Identifying Environmental & Social Risks in Supply … · Identifying Environmental & Social Risks in Supply Chains ... Olga Emelianova, Senior Analyst, MSCI ESG Research Top Commodities

1©2014 MSCI Inc. All rights reserved. msci.commsci.com

Identifying Environmental & Social Risks in Supply Chains

Olga Emelianova, Senior Analyst, MSCI ESG Research

Top Commodities in Focus

Jaclyn Daitchman, Analyst, MSCI ESG Research

RIA Conference

May 27, 2014

2©2014 MSCI Inc. All rights reserved. msci.com

Agenda

About MSCI ESG Research


Olga Emelianova, Senior Analyst, MSCI ESG Research


Jaclyn Daitchman, Analyst, MSCI ESG Research

Q&A

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Olga Emelianova


Supply Chain – Impact and Risk


Let’s take a quiz!

Labor : what industry is most likely to take the largest labor cost?

Apparel

Food Products

Electronics

Health & Safety: what country poses the highest ESG risk for Apparel industry?

Vietnam

Cambodia

Mexico

Energy: what industry would be most affected by energy price increase?

Food Products

Electronics

Apparel


Labor Cost Health & Safety Energy Cost

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

China Vietnam Indonesia India

The wage gap between China and Vietnam has been widening since 2007

China continues to be the global manufacturing hub

The country has experienced the steepest wage increase over the last decade

Source: ILO Global Wage database, General Statistics Office of Vietnam, U.S. Bureau of Labor Statistics



Electronics are likely to be most affected

Cost of Goods Sold

Production in China 30% 50% 70% 100%

Wage Increase

10% 0.6% 1.0% 1.4% 2.0%

20% 1.2% 2.0% 2.8% 4.0%

30% 1.8% 3.0% 4.2% 6.0%

60% 3.6% 6.0% 8.4% 12.0%

Low scalability production

Dependence on local raw materials (rare earth)

Thin and shrinking profit margins

Samsung and Apple are a notable exception

Source: Thomson One Banker, company disclosure, MSCI ESG Research

Source: Thomson One Banker, company disclosure, MSCI ESG Research

9©2014 MSCI Inc. All rights reserved. msci.com 9


Apparel & Textiles: Bangladesh is not the only country at risk

CountryTextile exports, USD bln

Industrial employment

Monthly wage, USD

Injury rate,per 100,000 employees

Bangladesh 16.4 15.0% 881 366

Cambodia 4.6 16.9% 80 202

El Salvador 2.2 21.5% 1862 36073

India 12.9 22.4% 1022 325

Pakistan 12.5 20.0% 92 207

Vietnam 16.0 21.3% 722 46273

Notes:1 Bangladesh monthly wage shown with a 30% increase adjustment announced in 20132 Average monthly wage for country, due to regional or sector variations.3 Injury rates include public sector and family businesses.

Sources: International Labour Organization, the United Nations Statistics Division, The World Bank, Ministry of Labour and Vocational Training of Cambodia, Bangladesh Bureau of Statistics, Pakistan Bureau of Statistics, General Statistics Office ofVietnam


Labor Cost Health & Safety Energy Cost• The largest portion of product carbon footprint is attributed to energy and fuel use in

raw materials production and finished goods manufacturing

Source: IERS' Comprehensive Environmental Data Archive (CEDA) data, MSCI ESG Research

Raw Materials TransportationManufacturing Trade and Administration

Cheese Pasta, cookies Footwear2528 CO2e/USD 1 mln 1058 CO2e/USD 1 mln 846 CO2e/USD 1 mln

Soap Apparel Computers

810 CO2e/USD 1 mln 566 CO2e/USD 1 mln 284 CO2e/USD 1 mln


Labor Cost Health & Safety Energy CostApparel and Footwear will likely be most affected by energy price increase

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Diversified Discretionary Goods

Footwear

Apparel

Luxury

Food Products & Food Retail

Household Products

Trade and warehousing Transportation

Components and goods manufacturing Raw materials production

Cost Increase as a % of Revenue

Cost Increase as a % of Net Profit

Food Retail 0.64% 20.08%

Electronics 0.46% 14.77%

Food Products 0.59% 7.48%

Apparel 0.46% 7.06%

Footwear 0.47% 6.92%

Luxury Goods 0.35% 2.57%

Harder to push on consumers due to discretionary nature and competition based on price

Source: MSCI ESG Research, Thomson Financials, IERS' Comprehensive Environmental Data Archive (CEDA) data, company disclosure

Percent of companies monitoring energy use and emissions in supply chain:

If energy price globally goes 10% up…

Have the lowest control over the supply chain


Let’s take a quiz!

Labor : what industry is most likely to take the largest labor cost?

Apparel

Food Products

Electronics

Health & Safety: what country poses the highest ESG risk for Apparel industry?

Vietnam

Cambodia

Mexico

Energy: what industry would be most affected by energy price increase?

Food Products

Electronics

Apparel


Reputational Concerns Intensify

Workplace Safety and Raw Materials Production are high on public agenda

Number of Reported Controversies by Type

Source: MSCI Impact Monitor



Jaclyn Daitchman


Soy

PalmOil

Cocoa

Photo source: MIXA, via WebMD


Stearic Acid Sodium Lauryl Sulfate Glyceryl Stearate

Cetyl palmitate Octyl palmitate

Palmitoyl Tetrapeptide-3


Source: MSCI ESG Research

Palm Oil Dependency

Revenue from products that may contain palm oil

Revenue from all other products

84%

Household & Personal Products

36%

Food & Beverage

30%

Restaurants

9%

Retailing


Sources: RSPO Annual Communication on Progress 2012-2013, company disclosure

Responsible Sourcing Commitments

Company CountryVolume of palm

oil used (t) Less Stringent

(incl. GreenPalm)More Stringent

(excl. GreenPalm)

Year Year

Unilever NL 1,523,605 2012 2020

Procter & Gamble US 462,000 2015 -

PepsiCo US 457,200 2015 2020

Nestle CH 410,000 2013 -

Mondelez US 285,732 2015 -

Colgate-Palmolive US 109,259 2020 2020

Reckitt Benckiser GB 106,895 2015 2020

McDonald's US 103,336 2020 -

Kao JP 95,356 2015 2020

Johnson & Johnson US 77,800 2010 2015

Henkel DE 71,608 2015 2017

Wal-Mart US 71,463 2015 2015

L'Oreal FR 61,850 2010 2010

General Mills US 56,041 2015 2015

Kellogg US 50,000 2011 2015

Tesco GB 33,811 2012 2015

Danone FR 30,300 2011 2015

Beiersdorf Aktiengesellschaft DE 25,301 2013 2020

Associated British Foods GB 20,550 2015 -

Hershey US 20,282 2014 2014


Responsible Sourcing Progress

Unilever NL 1,523,605

Procter & Gamble US 462,000

PepsiCo US 457,200

Nestle CH 410,000

Mondelez US 285,732

Colgate-Palmolive US 109,259

Reckitt Benckiser GB 106,895

McDonald's US 103,336

Kao JP 95,356

Johnson & Johnson US 77,800

Henkel DE 71,608

Wal-Mart US 71,463

L'Oreal FR 61,850

General Mills US 56,041

Kellogg US 50,000

Tesco GB 33,811

Danone FR 30,300

Beiersdorf Aktiengesellschaft DE 25,301

Associated British Foods GB 20,550

Hershey US 20,282

Company CountryVolume of palm oil used (t)

0 100000 200000 300000 400000 5000001,470,000

Sources: RSPO Annual Communication on Progress 2012-2013, company disclosure

No certification Mass BalanceBook & Claim (Green Palm) Segregated or Identity Preserved


53%38%

9%

47%

27%

17%

9%

Less stringent committment: More Stringent

SELECTED COMPANY HIGHLIGHTS

No time-bound commitment Campbell, Clorox, Costco, Yum!

Brands

McDonald's, Mondelez,

Nestle, Procter & Gamble

Unlikely to achieve certifcation

by target year

On track to achieve certification

by target year

Colgate-Palmolive, McDonald's,

PepsiCo, Procter & Gamble, Wal-

Mart

Johnson & Johnson,

PepsiCo, Unilever

Heinz, Kellogg, Metro,

Sainsbury

-

Heinz, Nestle, Metro, Sainsbury

Have already achieved

certification

Johnson & Johnson, Kellogg, L'Oreal,

Marks & Spencer, Tesco, Unilever

Less Stringent Commitment (incl. GreenPalm) by 2015

More Stringent Commitment (excl. GreenPalm) by 2020

Source: RSPO Annual Communication on Progress 2012-2013, WWF “Palm Oil Buyers Scorecard” (2013), company disclosure , MSCI ESG Research

Responsible Sourcing Progress


Perceived constraints to meeting commitments

Many companies claim that their limited use of certified product is triggered by the lack of availability of certified sustainably produced palm oil and high premiums charged for certified palm oil.

83%

8%

3%

2%

4%

non-certified

certified, but not purchased

purchased by Unilever

purchased by the next 9 top buyers

purchased by rest of the world

Cost, USD % of

Revenue Cost, USD

% of

Revenue

Unilever (NL) 9,141,630 0.014% 309,291,815 0.457%

Procter & Gamble (US) 2,772,000 0.003% 93,786,000 0.118%

PepsiCo (US) 2,743,200 0.004% 92,811,600 0.140%

Nestle (CH) 2,460,000 0.003% 83,230,000 0.086%

Mondelez (US) 1,714,392 0.005% 58,003,596 0.161%

Colgate-Palmolive (US) 655,554 0.004% 22,179,577 0.135%

Reckitt Benckiser (GB) 641,370 0.004% 21,699,685 0.150%

McDonald's (US) 620,016 0.002% 20,977,208 0.076%

Kao (JP) 572,136 0.004% 19,357,268 0.139%

Johnson & Johnson (US) 466,800 0.001% 15,793,400 0.023%

Scenario 1

Less Stringent

(GreenPalm)

Scenario 2

More Stringent

(Segregated)

Supply exceeds demand Compliance cost is low

Source: RSPO Annual Communication on Progress 2012-2013, company disclosure , MSCI ESG Research


0.00%

0.08%

0.16%

0.24%

0.32%

0.40%

0.48%

-

25,000

50,000

75,000

100,000

125,000

150,000

Un

ileve

r (N

L)

Mo

nd

ele

z (U

S)

Re

chit

t B

en

ckis

er (

GB

)

Pe

psi

Co

(U

S)

Kao

(JP

)

Co

lgat

e-P

alm

oliv

e (

US)

Pro

cte

r &

Gam

ble

(U

S)

Ge

ne

ral M

ills

(US)

Ne

stle

(C

H)

Co

nA

gra

* (U

S)

McD

on

ald

's (

US)

Yu

m!

Bra

nd

s (U

S)

He

nke

l (D

E)

Ke

llogg

(U

S)

Gru

po

Bim

bo

(M

X)

Be

iers

do

rf (

DE)

Ori

flam

e (

BE)

He

rsh

ey

(US)

L'O

real

(FR

)

Ork

la**

(N

O)

Tin

gyi (

CN

)

Avo

n (

US)

Dan

on

e (

FR)

AB

F (G

B)

Joh

nso

n &

Jo

hn

son

(U

S)

Shis

eid

o (

JP)

Ke

rry

(IE)

Este

e L

aud

er

(US)

Lin

dt

& S

pru

en

gli (

CH

)

Cam

pb

el (

US)

He

inz

(US)

Dar

de

n (

US)

L B

ran

ds

(US)

Sain

sbu

ry (

GB

)

Tesc

o (

GB

)

Du

nki

n B

ran

ds

(US)

Nis

sin

Fo

od

s (J

P)

WM

Mo

rris

on

(G

B)

MEI

JI (

JP)

Ah

old

(N

L)

Aji

no

mo

to (

JP)

Mar

ks &

Sp

ence

r (G

B)

Wh

itb

read

(G

B)

Wal

-Mar

t (U

S)

Ae

on

(JP

)

Sod

exo

(FR

)

Seve

n &

i (J

P)

Wo

olw

ort

hs

(AU

)

We

sfar

me

rs (

AU

)

Nat

ura

Co

sme

tico

s (B

R)

Co

mp

ass

(GB

)

Mas

smar

t (Z

A)

BR

F (B

R)

He

rbal

ife

(KY

)

Wh

ole

Wo

od

s (U

S)

Ch

urc

h &

Dw

igh

t (U

S)

Sho

pri

te (

ZA)

Car

refo

ur

(FR

)

Ke

sko

(FI

)

Clo

rox

(US)

Cas

ino

(FR

)

Cen

cosu

d (

CL)

Met

ro (

DE)

Lob

law

(C

A)

Ge

org

e W

est

on

(C

A)

Safe

way

(U

S)

Kro

ger

(US)

Sup

erv

alu

(U

S)

Co

stco

(U

S)

Targ

et

(US)

Companies that purchase certified palm oil

Cost to revenue (most stringent certification)

422,600

Companies that do not purchase certified palm oil

Cost to revenue, %

Source: RSPO Annual Communication on Progress, company disclosure, media reports, MSCI ESG Research

Brand Visibility vs. Compliance Costs


1 21

1013

18

14

5

55

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Controversies and Proxies Filed on Palm Oil Issues: 2005-2013

Trends

Source: CERES


Regulatory costs

-2%

0%

2%

4%

6%

8%

10%

12%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Ind

on

esia

Mal

aysi

a

Thai

lan

d

Co

lom

bia

Nig

eria

Pap

ua

New

Gu

inea

Ecu

ado

r

Ho

nd

ura

s

Ivo

ry C

oas

t

Bra

zil

Co

sta

Ric

a

Cam

ero

on

Gu

atem

ala

DR

C

Gh

ana

Ph

ilip

pin

es

Mex

ico

An

gola

Do

min

ican

Rep

ub

lic

Gu

inea

Ind

ia

Ben

in

Ven

ezu

ela

Per

u

Lib

eria

Res

t o

f th

e w

orl

dA

nn

ual

Pro

du

ctio

n G

row

th (

%)

Pro

du

ctio

n (

'00

0 M

T)

Source: United States Department of Agriculture (2013 preliminary estimate)

Trends

Production in Latin America and Africa


Thank you


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Identifying Environmental & Social Risks in Supply … · Identifying Environmental & Social Risks in Supply Chains ... Olga Emelianova, Senior Analyst, MSCI ESG Research Top Commodities