How Would We Recognize It If We Saw It? CAPITALISM 2.0: How Would We Recognize It If We Saw It? TSSS February 7, 2013 bobwillard@sympatico.ca www.sustainabilityadvantage.com

MY BACKBURNER QUESTIONS 2012 2009 2005 2002 Most sustainable enterprises? Characteristics of a sustainable enterprise?

Top 5 most sustainable companies on the planet? MIRROR MIRROR … Top 5 most sustainable companies on the planet? Thoughts from our TSSS audience on Feb. 7, 2013… Patagonia - 10 Interface – 20 Toyota – 1 Vancity – 2 GE – 1 Seventh Generation – 7 AutoShare, ZipCar – 2 Suncor – 2 Arcelor Metal Dofasco – 2 Marks & Spencer - 1

http://www.sam-group.com/ … 2012 results SAM RANKING “Sustainability leaders” in 58 sectors Used by DJSI Assesses over 2,000 corporations http://www.sam-group.com/ … 2012 results

FORTUNE MAGAZINE RANKING Reputation Attributes “Most admired companies” Chosen by businessmen Rank Top 10 1 Apple 2 Google 3 Amazon.com 4 Coca-Cola 5 IBM 6 FedEx 7 Berkshire Hathaway 8 Starbucks 9 Procter & Gamble 10 Southwest Airlines Reputation Attributes Innovation People management Use of corporate assets Social responsibility Quality of management Financial soundness Long-term investment Quality of products/services Global competitiveness http://money.cnn.com/magazines/fortune/most-admired/2012/full_list/… 2012 results

http://www.thedailybeast.com/newsweek/2012/ … 2012 results NEWSWEEK RANKING “Green rankings” Helped by Trucost Look at Global 500 & U.S. 500 Rank Top 10 Global 1 Santander Brasil 2 Wipro 3 Bradesco 4 IBM 5 National Bank Australia 6 BT Group 7 Munich Re 8 SAP 9 KPN 10 Marks & Spencer Category Wt’g Environmental Impact 45% Environmental Management Environmental Disclosure 10% 100% http://www.thedailybeast.com/newsweek/2012/ … 2012 results

Key Performance Indicators GLOBAL 100 3,500 global public companies Compared to what is needed e.g. Factor Four improvements Key Performance Indicators Energy productivity Carbon productivity Water productivity Waste productivity Innovation capacity % Taxes paid CEO-to-Average-Worker Pay Pension fund status Safety performance Employee turnover Leadership diversity Clean capitalism pay link http://www.global100.org/; 2013 list

http://www.global100.org/; 2013 list GLOBAL 100: CANADA Top in Canada 21. Teck Resources 40. Barrick Gold 57. CN Railway 60. TELUS 71. Nexen 79. Enbridge 81. Suncor Energy 85 Sun Life Financial 87. Royal Bank 88. Cenovus Energy http://www.global100.org/; 2013 list

MY BACKBURNER QUESTIONS 2012 2009 2005 2002 Stage 4 vs. Stage 5? Most sustainable enterprises? Characteristics of a sustainable enterprise?

SUSTAINABILITY JOURNEY 5. PURPOSE & PASSION 4. INTEGRATED STRATEGY 3. Beyond Compliance Animated to do a gradual build, when clicked. ***************************************** Excerpt from “The Next Sustainability Wave,” as context for the discussion. The Stage 3 to Stage 4 Transformation and the Stage 5 Difference The leap from Stage 3 to Stage 4 on the sustainability journey requires linking market opportunities with corporate responsibilities: creating positives like innovative products and services for the world’s poor while eliminating negatives like pollution, waste, and child labor; creating new value like sanitation, health, safe food, clean water, and new jobs while eliminating non-value; seeing partnerships with diverse stakeholders in the market as a source of innovative solutions; seeing sustainability as an engine for growth as well as risk mitigation. Stage 3 is about incremental, continuous improvements in eco-efficiency. Stage 4 is about discontinuous, leapfrogging breakthroughs. It is about creative destruction of existing manufacturing process and product design, and breakthroughs in new products, services, markets, and processes. It is a transformation from Stage 3, not a transition. Transformations are not trivial. Moving from Stage 3 to Stage 4 requires internalizing sustainability notions in profound ways, both personally and organizationally. Environmental considerations move from the Environmental Affairs or Environment, Health, and Safety (EHS) department into the boardroom. Social considerations move from the Community Relations or Corporate Donations department into the strategy function. Sustainability-based thinking, perspectives, and behaviors are integrated into everyday operating procedures and the culture of the organization.36 When these migrations happen, the metamorphosis is underway. The payoff is tapping into the revenue, innovation, and productivity side of the sustainability business case rather than just the risk mitigation and cost-savings side. What about Stage 5? Stage 5 is very different, but simultaneously very similar. About 90% of what Stage 4 and Stage 5 companies do looks the same. They both deploy business strategies that respect the environment, the community, and the ongoing business health of the firm. Motivations differ. Stage 4 companies “do the right things” so that they are successful businesses. Stage 5 companies are successful businesses so that they can continue to “do the right things.” The line between Stage 4 and Stage 5 in [the slide] denotes this significant difference. The distinction is not meant to be a value judgment. Frankly, if we got to the tipping point of companies using sustainability as a management discipline at Stage 4, I would be delighted. I am less concerned with the righteousness of motivations than I am with results. 2. Compliance 1. Pre-Compliance

“Over the last 10 years, the ‘Sustainability Imperative’ has emerged, magnified by escalating public and governmental concern about climate change, industrial pollution, food safety, and natural resource depletion, among other issues.” Lubin and Esty, HBR May 2010

“Expect the Unexpected: Building business value in a changing world,” KPMG, 2012

Porter and Kramer, HBR Jan-Feb 2011 “Capitalism is under siege … The purpose of a business must be redefined around creating shared value (CSV)… How to reinvent capitalism—and unleash a wave of innovation and growth” Porter and Kramer, HBR Jan-Feb 2011

CAPITALISM 2.0 Capitalism 1.0 Capitalism 2.0 Purpose of the Firm Maximize shareholder value; ROI; Growth Creating shared stakeholder value, including the Environment Legitimate capitals Financial Financial, Natural, Human, Social Bottom lines Profit -first Profit, People, Planet Source of financial capital Stock market; Big financial institutions; Absentee owners Stock market; Smaller financial institutions; Customers; Employees; Local communities Market focus Global Local Environmental and social impacts Externalized Internalized Accountability boundaries The Firm The Firm’s value chain, over its products’ life cycles Transparency As little as possible Naked Business model Take-Make-Waste; Linear Borrow-Use-Return; Circular

DOWN-TO-EARTH ECONOMY Wall Street’s Organizing Principles Nature’s Organizing Principle View of natural capital Limitless free resource, to be exploited Finite valuable resource, to be respected and restored Resource control Monopolized Shared Growth Infinite growth of money and consumption A stage in life’s endless regenerative cycles Timeframe Immediate return Sustained yield over time Efficiency measures Returns on financial capital Returns on social and natural capital Primary performance indicators Growth in financial returns, assets Life’s abundance, health, resilience, and creative potential Primary dynamic Competition to maximize self-interest Cooperation to optimize self- and community-interest Based on David Korten, “The Down-To-Earth Economy,” Yes! Magazine, Winter 2013

THE REAL WORLD

NESTED DEPENDENCIES Enough, for all, forever. Environment Human Society Human Economy X Enough, for all, forever.

TRULY SUSTAINABLE ENTERPRISE Environment Human Society A truly sustainable enterprise creates positive economic, environmental, and social value. Human Economy X If it were to operate forever, it would not only do no harm; it would do well by doing some good.

GOLD STANDARD FRAMEWORK ESG Governance Environmental Social

Breakout Group Discussion Question: ESG CRITERIA Breakout Group Discussion Question: List 5 ESG criteria that you would use to assess whether or not a company is a truly sustainable enterprise. “Mount Sustainability”

ESG CRITERIA Breakout Group Idea Harvesting: "Noble purpose" – but how do we measure this, what is/are the metric(s) Do consumers as well as investors understand the implications of supporting the company? Criteria for this could be direct or indirect, e.g. whether company is effective in educating/communicating investors/consumers to understand these effects/implications Fair wages and distribution of wealth throughout value chain – inputs/outputs No waste in network/ecosystem – if there is a product with waste must have way to reuse – closed loop process/concept

ESG CRITERIA Breakout Group Idea Harvesting: Degree of community/stakeholder engagement – sliding scale from hierarchy to cooperative (includes employees and broader community) Is it a ‘learning organization’ with ‘permission to fail’ PUMA – Is it possible to estimate what the environmental impact of all our supply chain operations are and convert that into a financial number – eg material resources, carbon, water – if these costs are considered what was seen as a profitable company can easily be seen as a losing company. Puma was a leader in assessing actual costs when by internalizing what were previously seen as externalities - they 'gave themselves a bill' for environmental costs

ESG CRITERIA Breakout Group Idea Harvesting: Need to be positive on all three legs of ESG or is there allowance to be negative/neutral on 1-2, if positive on other(s) – parallel to this is carbon trading –> can you 'buy yourself out?' of being 'bad' 100% of compensation for everyone in company not simply tied to shareholder value but aligned 100% to stakeholder value Equity: i.e. no one is exploited through activities/operations of company – could be evaluated on many levels including legal, living wage  if we dream big, let's look at company's whole value chain, not just the company (Big question – where does accountability end? How much is enough? When is enough enough?) And, if they ‘do too much good’, and put themselves out of business, then the G leg of the stool is broken, right?

ESG GOLD STANDARD CRITERIA Environmental Carbon positive Energy positive Water positive Materials positive Waste positive Provides services (vs. products) Restorative to ecosystems Social Fair share of taxes Labor rights & safe working conditions Fair employee remuneration Family-friendly benefits Engaged employees Local workers, purchases, & investments Products & services build social capital Governance / Financial Financially sustainable Ethical business practices Diverse senior leadership Transparent / Engaged stakeholders Sustainable business model, policies, & systems Sustainable value chain / Life-cycle accountability Sustainability champion / Leader of transformation

MY BACKBURNER QUESTIONS 2012 2009 2005 2002 Correlation with market value? Stage 4 vs. Stage 5? Most sustainable enterprises? Characteristics of a sustainable enterprise?

MARKET PERFORMANCE Robert G. Eccles et al, “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance,” HBS working paper 12-035, Nov. 25, 2011. http://www.hbs.edu/research/pdf/12-035.pdf..

REPORTING COMPANIES OUTPERFORM 53% of S&P 500 companies are published sustainability- or CSR-type reports in 2011, up from 20% in 2010 63% follow the Global Reporting Initiative (GRI) framework Between 2007 and 2011, companies that reported on their sustainability efforts outperformed the broad S&P 500 Index Governance and Accountability Institute, “2012 Corporate ESG / Sustainability / Responsibility Reporting: Does It Matter?” December 2012

IIRC Will create the globally accepted International <IR> Framework that includes financial, governance, management commentary, and sustainability reporting. Reports will include material sustainability impacts, and show how the company creates value in the form of financial, manufactured, human, intellectual, and natural capitals. December 2013: Version 1.0 of the Framework Q1-Q4 2014: Pilot Program with the Business Network (80 companies) and the Investor Network (30 investors) International Integrated Reporting Council (IIRC) http://www.theiirc.org/

Sustainability Accounting Standards Board (SASB) http://www.sasb.org/ Will develop industry-specific standards to measure and disclose ESG performance on the top 10 material sustainability issues, for mandatory Form 10-K filings with the SEC. A complete set of standards covering all 10 sectors and 89 industries will be available in Q2 2015. Sustainability Accounting Standards Board (SASB) http://www.sasb.org/

GISR Will create a world class corporate sustainability ratings standard, to embed sustainability into the capital markets worldwide Global Initiative for Sustainability Ratings http://ratesustainability.org/resources/

How Would We Recognize It If We Saw It? CAPITALISM 2.0: How Would We Recognize It If We Saw It? TSSS February 7, 2013 bobwillard@sympatico.ca www.sustainabilityadvantage.com