Sustainability Matters 2014 - Framework | Strategies for...

HOW SUSTAINABILITY CAN ENHANCE

CORPORATE REPUTATION

Sustainability Matters 2014

THE CONFERENCE BOARD creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society.

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Sustainability Matters 2014How Sustainability Can Enhance Corporate Reputation

RESEARCH REPORT R-1538-14-RR

by Thomas Singer (Editor)

Contents

4 Introduction: How Sustainability Can Enhance Corporate Reputation

8 Sustainability and Firm Performance Marc Bertoneche and Cornis van der Lugt

19 Principles for Generating Shared Value Dana Brown and Jette Steen Knudsen

25 The Link between Sustainability and Brand Value Bahar Gidwani

36 Communicating Sustainability to Enhance Corporate Reputation 36 Part I: Real vs. Perceived Sustainability Performance

James Cerruti

41 Part II: A View by Industry James Cerruti

49 Part III: Learning from Absolute Leaders in Sustainability James Cerruti and Kathee Rebernak

58 The Role of CSR in Managing Reputation Daniel Diermeier

64 Measuring Corporate Reputation Grahame Dowling and Naomi Gardberg

70 About the Authors

71 Related Resources from The Conference Board

Research Report sustainability matters 2014 www.conferenceboard.org36

Communicating Sustainability to Enhance Corporate ReputationPart I: Real vs. Perceived Sustainability Performanceby James Cerruti

Major companies across industrial sectors are putting more effort and investment into demonstrating good corporate citizenship on environmental, social, and related governance factors. However, research shows that it may be getting harder for companies to gain recognition for doing so.

In 2012, Brandlogic and CRD Analytics prepared the 2012 Sustainability Leadership Report: Measuring Perception vs. Reality, marking the second year for the annual report and continuing our pioneering work in comparing real sustainability performance to the perceptions of key stakeholders. This follow-on study used the same methodology established for the inaugural report (see box for a summary).1 Moreover, the follow-on study validated the methodology’s usefulness as a management framework for making decisions about if and where to invest in sustainability, both on the operational and communications fronts.

With a second set of data in hand, we are able to observe year-over-year movement. Overall, real performance on sustainability is rising, reflecting ongoing and intensify-ing corporate efforts to define and achieve sustainability goals. However, perceived performance, on average, is declining. The findings suggest that it is becoming more difficult to achieve differentiation among those audiences who are most attentive to sustainability, despite a better track record. This finding is both striking and surprising. Why is perception slipping despite an increasing volume of communications around sustainability? In what follows, we explore possible answers.

About the Brandlogic Sustainability Leadership Report

The rationale and methodology behind the annual Sustainability Leadership Report is described in detail in The Conference Board November 2012 Director Notes, “Charting a Path to Sustainability Leadership.” In summary:

• 100 leading global brands were sampled across nine selected Global Industry Standard Classification (GICS) categories.

• Real reported performance ratings on 141 environmental, social, and governance factors were provided by CRD Analytics, the company behind the NASDAQ OMX CRD Global Sustainability Indexsm.

• Brandlogic conducted the quantitative perception survey among three highly attentive audiences: investment professionals, purchasing/supply professionals, and graduating students who will soon be entering the workforce. These audiences were located in six countries, representing both mature and emerging economies: United States, the United Kingdom, Germany, Japan, China, and India.

• The two sets of data were aggregated and mapped to a pair of 100-point scores: the Sustainability Reality Score (SRS) and Sustainability Perception Score (SPS). These were plotted on a grid—the Brandlogic Sustainability IQ Matrix™—allowing direct comparison of all surveyed companies. The Sustainability IQ Matrix comprises four quadrants:

1 Leaders Those who excel in both real and perceived performance

2 Promoters Those with relatively high perceived performance, but relatively low real performance

3 Challengers Those with good real performance but relatively low perception ratings

4 Laggards Companies that trail on both dimensions

For a copy of the 2012 Sustainability Leadership Report, visit www.sustainabilityleadershipreport.com.

®

2012 Sustainability Leadership Reportmeasuring perception vs. reality for prominent global brands

Supported by

Version 1.1

www.conferenceboard.org Research Report sustainability matters 2014 37

2012 Report Findings: A Story of DivergenceThe good news is that, in 2012, real total environmental, social, and governance (ESG) performance rose for 93 of the 94 companies surveyed in both years of the report (six companies were replaced for various reasons pertaining to selection criteria). The increase suggests that businesses are taking sustainability seriously and making it a part of the business strategy. It also has an implication for rankings: better performance, generally, raised the mean by 9 points, making it more difficult for companies to rise into the Leaders quadrant of the Brandlogic Sustainability IQ Matrix™. (See “About the Brandlogic Sustainability Leadership Report” for details on the quadrants found in the Sustainability IQ Matrix.)

In a number of cases, these gains in real ESG performance were dramatic. Roughly one-fifth of companies increased their scores by more than 10 points. Seven of these saw increases of more than 24 points on the 100-point Sustain-ability Reality Score (SRS) scale.

On the perception front, the story was very different. The mean Sustainability Perception Score (SPS) dropped from 47.2 in 2011 to 44.5, and, of the 94 companies surveyed in both years, more than two-thirds (68) saw a decline in their score. Twenty-seven companies experienced declines of five points or more, with 12 of these dropping by more than eight points.

Looking at the relationship of reality scores to perception scores also yielded some interesting findings. In almost every case in which a company’s reality score was higher than its perception score (32 of 33 companies), the gap has widened. Given the general improvement in real performance and the decline in perceived performance, this is not surprising. Similarly, in all 26 cases in which the reverse situation exists—the company’s perception score was higher than its reality score—the gap has narrowed. In 35 instances, the gap flipped direction, and, in all of these cases, the shift was from perception leading reality to the opposite.

What’s notable is how dramatic some of the changes were. In 2011, 15 companies had a perception score that was higher than the reality score by more than 20 points. In 2012, there were only two: Facebook and Amazon. Both had very low reality scores across all dimensions, Facebook performing worst on the social dimension (12.5 points) and Amazon struggling most on environmental (8 points). Bank of America also saw a marked shift. Its perception score remained stable, while its real performance score jumped 28 points after more than doubling its environmental score and almost doubling its social score.

What the Findings SuggestIt’s clear from the divergence in the SRS and SPS scores that companies’ ability to deliver on sustainability is outstripping their ability to communicate their sustain-ability achievements effectively. But why? We know that the volume of communications, in the form of corporate responsibility reports and similar messaging, as well as in advertising and other brand communications, is on the rise. Brand reputation—both positive and negative—plays strongly here.

For example, Apple has the highest perceived performance score, despite below-mean real performance and a rela-tively modest commitment to ESG factors. Meanwhile, ExxonMobil has a high sustainability reality score, but, despite major efforts to communicate its sustainability commitments, the company can’t seem to elevate perception. Its industry’s poor reputation creates significant headwinds. This reinforces the long-term value of investing to build a positive brand image.

Companies’ poor perception scores may also reflect increasing skepticism by key stakeholders, some of whom may not be seeing the benefits they expect from these companies’ sustainability practices. Part of the data that supports the SPS rankings is highly suggestive and supports this idea.


Chart 1

Year-over-year change in real and perceived corporatesustainability performance from 2011–2012

Even as companies improved their real performance on sustainabilityperceptions among highly attentive stakeholders are slipping.

Colgate-Palmolive Walt Disney

HondaMarriott

BMW

Volkswagen

PanasonicSony

Toyota

Nike Ford

Starbucks

Nestlé

Avon

Michelin

Adidas

McDonald’s

Danone (Dannon)

Coca-ColaPepsiCo

Kellogg’s

Heineken

Tesco

Walmart

ConocoPhillips

Chevron

ShellBP

Dow Chemical

Visa

Zurich

UBS

Bank of America

Allianz

Vodafone

Deutsche Bank

AXA

AmericanExpress

Citi

GoldmanSachs

ABB

3MSiemens

HoneywellLufthansa

Boeing

General Electric

American Airlines

UPS

EADS (Airbus)

Caterpillar

FedEx

British Airways

Japan Airlines

Komatsu

Tata

Accenture Microsoft

IBM

Intel

Cisco

Apple

Philips (electronics)

Canon

Samsung

HP

TI

Fujitsu

Facebook

Xerox

Nintendo

BASF

AlcoaDuPont

ArcelorMittal

BHP Billiton

ExxonMobil

Abbott Labs

Johnson & Johnson

GlaxoSmithKline

Novo Nordisk

Merck

Bayer

P�zer

AstraZeneca

Roche

Google

Nokia

Yahoo!

AT&T

Deutsche Telekom (T-Mobile)

HSBC

Amazon

BT (British Telecom)

L’Oréal

Dell

SAP

John Deere

Barclays

H&M

SPS greater than SRS

Alignment gap > 20 points

Alignment gap 10 - 20 points

Alignment gap < 10 points

SRS greater than SPS




Key

Sustainability Perception Score (SPS) (Scale: 0 - 100)

Sustainability Reality Score (SRS) (Scale: 0 - 100)

Challengers

Laggards

Leaders

Promoters

© C

opyr

ight

201

2 Br

andl

ogic

Cor

p.

80

70

60

50

40

30

20

10

030 40 50 60

Mean51.7

Mean 44.5

2011Mean

42.4

2011 Mean 47.2

Source: 2012 Sustainability Leadership Report: Measuring Perception vs. Reality, Brandlogic, 2012, p. 6.

Perceptiondown 2.7 points

Reality up9.3 points


In both the 2011 and 2012 studies, graduating students provided the lowest overall ratings of corporations, perhaps reflecting a natural skepticism about corporate citizenship among younger people. Perceptions from the two other stakeholder groups changed significantly. As shown in Chart 2, in 2012, downgrades in perceptions by purchasing professionals were twice to four times as large as those among investment professionals. Given that those directly involved in the supply chain are exposed to operational realities, while investors focus on financial results, it’s easy to see why purchasing professionals may be less willing to buy into a company’s sustainability story if it’s not supported by what they see on a daily basis.

There were also distinct differences in the magnitude of perception change between respondents in newly developed countries and those with more mature economies. Overall, environmental and social perception scores saw larger declines among newly developed countries, while governance perception scores for those countries held up better than the scores for developed countries. It should be noted that in the inaugural 2011 study, perception ratings were much higher overall in newly developed countries; the changes shown in Chart 2 actually reflect a closer alignment between newly developed and developed countries, although perception scores are still higher in newly developed countries than in developed countries. It is possible that these differences are cultural in nature: those respondents in mature markets could be applying higher personal standards to corporate citizenship.

Why This Should Matter to YouAs a rule, consumers do not make choices based on perceptions of corporate citizenship, so if they don’t care, why should you? The answer is that there are audiences for whom sustainability is vitally important and for whom corporate citizenship—especially on social factors—plays a large role in decision making. We refer to these audiences as “highly attentive” and they include:

• Investment professionals They base their decisions on all aspects of corporate performance.

• Purchasing managers Increasingly, their own organization’s sustainability policies give preference to suppliers that also operate sustainably.

• Graduating university students They are in the process of de-ciding where they want to work, and the long-term sustainability of prospective employers is of great importance to them.

Eighty-eight percent of respondents characterized as “highly attentive” state that corporations’ good corporate citizenship is either extremely or somewhat important in the decisions they make to invest in, partner with, or work for a company. Half say it is extremely important. Attracting investment, forging solid business relationships, and nurturing the talent pipeline are all critical to any company’s long-term success—ample reasons to make a serious commitment to both sustainability performance and communicating it.

Chart 2

Year-over-year change in perceived corporate sustainability performance by segment from 2011–2012

The changing perceptions among stakeholder groups suggest that their points of view may be shifting as they gain experience

with sustainability and what it means in the real world.

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

Investment professionals

Purchasing professionals

Graduating students

Developed countries

Newly developed countries

Environmental Social Governance

-1.2-1.0

-1.9

-5.2-4.7

-3.6

-1.7

-2.8

-1.4

-2.1-2.2 -2.3

-3.0 -3.3

-1.5

Source: Brandlogic, 2012.

0

10

20

30

40

50

60

70

80

90

100

Chart 3

Stated importance of good corporate citizenship in decision making

The importance of good corporate citizenshipto decision making is rated very differently,

depending on which audience you’re talking to.

“Highly attentives” Consumers

88%a

Source: Brandlogic, 2012.

a 2012 Sustainability Leadership Report: Measuring Perception vs. Reality,Brandlogic, 2012.

b Tom Zara, “The New Age of Corporate Citizenship: Doing Strategic Good thatBuilds Brand Value,” Interbrand, p. 4 (www.interbrand.com/Libraries/Articles/IBNY_corporate_citizenship_100928.sflb.ashx).

EXTREMELYOR SOMEWHAT

IMPORTANT

2%b

• Invest in • Partner with• Work for

• Purchase intent


An Opportunity for ActionWhether the slip in perception ratings signals a trend or a one-time correction remains to be seen. It does, however, point to an important opportunity for companies across all industries. Facing greater skepticism across the board, it is important for companies to ramp up their efforts to communicate both their sustainability commitments and accomplishments in a way that resonates with their key audiences. Many do this in the form of a corporate sustainability report (CSR) that is prepared in parallel with their annual report. Others take an integrated approach and blend ESG data into their annual reports. However, these are not the only communications channels being leveraged. An increasing number of companies are moving toward integrating sustainability messages directly into

corporate brand communications and customer value propositions, thus gaining the efficiencies of leveraging primary channels of persuasion.2

Most of the Leaders in the 2012 study have also become quite adept at incorporating sustainability into the presentations they use to engage directly with discrete stakeholder groups, whether an investor road show or a campus recruitment visit. As a whole, these initiatives are still relatively new and the quality of communications varies widely. It’s worth the effort to sample what’s available, whether in the form of a CSR, sustainability website, or other communications, and learn from it to guide your own strategy.

Common Characteristics of Sustainability Leaders

• Treat sustainability as an integral part of business strategy, not just a compliance issue. Some Leaders build a corporate strategy that focuses on the value of adherence to key sustainability principles in terms of enhanced operations, finances, and relationships. They have evolved a clear business case for sustainability initiatives and see that it is possible to “do well by doing good.”

• Take responsibility for the impact of internal operations and those of associated entities, such as supply chain partners. Leading companies have issued formal codes of conduct for suppliers that define minimum performance standards on ESG

and also hold suppliers responsible for the conduct of subcontractors. Having these codes shows an understanding that sustainability is not an isolated concept, but one that is based on understanding and managing interdependencies in the value chain of the business.

• Implement GRI standards for report-ing and ensure that the materiality of sustainability issues is understood by all stakeholder groups. Leaders excel at meeting the GRI standards fully and transparently. Using recognized stan-dards is essential because it helps ensure acceptance by stakeholders. In addition, highlighting the materiality of sustain-ability issues in a way that is meaningful

for each stakeholder group sets the tone for both operational and strategic decisions across the enterprise.

• Integrate sustainability into the brand and client value propositions. Making sustainability a central part of the customer conversation can yield enormous benefits in terms of brand value, fundamentally changing how a company is viewed in the marketplace.

• Focus their operational initiatives and related communications on carefully selected themes tied to the core of the business. Leaders tend to use relevant themes to create varied, yet complementary, communications to key stakeholder groups.

For specific examples of practices used by leading companies, see James Cerruti, “Charting a Path to Sustainability Leadership,” Director Notes, Vol. 4, No. 22, The Conference Board, November 2012.


Part II: A View by Industryby James Cerruti

An analysis of real and perceived sustainability performance across and within industries highlights the importance of communications in helping to drive positive perception of the corporate brand.Grouping companies into their respective industry sectors provides a critical context that helps put sustainability performance in perspective (see Chart 4). This preliminary examination by aggregated GICS categories shows that, contrary to what might be expected, no company is a Laggard solely because of a negative industry “halo effect,” which is defined as a generalization that projects the perception of one or two poorly performing companies

onto the whole industry or, more precisely, a kind of guilt by association. For example, the energy (oil & gas) and materials & mining sectors might be expected to score below average on both real and perceived sustainability performance. However, when the aggregated ESG dimensions are con-sidered, these sectors rate as Challengers (i.e., they have good real performance with relatively low perceived performance), along with the financials and consumer staples industries.

Healthcare (pharmaceuticals)


Sust

aina

bilit

y Re

ality

Sco

re (S

RS) (

Scal

e: 0

- 10

0)

Challengers

Laggards

Leaders

Promoters

© C

opyr

ight

201

2 B

rand

logi

c C

orp.

70

60

50

40

3030 40 50 60

Mean51.7

44.4Mean

2011Mean42.4

47.22011 Mean

Information technology

Industrials & transportationConsumer discretionary

Telecom & internet

Energy (oil & gas)

Financials

Materials & mining

Chart 4

Industry average comparisons: total ESG

Source: Brandlogic, 2012

Consumer staples

SPS greater than SRS




SRS greater than SPS




Key


Only two GICS categories were Leaders with both high real and high perceived performance: pharmaceuticals and information technology. Industrials & transportation, consumer discretionary, and telecom & internet were rated as Promoters (i.e., those with high perceptions but relatively low real performance).

It is revealing that there is a wide range of real perfor-mance among sectors—a 21-point span—whereas perceived performance varied by only seven points. This highlights the importance of communications in driving corporate brand perception.

A Closer Look at ESGIn addition to aggregating the research data by GICS category, we can separately examine each category in terms of the three sustainability dimensions that make up ESG to show where each categories’ strengths and weaknesses are.

For example, when the ESG dimensions are considered together, energy (oil & gas) companies are rated as Challengers, but when environmental factors are considered alone, these companies are rated Laggards (Chart 5).

Looking at this dimensional information, two significant facts with differing implications emerge:

• For sectors that rate as Promoters and even Challengers based on aggregated performance, the real ESG dimension most in need of improvement is the environmental one. The environmental dimension, therefore, remains an operational investment imperative for all sectors. Even the arguable exceptions, the pharmaceuticals and information technology industries, have scores that fall far short of their full potential.

• The biggest negative misperceptions of performance versus reality tend to be on the social and governance dimensions. There is a clear need for improvement of communications regarding these dimensions for all of the industries except for the telecom & internet sector, whose relatively poor perceived performance reflects relatively poor real performance.

Chart 5

GICS category sustainability performance broken down by ESG dimensions (Scores on 100 point real and perceived performance indices)

Total ESG

Consumer discretionary

Consumer staples

Energy (oil & gas)

Financials

Healthcare (pharmaceuticals)

Industrials & transportation

Information technology

Materials & mining

Telecom & internet

Environmentaldimension

Socialdimension

Governancedimension

42.1 43.6 51.6 47.4 49.5 46.5

53.2 43.3 40.3 42.0 58.2 44.0 61.2 43.1

52.0 39.3 34.7 37.9 60.2 39.4 61.1 40.3

53.4 42.1 48.6 38.5 48.0 43.6 63.8 42.7

62.3 44.8 58.9 43.3 66.2 45.2 61.6 45.6

48.8 45.4 40.2 43.8 49.9 46.1 56.1 45.8

56.6 46.6 55.7 44.5 58.4 47.2 55.8 47.3

51.9 40.2 40.9 39.4 54.0 40.2 60.8 41.2

41.4 44.6 33.0 42.2 44.4 45.8 46.9 44.6

46.247.7

51.7 44.5 44.8 42.3 53.8 45.3 56.5 44.9Overall mean of 100 companies

Key

Exception to category total ESG performance

Real Perceived Real Perceived Real Perceived Real Perceived


It is interesting to note that all Challenger GICS categories are significant Laggards on at least one ESG factor. Financials perform as Laggards on the social dimension—something readily seen in media coverage—while consumer staples, materials & mining, energy (oil & gas) and telecom & internet are environmental Laggards. In fact, telecom & internet has not only the lowest real performance of all the industries on environmental factors, it also scores the lowest of all industries on real social and governance performance. What is more remarkable is that, despite low real performance scores across all three dimensions, this sector’s perceived performance is essentially tied with the GICS category Leaders—pharmaceuticals and information technology. How can this be?

Variation within IndustriesAs expected, performance within a given sector varies, both between individual companies and from the sector mean. Comparing the performance of true peers in similar businesses highlights the impact of “halo effects” and the effectiveness of communications strategies.

The inefficiency of chosen communications channels and/or the ineffectiveness of messaging content can contribute to a significant negative disparity between real and perceived performance for a majority of companies. Real performance outstrips perception. For Leaders and Promoters, however, the effectiveness of content delivered through the primary channels of persuasion (directly through major brand communications channels and customer value propositions) plays a prominent role in their high perception ratings. Intelligent use of these channels underpins the success of many Leaders in achieving credit for above-average real performance. It also seems to be driving “positive” misperceptions for certain companies or subsectors. These companies reap positive results even though the content they create to drive perceptions is often relatively narrowcast, focusing on one specific aspect of sustainability rather than the broader picture.

What follows is a discussion of individual company performance within each of the nine industry sectors, along with the changes in ratings from 2011 to 2012. The industries are grouped by where they fall on the Sustainability IQ Matrix (Leaders, Promoters, Challengers, and Laggards).

DISTORTING PERCEPTION: THE “HALO EFFECT”

The high perception rating of the telecom & internet sector despite poor real performance highlights the power of the positive “halo effect.” A generally positive perception of this industry’s products, technologies, and societal-change leadership, which is driven by experiential and communications influences, seems to have translated into a beneficial reputation that radically distorts perceptions of performance for the better on broader, comparative sustainability factors. The positive perceived sustainability performance in this case is achieved without any investment in sustainability brand messaging per se.

The converse is arguably at play for a number of GICS categories in the Challengers quadrant, in which a negative reputational “halo” is preventing recognition for relatively high real sustainability performance, even in cases in which significant investment in sustainability-related brand communications is evident. A good example of this is ExxonMobil, which significantly improved its real performance from 2011 to 2012. Aided by a strong ad campaign calling for better math and science education, the company improved its perceived performance, although it was still below the study mean. Arguably, this may have been influenced by general negative perceptions of its industry.


Leader SectorsNumerous company comparisons in the IT sector drive home the significant difficulty faced by companies striving to align their real and perceived sustainability performance (Chart 6). For instance, IBM is exemplary in its integration of sustainability into its business strategies, its customer value propositions, and the brand messaging delivered through primary communications channels. The company’s highly successful Smarter Planet campaign is an excellent example of brand messaging. IBM leads all 100 studied companies on real ESG performance and exceeds Apple’s real performance by 28 points. Yet Apple surpasses IBM on perceived ESG performance, and, at 55.6 points for this dimension, leads all 100 companies in the study. Moreover, Apple’s perception score has improved year over year, despite negative media coverage related to labor issues and lack of transparency about corporate governance and operations. (The company has taken steps on both issues of late.) Apple’s perceptual sustainability ratings appear to derive partly from a positive “halo effect” from positive market reception of its products and from its well-received “innovative” brand communications.

In the pharmaceuticals (healthcare) sector, the companies’ real and perceived ratings were similar, although J&J leads its peers slightly (Chart 7). The perceived performance of this sector as a whole declined from 2011 to 2012. Except for Roche, all of the pharma companies studied were Leaders in 2011. However, only half remained Leaders in 2012. With the exception of Merck, overall real performance improved, yet perception scores for this sector declined across the board.

What caused the broad-based movement in the pharma-ceutical category? One possible explanation may be that these companies stood out as leaders for more than a decade by defining corporate purpose as delivering social good (better health, better living, etc.). Today, these types of communications are no longer unique, and companies in all industries define themselves by and communicate similar messages. Another possible factor affecting this sector’s reputation is the media’s continuing association of pharmaceutical companies with excessive health care costs in a number of developed countries, which could be seen as contradicting these companies’ purpose statements.



IBM

Intel


Dell

SAPCisco

MicrosoftAccenture

Canon

Samsung

HP

Xerox

Nintendo

Texas Instruments (IT)

Fujitsu

Apple

Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012

Chart 6

Industry peer comparison: information technology


Chart 7

Industry peer comparison: healthcare (pharmaceuticals)



Johnson & Johnson

Abbott LabsNovo Nordisk

Pfizer

GlaxoSmithKline

RocheAstraZeneca

Bayer

Merck

Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012



Challenger SectorsThe financial services category (Chart 8) yielded no Leaders in 2011, despite high real sustainability performance by several firms (Allianz, AXA, Citi, Deutsche Bank, HSBC, and UBS). The most likely explanation for this is the negative reputational headwinds these companies faced during the Great Recession, along with the relatively low profile taken by most of these firms in sustainability communications. In general, sustainability does not feature prominently in their overall brand strategies.

Two firms, AXA and Deutsche Bank, broke through to the Leader category in 2012 by stepping up their profile on sustainability issues and enhancing their communications. Deutsche Bank released a “study of studies” in 2012, and AXA made a concerted effort to embed sustainability in its brand messaging and investor communications.3 This can be seen on the corporate website, where sustainability is a prominent part of the primary navigation.

The financial services category also demonstrates a gap between real and perceived ESG performance due to an industry “halo effect.” For instance, Zurich, with a real performance score 23 points below AXA, received a perception score that is slightly higher than AXA’s. Here again, a tendency by stakeholders to lump together sector peers appears to have benefited Zurich and may be making it difficult for AXA and Allianz to distinguish themselves.

In consumer staples, Coca Cola and PepsiCo ranked almost identically on both real and perceived performance in 2011 (Chart 9). In 2012, both companies’ real performance advanced in tandem, but Coca Cola improved its perceived performance score relative to PepsiCo and the study mean and emerged as a new Leader. While it’s difficult to say with any certainty whether there is a strict correlation, Coke is a good example of the potential impact of brand communica-tions on stakeholder perception. In 2012, Coca Cola began using its main channels of brand com munications, including television advertising, to convey a set of messages about the responsible consumption of sugar in beverages and foods.

In consumer staples, Walmart and Tesco provide a revealing peer comparison. Both are Laggards that improved real performance year over year. Walmart’s improvements—reflecting, in particular, substantial commitments to and progress on reducing greenhouse gas emissions—were significant enough to surpass Tesco significantly on real performance ratings. Despite its greatly improved real performance, Walmart’s perceived performance declined, while Tesco’s perceived performance rose. Here is a clear case where the choice of communications mode matters.



Deutsche Bank

Zurich

AXA

UBS

Visa

American Express

Allianz

Bank of America

HSBC

Barclays

Citi

Goldman Sachs

Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012

Chart 8

Industry peer comparison: financials


Tesco

Danone (Dannon)Colgate-Palmolive

Kellogg’sWalmartHeineken

Coca-ColaPepsiCo

Nestlé



Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012

Chart 9

Industry peer comparison: consumer staples



Walmart uses press releases to highlight its ESG com-mitments and progress, and the company documents its various initiatives with formal reporting and separate descriptions.4 These communications are available but rela-tively buried on the company’s website. Contrast this with Tesco’s use of primary communication channels. Tesco’s website landing page includes an entire section devoted to lifestyle and community that invites customers to directly engage in Tesco’s initiatives to save rain forests and support responsible farming.5 Tesco also uses in-store messaging to convey commitments to healthy living and sustainable practices. From an engagement perspective, it may not be so surprising that Tesco is getting more credit from our highly attentive audiences for its ESG efforts than Walmart.

Despite the fact that four of the five energy (oil & gas) com panies covered in the study demonstrated real performance above the study mean across the aggregate of GRI reporting categories, the energy (oil & gas) sector seems to be wearing a negative halo (Chart 10). This less-than-positive perception is undoubtedly due to the negative feelings toward the industry as a result of a number of catastrophic events that seriously affected the environment, employees, and communities. As a result, many assumed the sector’s sustainable environ mental and social practices were inadequate.

As shown previously by Zurich, the halo effect can cause “positive” distortions. At least one company in the energy sector seemed to benefit from the tendency by the public to lump peer com panies together perceptually. Conoco Phillips lags far behind all its peers on real performance, yet its perception score is higher than all of its industry peers except for ExxonMobil. While perception scores of most energy category players declined year over year, ExxonMobil’s rose. This may be linked to the company’s concerted effort to communicate a leadership position on social issues, and education especially, through the primary channels of brand advertising, notably in the form of its math and science education campaign.

The materials & mining sector, like energy (oil & gas), is involved in extraction and heavy processing and bears a burden of the high environmental impact caused by its operations (Chart 11). In line with the majority of companies in the study, most of the companies tracked in this category saw their perception scores drop.

Alcoa, BASF, and DuPont suffered some of the largest declines in perception and fell into the Laggard quadrant in 2012. However, Dow and BHP Billiton recorded real performance above the study mean, casting doubt on the notion that the nature of the business prevents sustainability leadership. Dow bucked the sector trend by registering gains in perceived performance.

Chart 10

Industry peer comparison: energy (oil & gas)

ExxonMobil

ConocoPhillips

Chevron

ShellBP



Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012


Chart 11

Industry peer comparison: materials and mining

BHP Billiton

Alcoa

ArcelorMittal

DuPont

Dow Chemical

BASF



Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012



Promoter SectorsA comparison of competing brands in category subsectors reveals major disparities between real performance and perception. For instance, in consumer discretionary, L’Oreal (Chart 12) (one of only six companies to advance to the Leader quadrant from 2011 to 2012) scored slightly below Avon on perception—45.3 points and 46.8 respectively— yet L’Oreal’s real performance score exceeded Avon’s by 30 points (60.3 points versus 30).

A similar gap exists in the automotive subsector. Promoters Toyota and Honda, with relatively low real performance scores, have perception scores similar to those of Leaders BMW, VW, and Ford. How can this be? One possible explanation is that both Toyota and Honda have been building reputations as leaders in fuel-efficient engines for years, and they have promoted this favorable sustainability reputation effectively through primary brand communications. As a result of their strong communication on a single area of good performance, stakeholders appear to project outperformance on other ESG dimensions.

In contrast, BMW, VW, and Ford have largely directed broader-based communications of their high, real sustain-ability performance through secondary channels, and, as a result, these auto manufacturers have received less recognition from our highly attentive audiences.

In the industrial & transportation sector, GE stands out on sustainability communications (Chart 13). It bucked the general trend of a year-over-year decline in perceived performance to become a Leader. GE used both its primary corporate brand (the ecomagination platform)6 and secon dary channels of communications (reporting, CSR/Sustain ability sections on web site, PR etc.) to underscore its sustainability commitments and real performance and gain credit for them.7 Other Leaders in the category—especially ABB and Siemens—make use of sustainability messaging in their customer value propositions and provide high-quality, detailed reporting of ESG performance through secondary channels.

Walt Disney

HondaMarriott

BMW

Volkswagen

PanasonicSony

Toyota

Nike

Ford

Starbucks

AvonMichelin

AdidasMcDonald’s

L’Oréal

H&M



Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012

Chart 12

Industry peer comparison: consumer discretionary


Chart 13

Industry peer comparison: industrials and transportation

ABBSiemens

3M

Boeing

John DeereEADS (Airbus)

General Electric (GE)

HoneywellAmerican Airlines

Lufthansa

Japan Airlines (JAL)

Komatsu

UPS

Caterpillar

TataBritish Airways FedEx



Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012



In this category, a gap also exists between real performance and perception. One example is the comparison of FedEx and UPS. UPS achieved top-three real performance among all studied companies in 2012, placing just behind IBM and Dell. The company’s ESG reporting is robust, yet UPS remained in the Challengers quadrant. Through 2012, UPS had not linked its sustainability messaging to its primary brand communications. In contrast, FedEx, which has a real performance score far below that of UPS, is perceived to be performing ahead of its key competitor. FedEx’s approach, like the auto manufacturers mentioned earlier, seems to be the use of advertising and other main brand communications channels to convey strong performance in a single important category—in this case, commitment to fleet fuel efficiency—while limiting both its commitments to and reporting on the broader range of E, S and G GRI metrics.

The airline subsector offers another example of the “halo effect.” JAL, though improving, had real performance in 2012 well below its airline peers, including British Airways. Yet JAL’s perception score was not far behind Lufthansa’s and was significantly higher than that of British Airways.

Finally, the telecom & internet category demonstrates the most extreme gap between real and perceived performance (Chart 14). At the macro level, the four internet companies covered (Amazon, Facebook, Google, and Yahoo!) all fall well below the telecom companies on real performance, yet they scored similarly to or ahead of the telecom players on perception. In fact, these internet companies all had real performance in the bottom 10 percent of the 100 companies studied.

Despite poor real performance, three of the four scored above the study mean on perceived performance, and two (Amazon and Google) registered perception scores in the top 25. Amazon, Google, and Yahoo! all scored ahead of Leader Nokia on perception. It appears that, like Apple, the positive market reception of the companies’ products and brand communications are having a positive “halo effect” on their perceived sustainability performance.

Chart 14

Industry peer comparison: telecom and internet

Yahoo!


Nokia

BT (British Telecom)

Google

Facebook Amazon

AT&T

Vodafone



Challengers

Laggards

Leaders

Promoters

80

70

60

50

40

30

20

10

030 40 50 60

Mean2011

Mean2011

Mean2012

Mean2012



Part III: Learning from Absolute Leaders in Sustainabilityby James Cerruti and Kathee Rebernak

Having examined best practices, changes over time, and the difficulties of achieving recognition for ESG performance, this section takes a closer look at leading companies’ real and perceived performance on the disaggregated E, S, and G dimensions of performance. Also examined are the practices of seven companies that outperformed their peers on ESG factors overall and on a disaggregated basis.

While the SPS and SRS are useful, they leave some questions unanswered. In particular:

1 Is it only the overall study Leaders that score as Leaders on each of the three E, S, and G dimensions when examined individually, or do other companies also achieve leadership when measured on the separate dimension indices?

2 Among those companies that score as Absolute Leaders (i.e., above mean performance on both the real and perceived indices on all three E, S and G dimensions individually as well as in aggregate) what patterns of practice do they employ, especially when it comes to real performance?

The Story Told by Disaggregating E, S, and GIn the 2012 study, 32 companies ranked as Overall Leaders; that is, they had above-mean scores on both real and per ceived aggregated ESG performance. However, of these 32 companies, only 13—which are referred to as Absolute Leaders—scored as Leaders on all three dimensions (Chart 15).

The remaining 19 scored below the mean on at least one E, S, or G dimension on either real or perceived performance. For example, due to its high Environmental score, Ford ranked as an Overall Leader, despite perceived performance shortfalls in the Social and Governance dimensions. Accenture ranked as an Overall Leader, even though the company did not rank as a Leader in any of the disaggregated ESG dimensions. That is the result of aggregating the overall ESG index scores. Accenture’s high real Environmental score offset the company’s below-mean real scores on the Social and Governance dimensions, while its above-mean perception scores on both Social and Governance offset a below-mean perception score on the Environmental dimension.

BMW

Ford

Volkswagon

Sony

Walt Disney

Coca-Cola

Danone (Dannon)

Nestlé

Colgate-Palmolive

DeutscheBank

AXA

Abbott LabsGlaxoSmithKline

Johnson & Johnson

Novo Nordisk

P�zerEADS (Airbus)

3M

ABB

GESiemens

John Deere

Accenture

Cisco

Dell

IBM


Intel

Samsung Microsoft

SAPNokia


Sustainability Reality Score (SRS) (Scale: 0 - 100)Leaders

80

70

60

50 60

50SRS Mean

SPS Mean

Chart 15

Brandlogic Sustainability IQ Matrix 2012Overall Leaders and Absolute Leaders

SM

SRS vs. SPS Gap




Key

Absolute Leaders

Other Overall Leaders


The performance of the 19 Overall Leaders that did not rank as Absolute Leaders most often lagged behind their peers on the Social dimension. Twelve Overall Leaders trailed their peers in terms of Social scores, six trailed on Environmental, and four trailed on Governance (Table 1). For those com-panies with dimensional performance in the Challenger quadrant, the shortfall was on perception, not reality. For Promoters the opposite was true. Those with dimensional performance in the Laggards quadrant fell short on both real and perceived performance on that dimension.

As previously noted, 32 companies in the 2012 study were Overall Leaders based on aggregated scores. However, when the scores are disaggregated, 11 additional companies emerge as Leaders on one or two E, S or G dimensions.

Environmental Performance: The Lowest Barrier to LeadershipOf the three E, S and G dimensions, the lowest means for both real and perceived measures are on the Environmental dimension, creating a lower hurdle to leadership than for the other two dimensions.

When considering Environmental performance alone, eight additional companies enter the top ranks along with 26 of the Overall Leaders (Chart 16). One company, UBS, scores second of all companies on real Environmental performance, just behind IBM. Another, Apple, achieved the fourth-highest score among all 100 companies on its perceived Environmental performance, just below SAP.

While real performance improvements in the Environ-mental dimension is a challenge for companies across all industries, the challenge in the Social and Governance dimensions for most companies is better communicating actual performance.

Table 1

Overall Leaders lagging on one or more dimension

Environmental dimension

Social dimension

Governance dimension

Challengers L’Oréal Coca-Cola Ford

Deutsche Bank Nestlé

AXA GlaxoSmithKline

Accenture Novo Nordisk

Cisco

Nokia

Ford

Promoters Colgate-Palmolive Walt Disney Danone (Dannon)

EADS (Airbus) Accenture

John Deere

Accenture

Microsoft

Laggards Pfizer Samsung

BMW

Ford

Volkswagon

Sony

Walt DisneyCoca-Cola Danone

Nestlé

UBS

Abbott Labs

AstraZeneca

GlaxoSmithKlineJohnson & Johnson

Novo NordiskEADS(Airbus) 3M ABB

GE

Siemens

John Deere

Apple

Cisco

Dell

HP

IBM

Philips (electronics)Canon

Intel

Samsung

Microsoft

SAP

BASF


Nokia



Leaders80

70

60

50 60

Envir. SRS

MeanEnvir.SPS

Mean

50

Chart 16

Brandlogic Sustainability IQ Matrix 2012Leaders on the environmental dimension

SM

Environmental SRS vs. SPS Gap




Key

Leader on environment, but not an Overall Leader

Overall Leader


Social Performance: A More Exclusive Measure of LeadershipOnly 21 out of the 100 companies qualified as Leaders on the Social dimension, compared with 34 that qualified as Leaders on the Environmental dimension (Chart 17). Almost all of the 21 companies are also Overall Leaders; only one, Nike, is a Leader on the Social dimension but not an Overall Leader. The Social dimension is also where many Overall Leaders struggle: 12 Overall Leaders are either Promoters or Challengers in Social performance. This is a much greater portion of the Overall Leader group than on either of the other two dimensions.

Governance: A Strong Link to Overall LeadershipAn examination of scores on the Governance dimension reveals that nearly all of the Overall Leaders also scored as Leaders on this dimension. The four companies that

did not were Accenture, which scored below the mean on real governance performance but above the mean on perceived governance performance; Danone, with real governance performance just below the mean and perceived governance performance above the mean; Ford, which had real governance performance well above the mean, but perceived governance performance slightly below the mean, and Samsung, which scored below the mean on both real and perceived governance performance. Five companies that were not among the Overall Leaders emerged as Leaders in Governance: American Express, Boeing, HP, Nike, and Zurich (Chart 18).

Just as some Overall Leaders did not score as Leaders on one or more dimensions, two companies scored as Leaders on two dimensions but did not achieve an aggregate score high enough to place them among the Overall Leaders: HP, which scored as a Leader on Environmental and Governance, and Nike, which scored as a Leader on Social and Governance dimensions.

NikeBMW

Volkswagon

L'Oréal

Danone (Dannon)

Colgate-Palmolive

Deutsche Bank

AXA

Abbott Labs

Johnson & Johnson

P�zer

3M

ABB

GESiemens

Dell

IBM


Intel

Samsung

SAP



Leaders80

70

60

50 60

Soc.SRS

Mean

Soc. SPS Mean

50

Chart 17

Brandlogic Sustainability IQ Matrix 2012Leaders on the social dimension

SM

Social SRS vs. SPS Gap




Key

Leader on social, but not an Overall Leader

Overall Leader

Nike

BMW

Volkswagon

L'Oréal

Walt Disney

Coca-Cola

Nestlé

Colgate-Palmolive

DeutscheBank

AXAZurich

American Express

Abbott Labs

GlaxoSmithKline

Johnson & Johnson

Novo Nordisk

P�zer

Boeing

AEDS(Airbus)3M

ABB

GE

Siemens

John Deere

CiscoDell

HPIBM


Intel

MicrosoftSAP

Nokia



Leaders80

70

60

50 60

Gov. SRS

Mean

Gov. SPS Mean

50

Governance SRS vs. SPS Gap




Key

Leader on governance, but not an Overall Leader

Overall Leader

Chart 18

Brandlogic Sustainability IQ Matrix 2012Leaders on the governance dimension

SM


A Closer Look at Absolute LeadersA closer examination of the Overall Leaders in the 2012 study reveals a select group of Absolute Leaders, companies that excelled in both aggregated ESG performance and on E, S, and G dimensions individually (Table 2). These companies fell into just four of the nine Global Industry Classification Standard (GICS) categories covered in the study.

Using an analytical model developed by management con-sultancy Framework LLC,8 the practices of seven Absolute Leaders with the highest real performance scores were examined: BMW, Dell, IBM, Intel, Johnson & Johnson, SAP, and Volkswagen (Chart 19).

Perceptual Variance among Respondents in Developed and Newly Developed Markets

Perceptions were not constant around the world or among audience segments. When comparing perception scores in developed countries (the United States, United Kingdom, Germany, and Japan) and newly developed countries (China and India), clear differences emerged. When Newly Developed country scores were disregarded, both perception scores and the perceptual mean were considerably lower. The gap across the disaggregated E, S, and G factors was fairly consistent, meaning that the relative rankings did not shift much.

However, if the Newly Developed market respondents’ SPS scores were set aside, the remaining gap between real and perceived performance in Developed markets was much greater than indicated by the aggregated study results. The question remains, why should there be such variation in the perception of the same global companies in different markets? Does it have to do with the mental comparators used in judging a company—for instance, local companies in India or China versus global players?

Or does it perhaps reflect a cultural phenomenon, to which other researchers may attest, that in Asia overall respondents are simply less willing to rate companies, products, or people at the lower end of the scale?

Average perceived performanceamong respondents in developedversus newly developed markets

Environmental 34.0

59.3Newly developed

Developed

Social 37.5

61.2Newly developed

Developed

Governance 36.4

62.4Newly developed

Developed

Table 2

Absolute Leaders

Information Technology

Industrial and Transportation

Consumer Discretionary

Healthcare (Pharmaceutical)

Dell ABB BMW Abbott Labs

IBM GE Volkswagen Johnson & Johnson

Intel Siemens

Philips Electronics 3M

SAP

BMW

VolkswagonAbbott Labs

Johnson & Johnson

3M

ABB

GESiemens

Dell

IBM


Intel

SAP



Leaders80

70

60

50 6050

SRSMean

45

SRS vs. SPS Gap




Key

Top real performance Leaders

Other Absolute Leaders

Chart 19

Top real performance Leadersamong Absolute Leaders, 2012


The analysis considered the following criteria:9

Robust reporting and disclosure The extent to which com-panies report ESG performance and the extent to which they apply and/or adhere to international reporting standards.

Robust disclosure is a means not only to elevated perception of performance but also to better real performance on key ESG metrics (i.e., “what gets measured gets managed”).

Materiality Whether the companies have and disclose a process for prioritizing issues based on an understanding of the concerns of external stakeholders, as well as company management.

Substantive goals and targets Whether the companies state quantifiable targets, and whether those goals and targets are related to material issues.

Financial alignment The extent to which the companies have made an explicit connection between performance on ESG issues and the ability to create financial value.

Also looked at was whether the companies clearly articu-lated their recognition of the long-term financial value of integrating ESG considerations into strategy, operations, and product development, and whether they view such integration as a path to greater innovation. Finally, financial disclosures were reviewed to see if material issues or risks identified in sustainability reporting were represented in the discussion of risk factors.

Robust Reporting and DisclosureMost Absolute Leaders engage in rigorous reporting. All seven companies report regularly on performance and adhere to the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. Two companies, Intel and SAP, have produced reports they declared as integrated.10 All but one, Johnson & Johnson, have purported to apply the GRI guidelines at the “A” level, and four companies (BMW, Intel, SAP, and Volkswagen) have sought assurance for at least some of their data.11 Reporting to the GRI’s highest application level not only requires some rigor by the companies, but it also enables them to leverage the tremendous amount of highly granular data required to do so in their own operations. In other words, robust reporting provides the information needed to enhance real ESG performance.

With the exception of one company (BMW), the Sustain-ability Perception Scores for the companies that reported to the GRI at an “A” level and sought assurance were higher than the median of the Absolute Leaders. Companies that applied the GRI guidelines at an “A” level also generally disclosed the indicators most commonly sought by the ratings, rankings, and disclosure frameworks, such as the Dow Jones Sustainability Indexes, NASDAQ CRD Sustainability Index, MSCI, Sustainalytics, FTSE4Good, Ceres, the EICC, and others.12

What’s more, most of these Absolute Leaders have reported their ESG performance to some degree for several years. Johnson & Johnson reported on ESG performance as early as 2000; SAP first published a sustainability report in 2007, but “graduated” to integrated reporting while still applying the GRI in 2013. The length of time a company has been reporting, while not directly related to the likelihood that the company will integrate ESG considerations in all areas of the business, does indicate movement in that direction. The label a company chooses for its ESG efforts can also signal the degree to which it employs integrative thinking in conducting its business. For example, terms such as “sustainability” and “sustainable value” suggest recognition of ESG’s importance to the long-term value and operation of the business. In contrast, terms such as “corporate social responsibility” or “citizenship,” which often have been associated with philanthropic activities, can convey that such matters are secondary considerations for the company rather than ones material to its financial well-being.13

Table 3 Criteria for leading ESG performance The performance of the seven companies whose total Sustainability Reality Score was at or above the median on each of the seven assessment criteria.

Company

Reporting and

disclosure

Year of first

reportMateriality

analysis

Goals and

targetsFinancial

alignments

BMW A+ (2012) 2001 P P P

Dell A (2012) 2003 P P

IBM A (2012) 2004 P

Intel A+ (2012)* 2002 P P P

J&J C (2011) 2000 P P P

SAP A+ (2012)* 2007 P P P

VW A+ (2012) 2001 P P P


MaterialityA convergence of focus, opinion, and research on materiality analysis from organizations such as the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), and the GRI G4 Sustainability Reporting Guidelines, as well as additional research and work conducted over the past eight years, points to a relationship between materiality analysis and better real ESG performance.14 Materiality analysis leads companies to a better understanding of the impact of ESG issues on overall performance and financial value, while also enabling them to focus attention and resources on the issues that matter most to stakeholders and, consequently, the company itself.

The materiality analysis process is twofold, involving engagement with external stakeholders to understand their concerns and an internal assessment of the impact (positive or negative) a broad range of issues has on company performance. Six of the seven Absolute Leaders conducted a materiality analysis and published the results, supporting the conclusion that there is value in both the process and examination of the results in the context of the business as a whole (Chart 20).

1. First, we use specific criteria to internally identify the 20 most relevant issues for society and the company.

2. Then our stakeholders (primarily sustainability experts) evaluate these 20 topics in an online survey. To enhance quality, we also carry out a stakeholder analysis. The stakeholder survey and analysis result in a prioritisation of the topics by our stakeholders.

3. Finally, experts from the company’s strategy offices carry out a materiality workshop to evaluate the significance of the topics for the BMW Group. This makes the results more robust.

The results of the materiality analysis are mapped out above. The y-axis maps the relevance of the topics to our stakeholders, the x-axis shows the relevance of the topics from the company’s internal perspective. We judge a core area to be particularly significant if it is categorised as very important by both our stakeholders and the company. The materiality matrix is the point of departure for regular verification of the direction our sustainability strategy is taking.

Reprinted with permission from Adding Value; Sustainable Value Report 2012, page 14, BMW Group.

Chart 20

BMW materiality analysis 2012

IMPO

RTA

NCE

FO

R ST

AKE

HO

LDER

S

IMPORTANCE FOR BMW GROUP

Corporate Volunteering

0

0

1

1

2

2

3

3

4

4

5

5

6

6

7

7

8

8

9

9

Work-life balance

Further education and trainingDemographic change

Biodiversity

Corporate Citizenship

Water Human rights

Diversity

Donations/Sponsoring

Occupational health and safety

Sustainabilitystrategy and management

Environmental and social standards in the supply chainProduct safety

Energy supply/Renewable energy

Future mobility/Mobility services

CO2 emissions and climate change

Alternativedrivetraintechnologies

Anti-corruption/Compliance

E�cient use of resourcesand recycling management


However, these companies did not appear to integrate or connect their materiality and risk management processes in any way. Where materiality was discussed, the process was not mentioned in the context of risk management, and those companies that did discuss risk management in depth did not mention materiality as a component of that process. For example, SAP, whose material issues and risk factors are closely aligned, did not discuss materiality in the context of risk management. By stating as a goal the incorporation of human rights (a material issue) into its compliance risk-analysis process, Volkswagen has taken a step toward aligning these two processes. Given that investors increasingly see ESG issues as material to company performance, these companies have an opportunity to use the materiality analysis process and results as a bridge to stronger, more integrated risk management processes and thus demonstrate greater integration of ESG issues into corporate strategy.

Goals and TargetsIn reviewing the companies’ goals and targets, two characteristics were assessed: quantifiable, time-bound targets linked to broader goals and objectives, and linkages between the companies’ goals and targets and the material issues they identified. On both fronts, the results illustrate an opportunity for companies to better quantify their goals and targets in a way that is useful to both stakeholders and the companies. While these Absolute Leaders are exemplars in many ways, they could further strengthen these links.

This review revealed the following commonalities:

• All seven companies set quantitative targets on energy use and CO2 emissions, though they varied widely in terms of specificity and presented a challenge for stakeholders seeking comparable data across and even within sectors. BMW15 and Volkswagen16 used similar targets and metrics for CO2 emissions; with some effort, stakeholders can compare targets and performance. Dell17 aims to reduce emissions from product manufacturing per dollar of revenue; Intel18 uses a per-chip metric; SAP19 states an absolute reduction target and tracks emissions in absolute, per-employee, and per-euro figures.

• All companies save one (IBM) track and report on Scope 3 emissions. Intel20 and Dell report only on business travel. BMW tracks logistics and business travel emissions. Volkswagen, which, in its most recent report, published for the first time its Scope 3 emissions, noted that “the ‘use phase’ emission category accounts for over 70% of all Scope 3 emissions.” SAP tracks Scope 3 emissions from products and services it buys and sells, as well as business travel.

• All seven companies seem to have difficulty in quantifying diversity goals and performance. Volkswagen has ventured further than the others, setting a target for the group in Germany for “an increase in the percentage of women at all management levels to 30 percent in the long term.”21 Volkswagen has also set a graduate recruitment target for women of at least 30 percent of all hires. While these targets are not time-bound, they are quantifiable. The lack of specificity in goal-setting, in terms of both numbers and time, makes it difficult for stakeholders to gauge progress.

Finally, an analysis conducted by Framework of how closely the goals and targets were linked to material issues or priorities revealed that those companies that identified material issues stated goals and targets that were related, to some degree, to those issues. Intel, for example, set quantitative goals for energy use, product energy efficiency, employee engagement, water intensity, and support for education and technology access—all issues appearing in the upper right quadrant of its materiality matrix.

Financial AlignmentFive of the Absolute Leaders make explicit the connection between ESG performance and long-term financial value. The two that do not, Dell and IBM, present their efforts as beneficial to society without a clear link to their business value. BMW notes that sustainability has been a strategic corporate objective on the BMW Group Balanced Scorecard since 2009. All projects consider social and environmental factors in the decision-making process, and sustainability targets are built into managers’ performance-based remuneration.


Intel makes a convincing case for the value of integrating ESG considerations into business strategy and operations, noting risk reduction, innovation, cost savings, employee engagement, and brand value as tangible business out-comes (see box above).22

SAP published its first integrated report in 2013 and presents the clearest relationship between performance on ESG issues and the company’s ability to execute its busi-ness strategy. SAP defined sustainability as follows:

For SAP, sustainability is the ability to manage economic, social, and environmental risks and opportunities holistically for increased profitability. It contributes to our vision to make the world run better and improve people’s lives. SAP is committed to fully integrating sustainability into our strategy and business model and in this way the company pursues a corporate strategy that is sustainable rather than a stand-alone sustainability strategy. [emphasis added].23

In making this fine semantic distinction, SAP illuminates the essence of true ESG integration. What’s more, SAP demonstrated significant alignment between the material issues identified by its materiality analysis and those risks identified in the company’s discussion of risk factors. Those issues—human and intellectual capital management, security and privacy, business conduct, and climate and energy—are each referenced to some degree in the risk factors discussion. For example, SAP references environmental performance and social investment:

Failure to respond to meet customer, partner, or other stakeholder expectations or generally accepted standards on climate change, energy constraints, and our social investment strategy could negatively impact SAP’s business, results of operations, and reputation. In the last few years, SAP has proven that it is possible to take a proactive position on social and environmental issues while delivering robust financial growth. As a result, we received great recognition for our sustainability efforts. As a proof point for SAP’s sustainability performance, we continue to be listed in the most prominent and recognized sustainability indices, such as the Dow Jones Sustainability Index or the Sustainability Leadership Report by Brandlogic. We believe that the risk of failing to meet expectations regarding our energy and emission strategy as well as social investment strategy is unlikely to occur and that if the risk were to occur, it would have a moderate negative impact on our reputation, business, financial position, profit, and cash flows as well as on the achievement of our revenue targets. We classify this risk as a low risk.24

SAP, BMW, and Volkswagen all state in their communica-tions that they view their financial performance as a function of their performance on ESG issues. For instance, SAP states: “…our future success hinges on how well we holistically navigate the social, environmental, and economic contexts in which we operate.”25

ConclusionWhen addressing ESG issues, companies should con-sider both their operational performance, as well as the per ceptions of their key stakeholders. Focusing on both real and perceived performance can generate additional opportunities and highlight areas of risk. For example, a company with good operational performance can gain considerable brand equity by working to align stakeholder perceptions with reality.

INTEL’S INTEGRATED VALUE FRAMEWORKIntegrating corporate responsibility and sustainability into our business and decision-making creates value for Intel in four main ways. It helps us: reduce risk and protect our license to operate; improve the efficiency and effectiveness of our operations; protect and build brand value; and drive revenue growth through innovation and identification of new market opportunities.

RISK MANAGEMENTLicense to Operate and Governance• Regulatory risk

(i.e., environmental)• Community engagement• Supply chain responsibility

BRANDReputation and Goodwill• Differentiation• Trusted partner• Goodwill

OPERATIONSCost Savings and Continuous Improvements• Operational efficiency• Management quality• Employee engagement

REVENUEGrowth and Innovation• Market expansion• Product innovation• New customer needs

Source: Intel 2012 Corporate Responsibility Report, p. 12, http://csrreportbuilder.intel.com/PDFFiles/CSR_2012_Full-Report.pdf


The analysis across and within industries and the dis-parities discovered between real and perceived sustainability performance suggest the following:

• The overall decline in perceived performance for two-thirds of the companies may be the result of rising skepticism based on more companies making claims about their sustainability initiatives.

• A negative industry “halo effect” can hinder a company’s abil-ity to gain recognition for above-average real performance, as demonstrated by the gap between real and perceived perfor-mance scores in the financial services, energy (oil & gas), and material & mining sectors.

• Likewise, a positive “halo effect” can drive more positive views of companies’ actual sustainability performance, as seen in the information technology and telecom & internet sectors.

• Concerted, assertive communication on sustainability by companies with relatively high real sustainability performance is crucial to attaining recognition among key stakeholders.

• Leveraging the primary (i.e., brand) channels of communica-tion and persuasion appears to be the most effective way to improve perception.

Moreover, the practices of the Absolute Leaders can offer some valuable lessons for companies on how to achieve real sustainability performance.

Measuring and reporting performance on the ESG issues of concern to key stakeholders has intrinsic value to both stakeholders and companies. The information generated through reporting can be used to improve corporate practices and to better understand the impact of ESG issues on the company’s bottom line. Indeed, the majority of the Absolute Leaders points to a clear connection between real ESG performance and financial outcomes in their communications.

While the Absolute Leaders outpace their peers on real ESG performance, even Absolute Leaders have opportunities for improvement. In particular, many could benefit from closer alignment of ESG goals and targets with their overall business strategies, financial reporting, and other stakeholder communications.

Endnotes1 James Cerruti, “Charting a Path to Sustainability Leadership,” Director Notes,

The Conference Board, Vol. 4, No. 22, November 2012.

2 John Peloza et al., “Sustainability: How Stakeholder Perceptions Differ from Corporate Reality,” California Management Review, Vol. 55, No. 1, Fall 2012, pp. 74–97.

3 Sustainable Investing: Establishing Long-term Value and Performance, Deutsche Bank, June 2012 (www.dbcca.com/dbcca/EN/investment_research.jsp).

4 See the Walmart Community Giving website (http://foundation.walmart.com/our-focus/sustainability).

5 For more information, visit the Tesco website (www.tesco.com).

6 For more information, visit the ecomagination website (www.ecomagination.com).

7 See GE profile (www.sustainabilityleadershipreport.com/downloads/ProfileGE_SustainabilityLeadershipReport.pdf).

8 Framework helps companies create and preserve value through sustainable business practices. Its clients are represented in the Global FT500, Fortune 500, S&P 500, Dow Jones Sustainability, and FTSE4Good indices, and the firm is strategic counsel to the U.S. Network of the United Nations Global Compact. For more information, please visit http://www.framework-llc.com.

9 The assessment of these criteria is based on a review of the companies’ publicly available information.

10 The International Integrated Reporting Council (IIRC) consultation draft identified integrated reporting through the presence of six principles-based criteria: (1) strategic focus and future orientation, (2) connectivity of information, (3) Stakeholder responsiveness, (4) Materiality and conciseness, (5) Reliability and completeness, and (6) consistency and comparability. For more information, please see the IIRC consultation draft at (www.theiirc.org/wp-content/uploads/2013/04/Front-of-CDraft.jpg).

11 All references to the GRI are to the G3 sustainability reporting guidelines. In the G4 guidelines, released in May 2013, the GRI has replaced the G3 application-level scheme with a two-level system of “core” and “comprehensive” reporting.

12 Based on Framework’s mapping and identification of indicators most commonly tracked by well-known ratings, rankings, and disclosure frameworks.

13 Terms used to describe ESG performance include sustainability (SAP, Volkswagen), sustainable value (BMW), corporate social responsibility (J&J), corporate responsibility (IBM, Intel).

14 See http://framework-llc.com/the-materiality-bridge/.

15 See “Objectives, Key Facts, and Figures,” (www.bmwgroup.com/e/0_0_www_bmwgroup_com/verantwortung/svr_2012/ziele-kennzahlen-fakten.html).

16 See The Sustainability Report 2012, Volkswagen, (http://sustainability-report2012.volkswagenag.com/en.html).

17 See FY13 Corporate Responsibility Summary Report, Dell (http://i.dell.com/sites/content/corporate/corp-comm/en/Documents/dell-fy13-cr-report.pdf).

18 See “Energy and Emissions: Greenhouse Gas Emissions,” SAP Integrated Report 2012, SAP, www.sapintegratedreport.com/2012/en/performance/energy-and-emissions/greenhouse-gas-emissions.html

19 See “Key Facts,” SAP Integrated Report 2012, SAP (www.sapintegratedreport.com/2012/en/nc/key-facts/key-facts.html).

20 http://csrreportbuilder.intel.com/PDFFiles/CSR_2012_Full-Report.pdf

21 See “Goals and Actions,” The Sustainability Report 2012.

22 Intel 2012 Corporate Responsibility Report, p. 12, http://csrreportbuilder.intel.com/PDFFiles/CSR_2012_Full-Report.pdf.

23 See “Glossary,” (www.sapintegratedreport.com/2012/en/additional-information/glossary.html?tx_a21glossaryadvancedoutput_pi1[char]=s&no_cache=1).

24 See “Combined Management Report: Risk Report” (www.sapintegratedreport.com/2012/en/performance/risk-report.html

25 See “About This Report: Why Integrated Reporting?” (www.sapintegratedreport.com/2012/en/about-this-report/why-integrated-reporting.html).

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