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O2: An agent for change?

A review of Think Big, O2’s sustainability programme

Thursday 7th June 2012

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With the arrival of “Think Big”, O2 has the hallmarks of a next generation sustainability leader. Thanks to its published material and willingness for open discussion, we are able to examine an ambitious programme with a contemporary shape. Think Big goes beyond direct environmental and social impacts to address the impacts of suppliers, customers and society. It seeks to become an “agent for change”, an unusual level of ambition when compared to most “Corporate Social Responsibility” programmes.

A contemporary shape If M&S’s Plan A was formed in the “Inconvenient Truth” era, Think Big owes much of its shape to a backdrop of rising youth unemployment, growing social unrest and a government that is cutting back on social programmes. Fertile ground for companies with social purpose. Think Big is defined through its three main goals for 2015, where it aims to have:  Helped 1m people develop skills for life and lead community projects across the UK.  Helped 10m people live in easier and more sustainable ways.  Delivered carbon benefits to customers that are 10 times the impact of its network.

O2 has already established its leadership credentials. A number of indicators point to O2 leading its sector on carbon, and anecdotal evidence suggests it is doing more to engage UK youth than any other UK company.

Think Big is strong on upstream and downstream carbon and energy, the “baseload” of sustainability strategies. What makes it different is its ambition to engage communities and develop technologies that could transform the sustainability of society.

But with ambitious targets, a contemporary shape and an engaged CEO, there may be a lot more to come

Our Top 10 picks from Think Big

"Think Big is designed to break through the notion that today's problems are too big to solve. If we think boldly, involve our customers and offer bite-sized solutions to millions of people, together we can make a difference….. The biggest contribution we can make to a sustainable future is as agents of change." Think Big Blueprint, p. 1 & 6.

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Having interviewed O2 employees and stakeholders and reviewed its published documents, we highlight 10 key points that have relevance to companies in a variety of sectors. #1 – Ambition. Both O2 and Forum for the Future, its primary advisor for Think Big, set out to create sustainability targets that “would cause the sustainability team sleepless nights”. They believe this will generate the incentives to find the transformational solutions that are needed. The three goals are drawn up from 40 commitments, covering the different areas of the business. Each commitment is owned by the heads of the major functions, or “Directorates”, who are responsible for meeting them.

The process of drawing up these commitments has parallels with other leaders such as Nissan. Knowing how to reach 50-65% of the targets, the remaining “stretch” will come from yet-to-be discovered innovation in technologies and processes. #2 – Determining “materiality” Successful sustainability programmes tend to have high resonance with major stakeholders, are relevant to the business strategy, and tackle pressing issues for society. O2 put a lot of work into determining its material issues, including:  O2’s history of supporting community initiatives, particularly youth programmes, was popular with staff.  Consumer focus groups found that young people were the social issue of greatest concern.  An extensive stakeholder survey, which asked participants what they expected of a leader, and what was important to them.  Input from a number of advisors, including Forum for the Future, BITC, and ERM.  Cross-referencing its programme with others such as M&S’s Plan A and Unilever’s Sustainable Living Plan. #3 – Speed of build. Forum for the Future told us they are “impressed by O2’s speed – what it has achieved in 3 years equates to what an average partner has achieved in 10 years. It has moved with remarkable speed and confidence, particularly given it has been operating in tough economic conditions”. That speed will give O2 confidence that it can deliver on its goals. #4 – Youth programme. O2’s commitment to youth and community is perhaps the most remarkable and pioneering element of Think Big. Think Big rejects philanthropy in favour of partnering with charities, a carefully-structured funding programme and mentoring. The structure it has created could be used to tackle a variety of social issues, and includes:

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1. Think Big. Any 13-25 year old can apply online for a £300 grant for a community activism idea, paid on a money card with no receipts required. 2. Think Bigger. After passing through the first stage, companies can apply for a further £2,500 and direct help from the charity UK Youth. 3. National campaigns. Successful Think Bigger campaigns have featured in short films in cinemas across the UK.

"What the young leaders appreciate is the trust that O2 shows them. A big company trusting them with £300, with no receipts, means a lot." Fiona Blacke, CEO of the National Youth Agency. O2 has launched over 2,000 Think Big projects, growing from 85 applications per month in early 2010, to an average 120 in the first 5 months of 2012. 6 projects have turned into national campaigns, with over £1m being paid out to young leaders to date.

#5 – Searching for game-changers. O2 recognises that even if it has a significant influence on its own impacts, as well as those of its suppliers and customers, together they have little impact on the sustainability of the economy. Think Big is unusually and deliberately positioned to accelerate game-changing solutions, primarily in two areas that are discussed in Insight 1 on page 4:  Technologies that can make a breakthrough, particularly around ICT.  A high belief in what can be achieved through the power of connectivity. #6 – Aligned with core business. Sustainability strategies that have limited relevance to, or worse still are at odds with, the profitability of the core business are unlikely to work their way into core strategy. Think Big sits well with core strategy in a number of ways:  It uses normal investment processes for sustainability investments, maintaining its reputation as commercially viable.  Many initiatives are income-generating, which aligned sustainability with those primarily concerned with business growth.  O2 sees its Youth programme as having a motivating impact on the organisation, seeing a direct link between happy staff and happy customers.

"We have been struck by the integrity of its approach, which has led to significant progress in a number of areas" Jonathon Porritt, Founder Director & Trustee, Forum for the Future #7 – Supply chain strategy. O2’s annual £3bn supplier spend makes it a small buyer in global markets. However, a combination of putting sustainability considerations in all purchasing decisions, its planned Supplier Forum and particularly its Eco Ratings (see Insight 2 on page

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6) means O2 is starting to impact the Telefónica supply chain. #8 – Integrated energy strategy. O2 hired its first energy specialist 6 years ago, and since then it has integrated energy and carbon thinking into all business areas. Having already found considerable efficiencies with conservative investment hurdles, it is now focused on revenues and energy services arrangements.  Network efficiency: O2 improved the energy intensity of its network by 36% in the 4 years to 2011  Customer efficiency: O2 and its parent Telefónica are developing a number of new services to improve energy efficiency at home and whilst driving.  Renewables: O2 uses 100% renewable energy where has direct control of the energy bill, and is currently evaluating onsite generation in order to its sustainability targets.  Energy security: O2 has a strategy for potential brownouts in 2015, involving backup generation.  Energy services: O2 is currently investigating ESCO / EPC arrangements for paybacks beyond 3 years, which could provide a next level of efficiency whilst sticking to its payback rules. #9 – Responsibilities in all roles. Whilst not everyone agrees that putting sustainability in score cards is the best way to engage an organisation, O2 has done it with conviction. Around 3,800 of the 11,500 workforce are directly engaged in Think Big, but by the end of 2012 all employees will have formal sustainability responsibilities that have up to a 25% weighting in bonus calculations. #10 – Recognition of its leadership. Whilst we expect O2’s leadership to emerge over the next couple years, it is already seeing a validation of its strategy through areas such as:

INSIGHT 1: ICT – THE GAME CHANGER? Think Big is one of the few sustainability strategies that has actively sought to harness and measure system changing technologies in its sustainability strategy. Information and Communications Technology (ICT) is well placed to deliver a more sustainable society. The “Smart 2020” report, published in 2008 by the Climate Group, estimated the growth in ICT emissions up to 2020 would be more than offset by ICT generated reductions, which would be five times greater. O2 has set itself the goal of delivering carbon benefits to customers that are 10 times the impact of its network, thus more ambitious than predictions for the sector. Connect, Collaborate, Change O2 believes ICT can “enable individuals to do things completely differently, harness the ingenuity of the connected millions to create change together and encourage systemic shifts in the way society operates.” Importantly, it sees these solutions as aligned with its core business strategy, particularly as it moves from a focus on voice into wider applications-based solutions. Key areas include:  Dematerialisation: Videoconferencing, e-commerce, hardware, e-Government, e-Health, virtual office, e-billing / paperless and route planning.  Communication: peer to peer, collaborative consumption, video sharing etc. Existing activities O2 already has a number of initiatives that fall into these categories, including:  O2 Health: remote video technology, and “virtual testing”, improving services whilst reducing travel.  O2 Drive: A fleet management tool that increases fleet fuel efficiency by 25%.  Telepresence services – using technology to enable high quality electronic meetings  Comprehensive Flexible Working Solutions Wayra Wayra is a new Telefónica initiative run out of London, an incubator model to support social entrepreneurship. Aimed at digital start-ups, it provides seed funding of up to £50k, office space and mentors. Whilst the projects do not need to be sustainability solutions, O2 expects a significant portion to be engaged in delivering more sustainable business models. The first 16 successful companies were announced in May 2012. Measurability There will be some major challenges around measurability in this area, and it will be interesting to see how O2 monitors its progress against ambitious targets. Not only are there issues over who “owns” the improvements – the customer, the handset manufacturer, O2 etc., but tracking the savings will also be difficult. O2 is currently developing a customer carbon tracker tool, and it may be that it does some valuable work on behalf of a lot of industries.

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1. In 2010, O2 was the first UK mobile operator to achieve the Carbon Trust Standard, which it retained in 2011. 2. It was in the top 5% in the CRC Performance League Table in 2011 and was the top mobile phone operator. 3. The head of the UK National Youth Agency told Green Monday that O2 is probably doing more for youth than any other UK company.

About CEO Ronan Dunne The 9-person sustainability team at O2 attribute a lot of the ambition and speed of development of Think Big to CEO Ronan Dunne. It reflects his personal interest in youth engagement and climate change, but also his belief that sustainability should be a “win-win”.

10 Things to watch We will be following O2 over the next 18 months for signs that it is on track to become an agent for change. With ambitious targets, if it executes its plan it is likely to inspire followers in different sectors and across national boundaries. 1. More C-suite engagement. All O2 Directors are championing sustainability internally, and, for example, its Enterprise and HR Directors have been championing the benefits of flexible working externally. But with many functions in the corporate sector lacking sustainability role models at senior levels – particularly marketing and finance – O2 can influence others by championing sustainability within different professions.

2. Educating the consumer. Nothing would Ronan became CEO of O2 in 2008, having been the CFO since 2001. With CFO’s often characterised as an obstacle to the sustainability programmes, his background is unusual. Ronan explains in an interview on the O2 website that his “Damascus Moment” was at a climate change conference organised by Xerox in 2008, chaired by Jonathon Porritt.

have a greater impact than if O2 finds ways of shifting demand to more sustainable products and services. We’d like to see O2 experiment with different solutions, particularly away from point of sale. M&S’s “Beach Clean Ups” could be an example of how to educate through community-based activities.

There, a representative from Procter & Gamble explained how a pursuit of carbon efficiency had led them to develop Arial 30, a soap that washed at 30 degrees – saving customer’s energy bills whilst being cheaper to manufacture.

3. Measuring the value of sustainability. M&S calculates that Plan A contributed £70m to net profit in 2011. The O2 team believe Think Big is cash generative, but it may inspire its own stakeholders and other companies if it were able to clearly articulate the value created.

Four years later, Ronan has one-on-one meetings with Jonathan Porritt twice a year, where he explains O2’s progress. In doing so, he has created a personal accountability with someone who has a track record of being outspoken on the sustainability of business models.

4. Environmental and Social Profit & Loss accounting. Puma is pioneering EPLs and SPLs, which can help to identify how the cheapest environmental and social impacts can be removed. Companies like O2 can add momentum to this growing movement.

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INSIGHT 2: ECO RATING With the help of Forum for the Future and collaboration with manufacturers, O2 developed its “Eco Rating” to measure the sustainability of each handset it sells, and which it hopes will be fundamental in the development of a global industry standard. Whilst it has not had a major impact in shifting consumer behaviour, it has raised the issue up the agenda at the handset manufacturers and has played a role in driving the recent improvements in handset efficiency. The formula Each handset is given a score from 0.0 to 5.0, reflecting the efficiency of the device in use and the ethical and sustainability performance of its supply chain. The ratings are generated through a 20minute excel-based questionnaire completed by the supplier, with scores weighted as follows: [1] Corporate impacts: 11% [2] Raw materials and manufacturing impacts: 26% [3] Substance impacts: 7.5% [4] Packaging and delivery: 7.5% [5] Use impacts: 19% [6] Disposal impacts: 4% [7] Functionality: 25% Improving scores Since O2 launched Eco Ratings in 2010, the average score has increased from 3.2 to 3.7 out of 5, with most improvement coming from areas such as more efficient packaging, which also reduces the manufacturer’s transport costs. O2 was told by the sustainability team inside one of the biggest global manufacturers that Eco Rating had elevated the importance of their team internally. Apple is O2’s only supplier to decline to complete the survey, and its handsets do not have a rating.

Potential to become an international standard O2 is encouraged by the response it has had from manufacturers and operators, and is confident that its leadership will deliver an international standard within the next 18 months. There is an outstanding question over the owner and manager of the methodology, likely to be one of the global bodies GSMA or ITU. O2 and Forum for the Future’s work in this space may have a major impact on the sustainability of global handsets sold, as well as a template for other sectors.

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5. More progress on ICT. Measuring progress in ICT development will be challenging, but some inspiration can be drawn from the likes of Philips, GE and Siemens. Would it help to have a technology specialist in the sustainability team? 6. Enabling exchange. Can O2 go beyond its existing recycling initiatives and create a peer-to-peer swapping platform, drawing inspiration from M&S’s "shwopping", and the trend of “swishing”? O2 could also use

these events to as an opportunity to educate its customers. 7. Collaboration. O2 has developed its strategy using internal knowledge and advisors, but many of the problems it is solving are common to many companies. Greater cross sector collaboration with other leaders may increase the speed of development. 8. Getting Eco ratings adopted globally. The O2 team are reasonably confident that it will

INSIGHT 3: MEASURING SOCIAL IMPACT With many companies considering how to measure the social impact of their sustainability programme, O2 is doing pioneering work around the measurement of social impact. As we discussed in #4 on page 2, O2 has set itself an ambitious target of impacting 1m young people by 2015, and below we look at how it is going to measure its progress against this target. Calculating impact O2 wanted to apply to social investments the same level of scrutiny that is currently applied to financial investments, and asked Durham University to measure how its existing Think Big projects had impacted young people. Based on a sample of projects, Durham University estimated a typical project impacts 90 young people, which O2 refers to as the “Onion Effect” due to the different layers of influence. The young leader who received the initial £300 funding engages directly with an average 18 people, with a further 72 young people being influenced by the project. An example Toby ran a youth workshop on a council estate in Portsmouth, where a Youth Centre had recently closed down. With £300 he was able to put on street dance workshops, with people attending on a weekly basis and culminating in the group putting on a performance for the town Mayor. In this example the reach was considerably more than 90 people. Extrapolating into the future Using this formula, O2 has projected that 600,000 young people will be impacted though its Youth programme by 2015. Add to this a further 400,000 young people that it expects to be involved in other initiatives such as “O2 Learn” and its work experience programme, and it considers its target of 1m people to be achievable. To put this in perspective, this is roughly the number of “NEET’s” (those Not in Employment, Education or Training) in the UK today. Auditing progress O2 are still working out how it will audit its progress toward the figure, but it is committed to doing so. Its first assessment will be part of the first year review of Think Big in 2012, which is likely to be undertaken by Durham University or another 3rd party. It tracks applications, projects approved and surveys completed on a monthly basis, and should be able to generate robust data. 7 | O2: An agent for change? | Green Monday | June 2012

get Eco Ratings adopted by a global body over the next 18 months, which could inspire similar rating systems for other industries. 9. Energy services solutions. O2’s policy of limiting carbon and energy investments to 3year pay backs or less is robust, but it should be able to find partners who will be willing to fund and operate the longer paybacks. O2 could establish a well-organised and commercially attractive model for others. 10.Monitoring progress. O2 expects to report its progress against its targets after the first 12 months of Think Big, and we hope it will display a high degree of transparency and tangible measurement. If it can demonstrate material benefits and that it is on track to meet its goals, it may again inspire others to follow its lead.

"I recognise the importance of publicly declaring our ambitions and being held to account." Ronan Dunne, CEO of O2, in Think Big Blueprint.

Conclusion If O2 meets its 2015 goals, will it be a global sustainability leader? Very likely. In the process, would it build a more successful business and inspire other companies in a variety of sectors and countries to follow suit? There is a high probability of both happening. O2 has got itself into a rare position. It could become a poster child for what Richard Branson and other business leaders are calling a future where “doing good” is equated with “doing well”. And with sustainability being an arena that is longer on rhetoric than action, companies such as O2 that are changing their business models

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should be applauded. And it may well be that the longest applause will come, over time, from its shareholder Telefónica.

About Green Monday Green Monday exists to evolve sustainable business models. Based in Chancery Lane, London, we do this through a series of events, benchmark surveys and case studies. . This report is written by Jim Woods, Director of Content at Green Monday. [email protected] +44 (0)20 7160 9851 |www.greenmondays.com

INSIGHT 4: ENGAGING CUSTOMERS ON THE SUSTAINABILITY JOURNEY O2 believes it can make its biggest contribution to a sustainable society by helping its customers to make more sustainable choices, which takes it into what many regard as the next big frontier in sustainability strategies – engaging the consumer. Many leading consumer-facing companies are ahead of their customers on the issue of sustainability, and recognise that to deliver real change they need to educate their customers. It is a complex area, with some consumers being unresponsive to sustainability information and others responding negatively. Sustainability has limited impact on purchasing decisions O2 recognises that it will not meet its ambition by relying on its consumers making ethical purchasing decisions. Its own consumer research found that sustainability credentials have a strong influence on purchasing decisions for 11.5% consumers of mobile devices. And of the 15% of its customers that are aware of its Eco Rating tool, 26% are willing to factor it into purchasing decision – many consumerfacing businesses will sympathise with these numbers. Trying to remove the phone charger Mobile phone chargers are a good illustration. O2 has been working with manufacturers to standardise the micro USB connector, and today 90% of their phones sold have this connection. This allows for phones to be sold without chargers, saving on waste, with O2 aiming to stop selling chargers with handsets by 2015. However, its recent market research suggested that people like to have spare chargers, and may sense a loss of value – will O2 risk upsetting its customers on this? Engaging through an array of different services O2’s current strategy is to engage its customers through a variety of services that have sustainability benefits but which are not being sold on a sustainability basis, i.e. looking for technological innovation rather than a sense of higher purpose from the consumer. It sees these as win-win’s, where O2 can generate new revenues whilst at the same time reducing customer impacts and raising awareness of key issues such as energy and carbon. Examples include:  O2 Recycle, a phone recycling programme. Working with partner Redeem to reuse or recycle used handsets, this is now the 3rd largest handset recycling scheme in the UK.  Drive Connect. By putting SIM cards in vehicles allows for a 25% energy efficiency improvement through route planning, improved driving standards and traffic avoidance. As part of this initiative, O2 has also committed to help put in place 10,000 EV charging points by 2015.  Home Energy, with parent Telefónica, O2 is investing smart meter services for homes with its “My Energy” service being launched later in 2012 which will allow customers to turn off all their electrical appliances remotely. Trials by parent company Telefónica have reduced the cost of running a washing machine by 56%, and an overall reduction in energy bills of 25%.  Side by Side, a national “telehealth” service, which enables specialists to advise in operations remotely and stores records electronically. O2 believe this will have saved the NHS 1m hours, £50m and 100,000 tonnes of CO2 by 2015. O2 recognises it will also need to engage customers on sustainability issues, but not at the point of payment. It expects to be considering initiatives that combine community-based activities with learning – we look forward to seeing how these initiatives develop.

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