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CR May-June 2013

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The CR Meter A New Era Responsibility is on the rise— and shows no signs of letting up. By Chris Park and Dinah A. Koehler More and more companies today are undertaking environmental and social efforts to complement traditional business activities, using these efforts as catalysts to improve everything they do—from innovation and customer relationships to brand building and beyond. The results? Higher profits, lower costs and risks, increased shareholder value, and competitive advantage. And, though it may not be the primary motive, a measurable positive impact on society and the planet. Embedding environmental, social, and governance (ESG) factors into your strategy and business practices isn't just good corporate citizenship. It's smart business. Historically, many companies treated ESG issues as important—but tangential to the core business. Sometimes their motivation was a desire to be recognized as good corporate citizens. In other cases, ESG issues were viewed as compliance requirements, or perhaps good public relations. But more often than not, these issues were managed as secondary activities with an indirect connection to the core business and bottom line. Another Deloitte survey found that two-thirds of global CFOs expect their role in ESG-related strategies to increase over the next two years. This suggests that the ESG imperative is becoming a C-Suite issue and is expected to have a material impact on the bottom line. Trend Driver? Five factors account for the accelerating growth of corporate interest in ESG issues—none of which shows any sign of letup. A new era of the responsible enterprise appears to be here to stay. Loss of trust. According to the 2012 Edelman Trust Barometer, public trust in business continues to decline, dropping to 45 percent in the United States, compared to 51 percent in 2010. Trust in government is even lower. These findings indicate a growing perception that large institutions are not serving the public interest well. All of that is changing. The market today is undergoing a significant shift, with companies increasingly expected to address ESG issues head on. At the same time, many are recognizing both the tangible and intangible value of integrating these issues into core business activities. Commitment of human and financial capital to this area continues to grow, especially among companies that see clear impacts on their value chain. Stakeholder pressures. Pressure from consumers and investors is an important motivator for businesses to take action on ESG issues. Globally, this pressure is increasing, especially as the ranks of the middle class expand in emerging markets such as China and India. A wealthier and more educated middle class tends to have higher expectations for corporate ESG performance, as illustrated by growing protests against new factories in China. In addition, today's investors are increasingly concerned about short-term ESG risks and tend to reward companies that disclose more ESG information. The number of S&P 500 companies that issued sustainability reports jumped from 19 percent in 2010 to 53 percent in 2011—and is expected to continue rising. In Deloitte's recent ESG Survey of 250 business executives about these issues, three drivers of ESG imperatives were identified: a need to bolster the corporate reputation and brand, increased regulatory scrutiny, and higher expectations from consumers and the broader community. Most of the surveyed executives expect ESG issues to have a growing impact on their strategies, products and services, and operations over the next two years. Not surprisingly, large companies (with more than $10 billion in revenue) foresee the greatest impact. These companies tend to operate across industries and geographies where the social and environmental issues are most acutely visible. Natural resources pressures. Growing global demand and supply constraints are generally pushing up prices for energy, agricultural products, and raw materials—an upward trajectory punctuated by periods of extreme volatility. For example, precious metal prices have increased fourfold since 2005. Also, the recent U.S. drought, which affected nearly two-thirds of the contiguous states, was the worst in 60 years and drove up cereal prices by 17 percent. Such resource trends are increasingly top of mind for business leaders and managers. More than 70 percent of Deloitte's ESG survey respondents said their organizations were making a significant commitment to improved resource efficiency. [20] CR MAGAZINE | MAY/JUNE 2013

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