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1. How businesses are beginning to embrace sustainabilityESG: Beyond the tipping pointBalancing profit with sustainability is easier for some sectors than for others68% Technology56%Industrials/manufacturing58% Energy38% Transport57% Financial services58%56% Consumer goodsAverageBalancing customer demands for sustainability with shareholder profit expectations is holding back progress on both fronts(Percentage of respondents who agree)Sustainability and profitability are not competingpriorities, according to Peter Harris, vice presidentfor international sustainability at global logisticsprovider UPS. “Rather, they are increasingly likely togo hand in hand,” he says. “If you look at the riskswe face as an organization and the opportunitiesthat we have, it is commercial common sense for usto strongly pursue ESG, or sustainability.”Investors will be aware of the potential disruptionfrom the energy transition and social justicemovements. Business leaders who worry todayabout shareholders’ expectations may soon facedifficult questions about ESG failures.“We have seen the conversation shift significantly,and the focus is no longer purely on shareholdervalue, but also the broader stakeholder value,”says David Crofts, executive director, enterprise riskmanagement at Mubadala Investment Company.“We are seeing an increased interest from manyof the organizations we work and engage with,including the World Economic Forum. They arelooking to long-term, institutional investors,including funds like Mubadala, to have a robustapproach to understanding and managing themost material ESG topics as we deploy capital andmanage our investments.”12

ESG: Beyond the tipping point2. ESG takes center stage2.ESG TAKESCENTER STAGE13

ESG: Beyond the tipping point2. ESG takes center stage14

2. ESG takes center stageESG: Beyond the tipping pointThe COVID-19 pandemic has reminded businesses ofsociety’s fragility and their exposure to its disruption –particularly in an interconnected global marketplace.In our research, 85 percent of respondents say thatthe crisis is a wake-up call for business leaders: it hasshown that they need to make big changes to theiroperating models and ensure long-term sustainability.Higher ESG ratings require better supply chainmanagement and governance of employee practices.The organizations that perform less well in theseareas have been more exposed to the crisis.The pandemic is giving businesses a new perspective on ESG and resiliencestrongly disagree2%2%somewhat disagree11%strongly agree42%neutral43% somewhat agreeThe pandemic is the wake-up call that business leaders need to make large changesto their operating models and ensure long-term sustainability15

2. ESG takes center stageESG: Beyond the tipping pointMore than six in 10 respondents (63 percent) saythat ESG principles or strategies have become moreof a priority for their business since the outbreak ofthe pandemic. Only 18 percent of respondents inEurope say ESG principles have become much moreof a priority, possibly due to a high existing standard.However, other regions are keen to catch up.ESG has risen in importance less dramaticallyin Europe than elsewhereMuch more of a priorityA little more of a priorityAPAC40%34%Middle East & Africa40%24%Different sectors have also reacted differentlyto the pandemic. In the logistics sector, forexample, companies experienced new risks,such as transportation bottlenecks, as well asnew opportunities from the massive spike ine-commerce. For some firms, it has led to a newfocus on sustainability.This learning process is feeding into businesses’increased emphasis on ESG: 54 percent ofbusinesses say that during the crisis theydiscovered that improving social and governancestandards enabled them to make more of adifference than they had previously realized. That isparticularly true in the Asia-Pacific region, where 74percent saw a larger than expected impact of theirhigher social and governance standards – muchhigher than elsewhere.“We need companies to be doing their part toimpact sustainability, addressing the environmentaland social challenges of our lifetimes,” says GayleSchueller, vice president and chief sustainabilityofficer at 3M. “We expect countries to do that andwe expect individuals and NGOs to do that, butcompanies have a unique ability to do that – boththrough their products and their own footprints.”North America27%32%Europe18%35%Average32%31%Since the outbreak of the pandemic, would you say thatESG principles or ESG strategies have become more or lessof a priority for your business?(Percentage of respondents who agree)16

2. ESG takes center stageESG: Beyond the tipping pointMany companies were surprised bythe immediate impact of improvingESG standards54%49%47%We realized that we couldmake a more immediatedifference than we thoughtby improving social andgovernance standards, and arebuilding on the momentumWe expect ESG to become abigger consideration forinvestors in the wake of thepandemic, and we need tomeet inclusion criteriaSince the pandemic startedour customers have beenmore interested in ESG, andwe are responding to demandINVESTORS SHIFT TO ASTRONGER POSITIONDespite the shift of accountability to a broaderstakeholder group, shareholders are a driving forcefor ESG across sectors and regions. Nearly half ofall respondents (49 percent) say they are prioritizingESG because it is important to investors.This reflects the fact that investors are now seekingout businesses with solid ESG credentials; 78percent of respondents say that their own fundmanagers are more likely to invest in assets thatemphasize ESG factors now, compared with 12months ago.Fund managers are pivoting toward ESGNorth America84%47%We are taking steps toimprove our resilience, andESG performance is a criticalpart of thisMiddle East & Africa80%APAC41%Since the pandemic startedthere has been morepressure from employeesfor sustainability80%Europe68%33%We have seen financialbenefits from our existingESG strategiesYou said that ESG has become more of a priority for yourbusiness since the outbreak of the pandemic. Why is that?Average78%Our fund manager(s) is/are more likely to invest in assets thatemphasize ESG factors than they were 12 months ago(Percentage of respondents who agree)17

2. ESG takes center stageESG: Beyond the tipping pointEnergy company fund managers are keen to have ESG exposure90% Energy71% Transport82%Industrials/manufacturing67% Consumer goods81% Technology78%75% Financial servicesAverageOur fund manager(s) is/are more likely to invest in assets that emphasize ESG factors than they were 12 months ago(Percentage of respondents who agree)So even if businesses themselves do not see thepandemic as an ESG tipping point, they do acceptthat investors feel this way.The pandemic might have been a wake-up call formany, but the foundations of ESG have long been inthe making, and some businesses will find the pivoteasier than others.Derek Rozycki, head of responsible investing atMubadala Investment Company, says the sovereignwealth fund has always incorporated considerationof ESG metrics into its transactions on a deal-by-dealbasis. “But now, there is a growing body of evidencethat shows that by focusing on the right aspects ofresponsible investment and ESG initiatives you cansignificantly accelerate returns and value creationover time,” he says.18

ESG: Beyond the tipping point3. From challenge to opportunity: ESG payback3.FROM CHALLENGETO OPPORTUNITY:ESG PAYBACK19

3. From challenge to opportunity: ESG paybackESG: Beyond the tipping point“When you innovate, you find that the risks startto turn themselves into opportunities,” says PeterHarris, vice president for international sustainabilityat UPS. “You can enhance the brand, connectwith customers who are looking for future-mindedsolution providers, connect with investors andconnect with employees. All those opportunities payyou back commercially.”Like UPS, many businesses are looking forward to arange of benefits from investment in sustainability.“The way you can get out of hopeless inevitability isby doing, building and creating,” says Josh Giegel,co-founder and CEO at Virgin Hyperloop, whichis developing high-speed transport technologyoffering zero-direct-emissions travel.“With the hyperloop, we want to enable a 21stcentury lifestyle with 21st-century responsibilitiesfor protecting the environment with 21st-centurytechnology,” he adds. “That really resonates with alot of people.”COMPANIES PREDICTRAPID RESULTSMany businesses anticipate that the pay-offs fromstrengthening ESG aspects in their organization,or in the case of financial services companiesincorporating ESG data into their decision-making,will accrue quickly. In our research, 65 percent ofrespondents expect to realize the financial benefitsof ESG investment within the next two years,including 35 percent who expect it within the next12 months.ESG benefits are expected sooner ratherthan laterIn more than 5 years8%In 3–5 years19%In 1–2 years30%Within 12 months35%Not expecting any financial benefits4%Don't know/not applicable3%When does your company expect the financial benefits frominvesting in ESG principles to materialize?20

ESG: Beyond the tipping pointThey have good reason to expect to win big.In his 2021 letter to CEOs, Larry Fink says that“companies with better ESG profiles are performingbetter than their peers,” and are enjoying a“sustainability premium.”“During 2020, 81 percent of a globallyrepresentative selection of sustainable indexesoutperformed their parent benchmarks,” says Fink.“This outperformance was even more pronouncedduring the first-quarter downturn, another instanceof sustainable funds’ resilience that we have seen inprior downturns.”But in addition to financial gains, many businessesare also seeing non-financial benefits: 26 percentof respondents to our research say they areexperiencing enhanced operational efficiency,and 21 percent say they have benefitted from animproved public image and better media coverage.3. From challenge to opportunity: ESG paybackIncreased emphasis on sustainability/ESG hasled to wide-ranging non-financial benefitsEnhanced operational efficiency26%Greater efficiency and cost-control26%More favorable public image/media coverage21%Improved customer retention20%New client base19%Which of the following outcomes, if any, has your organizationachieved as a by-product of its efforts to become moresustainable or embed ESG in its portfolio? (Top 5)21

3. From challenge to opportunity: ESG paybackESG: Beyond the tipping pointSome sectors are doing even better. About athird of consumer goods companies (34 percent)say that ESG investment has enhanced theiroperational efficiency; 40 percent of respondentsfrom industrial companies say their cost-controlis in better shape; and 35 percent of respondentsin the financial services sector say it has improvedcustomer retention.Gains vary by sectorConsumer 21%16%18%25%EnhancedoperationalefficiencyGreater efficiencyand cost-controlMore favorablepublic image/mediacoverageImprovedcustomerretentionNew client baseWhich of the following outcomes, if any, has your organization achieved as a by-product of its efforts to become moresustainable or embed ESG in its portfolio? (Top 5)22

3. From challenge to opportunity: ESG paybackESG: Beyond the tipping pointSustainability opens up a new client base for companies in the Middle East & AfricaAPACEuropeMiddle East & AfricaNorth ter efficiencyand cost-controlMore favorablepublic image/mediacoverageImprovedcustomerretentionNew client baseWhich of the following outcomes, if any, has your organization achieved as a by-product of its efforts to become moresustainable or embed ESG in its portfolio? (Top 5)23

3. From challenge to opportunity: ESG paybackESG: Beyond the tipping pointSOME CHALLENGES LINGERIf the benefits are so clear cut, what is holding somebusinesses back?In the research, the biggest problem is sustainablesourcing: 24 percent of respondents worry abouthow to invest in sustainability while maintaining lowprices for natural resources; in Asia-Pacific, the figurerises to 29 percent.Unilever is working with the likes of WWF to createa level playing field for responsibly sourcing naturalresources such as palm oil. “When Unilever wassetting up sustainable sourcing for palm oil, werealized that if we brought others on board and didit at an industry level in a pre-competitive way, thereis an opportunity to create a sustainable supplychain at scale,” says Rebecca Marmot, the firm’schief sustainability officer.Even sustainability’s first movers need to work tokeep up, says Siemens Energy’s managing directorfor the Middle East and UAE, Dietmar Siersdorfer.Siemens Energy has committed to becoming acarbon-neutral company by 2030 and to switchingto electricity from renewable energy by 2023.“But everyone starts at a different point, andeveryone is at a different stage in the journey,” hesays. “Companies will move at different speeds indifferent sectors – as well as in the different regionsin which they operate.“We are always striving to reduce greenhouse gaseseverywhere, but the question is where to start,” headds. “Iraq, for example, has a high need for energy,but installing solar and more wind farms will notsolve the problem. They first need to use existingtechnology because they already have the relevantequipment, and then migrate over to renewablesover time.”Pressure to pay low prices for natural resources to remain competitive undermineslong-term sustainability and environmental goalsMarket pressure to maintain low costs for natural resources24%Uncertain business landscape due to pandemic22%Establishing a business case for enhancing sustainability20%Market pressure to maintain low costs for labor19%Poor-quality environmental data and reporting18%What are the biggest challenges your organization faces in its efforts to become more sustainable or embed ESGin its portfolio? (Top 5)24

3. From challenge to opportunity: ESG paybackESG: Beyond the tipping pointREPORTING BECOMES ESSENTIALMany businesses may not yet generate gooddata on their return on ESG investment, whichcreates problems for budgeting and the businesscase. In our research, 79 percent of businessessay they need to get better at reporting on theeffectiveness of their investments in ESG and thereturns they are generating.BlackRock also urges standardization. “Weappreciate that disclosure can be cumbersome andthat the variety of reporting frameworks createsfurther complexity for companies,” says Larry Finkin his CEO letter. “We strongly support moving toa single global standard, which will enable investorsto make more informed decisions about how toachieve durable long-term returns.”“If we were able to know that we had all the rightdata, and it was being all rolled up in the right way,and that every company was comparing apples toapples, then we could just focus on improvementand making things better,” says Gayle Schueller,vice president and chief sustainability officer at 3M.“Then we could just focus on improvement andmaking things better.”Businesses need to set clear targets and monitorperformance against them, but many are notcollecting the ESG data they need and struggle togenerate insight from what they do have. To builda business case for strengthening ESG, leadingorganizations will start pushing for and developingnew reporting standards – and will invest in dataanalytics in order to turn insights into action.Increased emphasis on sustainability/ESG has led to wide-ranging non-financial benefits2% don't know/not applicablestrongly disagree1%3% somewhat disagree14% neutralstrongly agree39%40% somewhat agreeWe need to get much better at reporting on the effectiveness and ROI of our investments in ESG practices25

ESG: Beyond the tipping point4. Purpose matters to your people4.PURPOSE MATTERSTO YOUR PEOPLE26

ESG: Beyond the tipping point4. Purpose matters to your people27

4. Purpose matters to your peopleESG: Beyond the tipping point“When it comes to attracting young talent, theywant to work for organizations that share their valuesand their enthusiasm,” says Derek Rozycki, headof responsible investing at Mubadala InvestmentCompany. “And they see us contributing to impactingsome of these significant challenges we face.”Businesses cannot overlook the growing role ofsustainability in the battle to recruit and retain highquality talent at all levels of the company. The extentto which they embrace ESG is becoming a crucialfactor in whether people want to work for them –even more than remuneration policies for some.“People want to work for a company that iscommitted to creating a positive impact on theworld,” says Dietmar Siersdorfer, Middle East andUAE managing director at Siemens Energy. “Andit is not only the younger generation. So this haschanged the job market. People do not want to beassociated with companies that create a negativeimpact on climate.”In our research, 72 percent of respondents saythey would be more likely to apply for a job at acompany with strong ESG credentials. Significantly,80 percent of C-suite leaders say that a business’sESG credentials would influence their willingness towork for it. Business leaders no longer want to runorganizations that are not committed to sustainability.In the North American job market, strongESG credentials are a big pullNorth America81%Middle East & Africa75%APAC67%Europe67%Average72%I would be more likely to apply for a job at a company ifit had strong ESG credentials (Percentage of respondentswho agree)Leadership candidates take note ofbusinesses’ ESG credentials80% C-suite66% General roles72% AverageI would be more likely to apply for a job at a company if it hadstrong ESG credentials (Percentage of respondents who agree)28

4. Purpose matters to your peopleESG: Beyond the tipping pointThe vast majority of respondents in the energy sector are drawn to companieswith strong ESG credentials88% Energy75% Financial services69% Technology67% Consumer g

ESG: eyond the tipping point Contents CONTENTS Page 3 Page 4 Page 7 Page 8 Page 13 Page 19 Page 26 Page 32 Page 33 Page 34 How businesses are beginning to embrace sustainability 2. ESG takes center stage From challenge to opportunity: 3. ESG payback Purpose matters to your people Foreword Introduction Infographic Conclusion Acknowledgments .