CITI: Guidance for Investor Relations Officers on Managing ESG Demand

An ERM Group Company
© 2018 BrownFlynn Ltd. All Rights Reserved.
Mike Wallace, Partner / September 28, 2018
Navigating ESG Disclosure: Market
Trends and Strategic Opportunities

/ 2© 2018 BrownFlynn Ltd. All Rights Reserved.
Agenda
Investor Activity & Market Trends
Understanding the ESG Ecosystem
ESG Due Diligence
Emerging Issues:
 TCFD
 Social & Human Capital
Active Management of the ESG
Ecosystem

Investor Activity &
Market Trends

Why Does Sustainability Matter?
Stakeholder pressure that customers receive from the groups listed below drives the need for sustainability
management. As pressure from these groups increases, customers enhance their management across their value
chains, and the pressure transfers upstream to suppliers.
Transparency on
Sustainability
Investors
Employees
Consumers
Customers
Suppliers
Regulators/
Legislators
Boards of
Directors
Local
Communities
Activists/
Advocacy
Groups
Industry
Associations

Investor Coalitions & Networks
Interfaith Center on Corporate Responsibility (ICCR)
 1972; nearly 300 members; representing over $400 billion
Institutional Investors Group on Climate Change (IIGCC)
 2001; over 150 members; representing over $20 trillion
Carbon Disclosure Project (CDP)
 2002; nearly 900 signatories; representing over $100 trillion
Investor Network on Climate Risk (INCR)
 2003; over 150 members; representing $25 trillion
Principles for Responsible Investment (PRI)
 2006; over 1,800 signatories; representing over $80 trillion
United Nations Guiding Principles Reporting Framework
 2013; over 67 investors; representing nearly $4 trillion
Task Force on Climate-related Financial Disclosures
 2015; over 32 members and 275 signatories;
representing over $86.2 trillion

Shareholders Voting with Values
435 shareholder resolutions were voted on in 2018 with a significant number focused on environmental
and social topics.
Source: 2018 Proxy Preview. As You Sow, Ceres

UN Principles for Responsible Investment (PRI)
The United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international
network of investors working together to put the six Principles for Responsible Investment into practice.
Its goal is to understand the implications of sustainability for investors and support signatories to
incorporate these issues into their investment decision making and ownership practices.
Source: http://www.unpri.org/
$7 $10 $13
$18 $21 $24
$32 $34
$45
$59 $62
$68
$82
63
185
361
523
734
890
1,050
1,186 1,251
1,384
1,501
1,714
1,961
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
UN PRI Growth Over Time
Assets under management (US$ trillion) Number of Signatories

UN PRI Signatories

Investor Interests
Investors are increasingly asking companies to disclose strategies for long-term value creation and
incorporation of ESG into business strategies.
I want to reiterate our request, outlined in
past letters, that you publicly articulate
your company's strategic framework for
long-term value creation and explicitly
affirm that it has been reviewed by your
board of directors…you must also
understand the societal impact of your
business as well as the ways that broad,
structural trends — from slow wage
growth to rising automation to climate
change — affect your potential for
growth.” – Larry Fink, BlackRock Letter
to CEOs, 2018
“As part of our stewardship review, we
classify companies according to how they
have: 1) identified material environmental
and social sustainability issues; 2)
assessed and, where necessary,
incorporated the implications into their
long-term strategy; and 3) clearly
communicated their approach to
sustainability and its influence on
strategy.” – Ronald O’Hanley, State
Street Letter to Board Members, 2017
“Shareholders rely on a strong board to
oversee the strategy for realizing
opportunities and mitigating risks.
Thorough disclosure of relevant and
material risks enables share prices to fully
reflect all significant known risks and
opportunities…Climate risk is an example
of a slowly developing and highly
uncertain risk—the kind that tests the
strength of a board’s oversight and risk
governance..” – F. William McNabb III,
Vanguard Letter to Directors, 2017
Further Reading: Why the world’s largest asset managers are pushing long-term thinking, Mark Tulay, Director, Strategic Investor Initiative, CECP

World’s Largest Asset
Manager
BlackRock encourages long-term planning.
In his annual letter to the CEOs of the S&P 500 on January 12, 2018,
Larry Fink once again highlighted the importance of understanding
the impacts that will enable long-term financial growth.
Among the key points of this year’s letter, Fink emphasized that
every company should:
 Demonstrate benefit to all its stakeholders, including shareholders,
employees, customers, and the communities in which it operates
 Build strong corporate governance practices that establish
communication between the company and its shareholders
 Describe its strategy for long-term growth and articulate its
framework for long-term value creation

Understanding the ESG Ecosystem

Investor Confusion Among
ESG Raters and Rankers
 The Problem: ESG raters take multiple
assessment approaches, emphasizing
subjectivity in analyzing and scoring
environmental, social, and governance
issues:
 MSCI ranks Tesla as industry leader;
 FTSE rates the company as laggard;
 Sustainalytics in middle of the pack
 Bottom Line: Investors should not treat
ESG scores as objective truth, but as
analyses that need to be understood
before acted on

Who makes up the ESG Ecosystem?
Based on sustainability reporting standards and frameworks, there are 100+ organizations producing
lists, rankings, ratings, and scorecards of the “top companies” and “most sustainable” companies.

Mainstream Raters are Acquiring ESG Data Providers

Mainstream Asset Managers are Acquiring ESG Assets

ESG Due Diligence

Bloomberg ESG Data Usage Over Time
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2012 2013 2014 2015 2016 2017
14,935
Bloomberg subscribers
used ESG data in 2018
(188% growth since 2012)
Number of Bloomberg Customers using ESG Data
Source: Bloomberg.com. August 2018. Retrieved from: https://www.bloomberg.com/impact/impact/sustainable-finance-solutions/

Bloomberg ESG Data
 By the end of 2018, Bloomberg will add over 20,000 metrics in 8 new
data categories including ESG, Supply Chain, and Corporate Actions.
 ESG data is fully integrated into the Bloomberg Terminal, with data
accessible using its ESG Dashboard and through multiple functions.
 There are currently over 900 ESG data points in Bloomberg.
 Additionally, the Bloomberg Terminal includes scores from common
third-party ESG research firms, such as Sustainalytics, CDP, ISS,
and RobecoSAM.
 Bloomberg provides their own rating, called an ESG disclosure score,
consisting of a rating from 0-100 based on a company’s level of
transparency (not performance). They also provide separate
disclosure scores for E, S, and G.
Bloomberg &
ESG Disclosure
Bloomberg covers more than 11,000 companies
for ESG data and more than 16,000 companies for
executive compensation data across 52 countries.
Source: Bloomberg.com. August 2018. Retrieved from: https://www.bloomberg.com/professional/product/2018-reference-data/
Bloomberg ESG Dashboard

Bloomberg ESG Dashboard Example
Bloomberg users simply type [ESG] into the terminal, and can easily view ESG metrics for any
publicly traded company.
Source: BP PLC Single Security Data. Bloomberg. Data accessed 9/18/2018

ESG Peer Comparison: Scores, Ratings, & Rankings
Source: Bloomberg data accessed 9/20/18

ESG Peer Comparison: Environmental Metrics

ESG Peer Comparison: Social Metrics

ESG Peer Comparison: Governance Metrics

Task Force on Climate Related Financial
Disclosures
Emerging Issues

What is the TCFD?
The Task Force on Climate-Related Financial Disclosures (TCFD) is an industry-led task force produced
recommendations designed to bridge the gap between how companies currently disclose information
and how investors would prefer that information be presented.
 The TCFD seeks to improve market understanding and analysis of climate-related risks and
opportunities by establishing a set of recommendations to “provide a common set of
principles” and “guide disclosure to help financial markets assess and price climate-related
risks and opportunities.”
 The TCFD recommendations established a method for standardizing climate-related
financial disclosures in a way that would be useful for investors, lenders, and insurance
underwriters in understanding material risks posed by climate change.
 TCFD’s recommendations “will help companies understand what financial markets want
from disclosure in order to measure and respond to climate change risks, and encourage
firms to align their disclosures with investors’ needs.”
Source: Frequently Asked Questions Understanding How SASB Standards and TCFD Recommendations Are Complementary

Who Sits on the Task Force?
The Task Force is made up of 32 member organizations from around the world, including:
① Large banks
② Insurance companies
③ Asset managers
④ Pension funds
⑤ Large non-financial
companies
⑥ Accounting and
consulting firms
⑦ Credit ratings agencies

Notable Signatories as of June 2017

Notable Signatories as of December 2017

Notable Signatories as of September 2018

Social & Human Capital
Emerging Issues

Human Capital Activity
CSHS Human Capital Project
fair labor practices,
health and safety,
responsible
contracting and
diversity
20152014
workforce
demographics;
workforce stability;
workforce
composition;
workforce skills and
capabilities; workforce
culture and
empowerment;
workforce health and
safety; workforce
productivity; human
rights; and workforce
compensation and
incentives
total headcount,
“broken down by the
division between full-
time and part-time
employees, gender, and
diversity; Annual
turnover—including
both planned and
regrettable turnover;
Investment in training,
skills, and professional
development—
including the rate of
progression and
promotion within the
business; and Employee
engagement score.
2016
gender diversity;
employment type,
such as full-time, part-
time or agency
workers; staff turnover;
accidents, injuries and
workplace illnesses;
investment in training
and development; pay
ratios between the
highest paid and
median and lowest
quartile workers across
the company; and
employee engagement
scores.
2017
workforce
composition,
unionization, worker
participation in
decision-making,
OHS practices,
training and
development and
employee
compensation
policies.
workforce
composition,
worker welfare,
investment in skills
and worker
representation.
Sources: Corporate Disclosure of Human Capital Metrics. October 2017. Retrieved from: https://lwp.law.harvard.edu/files/lwp/files/pension_paper_corporate_disclosure_of_human_capital_metrics_102317.pdf
CSHS Human Capital Project. http://www.centershs.org/human-capital.php

 hiring and retention,
 employee engagement,
 training,
 compensation,
 fair labor practices,
 health and safety,
 responsible contracting,
 ethics,
 desired company culture, and
 diversity, both with respect to a company’s direct employees and to the employees of
vendors throughout the company’s supply chain.
Human Capital Management Coalition
Views Human Capital Management (HCM) as encompassing a broad
range of corporate practices related to the management of employees,
including, but not limited to:
Members:
UAW Retiree Medical Benefits Trust
AFL-CIO Office of Investment
Amalgamated Bank LongView Funds
California Public Employees’ Retirement System
California State Teachers’ Retirement System
Calvert Research and Management
Connecticut Retirement Plans and Trust Funds
CtW Investment Group
Domini Impact Investments LLC
Hermes Equity Ownership Services
Illinois State Board of Investment
Office of Illinois State Treasurer Michael W. Frerichs
International Brotherhood of Teamsters
Legal and General Investment Management
LiUNA
The Nathan Cummings Foundation
Office of the New York City Comptroller Scott Stringer
Office of the New York State Comptroller Thomas P. DiNapoli
Ohio Public Employees Retirement System
Pennsylvania Treasury
Segal Marco Advisors
Sycomore AM
Trillium Asset Management
UAW Employees Pension and Severance Plan
UFCW Pension Plan for Employees
Zevin Asset Management
Source: Human Capital Management Coalition. 2018. Retrieved from: http://uawtrust.org/hcmc
2014 2015 2016 2017 2018

A sample of some of the influential and global participants:
• Louise Davidson, CEO, Australian Council of Superannuation Investors
• Martin Whittaker, CEO, JUST Capital
• Scott Connolly, Assistant Secretary, Australian Council of Trade Unions
• Kerrie Waring, Executive Director, and Joyce Haboucha, Co-Chair, Disclosure
and Transparency Committee; International Corporate Governance Network
• Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors
• Ken Hall, General Secretary-Treasurer, International Brotherhood of Teamsters
• Catherine Howarth, Chief Executive, ShareAction
• Denise L. Nappier, State Treasurer, State of Connecticut
• Gary Yee, Board Chair, British Columbia Municipal Pension Board of Trustees
• Heather Slavkin Corzo, Director, Corporations and Capital Markets, AFL-CIO
• Josh Zinner, Chief Executive Officer, Interfaith Center on Corporate
Responsibility
• Michael W. Frerichs, State Treasurer of Illinois
• Ronald B. McKinley, Chair, ISO TC/260
• Paul Kearns, Chair, Maturity Institute
• Anne Simpson, Investment Director, Sustainable Investments, California Public
Employees Retirement System (CalPERS), and Anne Sheehan, Director of
Corporate Governance, California State Teachers' Retirement System (CalSTRS)
U.S. Securities & Exchange Commission
Rulemaking Petition - https://www.sec.gov/comments/4-711/4-711.htm
2014 2015 2016 2017 2018

Center for Safety & Health Sustainability – Human
Capital Project
Link: CSHS Website
The Harvard research study looked at disclosure on
twelve topics selected from the Human Capital
section of RobecoSAM’s Corporate Sustainability
Assessment (CSA).
 Training Hours
 Training Cost
 Return on Training
 Employee Development
 Employee Development Business Benefits
 Employee Development Qualitative
 Operating Profit per Employee
 OHS Framework
 OHS Oversight
 OHS Work Environment
 Lost-Time Injuries
 Fatalities
Link to Harvard Research Report

BlackRock: Social & Human Capital
March 2018
Research has consistently shown the importance of human capital to company performance.
Companies included in Fortune magazine’s “100 Best Companies to Work For” lists earned,
over the long-term, excess risk-adjusted returns of 3.5%.
When engaging boards on HCM we are likely to discuss:
 Oversight of policies meant to protect employees (e.g.,
whistleblowing, codes of conduct, EEO policies) and the level of
reporting the board receives from management to assess their
implementation
 Process to oversee that the many components of a company’s HCM
strategy align themselves to create a healthy culture and prevent
unwanted behaviors
 Reporting to the board on the integration of HCM risks into risk
management processes
 Current board and employee composition as it relates to diversity
 Consideration of linking HCM performance to executive
compensation to promote board accountability
 Board member visits to establishments or factories to independently
assess the culture and operations of the company
When engaging management teams, the topics covered
may include:
 Policies to encourage employee engagement outcomes and key
drivers (e.g., wellness programs, support of employee networks,
training and development programs, and stock participation
programs)
 Process for ensuring employee health and safety and complying
with occupational health and safety policies
 Voluntary and involuntary turnover on various dimensions (e.g.,
seniority of roles, tenure, gender, and ethnicity)
 Statistics on gender and other diversity characteristics as well as
promotion rates for and compensation gaps across different
employee demographics
 Programs to engage organized labor and their representatives,
where relevant
 Systems to oversee matters related to the supply chain (including
contingent workers, contractors and subcontractors)
Source: https://www.blackrock.com/corporate/literature/publication/blk-commentary-engagement-on-human-capital-march2018.pdf
2014 2015 2016 2017 2018

 WBCSD is a global, CEO-led organization of over 200 leading businesses working
together to accelerate the transition to a sustainable world.
 The Social & Human Capital Coalition is an initiative which aims to mainstream the
measurement of social & human impacts for business – shifting the improvement of
social & human performance from an optional extra to a core part of business decision
making.
The Protocol serves two purposes:
1. It provides a consistent process to guide companies through the journey of measuring,
valuing and better managing social and human capital.
2. It provides a framework for collaboration to harmonize the currently fragmented
landscape of social & human impact measurement and valuation, and to move towards
standardized approaches for business.
WBCSD’s Social & Human Coalition and Protocol
The phrase “Social & Human Capital” is being defined through a public
comment process that the WBCSD launched on April 17, 2018.
Wbcsd & SHCC links
2014 2015 2016 2017 2018

2018 Overview
 Candidates: FORTUNE 1000, Global 500 companies, and other
major non-U.S. companies
 56 industry groupings: 211 non-U.S. companies from 28
countries and 475 U.S. companies
 Questionnaires: customized per industry
 Participants: Approximately 3,900 senior executives, outside
directors, and industry analysts
 Attributes: 9 attributes, developed prior to the inception of the
Most Admired Companies rankings in the mid-1980s through a
series of interviews with executives and industry analysts to
determine the qualities that make a company worthy of
admiration.
 Scoring: Overall score is determined through a simple average
of the individual attribute scores. Companies who rank in the top
half of their industry are defined as “most admired” within their
industry.
What are the attributes of reputation on which companies are
evaluated in determining the industry rankings?
1. Ability to attract and retain talented people
2. Quality of management
3. Social responsibility to the community and the environment
4. Innovativeness
5. Quality of products or services
6. Wise use of corporate assets
7. Financial soundness
8. Long-term investment value
9. Effectiveness in doing business globally
FORTUNE Magazine’s World’s Most Admired Companies
Each year, top executives and directors among eligible companies are surveyed to identify the top 50
companies with the strongest reputations.
Source: “The World’s Most Admired Companies 2018.” Korn Ferry Institute. Retrieved from: https://www.kornferry.com/institute/fortune-admired-companies-2018

Sorted Social & Human Capital Metrics on Bloomberg
Social Human CapitalOverlap
Employees
Employee Turnover %
Number of Part-Time Employees
Number of Temporary Employees
Number of Contractors
Employee Diversity
% Women in Management
% Women in Workforce
Gender Pay Gap Breakout
Percentage Gender Pay Gap for Senior Management
Percentage Gender Pay Gap Mid & Other Management
Percentage Gender Pay Gap Employees Ex Management
% Gender Pay Gap Tot Empl Including Management
% Minorities in Management
% Minorities in Workforce
% Disabled in Workforce
Community & Customers
Community Spending
Community Spending/Profit Before Tax
Community Spending Percentage of EBITDA
Community Spending Percentage of Total Equity
Number of Customer Complaints
Supply Chain
Number of Suppliers Audited
Number of Supplier Audits Conducted
Social Supply Chain Management
Number Supplier Facilities Audited
Sustain Sup Guidelines Encomp ESG Area Pub Disclsd
Employees
Number of Employees - CSR
% Employees Unionized
Employee Average Age
Policies
Health and Safety Policy
Equal Opportunity Policy
Human Rights Policy
Training Policy
Business Ethics Policy
Fair Remuneration Policy
Employee Protection / Whistle Blower Policy
Anti-Bribery Ethics Policy
Policy Against Child Labor
Accidents & Fatalities
Workforce Accidents - Employees
Lost Time from Accidents
Fatalities - Contractors
Fatalities - Employees
Fatalities - Total
Lost Time Incident Rate
Fatalities - Third Party
Fatalities per 1000 employees
Accidents per 1000 employees
Lost Time per Employee
Total Recordable Incident Rate
Total Accidents - Contractors
Lost Time Incident Rate - Contractors
Total Recordable Incident Rate - Contractors
Employee Training
Employee CSR Training
Employee Training Cost
Total Hours Spent by Firm - Employee Training
Training Spending per Employee
Other
Sustainable Investment/Capital Expenditures
Source: Bloomberg. Metrics as of 8/7/2018

Active Management of the ESG
Ecosystem

Resources

What Can Companies do to Manage ESG?
Link to website: https://brownflynn.com/resources/brownflynn-wbcsd/ Link to website:
http://www.societycorpgov.org/governanceprofessionals/currenttopiclandingpages/sustainability/esg-briefs

/ 45
ESG Ratings & Rankings Survey (Initial Results)
7-8 Responders:
Bloomberg, MSCI
6-7 Responders:
CDP, RobecoSAM, Sustainalytics
5-6 Responders:
Vigeo-EIRIS, Thomson Reuters, EcoVadis
4-5 Responders:
IW Financial, Other
Other:
 BlackRock
 Calvert
 Trucost (S&P)
 GRI
 Investor Groups
 Mainstream shareholders: Wellington, Vanguard, BlackRock, etc.

/ 46
ESG Ratings & Rankings Survey (Initial Results)

Case Study

Edwards Lifesciences
Sustainability Journey
Edwards Lifesciences’ 2014 sustainability report was a
7-page document with simple design and minimal content
that was not aligned with the Global Reporting Initiative.
Edwards retained BrownFlynn to provide strategic counsel,
conduct a materiality assessment, and oversee the creation
of its first online report. BrownFlynn supported Edwards
in drafting, designing and launching its 2015 online
sustainability report that meets all requirements for
a GRI G4 Core level report.
The report includes an interactive matrix showing how
the company’s material sustainability topics align with
its corporate aspirations.
Leveraging the report content, BrownFlynn drafted
Edwards’ 2016 Sustainalytics response, resulting in an
increased score. This score was an input into the Harvard
Business Review’s ranking of top global CEOs, which
recognized Edwards CEO Mike Mussallem in late 2016.
Another outcome of BrownFlynn’s work with Edwards is
the company’s increase in its 2016 MSCI scores for several
environmental and social indicators.
MSCI Scores 2015 SCORE 2016 SCORE
Environment Social

Materiality Assessment
 Engaged more than 60
stakeholders to identify, prioritize
and validate the Company’s most
significant sustainability impacts,
risks, and opportunities, driving
the Company’s strategy and
goals, management approach,
and reporting.
 Interactive matrix published
on Edwards.com.
“Materiality & Stakeholder Engagement”. Edwards Lifesciences. https://www.edwards.com/sustainability/our-
approach/materiality-stakeholder-engagement/

Edwards Lifesciences Interactive Matrix
Environment Social Governance

ESG Data Disclosure
• Published on Edwards.com
• Disseminated to most influential
ESG research firms
• Positive feedback and
increased engagement

/ 52
Single Security Data
Company reported ESG data is available at a single security level. Offering complete transparency, ratios
and third party scores are also available.
ESG Company data,
disclosure scores, ratios
and third party data

/ 53
ESG Peer Analysis
Analyze a company’s ESG performance to assess current and historical risks and opportunities
ESG Performance and
peer comparisons
including ESG scores

Next Steps

Step 1: Understand ESG Ecosystem
 What does the ESG ratings and rankings ecosystem look like
today?
 Are your competitors disclosing things you are not?
 Can you disclose these things?
 Do we want to connect the internal dots and do a report, or fill the
immediate gaps?
Step 2: ESG Research Firm and Shareholder Mapping & Assessment
 Who is already looking at you and contacting you?
 Which of your largest owners have an interest in ESG?
 How important are those ESG research firms and owners
to you? (Prioritize)
Step 3: Strategic and Integrated Disclosure
 What do we already have in-house that we’re not
disclosing?
 What are our most important (material) ESG issues?
 Who are the internal SMEs that can help measure, manage and
disclose ESG information?
Is it time to create your own ESG narrative?
…..Or are you going to let others do that for you?

About ERM

An ERM Group Company
For more information on BrownFlynn’s services,
please visit www.brownflynn.com or contact us below.
Thank You
Mike Wallace
Partner
(424) 320 3501
mikew@brownflynn.com

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CITI: Guidance for Investor Relations Officers on Managing ESG Demand