Managing Sustainabilityrisks and opportunities in thefinancial services sector

Non-Executive Directors Briefing

www.pwc.com

May 2012

Phil Case

PwC UK

Agenda

1. Objectives and key interests

2.What is Sustainability/Responsible Investment and why isit important?

2.it important?

3. Drivers for action and the market response

4. Key considerations for Non-Executive Directors

5. Q&A

Objectives and keyinterests

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Introduction and objectives

The objectivesof this sessionare to explore:

What is understood by Sustainable Development and‘Responsible Investment’, and why it is important

What is the financial services sector’s response to thesustainability agenda and how are leading companiespositioning themselves?

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positioning themselves?

What are some of the key questions to consider whenaddressing sustainability issues for Non-ExecutiveDirectors (NEDs)?

Your own thoughts and perceptions on thesustainability agenda

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Setting the scene: How do we want to worktogether today?

Collaboration

Work together to enrich ourknowledge

Openness

Share issues,concerns and

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knowledgeconcerns andexperiences

Learning

Focus on“doing thingsdifferently”

Confidentiality

ChathamHouse rules

Key interests

What sustainability issue is a keyconcern or of special interest to youpersonally?

What sustainability issue is a keyconcern or of special interest to the

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concern or of special interest to theorganisations you work with?

What is Sustainability /Responsible Investmentand why is it important?

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Sustainable Development and ResponsibleInvestment

Sustainable development

Society (Government, individuals,companies, NGOs)

Sustainability“Sustainabledevelopment isdevelopment thatmeets the needs ofthe presentwithoutcompromising the

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Financial Services: Corporate Sustainability/ Responsible Investment

companies, NGOs)

GovernanceSocialEnvironment

compromising theability of futuregenerations tomeet their ownneeds”

Brundtland Report, 1987

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Evolution of Responsible Investment

Ethical/SRIinvesting

Growth andvalue creation

Manage sustainabilityrisks and capturesustainabilityopportunities to achieve

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Philanthropy

investingopportunities to achievelong-term outperformance

Avoid investing inbusinesses that have apotentially negative impacton society (e.g. tobacco,arms)

Values, not value-driven,investing

“Give back” tocommunities fromprofits - butotherwise businessas usual

Slide 8

Major trends are creating new risks for investors

Populationgrowth

Raw materialsscarcity

Demand forenergy Growing

importance ofemergingmarkets

Climate change

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Sustainabilityglobal trends

Biodiversity loss

Waterscarcity

Corporateleadership &competition

Urbanisation

Ethicalconsumerism

Connectivity &information

flows

Regulation &government

action

Slide 9

Source: PwC, Project Blue (http://www.pwc.com/gx/en/financial-services/projectblue/index.jhtml?WT.mc_id=0212-ProjectBlue_gx+Animated+Logo)

Extreme energyprice volatility

1,000

500

Fiscalcrisis

SlowingChinese

economy

CorruptionRegulatoryfailures

Asset pricecollapse

Geopoliticalconflict

Exp

ecte

dim

pact(B

illio

nU

SD

)

Environmental risks

2009 2011

Economic and geopoliticalrisks 2011

Concern over sustainability risks is growing

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250

100

50

Extremeconsumer price

volatility

Terrorism

Unlikely Likely Very likely

Exp

ecte

dim

pact(B

illio

nU

SD

)

Likelihood over next 10 years

2009 2011

Climatechange

Flooding

Stormsand

cyclones

Air pollution

Watersecurity

Biodiversityloss

Source: World Economic Forum Global Risks Report (2009 – 2011)

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Changing stakeholder dynamics:Creating new challenges

RegulatorsEnd of life obligations

Carbon reportingProduct stewardship

Fairness to customers

RegulatorsEnd of life obligations

Carbon reportingProduct stewardship

Fairness to customers

CommunitiesGlobal activismCoordinated campaigns

CommunitiesGlobal activismCoordinated campaigns

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InvestorsUN PRI

Pension fund

withdrawal decisions

Private equity response

and focus

InvestorsUN PRI

Pension fund

withdrawal decisions

Private equity response

and focus

CustomersEthical ConsumerismProduct and brandboycotts

CustomersEthical ConsumerismProduct and brandboycotts

Sustainability issues have business implicationsfor companies

Risks to companies

• Penalties/fines as a resultof breaches (e.g. HSE)

• Litigation

• Waste management

• Loss of social / regulatory

Opportunities for companies

• Improved operationalefficiency

• Customer attraction andretention/increasedmarket share

Megatrends

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• Loss of social / regulatorylicence to operate

• Reputational cost

• Rising cost of energy

• Increased competition forand cost of (scarce) rawmaterials

• Increased regulation

• Increased revenues/profitfrom “responsible”products/services

• Improved riskmanagement

• Improved access to capital

• Increased and sustainedshareholder value

• Employee attraction andretention

Drivers for action andthe market response

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Risks for banks

Financial

• Inability to makerepayments due toenvironmental/ socialcosts

• Loss of value of

Legal

• Potential direct liabilityfor bank (to pay forclean-up ofcontamination caused bya customer) through

Reputation

• Damage to reputationthrough association withpolluting, exploitative or‘unethical’ customers

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• Environmental and social risk should also be considered at a portfoliolevel

• A bank should avoid overexposure to particular industries sensitive toenvironmental/ social pressures

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• Loss of value ofcollateral/assets as aresult of contaminationor non-compliance

a customer) throughcontrol of client company

or possession of assets

Drivers for Action in Private Equity

Investors

Clean TechInvestments

UNPRI for PEcompanies

Responsibleinvestment

Reporting

Industryinitiatives e.g.

EVCA’s RI

Industryinitiatives e.g.

EVCA’s RI

Clean TechInvestments

UNPRI for PEcompanies

Responsibleinvestment

Reporting

Investors

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Managed Funds

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Private EquityHouse

Managed Funds

PortfolioCompany

PortfolioCompany

PortfolioCompany

Business ethics

Reputation risk/ opportunity

Climate laws

Sustainability‘mega-trends’

Environmentalliabilities

Supply chainpressures

Ethicalconsumers

Business ethics

Reputation risk/ opportunity

Climate laws

Sustainability‘mega-trends’

Environmentalliabilities

Supply chainpressures

Ethicalconsumers

Private EquityHouse

PortfolioCompany

PortfolioCompany

PortfolioCompany

Managing environmental and social risks infinance

This is usually achieved through one, or acombination, of the following approaches:

• Screening (e.g. ‘ethical investment’,‘responsible lending’)

• Risk-based assessment (e.g.‘environmental credit risk assessment’)

Investors andbanking professionalshave incorporatedenvironmental andsocial issues into their

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‘environmental credit risk assessment’)

• Engagement (e.g. ‘responsibleengagement overlay’)

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social issues into theiractivities for twodecades now

Sustainability/Responsible InvestmentThe business case

Business benefits

• Improving risk management • Preserve licence to operate

• Enhanced brand and reputation • Promoting and increasing innovation

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• Customer attraction and retention • Improved access to capital

• Enhance human and intellectualcapital

• Building and sustaining shareholdervalue

• Attracting and retaining talented staff • Identification of new opportunities

• Improved operational efficiency • Generating increased revenues

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Examples of value creation

Company What they’ve done Tangible benefits

• Forever Food: Ensuring that consumershave food to eat – forever

• 100% wild and farmed fish fromcertified sustainable resources by 2012

• Launch of Omega-3 fish finger in 2007resulted in 78% of consumers switchingfrom Cod to Pollack (3,000 tonnereduction in annual Cod catch)

• Brand/ reputation benefits

• Mission Zero sustainability strategy:to become a zero-impact organisation

• Eco-efficiency savings of $433m (1995 –2010)

• Winner of inaugural BusinessGreenLeaders Award

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Leaders Award

• Annual R&D spend: $700 mn in 2006 to$1.5 bn by 2010

• Revenue of $21 bn in 2011 (twice thegrowth rate of the company average)

• Reduce packaging by 5% globally by2013 (2008 Baseline)

• Vision: zero waste target

• Estimated saving of $3.4 billion annuallyfrom packaging reduction activities

• Innovation focus on products whichpromote resource efficiency and climateprotection

• Sales of €7.7bn from climate protectionproducts (2010), which accounts for20% of total sales

• Launched the Green Portfolio Programat 16 of its portfolio companies to helpthese companies manage theirenvironmental impacts and improvebusiness performance

• Collectively, companies have achievedmore than $365 million in financialimpact and avoided 810,000 metric tonsof GHG emissions, 2.2 million tons ofwaste, and 300 million litres of water

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What are leading banks doing to managesustainability issues? Examples..

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Examples of leading industry initiatives amongfinancial services institutions

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What are leading private equity houses doing tomanage sustainability issues? Examples..

In the USA:

• KKR worked with EDF to develop the ‘Green Portfolio Program’producing high-profile successes within their portfolio.

• Carlyle have also worked with EDF to develop the EcoValueScreen, anenvironmental due diligence screen focussed on identifying newopportunities for operational improvement and value creation.

In the UK:

Through a range ofoperationalimprovements at 14companies around theworld, [KKR’s] GreenPortfolio Program has

“

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In the UK:

• We are preferred suppliers to a major global PE House for sustainabilityopportunity and risks assessments for all their global acquisitions.

• We have worked with a UK-based global PE House to develop a PE-focused electronic sustainability risk assessment Toolkit, refreshedpolicies and procedures, training and a portfolio survey.

• Several PE Houses now have dedicated resources, or project teamsworking on sustainability issues: for example, Doughty Hanson, Actisand 3i each have a dedicated Head of Sustainability and Doughtymonitor sustainability issues within their portfolio at least monthly,reporting issues to investors bi-annually.

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Portfolio Program hasachieved over $365million in operatingcost savings andavoided 810,000 metrictons of greenhouse gas(GHG) emissions, 2.6million tons of wasteand 300 million liters ofwater since 2008.

Greenbiz 12/11

“

Sustainability / Responsible InvestmentPositioning a response

Product/serviceinnovation

Attract best staff

Brand enhancement

Build market share

Opportunity

Product/servicelife-cyclemanagement

Cost efficiencies

Branddifferentiation

BUSINESSOPPORTUNITY

This is where theleaders are

heading

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Risk

TimeCost inefficiencies

Licence to operate

Brand protection RISK MANAGEMENT

This is where manyorganisations start

Complianceand risk

management

Managing forvalue

Strategicadvantage

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Discussion

1. Where do you think your organisation ispositioned in this chart?

2. What do you view as the key challenges andopportunities for your company based on what youhave heard?have heard?

Key considerations forNon-Executive Directors(NEDs)

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So what does this mean for the Executive andBoard?

Business leadershave defined a newbusiness model forbusiness of thefuture:

Understand significance ofenvironmental, social and

governance signals for companyand sector

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Source: World Business Council for Sustainable Development

Integrateopportunity into

strategy

Define businesssuccess in long-

term context

Define businesssuccess in long-term context

The wider roleof the NED?

ClimateChange

Human rights /labour issues

CommunityInvestments

Supply ChainIntegrity

Ethical BusinessConduct

WasteManagement

ResourceUse

Governance

Reporting

Risk &opportunity

Strategy

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EnvironmentalRisk & Liabilities

Transparency& Disclosure

Learning &Development

Product / ServiceStewardship

ResponsibleTax

Health &Safety

Customer / Service& Treatment

Diversity & EqualOpportunities

NEDs

DisclosuresCommittee

AuditCommittee

RemunerationCommittee

Sustainabilitycommittee

Riskcommittee

NEDs

Key considerations for NEDs in supporting asuccessful sustainability programme:

1. Strategy

2. Governance

3. Management and Performance

4. Reporting

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Strategy: Linking sustainability to shareholdervalue

• The company has integrated sustainabilityinto its core business functions

• The sustainability strategy is designed havea broad impact across the value-chain

• The Unilever Sustainable Living Plancommits to ambitious targets over the next

Unilever represents a leader in itsapproach for the following reasons:

Case Study: Unilever

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commits to ambitious targets over the nextdecade

• The Plan is comprehensive and ambitious,rigorous, far-reaching and commerciallyfocused

Strategy: Key questions for NEDs

• What risks and opportunities are presented by the sustainability agenda andhow should your companies respond?

• How will the evolving sustainability and market conditions lead to valuecreation or destruction for your company now and in future years?

• What requirements are you seeing coming from your customers and otherkey stakeholders (investors, employees, government, etc.)?

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key stakeholders (investors, employees, government, etc.)?

Governance: Embedding sustainability

• Actis promotes world class standards across anumber of sustainability areas

• Established rigorous Environmental, Social andGovernance (ESG) guidelines, supported by:

1. A full time in-house dedicated team ofqualified professionals

Actis represents a leader in its approachfor the following reasons:

Case Study: Actis

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qualified professionals

2. The adoption of World Bank and IFCglobal standards

3. Adherence to the United Nations’Principles for Principle Investment

4. Improvement of ESG performance at allportfolio companies

5. Integration of ESG issues into itsinvestment decisions

Governance: Key questions for NEDs

• How is sustainability embedded within existing governance arrangementsacross the organisation?

• Are there adequate procedures and frameworks in place for managingreputational risk?

• How are stakeholder needs understood and responded to? Does this includeTreating Customers Fairly (TCF) principles?

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Treating Customers Fairly (TCF) principles?

Management and Performance: Understandinghow sustainability drives value

• Sustainability is used to create a competitiveadvantage and to drive commercial success

• Developed new business opportunities whilemanaging key sustainability risks

Standard Chartered represents a leader inits approach for the following reasons:

Case Study: Standard Chartered

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• Established has a coherent strategy and approachto managing and reporting on:

1. Contributing to the real economy

2. Promoting sustainable finance

3. Leading the way in communities

• Recipient of a number of leading sustainability-related awards

Management and Performance: Key questions forNEDs

• To what extent do risk processes incorporate robust analysis ofsustainability issues?

• Are adequate plans put in place to manage risks effectively and realiseopportunities?

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Reporting – An integrated approach

• Published an Environmental Profit and LossAccount (EP&L)

• Revolutionised the way the company thinks andreports about sustainability and a trend setter

• PUMA is using the results to:

PUMA represents a leader in its approachfor the following reasons:

Case Study: PUMA

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• PUMA is using the results to:

1. Inform corporate strategy

2. Inform operational decisions

3. Collaborate to drive change

4. Improve risk management

Reporting: Key questions for NEDs

• Who is your primary audience for reporting on sustainability performance?

• What management information is reported to senior management tosupport understanding of sustainability performance and how it affectswider business performance?

• How can reporting on sustainability performance be integrated with existingcommunication channels, such as the Annual Report?

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communication channels, such as the Annual Report?

Q&A

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www.pwc.com/sustainability

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