Striving toward Total Societal Impact in Australia€¦ · 4 Striving toward Total Societal Impact...

Striving toward Total Societal Impact in Australia

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June 2018

Douglas Beal, Sam Stewart and François Tibi

Striving toward Total Societal Impact in Australia

2 Striving toward Total Societal Impact in Australia

AT A GLANCE

Recent work released by BCG has shown a strong correlation between the financial performance of companies and their Total Societal Impact as measured by their performance in Environmental, Social and Governance (ESG) factors material to their industry.

As a starting point for this report, we researched the current ESG performance of some of Australia’s largest companies (398 with robust, relevant data). We compared them to a further 6,300 companies from other developed markets, including the US, Europe and Asia.

We found that while many Australian companies are performing well relative to their global peers, the large spread of results brings Australia’s overall average to below that of the global average. In the four categories we measured (Environment, Governance, Employees and Community) Australia performed best in Governance and worst in Community, relative to other regions.

The Boston Consulting Group 3

There is a growing consensus that the non-financial activities of a company, such as its impact on the environment and its surrounding

community, have an impact on the business’s financial performance. A growing body of research, including recent work from BCG, has demonstrated a strong correlation between a company’s impact on society – we call this Total Societal Impact (TSI) – and its Total Shareholder Return. TSI is not a single metric, but a collection of measures and assessments. It includes the impact of a company’s products and services, its operations and its corporate social responsibility (CSR) initiatives. It also includes the results of explicit decisions the company makes to adjust its core business to create positive societal benefits.

In our recent report, Total Societal Impact: A New Lens for Strategy, we highlighted why some companies are more effective than others in linking their societal and financial objectives – both in the way they run their core business and in the minds of their investors. The report goes further to show what types of ESG topics, by industry, correlate with valuation multiples and margins – good proxies for shareholder returns. We discovered that the strongest correlations are those that are specific to a particular industry: reducing waste in consumer goods; incorporating environmental factors into banks’ credit decisions; biopharma companies providing access to their medicines to marginalised communities. Now, corporate leaders are rethinking the role of business within society.

In this report, we look at Australian company performance in Environmental, Social and Governance (ESG). Looking at ESG performance is a starting point for understanding the link between financial performance and Total Societal Impact in Australia.

We found that Australian companies are performing well compared to their global counterparts in some industries (like Real Estate and Investment Management) and not as well in others. When ESG is looked at using four categories, Environment, Governance, Employees and Community, we discovered that Australian companies are doing better than the global average in Governance and Employees, about equal in Environment and well below in Community.

There is a growing consensus that the non-financial activi-ties of a company, such as its impact on the environment and its surrounding community, have an impact on the business’s financial performance.


There is a number of Australian and global examples of leadership in this area and some trends that have emerged from companies that are performing best. Five common themes are:

1. Companies that embrace an integrated financial and societal impact model, incorporating both in their strategy, business model and reporting, perform well.

2. Choosing the right initiatives in line with a company’s business model, products and services will help improve its Total Societal Impact.

3. Companies that partner with other organisations to deliver wider societal benefits are often strong performers – if the partnerships are scaled and meaningful.

4. Transparency in reporting and communication is important.

5. Companies that provide the right incentives to their employees and management also perform better.

To develop our TSI rankings, we used November 2017 data from CSRHub, an aggregator of different ESG rating inputs.

The companies listed on CSRHub are rated using a database of socially responsible investing research firms, indexes, publications, ranking systems, NGOs, crowd sources and government agencies.

These data sources are aggregated, mapped to 12 subcategories, nor-malised, and weighted by a patented algorithm, to give ratings in four categories:

• Community • Environment • Employees • Governance.

These ratings are then averaged out to give an overall rating.

For this analysis, we compared the 398 companies in Australia on CSRHub to 3459 companies in the US, 1305 companies in Asia1 and 1572 companies in Europe.2

Notes1. China, Hong Kong, Japan, Kazakhstan,

Macau, South Korea and Taiwan

2. Austria, Belgium, Channel Islands, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Lithuania, Luxembourg, Malta, Monaco, The Netherlands, Norway, Poland, Portugal, Romania, Russia, Spain, Sweden, Switzerland, Ukraine and the UK

METHODOLOGY


ESG in Australia – bridging the gap to Total Societal Impact

Ever since Corporate Social Responsibility entered the business lexicon in the 1950s, companies have worked on improving their environmental, social and gover-nance credentials (commonly referred to as ESG). Over the years, many businesses have refined their understanding of ESG and begun to more closely measure their impacts on their stakeholders and the environment.

Today’s leading companies consider the effects of their business operations on the environment, communities and their employees and, by extension, the impact on their bottom line and shareholder value. There are good reasons for this focus – companies are beginning to see dividends from a number of fronts.

Firstly, in many industries, the key to great customer experience is to have highly engaged employees. This engagement often comes from a sense of pride in what their company does, leading to better customer service and a better customer journey.

Secondly, data on company performance in ESG areas is becoming more readily available and reliable. In turn, this increases transparency and draws more scrutiny from investors and stakeholders.

Finally, these same investors are using this information to value risks and, to some extent, increase their valuations of companies. They are asking for even more accu-rate, standardised and timely data. In the past, companies may have considered ESG somewhat separately from the business strategy or financials. Today, they are considering it as an integrated part of what they do, and companies that carefully choose ESG goals that align to their own corporate ones will be the most successful.

To delve into these trends in Australia, BCG analysed ESG data from CSRHub, a sustainability ratings provider. We used the November 2017 ratings, which included the most up-to-date and historical ESG data inputs from nearly 7000 companies around the world. The Australian results included a sample of 398 companies that all report across four key categories measuring the Environ-ment, Governance, Employees and Community. Companies with robust data sets were included in our analysis, while companies with incomplete data were not included.

Australian companies have room to improve their ESG outcomesThe results show that Australian companies have some catching up to do with the rest of the world. Overall, Australian companies rank below European compa-nies and slightly below Asian and American companies (see Exhibit 1).

Across all categories and industries in Australia, a wide spread in performance emerged. Some companies are leading the charge, and others are lagging (see Exhibit 2). The standard deviation of these categories was highest in the Employee category with a standard deviation from the average of 9.3. Environment had a standard deviation of 8.7, Community 7.5 and Governance 7.4.

Today’s leading companies consider the effects of their business operations on the environment, communities and their employees and, by extension, the impact on their bottom line and shareholder value.


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48.4

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Global average company score

on ESG1

49.9

1 Average company score (6734 companies across Australia (398), USA (3,459), Asia (1,305), and Europe (1,572)) based on community, employees, environment and governance. Each company is scored from 0 to 100 Source: CSRHub (Nov 2017) – average overall ESG index scores across all companies in each region

Exhibit 1: Australia is behind other developed markets in ESGCompany performance on Environmental, Social and Governance (ESG)

Exhibit 2: There is a wide spread of company performance in Australia

1 Performance of 398 Australian companies from November 2017 CSRHub data. Each company is scored from 0 to 100. Based on November 2017 data from Asia, USA, Europe and Australia (6734 companies) Source: CSRHub (Nov 2017) – average overall ESG index scores across all companies in each region


ESG category analysisWe also analysed Australia’s performance in each of the four categories – Environment, Governance, Community and Employees. Australia performed best in Governance with a score of 49.4, second only to Europe’s score of 53.3 (see Exhibit 3). The next best performing category was Employees, at 50.9, behind Europe and the US (also the US’s best performing category). Australian companies were furthest behind the other regions in Community.

When category scores are analysed individually, it is important to note two points:

• New external events or topics can affect the inputs into the scores (e.g. the socially responsible investing research firms, indexes, publications, ranking systems, NGOs, crowd sources and government agencies) – and this can happen quickly. A company may have been tracking well for many months or years in the Employee category. A change in social norms, or emphasis on workplace diversity, might lead to a significant downgrade or upgrade in that company’s Employee ranking. For example, the 2012 factory fire in Bangladesh that killed 112 workers forced a quick re-evaluation of the importance of human rights in supply chains.

• We have avoided comparing across industries. This is because both the data and the issues faced in different sectors are completely diverse (e.g. it would be impossible to adequately rate and compare the environmental activities of a mining or utilities company with a consumer goods business). However, it is important to consider what the best performers are doing well in order to learn from the data.

49.046.0

53.8 55.2

Environment

Au US EuAsia

50.955.7

50.754.8

Employee

Au US EuAsia

43.749.5 48.5 49.4

Community

Au US EuAsia

Governance

49.444.2 44.8

53.3

Au US EuAsia

Exhibit 3: Australia performs well in Governance and lags in Community

Source: CSRHub (Nov 2017) – average ESG category score


3 Nationwide Financial Services Annual Report 2018 https://static.nationwide.com/media/2017-Nationwide-Annual-Report-NFM-17302AO_tcm826-230284.pdf?r=8

4 https://skytopstrategies.com/csr-fortune-500-companies-measure/

Australia lags in the Community category The three ESG sub-categories for Community scores are Community Development and Philanthropy, Product, and Human Rights and Supply Chain.

Overall in Community, the US performed best on average, with Europe only slightly behind. While Australia is behind overall, there are many exceptions. ANZ Bank has scored above average in the Community category. Anita Fleming, Executive Manager, Group Strategy at ANZ, said the bank had long-standing, proven community financial education programs, with plans to bolster community-directed offerings. The bank’s purpose is to shape a world where people and communities thrive and it is committed to tackling three complex societal issues: housing, environmental sustainability and financial wellbeing.

ANZ has recently been part of two different examples of community-related initiatives and partnerships that address financial wellbeing – with Fiji National Provident Fund and Fortescue Metals Group.

“One example is a partnership we announced with Fiji National Provident Fund to replace cash and cheques with electronic payments in the country. Another example is with one of our clients, Fortescue, when they approached us about a project to support indigenous service providers to thrive. In a landmark initiative, ANZ and Fortescue established a $50mn leasing facility for indigenous businesses. In many instances, these businesses did not have the credit history to access capital from a bank to build their businesses. But with Fortescue as a backer, they are able to access finance. To me, this is a different way of looking at the community topic and how you might work with industry peers to solve what would be a financial exclusion story.”

An international example of a high-performing business in its overall ESG score is US company Nationwide Financial Services. It was also one of the best performing companies in the world in the Community category. Its sustainability report men-tions philanthropy, volunteerism and workplace giving as some of the main pillars of its strategy. In its 2017 annual report, Nationwide reported that it has donated over US$430m to non-profit foundations since 2000.3 The company has a long history in community engagement practices, including over 60 years of partnership with The American Red Cross, and its employees donate a total of nearly 16,000 units of blood annually. Nationwide has also partnered with Feeding America and donated 20 million meals over 14 years.4

Australia’s environment performance is middle of the road In the Environment category, CSRHub performance is based on three sub-categories of Energy and Climate Change, Environment Policy and Reporting, and Resource Management.

Australia’s performance in the Environment category (49.0) was close to the global average (49.8). There has been a push by Real Estate companies, for example, to

While Australia is behind overall, there are many exceptions.


move toward green-rated buildings and solar capacity, while banks have started to offer a range of green financing and bonds (see, Case Study – ANZ Bank).

Globally in Environment, European companies outperformed the rest of the world. This may be due to significant regulations to reduce emissions under the European Union’s Emissions Trading System (EU ETS).

Outside the energy industry, the online luxury fashion retailer YOOX NET-A-POR-TER GROUP (YNAP) (formed in the October 2015 merger between YOOX and NET-A-PORTER), is one of the top performing companies in Europe and globally in both the Environment category and overall.

YNAP’s 2016 Sustainability report pointed to a number of environment initiatives that helped it stand out, including clever partnerships and a significant waste

ANZ Bank’s purpose is to shape a world where people and communities thrive. As part of bringing their purpose to life, the bank is committed to supporting household, business and financial practices that improve environmental sustainability.

In a first for the Asian region, ANZ played a leading role in the successful completion of global agri-business Olam’s debut US$500 million three-year sustainability-linked loan.

The credit facility is unique in Asia and a first for the agri-sector globally – borrowers / Olam receive favourable pricing on interest rates if they hit certain sustainability targets.

ANZ Bank was Mandated Lead Arranger for the transaction, which involved 14 other lenders.

David Leong, ANZ’s Head of Special-ised Industries, Singapore, said that

as part of the loan agreement, Olam will be tested on over 50 ESG metrics each year, including carbon intensity, responsible sourcing and marketing and board diversity and indepen-dence. If the pre-set improvement targets are met, the interest margin on the facility will be reduced. This means Olam will have two opportuni-ties during the life of the three-year revolving credit facility to reduce the interest margin.

“The debut Sustainability Linked RCF is unique as it’s the first of its kind in Asia. As a key relationship banker to Olam, we’re pleased that they’ve recognised ANZ as a partner who cares about ESG in its way of doing business.” he said.

Olam’s targets will be assessed annually by Sustainalytics, a global leader in environment, social and governance research and ratings.

CASE STUDYANZ Bank – Olam Green financing loan


reduction strategy. The Group is part of RE100, a commitment by leading international companies to get to 100% renewable power by 2020. In addition, YNAP promotes sustainable fashion through different online stores, in particular via YOOXYGEN, the first online destination, launched in 2009, dedicated to conscious fashion brands.

The sustainability report also highlighted a shift toward more sustainable packaging, and the company has recently announced a fur free policy.5

Employees category is strong for AustraliaCSRHub scores for the Employees category are based on performance in Compen-sation and Benefits, Diversity and Labour Rights, and Training, Health and Safety.

Of all four categories, Australia performed most strongly among global peers in Employees, second only to Europe.

Real Estate was Australia’s best performing industry in this category, with a collaborative approach to sustainability.

More broadly, ERG is a European renewable energy company (the first wind opera-tor in Italy) that has made a concerted effort to train and develop its employees, with around 97% of the total workforce involved in training programs. The number of training days for staff (currently at 6.6 days/employee) is a key metric in its sustainability report.

ERG clearly states that the health and safety of employees and third parties, and the environment in the wider sense, are of paramount importance for running its business and managing its plants.6 For example, its early budgeting and invest-ment phase allows for the importance of health and safety activities to be fully factored in.

Outperformance in Governance Ratings for the Governance category are made up of three sub-categories of Board, Leadership Ethics, and Transparency and Reporting.

Compared to its global peers, Australia performed well in the Governance category with a score of 49.4. Europe is first with an average rating of 53.3. Governance is also the only category where Australia performed better than the global average.

South Korea’s SK Chemicals is one of the top ranked companies globally for its ESG data and particularly in the Governance category. It has switched to integrated and transparent reporting – four versions of its integrated report are published in Korean, English, Chinese and Japanese. The report shows the results of a diagnostic survey of its managers’ ethical practices.7 It also operates

5 YOOX NET-A-PORTER GROUP is going completely fur free. Maura Branigan. Fashionista.com. June 6, 2017. https://fashionista.com/2017/06/yoox-net-a-porter-group-fur-free

6 ERG Sustainability Report 2017. Accessed at http://www.erg.eu/documents/10181/362246/DNF+2017_ENG/d327c62d-07db-4e47-8a26-6592c64c4bcd

7 SK Chemicals Sustainability Report 2016. https://www.skchemicals.com/pdf/2016_eng.pdf


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Australia Europe Asia US

Industrial Goods

Financial Institutions

Principal Investors & Private Equity

Real Estate Energy

Consumer

Services

Technology, Media & Telecom

Health Care

Exhibit 4: Compared to global peers overall, Real Estate is Australia’s best performing industry

8 SK Chemicals Sustainability Report 2016. https://www.skchemicals.com/pdf/2016_eng.pdf

an autonomous compliance program for fair trade, with the aim of earning customer trust in the market through fair competition.8

Australian Real Estate is leading the pack globallyWe also looked at the data for each industry. The most reliable way to compare industries is not with each other, but to compare an industry’s performance across different regions, in order to compare like for like. When we compare the data this way, Real Estate is Australia’s best performing industry across all four categories.

In Real Estate, Australia’s score of 49.5 is second to Europe’s of 50.5. Real Estate’s high Employee score of 54 is followed by 51.3 in Environment, and 49 in Governance.

CSRHub categories such as Accounting, Tax and Payroll Services, Management and Sales ConsultingSource: CSRHub (Nov 2017) – average overall ESG index scores of 398 Australian companies with robust data from November 2017


The importance of ESG in establishing Total Societal Impact In October 2017, BCG released a study of the impact of environment, social and governance issues on company performance, called Total Societal Impact: A New Lens for Strategy. The report was ground breaking in providing solid evidence to back the correlation between ESG performance and a company’s financial performance.

The main findings from the TSI study were:

• Non-financial performance (as captured by the ESG metrics) was statistically significant in predicting the valuation multiples of companies in all the industries we analysed.

• In each industry, investors rewarded the top performers in specific ESG topics with valuation multiples that were 3 percent to 19 percent higher, all else being equal, than those of the median performers in those topics.

• Top performers in certain ESG topics had margins that were up to 12.4 percentage points higher, all else being equal, than those of the median performers in the same topics.

These findings make it clear why a solid understanding and view of ESG indicators is imperative for both companies and their investors. The links in each industry between performance in specific ESG topics and financial performance present business leaders with opportunities to enhance both TSI and TSR.

One challenge around the world in advancing TSI to a new phase is the availability and quality of data. Organisations such as the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosure (TCFD) are working to find solutions for financial markets which they say need better, more comparable and complete information about climate change.

The TCFD’s objectives are to develop climate-related disclosure recommendations that provide information for investors so as to promote more informed investment, credit and insurance underwriting decisions.

One challenge in advancing TSI to a

new phase is the availability and quality of data.


What next for TSI in Australia?So what can Australian companies do to seriously establish world-leading practices in ESG? And what are some of the key lessons from the world’s leading companies? We have six key steps they can take, based on findings from this analysis.

1. Companies must acknowledge and integrate total societal impact into their business model, strategy and, to some extent, the finance team to help with Investor Relations and messaging. Integration can reduce the risk of significant negative events, open up valuable new opportunities and possibly increase corporate longevity.

2. Choose important and material issues, relevant to the company and stakeholders, which will become the focus within a certain time period. Our research into TSI found that a precise focus on key areas based on a company’s industry can have a statistically significant increase in its valuation margin.

3. Engage directly with key stakeholders – including employees, customers, government, and shareholders – on the societal issues that are most important to them.

4. Transparency is vital in reporting and for managing the metrics that matter.

5. Build partnerships with other organisations with a keen interest in the same topics, to find scale and underwrite risks that might have made certain programs unachievable.

6. A robust societal impact program requires the right management, reporting and governance structures, and the right incentives across the whole business.

For companies wanting to advance there is a clear opportunity. As our research proves, with the right focus and investment in the things that really matter, a company can improve not only its TSI performance but also its overall company performance.

And that should be on the radar of every good business leader.


About the AuthorsDouglas Beal is a Director, Social Impact based in BCG’s Hong Kong office. Doug is on the leadership teams of BCG’s Social Impact, Global Advantage, and Strategy practices. Prior to his current role, Doug was the global head of BCG's economic development topic area. You can contact him by email at [email protected].

Sam Stewart is a Partner and Managing Director in BCG’s Sydney office. Sam leads two of BCG's practice areas in Australia and New Zealand: Financial Institutions and Strategy. He is also a member of BCG's global leadership team for Retail Banking. You can contact him by email at [email protected].

François Tibi is a Senior Partner and Managing Director in BCG’s Sydney office. He is the Social Impact leader in Australia and New Zealand, a core member of BCG’s Energy practice, and he leads the oil cluster across Southeast Asia, Australia and New Zealand. You can contact him by email at [email protected].

For more informationTo discuss this report, please contact one of the authors using the email addresses above.

To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow The Boston Consulting Group on Facebook and Twitter.

© The Boston Consulting Group, Inc. 2018. All rights reserved.06/18

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