Environmental, Social and Governance (ESG) Consulting
Consulting services and advice to help you manage Environmental, Social and Governance (ESG) considerations, risks and opportunities.
ESG & value-creation: How Starbucks fortified its supply chain to beat the market
Exploring Starbucks' “Shared Planet Initiative”.
Tunde Agoro
Ask people what they understand by ‘ESG’ and answers may range from “marketing slogan” to “risk management tool”. But Environmental, Social and Governance (ESG) is far more than that. And to tackle this misconception we need better visibility of real-world examples. Case studies can help to bridge the gap between theory and practice; demonstrating the role ESG can play as a driver of value creation.
Making this link is crucial. Without this, sustainability will remain largely invisible to the markets; under-priced and undervalued.
So how do we translate environmental and social impacts into financial price signals that investors can recognise and respond to? The story of Starbucks* emerging from the global financial crisis perfectly illustrates the positive link between ESG factors and investment performance.
The Starbucks ESG story
Over the 2008 calendar year Starbucks’ shares lost 50% of their value as the firm reeled from the effects of the 2007–08 financial crisis1. Firms in every sector of the economy faced similar struggles – including other similarly sized large-caps like McDonald’s which operate food and drink outlets across the globe. In October of 2008, in the midst of this turmoil, the newly returned CEO, Howard Schultz, unveiled a global sustainability drive at the firm2.
Many analysts were perplexed at why Schultz would prioritise a sustainability agenda at a time when sales were slowing for the first time in its history. Nevertheless, Schultz pushed forward a 13-point Shared Planet Initiative which set out an array of ESG-related objectives3 (although the ESG label was not in common use at that time):
- Double procurement of fair-trade certified coffee from 6% to 12% within a year
- Target 100% ethically sourced and responsibly grown coffee by 2015
- Provide its 400,000 small-holder coffee farmers in 30 countries with access to financial support and extended contract terms.
- Incentivise farmers to drive biodiversity and habitat preservation specific reforms
- Reduce emissions and improve resource efficiency in all new stores through independent Leadership in Energy and Environmental Design (LEED) certification
Today, Starbucks has achieved or exceeded all of these aims, and has set new more ambitious targets going forward.
But what about the impact on value-creation? What about competitive advantage and investment return versus its corporate peers? On the face of it, investment in supply-chain reform, biodiversity, and real-estate certification is expensive – so how does this translate to performance?
Driving value-creation
Over 10 years (counting from 01 October 2008 to 01 October 2018), Starbucks invested around $70million in its sustainability programmes and not only recovered from the financial crisis, but recovered significantly faster and outperformed comparably sized peers on a risk-adjusted basis. Starbucks saw a 134% improvement in its share price over the 2009 calendar year and continued to strengthen, surpassing its historic 2006 peak by the end of 20114.
KPMG noted that from the end of 2008 through to 30 November 2016 Starbucks’ stock significantly outperformed the S&P 500 stock index5. In Starbucks’ own words this success demonstrated that “sustainability is not just an add-on, but integral [to] our strategy and finances”6.
Taking a wide-angle lens, over the 10-year period from 01 October 2008 to 01 October 2018, Starbucks delivered a 651% improvement in share price from $7.40 to $55.58 (compared to a 162% improvement by McDonalds over the same period).
But whichever way you slice the figures in terms of time horizons, it’s clear Starbucks gained a notable advantage. And for the portfolio managers among you – SBUX’s Sharpe Ratio was also favourable relative to peers, indicating the investment performance was not simply a function of higher risk and volatility.
|
Closing share prices |
SBUX |
MCD |
|
01-Oct-08 |
7.4 |
63.6 |
|
01-Oct-18 |
55.58 |
166.6 |
|
Percentage change |
651% |
162% |
|
See footnote 4 |
|
|
How ESG can drive value-creation
So how did the ESG factors prioritised by Schultz make the leap from environmental and social impact to driving shareholder value and competitive advantage? The answer goes right to the heart of how risks and opportunities are approached through an ESG lens.
By improving contract terms for smallholder farmers, paying fairer prices, and focusing on regenerative agricultural techniques, Starbucks was not just doing environmental and social good. It was (a) making its supply chain more resilient to economic and environmental shocks, and (b) aligning itself with deep changes in consumer sentiment to place higher value on sustainable business – in Schultz’s words “reigniting the emotional attachment with customers.”7
By fortifying its supply chain and getting ahead of the curve on consumer sentiment, Starbucks was – in financial terms – reducing revenue risk relative to other providers. This was the ESG-derived price signal that investors responded to so positively and unambiguously.
As strategic advisors from both a technical and commercial perspective, we translate sustainability factors into investment opportunity; enabling you to create value with confidence. Tailoring our services to corporates, developers, financial institutions and investors, we help our clients ensure their sustainability efforts lead to future growth.
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RPS is currently advising a major corporate, invested in their local economy at multiple levels, to develop an ESG strategy that catalyses value creation; driving low-cost but high-impact improvements in economic resilience and stability; reducing financial risk; and stimulating growth.
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Why RPS?
We turn ESG vision into value. Our ESG Advisory Service is designed to enhance visibility of opportunities as well as risks, whether physical, commercial or financial in nature. Beyond this, we draw on market-leading technical expertise to evaluate the potential for adaptation and innovation across a range of scenarios and cost-parameters. Progress toward your strategic objectives is then benchmarked and reported alongside the latest definitions and disclosure standards.
Sustainability leans on careful, creative, and judicious application of technical insight. At RPS, we combine those insights through a strategic lens – allowing unified delivery of otherwise segregated economic, environmental, and social impacts. Joined-up solutions are part of our ethos: Making complex easy.
*Starbucks is not a client of RPS
1 Macrotrends, https://www.macrotrends.net/stocks/charts/SBUX/starbucks/stock-price-history (accessed 19 April 2022)
2 Starbucks, https://stories.starbucks.com/emea/stories/2020/starbucks-sustainability-timeline/ (accessed 19 April 2022)
3 Starbucks, Global Responsibility Report, 2008, https://content-prod-live.cert.starbucks.com/binary/v2/asset/137-71968.pdf (accessed 19 April 2022)
4 Yahoo Finance, https://uk.finance.yahoo.com/quote/SBUX/history?p=SBUX&guccounter=1 (accessed 19 April 2022) (as measured from: closing share price of $7.40 on 01 Oct 2008 to closing share price of $9.98 on 01 October 2009; the historic peak, prior to 01Oct2008 was its closing share price on 05 May 2006 of $19.815; Starbucks share price first breached its 2006 high of $19.815, at the close of 01 July 2011 with a share price of $20.095)
5 KPMG, ESG, strategy, and the long view, 2017
6 Starbucks Corp, Press release, May 16, 2016, https://stories.starbucks.com/press/2016/starbucks-issues-the-first-u-s-corporate-sustainability-bond/ (accessed 19 April 2022)
7 Business Today, https://www.businesstoday.in/magazine/lbs-case-study/story/how-starbucks-survived-the-financial-meltdown-of-2008-136126-2014-09-22 (accessed 19 April 2022)
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