sustainability strategy

11. Early Findings from the Research
Provided by Morphological Analysis
From the internal Perspective
From the external perspective

12. Knowing a Sustainable Company
from Looking Within
Managers at all level consider sustainability initiatives as part of their job;
Corporate strategy includes ESG goals and makes money from that;
Sustainability goals are detailed, quantified and monitored;
Sustainability performance is attached to financial performance;
Managers are rewarded for their sustainability performance;
Changing management terminology: accountability, environmental accounting,
shareholder engagement; water and carbon footprint; etc.;
Company regularly partners with outside stakeholders;
New products originated from environmental and social initiatives.

13. Knowing a Sustainable Company
from the External Perspective
Improve and enhance accountability, transparency and investor trust;
Evolve risk-management to a corporate sustainability-risk perspective;
Develop new sources of competitive advantage in the entire value-chain
by differentiation, from innovating in ESG product and service development;
Assure capital markets prime access by ESG achieving standards;
Outperform shareholder’s ROSS – Return on Sustainability Strategy;
Create visible, measurable, reportable ESG value for all stakeholders;
Measure ESG reputation in terms of cost of capital, exports revenue, etc;
Institutional shareholders are engaged in company’s environment-social governance.

14. Research Perspective:
Sustainability Value -Based Strategy
ESG Strategy
Value-Creation
Financial Goals Measuring Business
Strategy Executive Compensation Strategy
Parameters
Shareholder Engagement
Investor Strategy
Project Cash Flow
Private Equity IPO, M&A Divestiture
Finance Contribution

15. Return on Sustainability Strategy Framework
Sustainabilit y Value-B as ed ROI
Net Profit & Free Cash Valuation
Dividend Flow Multiple
Margin Cost of Capital
Revenue Growth
Improvement Reduction
Risk
New Market Differentiation Operation Cost Reputation Market
Market s Entry Share Growth Price Premium & Productivity Premium Ratings Grade
ESG ESG
Image-Based Public Capex-Opex Knowledge Reputation
Power Pricing Support Modeling Capital Branding
ESG ESG
Ecotech-Based Social-Focused Stakeholder Risk Mapping Accounting
Products Products Engagement & Strategy & Reporting
ESG Value-Chain ESG ESG ESG
Innovation & ESG Risk & Long-Term Performance Leadership
Adaptability Opportunities Strategic View Standards Initiatives
...
Capturing Sustainability Value -Creation Drivers and Levers

16. Corporate Sustainability-Risk Framework

17. Value-Chain Sources of Sustainability Advantages
Support Activities & Knowledge Capital
Company Sustainability BI & analytics platform; Capex-Opex sustainability-based decisions; Corporate
Infrastructure Sustainability Governance Structure
Creating and internalizing a culture for sustainability; Developing capabilities on sustainability-based
Human Capital
management ; Corporate Sustainability Education; Sustainability-oriented Compensation System
Innovation and
Environmental-based design; Clean technologies development; Environmental material specifications
R&D Capital
Leadership Promptness and ability to convert Sustainability Strategy into Shareholders/Stakeholders Value;
Capital Stakeholder-Based Management Approach; Stakeholder Sustainability Education initiatives
C orporat e Sust ain ab ilit y Main st ream
Corporate image Life-cycle process
Responsible suppliers, Distributors & outsourcers
& reputation
Carbon & Water Stimulating less-harmful material safe storage,
Footprint transportation , packaging and waste disposal
Stimulating ethical and anti-corruption competing practices, fraud prevention, striving for
upstream-downstream ESG internationally acceptable standards adoption
Primary
Activities Upstream Inbound Downstream
Logistic & Marketing End-Cycle
Logistic & Logistic &
Supply Chain & Sales Services
Operations Channels

18. Corporate Sustainability Strategy Framework
Be nchmark in g
Financing-Based ESG Risk Assessment Goals Setting
Corporate Sustainability-Risk Strategic Mapping
ESG Legal & Compliance Framework Risk Strategy
Strategy
Project Financing-Based ESG Assessment
Stakeholder-Based Management Action Plan
Investor-Based Management Governance Framework
External Impacts Measuring and Accounting Detailing &
Goals’ Detailing
Métrics
& Metrics
Sustainability Dashboarding
Business
ESG Strategy Perspective
Drivers Implementation
& Monitoring
Sustainability Shareholders
Business
Value-Based Engagement
Stakeholder
Strategy Goals
Perspective
ROI Engagement
Value-Creation
Financial Goals Measuring Business
Strategy Strategy Stakeholders
Executive Compensation Balanced
Parameters Corporate
Finance Sustainability
Engagement
ScoreCard
Finance Goals
Perspective Communication
Framework
Communication
Sustainability
Competitive Investor-Based
Shareholder Reporting
Reporting
Scope Shareholder Engagement Management Goals
Perspective
Investor Strategy
Creating and Internalizing the Culture of Corporate Sustainability

19. Responsible Investment Paradigm
We will incorporate ESG issues into We will be active owners and
investment analysis and decision- incorporate ESG issues into our
making processes ownership policies and practices
We will seek appropriate disclosure on We will promote acceptance and
ESG issues by the entities in which we implementation of the Principles within
invest the investment industry
We will work together to enhance our We will each report on our activities
effectiveness in implementing the and progress towards implementing
Principles the Principles
Sh are h o ld e r En g ag e m e n t
To I m p ro ve I n ve s t e e ’s Sus t ain ab ilit y Go ve rn an ce

20. Findings from the FDC
T h e C e n t r e f o r S u s t a i n a b i l i t y a n d C o r p o r a t e R e s p o n s i b i l it y
The Sustainability Challenge and the
Corporate Strategy Planning of Brazilian Companies
2009’s Research

21. FDC’s Next Research
Shareholder Engagement Effectiveness:
The Best Practices on Environmental & Social
Governance in the Investee Companies.
Targeted Public:
Pension Funds and its Investee Companies.
Responsible Investment Best Practices Responsible Investment
Program for Program for Investee
Pension Funds and Asset
Paper Companies’ Board Members
Management Professionals Publication and C-Suite Managers

22. Thank you!
Jose Antonio Chaves
Rua Carvalho de Almeida, 48 Conj. 23 – Cidade Jardim
CEP 30380-160 – Belo Horizonte – MG – Brazil
Phone: +55 31 3231-4688 - Mobile: +55 31 9312-4688
Email: jose.antonio.chaves@gmail.com