Global Corporate Citizenship Environmental Business...

Global Corporate CitizenshipEnvironmental Business Council of New England, Inc.

Greg HintzMcKinsey & Company

February 26, 2007

BUSINESS OPERATES WITHIN AN OVERALL SOCIAL CONTRACT

BusinessFormal contract

Semi-formal contract

Frontierexpectations

Society

Expectations and rules on business are explicit and often bound by law (e.g., regulation, tax policy, private contracts)

Expectations have not (yet) consolidated on emerging issues (e.g., towards food companies regarding health implications associated with obesity)

Societal expectations of business are not codified but implicitly agreed (e.g., treatment of workers at a national level)

Governance

LEADERS MUST CONFRONT DAUNTING ESG ISSUES

Environmental

Climate change and energy efficiency

CO2 emissions or global warming

Corruption

Particularly important in weak governance states

Labor practices

Within companies, but increasingly in supply chains

Environment

Biodiversity and other environmental issues

Trust

Eroding trust in companies

Healthcare

Rising healthcare costs and managing workforce health

Natural resources

Water was particularly important

Education/Talent constraints

Sourcing talent in local mar-kets is becoming a challenge

Social

% of respondents*

** For example, by providing good jobs, making philanthropic donations, and going beyond legal requirements in minimizing pollution and other negative effects of business

Source: September 2007 McKinsey survey of 7,751 consumers in Brazil, Canada, China, France, Germany, India, UK, US; July 2006 McKinsey survey of 4,063 consumers in China, France, Germany, India, Japan, United Kingdom, United States,; McKinsey Quarterly surveys of 4,238 global business executives (in December 2005) and of 2,687 global business executives (in September 2007)

89

11

Consumer

16

84

Executive

Focus solely on providing thehighest possible returns to investors while obeying alllaws and regulations

Generate high returns toinvestors but balance this withcontributions to the broaderpublic good**

Which of the following statements best describes the role that large corporations (public and private) should play in society?

88

12

Consumer

100%

Executive

84

16

2006 2007

Repeated Question in 2007

Consumers

Executives

CONSUMERS AND EXECUTIVES CONTINUE TO BELIEVE THAT BUSINESS SHOULD PLAY A WIDER ROLE IN SOCIETY

FOR EXECUTIVES, CLIMATE CHANGE HAS BECOME A CRITICAL ISSUE THAT COMPANIES MUST ADDRESS TO REMAIN COMPETITIVE

4

13

13

13

15

16

16

16

20

22

22

24

24

25

48

3

14

11

12

18

17

9

13

17

28

26

41

23

29

28

Human rights standards

Environmental issues, including climate change

Health care and other benefits for employees

Demand for healthier/safer products

Pay inequality between senior executives and other emplo

Demand for more investment in developing countries

Opposition to foreign investment and freer trade

Demand for more ethically produced products

Privacy and data security

Affordable cost of products for poor consumers

Job losses from offshoring

Ethical standards for advertising and marketing

Political influence/involvement of companies

Workplace conditions and safety

Pension and retirement benefits

2007

2005

5

9

12

15

15

16

16

16

18

19

21

21

25

33

51

5

12

9

11

18

21

19

17

15

23

18

19

42

33

31

Affordability of products for poorer consumers


Health care benefits and other employee benefits

Job losses and offshoring


Political influence/involvement of companies

Pay inequality between senior executives and other employees


Demands for more investment in poor developing countries

Human-rights standards




Demand for healthier/safer products


Top Issues - public/political attention Top Issues - impact on shareholder value

CONSUMERS AND EXECUTIVES AGREE THAT THE ENVIRONMENT IS AN IMPORTANT ISSUE, THEY DO NOT AGREE ON OTHER ISSUES

Top 3

Which issues will be most important in the next five years? Select 3

5

4

5

6

7

9

12

16

18

19

21

28

31

31

33

55

2007


Demand for healthier or safer products


Health care benefits and other employee benefits

Affordable cost of products for poorer consumers

Human-rights standards


Job losses from moving jobs overseas



Demands for more investment in developing countries


Political influence/political involvement of companies

High level of executive compensation


Other (please specify)

Consumers Executives

8

9

16

19

16

12

15

33

25

18

5

15

21

16

21

51

2007

% of respondents selecting each response

Repeated Question in 2007*

If large companies want to improve their overall reputation, which of the following actions do you think would be most effective? (Please select one answer only)

Top Action

* New answers were added to 2007 survey, therefore results are not comparable to 2006 surveySource: September 2007 McKinsey survey of 7,751 consumers in Brazil, Canada, China, France, Germany, India, UK, US

1

6

5

8

4

8

22

23

10

13

8

8

9

2

6

7

22Improving benefits and conditions for employees

15Taking action to become more environmentally friendly

14Limiting redundancies and moving of jobs overseas

10Being transparent about business practices

Tightening safety and environmental procedures

Limiting political contributions and influence

Limiting growth of senior management pay

Tightening corporate-governance procedures

Increasing philanthropy /social investment

Other (please specify) 2

6

4

5

8

15

21

14

13

12

1

2

3

3

3

18

20

28

11

11

1

4

2

5

7

7

30

21

10

13

1

7

1

9

3

11

10

17

17

24

0

3

3

6

1

19

18

10

20

20

7

0

6

1

8

10

17

18

11

21

THE ACTIONS THAT CONSUMERS THINK WOULD BE MOST EFFECTIVE IN IMPROVING A COMPANY’S REPUTATION

FOR CONSUMERS, THE ENVIRONMENT IS THE #1 ISSUE GLOBALLY, BUT THERE IS LESS CONSENSUS ON THE IMPORTANCE OF OTHER ISSUES

Rank of Issue in 2007

Environmental issues, including climate change 1 2 1 1 1 2 1 2 1

Demand for healthier or safer products 2 5 3 4 3 6 3 3 2

Pension and retirement benefits 3 4 5 2 4 1 8 4 7

Health care benefits and other employee benefits 4 1 2 5 8 8 5 1 8

Affordable cost of products for poorer consumers 5 6 4 3 6 3 2 5 3

Human-rights standards 6 8 8 8 2 9 4 9 4

Workplace conditions and safety 7 9 6 10 7 4 6 7 6

Job losses from moving jobs overseas 8 3 7 6 5 5 13 13 13

Privacy and data security 9 7 9 7 11 7 9 6 10

Demand for more ethically produced products 10 10 10 9 9 10 10 8 9

Demands for more investment in developing countries 11 16 16 11 10 14 7 12 5

Ethical standards for advertising and marketing 12 12 11 12 15 16 11 11 11

Political influence/political involvement of companies 13 11 13 14 14 12 12 14 14

High level of executive compensation 14 15 14 16 13 11 15 10 15

Other (please specify) 15 13 12 13 16 15 16 16 12

Opposition to foreign investment and freer trade 16 14 15 15 12 13 14 15 16

Which issues will be most important in the next five years? Select 3

Source: September 2007 McKinsey survey of 7,751 consumers in Brazil, Canada, China, France, Germany, India, UK, US

Source: IPCC Draft Synthesis report – May 2007; team analysis

The 4th IPCC report

• “Warming of the climate system is unequivocal”: 11 of the 12 past years have been the warmest since 1850, when temperature chronicles begin

• Most warming over the past 50 years is “very likely due to anthropogenic greenhouse gas increases”

• Some future impacts already appear unavoidable, owing to the inertia of the climate system

• High agreement that there is substantial economic potential for the mitigation of global GHG emissions over the coming decades that could offset the projected growth of global emissions or reduce emissions below current levels

THE DIAGNOSIS IS CLEAR

0

10

20

30

40

50

60

70

80

90

100

2000 2010 2020 2030 2040 2050 2060

44GtCO2e

70GtCO2e

65GtCO2e

50GtCO2e

1,000-1,200 ppm by 2100.

?°C

630ppm,~3,5°C

550ppm~3°C

Global emissions, GtCO2e per annum

Growth in global GDP:+150% vs. year 2000

500 ppm

550 ppm

Natural absorption ability

450 ppm

45GtCO2e

35GtCO2e

450ppm~2°C

STABILIZING CLIMATE IS A BIG CHALLENGE, AND IN THE LONG-TERM, EMISSIONS MUST NOT EXCEED NATURAL ABSORPTION

Potential Gigatons CO2e/year

U.S. GREENHOUSE GAS ABATEMENT POTENTIALS – 2030

* Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis and have quantifiable targets; targets calculated off the 2030 U.S. GHG emissions of 9.7 gigatons CO2e/year (reference case)

Source: McKinsey analysis

Low-range case1.3 gigatons

Mid-range case3.0 gigatons

High-range case4.5 gigatons

Increasing levels of commitment and action

-200

-150

-100

-50

0

50

100

150

200

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Abatement implied by proposed legislation:

3.5-5.2 gigatons*

Cost Real 2005 dollars per ton CO2e

Abatement cost <$50/ton

U.S. MID-RANGE ABATEMENT CURVE – 2030


0

0 1.0 1.2 1.4

90

1.8 2.00.2 2.2 2.4

30

2.6 2.8 3.0 3.2

60

-120

-220

-30

-60

1.6

-90

CostReal 2005 dollars per ton CO2e

0.4 0.6 0.8

-230

Residential electronics

Commercial electronics

Residential buildings –Lighting

Commercial buildings –LED lighting

Fuel economy packages – Cars

Commercial buildings –CFL lighting

Cellulosicbiofuels

Industry –Combined heat and power

Existing power plant conversion efficiency improvements

Conservation tillage

Fuel economy packages – Light trucks

Commercial buildings –Combined heat and power

Coal mining –Methane mgmt

Commercial buildings –Control systems

Distributed solar PV

Residential buildings –Shell retrofits

Nuclear new-build

Natural gas and petroleum systems management

Active forest management

Afforestation of pastureland

Reforestation

Winter cover crops

Onshore wind – Medium penetration

Coal power plants – CCS new builds with EOR

Biomass power –Cofiring

Onshore wind –High penetration

Industry –CCS new builds on carbon-intensive processes

Coal power plants – CCS new builds

Coal power plants –CCS rebuilds

Coal-to-gas shift – dispatch of existing plants

Car hybridi-zation

Commercial buildings –HVAC equipment efficiency

Solar CSP

Residential buildings –HVAC equipment efficiency

Industrial process improve-ments

Residential water heaters

Manufacturing –HFCs mgmt

Residential buildings –New shell improvements

Coal power plants–CCS rebuilds with EOR

PotentialGigatons/year

Commercial buildings –New shell improvements

Afforestation of cropland

Onshore wind –Low penetration

2005 emissions

Expected growth

Reference case

* Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis and have quantifiable targets

Source: U.S. EIA Annual Energy Outlook (2007) “Reference case," U.S. EPA; Pew Center On Global Climate Change; McKinsey analysis

Projected GHG emissions

Gigatons CO2e

2.5

Range of proposed reductions*

1990 level 1990 level-27%

2030

-3.5-5.2

4.5

6.2

9.7

7.2

THE CHALLENGE OF RISING U.S. EMISSIONS

High-range case

Gigatons CO2e, options less than $50 per ton CO2e

Mid-range case

Trans-portation

IndustryProjected emissions

Carbonsinks**

Emissions after

abatement***

Buildings & appliances

Power

0.7-0.9

0.3-0.70.6-0.8

0.5-0.60.8-1.6

5.2-6.7

9.7

* Based on bills introduced in Congress that address climate change and/or GHG emissions on an economy-wide basis and have quantifiable targets; targets calculated off the 2030 U.S. GHG emissions of 9.7 gigatons CO2e/year (reference case)

** Including abatement in the agriculture sector

*** Adjusted for cumulative rounding errors

Source: U.S. EIA; EPA; USDA; McKinsey analysis

Additional potential:

• Options >$50 per ton

• Demand response

• Breakthrough technology innovations

• Lifestyle choices

Range of proposed reductions*

CLUSTERS OF ABATEMENT POTENTIAL - 2030

CORPORATE CITIZENSHIP IS NOT JUST RISK MANAGEMENT:4 SOCIOPOLITICAL TRENDS OFFERING OPPORTUNITIES FOR RENEWAL

Environmental sustainability

Poverty alleviation/bottom of the pyramid approaches

Public health/wellness

Ethically responsible products (e.g., fair trade)

MANAGING SUSTAINABILITY: 5-DIMENSIONAL STRATEGY

How to turn socio-political trends into new business and industry-shaping opportunities

How to spot and evaluate socio-political trends that can pose a risk to the business

How, and where, to build and maintain meaningful relation-ships with stakeholders

How to build trust around the company's brand and the values to which it aspires

How to use regulation to gain and sustain a competitive advantage

RenewalRisk

RegulationReputation

Relationships

ORGANIZATIONAL IMPLEMENTATION – ALIGNMENT ACROSS FUNCTIONS AND CENTRAL COORDINATION ARE CRITICAL

Coordi-nation –ideally through CEO leadership

External communications and outreach

External engagement efforts, including • PR and communications• Engagement with stakeholders• Philanthropy and partnerships with NGOs

Government and regulatory strategy

Interactions with states and legal systems, including• Political and international issues lobbying • Submissions to regulators• Legal affairs (e.g., response to lawsuits)

Organization and culture

Tools to embed social contract management within the organization, e.g.• Organizational structure• Internal communications• Incentive systems• Skills development (e.g., hiring of diplomats, social

development experts)

Internal policies and processes

Policies on ethical issues and other general business processes, e.g.• Marketing and advertising tactics• Policies on environment, human rights, etc.

Core business strategy

Changes to core business, e.g.• Entry into or exit from markets or product lines• Change in production or sourcing methods• Acquisitions and investments

Global Corporate CitizenshipEnvironmental Business Council of New England, Inc.

Greg HintzMcKinsey & Company

February 26, 2007

Abatement potential Gigatons CO2e /year

Cost of abatementReal 2005 dollars per ton CO2e

Two dimensions

Each bar represents one option or a group of closely related options (e.g., “improvements to residential buildings”)

• Width: amount of CO2e that can be reduced annually by means of this option

• Height: average cost of avoiding 1 ton CO2e with this option, as measured against emissions reference case. Cost is averaged across sub-options, regions, and years

How to read an abatement curve

Two nuances

• “Negative cost” (below the horizontal axis) indicates a net benefit or savings to the economy over the lifecycle of the option; “positive cost” (above the axis) means that capturing the option would incur incremental lifecycle costs versus the reference case

• The average cost of an option does not necessarily equate to the price signal needed to stimulate capture of that option

ASSEMBLING THE ABATEMENT ENVELOPE

Exhibit 9

* 2005 real dollars; average cost for a new CCS-equipped coal-fired power plant, excluding the financing costs


Low-range case Mid-range case High-range case

Increasing levels of commitment and action

-50

-200

-150

2,000 4,000

50

-100

100

0

Cost$/ton

0 3,000 4,0001,000 2,000

0

100

50

-100

-150

-200

Cost$/ton

-50 0 1,000 2,000 3,000 4,000

100

150

50

-100

-150

-200

-50

Cost$/ton

0

• Available at scale by 2025• Capital cost – $3,100 / kW *• Modest learning and performance

improvement • Per-ton cost below $50 only if coupled

with EOR

• Available at scale by 2020• Capital cost – $2,800 / kW *• Steady learning and performance

improvement• Moderate injection costs

CCS new-build

60 megatons at $42 per ton



COAL POWER PLANT –CCS NEW-BUILD EXAMPLE

CCS new-build with EOR

• Available at scale by 2015• Capital cost – $2,600 / kW *• Accelerated learning and

performance improvement• Low injection costs

with EOR without EOR

CCS new-build

with EOR without EOR

High-range caseMid-range case

1.3 3.0 4.5

xAbatement potential below $50/ton, gigatons

Low-range case

DRIVERS OF GHG ABATEMENT POTENTIAL – 2030

Exhibit 10

* Average for new vehicle sales; average across gasoline internal combustion, diesel, hybrid electric and plug-in hybrid electric vehicles; includes opportunities above $50 per ton

** Alternatives to conventional gasoline propulsion: diesel, hybrid electric and plug-in electric hybrid vehicles; share of new sales

*** Lighting: CFLs and LEDs, share of new residential sales. Homes: incremental total built (or rebuilt) to Energy Star efficiency or higher

Source: US EIA; McKinsey analysis

2005

BiofuelsBillion gallons

16 14

16 51

125

• Starch - 4• Cellulosic - 0

Light-duty vehicles

47 mpg34 mpg60%

53 mpg38 mpg71%

34 mpg 27 mpg 14%

• Cars* – 28 mpg • Light trucks* – 22 mpg • Alternatives** – 3%

NuclearGigawatts

129 153113• Nuclear - 100

Coal with CCSGigawatts

3223

50 33

913

• Rebuilds – 0• New builds – 0

Buildings energy efficiency***

70%37 million

75%49 million

15% 25 million

• Efficient lighting: 8% • Efficient homes: N/A

164 80

148

RenewablesGigawatts

1163050

701028

• Wind – 10• Solar CSP• Solar PV <1


Description of opportunity

• More efficient HVAC equipment in initial installation and in retrofits

• Performance tuning for existing systems

• Increased in-use efficiency and reduced stand-by losses in PCs, office equipment, televisions (including set-top boxes), audio systems, and similar devices

• Substitution of advanced lighting technologies, e.g., CFLs and LEDs, for inefficient lighting

• Improved efficiency and switch to alternative fuel/ technologies, e.g., tankless and natural gas

• Increased penetration in large office buildings (>100,000 sq.ft), hospitals and universities

MID-RANGE CASE – 2030

• Building controls• Residential and commercial appliances• Commercial water heaters• Fuel switching in residential and commercial heating

• Improved new-build shells and building retrofits in commercial and residential buildings, e.g. better insulation, air tightening, reflective roof coatings

Options less than $50/ton CO2e

ABATEMENT OPTIONS – BUILDINGS-AND-APPLIANCES CLUSTER

Exhibit 21

Potential Megatons CO2e

70

50

60

70

100

120

240

Electronicequipment

Building shell

Lighting

HVACequipment

Combined heatand power

Residentialwater heaters

Other

Average cost $(2005 real)/ton CO2e

-87

45

-93

-36

-8

-42




• Commercialization of cellulosic biofuels (various feedstocks and conversion processes)

• Technology upgrades improving fuel efficiency • Increasing penetration of alternative propulsion

technologies (diesel)

• Technology upgrades improving fuel efficiency • Increasing penetration of alternative propulsion

technologies (diesel)

• Plug-in capability in addition to basic hybridization in light-duty vehicles

• Technical upgrades improving fuel efficiency

• Medium and heavy truck hybridization • Aircraft fuel efficiency (design and operations)• Reduction in motor vehicle air conditioning

leakages

ABATEMENT OPTIONS – TRANSPORTATION CLUSTER

Exhibit 22


25

20

30

70

100

95

Cellulosic biofuels

Light-duty vehicle fuel economy –

cars

Light-duty vehiclefuel economy –

light trucks

Other

-18

-81

-69

-8

15

Medium/ heavy truck

fuel economy

Light-duty plug-in hybrids






ABATEMENT OPTIONS – INDUSTRIAL AND WASTE CLUSTER

Exhibit 24

• Methane management in coal mining, natural gas and petroleum systems, and waste

• HFCs/PFCs in manufacturing processes• Nitrous oxide in chemicals processes

• Industry-specific measures in fired and steam systems, process controls, energy recovery, maintenance

• Electric motor upgrades and end-use-specific systems improvements

• Additional CHP capacity in primary metals, food, refining, chemicals, pulp and paper

• Primarily medium and large turbine applications (>5 megawatts)

• CCS new builds on carbon-intensive industrial processes, such as coal-to-liquids

• Select industrial cogeneration sites with CCS new builds

• Increased use of industry-specific advanced processes, recycling and product recovery, product reformulation and commercialization of emerging technologies

• Composting• Capping and improvements to restoration layers• Small-scale electric generation projects


45

70

75

80

255

95


Recovery and/ or destruction of non-CO2 GHGs

Carbon captureand storage

Combined heatand power

Other

Energy efficiency

New processesand product

innovation

3

49

-15

6

-33

Average cost$(2005 real)/ton CO2e




ABATEMENT OPTIONS – TERRESTRIAL CARBON SINKS

Exhibit 25

• Planting trees, primarily on marginal/degraded or idle pastureland where erosion is high and/or productivity is low

• Planting trees, primarily on marginal/degraded or idle cropland where erosion is high and/or productivity is low

• Active – thinning, stand improvement• Passive – restricted grazing, natural regeneration • Restoration of degraded forests

• Planting harvested cropland with grass or legume cover crop during winter

• Planting crops amid previous harvest’s residue using various approaches, including ridge tillage and no-till farming

• Elimination of summer fallow


<5

40

80

80

130

110


Afforestation –pastureland

Forest management

Afforestation –cropland

Other

Conservation tillage

Winter cover crops

18

23

39

-7

27





ABATEMENT OPTIONS – POWER CLUSTER

Exhibit 26

• Class 5-7 on-shore winds with economic grid integration costs

• Nuclear power plant new-builds• Up-rates for existing nuclear plants• Reactivations

• Rebuilds of pulverized coal plants with CCS, plus CCS new builds

• Includes injection to enhance oil recovery

• Residential and commercial distributed power generation with solar photovoltaics

• Improved heat rates of base-load pulverized coal power plants

• Low-class on-shore and offshore wind (90 megatons)• Concentrating solar power (50)• Biomass co-firing (50) • Geothermal power (10)• Small hydroelectric power (10)


210

50

60

70

290

120


Carbon captureand storage

Wind

Nuclear

Other

Conversion efficiency

Solar PV

44

20

9

-15

29

Average cost$(2005 real)/ton CO2e

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