The Goldman Sachs Group, Inc. (CSCO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Cisco Systems ESG Update Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Rod Hall. Sir, the floor is yours.

Yes, thank you. Good morning, everyone. Thanks for joining us this morning. We have a very interesting call today on Cisco's Environmental Sustainability and just overall sustainability efforts, and we have a distinguished group of people here to speak. So from Cisco, we have Katherine Toch, who's the Director of People and Communities at Cisco; and we also have Darrel Stickler, who's the lead for Global Environmental Sustainability. So a couple of great people from Cisco. And then also from Goldman Sachs, we have Derek Bingham, who is the Head of our Americas GS Sustain research effort; and we've also got Evan Tylenda, who's the Head of our EMEA effort for GS Sustain. So some good sustainability people from Goldman as well. I need to read a quick disclosure from Goldman Sachs, and then I'm going to hand over to Emily Hunt, who's going to do the same for Cisco, and then we'll jump into the content of the call. So we are required to make certain disclosures in public appearances about Goldman Sachs' relationships with companies we discuss. The disclosures relate to investment banking relationships, compensation received or 1% or more ownership. We're prepared to read aloud disclosures to any issuer upon request. However, these disclosures are available in our most recent reports available to you as clients in our firm portals. So for GS clients' disclosures and updates to those disclosures are also available by ticker on the firm's public website at www.gs.com/research. So also, the views stated by non-Goldman Sachs personnel do not necessarily reflect those of Goldman Sachs. So with that, over to you, Emily, to do your bit and then we'll jump into the call.

Okay. Thanks, Rod. Yes, I'd just like to say from the Cisco side that we may make forward-looking statements which are subject to risks and uncertainties, which are outlined in our SEC filings, which can be found on Cisco's IR website at investor.cisco.com. And the actual results or events may differ from those forward-looking statements. With that, I'd like to hand over to Katherine.

Great. Thanks, Emily. Hi, everyone. Thank you for joining us today to discuss Cisco's commitment to creating an inclusive future through our corporate social responsibility program. Today, I look forward to sharing an overview of corporate social responsibility at Cisco, or what I'll refer to moving forward as CSR as well as highlights of our progress in FY '19 globally. Next slide. We launched our 15th annual CSR report on December 10, 2019, in accordance with the GRI standards. The report is very comprehensive and serves as our single source of truth for environmental, social and governance work. The report is focused in 2 key areas. We call the prep portion of the report our story, and here, we share the highest level insights into our strategy around CSR sustainability as well as some of our key initiatives related to those key priority areas. The bulk of the report, 90%, we call the details, and that's for those people that are evaluating our performance that really want to dive much more deeply into the data and the metrics and our progress. This section really lays out our performance against not only our priority issue areas, but those topics that are of interest to key stakeholders and that require our due diligence. For example, water, biodiversity, affluence and et cetera. This report is organized to highlight our key priority issue areas where executive sponsorship focuses. Next slide. The detailed section of our FY '19 report is organized into 3 pillars, as you'll see here: People, planet and society. Within each section, we discuss our priority issue areas that you see here. Every other year, we do a deep ESG materiality assessment engaging both internal and external stakeholders. And in really understanding those insights, what are emerging risks and opportunities, and what are those issues that are both most relevant to Cisco's business and where we believe we could have the greatest impact on both society and the environment as well as our employees. The priorities from this assessment help us to prioritize what to cover in the report. In our people section, we discuss our programs for employees, that's inclusion and collaboration, employee community impact, team development, health and wellness, and ethics and integrity. Again, at the core of our success as an organization is our people, and they are helping to drive innovations that are important to our customers, our partners worldwide. Inclusion and collaboration is another key focus that includes creating full-spectrum diversity, both in terms of gender, ethnicity, background, age, et cetera, to ensure that our workforce represents the diversity of our customers and our partners worldwide. We believe that our employees want to work for a company that has a higher purpose, that understands the importance of addressing global problems and their local communities. And so we provide numerous opportunities for our employees to follow their passion to engage at the community level in terms of addressing global problems, whether that be hunger, poverty, climate change, job creation, growth and technology, STEM education. From a societal perspective, it's really about scaling inclusive social and economic impact in countries around the world, and we do that both from our operations and communities more broadly. From a societal perspective, we have 5 key priority areas. First, building skills and entrepreneurship. Building skills and entrepreneurship is critical to Cisco's business. For us, it's about how we create that talent pipeline to establish the workforce of the future. With the rapid change in technology, it's critically important that we have people available to us that have the skills and knowledge and expertise to help drive innovations across Cisco, not only for our customers but our partners in the future. So we have a very, very strong focus on the building skills and entrepreneurship and ultimately helping to drive that talent. Next is strategic social investments. What we mean here is how we are helping to drive innovative IT solutions for our communities around the world, and we do that in partnership with nonprofit organizations. How we are helping to leverage both cash and technology grants to ensure that we're helping them to accelerate their own global problem-solving across the critical areas, including human needs, disaster response, education opportunity and economic empowerment. Third is technology and human rights. Within human rights, we think about ethical conduct, data security and privacy as well as digital rights, critically important in terms of both our workforce, our extended workforce, communities worldwide, in terms of the technologies and solutions that we sell. Data privacy and security comes next as something that's core to our business. It's imperative from a business perspective that we protect customer data, but also that we promote strong data privacy policies as they protect all people. We've called for federal privacy legislation and have demonstrated leadership on this issue because privacy is a human right. And fifth is responsible sourcing and manufacturing. As you know, Cisco outsources all of its manufacturing. We have a global extended supplier base around the world, and we are very focused on ensuring that they follow the same ethical standards as Cisco, and that we're ensuring responsible sourcing for the components that go into our products as well as in terms of manufacturing and how we are leveraging technology. How we are helping to encourage our suppliers to not only respect human rights, but also to drive environmental impact to share their challenges so that we can also create capacity building across our global supply chain and help them to continue to succeed in the digital environment. And then lastly, under planet, it's really about how do we advance environmentally sustainable growth in a digital world. Here, we have 2 key priority areas for Cisco. They are energy and greenhouse gas emissions. This is really about how are we helping to minimize our impact on the environment by reducing greenhouse gas emissions, and how are we helping to also increase our use of renewable energy sources. And how we are helping to ensure that our technologies are helping our customers and our partners to reduce their greenhouse gas emissions. And secondly is around material use and waste, how are we being as efficient and effective in the use of our raw materials, and how are we also managing our waste, both in terms of our product end-of-life, the opportunity to bring more and more of our product back from our customers to be able to refurbish, reuse and potentially resell those products and technologies. So these are some of our key priority areas, the areas where we put our greatest investment and resource focus, and you'll find a lot more extensive reporting on these issues in our CSR report in the details. Next slide. CSR is integrated into Cisco's business strategy and function. This slide demonstrates the process by which we receive feedback and iterate on our process. At Cisco, CSR and sustainability are tightly integrated with our business strategy. This graphic shows how that plays out in practice, how we are engaging our business functions to ensure that they understand the risk and opportunities of our key priority areas. The business owns their own goals and implementation. What we do in corporate affairs through the Cisco -- through the CSR reporting process is to synthesize and highlight those goals and progress on completing them, which is a key function of the continuous feedback loop. The way that we look at it in corporate affairs is the organization that helps us to drive the awareness and understanding of our key priority issues and helps the business to embed this into their daily business practices. This all starts with CSR reporting. That includes both the annual report as the key stakeholder engagements that we have throughout the year, whether that be Carbon Disclosure Project, the Dow Jones Sustainability Index, or other key surveys and stakeholder inquiries from customers and partners around the world. And all of that helps us to understand where we are, what goals we've set and what progress we're making. Second is we move on to stakeholder engagement analysis. I've spoken already about that in terms of materiality assessment, how we look across ES&G in terms of what is most material to Cisco's business, and we do a great deal of benchmarking, how are we doing in terms of our peers and competitors as well as leading companies out in the world who are leading the effort around ESG and what we learn from those companies. Third, we look at stakeholder feedback to the business. We take all of this feedback and we synthesize it back into the business functions. Then we look and work very closely with our functions to help them prioritize. It's important for us to establish long-term goals on which we can measure ourselves in the past. We have set primarily annual goals, and we've realized over time that it's really -- these are really complex issues that require a multiyear effort to really move the needle. And so most of our goals today are 5 years, if not 10, in length because, again, we realize that this requires key public-private partnerships, cross-functional alignment and engagement and investment over a multiyear period. Next slide. So here's a dashboard of the summary of our progress on the key goals we're currently tracking across the 3 pillars that organize our report. The first being 2019, the people dashboard, which really focuses on our employees and their engagement in communities. Today, 51% of our employees are engaged. They've either donated their time or their money, and our goal is 80% participation by 2020. So we're on our way. But today, we're at 51%, which equals 447 -- over 447,000 volunteer hours in FY '19. Some of our other people highlights include #1 world's best workplace, according to Great Places to Work Institute, and 93% of our employees say Cisco is a great place to work. Secondly, from a society perspective in our work to support people and communities where we do business, we've made progress to positively impact 1 billion people by 2025. Since then, from a cumulative perspective, we've hit -- we've impacted 469 million people. We've also met our goal to reach 2 million students per year through Cisco Networking Academy by 2020, a year early. From a planet dashboard perspective, we've reduced the total Cisco Scope 1 and 2 GHG emissions worldwide by 60%, and that's a goal that's in progress. And you'll see others here like electricity generated from renewable sources for at least 6 -- for at least 85% of our goal by FY 2000 -- by FY '22. Next slide. So overall, what we've accomplished in FY '19. This is what we called our place -- our placemat slide that shows our key CSR accomplishments across the business. This, in some cases, is a recap and highlight from the year beyond just progress on goals. Some of the other highlights here are 62% of our Cisco's executive leadership team's diverse in terms of gender and/or ethnicity. Over -- Cisco has donated over $408 million in company-wide donations, which includes cash, product and in kind. So all of this gives you at the highest level, some of the key initiatives that we drove in FY '19. And what I think is most important, too, is to remember that the CSR report is the best source of information around environmental, social and governance-related topics. But I do encourage you to check out the CSR report. One other thing I'll point out this year is that we've also created a new web-based interactive tool. So for those of you that want a more interactive approach to our report, there is that opportunity. But you can also download the report, either the story or the full detailed section. And with that, I'll pass it back over to Emily. I think to Derek, actually.

Right. So Katherine, thanks for taking us through that. We're going to move now to the fireside chat portion, and we are going to take questions from the line and the webcast in a bit. We always appreciate the opportunity to talk with a company who is a real leader in the space just because I think this is an evolving area. It's an area where everybody's trying to figure out the best way from an investor standpoint to assess companies on ESG. And so it's a great opportunity to hear from companies themselves and have that dialogue about kind of what your challenges are, what you've learned, what best practices are. So we've got a few questions on some of those.

But I wanted to start with sustainability governance. Could you tell us a bit more about how Cisco's decided is the best way for sustainability to be run in the firm. Meaning, the best place for accountability to lie, the leadership organization? And is this something that has evolved over time?

Thanks, Derek. This is Emily from the IR team. So I think I'll take that one. Well, Katherine doing her presentation kind of outlines the role of the corporate affairs team in terms of their responsibility for leading the social investment programs as well as championing our commitment to CSR performance and transparency. When it comes to the specific ESG priorities, again, as Katherine said, those are owned by the business functions, and therefore, by the executive leaders of those business functions. And those priorities are integrated into the ongoing business strategy and planning for each of those business functions. So the responsible execs are therefore incentivized with performance goals for which they are compensated as part of their role. So for example, our Chief People Officer has goals around talent attraction, retention, diversity. Our Head of Workplace Resources has goals around greenhouse gas -- greenhouse gases and energy. Our Head of Supply Chain has goals around the circular economy. And our Head of Security has goals around data privacy, et cetera. So the business functions set relevant goals and they implement plans to meet those goals, and they measure performance against those goals. And if there is a cross-functional approach that's needed, then we establish teams to implement our commitments against those goals. And we've benchmarked against a number of other companies to see how they do it, and we feel that this is the best way for Cisco. And it's a process that hasn't -- I would say it has evolved over time as our priorities have shifted, but it's really been in place for a number of years. When it comes to the Board oversight, we have regular reporting to the Board, which is done through the natural business reporting outlets. So for example, talent issues are reported to the compensation committee, greenhouse gas energy process against goals on those metrics are reported to the finance committee, privacy and data security to the audit committee, et cetera, et cetera. But what is new since the last fiscal year, FY '19, is that the Nomination and Governance Committee of the Board has assumed overall responsibility for reviewing Cisco's policies and programs concerning CSR, which obviously includes all those ESG matters and for taking appropriate actions where required. So that is a new development as of the last fiscal year.

Thanks. Evan?

Excellent. So you mentioned in your presentation, the importance of addressing issues within the supply chain. And admittedly, for investors, supply chain is one of the most challenging topics that we have to analyze as we don't always have clear and consistent quantifiable metrics to really measure performance. So my question is, from your perspective, what are some of the most important KPIs that you use to measure supply chain sustainability performance? And what are some KPIs that investors should look to, to gain comfort with a complex global supply chain?

Derek, this is Darrel. I can take that. A significant focus for Cisco to measure supply chain sustainability is an initiative within the Responsible Business Alliance, or RBA, to define a common set of indicators. The RBA changed its name a couple of years ago. It used to be EICC. So that may be more familiar to a lot of people. The RBA website has a document of the practical guide to transparency and procurement to help buyers looking for insight and transparency on supply chain policies and practices. The intent is to standardize how supply chain sustainability is measured. So that's a really good reference. In the environment space, responding to the CDP carbon questionnaire is a priority. Supply chain emissions receives a lot of stakeholder attention. And as -- we've had goals tracking supplier reporting CDP since 2011, and we recently announced last August an absolute emissions reduction goal for our supply chain to address waste and align with full implementation of circular economy principles. Last summer, we announced a goal that by 2025, 70% of Cisco's component and manufacturing suppliers by [ spend ] will achieve a 0 waste diversion rate at least one of their Cisco sites. We're currently around 20%, so we have some work to do on that. In addition to address basic clean air and clean water in China, we have focused on the metrics used by IPE, which is a very good environmental nonprofit in China. We've made substantial progress over the last couple of years tracking our supplier compliance to Chinese clean air and clean water regulations, and this improvement can be seen in our IPE scores. And on the social side of the supply chain, we rely on a robust audit program managed through RBA. These audits have a broad remit, but there's a very strong focus on detecting and preventing forced labor and human trafficking, which are probably the top supply chain sustainability risks. We publish metrics of the audit signings in our CSR report, and we also include tracking issues to closure. And last, also classified as a social topic, it is responsible minerals or it's often called conflict minerals, which is another key focus and of interest to customers and other stakeholders. Conflict minerals are often linked to forced or slave labor as well as environmental degradation. Derek?

I wanted to ask a question about Cisco Network Academy, something really unique to Cisco. It seems it's something that has real ecosystem benefits to the business. And at the same time, there's a good deal -- when you're reading through your sustainability disclosures, there's a good deal of philanthropic and purely educational purposes to the initiatives. So my question is sort of a bean counting question. But with such a massive initiative, I presume it takes significant expenditures. I was just curious where C&A spending shows up in the financials? And is it different from how you'd account for other philanthropic or sustainability initiatives?

Yes. This is Katherine. I'll take that question. Yes, it is part of our philanthropic spending. We account for it as an operating expense. For FY '19, we reported, from an in-kind contribution, the value of that was over $315 million, and that includes items like the development of our curriculum, the support of the students and the partners that help manage the program and implement it, our network simulation and tools, instructor course guidelines and ongoing instructor trainings. As I stated earlier, the program has over 2 million students enrolled in Networking Academy this past year, and the program really provides opportunity that can change lives and change communities. We work alongside, again, partners and educators as well as governments and employers to bring global and inclusive access to digital skills to millions of people. And we really believe, because of the workforce and the way it will look in the future, that these large-scale growth is predicted based on the adoption of new technologies bringing upwards of 100 -- 133 million new job roles by 2022. So we do believe Cisco Networking Academy couldn't be timelier and more relevant in the partnership with traditional and nontraditional learning organizations, such as again, universities, community colleges, even prisons, where we're helping to bridge the shift from those conventional jobs to the in-demand IT-savvy jobs by providing the best-in-class curriculum to those education partners free of charge. We're bringing greater career possibilities to people everywhere.

So one for me. Stepping back in kind of the environmental side, looking at emissions. And particularly, not to -- sorry? Not just Scope 1 and 2 emissions, but Scope 3 emissions, is admittedly, again, another very tricky topic and issue for investors to analyze, and admittedly, where a lot of -- we see a company's carbon footprint across their value chain being the most significant source of emissions. But from your perspective, how can investors gain confidence in some standardization approaches? Or are there consistent approaches to measuring Scope 3 emissions across the company's value chain?

Got it. I can take that. I can -- we realized as far back as 2007 that supply chain greenhouse gas emissions will need to be addressed. Cisco has been doing this for a long time. Back then, this interest was from environmental advocacy groups concerned about outsourcing and externalities in general. Supply chain emissions come into play once you set Scope 1 and 2 greenhouse gas reduction goals. This is a real hard point that drives addressing supply chain emissions because meeting a reduction goal by shifting emissions out of Scope 1 and 2 into Scope 3 is obviously not transparent. And because Scope 3 reporting standards weren't in place back then, the shift wasn't visible. So internally, starting in 2008, we started tracking as a percentage of direct spend, how many of our suppliers were reporting to CDP. And Cisco has reported to CDP since the beginning, which I think CDP started in 2002. So it seemed very sensible for our suppliers to do so as well and we didn't feel embarrassed by putting that sort of requirement on them. To be honest, our supplier reporting numbers weren't great at the beginning. So we had a lot of work to do to improve. A key milestone was the release of the Scope 3 accounting standards. This was put out by WRI, the World Resources Institute, and WBCSD. And this is part of The Greenhouse Gas Protocol. Cisco was on the standards committee. And once the standard was in place in 2011, we were more comfortable going public with supply chain emissions metrics. So in our 2011 CSR report, we started publishing a facsimile of the letter we were actually sending to all our suppliers, and we've published this letter every single year since. The letter outlined a simple but effective 5-step program for all suppliers. And we chose on purpose one -- this is a complicated topic and it's a long-lasting topic, so we wanted to make sure it was simple that -- because we were communicating to such a large audience, so we chose binary parameters, yes or no, that we could obtain from the CDP survey, so we could accurately trend year-to-year. So our 5 steps were that our suppliers had to report to CDP: Yes/No. We had to make their response public: Yes/No. They had to get third-party assurance, because reporting without assurance has a lot less value. And fourth, they had to set a reduction goal. And finally, we wanted them to push this process, these 5 steps to their suppliers. So we published the actual letter to provide full disclosure to stakeholders so they know that we're taking their concerns seriously, and also because we want other companies to benefit from our example. We've given a number of talks facilitated by CDP in their industry meetings about how we approach this topic. In 2011, we also started publishing our progress on step 1 reporting to CDP. And we included data back to 2008 because that's when we started to think about this. Back then, we only reported on step 1 since we needed to boost performance before adding additional requirements to our suppliers. I mean, we laid it all out for them, but we've realized that, a let's get step 1, make some significant progress, and then push them for the follow-on steps, call it walk before running. As progress on step 1 regarding the CDP improved, we pushed the requirements to more supplier types to capture more of our spend, including our Tier 1 contract manufacturing component suppliers, logistics and recycling vendors. We also started reporting progress on steps 2 through 5. And in 2017, we were reporting on all 5 steps for each of the 4 categories of suppliers, which is where most of our spend is. The graphic for all of this is pretty complicated. But again, we're trying to be transparent and share best practice. For the fourth step I mentioned, reduction goals, we weren't sure how much reduction opportunity there was at our manufacturing partners. So in 2015, we ran an energy monitoring pilot at one site. It was an IoT-related exercise as well. There's a Cisco blog on it, and the Wall Street Journal actually did an article. The pilot manufacturing site was able to cut energy usage a little more than 25% in absolute terms, mostly just by turning equipment off when it wasn't being used. Real high-tech, right? So our investment was installing about 1,300 energy monitoring sensors in the Cisco part of the facility. And with this experience, we became much more comfortable that our suppliers should also have an absolute reduction goal. So the latest step in our journey to address greenhouse gas emissions in our supply chain is a goal announced last August to reduce Cisco-related emissions in our supply chain by 30% absolute by FY '30, and we're using FY '19 as a baseline. So now both Cisco and our supply chain have absolute Scope 1 and 2 reduction goals. Okay? Derek.

Well, one more for me quickly, and then -- where emissions -- this is another hot topic with COP25, where emissions cannot be reduced either via efficiency or transition to renewables, how do you view the effectiveness of carbon offsets? And how credible are those? And to what extent does Cisco explore offsets?

Yes. So your question referred to maybe the need for low carbon electricity, and that's a little different than offset. So let me talk a little bit about how we view offsets and maybe we can have additional discussion about renewable energy and so forth. So as a matter of policy, Cisco has not used carbon offsets, although there have been experiments by some product teams in select geographies as part of our go-to-market activity. But in general, offsets, whatever their certification, it requires noncore expertise to administer and it poses a substantial risk to our sustainability reputation and goal reporting. Planting trees is a common offset for everyone except, I guess, forestry companies. But we're a network company, not a forestry outfit. So vetting the offset requires an investment that isn't leveraged in the rest of the business. And we get a lot of people coming to us, profit, nonprofit or profit-seeking enterprises, trying to sell us or get us involved in offset programs. So you might say, well, that's why you hire an outside firm to manage all of this, but we prefer lower risk alternatives. We've also found that offsets, as I'm describing them, project an undesirable appearance of buying your way out of the problem rather than changing behavior, innovating a lasting solution to actually reduce greenhouse gas emissions. For example, why work through the practical and cultural issues of power working or reducing business travel when you can spend money and just offset? And you also shouldn't forget that offsets are an ongoing drag on the business since every year, you have to pay this recurring expense. It's almost like a tax or an indulgence. There's also another more subtle impact to relying on offsets by planting trees or so forth. We found that in our operations, a type of moral hazard is created by offsets. Your employee base is not incentivized to innovate and discover the sustainability business win-win when they know the company essentially will cover for them. It's better, although a lot harder, to invest in technology and any needed training to change behavior so that you can reap the reward of reduced cost, improved productivity and increase employee job satisfaction. That is there's lasting benefit for your investment.

Fascinating. Back to Derek.

We are going to take some questions. We got a ton of questions. We're going to do our best to get through as many of them as we can. I had one more before we go there that we wanted to hit, and that is on the topic of impact of your hardware products in terms of both waste and energy efficiency. And my question is one for investors who have hundreds of companies that they're trying to assess. Are there some certifications or designations in the industry that investors ought to look out for that you think are good signals of stewardship on both of those fronts, waste recycling, et cetera, and also energy efficiency of your products?

Yes. Yes, let me give you some perspective -- this is Darrel still -- on the best measures of product and company sustainability. For product certifications, I would look for standards that address only a single topic. For example, in the tech space, 80-Plus, that's like 80 and the word plus, for power supplies or PSUs; and Energy Star, the ETA program. Those are both good benchmarks. The 80-Plus has broad applicability. But an applicable Energy Star guide might not be available since the EPA prioritizes high-volume, high-impact product categories, and that's typically in the B2C space, business-to-consumer space. In Cisco's case, many of our products don't have an energy star guide and aren't amenable to this type of guide because of the pace of innovation and the lack of standardized equipment functionality. So the ATIS tier standards define a very useful ratio of work performed to energy consumed and efficiency and are -- this reporting is required by many of our telecom customers. We also contributed significantly to this standard back, I think it was in 2012. The acronyms I knew, so ATIS is the Alliance for Telecommunications Industry Solutions. And the tier, the ATIS tier, this is the telecommunications energy efficiency ratio. And again, it's just a -- it's a way to measure how much you're getting for the electricity that you're using. For third-party assessments of company sustainability, we rely on a couple of benchmarks. And so CDP has been mentioned. They have water and carbon questionnaires. Their methodology is really solid. So if you see a good score there, there's good performance. We use RobecoSAM, which I guess has recently been taken over by S&P Global, and they publish the Dow Jones Sustainability Index. It's a very comprehensive overview of all manner of sustainability. Corporate Knights, the Global 100, they publish the results coincident with The World Economic Forum's Davos meeting, so it gets a lot of attention. And lastly, Barron's put out U.S. most sustainable companies section. They do it once a year. They should be coming out here pretty soon. They're in the third year. And also, the Wall Street Journal, a sister publication, does a Management Top 250, where the criteria's significantly skewed to social responsibility and sustainability. But like I said, these last 2, Barron's and Wall Street Journal, are only in their third year, but they have the imprimatur of globally recognized business press that our CEOs probably all read. In addition, the Drucker Institute backs the Wall Street Journal ranking, and it has a very, very strong, statistically-valid methodology based on Peter Drucker's 5 management principles. So these -- this set is what we use. And we think they're high-quality because good methodology and consistent methodology is one of the key criteria we have in picking key benchmarks. One thing I would -- Corporate Knights, I mentioned, and it's very interesting, they've popularized a measure of what they call green revenue, and many of you might have run across this measure or similar efforts by other organizations. Currently, any sort of measure of green revenue, I think, should be considered a work-in-progress. There are issues with claims of Scope 3 emissions impact that seem to be more hope and promise or marketing than supported by clear case studies at scale. So if you see green revenue, just realize, not yet, that's not something I can rely on. We also recommend just looking at a company's annual CSR or sustainability report. Look especially at the tables and figures and take the time to compare year-to-year presentation. What did the company say 3 years ago, 2 years ago, last year, about a particular goal? Does the presentation of that data and the assurance provided at least come close to the quality that you expect for financial reporting? If so, you're probably on more solid ground evaluating risks and opportunities while the larger global sustainability discipline continues to mature. Derek or Evan?

So I'm going to dig into some of the questions. And Evan and Rod, if you have anything, please -- anything else that you'd like to hit on, please jump in. What I want to do is go up a little higher level with the first couple of these. I'm going to try to kind of bring them in batches. So 2 that I'll throw out there. One from the webcast is, what do you consider the single most material ESG issue facing the business, and why? So I suspect you level your children the same, but I wanted to throw that out there anyway just to see if something really jumps to mind. And then at the same time, one of the questions that is higher level is, how do you make and justify business and financial cases for ESG practices? Is ESG just a new cost center? So there's something to justify the whole effort. So I wondered if you could -- if you had any thoughts on either of those 2 questions.

Hey, Kath, do you want to split the first one, the most material? I can do enviro. So on -- for Cisco, on the environment side or perspective, greenhouse gas energy is the top issue. We sell some $36 billion-worth of hardware, give or take, every year, and all of it plugs into the wall. And the use of IT is increasing. That's a good thing because there's a lot of economic value that comes from the advance in information technology, but it does require power. And so that's where we focus, both in our operations and our supply chain, in our products and also some of the solutions that we offer to our customers. Kathy?

Yes. As you said, it's hard to pick one in this area. I would probably put talent up there, both from the standpoint of Cisco and what we're looking for and what we need as a company. But also just as important, our partners, our customers and Cisco's ecosystem. So really, being able to find and attract top talent, retain talent, I think, is a really key ESG issue that we've got to stay in front of as much as possible in today's economy.

And the second part is of kind of justifying business and financial cases. How do you do -- how does that work in Cisco? How high is the bar?

This is Darrel again. I can tell you from the environmental side, I do a lot of interviews with college kids and stuff. Everybody wants to be in sustainability. And one other thing -- one of the points I always have to make with them is, hey, listen, when you come to do sustainability in a for-profit company, especially a large global company like Cisco, what you're signing up for is discovering the business value of sustainability. If you just want to focus only on benefit and not the cost, go work for an NGL. Their purpose is to raise visibility and be very much on one side of the issue. And so at Cisco, we started maybe back around 2004, 2005, the environmental program started at Cisco. And for a long time, this was the thing that we struggled with, is how do you make it just not be a cost? Like you're going to do this, and now you have to do this and you have to spend money. So when we set our Scope 1 and 2 reduction goals, those were justified by paybacks that were very attractive, somewhere in the 18-month to 3-year back then payback. And so our CFO didn't approve the investment unless our facilities organization could prove that they would save energy from the investments that they made. And that goes, too, on our circular economy effort. There's tremendous opportunity for revenue, cost savings in implementing circular economy principles, but it takes a lot of work. Typically, environmental measures are systems problems, meaning they're multidisciplinary. And in a big company where you have outsourced manufacturing, you have markets all over the world, it takes a special team of people to understand the business well enough to design something that improves cost, improves customer satisfaction or product functionality.

Darrel, it's Rod. I -- from Goldman. I just wanted to add to this. One of the things I think -- Derek and I sit in the same office, and one of the issues we talk about a lot is we all believe that there's value in these efforts, or we think there probably is. But I know the person asking that question and I kind of agree with them. We have a really hard time. Financial analysts who cover stocks are real -- must be able to quantify everything in terms of earnings and in terms of cash flow for the company financial results. And what we have -- we still have a really hard time doing is stitching the sustainability efforts of not just Cisco, but other companies back into that and figuring out how to think about the value of these efforts. And I don't know if -- I know it's not an easy thing to do, but I don't know if you guys have considered further disclosures? Or if you have -- feel like you have made disclosures that help with that. Just maybe you could talk a little bit about how you then communicate back to the financial community the value of these things and let them put it into numbers.

Yes. I need to be careful about -- I don't want to run afoul with my investor relations partners. But sustainability, the truth is, is right now, cost reduction is a big motivator. And I don't know whether the cost reductions that we see rise to the level of materiality that's expected from maybe a revenue perspective, I think that's just a matter of time. It [ might take ] longer than people predicted, maybe 10 years ago, and especially considering the type of press that climate change and so forth gets. But eventually, we're going to figure out how to impact the business side in a scalable, sizable way, and I just don't think maybe we're there yet.

The other big thing we think about a lot and we do value is talent, especially in technology. So we -- just as feedback, any kind of quantification you could provide in terms of how this -- I know qualitatively, it must impact your ability to recruit and retain talent, but then is there -- is that quantifiable in any way? It seems like it should be, but I don't know how you guys think about quantification of that?

This is Katherine. I mean, today, we -- anecdotally -- we know that -- and we hear from employees who have joined Cisco, that it's one of the reasons they've come to Cisco. We've done some internal surveys that have said things like 83% of our employees feel CSR is important for them as well as to the impact that Cisco has on the world. So we -- and we have lots of employees that raise their hands to say what can I do as part of my job to support the efforts around CSR for Cisco and to make their own communities and the world a better place. So I think a lot of it -- it is anecdotal, but it's integrated into really employees really wanting purpose behind what they do and bringing their full selves to work. I think we're coming at a time where people want to see the line that goes from running a strong business, but also being part of the communities that they live and work in. So I think we don't have all the measurements in place. I think we've got to keep looking for those. But I also think we know, through surveys and some of the feedback that we get today, that we're on the right track as we head down this path of really bringing it closer and closer to the business. We have a program called CSR ambassadors, where employees are lining up to say, on top of what I do during my day job, could I also help with volunteering, or being on a committee, or reviewing grants? And so I think all of that, again, is supporting the idea that to retain and recruit top talent, I think this is a big piece of it.

One from my end and sort of related to the product impact side, is how do you think -- there's a question from the queue, around scope for emissions or avoided emissions, and sort of this idea that the products and services that you provide actually are leading to a net positive benefit, be it avoiding travel, for example, or conferences and so forth. So any thoughts around that and how you quantify any impact there or opportunities?

This is Darrel. Well, first, I'd like to ban Scope 4. I think Scope 3 causes enough confusion. And going onto Scope 4 is probably just a little too much. Actually, there's a draft sector supplement for ICT out. It's a Greenhouse Gas Protocol document. And the issue of avoided emissions has been raised. It's actually one of those issues that -- Cisco had really strong opinions on it because those greenwash and avoided emissions are, I think, are -- you have to be really careful. And the problem is, is look, the reason we're concerned about this is because greenhouse gas concentrations in the Earth's atmosphere are increasing. I think just in 50 years, which is probably within most of our lifetimes, concentrations have increased from about 320 ppm up over 415. I mean, that's huge when you consider the Earth's 4.5 billion years old. So avoided emissions, it can be very squishy. What we need to do is reduce emissions. So let me give you an example, a practical example. So when we introduced Cisco TelePresence, Cisco made a travel reduction goal, not an avoided goal, but a reduction goal. And so whatever our travel was, 200,000 metric tons of CO2 a year, we wanted that to go down. That's how you solve the problem. What avoided emissions would be is, well, before we got TelePresence, our emissions were increasing 5% a year because we were adding 5% head count. And so then, you can make these sometimes fantastical projections of how much you avoid it. And it really has no meaning in terms of the actual global problem. So I think we should be focusing on the actual reductions to address the global problem and not so much on these theoretical avoided-type scenarios.

Got it. Sorry, a few questions on the topic of renewables, emissions and goals that I'm going to try to weave together. So as a starting point, one of the questions referenced the 48% reduction in Scope 1 and 2 and asked, what was the -- was there a principal driver of this? Was it mostly driven by switching over to renewable sources? And if yes, there's a follow-up on your major transition to renewable sources and looking for advices -- advice you would give to the other companies trying to do the same thing.

Sure. Well, another enviro question. We announced our first greenhouse gas reduction goal back in 2008. And we're actually -- today, we're on our third 5-year goal. The way it shook out is most of our investment is in energy efficiency, projects around our facilities, whether it's changing the variable speed drives, or putting window film in order to block the sun, those types of changes. And in practice, before we started doing this, our energy consumption was increasing every year because we're adding more equipment to our labs, and our equipment was using more and more energy. The way the number shook out is the energy efficiency investment offset or stopped the rise. So we're able to have our emissions level off because of the energy efficiency investment. And that was good because that means that investment just pays off for you every single year forever because that's energy you're not going to be using. Then we switched -- obviously, you're going to be using some electricity. You can't make that go to 0. This is an economy based on scarcity. So then we look for low-carbon sources of electricity. And that's where the renewables comes in. And in general, we started out with buying green electricity. Some people call them RECs. And these are certified RECs. There's rules around -- because people don't want you taking credit for stuff, say, a hydro facility that's been there for 100 years, the environmental [ equity ] ecosystem wanted companies buying renewables to facilitate or encourage investment. And so there was a cutoff that you could only take credit for buying green electricity from facilities put on the grid after a certain year. We've also put, in some cases, solar on our facilities, but not too much just because our buildings are pretty energy-intensive. There's not a lot of space on the roof or around the campus to put solar. We also have put in place several PPA agreements, purchase power agreements, where we contract for a long-term supply of electricity, and these contracts are very attractive in terms of saving money over the long-term on electricity because we have projections of where electricity rates are going to go. And the way the market's going, these are really good investments for us to save money. I don't know if that covers the -- there were a lot of questions in there.

Yes. Well -- yes, we got great engagement. I really appreciate the questions. I'm going to give you, Darrel, one more, and I think we're coming up on time. And then I'll hand it back over to Emily or Katherine or Rod for any kind of last remarks. But here's a little pushback for you. So the question is, if avoided emissions targets are squishy, then why have 2019 planet dashboard focus on avoided GHG emissions? What makes 1 million metric ton goal here not squishy in your eyes?

Okay. Good question. So that goal was set back in 2016. And to be honest, that was a time when we were trying to get broader engagement within our supply chain organization. And so we were looking for a goal that could -- we could use to do something worthwhile, but also engage various groups, the packaging groups, the logistics groups, around supply chain to start to understand these issues. And it was a transition step so that we could do something like we just did, which is announce an absolute reduction goal. The accomplishments behind that 1 million tonnes avoided are real. We have real packaging improvements. We have real mode shift in -- for logistics. But the real challenge is finding ways to reduce emissions. And sometimes, you just have to take baby steps.

I guess...

If you don't mind, one last one, I guess, from my end. Maybe a response to us as investors, what is the best method that we can engage with companies on? In particular, this gets around the issue of survey fatigue. There's a new rating every single day. It seems like how can investors better engage with companies, particularly as these new initiatives like BlackRock announcement and so forth. So how can we be helpful?

Yes. I'm going to take that because my group also does the stakeholder inquiries, all the surveys and stuff. We do it for all ESG. And I talk to my counterparts when I'm at an industry meeting, and I hear this survey fatigue. But I have to be honest with you, we don't really see it. We recognized early on that there were going to be a lot of people interested in the topic. And instead of pushing back on this or that survey, which I saw that, it's like, wow, you can get 5 people involved and spend 20 man hours or people hours figuring out whether you should answer something, why don't you just answer it? And so that's been our approach. And in general, we don't really feel like we're answering extra surveys. I mean, I hear people complaining about CDP, for example, and I think CDP is just the greatest thing since sliced bread. I mean, we would all be just so much poorer without them. I can just imagine the number of surveys we would have to be answering about greenhouse gas emissions if CDP didn't exist. So I guess, from Cisco's perspective, we're not really seeing it. We probably get, I don't know, 125 to 150 inquiries. This includes customer inquiries every quarter. And there's probably only 1 or 2 that are really questionable or aggravating an answer. You just have to be efficient.

Perfect. Derek?

That's it for me. I think we need to wrap up. So I'm going to pass up -- pass off to Katherine or Emily, if you had any closing remarks, please do so. Otherwise, I'll hand it over to Rod.

I just wanted to quick -- again, thank you, everyone, for the conversation and the discussion and some of the really important questions that I think we -- continue to make us better in what we do and how we do it. I do think there are additional questions we didn't answer, so we definitely want to make sure that we respond to those quickly and get those back. So thank you for the time.

Yes. Thanks, Katherine and Darrel. We really appreciate it. And we always say at the end of these, both Derek and Evan and also myself for the -- to the extent it's helpful, we're all available to try to help people with anything that they didn't get answered, and we'll also try to coordinate back with Cisco on some of these unanswered questions. So thanks, everybody, for joining. Really appreciate it. And thank you, Katherine and Darrel as well.

A pleasure. Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.