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Global Corporate CitizenshipEnvironmental Business Council of New England, Inc.
Greg HintzMcKinsey & Company
February 26, 2007
BUSINESS OPERATES WITHIN AN OVERALL SOCIAL CONTRACT
BusinessFormal contract
Semi-formal contract
Frontierexpectations
Society
Expectations and rules on business are explicit and often bound by law (e.g., regulation, tax policy, private contracts)
Expectations have not (yet) consolidated on emerging issues (e.g., towards food companies regarding health implications associated with obesity)
Societal expectations of business are not codified but implicitly agreed (e.g., treatment of workers at a national level)
Governance
LEADERS MUST CONFRONT DAUNTING ESG ISSUES
Environmental
Climate change and energy efficiency
CO2 emissions or global warming
Corruption
Particularly important in weak governance states
Labor practices
Within companies, but increasingly in supply chains
Environment
Biodiversity and other environmental issues
Trust
Eroding trust in companies
Healthcare
Rising healthcare costs and managing workforce health
Natural resources
Water was particularly important
Education/Talent constraints
Sourcing talent in local mar-kets is becoming a challenge
Social
% of respondents*
** For example, by providing good jobs, making philanthropic donations, and going beyond legal requirements in minimizing pollution and other negative effects of business
Source: September 2007 McKinsey survey of 7,751 consumers in Brazil, Canada, China, France, Germany, India, UK, US; July 2006 McKinsey survey of 4,063 consumers in China, France, Germany, India, Japan, United Kingdom, United States,; McKinsey Quarterly surveys of 4,238 global business executives (in December 2005) and of 2,687 global business executives (in September 2007)
89
11
Consumer
16
84
Executive
Focus solely on providing thehighest possible returns to investors while obeying alllaws and regulations
Generate high returns toinvestors but balance this withcontributions to the broaderpublic good**
Which of the following statements best describes the role that large corporations (public and private) should play in society?
88
12
Consumer
100%
Executive
84
16
2006 2007
Repeated Question in 2007
Consumers
Executives
CONSUMERS AND EXECUTIVES CONTINUE TO BELIEVE THAT BUSINESS SHOULD PLAY A WIDER ROLE IN SOCIETY
FOR EXECUTIVES, CLIMATE CHANGE HAS BECOME A CRITICAL ISSUE THAT COMPANIES MUST ADDRESS TO REMAIN COMPETITIVE
4
13
13
13
15
16
16
16
20
22
22
24
24
25
48
3
14
11
12
18
17
9
13
17
28
26
41
23
29
28
Human rights standards
Environmental issues, including climate change
Health care and other benefits for employees
Demand for healthier/safer products
Pay inequality between senior executives and other emplo
Demand for more investment in developing countries
Opposition to foreign investment and freer trade
Demand for more ethically produced products
Privacy and data security
Affordable cost of products for poor consumers
Job losses from offshoring
Ethical standards for advertising and marketing
Political influence/involvement of companies
Workplace conditions and safety
Pension and retirement benefits
2007
2005
5
9
12
15
15
16
16
16
18
19
21
21
25
33
51
5
12
9
11
18
21
19
17
15
23
18
19
42
33
31
Affordability of products for poorer consumers
Pension and retirement benefits
Health care benefits and other employee benefits
Job losses and offshoring
Workplace conditions and safety
Political influence/involvement of companies
Pay inequality between senior executives and other employees
Ethical standards for advertising and marketing
Demands for more investment in poor developing countries
Human-rights standards
Privacy and data security
Environmental issues, including climate change
Opposition to foreign investment and freer trade
Demand for healthier/safer products
Demand for more ethically produced products
Top Issues - public/political attention Top Issues - impact on shareholder value
CONSUMERS AND EXECUTIVES AGREE THAT THE ENVIRONMENT IS AN IMPORTANT ISSUE, THEY DO NOT AGREE ON OTHER ISSUES
Top 3
Which issues will be most important in the next five years? Select 3
5
4
5
6
7
9
12
16
18
19
21
28
31
31
33
55
2007
Environmental issues, including climate change
Demand for healthier or safer products
Pension and retirement benefits
Health care benefits and other employee benefits
Affordable cost of products for poorer consumers
Human-rights standards
Workplace conditions and safety
Job losses from moving jobs overseas
Privacy and data security
Demand for more ethically produced products
Demands for more investment in developing countries
Ethical standards for advertising and marketing
Political influence/political involvement of companies
High level of executive compensation
Opposition to foreign investment and freer trade
Other (please specify)
Consumers Executives
8
9
16
19
16
12
15
33
25
18
5
15
21
16
21
51
2007
% of respondents selecting each response
Repeated Question in 2007*
If large companies want to improve their overall reputation, which of the following actions do you think would be most effective? (Please select one answer only)
Top Action
* New answers were added to 2007 survey, therefore results are not comparable to 2006 surveySource: September 2007 McKinsey survey of 7,751 consumers in Brazil, Canada, China, France, Germany, India, UK, US
1
6
5
8
4
8
22
23
10
13
8
8
9
2
6
7
22Improving benefits and conditions for employees
15Taking action to become more environmentally friendly
14Limiting redundancies and moving of jobs overseas
10Being transparent about business practices
Tightening safety and environmental procedures
Limiting political contributions and influence
Limiting growth of senior management pay
Tightening corporate-governance procedures
Increasing philanthropy /social investment
Other (please specify) 2
6
4
5
8
15
21
14
13
12
1
2
3
3
3
18
20
28
11
11
1
4
2
5
7
7
30
21
10
13
1
7
1
9
3
11
10
17
17
24
0
3
3
6
1
19
18
10
20
20
7
0
6
1
8
10
17
18
11
21
THE ACTIONS THAT CONSUMERS THINK WOULD BE MOST EFFECTIVE IN IMPROVING A COMPANY’S REPUTATION
FOR CONSUMERS, THE ENVIRONMENT IS THE #1 ISSUE GLOBALLY, BUT THERE IS LESS CONSENSUS ON THE IMPORTANCE OF OTHER ISSUES
Rank of Issue in 2007
Environmental issues, including climate change 1 2 1 1 1 2 1 2 1
Demand for healthier or safer products 2 5 3 4 3 6 3 3 2
Pension and retirement benefits 3 4 5 2 4 1 8 4 7
Health care benefits and other employee benefits 4 1 2 5 8 8 5 1 8
Affordable cost of products for poorer consumers 5 6 4 3 6 3 2 5 3
Human-rights standards 6 8 8 8 2 9 4 9 4
Workplace conditions and safety 7 9 6 10 7 4 6 7 6
Job losses from moving jobs overseas 8 3 7 6 5 5 13 13 13
Privacy and data security 9 7 9 7 11 7 9 6 10
Demand for more ethically produced products 10 10 10 9 9 10 10 8 9
Demands for more investment in developing countries 11 16 16 11 10 14 7 12 5
Ethical standards for advertising and marketing 12 12 11 12 15 16 11 11 11
Political influence/political involvement of companies 13 11 13 14 14 12 12 14 14
High level of executive compensation 14 15 14 16 13 11 15 10 15
Other (please specify) 15 13 12 13 16 15 16 16 12
Opposition to foreign investment and freer trade 16 14 15 15 12 13 14 15 16
Which issues will be most important in the next five years? Select 3
Source: September 2007 McKinsey survey of 7,751 consumers in Brazil, Canada, China, France, Germany, India, UK, US
Source: IPCC Draft Synthesis report – May 2007; team analysis
The 4th IPCC report
• “Warming of the climate system is unequivocal”: 11 of the 12 past years have been the warmest since 1850, when temperature chronicles begin
• Most warming over the past 50 years is “very likely due to anthropogenic greenhouse gas increases”
• Some future impacts already appear unavoidable, owing to the inertia of the climate system
• High agreement that there is substantial economic potential for the mitigation of global GHG emissions over the coming decades that could offset the projected growth of global emissions or reduce emissions below current levels
THE DIAGNOSIS IS CLEAR
0
10
20
30
40
50
60
70
80
90
100
2000 2010 2020 2030 2040 2050 2060
44GtCO2e
70GtCO2e
65GtCO2e
50GtCO2e
1,000-1,200 ppm by 2100.
?°C
630ppm,~3,5°C
550ppm~3°C
Global emissions, GtCO2e per annum
Growth in global GDP:+150% vs. year 2000
500 ppm
550 ppm
Natural absorption ability
450 ppm
45GtCO2e
35GtCO2e
450ppm~2°C
STABILIZING CLIMATE IS A BIG CHALLENGE, AND IN THE LONG-TERM, EMISSIONS MUST NOT EXCEED NATURAL ABSORPTION
Potential Gigatons CO2e/year
U.S. GREENHOUSE GAS ABATEMENT POTENTIALS – 2030
* Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis and have quantifiable targets; targets calculated off the 2030 U.S. GHG emissions of 9.7 gigatons CO2e/year (reference case)
Source: McKinsey analysis
Low-range case1.3 gigatons
Mid-range case3.0 gigatons
High-range case4.5 gigatons
Increasing levels of commitment and action
-200
-150
-100
-50
0
50
100
150
200
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
Abatement implied by proposed legislation:
3.5-5.2 gigatons*
Cost Real 2005 dollars per ton CO2e
Abatement cost <$50/ton
U.S. MID-RANGE ABATEMENT CURVE – 2030
Source: McKinsey analysis
0
0 1.0 1.2 1.4
90
1.8 2.00.2 2.2 2.4
30
2.6 2.8 3.0 3.2
60
-120
-220
-30
-60
1.6
-90
CostReal 2005 dollars per ton CO2e
0.4 0.6 0.8
-230
Residential electronics
Commercial electronics
Residential buildings –Lighting
Commercial buildings –LED lighting
Fuel economy packages – Cars
Commercial buildings –CFL lighting
Cellulosicbiofuels
Industry –Combined heat and power
Existing power plant conversion efficiency improvements
Conservation tillage
Fuel economy packages – Light trucks
Commercial buildings –Combined heat and power
Coal mining –Methane mgmt
Commercial buildings –Control systems
Distributed solar PV
Residential buildings –Shell retrofits
Nuclear new-build
Natural gas and petroleum systems management
Active forest management
Afforestation of pastureland
Reforestation
Winter cover crops
Onshore wind – Medium penetration
Coal power plants – CCS new builds with EOR
Biomass power –Cofiring
Onshore wind –High penetration
Industry –CCS new builds on carbon-intensive processes
Coal power plants – CCS new builds
Coal power plants –CCS rebuilds
Coal-to-gas shift – dispatch of existing plants
Car hybridi-zation
Commercial buildings –HVAC equipment efficiency
Solar CSP
Residential buildings –HVAC equipment efficiency
Industrial process improve-ments
Residential water heaters
Manufacturing –HFCs mgmt
Residential buildings –New shell improvements
Coal power plants–CCS rebuilds with EOR
PotentialGigatons/year
Commercial buildings –New shell improvements
Afforestation of cropland
Onshore wind –Low penetration
2005 emissions
Expected growth
Reference case
* Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis and have quantifiable targets
Source: U.S. EIA Annual Energy Outlook (2007) “Reference case," U.S. EPA; Pew Center On Global Climate Change; McKinsey analysis
Projected GHG emissions
Gigatons CO2e
2.5
Range of proposed reductions*
1990 level 1990 level-27%
2030
-3.5-5.2
4.5
6.2
9.7
7.2
THE CHALLENGE OF RISING U.S. EMISSIONS
High-range case
Gigatons CO2e, options less than $50 per ton CO2e
Mid-range case
Trans-portation
IndustryProjected emissions
Carbonsinks**
Emissions after
abatement***
Buildings & appliances
Power
0.7-0.9
0.3-0.70.6-0.8
0.5-0.60.8-1.6
5.2-6.7
9.7
* Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis and have quantifiable targets; targets calculated off the 2030 U.S. GHG emissions of 9.7 gigatons CO2e/year (reference case)
** Including abatement in the agriculture sector
*** Adjusted for cumulative rounding errors
Source: U.S. EIA; EPA; USDA; McKinsey analysis
Additional potential:
• Options >$50 per ton
• Demand response
• Breakthrough technology innovations
• Lifestyle choices
Range of proposed reductions*
CLUSTERS OF ABATEMENT POTENTIAL - 2030
CORPORATE CITIZENSHIP IS NOT JUST RISK MANAGEMENT:4 SOCIOPOLITICAL TRENDS OFFERING OPPORTUNITIES FOR RENEWAL
Environmental sustainability
Poverty alleviation/bottom of the pyramid approaches
Public health/wellness
Ethically responsible products (e.g., fair trade)
MANAGING SUSTAINABILITY: 5-DIMENSIONAL STRATEGY
How to turn socio-political trends into new business and industry-shaping opportunities
How to spot and evaluate socio-political trends that can pose a risk to the business
How, and where, to build and maintain meaningful relation-ships with stakeholders
How to build trust around the company's brand and the values to which it aspires
How to use regulation to gain and sustain a competitive advantage
RenewalRisk
RegulationReputation
Relationships
ORGANIZATIONAL IMPLEMENTATION – ALIGNMENT ACROSS FUNCTIONS AND CENTRAL COORDINATION ARE CRITICAL
Coordi-nation –ideally through CEO leadership
External communications and outreach
External engagement efforts, including • PR and communications• Engagement with stakeholders• Philanthropy and partnerships with NGOs
Government and regulatory strategy
Interactions with states and legal systems, including• Political and international issues lobbying • Submissions to regulators• Legal affairs (e.g., response to lawsuits)
Organization and culture
Tools to embed social contract management within the organization, e.g.• Organizational structure• Internal communications• Incentive systems• Skills development (e.g., hiring of diplomats, social
development experts)
Internal policies and processes
Policies on ethical issues and other general business processes, e.g.• Marketing and advertising tactics• Policies on environment, human rights, etc.
Core business strategy
Changes to core business, e.g.• Entry into or exit from markets or product lines• Change in production or sourcing methods• Acquisitions and investments
Global Corporate CitizenshipEnvironmental Business Council of New England, Inc.
Greg HintzMcKinsey & Company
February 26, 2007
Abatement potential Gigatons CO2e /year
Cost of abatementReal 2005 dollars per ton CO2e
Two dimensions
Each bar represents one option or a group of closely related options (e.g., “improvements to residential buildings”)
• Width: amount of CO2e that can be reduced annually by means of this option
• Height: average cost of avoiding 1 ton CO2e with this option, as measured against emissions reference case. Cost is averaged across sub-options, regions, and years
How to read an abatement curve
Two nuances
• “Negative cost” (below the horizontal axis) indicates a net benefit or savings to the economy over the lifecycle of the option; “positive cost” (above the axis) means that capturing the option would incur incremental lifecycle costs versus the reference case
• The average cost of an option does not necessarily equate to the price signal needed to stimulate capture of that option
ASSEMBLING THE ABATEMENT ENVELOPE
Exhibit 9
* 2005 real dollars; average cost for a new CCS-equipped coal-fired power plant, excluding the financing costs
Source: McKinsey analysis
Low-range case Mid-range case High-range case
Increasing levels of commitment and action
-50
-200
-150
2,000 4,000
50
-100
100
0
Cost$/ton
0 3,000 4,0001,000 2,000
0
100
50
-100
-150
-200
Cost$/ton
-50 0 1,000 2,000 3,000 4,000
100
150
50
-100
-150
-200
-50
Cost$/ton
0
• Available at scale by 2025• Capital cost – $3,100 / kW *• Modest learning and performance
improvement • Per-ton cost below $50 only if coupled
with EOR
• Available at scale by 2020• Capital cost – $2,800 / kW *• Steady learning and performance
improvement• Moderate injection costs
CCS new-build
60 megatons at $42 per ton
105 megatons at $38 per ton
165 megatons at $20 per ton
COAL POWER PLANT –CCS NEW-BUILD EXAMPLE
CCS new-build with EOR
• Available at scale by 2015• Capital cost – $2,600 / kW *• Accelerated learning and
performance improvement• Low injection costs
with EOR without EOR
CCS new-build
with EOR without EOR
High-range caseMid-range case
1.3 3.0 4.5
xAbatement potential below $50/ton, gigatons
Low-range case
DRIVERS OF GHG ABATEMENT POTENTIAL – 2030
Exhibit 10
* Average for new vehicle sales; average across gasoline internal combustion, diesel, hybrid electric and plug-in hybrid electric vehicles; includes opportunities above $50 per ton
** Alternatives to conventional gasoline propulsion: diesel, hybrid electric and plug-in electric hybrid vehicles; share of new sales
*** Lighting: CFLs and LEDs, share of new residential sales. Homes: incremental total built (or rebuilt) to Energy Star efficiency or higher
Source: US EIA; McKinsey analysis
2005
BiofuelsBillion gallons
16 14
16 51
125
• Starch - 4• Cellulosic - 0
Light-duty vehicles
47 mpg34 mpg60%
53 mpg38 mpg71%
34 mpg 27 mpg 14%
• Cars* – 28 mpg • Light trucks* – 22 mpg • Alternatives** – 3%
NuclearGigawatts
129 153113• Nuclear - 100
Coal with CCSGigawatts
3223
50 33
913
• Rebuilds – 0• New builds – 0
Buildings energy efficiency***
70%37 million
75%49 million
15% 25 million
• Efficient lighting: 8% • Efficient homes: N/A
164 80
148
RenewablesGigawatts
1163050
701028
• Wind – 10• Solar CSP• Solar PV <1
Source: McKinsey analysis
Description of opportunity
• More efficient HVAC equipment in initial installation and in retrofits
• Performance tuning for existing systems
• Increased in-use efficiency and reduced stand-by losses in PCs, office equipment, televisions (including set-top boxes), audio systems, and similar devices
• Substitution of advanced lighting technologies, e.g., CFLs and LEDs, for inefficient lighting
• Improved efficiency and switch to alternative fuel/ technologies, e.g., tankless and natural gas
• Increased penetration in large office buildings (>100,000 sq.ft), hospitals and universities
MID-RANGE CASE – 2030
• Building controls• Residential and commercial appliances• Commercial water heaters• Fuel switching in residential and commercial heating
• Improved new-build shells and building retrofits in commercial and residential buildings, e.g. better insulation, air tightening, reflective roof coatings
Options less than $50/ton CO2e
ABATEMENT OPTIONS – BUILDINGS-AND-APPLIANCES CLUSTER
Exhibit 21
Potential Megatons CO2e
70
50
60
70
100
120
240
Electronicequipment
Building shell
Lighting
HVACequipment
Combined heatand power
Residentialwater heaters
Other
Average cost $(2005 real)/ton CO2e
-87
45
-93
-36
-8
-42
Options less than $50/ton CO2e
Source: McKinsey analysis
Description of opportunity
• Commercialization of cellulosic biofuels (various feedstocks and conversion processes)
• Technology upgrades improving fuel efficiency • Increasing penetration of alternative propulsion
technologies (diesel)
• Technology upgrades improving fuel efficiency • Increasing penetration of alternative propulsion
technologies (diesel)
• Plug-in capability in addition to basic hybridization in light-duty vehicles
• Technical upgrades improving fuel efficiency
• Medium and heavy truck hybridization • Aircraft fuel efficiency (design and operations)• Reduction in motor vehicle air conditioning
leakages
ABATEMENT OPTIONS – TRANSPORTATION CLUSTER
Exhibit 22
MID-RANGE CASE – 2030
25
20
30
70
100
95
Cellulosic biofuels
Light-duty vehicle fuel economy –
cars
Light-duty vehiclefuel economy –
light trucks
Other
-18
-81
-69
-8
15
Medium/ heavy truck
fuel economy
Light-duty plug-in hybrids
Potential Megatons CO2e
Average cost $(2005 real)/ton CO2e
Options less than $50/ton CO2e
Source: McKinsey analysis
Description of opportunity
ABATEMENT OPTIONS – INDUSTRIAL AND WASTE CLUSTER
Exhibit 24
• Methane management in coal mining, natural gas and petroleum systems, and waste
• HFCs/PFCs in manufacturing processes• Nitrous oxide in chemicals processes
• Industry-specific measures in fired and steam systems, process controls, energy recovery, maintenance
• Electric motor upgrades and end-use-specific systems improvements
• Additional CHP capacity in primary metals, food, refining, chemicals, pulp and paper
• Primarily medium and large turbine applications (>5 megawatts)
• CCS new builds on carbon-intensive industrial processes, such as coal-to-liquids
• Select industrial cogeneration sites with CCS new builds
• Increased use of industry-specific advanced processes, recycling and product recovery, product reformulation and commercialization of emerging technologies
• Composting• Capping and improvements to restoration layers• Small-scale electric generation projects
MID-RANGE CASE – 2030
45
70
75
80
255
95
Potential Megatons CO2e
Recovery and/ or destruction of non-CO2 GHGs
Carbon captureand storage
Combined heatand power
Other
Energy efficiency
New processesand product
innovation
3
49
-15
6
-33
Average cost$(2005 real)/ton CO2e
Options less than $50/ton CO2e
Source: McKinsey analysis
Description of opportunity
ABATEMENT OPTIONS – TERRESTRIAL CARBON SINKS
Exhibit 25
• Planting trees, primarily on marginal/degraded or idle pastureland where erosion is high and/or productivity is low
• Planting trees, primarily on marginal/degraded or idle cropland where erosion is high and/or productivity is low
• Active – thinning, stand improvement• Passive – restricted grazing, natural regeneration • Restoration of degraded forests
• Planting harvested cropland with grass or legume cover crop during winter
• Planting crops amid previous harvest’s residue using various approaches, including ridge tillage and no-till farming
• Elimination of summer fallow
MID-RANGE CASE – 2030
<5
40
80
80
130
110
Potential Megatons CO2e
Afforestation –pastureland
Forest management
Afforestation –cropland
Other
Conservation tillage
Winter cover crops
18
23
39
-7
27
Average cost $(2005 real)/ton CO2e
Options less than $50/ton CO2e
Source: McKinsey analysis
Description of opportunity
ABATEMENT OPTIONS – POWER CLUSTER
Exhibit 26
• Class 5-7 on-shore winds with economic grid integration costs
• Nuclear power plant new-builds• Up-rates for existing nuclear plants• Reactivations
• Rebuilds of pulverized coal plants with CCS, plus CCS new builds
• Includes injection to enhance oil recovery
• Residential and commercial distributed power generation with solar photovoltaics
• Improved heat rates of base-load pulverized coal power plants
• Low-class on-shore and offshore wind (90 megatons)• Concentrating solar power (50)• Biomass co-firing (50) • Geothermal power (10)• Small hydroelectric power (10)
MID-RANGE CASE – 2030
210
50
60
70
290
120
Potential Megatons CO2e
Carbon captureand storage
Wind
Nuclear
Other
Conversion efficiency
Solar PV
44
20
9
-15
29
Average cost$(2005 real)/ton CO2e