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Venice, October 28, 2011

Paolo NazzaroHead of Group Sustainability - Telecom Italia

Valuing non financial performanceIdentifying, measuring and managing material drivers of

value

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Reporting

Gap

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►

Non-financial performance is regarded as important by both senior executives and investors

►

Companies are slow to integrate non-financial performance measurements in the mainstream business strategy internally and to communicate these externally

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Investors are slow to incorporate non-financial indicators into valuation models

►

ESG factors are a key driver of non-financial performance

Central

proposition

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Companies

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Perceived lack of expertise in NFP issues and reticence to discuss unless intrinsic to core business strategy

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Concern over the robustness of NFP management information and internal methodologies for delivering it

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Lack of confidence in ability to manage NFP to deliver forecast numbers

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Scepticism at investors’

interest in NFP

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Worries about impact on personal credibility of promoting non-core financial messages

What

causes

this

information asymmetry?

(1/2)

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Investors

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Inadequate evidence of causal link between NFP and financial performance

►

Lack of robust inter-company or sectoral

frameworks for NFP comparison

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Interest often limited to assessment of NFP directly impacting on strategy or leadership competence

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Protection of proprietary analytical tools/approaches and market differentiation creating lack of transparency in NFP assessment

methodologies

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The relative importance of NFP issues differing between risk and regulatory environments

What

causes

this

information asymmetry?

(2/2)

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►

Business leadership from Lloyds Banking Group and Telecom Italia

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Parallel research programme: EABIS through its corporate founding partners, Doughty Centre for Corporate Responsibility at the Cranfield

School of Management (UK), Bocconi

(Italy), Vlerick

Leuven Gent (Belgium)

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Key partnership with EFFAS (ESG Commission) and DVFA

►

Moderation

from

CSR Europe

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5 focus groups (Rome, Frankfurt, Paris, Stockholm, Utrecht) with

the participation of investors, businesses, consultants, representatives from institutions, academia and stakeholders

The LAB structure

and the focus groups

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A comprehensive review of the critical areas of non-financial performance and their contribution to financial performance

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A framework for proposed metrics and strategies for management and communication of key areas of non-financial performance highlighting the link with financial performance

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A declaration of principles and recommendations addressed to different stakeholders (companies, investors, EU institutions, business schools, trade bodies)

Outputs

phase

1 of

the LAB

GRUPPO TELECOM ITALIA

20 dicembre 2010

TELECOM ITALIA TELECOM ITALIA -- CONFIDENZIALECONFIDENZIALE

ER – Branding, Corporate Identity e RicercheUso Confidenziale

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Recommendations

– Investors

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The Collaborative Venture

ProjectDELPHI

CollaborativeVenture led by:

Telecom Italia, Solvay,Lloyds

Banking Group, KKR

Companies’Assessment

and bestpractice

sharing

Identificationof

superfactors

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Project Delphi

Work Stream

Initial

“Straw-Man”

hypothesis

of

superfactors

Validation

from

financial

analysts

(EFFAS)and asset

managers

Validation

from

large

asset

owners

Final

list

of

superfactors

Structure

SPONSOR

STEERING COMMITTEE

PROJECT MANAGER

WORKSTREAM LEADERS

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CSR Europe and EABIS have developed a framework as an instrument to explore member’s experiences while measuring their non-financial performance, with the objective to identify their progress and thus their maturity. This framework is based on the outputs from the first phase of the Laboratory on Market Valuation of Non-Financial Performance

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Learning

process

and best practices sharing

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Both primary (companies’

self assessment + direct conversation with CSR Europe and EABIS’

representatives) and secondary (desk research

completed throughout the enterprises disclosed attitudes) data examination.

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Measurement is based on a scoring system that is attributed to each aspect where the companies are being scanned

Companies’ assessment

and best practices

sharing

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Non-financial drivers and key metrics

Non-financial

drivers Key metrics

Human Capital Employee

engagement

Customer

Relations

Society

Environment

Customer

Satisfaction

Public perceptionSupply

chain

mgmt.

Carbon

emissions

Waste

mgmt.

Energy efficiency

Innovation

Corporate Governance

New product

& process

develop.

Ethical

integrity

Processes

& procedures

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A desired flightpath?