NIRI ESG Presentation January 2009

©2009 Wallace Partners. All Rights Reserved.
Green is the New Black:
Why Environmental, Social and Governance Issues
Should Be Part of Your Company’s Story in 2009
Mike Wallace, President
Wallace Partners
Direct: 626.403.6921
Cell: 415.810.9095
Email: mike@wallacepartners.net

Why should you care?

Who is interested?

So what in the hell is a carbon footprint?

Comparing Carbon Disclosures
0.03%3.02124611,703536,000PG&E
0.46%71.1528582115,35712,609,867Exelon
0.73%124.644991,28917,13222,089,040Constellation Energy Group
1.05%14.33571,8681,3602,540,117AVISTA Corp
1.13%139.975601,99612,43024,805,542Public Service Enterprise Grp
1.13%78.453141,9976,96313,904,081WPS Resources Corporation
1.27%32.571302,2432,5735,771,509Puget Energy Inc.
1.63%128.525142,8837,89922,777,035Nisource Inc.
1.80%182.237293,19610,10632,295,775Entergy Corp
1.89%39.201573,3452,0776,947,618PNM Resources, Inc.
2.13%255.941,0243,78311,98945,359,808FirstEnergy
2.26%267.171,0693,99711,84647,349,255FPL Group
2.63%163.806554,6686,21929,029,910PPL Corporation
2.67%80.413224,7343,01014,250,000Teco Energy Inc.
2.70%282.131,1294,79110,43750,000,000TXU
2.85%276.481,1065,0459,71249,000,000Reliant Energy Inc.
3.11%118.494745,5043,81621,000,000Wisconsin Energy Corporation
3.24%327.601,3105,74410,10858,059,820Progress Energy Inc.
3.75%361.091,4446,6489,62563,993,950Xcel Energy Inc.
4.69%140.255618,3192,98824,856,860Pinnacle West Capital Corp
5.70%773.023,09210,10813,554137,000,000Southern Company
6.59%84.6433911,6741,28515,000,000DPL Inc.
6.82%826.433,30612,09412,111146,464,960American Electric Power
% of
Turnov
er
Cost of 25%
reduction at
$22.57 ($Mn)
Cost of carbon priced at $22.57
(EU ETS Average for 2005) in
$Mn
Carbon
Intensity
(tCO2/$Mn)
Revenue
($Mn)
Emissions
disclosed
(tonnes)
Company

Sector Study: Electric Utilities 265
 42% of Electric Utilities answered the questionnaire
 30% provided quantified emissions data
 67% of companies that are members of the EU ETS
provided emissions data
Response rates were low.
The Electric Utilities sector is very carbon intensive
(25% of global CO2 emissions).

Who really cares?

Shareholder Initiatives & Coalitions
 Principles for Responsible Investment (PRI)
 Started 2006
 Currently represents over $15 Trillion in investment capital
 235 signatories
 Investor Network on Climate Risk (INCR)
 Started 2003 with 10 members representing $600 Million
 68 members
 Carbon Disclosure Project (CDP)
 Started 2002 with 35 signatory groups representing $4.5 Trillion
 385 signatory groups
 Institutional Investors Group on Climate Change (IIGCC)
 Started 2001
 Currently represents $5.4 Trillion in investment capital
 42 members
 Interfaith Center on Corporate Responsibility (ICCR)
 Started 1972
 Currently represents over $100 Billion
 275 members

Investor Network on Climate Risk
 California
 Connecticut
 Florida
 Iowa
 Illinois
 Kentucky
 Maine
 Maryland
 New Mexico
 New York
 New Jersey
 Nevada
 North Carolina
 Oregon
 Pennsylvania
 Rhode Island
 Vermont
 Wisconsin
68 members representing over $7 Trillion in investment dollars
State Pension Plans with a position on carbon

Latest Shareholder Initiatives
 Launched in December 2008
 First voluntary, global sector-wide framework for financial
services (banks and insurers) to address climate change.
 Corporate banks will:
 Assess the climate-related risks in their loans and investments
 Engage significant suppliers on climate change issues
 Wide Scope for Principles:
 Asset management
 Retail banking
 Insurance and re-insurance
 Project finance
 Investment and corporate banking

385 Signatory Investors representing over $57 trillion in assets
Announced Strategic Partnerships in September 2008
 "CDP data on Bloomberg allows users to access information about
carbon emissions of companies, helps investors to assess the potential
regulatory impact on their investments, and creates greater transparency
and more tools for Bloomberg customers to participate in the emissions
trading markets."
 “Companies need to measure and report their carbon emissions and be
clear about how they are managing them. Unless they do so, they risk
losing sight of the impact of climate change on the long-term financial
health and future prospects of their business.”

Investors push for corporate
responsibility pledge Reuters 27
October 2008
 52 investors representing more
than $4.4 trillion worth of assets
 Letters to CEOs of 9,000 listed
companies urging them to sign
up to key corporate
responsibility principles
 Calling on companies to sign the
Global Compact - a set of
international standards on anti-
corruption measures, human
rights and the environment
United Nations Initiatives

But these are just the radicals . . .
Californian’s . . . .
Politicians . . . .
Activist Shareholders . . . .
Europeans . . . .
. . . . right?

Who else is interested?

Who is analyzing sustainability?

Social
Investment in the Future
Environment
ES Management
Corporate Governance
Auditfees,
Option
expensing
CEO/Chair separation,
IndependentBoardCommittees,
CEO compensation
Block holdings,
Protectionof
minority
shareholders
ES Reportingand
Assurance
Leadership diversity,Leadership
compensationlink toES performance
LeadershipES
responsibility
Fatalities,Injury rates,
Payrollper employee
Number ofemployees andcontractors,
Employeediversity atalllevels,Employee
health,recruitmentpolicy,labour rights
andtraining
Humanrights and
security,Business ethics
andtransparency
Resourceuse,Hazardous
spills anddischarges
GHG emissions andtrading,Waste
management,Investmentingas assets
Renewable andalternative
energy,Biodiversity and
ecosystem management
R&Dand Capex versus returns to
capitalproviders,Growthversus
maintenance capex
Community investment
Access to (high quality) resources, brand, new products,
advertising, intellectual property, supply chain
Returns, earnings growth,
dividend growth, capital structure
Stock market performance
Day to day... ... Vision...Medium term...Day to day... ... Vision...Medium term...
Economy
- Markets
- Exchange rates
- Interest rates
- Commodity prices
- Globalisation
- Energysupply /
demand
- Emerging markets
- BRICs
Society
- Communities
- Population growth
- Health, disease
pandemics
- Consumers
- Suppliers
- NGOs, lobbygroups
- Education
- Government policy, taxes,
regulations
Industry
- Innovation, technological
advances
- New competition
- Substitutes
- New regions, new
markets, new products
- Costs, incl. taxes
- Market share
- Public image
- Regulations
Environment
- Water
- Land
- Animals, plants
- Air
- Weather patterns
- Climate change
- Biodiversity
- Agriculture
Industry Themes and Company Valuation
R&Dinvestment
Methodology at Goldman Sachs

What is ESG?

What is ESG?
 CSR - Corporate Social Responsibility
 SD – Sustainable Development
 CC - Corporate Citizenship
 BE – Business Ethics
 CG – Corporate Governance
 ESG – Environmental, Social and Governance
 Footprint – Environmental & Carbon
Transparency, Materiality, Accountability,
Balanced Reporting, Stakeholder Engagement
Like any good industry we need some lingo . . .

Sustainability: Definitions & Perceptions
“Development that meets
the needs of the present
without compromising the
ability of future generations
to meet their own needs”
~U.N. Brundtland
Commission, 1987
 “The business of business is business,
not sustainability.”
 “Sustainability seems to encompass
everything under the sun. It’s just
more tree-hugger mumbo jumbo.”
 “Sustainability is about good
citizenship and public relations.
We’re already doing that. There’s
nothing more we need to do.”
 “Mushy”
 “Berkeley-esque”

Changing Perceptions
Economist
2004: CSR is philanthropy at a corporation’s expense.
2008: CSR is just good business.

Are companies taking this seriously?

 More than 90% of CEOs are doing more
than they did 5 years ago to incorporate
environmental, social, and governance issues
into strategy and operations:
 72% of CEOs: corporate responsibility should be embedded
fully into strategy and operations
 59% of CEOs: corporate responsibility should be embedded
into global supply chains
How are companies responding?

How is the market evolving?
Global Report Output by Year

How is the market evolving?
Global Report Output by Type

Global Reporting Initiative
 Reporting guidelines include reporting principles, standard
disclosures of on management systems and 47 core (and 32
“additional”) performance indicators
 Over 1,000 organizations (both private and public sector) across
60 countries report using some version of the GRI Guidelines

Who’s involved in the GRI?
GRI Organizational Stakeholders
GRI Reporters

UN Global Compact
 Promotes responsible corporate citizenship so that business can be
part of the solution to the challenges of globalization.
 Over 6,000 organizations - businesses, NGOs, and other
stakeholders are signatories

Who’s on the UN Global Compact?

CorporateRegister.com
 18685 CSR reports across 4748 companies as of November 3,
2008
 Quick references to GRI, UN Global Compact and other CSR
affiliations

Sustainability Reporting
KPMG Study (October 2008)
 74% of top 100 US companies published corporate
responsibility (CR) information in 2008 either as part of their
annual financial report or as a separate document
 Doubled since 2005 - up from 37%
 80% of Global Fortune 250 companies now release CR data
 Up from 64% in KPMG’s 2005 International analysis
 Now driven by economical concerns, rather than ethical
 Reasons cited:
 70% cited ethical considerations as primary driver for CR disclosures
 50% cited economic concerns as the leading reason

Employees – Attraction & Retention
“It is one of the soft things that many companies don’t
understand but it is crucial in the retention and moral
of employees . . . It is amazing how the highest
talented people will grill you about your sustainability
practices in job interviews. … We’ve seen a lot more
interest in it, so it really does matter.”
Larry Vertal, senior strategist at AMD

Employees – Attraction & Retention
Survey of 759 graduating MBAs at 11 top business
schools reveals that the future business leaders rank
corporate social responsibility high on their list of
values, and they are willing to sacrifice a significant
part of their salaries to find an employer whose
thinking is in synch with their own.
STANFORD GRADUATE SCHOOL OF BUSINESS June 2008

Customers – The Wal-Mart Effect
October’s headlines:
- Wal-Mart Suppliers Face Energy, Other Mandates – WSJ
- Wal-Mart to seek greener supply chain – FT
- Wal-Mart aims to go green with global supply chain makeover – NYT
 Global Responsible Sourcing Initiative
 CEOs from more than 1,000 suppliers convened in Beijing
 Wal-Mart CEO sets out a range of objectives for the company's supply chain
and for its Chinese retail operations, which will include targets for the
reduction of water and energy usage, reductions in packaging, and
commitments to develop more sustainable products.
Some of those impacted:
Procter & Gamble FedEx
Kimberly-Clark Lenovo
Coca-Cola Newell Rubbermaid

Customers – Industry Initiatives
Collaborating to Help Ensure Safe Conditions, Worker
Rights and Environmental Responsibility in the Global
Electronics Supply Chain
EICC sets forth performance, compliance, auditing and reporting
guidelines across five areas of social responsibility:
 Labor
 Health and Safety
 Environmental
 Management System
 Ethics

How does this relate to performance &
governance?

Who’s measuring what & how?

Sustainability Criteria
 Corporate Environmental
Policy
 Stakeholder Communication
 Strategic Planning
 Code of Conduct
 Reduction Targets
 Environmental Management
Systems
 Corporate Citizenship /
Philanthropy
 Labor Practice Indicators
 Human Capital Development
 Social Reporting
 Talent Attraction and
Retention
 Corporate
Environmental Policy
 Monitoring and Reporting
 Social and Stakeholder
Criteria
 Human Rights Criteria
 Supply Chain Labor
Standards Criteria
 Countering Bribery Criteria
 Beneficial Products and
Services
 Pollution Control and
Prevention
 Hazardous Waste
 Regulatory Problems
 Substantial Emissions
 Community
 Diversity
 Employee Relations
 Human Rights
 Product
EnvironmentalSocial

A quick snapshot: The Tech Sector
AAXToshiba
GAXNEC
GA/AAXXMicrosoft
GA/AAXXIBM
GA/AAXXXIntel
GA/AAXXXHP
GAXFujitsu
AAXEMC
GA/AAXXDell
AAX
Computer
Associates
AAXApple
Fortune’s
Most Admired
Business Ethics
- Top 100
FTSE4GoodDJSI

A GHG Focus on Tech (2006 data)
Environmental / CSR Report114.003,870,617.292,258.275.6053,763.08Diversified IndustrialsToshiba
Environmental / CSR Report76.491,972,684.661,155,049.0840,892.71Computer HardwareNEC
Environmental / CSR Report16.64703,681.4333,347.3044,282.00SoftwareMicrosoft
Previous Year42.243,196,249.88665,360.5991,424.00Computer ServicesIBM
Environmental / CSR Report159.844,590,525.271,065,062.1035,382.00SemiconductorsIntel
Environmental / CSR Report42.683,507,308.10404,890.1091,658.00Computer HardwareHP
Exact (Communicated)51.721,669,306.84431,146.6240,608.66Computer HardwareFujitsu
Environmental / CSR Report45.00461,560.9640,429.0811,155.09Computer HardwareEMC
Previous Year31.821,385,131.31393,802.4055,908.00Computer HardwareDell
Estimated17.5750,794.8215,904.253,796.00SoftwareCA, Inc.
Estimated41.43463,959.80336,180.8519,315.00Computer HardwareApple
GHG Data Source
Total CO2
Intensity
(tonnes /
$m revenue)
Indirect
Quantity
CO2
(tonnes)
Direct
Quantity
CO2
(tonnes)
Revenue
($Millions)
ICB SubsectorCompany

 Covering six sectors - energy, mining, steel, food,
beverages, and media - the companies that lead in
implementing environmental, social, and
governance (ESG) policies have outperformed the
general stock market by 25% since August 2005.
 In addition, 72% of these companies have
outperformed their peers over the same period.
Is there a positive correlation?

An investors Perspective
City National Bank

How do companies deal with this?

Who are we helping?

What does this mean to IROs?
 There are dozens of organizations rating, ranking, and publicly
judging the sustainability performance of thousands of companies
 A wide variety of sustainability performance indicators are
being used by the world’s most influential financial institutions
 Increased voluntary reporting, coupled with enhanced researching
capabilities creates a new level of transparency and
comparability
 Quantified data and analysis is becoming more readily available
and reliable
 Not reporting on sustainability sends its own message
 Inconsistent reporting creates legal, financial, reputational
and governance risk
 Every company – large/small, public/private - is faced with
increasing sustainability expectations
The Challenges:

Extra Benefits
 Human Capital
 Customers/Consumers – Sales
 Shareholders/Financiers/Insurers
 Reduced operational costs
In 2009:
 Increased Public Funding

Capital & Reputational Benefits
 Opportunity to validate your
firm as a sustainability leader
within industry
 Opportunity to attract a growing
subset of investors
 Attractive indices for pensions
and institutional funds (Many of
whom lead Investor Coalitions
on Sustainability)
 Multi-faceted PR opportunity

Business Integration Process
 Establish a Governance Council
 Who owns the success of this initiative?
 Which stakeholders are most affected?
 Benchmarking / Market Analysis
 Where do you sit amongst your peers?
 Where are your future opportunities?
 Internal Assessment
 Where do you sit in your own eyes?
 Who do you believe are your stakeholders?
 External Assessment
 What do key stakeholders think of you?
 Who else is a key stakeholder?
 Gap Analysis
 What’s the difference between the inside and outside?
 What is being measured, and what does the market want measured?

Case Study: Genentech
 Benchmarking – CSR Performance Matrix
 Engagement
 Internal Assessment
 External Assessment
 Gap Analysis
 Optimization – measure, manage, report &
engage
 Monitoring & Continuous Improvement

Industry Review of Sustainable Practices
 Biotechnology
 Pharmaceuticals
 Companies studied by…
 Market capitalization
 Growth profiles
 52 companies selected
 43 sustainability reports
found
 Evaluated these companies for…
 Sustainability definition
 Sustainable Governance structure
 Environmental, social, & economic
indicators
 Sustainability goals & progress
 Industry-specific issues
 Scope & format of report

Definitions of Sustainability
 Johnson & Johnson
 “We define sustainable growth as achieving
economic viability while promoting social
equity & environmental protection.”
 Pfizer
 “Citizenship defines our role in local &
global communities and how we strive to
conduct business responsibly in a changing
world.”
 Genzyme
 “We are driven, first and always, by our
commitment to patients… The talents,
energy, & determination of each employee
enables us to do this important work…
Our commitment also extends to the
environment and the communities where we
operate.”
 Roche
 “We are committed to sustainability and
thus to running our business in a way that is
ethical, responsible and creates long-term
value. And, since it takes up to 12 years to
bring a new drug to market, our business
model inevitably has a long-term focus. We
must be responsive to developments in science
and society, generate a level of resources that
ensures our independence and be willing to
take calculated risks.”
 Baxter
 “We use the term “sustainability” to describe
our long-term approach to balancing our
business priorities with our social, economic
& environmental responsibilities. These
efforts align with and support the company’s
higher purpose of saving & sustaining lives.”

Sustainability Reporting Focus: BiopPharma
Sustainability Reporting Scope of Biotech/Pharma Companies
based on size of company
0
2
4
6
8
10
12
Below $5B Between $5B and
$20B
Over $20B
numberofcompanies
EHS + Beyond + GRI
EHS + Beyond
EHS only
no report

Sustainability Indicators & Goals
 Example: Greenhouse Gas (GHG) Reduction Goals
 Calculation methodologies of great interest…
J&J199020107
NovoNordisk2004201410
AstraZeneca2005201012
Lonza2000201025
Company
Base
Yr.
Target
Yr.
%
Red.
‘Absolute’
BMS
Bayer
Merck
Lily
Pfizer
Company
Sales2001201010
Prod2005201510
Sq. Ft.2004200825
Sales2003201033
Sales2000200735
Norm.
By
Base
Yr.
Target
Yr.
%
Red.
‘Normalized’
vs.

Potential Sustainability Issues
Pharma Specific Issues Economic Issues
Environmental IssuesSocial Issues
* Not specifically covered by DJSI
Climate
strategy
Eco-efficiency
(energy /
water)
Forest
products*
Pharma in the
Environment*
Public policy /
lobbying
R&D
Corporate
Governance
Risk
Management
Workplace
Diversity
Occ Health
& Safety
Employee
welfare and
benefits
Philanthropy
Supplier
management
Community
Involvement
Bioethics
Animal
Testing
Access to
Medicine
Genetically
Modified
Organisms*
Clinical
Trials/Product
Safety
Ethics/
Marketing
Intellectual
Property
Rights*
Framework: Dow Jones Sustainability Index

Internal Stakeholders
 Recognizing industry trends…
 We then needed to look internally for ‘Value’ & ‘Guidance’
 20 people selected for 1:1 sustainability discussions
 Interview checklist developed
 Stakeholders
 Who’s important for our focus?
 Sustainability issues
 Issues of strength, opportunity, & value?
 Perceptions of our sustainability goals
 Overall business value of sustainability
 Time spent for conducting and compiling this was invaluable

BioPharma External Sensing
 Besides the industry study and internal interviews, we spoke
with…
 SAM
 Key partner
 Certification body
 CA Climate Action Registry
 Recurring themes:
 Bio / pharma’s “impact” on climate issues not significant, although
many stakeholders track this issue closely
 Water is important
 Supplier management
 Access to medicine is key bio / pharma issue
 PIE - to watch

Sustainability at Genentech
“Our current programs are focused on reducing our
environmental impacts and assuring personnel safety
& health.
We understand that sustainability is a broader
concept that encompasses not only the environmental,
but also the social and economic aspects of our
business.
As a bio-pharmaceutical company, the social element
is important. In fact, Genentech has strong and
award-winning programs for the management of a
variety of business issues, such as access to medicine,
innovation in research, clinical trial practices, and
employee welfare and benefits.”
Source: 2007 Sustainability Report

GNE Sustainability Governance
 During 2007, a number of
changes were made to
strengthen sustainability
governance processes.
 Sustainability Committee
 Senior Mgmt. Focused
 ‘Strategic’
 Environmental Sustainability Team
 Middle Mgmt.
 ‘Tactical’
 Green Genes Club
 Employee-based
 Activities & Communication
Green Genes
Employee Club
Sustainability
Committee
Env Sustainability
Team

NIRI ESG Presentation January 2009

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NIRI ESG Presentation January 2009