Session 1 – Sustainability

as an Advantage: Value
Creation Levers of ESG
Strategies
September 2023
 Introduction: The need for action

ESG: A source of value creation

Sustainability as
• Introduction
an advantage

Copyright © 2023 by Boston Consulting Group. All rights reserved.

• A systematic deep-dive

ESG leadership: an outlook

1
 Introduction: The need for action

ESG: A source of value creation

Sustainability as
• Introduction
an advantage

Copyright © 2023 by Boston Consulting Group. All rights reserved.

• A systematic deep-dive

ESG leadership: an outlook

2
 We take a holistic approach to sustainability – a definition: ESG

Environmental Social Governance

Copyright © 2023 by Boston Consulting Group. All rights reserved.

With the challenge of climate Health and safety of employees, Corporate governance such as
change, a company's usage of natural product liability and the assumption leadership's orientation on ESG-
resources and its pollution and waste of responsibility within a company's aligned company policies and
management become a matter of environment shape its public image corporate social responsibility are
societal awareness the steering mechanisms of ESG
implementation

3
 Fifty years after Nobel laureate Milton Friedman famously declared that the sole
“social responsibility of business is to increase its profits,” corporations are
abandoning the dictum. They’ve gone from shareholder to stakeholder returns

Glasgow Finance Alliance for Net Zero (GFANZ) brought over 450 financial firms

2020 was a across 45 countries responsible for assets of over $130 trillion committed to
science-based net-zero emissions target by 2050, covering all emission scopes,

turning point for include 2030 interim target settings

corporate # of companies committed to science-based targets (SBTi)

sustainability In 2021,
companies
4,000 +127%

with science- +45% 2,356

2,000
based climate
– and from 2021
1,039
targets more 718
231 306

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than doubled 0
onwards this 2017 2018 2019 2020 2021

accelerated Cumulative committed companies Cumulative with approved targets

further We are asking companies to disclose a plan for how their business model will
be compatible with a net zero economy […] We are asking you to disclose
how this plan is incorporated into your long-term strategy and reviewed by
your board of directors
—Larry Fink, CEO of BlackRock, letter to CEOs 2021

Source: SBTi. 4
The societal context is changing for business in the '20s

Escalating investor Shared urgency to mitigate Higher bars on Increasing transparency

and social activism climate change impacts rights to operate on ESG performance

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Investors Good products Collaboration for
Powerful purpose
skew capital doing good collective action
5
Globally we face an unprecedented challenge: Take the Delay raises need
example of global warming for efforts
Annual emission
reduction until 2030
Currently not on track with 1.5° or 2° paths to meet 1.5° path

Global net CO2equivalent emissions pathways - Gt per year

-7%
60
Current
trajectory1
starting in 2020
40 Paris-pledges2

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vs
20
2o C path3

1.5o C path4 -15%

0
2010 2020 2030 2040 2050

1. Assumes CO2 emissions grow from 2018 at same rate as the Current Policies scenario in UNEP 2019 Gap report to 2050 (1.1% CAGR)
2. Assumes countries decarbonize beyond at same annual rate that was required to achieve their INDCs between 2020 and 2030 3. Assumes
delaying until 2025
25% reduction by 2030 and net-zero by 2070 4. Assumes 45% reduction by 2030 and net-zero by 2050 Note: Emissions of non-CO2 GHGs are
also to be reduced by more than 50% in pathways limiting global warming to 1.5°C
Source: IPCC, UNEP Emissions Gap Report, BCG analysis 6
 Copyright © 2023 by Boston Consulting Group. All rights reserved.
If you are ambitious, the sustainability lens should be an integral
part of your agenda. Start with the low-hanging fruits, gain
experience and communicate effectively — this step-by-step
transition is decisive to becoming a winner of the next decade!
7
More companies are announcing sustainability actions each year
Acting now is key to not falling behind

Number of climate & sustainability

announcements by category
Make investments, undertake M&A,
“Action” oriented events have significantly Actions
decrease operational carbon intensity
increased vs. other categories
214
3%
Commitments Set targets, e.g., net zero by 2030

42%

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Affiliations Announce partnerships / memberships
82
6%
59% 55% Accolades Communicate awards / ratings
34
18 68%
17% 44% 35%
39% 32%
Acknowledge environmental
2018 2019 2020 2021 Controversy
controversies / responses
Note: Based on 348 events across 50 companies studied from 1Jan 2018 through 31 December 2021; study focused on the ASX50, with 4 companies not having
any ESG announcements during the time period assessed and 4 companies from outside the ASX50 added due to their size – REA, TPG, CHC, NXT
Source: S&P Capital IQ; BCG ValueScience®, Company press releases and other news sources 8
Pressure on the industry to transform is increasing

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Regulatory, Investor pressure on Peer pressure as Customers and
governmental and high-emitting sectors asset managers and employees demand
scientific pressure on and increase in ESG their suppliers set companies to raise their
emissions targets funds targets standards

Source: BCG analysis 9

Deep-dive | Companies are facing multiple and increasing
pressures to move on ESG
Deep-dive on next slides
Tightening and widening regulation
• Regulators are increasing the breadth and depth of ESG regulation across the globe led by
the EU with new regulation such as CSRD, EU Taxonomy, and SFDR

Scientific consensus Today

• New research on planetary boundaries expand companies' scope of responsibility from
climate "only" to incl. biodiversity, resources, water, pollution, and land use change ESG can provide
a competitive
Investor demand advantage
• Investors are increasingly reallocating capital to ESG and divesting from companies with
insufficient short and long term ESG strategies

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Intensified competition
• Companies across sectors are competing on ESG to create differentiation and uniquely
position themselves towards tomorrow's sustainable consumers, investors, and regulator

Customer expectation Tomorrow

• Customers are increasingly willing to pay a price premium for sustainable solutions with
carbon taxes likely to increase the future appetite. In addition, mature customers are ESG will
explicitly requiring ESG information from suppliers become a license
to operate
Employee demand
• ESG is rapidly approaching as a key source for access to talent and employee retention as
new generations of employees are first looking towards sustainable companies
Source: BCG analysis 10
 Regulation

Regulation deep dive | Policy & regulation engagement on sustainability is

accelerating & laggards may face penalties…

Number of countries with national-level regulation on carbon emissions (Nov. 2021)

Emissions
49
trading system

Planned
48
coal exit

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Planned ban of new
combustion engines 401

Carbon
29
tax

Europe Asia Pacific LatAm Africa North America Evolution in last 3 years

1. Including 20 countries under EU proposed "Fit for 55" package

Source: Powering past coal alliance; International Council on Clean Transportation; The World Bank; BCG analysis 11
 Regulation

Regulation deep dive | …while leaders may secure funding pools to support
transition
Illustrative examples of governments investing in and creating incentives for sustainability

The Infrastructure Investment and Jobs Act

The European Green Deal Investment Plan
(IIJA) and Inflation Reduction Act (IRA)
Allocate ~$480B in federal funding in 2022 to climate measures Mobilize at least €1T of sustainable investments from 2021-
through infrastructure grants, investments, and tax credits 2027, and provide incentives to re-direct private investment

Green Technology R&D tax incentives The 2020 French Stimulus Package
R&D tax credits starting 2020 of 30-40% (smaller firms) and 20- Allocate a third of the €100B stimulus package (4% of GDP) to

Copyright © 2023 by Boston Consulting Group. All rights reserved.

30% (larger firms) for 48 carbon neutrality technologies green measures, incl. €9B to reach carbon neutrality by 2050

German Future Fund (2021) and

The Low Carbon Economy Fund (LCEF)
Environmental Innovation Program (2020)
Cover €10B costs / risks to fund emerging technologies, Invest an additional $2.2B in expanding the LCEF in
providing projects non-repayable cash grants up to 30% of costs, implementing Pan-Canadian Framework on Clean Growth and
with subsidized loans for the rest Climate Change, offering up to $1.4B to Provinces adopting it

Source: IRA; European Commission; Yonhap News Agency; Govt. of Canada; Deloitte Survey of Global Investments and Innovation Incentives 2020; BCG Analysis 12
 Regulation

Regulation deep dive | Two pieces of upcoming regulation is especially worth

keeping an eye on related to ESG In addition, EU Carbon Border Adjustment will have
implications on taxation for materials sourcing
Corporate Sustainability Reporting EU Taxonomy to define sustainable
Directive (CSRD) activities

What What
• In short, the CSRD is EU's new sustainability reporting • In sum, the EU Taxonomy is EU's answer to "what
legislation is sustainable" enabling market participants one
• It goes into force for financial year 2024 unified definition
• It significantly expands the ESG breadth and depth of • The legislation will impact financial market
ESG metric public disclosure participants and large companies subject to the
current NFRD reporting1
Implication

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• Companies will have to assess (double materiality Implication
requirement), collect, monitor, and report on a wide • For companies' economic activities to qualify as
set of ESG KPIs to stay compliant with regulation "sustainable", you must satisfy three thresholds:
• Topics include 1) climate change, 2) pollution, 3) • 1) significantly contribute to 1 of 6 environmental
water, 4) circular economy/resource use, 5) objectives
biodiversity & ecosystems, 6) own workforce, 7) • 2) Do no significant harm to any of the
workers in the value chain, 8) affected communities, environmental objectives
9) end-users, 10) business conduct • 3) Meet minimum safeguards3 related to human
and labor rights
Note: 1. All large companies with >250 employees to report in 2026 according to CSRD, 2. Environmental objectives include: climate change mitigation, climate change
adaption, water, circular economy, pollution, and ecosystems/biodiversity, 3. Meet human rights and labor rights in accordance with UNGP and OECD guidelines
Source: BCG analysis 13
 Regulation

Regulation deep dive | The EC's Climate Guidelines recommend to monitor 10

indicators, which upcoming regulations could require to disclose
GHG1 emissions GHG emissions GHG emissions GHG emission Energy efficiency
Scope 1 Scope 2 Scope 3 reduction targets targets

Direct emissions Indirect emissions Emissions from the Absolute reduction Energy intensity
(fuel, heating gas, linked to power, rest of the value chain targets of Scope 1,2 (kWh/ton, Wh/€ of revenues…)
air conditioning…) heat and steam (upstream & downstream) and/or 3 emissions reduction targets
in tons of CO2e in tons of CO2e in tons of CO2e in year-on-year % in year-on-year %

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Energy mix Energy mix Physical Proportion of Proportion of
composition RE2 targets climate risks green activities green bonds

Quantity of energy Objectives to increase the Share of assets exposed to Share of turnover Share of green bonds and/or
consumed and/or produced share of renewables future acute or chronic from green activities green outstanding amounts
per type of resource within the energy mix physical climate risks (under EU Taxonomy) (e.g. Green Bonds)
in MWh in year-on-year % in % in % in %
14
1. GHG: greenhouse gas 2. RE: renewable energy
 Regulation

Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA)
include $479B in new climate and energy spending
Funding by initiative Key incentives:
• Tax credits for investments in solar and storage
95 479 • Tax credits for producing wind and nuclear energy
($B) 34
Carbon-free • Tax credits for transmission interconnects related to
Funding from IIJA
energy these clean energy projects
110
Funding from IRA 71 61 • Funding for energy efficiency
0
71 • Tax incentive for purchase of electric vehicles
35 Transportation • Funding for EV charging infrastructure
41 18
17
18 • Carbon capture tax credit for point source capture
237 23 • Carbon capture tax credit for direct air capture (DAC)

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41 Clean tech • Tax credit for production of clean hydrogen
369 • Funding for hydrogen and DAC hubs
• Funding for sustainable aviation fuels (SAF)

196 • Funding for advanced manufacturing production

Manufacturing • Investment for advanced industrial facilities

• Agriculture initiatives
Carbon- Transportation Clean tech Manufacturing Other Total climate • Methane emissions charge (revenue generating)
free energy & energy Other • Resilience investments (e.g., rural area dev.)
invest. • Greenhouse gas reduction fund

Note: additional details on the IIJA and I RA in appendix

Source: EPA; CBO; BCG analysis 15
 Regulation

Tax credits have made renewable energy more economical, enabling

companies to transition earlier

-18%
Levelized Cost of Energy $/MWh
$136
Cost without tax credit -21%
$112
Cost with tax credit $100
-42%
$77 $79

-49%
-63% $44
$40
$35

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$20
$13

Solar Onshore wind Offshore wind Storage Nuclear1

Post-IRA
60% Investment $35/MWh2 60% Investment 5O% Investment $31/MWh2
incentive Tax Credit Production Tax Credit Tax Credit Tax Credit Production Tax Credit
applied
1. New small-modular reactor; 2. Assumes $15/MWh incentive, inflation adjusted and with bonuses;
Note: all technologies assume base+ prevailing wage bonus+ domestic production bonus+ energy community bonus, and wind and solar also include low-income bonus
Source: Lazard, BCG analysis 16
 Regulation

Significant incentives likely to scale deployment of clean tech, creating new

growing profit pools

Carbon capture, utilization

Hydrogen (H2) and storage (CCUS) Direct Air Capture (DAC)
Thousand tons H2/year Million tons CO2/year Million tons CO2/year
2,248 170 16

971 1,000 84
692 5

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20
1 1 0
Blue H2 Green H2 CCUS DAC

Legend
2020 Voume 2030 volume (conservative adoption) 2030 Volume (wider adoption)

Will drive use as a low-carbon fuel Will make carbon abatement across several
Will create almost completely
for energy, transport, or feedstock sectors, e.g., refining, cement, steel, etc.
Novel market for DAC
for materials production more economical

Source: BCG Analysis 17

 Introduction: The need for action

ESG: A source of value creation

Sustainability as
• Introduction
an advantage

Copyright © 2023 by Boston Consulting Group. All rights reserved.

• A systematic deep-dive

ESG leadership: an outlook

18
ESG is increasingly a source of value creation

A strong sustainability / ESG performance can have various impacts

Higher market
Influence on valuation
investor
Lower cost of 7
decision-making
capital, better
6 6
financing access
Management of
5 5 5
regulatory risk
Higher
4 4 4 4
profitability
Market expansion

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Higher sales 3 3 3
& new business
& employee
2 2 2
attractiveness
1 1
40% of Continuously 0.2-0.4ppt. 33% of AuM
A platform to go 2-5ppt. margin >10% valuation
millennials use evolving lower cost of invested
beyond the core premium premium
ESG to select job regulation capital sustainably

X Impacted by layer x
Note: Example of value creation: 1. ESG leaders experience profitability margin premiums of up to 27% and higher market valuations ~25%2. Talent
attraction and retention as 40% of millennials use ESG to select jobs and 30% will leave jobs if lack of robust ESG strategies, 3. ESG leaders are face less
regulatory risks and investor divestments with robust ESG roadmaps
Source: BCG analysis 19
 Sales & employee 1
attractiveness

of consumers actively bought more

More eco-friendly 72% eco-friendly products in 2019 than in
products are 2014
demanded & shift
in willingness to
of consumers indicate they would
ESG drives pay higher
premiums >20% pay a 10%+ premium for eco-friendly
packaging on beverages & beauty
consumption products

decisions and
employer of millennials said that they've

Copyright © 2023 by Boston Consulting Group. All rights reserved.

High pressure on ~40% chosen a job in the past because the
attractiveness management to company performed better on
sustainability than the alternative
incorporate
sustainability to
attract & keep of employees said that they've left a
top talent ~30% job in the past because of the
company's lack of a sustainability plan

Sources: Accenture Chemicals Global Consumer

Sustainability Survey 2019; BCG analysis 20
 Sales & employee 1
attractiveness

Consumer preference: When quantified, >70% of consumers express

willingness to pay premium for eco-friendly packaging
CPG industry
Initially, only 45% of customers … but over 70% express they will pay
express they are more willing to more for eco-friendly packaging when … and surprisingly their income
pay for eco-friendly packaging … quantified … distribution follows the overall survey.
“I am more willing to pay more for a $10 6-pack beverage product Income distribution
product in sustainable and/or (Non-eco-friendly to eco-friendly packaging)
environmentally friendly packaging” Willing to pay more
27% 27% >10% more 26% 42
38
74% 35 33
Overall survey
20%

45% 15%
16 15
5% 6 5 5 5

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15%
$.25 - $.50 $.50-$1.00 $1.00-$2.00 $2.00+ Would not $0-$50K $50K-100K $100K-$150K $150K-$200K $200K+
pay more

$10 beauty/personal care product

30% (Non-eco-friendly to eco-friendly packaging)
>10% more 28% 42
25% 38
24%
72% 23%
35 33
Strongly agree 16%
17%
Agree 16 15
Disagree 7%
6 5 5 5
13%
Strongly disagree
$.25 - $.50 $.50-$1.00 $1.00-$2.00 $2.00+ Would not $0-$50K $50K-100K $100K-$150K $150K-$200K $200K+
pay more
Source: From BCG Consumer Survey dated Feb 21, 2020, n = 5,111 21
 Sales & employee 1
attractiveness

Employee attractiveness: To attract top talent in the future, companies need

to push their sustainable agenda
Overarching

A high share of employees have chosen or left a job Employees feel more engaged and would even
because of the company's sustainability agenda consider a pay cut, working for a sustainable company

~40% ~30% >1/3 >10%

of millennials said that of employees said that of employees said that of employees said
they’ve given more

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they've chosen a job in they've left a job in they'd be willing to go
the past because the the past because of the time and effort to a as far as to take a
company performed company's lack of a job because of their $5k-$10k annual pay
better on sustainability sustainability plan employer’s cut to work at an
than the alternative sustainability agenda environmentally
responsible company

Note: Sample size of 1,000 employees at large US companies

Source: FastCompany 2020; BCG analysis 22
 Market expansion 2
& new business

of CPG growth ('13-'18) in the US came from sustainability-marketed

~50% products, despite representing only 16.6% of the category in '18

ESG leads to
Industry Examples
market
new sales by C&A with new faster growth for Unilever's
expansion & C2C1 Certified apparel line "sustainable living" brands3
~4M in first two years2 – best- 69% vs rest of business, relating
new business selling products with margins to 75% of Unilever's total

Copyright © 2023 by Boston Consulting Group. All rights reserved.

on par with conventionals revenue growth
fields
new sales by global shoe
manufacturer with new line green revenues3 (~64% of
>1M of sneakers made from €11.5B total sales) were generated
recycled ocean plastic PET by Philips in 2018
bottles

1. Cradle to Cradle 2. 2017 & 2018 3. See slide notes

Sources: NYU Stern Center for Sustainable Business; C&A; Unilever; Philips; BCG analysis 23
 Market expansion 2
& new business

Market expansion: Sales growth is positive, but nuance and segmentation

required to understand where in market to capture value
CPG industry
Sustainable products account for ~50% of growth in last …however, there is a non-linear relationship between
5 years… product pricing and sales
Price premium (%) US Sales CAGR (%)
Share of US Share of market Sustainable Conventional
market (%) growth (%) CAGR (%) (2016-19) (2016-19)
Refrigerated
17% dairy 74% 4% (1%)

50% 4.5%
Skin

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& body care
55% 6% 3%

83%
Vitamins
50% 0.8% & supplements 40% 17% 3%

2018 2013-2018 Baby food 20% 9% 0%

Sustainable Conventional
Note: Sustainable products include organic ingredients, responsibly sourced, responsibly packaged, certified fair trade
Source: NYU Stern Sustainable Share Index™; Nielsen; SPINS; BCG analysis 24
 Higher profitability 3

cost saving opportunity p.a. through

€>1T Circular Economy in manufacturing in the
EU and FMCG sectors globally

ESG driven annual savings by CAT REMAN1 offering an

10-30% end-to-life scheme to remanufacture
processes and machinery and components
operations can
lower savings by Unilever through water &

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>€1B energy efficiency as well as material &
operational cost waste reduction since 2008

improved water-use efficiency rate per

5% unit of productions across all of PepsiCo-
owned manufacturing locations ('18 vs '15)

1. Remanufacturing business of Caterpillar that covers around $3.5B worth of products and components
Sources: WEF "Toward the Circular Economy" Report; Unilever; BCG analysis 25
 Higher profitability 3

Circular Economy: Caterpillar paves the way in heavy machinery

remanufacturing—resulting in 10-30% annual cost savings
Industrial Goods

Clever scheme to promote end-of-life product Almost no waste sent to landfill, and huge
manufacturing reductions in energy and water use
CAT REMAN is the branch of Caterpillar that deals exclusively • Remanufacturing activities cover ~€3.5B worth of
with remanufacturing machinery or their components by products and components
offering an end-of-life scheme to customers who return their • 2M components received p.a.

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products in order to collect the initial deposit paid
• 10-30% total annual cost savings
Once the discarded product is received by CAT REMAN, it is • Up to 93% reduction in water used1
disassembled, cleaned, repaired and finally reassembled
• Up to 86% reduction in energy used1
into new products, incl. engineering updates and innovations
• Up to 99% reduction in material used1
In this way, value and functionality is added to the old • Up to 99% reduction in waste sent to landfill1
products or parts and they are sold as new with a full
warrantee

1. Compared to making a new product

Source: Resourceefficient.eu 26
 Reduction of 4
regulatory risk

Reduced impact or CO2 price threatens energy

avoidance of new ESG cost $100 intensive industries with costs up
blocks e.g., CO2 price to 39% of sales

EBITDA decrease for conventional/

Reduced risk of industry coal energy, following regulatory
ESG lens value pools shifts
~10% change; renewable sector benefits from
>50% EBIT increase in same period
helps manage
& reduce
of Bayer's revenue stems from
regulatory risks Reduced threat of product
~25% agricultural chemicals, while EU plans

Copyright © 2023 by Boston Consulting Group. All rights reserved.

and component bans CCP1 reduction by 50% by 2030

of Air France flights that are within a

Reduced threat to 2.5 hour train ride between Paris and
license to operate
100% domestic cities are no longer
permitted

1. Chemical Crop Protection 2. E.g., poor working conditions, pollution, destruction of nature and habitats, etc.
Sources: CDP Climate Reports 2018 / 2019; Reuters; European parliament; Bayer Annual Report 2019; Circle of Blue;
BCG analysis 27
 Reduction of 4
regulatory risk

• 2014/95 NFRD identifies four sustainability issues that large, public-

interest companies must report
• 2016/1011 and 2019/2089 include requirements for climate transition and
Paris benchmarks in financial services
• "Green Taxonomy" for sustainable investments in progress
• "Plastic waste tax" – introduced, minimum recycled targets aspired

Regulators raising • Article 173 requires listed companies to report on financial risks related to
climate change and measures adopted to reduce them
the bar • Carbon Regulation with increasing carbon prices

EU leading in non- • Congress discussing SEC's role in ESG & climate disclosure for the first time
in history (e.g., ESG Disclosure Simplification Act, Climate Risk Disclosure
financial disclosures

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Act)
with others expected to • 27 States with e-waste regulation – e.g., Indiana, EPR unless 60%+ recycled
follow based on weight sold
• California AB54/SB84 – packaging regulation

• Xi Jinping’s calling for "green finance" and Hong Kong now requiring
reporting on ESG risks and materiality methodology
• "Plastic Waste Import Ban" – regulation prohibits import from certain type
of plastics packaging with low grades and high pollution

28
Source: BCG analysis
 Reduction of 4
regulatory risk

Deep-dive | Example indicators required by selected EU regulations

"Green Taxonomy" Regulation Sustainable Finance Disclosure Regulation Non-Financial Reporting Directive

Create a European standard for the qualification Harmonize transparency rules for investment Harmonize and reinforce non-financial
Objective

of an economic activity as environmentally firms regarding the integration of sustainability reporting requirements for companies with
sustainable, i.e., "green" risks and the consideration of the adverse more than 500 employees
sustainability impacts of their investments

Delegated acts (including list of eligible Adopted in November 2019, application in Publication of a first revision project in
Dates

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activities) in December 2020, application in March 2021 December 2020
January 2022 for climate-related criteria1

Article 8 requires all non-financial companies Art.4 (for large companies3): indicators measuring Might specify non-financial reporting
Required indicators

subject to the NFRD (see right column) to the adverse sustainability impacts of the firm's standards based on the European
disclose the % of their turnover and of their investments (specified by RTS in Dec 2020) Commission's Guidelines on reporting
CAPEX/OPEX associated with green activities. climate-related information
Art.6 (optional): assessment of the 'likely impacts'
For financial institutions, the requirement might2 of sustainability risks on the value of each
be to disclose the ratio of green assets, as financial product
recommended by the Commission's climate- Art.7: indicators measuring the adverse
related reporting guidelines (see next page) sustainability impacts of each financial product

1. Delegated act in December 2021 and application in January 2023 for the other criteria (related to water resources, circular economy, pollution, and biodiversity) 29
2. Indicators will be specified in delegated acts by June 2021 3. More than 500 FTEs, or parent companies of groups with more than 500 FTEs
 Reduction of 4
regulatory risk

License to operate: Airlines in Austria and France are no longer allowed to fly
short, purely domestic trips
Travel industry

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In Austria there will be a The flight route Salzburg- Air France is no longer
ticket tax of 30 Euros for Vienna will not be operated permitted to sell purely
flight routes of up to 350km by AUA due to the COVID-19 domestic trips between Paris
bailout. For all train routes and domestic cities that are
under 3 hours, the principle is within a 2.5-hour train ride of
in place “train instead the capital
of plane”

Source: BCG analysis

30
 Lower cost of capital 5
Percentage points

Currently, immediate reward of lower cost of capital through high

ESG activities is minimal …
Difference in cost of capital between high- and low-ESG-scoring companies by industry1 MSCI World

0,6pp
0,4pp 0,5pp 0,4pp
0,4pp 0,4pp 0,4pp 0,4pp 0,4pp
0,4pp
ESG lens 0,2pp

leads to lower Energy Materials Industrials Consumer Consumer Healthcare Financials IT TelCo Utilities Real

cost of capital & discretionary staples services estate

better financing … but better financing access especially prevalent during COVID-19

Copyright © 2023 by Boston Consulting Group. All rights reserved.

access Canadian companies with Air France needs to halve its CO2
revenues of >$300M need to emissions of domestic flights by 20241,
commit to climate overall by 20302 & commit to source
disclosures and goals to 2% of its fuel requirements from
receive financial Covid-19 sustainable sources by 2025 to receive
support financial Covid-19 support

1. Low-ESG-scoring with 6.6% and high-ESG-scoring with 6.2% cost of capital across industries on average
2. Per passenger-kilometer, compared with 2005 levels
Sources: FlightGlobal.com; MSCI; BCG analysis 31
 Lower cost of capital 5

Better financing access: Government relief & stimulus packages for Covid-19
downturn often accompanied by sustainability conditions
Overarching

EU Canada Germany South Korea United States

EU £750 billion Covid Climate requirements in Green Recovery: South Koreas Green Microsoft, Visa and
recovery fund comes federal relief package Germany unveils plans New Deal others worth combined
with green conditions could signal future for €40bn climate Moons vision for a post-COVID $11.5 trillion want

Copyright © 2023 by Boston Consulting Group. All rights reserved.

A quarter of spending has policy priorities spending usage economy includes a new congress to include
been earmarked for climate Liberals included a climate- Raft of energy efficiency, commitment to reducing
emissions
climate in COVID-19
action and a “do no harm” reporting provision in the green transport, and
clause rules out
recovery plan
governments large company hydrogen programs put at
environmentally damaging financing facility heart of €130bn stimulus
investments package, as Bank of England
confirms financial support for
airlines

Source: BCG analysis 32

 Investor decision 6
making

Every third dollar is invested in

Sustainable investing is
now mainstream 33% sustainable assets globally1, leading to
a total of $31T in '18 (only $~23T in '16)

Investors are increasingly was the average allocation of

ESG is becoming incorporating ESG metrics
into decision-making
36% sustainable investments in portfolios
in '18, compared to 31% in '13
a priority for
investor
decision making CAGR of global green bond market

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Green bond market grows
significantly 57% ('15 to '19), resulting in a total green
bond & green loan issuance of $257.7B

Increasing divestments from Institutions globally have fully

e.g. fossil fuels by investors, 1200+ or partially divested from fossil fuels
institutions & banks leading to $14T divestments

1. See slide notes for information

Sources: GSI Review 2018; UBS "What's on investors' minds / 2018 Volume 2"; Climate Bonds "2019
Green Bond Market Summary"; gofossilfree.org; BCG analysis 33
 Investor decision 6
making

Green bond market: 57% annual growth rate of global green bond market

Overarching
Total Global Green Bond Issuance ($B)

+57% 257.7

162.1 170.6

87.4
42.2

Copyright © 2023 by Boston Consulting Group. All rights reserved.

2015 2016 2017 2018 2019

Green Bonds issued - 241 1,500+ 1,543 1,788

# of issuers - >90 239 320 496

# of countries - 24 37 44 51

Source: Green Bond Market Summary (2019, 2018, 2017, 2016); BCG Analysis 34
 Higher market 7
valuation

CPG companies performing best in Societal Impact metrics

have improved economic fundamentals … CPG Example

ESG performance
correlates with Topic Reducing
water stress
Minimizing
product and
Limiting negative
impacts to
Ensuring
responsible
higher market packaging
lifecycle impacts
biodiversity
and ecology
environmental
footprint
valuations

Copyright © 2023 by Boston Consulting Group. All rights reserved.

EBITDA margin
premium (pp)1 4.1 3.1 3.0 1.3

… and higher valuations: 11% valuation premiums

1. Average premium of top versus median TSI performers

Note: Values show correlations between ESG metrics and valuation/margin premiums
Sources: MSCI ESG Research LLC; OEKOM research AG; BCG analysis 35
 Higher market 7
valuation

Higher market valuations: Funds that select ESG leaders outperforming during
COVID-19 downturn

ESG index performance showed higher resilience than benchmarks during market downturn
ESG Index performance (% point spread from benchmark)

2,0% Start of sell-off Market picking-up

1,5%

1,0%

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0,5%

0,0%
26 02 09 16 23 01 08 15 22 29 05 12 19

-0,5%
Feb Mar Apr

MSCI World ESG Leaders Net Index vs MSCI World Net Index MSCI Emerging Markets ESG Leaders Net Index vs MSCI Emerging Markets Net Index

Source: Financial Times “ESG shines in the crash”, Morningstar “Sustainable Funds Weather the First Quarter Better Than Conventional Funds”, Refinitiv data As of 04/15/2020 36
 Introduction: The need for action

ESG: A source of value creation

Sustainability as
• Introduction
an advantage

Copyright © 2023 by Boston Consulting Group. All rights reserved.

• A systematic deep-dive

ESG leadership: an outlook

37
ESG unlocks value creation in two ways

The two-fold value

proposition of ESG The ESG imperative

Capture new -
sources of profits + Value
by participating in growing destruction
Value Value
sustainable markets, avoided
destruction
green premium, lower creation
captured
operational cost, talent

Copyright © 2023 by Boston Consulting Group. All rights reserved.

attraction, cost of capital

Mitigate business risks

related to material
environmental, social Current Captured Mitigated Business value Business value
and governmental factors e.g., business value new profits business risk with ESG without ESG
customer flight, regulatory risks,
resilience, stranded assets

Source: BCG analysis 38

Deep-dive | To capture value companies are utilizing different configurations
of 13 value creation sources
Value proposition Sources of value creation Examples
Premium pricing Capture higher prices by exploring customers' willingness to pay for sustainable solutions

New revenue streams Go beyond core business and build new revenue streams based on emerging green markets

Capture new Talent attraction and retention New top talent demands credible ESG targets and actions to be attracted and retained
sources of profits Customer loyalty Foster superior customer loyalty by building a strong value proposition to key customers

Reduction of operational costs Capture operational cost reductions e.g., through fuel efficiency and speed optimization

Increased investor access Attract new investors through ESG as they reallocate capital to sustainability to be future-fit

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Lower cost of capital Finance company transition through access to cheaper capital linked to ESG performance

Reduces stranded assets Avoid stranded assets through proper assessment of emission reduction pathways

Limit divestments Avoid divestments by showcasing a robust ESG transition pathway

Ensures resilient operations Mitigate supply chain risks through the correct set of ESG policies, processes and governance
Mitigate current
Safeguards social license to operate Safeguard against social backlashes through the correct set of ESG policies and processes
and future
business risks Regulatory risks/compliance Ensure compliance with ESG regulation through rightful and timely ESG disclosures

Avoid customer flight Mitigate risks of customer flight from supply chain incidents or non-sustainable products

Source: BCG analysis; The Strategic Race to Sustainability (BCG report, 2022) 39
 Capture new profits

Companies can generate returns from transitioning to greener profit

pools which are small today, but can have big upside

Industry 2019 market size Profit pool Demand growth rate ('16-'19)

366 Mt Fossil-based 3
Chemicals 2 Mt Bio-based 14

$2 T Animal-based 6

Food (US)1 $5 B Plant-based 22

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80M cars ICE -2

Automotive 7M cars EV 26

19k TWh Non-renewable 1 Green markets are growing 4-10x faster

than conventional markets.
7k TWh Renewable 6 Some green products (e.g., EV battery
Power materials) will be scarce, creating
opportunities for first movers
40
1. Different CAGR range for Food (2017-2020) Source: IEA, Institute for Bioplastics, PlasticsEurope, Statista, Our World in Data, BCG analysis
 Mitigate business risks

Capturing Sustainability as Advantage via decarbonization requires a

tailored approach depending on emission profile
EBITDA effect of $100/ton
Archetype Pressure points Emissions profile carbon shadow price
Illustrative industries

Heavy emitters Operations and Utilities ~55%

Scope 1 and 2 energy sources Materials ~22%

Distribution, Information Tech ~0%

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Light emitters
storage, and
Downstream Scope 3 Financials ~1%
end-of-life

Light emitters Supply chain Health Care ~1%

Upstream Scope 3 and inputs Communications ~1%
0% 20% 40% 60% 80% 100%

Scope 1 Scope 2 Scope 3 Downstream Scope 3 Upstream

Source: MSCI World 2021 GICS sectors; S&P Capital IQ; Refinitiv; BCG ValueScience® Center, using FY+1 revenue and EBITDA estimates as of today 41
 Mitigate business risks

Without action, the mechanisms to price carbon in will significantly

impact companies' financial performance

39 nations have created some sort of Carbon prices are expected to continue
regulatory carbon pricing growing through 2030
US$/ton of CO2e CAGR
('18-'30E)
200 Actual Forecast 27%

18%
100

Copyright © 2023 by Boston Consulting Group. All rights reserved.

20%
('18-'22)

0
2018 2020 2022 2024 2026 2028 2030
ETS Carbon price ETS & Carbon price Canada EU California

Proliferation of tools for investors to help analyze impact of

As carbon pricing increases and becomes a more relevant
carbon pricing on companies' costs, risks, and opportunities
consideration, investors have the tools needed to actively price
(e.g., BlackRock's Carbon Beta platform and MSCI's Risk emissions into their decisions
Assessment Module)
Note: Highlighted countries have implemented or scheduled for implementation a regulatory carbon expense
Source: WEF; World Bank; Natural Earth Country; BCG Analysis 42
The evidence is clear; a robust ESG strategy creates better returns

ESG leaders and laggards financial performance Rationale and potential upsides/downsides for
(Annualized share price increase/expected return due to ESG companies
performance) ESG leaders capture Potential upsides for the
business value by company
exploring new profit • Offer products aligned w.
pools while customers' net zero aims
ESG laggard ESG leaders e.g., intelligent solutions
mitigating business
that 1) measure and monitor
risks related to share of green energy and
environmental, social carbon footprint and 2)
and governance recommend consumption
5.56% factors based on grid emission
intensity

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Poor ESG performers Potential downsides for the
are more likely to company
experience value • Customer flight to
destruction as non- competitors that provide
-3.30% superior environmental data
mitigated risks
analytics services if company
related to ESG occur does not manage to
integrate ESG in core
offerings
1. ESG high performer: top 10% performing companies on important/material ESG topics; ESG low performer: bottom 10% performing companies on
important/material ESG topics; Financial performance is calculated as annualized share price increase/expected return
Source: Khan, Mozaffar N,. George Serafeim, and Aaron Yoon, Corporate Sustainability: First Evidence on Materiality, Harvard Business School Working
Paper, No. 15-073, March 2022; BCG analysis 43
Leaders are unlocking higher valuation across the board

Data from ~5,000 global players from 2016 to 2020

Valuation Price to Book Value Price to Price to EV to Price to

Performance Sales per Share Book Value Earnings EBITDA FCF
High

1st quintile

Copyright © 2023 by Boston Consulting Group. All rights reserved.

27%
13% 9% 10% 13%
Average (0%) 1%
Metric

-9% -10% -16%

-23% -21%

-61%
Low

5th quintile

Note: Sustainability leaders defined as top quintile Refinitiv ESG score, laggards defined as bottom quintile Refinitiv
ESG score; Market cap agnostic methodology applied (2x); Outliers removed with inter-quintile range methodology; N = ~5,000 global players
Source: Refinitiv data for listed companies from 2016 to 2020, BCG analysis 44
Companies in green businesses have higher valuations and TSR than
those in declining, grey businesses

EV/EBITDA Δ vs. S&P 500 10-yr TSR Δ vs. S&P 500

2011 2015 2019 2022 Absolute Relative
Green industries see valuation
Growing
Green Energy growth and TSR vs. overall
& 1.0 (0.6) 1.4 3.1 18% 1%
profit pools Environment market, indicating positive
investor sentiment and
returns from new profit pools
S&P 500 7.2 9.8 11.5 11.7 17% -

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Metals &
(0.5) (2.1) (3.7) (5.3) 5% (12%)
Mining Shrinking profit pools in
Stagnating
profit pools
hard-to-abate sectors
average lower TSRs vs.
Oil & Gas (0.9) (1.6) (4.8) (5.7) 2% (14%)
overall market showing
secular stagnation

Source: Capital IQ; Refinitiv Eikon, BCG analysis

45
Prioritization to material ESG topics are key to unlock superior value creation

Financial performance across ESG approaches

(Annualized share price increase/expected return due to ESG performance)
Winning approach

A focused approach to ESG

Material ESG topics: High performance
Non-material ESG topics: Low performance 6.0% (important topics only) drives
~3X impact relative to a
3X non-focused approach
Material ESG topics: High performance
Non-material ESG topics: High performance 2.0% Capital allocation to
non-important ESG topics is

Copyright © 2023 by Boston Consulting Group. All rights reserved.

inefficient and does not
Material ESG topics: Low performance boost value creation
Non-material ESG topics: High performance 0.6%
Companies with a ‘low-low’
performance experience value
Material ESG topics: Low performance
Non-material ESG topics: Low performance -2,9% destruction as key risks are
not mitigated

1. ESG high performer: top 10% performing companies on important/material ESG topics; ESG low performer: bottom 10% performing companies on
important/material ESG topics; Financial performance is calculated as annualized share price increase/expected return
Source: Khan, Mozaffar N,. George Serafeim, and Aaron Yoon, Corporate Sustainability: First Evidence on Materiality, Harvard Business School Working
Paper, No. 15-073, March 2022; BCG analysis 46
In summarizing, companies can take one of
four approaches to ESG
Companies should ask themselves…

High
Growth explorer Future fit
Where would you position your
Companies focus on creating Companies exploit new company today?
new value by capturing new emerging profit pools and
profit pools mitigate material ESG risks

Capture new
sustainable Where do you want to be placed in
profit pools the future?
Non-strategic Risk mitigator

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Value is bypassed as new profit Companies focus on mitigating
pools are underexplored and current and future risks in the
key risks have not been green transition to avoid value
mitigated destruction What are your main pain points in
Low achieving this?

Low Mitigating key business risks from High

material ESG topics

One-sided approach Two-sided approach Non-strategic approach

Source: BCG analysis; Project team analysis: Based on the two-fold value proposition of ESG 47
 Example Shipping Industry

Example| ESG can enable companies to capture value, e.g., through premium
prices, lower operational costs and higher customer loyalty…

Premium pricing Lower operational costs Customer loyalty

Cargo owners are willing to pay a Reduce operational costs through Customers are more likely to be
price premium for green logistics CO2e abating initiatives such as fuel loyal to companies with high ESG
reductions, speed optimization and performance
propulsion efficiencies

…7 out 10 cargo owners are

willing to pay a price premium
5%

Copyright © 2023 by Boston Consulting Group. All rights reserved.

and roughly 1/3 is willing to 67%
pay ≥5% more1… Lower operational
costs as 20-30% of 85%
carbon reduction
efforts are consistent Customers expect Customers with
…and 63% indicate they are with cost reductions2
willing to pay a higher to be more loyal to high WtP3 expect
63% premium in the near-future a carbon-neutral to be more loyal to
(within 5 years) provider a carbon-neutral
provider

1. BCG Shipping Decarbonization Survey, June 2021, N=125, 2. Based on Marginal Abatement Cost Curves (scenario 1) from the IMO GHG Study 2020.
Substitution to low- or zero carbon fuels comes with a steep cost today as market is still maturing 3. High WtP (willingness to pay): >2% price premium
Source: BCG Analysis; Shipping decarbonization survey (2021), BCG analysis and IMO (2020); Fourth IMO GHG Study 2020 48
 Example Shipping Industry

Example| … while mitigating risks, e.g., by avoiding stranded assets, be on the

forefront of regulatory changes and limit investor divestments

Stranded assets1 Regulatory risks Divestments

Companies run the risk of stranded New regulation raises the bar for ESG and Companies without ESG transition plans
assets/unanticipated write-offs as fossil poses risks to companies not well- are increasingly likely to undergo
fuel-based logistics and positioned on the agenda divestments
cargo decline
EEXI & CII: New measures
Expected %-distribution of CII ratings (2023)2 of energy efficiency and 8%
carbon intensity introduced 20%
in shipping3
Tanker 29% 1%

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Bulker 28% 5% CSRD: Mandatory disclosure of
~19 ESG topics likely to impact
Container 22% 8% ~650 EU shipping companies
0 50 100 directly and many more indirectly4

A B C D E Past five years: Next five years: 20% of

Emission trading scheme (ETS): EU 8% of investors have investors anticipate to
intends to cap maritime transport divested divest from carbon-
Some vessels that cannot improve the CII score Co2e through the from carbon-intensive intensive assets
from D-E to A-C will likely be less attractive and ETS mechanism assets
suffer unanticipated write-offs
1. Stranded assets: Assets that suffers unanticipated/ premature write-downs, 2. CII impact analysis: IMO's Carbon Intensity Indicator scores vessels from A to E based on its operational carbon
efficiency, with A being the most efficient. 3. Enforcement of CII is still to be seen in effect (regulation will be introduced in 2023) 4. Project team analysis of CSRD's impact on shipping
Source: Clarksons EEXI and CII Impact analysis and BCG analysis, IMO; IMO adopts key mandatory measures to reduce ships' carbon intensity, Corporate Sustainability Reporting (European
Commission, 2022), Robeco (2022); 2022 Global Climate Survey; Project team analysis 49
 Example Shipping Industry

Example| The evidence is clear; a robust ESG strategy can

create better returns in shipping…
TSR index: 12/31/2019 = 1001
+49%
270
255
240
225
8 p.p.
Shipping
210
195 companies with
180
165
+41%
robust
Annualized TSR
150 1/1/2020- ESG strategies
135 3/31/2022
deliver better

Copyright © 2023 by Boston Consulting Group. All rights reserved.

120
105
90 shareholder
75
60
returns
1/1/2020 1/1/2021 1/1/2022
ESG2 score ≥ median ESG2 score < median
ESG score: Environmental + Social + Governance commitment and effectiveness
TSR: Total Shareholder Return
1. Median rebalanced monthly total return of a set of 40 Marine Transport players; 2. ESG score measure a company’s relative material
Environmental (Toxic Waste & Emissions, Carbon Emissions), Social (Health & Safety) and Governance (Corporate Governance, Corporate
Behavior) performance, commitment and effectiveness
Source: Refinitiv Eikon; MSCI ESG Scores; BCG Climate & Sustainability Team analysis 50
 Introduction: The need for action

ESG: A source of value creation

Sustainability as
• Introduction
an advantage

Copyright © 2023 by Boston Consulting Group. All rights reserved.

• A systematic deep-dive

ESG leadership: an outlook

51
What we learn from looking at ESG leaders

ESG capabilities & strategy is not separate from the core business,
1
but with clear link to commercial strategy & processes

Decision making processes are need to be fast and react quickly to

2
ever-changing landscape or accommodate cross-BU decisions

ESG incentives should not be limited to top level management

3
without depth or breadth to drive behavioral or cultural change Winning in ESG
Focus should be on embedding capabilities within BUs/functions, requires a

Copyright © 2023 by Boston Consulting Group. All rights reserved.

4 transformation lens to
rather than developing oversized central teams
drive holistic change
Focus is required on leadership, culture and change management to
5 across the organization
drive the change

Sustainability should be anchored at the top and have sufficient

6
influence in business operations

Source: BCG analysis 52

Leadership requires explicitly engineering
advantage and value from sustainability

Without deep innovations in a business model,

sustainability performance does not emerge If it is not
material, it
Without actual or perceived penalties in externalities,
sustainability does not price in does not matter
– leaders make

Copyright © 2023 by Boston Consulting Group. All rights reserved.

Without catching growth tailwinds or accessing new
market segments, sustainability does not create upside
it material

Without innovation ahead of the industry, sustainability

does not differentiate as advantage

53
 ESG company maturity curve

Value
OUTLOOK
Accelerate
As companies
mature in their Sustainability is fully
ESG journey, ESG embedded in the business
model, people, processes and
becomes Embed culture, and is a significant
source of competitive
integrated in their advantage and value creation

Copyright © 2023 by Boston Consulting Group. All rights reserved.

business model Ensure sustainability is a
strategic priority for the
and becomes a Mobilize
business, with bold goals and
some flagship initiatives in
source of value key areas that have proven
impact and business cases Maturity
creation Meet expectations of
stakeholders and regulators
so that sustainability is not a
detriment, with opportunistic
initiatives for quick-wins

Note: Xxx
Source: Xxx Source: BCG analysis 54
bcg.com