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1©2014 MSCI Inc. All rights reserved. msci.commsci.com
Identifying Environmental & Social Risks in Supply Chains
Olga Emelianova, Senior Analyst, MSCI ESG Research
Top Commodities in Focus
Jaclyn Daitchman, Analyst, MSCI ESG Research
RIA Conference
May 27, 2014
2©2014 MSCI Inc. All rights reserved. msci.com
Agenda
About MSCI ESG Research
Identifying Environmental & Social Risks in Supply Chains
Olga Emelianova, Senior Analyst, MSCI ESG Research
Top Commodities in Focus
Jaclyn Daitchman, Analyst, MSCI ESG Research
Q&A
Please visit the MSCI ESG Research booth to find out more and pick up our reports!
3©2014 MSCI Inc. All rights reserved. msci.com
MSCI ESG Research Today
Over 70 asset owners with $2.3 trillion in assets
Over 650 clients with $15 trillion in assets globally
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Staff of 160+ in ESG, including 90+ in research
Over 40 years in ESG industry (IRRC, KLD, Innovest)
Signatory to the Principles for Responsible Investment
Global ESG Research Capabilities
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4©2014 MSCI Inc. All rights reserved. msci.com 4msci.com
Identifying Environmental & Social Risks in Supply Chains
Olga Emelianova
6©2014 MSCI Inc. All rights reserved. msci.com
Let’s take a quiz!
Labor : what industry is most likely to take the largest labor cost?
Apparel
Food Products
Electronics
Health & Safety: what country poses the highest ESG risk for Apparel industry?
Vietnam
Cambodia
Mexico
Energy: what industry would be most affected by energy price increase?
Food Products
Electronics
Apparel
7©2014 MSCI Inc. All rights reserved. msci.com
Labor Cost Health & Safety Energy Cost
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
China Vietnam Indonesia India
The wage gap between China and Vietnam has been widening since 2007
China continues to be the global manufacturing hub
The country has experienced the steepest wage increase over the last decade
Source: ILO Global Wage database, General Statistics Office of Vietnam, U.S. Bureau of Labor Statistics
8©2014 MSCI Inc. All rights reserved. msci.com
Labor Cost Health & Safety Energy Cost
Electronics are likely to be most affected
Cost of Goods Sold
Production in China 30% 50% 70% 100%
Wage Increase
10% 0.6% 1.0% 1.4% 2.0%
20% 1.2% 2.0% 2.8% 4.0%
30% 1.8% 3.0% 4.2% 6.0%
60% 3.6% 6.0% 8.4% 12.0%
Low scalability production
Dependence on local raw materials (rare earth)
Thin and shrinking profit margins
Samsung and Apple are a notable exception
Source: Thomson One Banker, company disclosure, MSCI ESG Research
Source: Thomson One Banker, company disclosure, MSCI ESG Research
9©2014 MSCI Inc. All rights reserved. msci.com 9
Labor Cost Health & Safety Energy Cost
Apparel & Textiles: Bangladesh is not the only country at risk
CountryTextile exports, USD bln
Industrial employment
Monthly wage, USD
Injury rate,per 100,000 employees
Bangladesh 16.4 15.0% 881 366
Cambodia 4.6 16.9% 80 202
El Salvador 2.2 21.5% 1862 36073
India 12.9 22.4% 1022 325
Pakistan 12.5 20.0% 92 207
Vietnam 16.0 21.3% 722 46273
Notes:1 Bangladesh monthly wage shown with a 30% increase adjustment announced in 20132 Average monthly wage for country, due to regional or sector variations.3 Injury rates include public sector and family businesses.
Sources: International Labour Organization, the United Nations Statistics Division, The World Bank, Ministry of Labour and Vocational Training of Cambodia, Bangladesh Bureau of Statistics, Pakistan Bureau of Statistics, General Statistics Office ofVietnam
10©2014 MSCI Inc. All rights reserved. msci.com 10
Labor Cost Health & Safety Energy Cost• The largest portion of product carbon footprint is attributed to energy and fuel use in
raw materials production and finished goods manufacturing
Source: IERS' Comprehensive Environmental Data Archive (CEDA) data, MSCI ESG Research
Raw Materials TransportationManufacturing Trade and Administration
Cheese Pasta, cookies Footwear2528 CO2e/USD 1 mln 1058 CO2e/USD 1 mln 846 CO2e/USD 1 mln
Soap Apparel Computers
810 CO2e/USD 1 mln 566 CO2e/USD 1 mln 284 CO2e/USD 1 mln
11©2014 MSCI Inc. All rights reserved. msci.com 11
Labor Cost Health & Safety Energy CostApparel and Footwear will likely be most affected by energy price increase
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Diversified Discretionary Goods
Footwear
Apparel
Luxury
Food Products & Food Retail
Household Products
Trade and warehousing Transportation
Components and goods manufacturing Raw materials production
Cost Increase as a % of Revenue
Cost Increase as a % of Net Profit
Food Retail 0.64% 20.08%
Electronics 0.46% 14.77%
Food Products 0.59% 7.48%
Apparel 0.46% 7.06%
Footwear 0.47% 6.92%
Luxury Goods 0.35% 2.57%
Harder to push on consumers due to discretionary nature and competition based on price
Source: MSCI ESG Research, Thomson Financials, IERS' Comprehensive Environmental Data Archive (CEDA) data, company disclosure
Percent of companies monitoring energy use and emissions in supply chain:
If energy price globally goes 10% up…
Have the lowest control over the supply chain
12©2014 MSCI Inc. All rights reserved. msci.com
Let’s take a quiz!
Labor : what industry is most likely to take the largest labor cost?
Apparel
Food Products
Electronics
Health & Safety: what country poses the highest ESG risk for Apparel industry?
Vietnam
Cambodia
Mexico
Energy: what industry would be most affected by energy price increase?
Food Products
Electronics
Apparel
13©2014 MSCI Inc. All rights reserved. msci.com
Reputational Concerns Intensify
Workplace Safety and Raw Materials Production are high on public agenda
Number of Reported Controversies by Type
Source: MSCI Impact Monitor
14©2014 MSCI Inc. All rights reserved. msci.com 14msci.com
Top Commodities in Focus
Jaclyn Daitchman
15©2014 MSCI Inc. All rights reserved. msci.com 15msci.com
Soy
PalmOil
Cocoa
Photo source: MIXA, via WebMD
16©2014 MSCI Inc. All rights reserved. msci.com 16msci.com
Stearic Acid Sodium Lauryl Sulfate Glyceryl Stearate
Cetyl palmitate Octyl palmitate
Palmitoyl Tetrapeptide-3
17©2014 MSCI Inc. All rights reserved. msci.com 17msci.com
Source: MSCI ESG Research
Palm Oil Dependency
Revenue from products that may contain palm oil
Revenue from all other products
84%
Household & Personal Products
36%
Food & Beverage
30%
Restaurants
9%
Retailing
18©2014 MSCI Inc. All rights reserved. msci.com
Sources: RSPO Annual Communication on Progress 2012-2013, company disclosure
Responsible Sourcing Commitments
Company CountryVolume of palm
oil used (t) Less Stringent
(incl. GreenPalm)More Stringent
(excl. GreenPalm)
Year Year
Unilever NL 1,523,605 2012 2020
Procter & Gamble US 462,000 2015 -
PepsiCo US 457,200 2015 2020
Nestle CH 410,000 2013 -
Mondelez US 285,732 2015 -
Colgate-Palmolive US 109,259 2020 2020
Reckitt Benckiser GB 106,895 2015 2020
McDonald's US 103,336 2020 -
Kao JP 95,356 2015 2020
Johnson & Johnson US 77,800 2010 2015
Henkel DE 71,608 2015 2017
Wal-Mart US 71,463 2015 2015
L'Oreal FR 61,850 2010 2010
General Mills US 56,041 2015 2015
Kellogg US 50,000 2011 2015
Tesco GB 33,811 2012 2015
Danone FR 30,300 2011 2015
Beiersdorf Aktiengesellschaft DE 25,301 2013 2020
Associated British Foods GB 20,550 2015 -
Hershey US 20,282 2014 2014
19©2014 MSCI Inc. All rights reserved. msci.com
Responsible Sourcing Progress
Unilever NL 1,523,605
Procter & Gamble US 462,000
PepsiCo US 457,200
Nestle CH 410,000
Mondelez US 285,732
Colgate-Palmolive US 109,259
Reckitt Benckiser GB 106,895
McDonald's US 103,336
Kao JP 95,356
Johnson & Johnson US 77,800
Henkel DE 71,608
Wal-Mart US 71,463
L'Oreal FR 61,850
General Mills US 56,041
Kellogg US 50,000
Tesco GB 33,811
Danone FR 30,300
Beiersdorf Aktiengesellschaft DE 25,301
Associated British Foods GB 20,550
Hershey US 20,282
Company CountryVolume of palm oil used (t)
0 100000 200000 300000 400000 5000001,470,000
Sources: RSPO Annual Communication on Progress 2012-2013, company disclosure
No certification Mass BalanceBook & Claim (Green Palm) Segregated or Identity Preserved
20©2014 MSCI Inc. All rights reserved. msci.com
53%38%
9%
47%
27%
17%
9%
Less stringent committment: More Stringent
SELECTED COMPANY HIGHLIGHTS
No time-bound commitment Campbell, Clorox, Costco, Yum!
Brands
McDonald's, Mondelez,
Nestle, Procter & Gamble
Unlikely to achieve certifcation
by target year
On track to achieve certification
by target year
Colgate-Palmolive, McDonald's,
PepsiCo, Procter & Gamble, Wal-
Mart
Johnson & Johnson,
PepsiCo, Unilever
Heinz, Kellogg, Metro,
Sainsbury
-
Heinz, Nestle, Metro, Sainsbury
Have already achieved
certification
Johnson & Johnson, Kellogg, L'Oreal,
Marks & Spencer, Tesco, Unilever
Less Stringent Commitment (incl. GreenPalm) by 2015
More Stringent Commitment (excl. GreenPalm) by 2020
Source: RSPO Annual Communication on Progress 2012-2013, WWF “Palm Oil Buyers Scorecard” (2013), company disclosure , MSCI ESG Research
Responsible Sourcing Progress
21©2014 MSCI Inc. All rights reserved. msci.com
Perceived constraints to meeting commitments
Many companies claim that their limited use of certified product is triggered by the lack of availability of certified sustainably produced palm oil and high premiums charged for certified palm oil.
83%
8%
3%
2%
4%
non-certified
certified, but not purchased
purchased by Unilever
purchased by the next 9 top buyers
purchased by rest of the world
Cost, USD % of
Revenue Cost, USD
% of
Revenue
Unilever (NL) 9,141,630 0.014% 309,291,815 0.457%
Procter & Gamble (US) 2,772,000 0.003% 93,786,000 0.118%
PepsiCo (US) 2,743,200 0.004% 92,811,600 0.140%
Nestle (CH) 2,460,000 0.003% 83,230,000 0.086%
Mondelez (US) 1,714,392 0.005% 58,003,596 0.161%
Colgate-Palmolive (US) 655,554 0.004% 22,179,577 0.135%
Reckitt Benckiser (GB) 641,370 0.004% 21,699,685 0.150%
McDonald's (US) 620,016 0.002% 20,977,208 0.076%
Kao (JP) 572,136 0.004% 19,357,268 0.139%
Johnson & Johnson (US) 466,800 0.001% 15,793,400 0.023%
Scenario 1
Less Stringent
(GreenPalm)
Scenario 2
More Stringent
(Segregated)
Supply exceeds demand Compliance cost is low
Source: RSPO Annual Communication on Progress 2012-2013, company disclosure , MSCI ESG Research
22©2014 MSCI Inc. All rights reserved. msci.com
0.00%
0.08%
0.16%
0.24%
0.32%
0.40%
0.48%
-
25,000
50,000
75,000
100,000
125,000
150,000
Un
ileve
r (N
L)
Mo
nd
ele
z (U
S)
Re
chit
t B
en
ckis
er (
GB
)
Pe
psi
Co
(U
S)
Kao
(JP
)
Co
lgat
e-P
alm
oliv
e (
US)
Pro
cte
r &
Gam
ble
(U
S)
Ge
ne
ral M
ills
(US)
Ne
stle
(C
H)
Co
nA
gra
* (U
S)
McD
on
ald
's (
US)
Yu
m!
Bra
nd
s (U
S)
He
nke
l (D
E)
Ke
llogg
(U
S)
Gru
po
Bim
bo
(M
X)
Be
iers
do
rf (
DE)
Ori
flam
e (
BE)
He
rsh
ey
(US)
L'O
real
(FR
)
Ork
la**
(N
O)
Tin
gyi (
CN
)
Avo
n (
US)
Dan
on
e (
FR)
AB
F (G
B)
Joh
nso
n &
Jo
hn
son
(U
S)
Shis
eid
o (
JP)
Ke
rry
(IE)
Este
e L
aud
er
(US)
Lin
dt
& S
pru
en
gli (
CH
)
Cam
pb
el (
US)
He
inz
(US)
Dar
de
n (
US)
L B
ran
ds
(US)
Sain
sbu
ry (
GB
)
Tesc
o (
GB
)
Du
nki
n B
ran
ds
(US)
Nis
sin
Fo
od
s (J
P)
WM
Mo
rris
on
(G
B)
MEI
JI (
JP)
Ah
old
(N
L)
Aji
no
mo
to (
JP)
Mar
ks &
Sp
ence
r (G
B)
Wh
itb
read
(G
B)
Wal
-Mar
t (U
S)
Ae
on
(JP
)
Sod
exo
(FR
)
Seve
n &
i (J
P)
Wo
olw
ort
hs
(AU
)
We
sfar
me
rs (
AU
)
Nat
ura
Co
sme
tico
s (B
R)
Co
mp
ass
(GB
)
Mas
smar
t (Z
A)
BR
F (B
R)
He
rbal
ife
(KY
)
Wh
ole
Wo
od
s (U
S)
Ch
urc
h &
Dw
igh
t (U
S)
Sho
pri
te (
ZA)
Car
refo
ur
(FR
)
Ke
sko
(FI
)
Clo
rox
(US)
Cas
ino
(FR
)
Cen
cosu
d (
CL)
Met
ro (
DE)
Lob
law
(C
A)
Ge
org
e W
est
on
(C
A)
Safe
way
(U
S)
Kro
ger
(US)
Sup
erv
alu
(U
S)
Co
stco
(U
S)
Targ
et
(US)
Companies that purchase certified palm oil
Cost to revenue (most stringent certification)
422,600
Companies that do not purchase certified palm oil
Cost to revenue, %
Source: RSPO Annual Communication on Progress, company disclosure, media reports, MSCI ESG Research
Brand Visibility vs. Compliance Costs
23©2014 MSCI Inc. All rights reserved. msci.com
1 21
1013
18
14
5
55
0
10
20
30
40
50
60
2005 2006 2007 2008 2009 2010 2011 2012 2013
Total Controversies and Proxies Filed on Palm Oil Issues: 2005-2013
Trends
Source: CERES
24©2014 MSCI Inc. All rights reserved. msci.com
Regulatory costs
-2%
0%
2%
4%
6%
8%
10%
12%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Ind
on
esia
Mal
aysi
a
Thai
lan
d
Co
lom
bia
Nig
eria
Pap
ua
New
Gu
inea
Ecu
ado
r
Ho
nd
ura
s
Ivo
ry C
oas
t
Bra
zil
Co
sta
Ric
a
Cam
ero
on
Gu
atem
ala
DR
C
Gh
ana
Ph
ilip
pin
es
Mex
ico
An
gola
Do
min
ican
Rep
ub
lic
Gu
inea
Ind
ia
Ben
in
Ven
ezu
ela
Per
u
Lib
eria
Res
t o
f th
e w
orl
dA
nn
ual
Pro
du
ctio
n G
row
th (
%)
Pro
du
ctio
n (
'00
0 M
T)
Source: United States Department of Agriculture (2013 preliminary estimate)
Trends
Production in Latin America and Africa
26©2014 MSCI Inc. All rights reserved. msci.com 26msci.com
MSCI ESG Global Client Service
Americas + 1.212.804.5299
Asia Pacific + 612.9033.9339
Europe, Middle East and Africa + 44.207.618.2510
www.msci.com/esg
27©2014 MSCI Inc. All rights reserved. msci.com 27msci.com
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