- So Good morning, I'm Tensie Whelan.
I'm the director of NYU Stern Center
for Sustainable Business.
And this is Nemanja Babic, who
is principal at A.T. Kearney,
and has been working
with us on the project
we're going to talk to you about.
First, let me just start with,
I think we've heard here today.
We all know and we all
believe that sustainability
creates financial value.
The challenge is how
do we best measure it,
and we have that challenge
for a variety of different reasons.
One is because accounting itself
is no longer really fit for purpose.
It was designed in a time
when as you see in 1975,
83% of a company's value
was in its capital assets,
but today it's now 80%
plus in its intangibles.
And accounting isn't really
well set up for evaluating that
or valuing that, and in addition,
much of sustainability is in intangibles
related to employee engagement
or in risk mitigation
on a variety of other areas.
Also we have a challenge
that we all speak different languages.
The corporate sustainability people speak
a different language than
the corporate finance people,
the buy side investors
speaks a different language.
And the sale side,
academics absolutely speak
a different language.
And we have NGOs and others
all speaking different languages,
so when we're trying to figure out
how do we value things, a
challenging translation problem.
We also as we've heard quite
consistently from the speakers.
We have challenge of whether we value
long term verses short term.
Clearly we need to value both.
How do we create a good balance there?
We've heard a lot about
sustainability risk
and the need to better value that.
We also really need to value
the sustainability benefits.
The upside of what we're doing here,
and we need to do that all in
a radically transparent world
where credibility of how you
do this is really important.
Because otherwise your assumptions,
you're going to be criticized and so on
for how you're doing this.
With this backdrop, we've
seen a lot of interesting data
around the corelation
between good, environmental,
and social and governance performance
and good financial performance.
This is a meta-analysis of
200 different academic studies
that Oxford and Arabesque,
which is an ESG quant firm did.
And those 90% of the studies
found lower cost of capital.
88% better operational performance.
80% that are stock price performance,
but it's a corelation, not a causality.
And I can tell you all
the finance professors
at Stern write me little nasty notes
saying this is just
corelation, not a causality.
You can't prove any of this,
so stop talking to us about it.
So how do I how do we begin
to tackle these sets of challenges?
So clearly we needed a new accounting
or evaluation framework
is one aspect of this.
And there's a number of
different initiatives on this.
We had the Embankment Project,
which is the Coalition
for Inclusive Capitalism
is working on together with Ernst & Young.
We have the UN Values Driver
which also looks at how do we assess,
and communicate the financial impact
of sustainability strategies.
A number of companies have
began to use that format.
We have another initiative
called Project ROI
developed by a group of consultants
that's working with Campbell's and others.
We have an organization that
I'm on a steering committee
called Driving Sustainable Solutions.
It's developed a language
of how sustainability
folks can make the ROI argument
to their finance
counterparts and companies.
And there's an online
learning course on that
if you're interested, that's open sourced.
So we at the Center for
Sustainable Business
on the research end of things said,
All right, we're at Stern.
We're a finance school, accounting school.
We need to focus on this
because we see this as
one of the big barriers
to really scaling up
sustainability because even today,
we have people saying we
don't see the business case.
And you're not tracking the business case,
and what I can tell you,
my previous job was running
the Rainforest Alliance
for 15 years working with.
We worked with 5000 companies
and over and over again,
I would ask them what
are you tracking on this?
In terms of the financial impact
and they weren't tracking that.
So here's the methodology
we've been designing
to complement and work with the
different players out there.
That when we see a company
really embeds sustainability
like Diane was talking about core
to their business strategy.
It can improve customer
loyalty, employee relations,
innovation, media coverage,
operational efficiency,
risk management, sales and
marketing, supplier relations,
and stakeholder engagement,
driving greater profitability,
higher corporate evaluation,
lower cost of capital
and ultimately both short
and one term value creation
for shareholders and society.
Okay, great big picture right.
So then the question is how
do we actually implement
that into something that
corporations can be begin to use
so that when an investor says,
"All right, what's under the hood here?"
The corporation is actually
tracking the metrics
to be able to do decision
making themselves,
and the investor is
better able to determine
why is this company ESG performance
resulting in good financial
performance or why not.
We decided we're piloting
different industries.
We decided to start with deforestation
for the supply chain commitments.
We had 450 companies
globally that committed
to deforestation for supply chains.
They're not implementing
that terribly well.
There's a variety of
different reasons for that.
It's complicated to do.
But part of it is not clear
what the financial case is,
if you're going to make
all these investments.
We worked with A.T.
Kearney, with McDonald's
and Carrefour as two
retailers active in Brazil
looking at beef, which
is the biggest driver
of deforestation in Brazil
both through the ranching practices,
and through the production
of soy for feed.
Funded by the Betty and
Gordon Moore Foundation,
working with two slaughter houses.
Working with a number of NGOs,
and working with two groups of ranchers.
And bottom line and Nemanja
is going to go through
this project and when
we're currently working on
with the automotive sector.
Bottom line in this
area is what we found is
that sustainable agriculture practice
has resulted in really
significant financial upside
for the ranchers but all
the way through the system.
And Nemanja will talk a bit about that,
and also that deforestation
free commitments
reduce risks but not
contribute to the upside.
In order to actually be able to invest
in those deforestation free commitments,
you need to have the
upside of improved quality,
productivity et cetera that you got
out of the Sustainable Act practices.
The methodology generally
is let's look for a particular industry,
look at a particular
industry's material ESG issues
using SASB and other guidance.
And after we looked at those,
what are the key strategies,
and initiatives that they
are using or could be using?
And what sustainability
benefits come out of those,
and then how do we quantify
and monetize those benefits?
Intangibles as well as tangibles.
So I'm going to turn it over to.
- Sure.
- Nemanja.
- Okay, so before I go into these details,
what I was particularly optimistic,
I'm going to use the word optimistic about
is that we open yesterday
with the fact that these
are economic decisions.
And this federation
framework actually gives you
a good methodological proof
that this is an economic
decision that is good.
And I will show Francesco,
we have a photo of Francesco.
Francesco in no way established the ranch
in the way it was established
because he was reducing
greenhouse gas emissions.
He's a cattle rancher,
and he made sane economic decisions
that are and we've actually proven,
have an economic benefit for him.
At the time it was established,
he didn't know how to quantify them,
and they were never quantified.
But this is not a decision out
of the goodness of someone's heart.
This is a sane, valuable
business decision,
and we prove throughout the value chain
where the benefits are.
This is the framework that
comes Tensie mentioned.
It occupies 19 benefits
and clearly not everything
applies everywhere in the value chain,
but a vast majority of the supply chain,
some of these for example,
better cost management.
The innovation, cost of capital reduction,
a very interesting thing.
We actually have ranchers
experiencing cheaper capital,
access to capital because
of the way their practice is
and I will all show you
how it ends up there.
And then risk avoidance,
this is a huge, huge factor
especially in the food system
where there are significantly
exposed to consumers,
any hint of malfeasance
in food chain immediately
causes consumers to ditch them.
And you remembered the
melamine-tainted dog food.
The KitKats of years past and what not.
Okay so not the last,
although it is the last one.
GHG emission, so greenhouse
gas emissions are,
I wouldn't say insidious but
in a number of these steps
in the value chain, there is
a greenhouse gas component.
And we have extracted the
valuation out of some,
not out of all for various
methodological reasons
and mind you this is in Brazil.
Brazil does not have carbon price yet.
Okay so quickly, how did we quantify them?
To be very honest, the
quantification as pedestrian
as it sounds, it's like well
what is the cost reduction in land use?
We can quantify that.
It is a relatively straightforward,
and some of these things,
it took us a little bit
to get to the best proxy
to quantify the impact.
On the cost management a
vast majority of the benefits
are coming from more control,
and better management practices.
And more control, it links
to the topic of transparency
that we talked this
yesterday and today a lot.
Once you know what your ranch is doing.
What the inputs are,
where the inputs are going
because you have to
report them to someone.
There is again a sane, economic decision
on making better decisions.
On innovation, we'll
see some of the examples
of innovation like pasture recuperation,
like water distribution systems.
Once you price out water
and you know that you need
report your water usage to someone
magically the water usage drops.
Because now I know where
and how to distribute water.
The fencing and rotation of pasture again,
we'll talk about that.
Land productivity, so
the issue in the Amazon
is these farmers don't
go out and cut the forest
because they have nothing else to do.
They go and cut out the forest
because that is the only
way to provide livelihood.
If there is an option for
them to gain livelihood
by not cutting down the Amazon forest.
They will do it because
well, first it's illegal,
second there is a monitoring supply chain
that actually prevents
you from selling the beef
from clear cuts and Brazil has invested
in satellite monitoring of the Amazon.
That's what reduced the deforestation
four times since 2007 I think.
It's a significant improvement
but again there needs to be a
benefit for the actual rancher
to do something like that.
Without the methodology,
here's a couple of examples.
This is what we found
for ranchers specifically
because that's where it starts.
It starts with raising the capital.
We've seen 2.3 increase in productivity
and also two cases that
would be evaluated in detail.
We've seen high quality beef,
so there is a difference in
measuring quality of beef.
And we have seen in a couple of cases,
we've seen significant improvement
in quality of beef, in some others not so.
There is up to seven times,
and I'll show you the actual numbers,
the increase in profitability
and approximately 20%
reduction in GHG emissions.
Here's what the net-net
result for ranchers look like.
This is in two cases.
These are two farms.
One in the southwest of Brazil,
and one for southeast Brazil.
- There's some southern regions
so another couple are
a number of small ones
and that is the big one.
- Is the big further up north.
And so the benefits, of
course there is a range of
benefits depending on the,
among other things in season,
and how well the
measurements are implemented.
But we've seen something
upwards of 20% and 30%
improvement in the profitability.
Clearly there is a cost.
You need to invest.
This is a very serious investment
especially from the rancher's standpoint
in establishing the infrastructure,
in establishing the water
distribution system.
In establishing the monitoring system,
in ensuring the right feed for the cattle.
But there is a significant
portion of cost reduction.
They no longer rent out land
because now they can intensify
the land that they have.
There is a revenue increase.
Slaughter houses and you'll
see that in the other example.
Slaughter houses will
pay more for better beef.
And slaughter houses need to be sure that
your beef is better.
So they will monitor
everything that you do,
how mature the beef was,
and what was water access of the beef.
So there is actually a premium
on zero-deforestation beef.
There's a financial benefit
from access to cheaper capital
because banks are now
more confident in you
being a low risk producer
because you're not breaking any laws.
You have opened yourself a
market to more premium products
so these guys benefit from
reduced cost of capital.
Net-net, this is where we landed.
Now speaking about climate change,
there is a benefit somewhere between half
and three million dollars for these farms
in the greenhouse gas emissions.
This is a little bit of a sad story,
but the primary greenhouse gas
component of cattle ranching
is raising the actual cow.
So methane is a very important
greenhouse gas emission
so the longer the cow lives,
the more methane it emits.
By intensifying production,
ensuring that these cows eat grass,
and grass is not very nutritious.
It eats grass, it eats soil,
it's supplemented properly
with mineral supplements
cattle matures earlier,
and goes to the slaughter house earlier.
So per kilo of meat you
have lower gas emissions
That's not going to turn
you into vegetarians.
I'm just being very realistic
and this is one of the big
components in reduction.
There are other reductions
in greenhouse gas emissions,
pasture recuperation,
river bank restoration.
River bank restoration as you can imagine,
once you clear cut the forest
there is a huge erosion issue
because it still rains in Amazon,
and it basically just
watches out the top soil.
It pollutes the river.
It basically creates a whole
slew of down stream issues.
And here's Francesco recuperating
the riverside vegetation,
so he actually revived
the rivers that previously
were basically devoid of life.
We've used a very, to quantify
the greenhouse gas emission,
we've used a very, very
conservative price,
which is the price of carbon in Mexico.
One to three dollars per ton.
Just to be on the safe
side and conservative side,
so Brazil does not have
a carbon price right now,
but that does not mean it might
not have it in the future.
Okay so then we moved further up.
And so this is for slaughter houses.
And so for slaughter houses
we've seen improvements,
again on the revenue.
Consumers will pay for a premium
for beef that has a stamp.
So if you recall the little
frog on Starbucks coffee.
The rainforest and land certified.
There's no little frog there.
There's a text saying it's
say zero-deforestation beef,
but there is a significant premium there.
There is a risk avoidance,
and it just so happens
that there were significant
risk and reputational issues.
Maybe a month after we finish this project
with one of these.
And so these are two
large slaughter houses.
JBS is the world's
largest slaughter house.
I think its turnover is
something like $56 billion.
Percentage wise, this is not
a huge improvement for them,
but it's still $100 million.
Percentage or not
percentage, it's $100 million
that you can actually prove was created
by adopting these practices,
and by encouraging the cattle producers.
Here's the revenue increase
where we found them
so as I mentioned,
there's the price premium.
There is an increase in
demand for sustainability,
so the more sustainable beef
these slaughter houses push out.
There is a bigger awareness of it,
and then there's a positive
reinforcement chain,
so there is actually more volume
being demanded by retailers.
Okay, so that was all about the cattle,
and I'm just making sure that
we had time for questions.
Now the next project we are working on
is the auto manufacturers.
A similar framework looking in where
and how we can quantify
the benefits of commitments
that the auto industry has made.
So clearly there's no
deforestation issue here,
but there are a number
of sustainable strategies
that auto industry has committed to,
which is reduce resource use,
reduce greenhouse gas emissions.
Huge for the transportation industry,
improved waste management,
many other sustainability practices.
This is what they're doing right now
and here's the benefits right.
I think in auto industry
because unlike ranching,
I think it's a more of
a corporate structure.
There is more accounting.
There is more reliable data.
We were looking into a
more systemic and clearer
and transparent reporting.
And here's an illustrative example
of what this looks like overall.
This is where we saw the
benefits and the improvements.
This is the EBIT increase
for some of these activities.
I think as I mentioned and we talked
about employees our employees care.
There is a huge cost and
conversely the benefit
of retaining people
who because now we feel
that you were doing a thing
that's good for the environment
and good for the world,
and good for the employees,
we are more than willing to stay with you.
And here is a couple of
benefits on the auto side.
We are still working through the project
so this is still in quantifying phase.
Clearly there's a sales growth.
You know this, there's an increase demand
for electric vehicles.
There's an increase in demand
for low emissions vehicles,
not mentioning the certain
software being used.
But there is a consumer demand for it.
There is a cost avoidance,
so a lot of the manufacturers
that you've seen there
are human manufacturers and these people
actually paid the price of carbon.
So where they could find the initiatives
that will reduce the
greenhouse gas emissions.
They're all over it because
this actually has a clear
direct monetary benefit to them.
And then one of the interesting is,
a lot of these supply
chains are almost closed.
So there is a lot of
materials that comes out
as a waste material from
pressing steel for example,
that is actually still valuable
steel that can be recycled.
So there is a side revenue
stream from good practices
that comes from stopping
the materials for a second.
And here's some of the benefits
and the cost reduction,
but I think think this
is pretty transparent.
I think we are at the time for questions.
If there are any.
- Yeah great, and just
to finalize on this,
we plan to continue this
in different industries.
So the next industry we're working
with the Stockholm School
of Economics is fashion.
And we welcome your questions,
and again this is a work in progress.
We're learning along the
way of how to do this.
Thank you.
(audience applauding)
