Materiality Tool for Impactful Business Projects

Materiality Tool for Impactful
Business Projects
May, 2017
Bangkok, Thailand

Agenda
Sustainability Failure Rate
Why this matters
Industries
Companies
How do they fail
Root causes
Examples
Mitigation strategies
6 capitals model
Examples
Putting it into practice
Case Study

Sustainability Failure Rate
Bain Achieving Breakthrough Results in Sustainability, 2017
2%
…..of Corporate
Sustainability efforts
achieved or exceeded the
expectations that were
set….

746.4
593.9
513.1
428.8
415.2
404.3
334.6
330.4
300.3
281.1
271.4
264.8
257.8
245.2
238.8
Apple
Google
Microsoft
Amazon
Facebook
Berkshire Hathaway
Exxon Mobil
Johnson & Johnson
Chase
Alibaba Group
Sustainability Industry
Wells Fargo
General Electric
AT&T
Bank of America
#11 in global ranking
http://dogsofthedow.com/largest-companies-by-market-cap.htm
Why this matters: Industry

Why this matters: Industry
• Assuming the 2%
success rate
• Scaling for the total
spend
• The total investment
with no material
benefit is larger than
the total market
capitalization of
General Electric
-265
5.4
-300
-250
-200
-150
-100
-50
0
50
Loss Gain

The reputation of a
company has a significant
contribution to its market
capitalization
Why this matters: Company Value
26%
39%
12%
S&P500 (avg) S&P500 (Large) S&P500 (Small)
http://www.world-economics-journal.com/The%20Impact

http://www.mckinsey.com/business-functions/risk/our-insights/are-you-
prepared-for-a-corporate-crisis
Number of media
headlines signaling
corporate reputation risk is
increasing
130
570
1030
1990-99 2000-09 2010-16
Why this matters: Company Reputation Risk

Failure: root causes
http://calleam.com/WTPF/?page_id=2213
Market & Strategy
Analysis
Organizational &
Planning
Leadership and
Governance
Quality
Risk
Competency
Engagement

Market & Strategy
Analysis
Organizational &
Planning
Leadership and
Governance
Quality
Risk
Competency
Engagement
1
2

Market & Strategy
Analysis
Organizational &
Planning
Leadership and
Governance
Quality
Risk
Competency
Engagement
1

Failure: root causes - market
WHATyoudo
HOW you do it
+
+
-
-

WHATyoudo
HOW you do it
+
+
-
- Tobacco
Fast Fashion
Modern Forestry
Consulting
Media

http://www.independent.co.uk/news/world/americas/kentucky-coal-museum-
harlan-county-solar-panels-install-save-money-renewable-energy-green-fossil-
a7676086.html

Mitigation Strategies
Market & Strategy
Analysis
Organizational &
Planning
Leadership and
Governance
Quality
Risk
Competency
Engagement
2

Understand
What kind of
company are
you?(1.0 vs
2.0 vs 3.0)

3.02.0
Company
focuses on using
their products
and processes to
mitigate impact
on society
Company efforts
on the benefits
of sustainability
to increase
efficiency
and decrease
risk
1.0
Company efforts
largely focused
on marketing
Firm typologies:

Understand
What kind of
company are
you?(1.0 vs
2.0 vs 3.0)
Define
What kind of
company do you
want to be

Understand
What kind of
company are
you?(1.0 vs
2.0 vs 3.0)
Map
Map your
stakeholders
Define
What kind of
company do you
want to be

http://www.michelin.com/eng/sustainable-development/performance-and-responsibility/Materiality-Analysis
Firm-Level Materiality (Michelin)

Understand
What kind of
company are
you?(1.0 vs
2.0 vs 3.0)
Map
Map your
stakeholders
Define
What kind of
company do you
want to be
Develop
Create your
sustainability
programme

Understand
What kind of
company are
you?(1.0 vs
2.0 vs 3.0)
Map
Map your
stakeholders
Create
Develop
impactful
sustainability
work
Define
What kind of
company do you
want to be
Develop
Create your
sustainability
programme

Clear commitments
with quantitative
targets
Leadership
Engagement
Business case for
change
Process and
incentive changes
Key success factors

Mitigation Strategies - Reminder
2%
…..of Corporate
Sustainability efforts
achieved or exceeded the
expectations that were
set….

62%
…..of respondents cited
public reputation as the
primary business
rationale for
sustainability programs—
nice to have, but not
essential to the business

not Material=“…not essential to
the business…”

SEC Staff Accounting Bulletin No. 99: Materiality
Definition: “A matter is material if it is
substantially likely that the information
will affect decisions of a reasonable
person”

6 Capitals Tool
Accounting Financial

6 Capitals Tool
Accounting
Sustainability
Labor
Financial
Financial Natural
Capitol
Local
Community
https://www.greenbiz.com/blog/2014/01/28/materiality-drives-sustainability-reporting

6 Capitals Tool
• In business using different screening tools can lead to
richer analysis and results
http://www.accountingtools.com/questions-and-answers/types-of-financial-analysis.html
Horizontal analysis
Vertical analysis
Short term analysis
Multi-company
comparison
Industry comparison

6 Capitals Tool
• Different tools to measure sustainability project
materiality
o ESG: Environment, Social and Governance
o GRI: Global Reporting Initiative
o 6 Capitals

6 Capitals Tool
Financial Capital Human Capital
Intellectual Capital Natural Capital
Social CapitalManufactured
Capital

6 Capitals Tool
https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2014/CorpFin/6-types-
of-Capital.jsp
Type Example
Financial Capital Pool of financial assets available
Manufactured Capital
These assets include physical distribution networks, products and
services, and how these goods and services are delivered to customers
Intellectual Capital Intangible assets, such as trademarks, patents, and brand equity
Human Capital Costs of employee turnover, retraining, and on-boarding new employees
Social Capital Productive relationships with external stakeholders
Natural Capital
Environmentally friendly buildings, alternative energy facilities, and the
integration of such practices into organizational supply chains

GOOD FOR:
6 Capitals Tool
• Evaluation of projects
• Evaluation of investments
• Evaluation of programmes
NOT GOOD FOR:
• Full-firm sustainability
assessments
• Stakeholder impact
evaluation

6 Capitals Tool
Note:
• In addition to the 6 Capitals tool, users are advised to
employ the financial measurements most commonly
used in their company
• For the purposes of the class – we are going to
simplify and just use the 6 Capitals tool without
financial measurements

Case Study: H&M
Materiality Assessment: Conscious Collection

Case Study: H&M
Programme:
• H&M collects used garments at its stores and
uses the resulting material to create the next
generation of clothing in their “conscious
collection”
• €0.02 per kilo of donated clothing is donated
to local charities

Case Study: H&M
Financial Materiality Will the sales of the Conscious
Collection clothing have a net
positive effect on the bottom
line?
Factors:
• Hurdle Rate
• WACC
• Risk / Yield curve
• Financing Mix
• etc

Case Study: H&M
Sustainable Materiality Will the sales of the Conscious
Collection clothing have a net
positive effect on the bottom
line?
Factors:
• Financial Capital
• Manufactured Capital
• Intellectual Capital
• Human Capital
• Social Capital
• Natural Capital

Case Study: H&M
Recycle: As of Feb 2017,
23,072 tons of clothing
collected.
Donation: As of Feb 2017,
€833.062 has been donated
to local charity.

Case Study: H&M
Type Reminder
Material
Yes No
Financial Capital financial assets
Manufactured Capital physical distribution
Intellectual Capital trademarks, patents
Human Capital employee turnover
Social and Relationship Capital external stakeholders
Natural Capital
environmentally
friendly

Case Study: H&M
Recycle: As of Feb 2017,
23,072 tons of clothing
collected.
Materiality: Current
technology = 276 years to
use all of this this material
Donation: As of Feb 2017,
€833.062 has been donated
to local charity.
Materiality: This is 0.00353%
of annual sales

Case Study: H&M
“Sin” Example
Hidden trade-offs narrow set of attributes eg recycled paper
Lack of proof
lack of tangible evidence eg % of post consumer
waste
Vague claims eg all natural
Irrelevant claims Ex: CFC free products
The lesser of two evils organic cigarettes
Outright lies false claims, eg energy rating
6 “Sins” of Greenwashing
http://sinsofgreenwashing.com/index6b90.pdf

6 Capitals Tool - Practice
Materiality Assessment: Nestlé
Nestlé pledged to reduce water withdrawals per ton of product
by 35% in 2020, compared with 2005 levels
http://www.nestle.com/csv/water/water-efficiency

Type Reminder
Material
Yes No
Financial Capital financial assets
Manufactured Capital physical distribution
Intellectual Capital trademarks, patents
Human Capital employee turnover
Social and Relationship Capital external stakeholders
Natural Capital
environmentally
friendly

Materiality Assessment: Nestlé
Nestlé pledged to reduce water withdrawals per ton of product
by 35% in 2020, compared with 2005 levels
Results (2016):
• €29.53m annual savings (0.13% of COGS vs 0.05% COGS investment)
• 1500 Olympic-sized swimming pools of water per year
http://www.nestle.com/csv/water/water-efficiency
http://www.nestle.com/asset-library/documents/library/documents/half_yearly_reports/2016-half-yearly-report-en.pdf

Materiality Assessment: Walmart
Walmart committed to doubling the fuel efficiency of its vehicle
fleet. $1 billion in annual savings and significant reduction in
greenhouse gas emissions

Materiality Assessment: Walmart
Walmart committed to doubling the fuel efficiency of its vehicle
fleet. $1 billion in annual savings and significant reduction in
greenhouse gas emissions
Additional Info:
• This project was originally presented to “reduce Walmart
greenhouse gas footprint” and failed to secure funding
• Project later reformatted to be more Material to the business,
and was funded

CASE STUDY
• Background:
• Value Chain – Who cares and why
• Supply Chain Sustainability
• Special Features
• Deep Dive: Child Labor
• The case of Allophone

Value Chain – Who cares and why
Reminder
• Definition “A matter is material if it is substantially
likely that the information will affect decisions of a
reasonable person”
• Business Materiality = Sustainability Materiality
SEC Staff Accounting Bulletin No. 99: Materiality

Blume & Keim Institutional Investors and Stock Market Liquidity
Retail, 33%
Index Funds,
17%
Institution
(ST), 25%
Institution (LT),
25%
75% of US
Equities are held
by Long Term
Investors
25% of US
Equities are held
by Short Term
Investors

McKinsey and Aspen Institute panel of Long Term investors
Sharp decline in
employee
satisfaction
Material
change in
asset base
Questionable supply
chain practice
(human rights or
environmental)
35% 39% 63%
Survey of long-term investors responding “most
concerned”

Summary:
The majority owners, of the majority of the US
equity market indicate that “Questionable
supply chain practice” has them Most
Concerned

Source: National Bureau of Statistics; Ernst & Young analysis
8%
5%
7%
12%
10%
5%
53%
Services
Tax
Labor
Capital
Raw Materials
Energy
Intermediate Goods
Manufacturing
18%
5%
16%
29%
1%
5%
26%
Services

65%
17%
5%
4%
9%
Average Corporate Cost
(S&P500)
Cost of Goods Sold SG&A
Interest & Taxes Depreciation and Other
Operating income
http://www.businessinsider.com/breakdown-of-sp-500-costs-since-1994-2014-3?IR=T
• On average - COGS
represents the largest
portion of retail prices
and corporate cost
structure
• In other words – the
company supply chain

Supply Chain Sustainability
Sustainability
Social
Environmental
Community
Financial
Company Employees1
2 Supply Chain Partners A Child Labor
B Fair Wage
C Working Hours
D Benefits
E Association Rights
F EHS
F Forced Labor

Supply Chain Sustainability
Conduct audits
in relevant
factories
Training to
prevent future
recurrence
Close open
issues found in
the audit
Identify

Special Features
UNIQUEFEATURES
Supply Chain Sustainability has a
number of unique features that
differentiate it from traditional
Supply Chain Management
EmotionalContent
Observers have preexisting
views
01
Transmitability
SCS issues can transmit risk
to other parts of the supply
chain or Company
02
Complexity
Underlying issues can be
far more complex than
traditional business issues
03

Special Features
Standard Risk model
• Risk = Magnitude x Probability
• Translation: How big a problem is this x what is the
likelihood of it happening?
• Example:
• What happens if my company burns down?
• Who is effected?
• How can we prevent it?
https://en.wikipedia.org/wiki/Risk_assessment

Sustainability Risk model
• Risk = Hazard + Outrage
likelihood of it happening x what is the public
perception?
• Example:
• What happens if my product poisons someone's family
pet?
Peter M. Sandman: Outrage Management Index
Special Features

Sustainability Risk model
• Risk = Hazard + Outrage
likelihood of it happening x what is the public
perception?
• Example:
• What happens if my product poisons someone's family
pet?
• What happens if my product poisons an investment
banker?
Peter M. Sandman: Outrage Management Index
Special Features

UNIQUEFEATURES
Supply Chain Sustainability has a
number of unique features that
differentiate it from traditional
Supply Chain Management
EmotionalContent
Observers have preexisting
views
01
Transmitability
SCS issues can transmit risk
to other parts of the supply
chain or Company
02
Complexity
Underlying issues can be
far more complex than
traditional business issues
03
Special Features

“ 5%?
That’s not so bad….”

https://upload.wikimedia.org/wikipedia/commons/6/65/Fredmeyer.jpg

https://upload.wikimedia.org/wikipedia/commons/6/65/Fredmeyer.jpg
“…mostly poison free…”
http://www.couponclippingcook.com/wp-content/uploads/2011/07/3-small-candies-in-bowls.jpg

Your Company
..... ..... .....Tier 2
..... ..... .....Tier 3
..... ..... .....Tier 4
..... ..... .....Tier 1
Customer Customer Customer
Commodity A Commodity B Commodity C
Traditional View

Q: Is this realistic?
A: Rartely

Q: Is this realistic?
A: Rarely

Troubled Supplier
Your
Company
Realistic View

Your
Company
Troubled Supplier
Realistic View

Special Features
Sustainability
Social
Environmental
Community
Financial
Company Employees1
2 Supply Chain Partners
B Fair Wage
C Working Hours
D Benefits
E Association Rights
F EHS
F Forced Labor
Child LaborA

http://www.movestheneedle.com/wp-content/uploads/2014/08/Lemonade-Stand.jpg

http://img2.timeinc.net/people/i/2015/news/150907/harry-potter-01-1024.jpg

https://s3-us-west-1.amazonaws.com/labs.theguardian.com/unicef-child-labour/imgtest/00173185.jpg

15 18
Child Juvenile Adult
0
http://www.ilo.org/global/about-the-ilo/media-centre/issue-briefs/WCMS_206127/lang--en/index.htm
Generally accepted definition:
Topic Deep Dive: Child labor

https://en.wikipedia.org/wiki/East_Asian_age_reckoning
Country Age at birth Child Age Changes
Europe, UK,
USA, Australia
0 Annually on date of birth
Cambodia 1 Sometime in the month of January
China 1 (depending on Province) February 4th or 5th
Korea 1 Beginning of the year
Mongolia 1
Girls: number of full moons since conception
Boys: number of new moons since birth
Vietnam 1 Early February

64
42
29
1
Agriculture
Manufacturing
Mining
Other
https://www.dol.gov/ilab/reports/child-labor/list-of-goods/
number of sub-sectors
In total there are
136 High Risk
sectors

http://www.ilo.org/global/topics/child-labour/lang--en/index.htm
78.0
59.0
13.0
9.2
Asia Pacific Sub-Saharan Africa Latin America Middle East & N Africa
employment (mils)

Child Labor on the decline (Source: International Labor Organization)
http://singularityhub.com/2016/06/27/why-the-world-is-better-than-you-think-in-10-powerful-charts/
246
222
215
168
134
107
2000 2004 2008 2012 2016 2020 (proj)
Total employment (mils)
-40%
-25%
Girls
Boys
Since 2000

Despite the obvious risk, most social
compliance professionals in the
manufacturing sector rate the risk of Child
Labor in China as “low”
Why?

94.00%
75.00%
35.00%
20.00%
2.00%
0.05% 0.03%
Working Hours Wages Worker Safety Discrimination Juvenile Labor Forced Labor Child Labor
% of social audits with finding

Age 0
Perception by media
& public
View of subject matter
experts
15 18
Child Juvenile Adult

CL example
Perceived Labor Risk

http://seeingredinchina.com/2011/04/27/how-poor-are-
chinese-farmers/
5,919
19,500
Rural Urban
Average Annual Wage
(renminbi)
http://economix.blogs.nytimes.com/2012/02/24/the-ieconomy-how-
much-do-foxconn-workers-make/?_r=0//
3.2x

Simple, fast process:
1) Get a fake ID
2) Apply at a high turnover factory
3) Build your work experience
4) Get a new job in 18 - 24 months

http://www.globaltimes.cn/Portals/0/attachment/2011/dff54b7e-bb85-4111-8512-38c74b8061c3.jpeg

http://cache.boston.com/universal/site_graphics/blogs/bigpicture/recess_03_18/r14_18219891.jpg

http://static01.nyt.com/images/2012/01/22/business/apple/appple-articleLarge.jpg

http://cdn1.i-scmp.com/sites/default/files/styles/980x551/public/images/methode/2016/03/28/38bb97d0-f4ae-11e5-91e4-
cb0759506578_1280x720.jpg?itok=jEtObqSI

https://tailgrab.org/u/2009/03/edward-burtynsky-china-manufacturing.jpg?1754ad

One of your classmates, Sam Li, has just landed
a great job at the new, cool, startup allophone.
As we all know, allophone are coming up with
the next best handheld device…..

http://www.digitaltrends.com/mobile/polytron-unveils-clear-cell-phone/
…..the Air.
A transparent phone

The microlithography patent for the technology
to make the Air is owned by allophone.
MegaCom have been contracted to assemble
the device
Only MegaCom, the worlds largest phone
manufacturer, can make the Air at the required
quantity and shipping dates

Two days before the launch of the Air your
friend Sam calls you with a problem
has agreed to carry the phone in Thailand
only after a social compliance audit of
MegaCom, Shanghai
The audit had some disturbing findings

The MegaCom, Shanghai audit found that 12 out
of the 13,000 employees at the factory were
found to be underage.
The 12 employees were all 15 years old

Due to your experience you have been called in
to advise Allophone and MegaCom on strategy
They are considering the following strategic
options:

Options Under Consideration
Option Detail Negatives
Delay the
launch
Continue with MegaCom
after they fix the situation
-Market share loss
-Time loss
-Increased costs
Admit fault
De-source MegaCom and
find another, more socially
compliant, factory
-Technology “lock in”
Ignore the
press
Look for other phone
carrier in Thailand. Wait
for the media storm to
pass
Does allophone have the
reputation assets to spend?

Questions
What is your preferred option?
Why?
Is the Child Labor content of the phone Material
to your decision?

MATERIAL
41,653,137 kg
23072 tons
23.07 thousands (tons)
12 years per ton of material
276.86 years to use all material
CHARITY
223,000,000,000 SEK in 2015 sales
€ 23,588,198,313.53 2015 in euro sales
€ 833,062.00 charity
0.00353% % of sales
http://hm.charitystar.com/en/home/
https://qz.com/662031/is-hm-misleading-customers-with-all-its-talk-of-sustainability/
http://www.rapidtables.com/convert/weight/kg-to-ton.htm
http://sustainability.hm.com/content/dam/hm/about/documents/masterlanguage/CSR/2015%20Sustainability%20report/HM_Susta
inabilityReport_2015_final_com_5.pdf
H&M Calculations

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