Corporate Sustainability a Progress Report

KPMG INTERNATIONAL Corporate Sustainability A progress report

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In cooperation with Contents

Foreword 3 Our thanks are due to all survey respondents and KPMG viewpoint 5 interviewees for their time and insights. About this report 12 Interviewees (listed alphabetically by company): Executive summary 13 • Hugh Share, Senior Global Director, Beer & Better World, Anheuser-Busch InBev Introduction 14 • Jeanne Ng, Director, group environmental affairs, CLP Holdings The role of government 23 • Victoria Mills, Managing Director, corporate partnerships Case Study: How FedEx, UPS and other program, Environmental Defense Fund logistics firms are driving new transport • Mitch Jackson, Vice President, environmental affairs and innovation 24 sustainability, FedEx Measuring and reporting 27 • Wayne Balta, Vice President, corporate environmental affairs and product safety, IBM Case Study: CLP—From integrated processes to integrated reporting 32 • Len Sauers, Vice President for global sustainability, Procter & Gamble Challenges ahead 34 • Sören Buttkereit, Head, corporate sustainability external office, Conclusion 37 Siemens • Bob Stoffel, Senior Vice President, engineering, strategy, supply chain distribution and sustainability, UPS (retired January 2011)

Foreword

The evidence that sustainability is Among those that have implemented the becoming a core consideration for principles of sustainability, enthusiasm is successful businesses around the world high. grows stronger every day. Nearly half of the people who took part It is a powerful undercurrent running in our survey thought that sustainable through the pages of the business media, practices would definitely improve an almost compulsory topic of discussion profitability for their companies. One at meetings of business leaders, and respondent whose company has a long- among the most thoroughly researched running program reported that for every business issues of the past decade. dollar they are spending, they are getting US$1.50-2.00 back, while another told But translating this into action is not us, with complete confidence, that “… all proving to be easy. As this survey shows, issues of sustainability will be solved by despite all the progress that has been innovation.” made, more than a third of businesses So what are the problems preventing a still do not have a sustainability strategy in wider take-up of sustainable practices? place. Of those that do, only one in three is reporting publicly on their progress.

On the evidence of our survey, they come These initiatives need to succeed because down to three things: it is clear from our investigations that • The need for financing solutions that sustainability can be a source of innovation will allow the longer term benefits of and growth, if governments help business sustainability to compete with other to make it so. The large amount of private programs with a higher short-term sector funds necessary to achieve climate payback change goals will be released only when investors are confident that governments • The need for common measures, are committed to making these new and underlying systems that produce systems work. credible information, to analyze the impact of sustainability programs We want to thank everyone who has taken part in this research project, especially our • The need for a clear and rigorous colleagues at the EIU and the respondents international framework of regulation who gave their time to let us hear their within which companies can plan with views. We hope the report will be of value confidence. to anyone with an interest in achieving a The fieldwork for this study was carried genuinely sustainable future for business. out before the United Nations Framework Ted Senko, Global CEO Climate Change Convention on Climate Change talks in & Sustainability and Yvo de Boer, Global Cancún, Mexico at which major efforts Special Advisor were made to win progress on the international agreements necessary for further adoption of sustainable practices.

KPMG viewpoint

Clearly, sustainability is rapidly becoming UPS or CLP Holdings (all of which are a strategic priority for businesses. Around profiled in the accompanying report) to see the world and throughout this survey, we that these market leaders are setting the see encouraging examples of pioneering pace and standard by which their peers will companies that have recognized the soon be held accountable. imperative of sustainability and created What propels these organizations – and strategies and solutions to effectively a host of others like them – past their respond to the issue. competitors is the recognition that For a growing number, the concept of sustainability goals must be tied to sustainability goes far beyond corporate operational strategy and measured in the social responsibility (CSR). It has become same way as other investments. And by the strategic lens through which they view treating sustainability as an investment their businesses. For these organizations, rather than a cost, they have adjusted their sustainability offers an undeniable business models to drive long-term change opportunity to gain competitive advantage, and make them more competitive in the drive innovation and generate real bottom- market. line results. And despite a complex array of challenges, these companies are already taking great strides towards shaping the global approach to sustainability. One need only look at leading global brands such as Procter & Gamble, Anheuser-Busch InBev,

Other companies, however, still see For example, governments may consider in changes that position the company to uncertainties and complexities which stop designing regulations that provide mitigate their risk and create competitive them from taking the initial steps required to incentives for businesses to transform. advantage. implement sustainability programs. For one, Indeed, in almost every jurisdiction, What gets measured gets managed the lack of a clear and consistent regulatory there is a real opportunity to create framework makes it difficult for companies to a stage upon which companies can Outside of regulation, many companies are formulate business decisions that can have achieve their sustainability goals in a finding that their largest challenges stem a long-term effect on sustainability. At the commercially viable manner. Managed from a lack of credible information, metrics same time, companies are struggling with appropriately, governments may find that and standards related to sustainability. This understanding how to build an appropriate they can effectively deliver on their own hampers progress in several ways. The business case for sustainability programs as environmental targets and create a self- first is – without meaningful benchmarks they grapple with sparse, inconsistent and sufficient market for sustainability. – many companies are unable to properly often unreliable data. gauge their progress in relation to their In the meantime, many companies are competitors and market leaders. This An evolving regulatory environment assessing both the risks and opportunities goes to the heart of good business Notwithstanding any assumed progress on that are posed by regulation. At the front decision making, and presents an issue the international stage, it is clear that more end, this generally includes a mix of for all stakeholders including investors, needs to be done to encourage businesses regulatory compliance reviews, enterprise shareholders and customers, all of whom to embrace sustainability. risk assessments and tax exposure are placing increased scrutiny on business evaluations, and can often result and product sustainability.

For sustainability programs to be properly There are a number of encouraging integrated into operational strategy, initiatives under way that seek to create meaningful and reliable metrics must industry benchmarks and reporting be developed along with the underlying standards such as the Global Reporting processes and systems to produce such Initiative activities and the International information. To determine long-term Integrated Reporting Committee’s work in ROI and delineate bottom-line benefits, this area. On a related front, new auditing sustainability programs must include standards are also under development: appropriate and relevant measurement that the International Auditing and Assurance leverages both financial and non-financial Standards Board released a proposed new metrics. Moreover, since this data will be standard for Assurance Engagements used to evaluate overall performance, it on Greenhouse Gas Statements. But should be subject to the same controls that continued progress and collaboration apply to the company’s financial systems among standard setters will be critical to ensure the information is accurate and to furthering the meaningful reporting of credible. sustainability initiatives globally. There is growing demand for the design of systems, processes, controls and governance frameworks that can properly measure and analyze sustainability metrics. And increasingly, assessments and audits of company sustainability reports are being conducted to provide stakeholders with a clearer view into the business’s progress and accomplishments.

Funding business sustainability programs

While one of the great challenges facing corporate sustainability programs lies in securing adequate long- term funding, we are seeing increasing levels of change and innovation in this area. As organizations increasingly view their business operations through the strategic lens of sustainability, many will find their programs can – and should – deliver measurable returns in the long-run. As you will find in the accompanying survey, some companies are already seeing returns of 50 to 100 percent on their programs; others believe returns to be much higher. This will invariably lead to new ways of thinking about financing strategic initiatives by leveraging both internal and external sources of funding. From an external standpoint, global banks, investors and financial institutions are putting greater focus on the impact and design of sustainability programs to gain a better snapshot of a company’s ability to assess risk, respond to change and deliver shareholder returns. A number of asset owners and mutual funds now evaluate companies on the sophistication and strength of their sustainability programs and include the outcomes in their investment decisions.

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Working together to achieve real change In the not-too-distant-future, it will be those As the world drives towards a state of companies that understand and respond sustainable capitalism, much of the heavy to the issue of sustainability by making lifting will fall on the private sector. For changes to their business models and their part, governments will need to work taking a commercial approach to investing together to develop and deliver clear and in sustainability programs that will achieve consistent rules in order to reduce the real and lasting benefits over the long-run. complexity and regulatory uncertainty of sustainability for business. For their part, the private sector must continue to lead and move ahead with both individual programs and cooperative initiatives that support the creation of a broader sustainability framework. Those that have yet to take their sustainability program from a philanthropic CSR objective to something substantial that is embedded in strategy will quickly find that – without an integrated and proactive approach to sustainability – they will rapidly lose ground to their competitors.

Looking Ahead

“I believe the private sector has the power to make a massive impact on global sustainability goals,” said Yvo de Boer, KPMG`s Special Global Advisor on Climate Change and Sustainability and Former Executive Secretary, United Nations Framework Convention on Climate Change. “But empowering them to do so will require supportive policy and actions on the part of the world`s governments. As we look ahead to Durban, we call on policy makers to deliver a strong, clear and unified vision for the future of carbon pricing and regulation, and – in such a way – provide the consistent framework businesses need in order to commit to robust sustainability programs.”

1 The 17th Conference of Parties (COP-17) of the United Nations Framework Convention on Climate Change will be held in Durban, South Africa, November 28 – December 9, 2011

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About this report

Corporate Sustainability: A progress report is a KPMG research paper, conducted in cooperation with the Economist Intelligence Unit. It reviews the importance of sustainability within business today and executive attitudes toward this issue. For the purposes of this report, corporate sustainability The survey was conducted in October 2010. is defined as: “adopting business strategies that Chart 1 meet the needs of the enterprise and its stakeholders today while sustaining the resources, both human and Survey has global perspective natural, that will be needed in the future.” (% of respondents located in each region) The report is based on the following inputs: • A global survey of 378 senior executives, 11% North America encompassing a range of industries, and evenly Europe 29% split among North America (US and Canada), Asia Asia Pacific Pacific and Europe, with a smaller representation 28% Rest of World from the Middle East, Africa, and Latin America. Organizations of all sizes were represented: 32% Source: Economist Intelligence 40 percent of respondents worked for firms Unit survey, October 2010 with revenues of at least US$1 billion, whereas 47 percent were from firms with revenues of • To complement this, and provide specific context, US$500 million or less. The respondent base was the Economist Intelligence Unit conducted very senior: 26 percent were CEOs, presidents or extensive desk research and in-depth interviews managing directors of their firms; half represented with numerous corporate sustainability the C-suite or board; and all respondents were in a executives and experts. management position.

Executive summary

This report examines the impact of key rationale. The primary focus is on • Business wants a successor to the sustainability on business practices, the the environmental side, in particular Kyoto Protocol. Two-thirds (67 percent) role that government is playing, how with regard to resource and energy of executives believe a new set of rules firms are reporting on this issue and efficiency. to replace those that will end in 2012 the challenges ahead. Some of its key is “very important” or “critical”. Just 8 findings include: • Sustainability is being viewed as a source of innovation—and percent think it is “not important”. The • Sustainability has moved up the new growth. Forty-four percent of field of sustainability is unusual in that corporate agenda over the past three executives agree sustainability is a corporate lobbying is weighted toward years. Sixty-two percent of companies source of innovation, and 39 percent tighter rules, even though this may surveyed have a strategy for corporate see it as a source of new business result in higher costs. sustainability, up from just over half opportunities. Far fewer disagree. in February 2008, despite the tough • Firms are increasingly measuring— economic environment that has made and reporting—their sustainability many organizations focus on goals with performance. Just over one out of immediate impact. Just 5 percent have three (36 percent) companies polled no plans to create such a strategy, while have issued at least one public report on remaining firms are in the process of sustainability, and another 19 percent developing such a plan. plan to do so soon—although a sizeable • Sustainability’s main drivers are minority (38 percent) have no plans to changing. Although regulatory do so. Two key challenges on this front requirements, brand enhancement and include generating relevant data and risk management remain key drivers of establishing relevant benchmarks. sustainability, cost reduction is also a © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. 14 | Corporate Sustainability

Introduction—Sustainability’s corporate evolution

“No one can resist an idea Senior executives interviewed for the current report often cited the depth of whose time has come.” engagement with the issue as the most Victor Hugo’s quote could well be surprising thing about their organization’s applied to corporate sustainability at the sustainability policies. German industrial dawn of 2011. Companies around the conglomerate Siemens, for example, now world remain committed to pursuing regards sustainability “not as a compliance sustainability agendas, despite a number topic, but as a strategy topic,” says of factors: a severe economic downturn Sören Buttkereit, Head of the company’s in many regions, high unemployment, a corporate sustainability external office. disappointing outcome from the 2009 It is worth noting, though, that this uptake Copenhagen climate change meeting and is more common among larger, publicly somewhat lower energy prices. listed firms, which are far more likely to Indeed, the proportion of firms with a have developed a corporate sustainability sustainability strategy has edged up to strategy (79 percent of those polled have 62 percent, from just over half in a similar one) than their smaller, privately held survey conducted by the Economist counterparts (49 percent). It can also be Intelligence Unit in early 2008. This rise sector-specific: among consumer goods was by no means a foregone conclusion a firms, for example, as many as eight in ten few years ago, but illustrates how the idea companies have developed a sustainability has caught hold within business. strategy.

Sustainability moves into the mainstream

Nevertheless, uptake is widespread: only Although sustainability encompasses a 5 percent of survey respondents say their broad range of issues, much work has company does not need a sustainability centered on the environment—dealing strategy, while most of the remaining firms with pollutants and greenhouse gases without such a plan are busy developing while improving efficiency in the use of one, or intend to have one soon. physical inputs. And while the need and As sustainability has moved into the desire to do the right thing is often cited as mainstream, firms have worked to widen their primary motivation, organizations are and deepen their efforts. increasingly finding economic drivers for such actions. Chart 2

Larger companies are more likely to have corporate sustainability strategies

(% of respondents who say their companies have an all-encompassing strategy for corporate sustainability)

Private companies with 49% revenues less than US$500 million

Public companies with 79% revenues over US$1 billion

Source: Economist Intelligence Unit survey, October 2010

Sustainability boosts bottom line Second, sustainability-related metrics some types of energy—still undercut In a 2008 study, only 31 percent of and objectives are being applied more the economic viability of some newer respondents said the biggest benefit frequently to new investment and project- technologies. Also, energy prices could of adopting sustainability would be related decisions, and thus reshaping, well remain relatively flat in the medium increased profitability; today, 48 percent to some degree, how some of these term, thus somewhat weakening a key of executives believe implementing decisions are made. motivation to adopt energy-saving policies. sustainability strategies would boost the For the passionate advocates of In the long run, however, prices seem sure bottom line in some way, either by cutting sustainability, all this is good news, but to increase. costs (27 percent) or increasing profitability their work is far from finished. Most Finally, the global regulatory environment (21 percent). The benefits often flow to organizations are still at an early stage in remains fractured and uncertain, despite a the bottom line, as the search for new implementing sustainability. Relevant skills majority of firms that are actually in favor of efficiencies cuts costs. But they also can and experience are in short supply. Many clear—including tighter—rules. boost revenues by creating markets for firms are grappling with the problem of This report explores each of these trends. new products and services. In both cases, deciding exactly what and how to measure, It argues that sustainability can be seen sustainability strategies are triggering and appropriate benchmarks are scarce. as a source of innovation and growth, promising innovations. The macroeconomic environment remains especially if government helps. It outlines challenging, making it difficult to obtain These efforts are driving other changes. the challenges faced in measuring and approval for larger capital investments. First, the need to measure such actions is reporting. Finally, it assesses the key And existing government policies—for giving rise to more internal monitoring and, hurdles still to overcome. as a result, external reporting. example, long-standing subsidies for

Where to next? Sustainability as a source of innovation and growth

Over the past decade, the issue of Already, basic engagement is widespread: sustainability has steadily gained greater about seven in ten companies polled for prominence on the corporate agenda. this report have undertaken an array of Numerous factors have contributed to this, sustainability-related activities over the particularly a widening array of laws and past year—and will continue to do so. regulations (cited by 42 percent of survey These typically include improving energy respondents) and a desire to enhance efficiency (72 percent); reducing products’ brand reputations (41 percent). Other environmental footprint (69 percent); and drivers include concerns about managing cutting either emissions or pollutants risks associated with sustainability (67 percent). Executives interviewed for issues (29 percent) and an interest in cost this report describe a wide range of such reduction (27 percent). actions. Chart 3

Companies engage in a variety of sustainability activities (% of respondents who say their companies have taken these actions in the last 12 months)

Improving energy efficiency 72% Reducing products' environmental 69% footprint

Cutting emissions or pollutants 67% Improving environment around 65% facilities Enhancing impact on local 61% communities

Source: Economist Intelligence Unit survey, October 2010

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Commitment to tough goals

This highlights the fact that businesses’ engagement with sustainability has, in general, deepened in recent years, especially in the environmental realm. Many firms are committing themselves to tough goals, even without regulatory mandates, in part because they believe such rules will come at some point. Procter & Gamble (P&G), with global revenues of US$78.9 billion in fiscal 2010, is a prime example. In late 2010 it set out a range of long-term targets for transforming its business, ranging from powering its plants solely with renewable energy to ensuring zero consumer and manufacturing waste goes to landfill. It has set a series of goals for 2020, such as using 30 percent renewable energy and reducing packaging by 20 percent. This comes even as the firm works to extend its reach to five billion consumers, from the 4.2 billion it currently serves.

“All issues of sustainability will be solved by innovation.” Len Sauers, Vice President for global sustainability, Procter & Gamble

Delivering on such targets will require Increased internal efficiency innovation, in terms of both processes Hugh Share, Senior Global Director for and technology. the firm’s Beer & Better World program, “All issues of sustainability will be solved says its internal efficiency system helps by innovation, I have no doubt in my mind,” create more efficient brewing operations says Len Sauers, P&G’s Vice President by standardizing processes worldwide. Its for global sustainability. Executives polled most efficient brewery, in Cartersville, GA, for this report generally agree: 44 percent uses 3.06 hectoliters of water for every think sustainability is a source of innovation hectoliter of beer produced, compared in their firms; just 18 percent disagree. with a company-wide average of 4.3 Such innovation is often focused on simple hectoliters in 2009. Those lessons have efficiency. Brewer Anheuser-Busch InBev helped a company plant in Ningbo, China, (AB InBev), for example, focuses on cutting cut its equivalent rate to 3.5 hectoliters, its water and energy use, while increasing the brewer’s target level for all of its plants recycling within its facilities. The firm, by 2012. It did so by implementing various which had revenues of US$36.8 billion in innovations, including narrower nozzle 2009 and holds a global market share of diameters on bottle-washing machines. nearly 25 percent, is working to cut water “We have a very strong culture around use by 30 percent by 2012 compared with business performance in every area and so 2007 levels, among other goals. I see that as something that is just going to drive efficiency in our operations in many different areas, of which sustainability is one,” says Mr. Share.

Logistics industry Alternative technology and fuels Sustainability economics is spreading The logistics industry is another example. UPS is also investigating alternative Such weighing of the economics of With the huge volume of goods delivered vehicle technologies and fuels, such as sustainability is spreading into other each day, even tiny efficiency gains can compressed natural gas, hybrid-electric, investment and project-related decisions translate into significant savings. Take UPS, all electric and hybrid-hydraulic. This too. which operates a fleet of some 100,000 alternative-fuel fleet has already driven At CLP Holdings, a Hong Kong- vehicles across more than 200 countries, nearly 200 million miles. In such areas, headquartered energy firm with 2009 delivering an average of 15 million packages UPS knows it needs to embrace new revenues of HK$50.7 billion (about US$6.5 each day to generate revenues of US$45.3 technologies, but here the economics billion), for example, the committee that billion in 2009. “If I can take a second out can be trickier. “Some pay back quickly, signs off on new projects and investments of handling those every day, that’s thirty whereas for others there is not a quick now includes the environmental affairs million dollars a year,” says Bob Stoffel, the pay-back. But we have to keep investing director, along with legal, HR and other firm’s Senior Vice President for engineering, in the future and we’ll make those trade- departments (see case study on page 32). strategy, supply chain distribution and offs,” says Mr. Stoffel. “So when you look sustainability until his retirement in at all the areas in which you can invest, you January 2011. The improved use of planning look at where you get the most return on technology alone has enabled UPS to trim investment and where you get the greatest 20 million miles a year from its deliveries, reduction in carbon.” by enabling optimization of collection and delivery routes, for example.

Sustainability prompting ﬁrms to develop new products and services

Sustainability is not only driving greater P&G exemplifies how leading firms are Developing a new focus efficiency internally, but is also prompting embracing sustainability as a source of All this points to a change in the way firms to develop new products and new growth. According to the survey, sustainability is being viewed. Siemens, services. P&G has embraced open about four in ten (39 percent) executives for example, has shifted over the past innovation to bring in new ideas for both see sustainability as a creator of new two years from a focus on risk and internal efficiencies and new or better business opportunities; far fewer disagree. compliance to something that directly products, such as an effective cold water And internal lessons can help shape drives business expansion. Siemens’ washing detergent. It actively encourages external solutions, too: Wayne Balta, Vice portfolio of environmental products and its 75,000 suppliers to suggest ideas, and President for corporate environmental services—including energy-efficient gas co-develops them with the vendors— affairs and product safety at IBM, says his turbines and offshore wind farms, as about half of its innovations are now firm’s long experience in improving the well as desalination and water-cleaning created this way. This in turn drives new environmental sustainability of various technologies—already outperforms the business growth: during 2007-12, it aims products and processes has in turn aided company’s other businesses. In fiscal to generate US$15 billion in sales from the company in developing new solutions 2009, it generated €23 billion (about US$32 products that help consumers reduce their for clients. billion) in sales from these products. environmental impact, such as by cutting energy used for laundry.

The global economic downturn of Streamline Power in the UK to large players For firms not willing or able to access 2008-10 has not been as detrimental to such as Ameresco in the US, have created external financing, another approach has the progress of corporate sustainability various “pay as you save” products, been to bundle up projects with longer and as might have been expected. However, which allows businesses to install energy shorter payback cycles. given that the financial services industry efficiency measures with no upfront costs “What some companies are doing is has been hardest hit, one of the challenges and with repayments that are less than the creating a portfolio of investments where created by the recession is difficulty in cashflow savings generated from reduced they group together investments with very obtaining financing for sustainability energy costs. short payback and that may not have big related projects. Such financing schemes are boosted by financial gains, with longer payback ones Businesses vying for financing for relevant the fact that many corporate investments that might have huge financial gains,” says investments were hit from two sides. seeking internal funding are often required Victoria Mills, Managing Director of the On the one hand, access to credit from to demonstrate a payback period of just 2-3 corporate partnerships program of the traditional sources has been substantially years, thus implying an annual return of 33 Environmental Defense Fund. curtailed, especially for small and midsize percent or better. “Many people would be In so doing, the basket of investments can companies. On the other hand, many happy to have a 6-7 percent return, in these help achieve the firm’s internal payback projects have become less attractive due times, when interest rates are so low, so requirements, thus persuading the CFO to to the sharp fall in many resource and the real challenge is in finding new financial support the initiatives. energy prices in 2009. “The business case structures to take it off companies’ balance deteriorated because of the input prices,” sheets,” says Mr. Buttkereit. says Siemens’ Sören Buttkereit. Accordingly, many vendors provide Nevertheless, there have been many financing schemes to accompany their creative examples of how some financing technologies. They compete against approaches might work. For example, various rivals, including those that are energy services companies (ESCOs), linked to specific energy utility firms or ranging from small providers such as other independent ESCOs.

The role of government

More laws and guidelines required Of those that are, twice as many want The field of sustainability is unusual in tougher domestic regulations than those that businesses generally agree that looking for weaker rules—and nearly four government should do more in terms times as many want tougher international of setting rules and targets. On almost regulations. every other issue, firms seek greater deregulation, but frustratingly slow progress in establishing new international laws and guidelines on sustainability have left companies in a tough position: aware that new rules are coming, but with no certainty as to what they will entail. Indeed, a large majority of the executives surveyed for this report are overwhelmingly in favor of an effective, global successor to the Kyoto Protocol— the first phase of which is due to end in 2012. Many are following up with political action: about one in five executives report their firms are lobbying government about domestic legislation relating to climate change.

Case Study: How FedEx, UPS and other logistics ﬁ rms are driving new transport innovation

In its efforts to increase its fleet’s whether it’s a price on carbon or something fuel efficiency, FedEx has lobbied the else. In other cases, certain industries US government to set fuel economy or businesses are trying to actually put and greenhouse gas regulations for the burden upon other sectors of the commercial vehicles. economy.” The goal was not only to aid internal This unequal burden is an important point, efforts to reduce consumption, but also and highlights the fact that the ongoing to help create a market for more efficient drive toward tougher regulations will help vehicles, as the firm alone doesn’t have some firms, just as it hinders others. On the purchasing power to transform the the one hand, significant numbers of market. “We felt the best way to [have an executives think new rules on climate impact] was through a regulatory approach, change, for example, would provide as it created a market for manufacturers fresh incentives to innovate and create to produce and sell these efficient new products (40 percent), or encourage technologies,” says Mitch Jackson, FedEx’s companies to adopt more wide-ranging Vice President for environmental affairs sustainability initiatives (39 percent). and sustainability. But as Mr. Jackson acknowledges, different companies will have different reasons for trying to shape the legislative agenda. “In some cases they’re trying to bring their greener innovative products to market and so they need legislation in order to do that,

Far fewer think otherwise. “Talking about “Talking about ‘green ‘green growth’, you’re saying you can actually increase growth if you are in growth’, you’re saying the right industries, and by the way that you can actually increase will increase resource efficiency,” says Siemens’ Mr. Buttkereit. growth if you are in the Goals and parameters right industries, and by Others add that the creation of certain the way that will increase high-level goals, such as the EU’s resource efﬁ ciency.” targeted 20 percent reduction in carbon emissions by 2020, or similar US plans Sören Buttkereit, Head, to cut emissions by 17 percent (albeit corporate sustainability from a different baseline), has provided companies parameters to guide their external ofﬁ ce, Siemens strategic planning: “We think it’s helpful in establishing benchmarks,” says UPS’s Mr. Stoffel.

A clearer picture

As things stand, companies cannot Still, there are decidedly mixed feelings as Twenty-two percent think such an yet fully assess the impact of the to the impact of a global climate accord. accord would deliver a more level playing ongoing climate change negotiations. Nearly half (46 percent) of executives field within their industry – in part polled think this would add to their because global rules are interpreted and The recently concluded COP16 talks regulatory burden – and increase operating implemented in widely varying fashions in Cancún produced a promising costs (41 percent). within individual countries. And 23 percent range of new agreements on think it will reduce the long-term strategic the post-2012 framework. These risks to their business from such things as include increased actions to reduce an adverse climate. Chart 4 emissions by developing countries and financial support and technology A global climate accord brings opportunities and challenges transfer mechanisms to support such (% of respondents who expect these impacts if a global climate change accord is reached) actions, but details on exactly how Increase regulatory burden 46% such mechanisms will work remain to Increase operating costs 41% be decided. Accordingly, executives have longer to wait before having a Provide incentives to innovate 40 % clear picture as to demands for their Provide incentives to adopt sustainability initiatives 39 % firms to cut emissions in the coming Bolster cost savings from energy efficiency initiatives 24 % years. Reduce long-term strategic risks to the business 23%

Deliver a more level playing field in their industry 22%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Source: Economist Intelligence Unit survey, October 2010

Measuring and reporting

The number of dedicated sustainability reports produced by companies has mushroomed over the past decade. In 1996, only about 300 firms globally did so; but as of early 2010, some 3,100 did, according to CSR Insight, a research firm. About one in three companies polled in our survey produce them now, and more than half will do so over the next two years. Smaller, privately held companies are least likely to report on these issues. Fully two-thirds of large companies, with annual revenues of US$5 billion or more, currently produce these reports, and a further 12 percent plan to do so within two years. Many are old hands: IBM, for example, has issued sustainability reports for two decades. A more recent take on this has been a movement toward integrated reporting, which provides both financial and non-financial information in a single document (see case study on page 24). Even without reporting, companies seeking to embrace sustainability need to measure their existing performance on a wide range of metrics, from energy consumption to water usage. “We look at very basic measures like greenhouse gas emissions, energy and water consumption, solid waste— these are all important, countable things,” says Victoria Mills, of the Environmental Defense Fund.

“We look at very basic measures like greenhouse gas emissions, energy and water consumption, solid waste—these are all important, countable things.” Victoria Mills, Managing Director, corporate partnerships program, Environmental Defense Fund

For many firms, this is already a long- Accordingly, as its clients’ businesses It also has a scale challenge in needing established activity. UPS, for example, grow, they can see their carbon emissions to measure consistently across the 214

tracks its CO2 emissions, water usage, per package or per kilo, for example. Such countries in which it operates. gallons of fuel used, energy consumption measurement is not straightforward: and so on. As part of its tracking, it although UPS has detailed data for its fleet establishes benchmarks that are of airplanes, it does not have equivalent meaningful to its specific business. It data when it sends some packages via a tracks not only its total emissions, but also commercial airliner or other third parties. its emissions on a density basis, based on packages, revenue and weight.

Measures and benchmarks “Most of it is in agriculture. Where [the Appropriate measures and benchmarks are complexity] comes in is that there’s not still being worked out for many industries, really a standardized methodology for adding to the overall challenge. Survey calculating or estimating these impacts,” respondents flag difficulties in finding says Mr. Share. He cites the example of meaningful benchmarks (76 percent) as a trying to calculate the total water used major or moderate challenge, along with within a specific product, given the paucity creating or finding reliable internal data (78 of data in the supply chain, especially percent). Take Anheuser-Busch InBev: the within agriculture, where official rates for company is aware that most of its impact, issues such as evapotranspiration (the in terms of its water and carbon footprint, sum of evaporation and plant transpiration is actually incurred outside of its walls. from the ground to the atmosphere) or groundwater usage are lacking. “That’s where the technical challenge is,” he says. Chart 5

Deciding how to measure is more difﬁcult than deciding what to measure (% of respondents who consider these a "major" or "moderate" challenge)

Creating or finding reliable internal data 78%

Finding meaningful benchmarks 76%

Determining what to report on 65%

Source: Economist Intelligence Unit survey, October 2010

Executives from both P&G and Siemens also highlight the challenge of sprawling product portfolios—and their impacts.

“We are in so many different businesses “A supplier scorecard… that size and breadth creates challenges,” allows us to extend our says Mr. Sauers. measuring and our tracking At Siemens, for example, it is difficult to calculate how many tons of greenhouse beyond just our own fence gas emissions are saved if a lighter and line.” more efficient set of trains is installed in a Len Sauers, Vice President for city. global sustainability, Procter & Nevertheless, both firms also benefit from their scale, by having resources to draw Gamble on, and a longer history of trying to track such things. At P&G, a Global Business Systems Group develops standards for tracking materials and raw inputs, ensuring plants consistently track energy, water, waste and so on. “We’re able to tap into all those systems to get a collective corporate number,” says Mr. Sauers.

P&G faces a new challenge in applying However, given that P&G’s key metrics “...you should have such systems across its vast supply chain. are well defined, this challenge is less programs in place toward It has co-developed a supplier scorecard daunting: “You should be tracking those with its partners, and is rolling it out to things anyway and you should have reduction in [energy, water its 400 largest suppliers. “It allows us to programs in place toward reduction in or other resources used] extend our measuring and our tracking [energy, water or other resources used] because they do lead to beyond just our own fence line,” says Mr. because they do lead to great cost Sauers. savings.” great cost savings.” Len Sauers, Vice President for global sustainability, Procter & Gamble

Case Study: CLP—From integrated processes to integrated reporting

Energy firm CLP Holdings has been After a robust debate, its board voted to working for some time to bolster both its reduce the standard rate of financial return internal and external efforts to grapple over the lifecycle of the project in order to with its environmental impact. ensure that the latest emissions reduction technologies were installed (despite this not On the internal front, the challenge has being a prerequisite of the bid). That way, been to add environmental metrics the company could remain on course for its and targets to its investment and overall emissions reductions targets. Ms. Ng project considerations. Accordingly, its admits this is an isolated case, but says such environmental affairs team now weighs in debates are now more common. Externally, on all new investments being considered. CLP works hard to communicate such “Our job is not to say yes or no, our job is efforts. It actively benchmarks itself against to say, this is everything that’s wrong with other firms, such as South Africa’s Eskom it, this is what you do, this is how much or France’s EDF, while also sharing best you should probably budget,” says Jeanne practices with these firms. Ng, Director of CLP’s environmental affairs team. The firm’s bid to build a new In 2009, it launched an interactive version coal-fired power plant in Jhajjar, India, of its sustainability report to make it exemplifies this. CLP had to balance the more accessible. It details its operating negative environmental impact of coal performance in line with Global Reporting against the social and economic benefits Initiative (GRI) standards, with data provided. independently verified at the plant level by local assessors.

The aggregate report is then checked Initiative (GRI) to set standards and again by another independent firm. CLP’s frameworks for integrated financial and progress on this front helped the firm win sustainability reporting. a sustainability reporting award from the Such integrated reporting is set to spread not-for-profit organization Globe Award, quickly, in both developed and emerging which works to recognize and encourage markets. In South Africa, for example, sustainability in business, society and several firms, including Anglo Platinum and academia. Eskom, have already produced integrated So what’s next? reports. This follows the introduction of Ms. Ng is now reviewing how to integrate the country’s King Report on Corporate CLP’s financial and sustainability reporting, Governance in 2009, with which all following in the footsteps of a handful companies listed on South Africa’s JSE of pioneers, such as BASF, Philips and Securities Exchange must comply. The Novo Nordisk. This won’t be easy, she report recommends that all firms produce admits: “There’s another learning process. an integrated report in line with GRI [Different departments] talk in different guidelines, or else give an explanation as to languages and yet we all need to agree [on why they have not. common] metrics.” But work is underway, and Ms. Ng is already on an International Integrated Reporting Committee working group, established in August 2010 by the Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting

Challenges ahead

Corporate sustainability advocates have made much progress in recent years. Today, corporate sustainability is a mainstream issue that is often led from the top. In many cases, sustainability-related activity is increasingly addressed as an efficiency issue. Indeed, given that leading firms have long embraced new efficiency initiatives, it is surprising that many firms are only now focusing on potential gains in resources and energy management. But embedding such thinking into the far greater pool of smaller and less regulated firms is far from assured. There are still many challenges to doing so. For one, relevant skills and experience are short on the ground, especially in a business context. CLP’s Director of the environmental affairs team, Jeanne Ng, notes that her team is comprised of environmental specialists, which is a challenge when trying to liaise with business unit heads. This is especially pertinent when different functions measure things in different ways, and highlights another need: the development of standards and definitions that can be applied across a range of industries, and rolled out consistently across global supply chains.

Establishing priorities ROI plays a role At a macro level, the global economic The economic environment can also environment hinders some, even as it aids affect the expected payback period from others. Of all the barriers to sustainability, efficiency projects, for example by creating this is the biggest: 45 percent of uncertainty about future resource costs. executives say business survival and For those firms that are heavily reliant on short-term financial pressures are bigger oil, such as UPS or FedEx, there may be priorities right now. Simply put, while most a strong long-term incentive to invest in a companies could save by cutting resources range of projects that can help to curb this costs, many management teams cannot fuel use. But for others, such as services drop their focus on retaining customers firms that consume relatively little fuel, and protecting revenues at this time. an expectation of flat energy prices in the And while many firms have embraced medium-term may lead them to focus on cost-cutting in recent years and boosted other initiatives that offer a faster return. resource- and energy-efficiency programs, some of the necessary capital investments At P&G, for example, all sustainability- are simply too large, especially for smaller related investment decisions, whether firms with limited access to finance. associated with implementing renewable energy or making environmental improvements in a particular operation, are subject to the same return on investment calculations.

“For every dollar we spend, we are getting US$1.50-2.00 back.” Wayne Balta, Vice president, corporate environmental affairs and product safety, IBM

But amidst this economic uncertainty, “If you think it is expensive to do things for Companies that do business in more than some executives see scope for companies the environment, you should try ignoring it. one location are likely to meet the most to maneuver ahead of rivals. “I think You’ll find out how expensive it gets.” He onerous requirements. Internationally, that’s really, at the end of the day, where says IBM’s decades-long effort to improve recent climate talks have delivered only the competitive advantage can be for environmental performance reaps major modest progress. All of this affects corporations, being able to overcome these returns: “For every dollar we spend, we are corporate decision-making: “I think the barriers and implement these kinds of getting US$1.50-2.00 back.” worst thing that could happen is that you things without those cost increases,” says A final challenge is the regulatory have uncertainty about regulation,” says Mr. Sauers. IBM’s Mr. Balta agrees, noting environment. In the US, where proposed Siemens’ Mr. Buttkereit. that within his firm, many environment- federal energy bills have stalled, states are related investment decisions have paid off. implementing their own regulations.

Conclusion—Seven key steps to implementing and beneﬁtting from corporate sustainability

Corporate sustainability comes in many • Set ambitious targets—and lead forms, and produces many different by example. Although many firms outcomes. In our global survey of are making solid progress by cutting resource use in specific departments, business executives, which polled a leading global firms are setting the wide range of industries and company pace by establishing tough, long-term sizes, executives were asked to provide goals that define a vision, balanced with an example of a benefit they had gained interim deadlines that force progress from a sustainability initiative. today. Both P&G and Anheuser-Busch • Use scenario planning to identify InBev have set themselves ambitious potential risks to your business—and goals for creating more sustainable new opportunities to exploit. A key businesses and are now focused on sustainability challenge, especially in achieving initial deadlines and targets. the environmental realm, relates to Decisive action here can often put firms regulatory and economic uncertainty ahead of the regulatory agenda, or and the likely impacts these might have. industry peers. Scenario planning can help establish a range of potential legislative and economic environments in which your firm might end up operating, putting particular challenges into focus and also sparking new ideas about emerging opportunities.

• Start measuring environmental inputs and productivity across your business. As the management maxim holds, what gets measured gets managed. Firms need to start measuring resource usage and productivity across all parts of their business, from water used per unit of output to energy consumed per delivery mile driven. At the outset, this can be a challenge for newcomers, especially in areas where data is difficult to obtain or proper guidelines and standards are not yet established. Global guidelines and standards can be helpful and are widely used. • Tap into employee engagement—both internally, and across business partners. Executives interviewed for this report cited the unexpectedly high levels of employee interest in their endeavors. Companies should tap into this enthusiasm, not only to increase engagement levels among staff, but also to gain access to new ideas and approaches at every level of the business. This can be extended to business and supply chain partners too. • Develop internal lessons into external products and services. Firms with experience of optimizing their own businesses have found this to be a rich source of expertise that can in turn help develop new products, services or innovations for clients.

IBM for example is drawing on its long • Benchmark and report progress. One experience of controlling and then of the key objectives for many firms preventing pollution to help inform and engaging with sustainability is the desire drive innovation in this area and develop to enhance their brand. Accordingly, it services to offer to clients, such as its is important to develop accurate and Smarter Planet proposition. transparent reporting to be shared • Explore other benefits that can be with a range of stakeholders, from derived from action on sustainability. potential investors and shareholders Consider what other opportunities may to clients and business partners. In result from actions on sustainability order to provide a relative measure of in your industry or market. Survey how the business is performing, firms respondents have discovered a wide need to benchmark themselves against array of benefits emerging from their their industry peers. They can do so by efforts. Aside from the improved reviewing industry metrics published resource efficiency, cost reductions through relevant organizations such and risk mitigation discussed in the as the World Business Council for report, other internal gains have included Sustainable Development, or by sharing better relations with suppliers and relevant data and best practices through partners, new products and services and industry bodies. This also helps to more motivated employees. Externally, develop appropriate standards and investor awareness may be improved, benchmarks for particular industries. and new markets may open up as a result.

Ted Senko, Global CEO Yvo de Boer, Special Global Advisor Climate Change & Sustainability Climate Change & Sustainability +1 212 872 6752 +44 20 7694 8173 [email protected] [email protected]

Catherine Lewis, Global Tax Leader Wim Bartels, Global Audit Leader Climate Change & Sustainability Climate Change & Sustainability +1 816 802 5240 +31 20 656 7783 [email protected] [email protected]

Barend van Bergen Head, KPMG’s Global Center of Excellence Climate Change & Sustainability +31 20 6564506 [email protected]

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The views and opinions expressed herein are those of the interviewees and survey respondents and do not necessarily represent the views and opinions of KPMG International and KPMG member firms. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Printed in the United Kingdom. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Publication name: Corporate Sustainability. Publication number: 314644. Publication date: April 2011. Printed on recycled material. Designed by Over The Woods.