The Business Case for Sustainability- Issues Affecting the Maximization of Benefits for ALL of Society

1. 8 February 2006 Environmental Science & Policy Seminar New Jersey Institute of Technology The Business Case for Sustainability-Issues Affecting the Maximization of Benefits for ALL of Society John L. Cusack johnlcusack@att.net Executive Director, NJ Higher Education Partnership for Sustainablity www.njheps.org President, Gifford Park Associates www.giffordpark.net

2. “ In the 19th century, • we were making money with money, • in the 21st century, • I believe and hope that we will use values to create value” • - Oliver Le Grand , • Chairman of the Board of Cortal • (a subsidiary of BNP Paribas)

3. “ No Place To Hide for the Irresponsible Business” • - Headline, Financial Times, • 29 September 2003

4. A Word From Our Sponsor…New Jersey HigherEducation Partnership for Sustainability (NJHEPS) NJHEPS is: • A consortium of 40+ NJ Colleges & Universities • an organization developing, promoting and implementing sustainability among higher education institutions, businesses, municipalities and citizens in NJ, the region and nationally • Founded in 1998, hosted at NJIT • Focused on energy efficiency, renewable energy, sustainable campus and building design (issued guidelines, BPU support) • Now an additional new focus on integrating social, economic and environmental (I.e., sustainability) issues into curriculum • Also targeting partnerships of higher education institutions with their communities and with similar higher ed sustainability groups in Northeast, Mid-Atlantic, nationally & globally

5. A Changing World for Senior Corporate Decision Makers Director’s & Officer’s Liability/Management Responsibility Company Image Balance Sheet Management Erosion of Public Trust Social and Environmental Disclosures Legislation and Regulation Shareholder Value Market Demands

6. Question: How Can Business Be Sustainable, and thus Create Environmental, Social and Economic Benefits/Profits? Many Components to the Issue: • Accounting/Measuring Performance • Taxes • Education • Scientific Understanding • Disclosure/Transparency • Accountability/Responsibility • Corporate Ethics (is that an oxymoron?) • Risk Assessment • Corporate Governance

7. Accounting/Measurement Present Systems Far From Perfect... • Social & Environmental issues don’t fit well in our 400+ year-old economic accounting systems • Traditionally, if an item could not be quantified, it was ignored (e.g., intangible assets, patents) • We need better ways of integrating sustainability issues into the business measurement system • “That which gets measured, gets managed” • But, how do you measure Corporate Sustainability? • Some rating systems are being used by investors

8. Sustainability Rating Providers for InvestorsA variety of sources... Three Largest, (Best?) & Most Global: • Innovest Strategic Value Advisors (ISVA) • Sustainable Asset Management (SAM) • Trucost Limited Others (many are national in scope): • Kinder, Lytenberg, Domini (KLD); Oekom; EIRIS; Arese; Ethibel; IRRC; Light Green Advisors; ISS; Core Ratings; Avanza; etc. [over 90 rating groups identified in a recent study done by GPA for a major multinational company] Note: traditional rating agencies starting to look at this field (e.g.,Moody’s now does governance ratings)

9. Innovest Rating Sample Results: Steel Sector- 3 Years

10. Innovest Ratings Sample Results: Telecom Sector

11. SAM/Dow Jones Sustainability Index Performance DJSGI World Index(December 1993 – March 2000, US Dollar, Price Index) DJSGI DJGI

12. Taxes Giving People The Wrong Incentives... • Taxes are often used to create incentives, not just to raise revenues (I.e., gas & oil drilling tax credits) • People agree that Profit, Jobs and Health Care are good, but we tax profits, jobs and health care! • We say Pollution is bad, but we don’t tax pollution! • Result : Management has an incentive to hide profit, and cut jobs & health care, but pollution is “free”- what is wrong with this picture? (Polish example) • Need political will and understanding to set better revenue-neutral incentives for corporate managers

13. Education Why Don’t People Know What They Don’t Know? • Business schools just starting to teach social and environmental issues to future business leaders • Examples: - Aspen Institute study of business schools - HP funding of CSR Chair at York University - FDU Institute of Sustainable Enterprise - Programs at UNC, Yale, Cornell, Michigan, Oregon, U. of California, etc. and in Europe • Need to integrate business and sustainability issues and education across all higher education

14. Scientific Understanding When must one act without certainty in all the facts? • “Don’t have to be a weatherman to know which way the wind blows”- Bob Dylan • Business executives operate in uncertainty all the time • Examples: - 2/3rds of investors still use active investment managers despite evidence that index funds outperform them. - White House says we need more facts on climate change, when number of global extreme weather events has risen from 150 in 1950 to 1600 in 2001 • Most European governments and citizens believe in the “precautionary principle”, which means test new products, medicines or chemicals BEFORE putting on the market, as opposed to recalling them AFTER damage is done

15. Disclosure/Transparency Investors can’t use information they don’t have... • Existing SEC and FASB rules cover some social and environmental issues, but have been ignored • Proposal before SEC to increase environmental disclosure is a start, but SEC moving slowly • Europe taking the lead, with countries like France requiring major corporations to report on their social and environmental impacts • Problem is standardization of reporting- GRI and SA-8000 are a start, but far from perfect

16. Accountability/Responsibility Post-Enron, Worldcom, Putnam, etc., who’s in charge? • Definition of Fiduciary Responsibility changing • Roles of Corporate Boards changing • Investor Pressure- both Mainstream & SRI • Supply Chain Issues increasing • Who should be held responsible? As the famous philosopher Pogo said, “we have met the enemy, and he is us…” • We all have to do something- as investors, educators, consumers, managers, voters...

17. Ethics What is a responsible corporation or institution? • Still a problem with the “entity that never dies- the corporation”- (hard to fear hell if you never die…) • However, corporations don’t hurt society or the environment, people do • Ethics and values are human issues set by society • Cultural values do differ by country, region and continent (look at Denmark & the current “cartoon” issue) • Will the “global society” help or hurt?

18. Risk Assessment Firms need to do a better job of assessing sustainability risks • As companies decentralize and expand, strategic inter-disciplinary risks (like sustainability) sometimes fall “between the cracks” of corporate management structures • As investors demand better disclosure of social/environmental liabilities more corporate understanding of sustainability risks is required • Thus, companies need to have a comprehensive system to identify, assess and mitigate social, environmental and economic risks and understand their potential impacts • Senior executives just starting to do this (BP, AIG, etc.) • National Association of Corporate Directors (NACD) suggested board risk committees as a “best practice” in a December 2002 report

19. Corporate Governance -The rules that govern how management manages... Definition- “Enhancing the Return on Capital through Increased Accountability.” Good corporate governance requires: • More accountability of directors, CEO’s, officers and managers of corporations. • More accountability of fund managers, trustees and investor shareholders. “Boards of Directors are like sub-atomic particles- they behave differently when observed” - Nell Minow

20. Example: Climate Pollution- It’s REAL, It’s HERE, It Will Have MAJOR Financial Impacts Climate Pollution will have a variety of financial impacts: • Health Insurance- “Climate change will lead to a resurgence in infectious disease unseen since the 19th century”- Paul Epstein, Harvard Medical School • Property Insurance- “World-wide economic losses due to natural disasters appear to be doubling every ten years, & have reached $1trillion over the past 15 years” - Munich Re • Impact on profits- “Companies will incur significant, & differing, material increases in operating costs due to increases in energy prices and GHG effects on suppliers” - Martin Whittaker, Swiss Re • 7 of 10 most expensive US disasters occurred in last 4 years, 6 of 10 most expensive US hurricanes in 2004/2005 • New Jersey has 5th highest amount of insured property at risk from hurricanes & storms (>$505b, as of 2004)

21. Corporate Governance & Climate PollutionWhy Do Investors Care?- It affects the Bottom Line…and the long term survival prospects of a company! • Fiduciary responsibilities of pension fund trustees, company board members and senior management regarding social & environmental issues like climate change & GHG emissions will continue to increase • In absence of corporate trust, verification of environmental and social performance will become increasingly important, creating new corporate reporting requirements and a new auditing field • Shareholders must be responsible too- (i.e., SEC says mutual funds voting proxies responsibly is the fund managers’ fiduciary responsibility, and is now required)

22. Value at Risk From Climate Change: Results of recent benchmarking exercise in the US energy sector…... Source: Value At Risk, CERES/Innovest, 2002

23. Corporate Governance & Climate Change Liability Disclosure • Corporate governance pressures on companies for reporting environmental compliance and disclosure, & to better identify & quantify emerging risks (like climate change) are increasing [Carbon Disclosure Project] • With recent studies indicating that 75% of CEO’s think climate is a serious business issue but only 25% say their firm is doing something, investors are VERY worried • Active and interested shareholders are submitting shareholder resolutions in increasing numbers on climate change issues (often attracting > 25% of the vote) • AIG says Directors &Officers insurance will not cover lawsuits by shareholders due to pollution exclusion; may cover if they disclose their climate risk management policy

24. Of Course, One Must Beware of Mere Superficial Changes...

25. Climate Change and the Financial World-Conclusions • Climate Change is a long term financial problem and financial markets are worried that firms are managing it poorly • Energy efficiency and GHG reduction costs are highly related to operating costs, and thus will directly affect financial results • Investors want to see more disclosure of how firms plan to assess, manage &mitigate potential climate change liabilities • Alternative energy will take a very long time to have an impact • Climate Change will present opportunities as well as problems • There will be winners and losers within industries, and across sectors (distributed generation vs. transmission lines)

26. Examples: How Poor Sustainability Management Can Reduce Shareholder Value • Aventis – Starlink genetically-modified corn • Union Carbide – Bhopal chemical leak • Exxon – Valdez oil spill • Sandoz – Warehouse fire, pollution of the Rhine • Royal Dutch/Shell – Brent Spar, Nigeria • Nike – “Sweatshops” in Asia • Monsanto – Genetically modified foods • ABB - Bakkun dam in Malaysia • GE – PCB in the Hudson & Housatonic Rivers • Elf Aquitaine – Erika tanker wreck off Brittany • Putnam Investments- allowing off-hours trading

27. Examples: How Innovative Sustainability Management Adds Shareholder Value • IBM Recycles computers and computer parts for use in leasing business- added $2 billion in sales in less than 3 years at 50% profit margin; • French chemical company Rhodia’s stock went up 20% in one day (12/05) after announcing CDM approval of GHG emission projects that will add $300m/yr to profits • DuPont invested $120m to reduce greenhouse gas emissions and added $240m/yr. to bottom line; • Patagonia and Timberland build businesses around clothing/apparel made by sustainable means.

28. In Summary- Companies can Materially Affect Their Bottom Line and Society in a Positive Fashion • However, major changes are needed in the ways we measure, assess, manage and assign responsibility for sustainability issues • Sustainability issues do have direct material financial impact, and are being used now as indicators of good corporate management and future financial performance of companies by investors • We are the ones responsible for making change happen!

29. A Final Thought- • “ It’s about demonstrating that companies can do the right thing while pursuing an economic return. That’s a vital part of the business school’s mission, because if business schools don’t teach it, who will? ” • - Dr. Steve Jones, new dean of UNC’s Kenan-Flagler Business School, in interview with the FT, 11/10/03