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Using Vectoring to Fast-Forward Your ESG Activities

How Dow Jones Sustainability Index data can help focus your sustainability efforts
Using Vectoring to Fast-Forward Your ESG Activities
Publ. date 13 Sep 2018
European temperatures in the past summer months were not as exceptional as some might think. According to the UN weather agency, CO2 levels are at their highest in the last 650,000 years, and so are the average temperatures, with the world’s nine warmest years all having occurred since 2005, and the five warmest since 2010. With the battle for sustainability heating up, companies and executives need to develop a new sense of urgency, moving it from the realm of compliance to that of a key driver of performance and innovation, which requires embedding it deeply into their core strategies.

Winning Sustainability Strategies & Vectoring

In the forthcoming book Winning Sustainability Strategies (Palgrave, 2019) the effective combination of direction and speed as applied by sustainability champions such as Unilever, Umicore and Novozymes, is dubbed Vectoring because it is analogous to the navigation service provided by an air traffic controller, whereby the controller decides on a particular path for the aircraft, composed of specific legs or vectors, which the pilot then follows. Sustainability programs that are looking for their North Star or Polaris, can lack air traffic controllers or often pilots for that matter. The absence of directional bearings, or the selection of inadequate ones, lead to misguided, uncoordinated actions and usually unsatisfactory results from the sustainability initiatives.  

To develop the concept of Vectoring, the anonymized results from ten selected industries over a three-year period were examined, for companies that elected to actively participate in the DJSI benchmark between 2015 to 2017. The ten industries researched (automotive, banking, chemicals, construction materials, electric utilities, pharmaceuticals, food products, professional services, textiles and telecom) were chosen to generate a representative sample of the industries addressed by MSCI’s Global Industry Classification Standard (GICS).  

As part of the analysis, all company DJSI scores on all criteria in the research period were restated as contributing to either risk reduction, opportunity seizing or both. To determine the company performance on risk reduction and opportunity seizing, DJSI experts independently rated the DJSI criteria for their potential contribution to either risk or opportunity based on the questions in the questionnaire. In the follow-up stage, the expert assessments were compared, and the differences were settled. Obviously, not all criteria have equal importance for the various sectors. To accommodate this, individual criteria weightings per industry were applied to the company scores, identical to those used by RobecoSAM for the composition of the DJSI for the years and industries researched.  

The next step in the analysis required the construction of a separate risk–opportunity matrix for each industry and each year. That matrix enabled the identification of the top 10% of performers. A comparison was then performed at the level of each criterion between the top decile and the industry average. This comparison yielded interesting insights when the gap between the top decile and the averages were statistically meaningful. From this breakdown, four archetypes of company sustainability programs were extracted, each with its own characteristics: traditional, communicative, opportunistic and transformational.  

Figure 1. Example of one sector’s risk-reward mapping and the four archetypes of sustainability programs 

Climate Strategy: An Example of Data Analytics  

The research method used in the book can be illustrated using the environmental, social and governance (ESG) benchmark scores of global companies on climate strategy. Climate change is often portrayed as one of the most important and truly global material issues, with the potential to destruct entire nations, kill wildlife in places such as the Great Barrier Reef, dramatically change agricultural practices or force massive migrations of people. With most, if not all, industries likely to be impacted by climate change, albeit to varying degrees, companies face the need to design appropriate strategies to tackle the challenge. While most companies focus on the risks associated with a changing climate, some also seek to identify and seize the business opportunities linked to this global challenge. To realistically assess the performance of companies on climate change, DJSI -composer RobecoSAM developed a climate strategy criterion in collaboration with CDP.  

The survey developed for the climate strategy criterion includes detailed questions on topics such as transparency in disclosure, emission targets, the presence of products and/or services classified as low carbon or that enable third parties to avoid GHG emissions and companies to assess their own financial risks and opportunities resulting from climate change. The climate strategy criterion is one of more than 20 criteria that make up the full RobecoSAM assessment, making it one of the most comprehensive of its kind. Other questionnaire criteria include corporate governance, operational eco-efficiency and human capital development. The relative weighting of each question and criterion is determined on an industry-basis by a RobecoSAM-appointed expert panel. For each criterion, companies receive a percentage of the maximum score; based upon the full set of questions in the climate strategy criterion, participating companies are awarded a score ranging from 0 to 100.  

Comparing the average score on the climate strategy criterion with the marks of the top decile performers over the three-year research period, provides some interesting insights. From the example in Table 1 on climate strategy, it is possible to infer that frontrunners outperform industry averages by some 16% – a meaningful difference.  

Perhaps more striking is the difference in performance when comparing the selected industries with each other; the scores of the highest-scoring industry (Construction Materials) and lowest-scoring industry (Telecom) are different by a stunning 36%, on a topic that is relevant for both industries.  

Table 1. Scoring on climate strategy criterion, 2015–2017 Dow Jones Sustainability Index, all companies, selected industries

Not all companies see their icebergs as melting at the same speed, and these different perceptions lead to more or less effective strategies for addressing climate change issues. In certain industries, such as food products and banking, sustainability champions outperform their industry averages by as much as 25%. Consequently, it is very important to understand what these frontrunners are doing differently and why.  

About the book  

This article is based upon Winning Sustainability Strategies (Palgrave 2019, Leleux and Van der Kaaij, forthcoming). Presenting numerous award-winning cases from IMD business school and examples from companies such as Unilever, Patagonia, Tumi, DSM and Umicore alongside original ideas based upon 20 years of consulting experience, this book reveals how to design and implement a stronger sense of focus and move sustainability programs forward. This proven combination of purpose, direction and speed is dubbed Vectoring.  

Based upon practitioner cases and data analysis from the Dow Jones Sustainability Index, Vectoring offers a plain-spoken framework to identify the relative position of companies compared to their peers. The framework and its 4 archetypes deliver insights for practitioners to locate inhibitors and overcome them by providing practical suggestions for process improvements. This includes designing and executing new sustainability programs, embedding the SDGs within company strategy and assessing the impact of sustainability programs on competitiveness and valuation. Offering directions for CFOs to shift companies from integrated reporting to integrated thinking in order to accelerate their sustainability programs, Winning Sustainability Strategies shows how to achieve purpose with profit and how to do well by doing good.    

Learning more about the book  

In Winning Sustainability Strategies, the requirement for a clear direction and strong execution is described as the Vectoring of sustainability strategies in 14 chapters. Each chapter contains recent research data, in-depth case studies from companies such as Unilever, Solvay and DSM and practical, downloadable tools.  

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