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Industry-Specific Metrics: The Future of Corporate Sustainability
October 26, 2011
Corporate sustainability is developing at lightning speed. We are moving from an era in which sustainability was a piecemeal process focusing on marketing and communications to one in which metrics are integrated into the strategic and operational model of a business. Until recently, normal practice was to identify and implement a few ‘green’ actions, initiate a branding campaign based on these actions, and maybe slap an eco-label on products. Co-authored with Alison Edwards
There are a couple of problems with this approach, and a focus on transparent, operational sustainability metrics can go a long way towards fixing these issues.
The first issue is that a firm’s overall environmental impact, and the benefits of its sustainability actions, need to be transparent to the public. More and more, consumers are demanding transparent information on sustainability, and delivering this information can be key to business success. Consumers are increasingly weary of claims made in marketing information or labeling schemes because there is no obvious connection between the label and actions implemented, much less to a measured reduction in impact. This means that the added brand value of sustainability can be lost without clear, transparent information to back it up.
Second, and more importantly, the actions taken may or may not be the most strategic and cost-effective ones to improve a firm’s overall environmental footprint. While some actions clearly save money, such as energy efficiency improvements or building commissioning, they are not necessarily the sexiest from a marketing point of view. However, they will support the firm’s bottom line, and, if couched in the right terms (i.e., a percent reduction in total energy/carbon footprint), they can indeed have marketing value. On the other hand, switching to biodegradable packaging has marketing value but its impact isn’t clear. While biodegradable packaging sounds eco-friendly, if information isn’t available the consumer may question whether this action had environmental benefit, and they may wonder how much this actually improves the overall footprint of the product and the company as a whole.
Focusing on transparent, operational metrics can address these problems. A metrics approach allows a company to be transparent. Performance metrics can be readily communicated to the public, like an eco-label, and they also carry real information to the customer. Sustainability metrics also work as reliable benchmarks from which all potential actions can be compared, strategy can be assessed, and a course can be set - both environmentally and financially. With a clear vision, strategy, and concise metrics, decision makers can easily identify the right actions to pursue. Of course, certain actions will have better marketing value than others, and estimates of this value can also be incorporated into the financial impacts of an action.
For sustainability metrics to have maximum impact, they need to arise from, and be strategically integrated into, core decision-making practices within a firm in a similar fashion to financial metrics used in business decisions. For example, in addition to net cash flow and gross margin, a firm may also track gallons of water per pound of product, or energy consumed per unit of product. When sustainability metrics are concise, this is possible and becomes a benefit to the bottom line, marketing, and environmental goals.
What does it mean to integrate sustainability metrics into business practice? It means that sustainability metrics are used in decisions to inform design choices, source materials, build new facilities, and select transportation modes. It means that metrics are strategically chosen - taking a company's business model, goals, operations, and its industry specific metrics into account. The metrics then help guide the company towards achieving its sustainability goals over time.
The next question, clearly, is what metrics to use, and how to collect the required information. This is where the sustainability field is currently evolving.
There are two main issues to consider here. First, the right metrics to use will vary by industry according to the environmental impacts it creates. Havard’s Hauser Center created a guide for industry-specific sustainability indicators and noted that each industry should rate the importance of all issues in the universe of potential sustainability issues and prioritize which should be included in a standardized set of metrics. It’s a unique process for every industry. For example, biodiversity issues may be important in the paper industry and relatively unimportant in the automobile industry. The opposite may be the case for a product’s impact on health. In this respect, standardized industry-specific metrics are still in the development phases.
Second, many aspects of the environment are difficult to quantify. For example, it’s fairly simple to quantify GHG emissions or water usage in a concise metric. On the other hand, impacts on biodiversity or toxicity are much harder to quantify, involve some assumptions, and inevitably, no matter our level of rigor, rely on subjective interpretations of environmental values. Because comprehensive approaches to sustainability involve more than GHG emissions and water usage, many industries are currently working on developing metrics that more comprehensively reflect sustainability.
To be useful, tracking and improving upon sustainability metrics must benefit the firm’s bottom line. This can occur in numerous ways. Some metrics may be of direct interest to customers and will affect their purchasing decision. For example, an automobile’s miles per gallon rating is important to a potential customer, as is the wattage of a bulb or the efficiency of an air conditioning unit. Other metrics may be more useful for minimizing operations costs, such as btu per square foot of building space or gallons of water per pound of product. For compliance purposes, grams of nitrous oxide emissions per revenue ton mile will be critical for the shipping industry. Finally, shareholders and investors are concerned about regulatory risk and are increasingly interested in corporate sustainability. Thus, in the airline industry, for example, metric tons of CO2e per revenue passenger mile could a critical metric. Soon, initial metrics will become standardized within many industries, and an inquiry into the fundamental performance of a firm will include not only financial metrics but sustainability metrics as well, allowing peer-to-peer comparisons of environmental and social impact.
Despite clear benefits, sustainability performance metrics are still unevenly developed in various industries. A Deloitte report on sustainability showed that in the retail sector, 55% of firms did not have any formal packaging reduction metrics, 45% had no recycling metrics, and 30% had no waste reduction metrics. In the consumer products sector, metrics are more relatively more widely adopted; within recycling metrics, over 60% of firms track total waste recycled per year, rate of recycling, and percent of recycled content. In addition, compliance drives most metrics currently tracked. According to a study by the National Academy of Sciences on industrial environmental performance metrics, pollutant releases are tracked by the four industries discussed in the report, while only three track material use and recycled content. In addition, supply chain metrics are either non-existent or emerging in these four industries, even though more than half a product’s footprint can originate in the supply chain. In all, sustainability metrics have a ways to go until they are fully integrated into the business model. A report by the Canadian Financial Executive Research Foundation showed that while 93% Canadian firms surveyed believe that it is important to report sustainability performance to senior management, only 38% actually do so. The lack of a clear, effective, and standardized way of doing so could be a critical barrier.
The good news is that several industry groups are taking bold and important steps to create sustainability rating tools. These include the Green Guide for Health Care, AASHE’s STARS rating system for higher education institutions, the Outdoor Industry Association EcoIndex, the Sustainable Apparel Coalition’s Apparel Index, the Stewardship Index for Specialty Crops, and several others. Most of these are in pilot or initial phases. These systems are an excellent first step, as well as an important means to define best practices within an industry. These tools, once perfected, can help serve as a roadmap towards sustainability. The following table, which is by no means comprehensive, lists some of these sustainability rating tools, along with some comparative information. Almost all of these initiatives involve collaboration between private and non-profit actors, and the broader the stakeholder participation, the more legitimate these will become.
Comparing Various Industry-Specific Sustainability Tools
|Industry||Name||Completion||Leadership||Current Usage||Metrics-based||Areas Covered|
|Green Building||LEED||Established||Non Profit with Industry||Broad||No||New Construction, Existing Buildings, others|
|Higher Education||AASHE STARS||Post-Pilot||Non Profit||Broad, Initial||No||Education, Research, Operations, Planning|
|Apparel||Apparel Index||Pilot||Industry with Non Profit||Core Group||Limited||Materials, Packaging, Mfg., Transport, Use, EOL|
|Outdoor Equipment||EcoIndex||Pilot||Non Profit||Core Group||Limited||Materials, Packaging, Mfg., Transport, Use, EOL|
|Electronics||EICC||Established||Non Profit with Industry||Broad||No||Labor, Environment, EH&S, Ethics|
|Solar PV||Solar Scorecard||1st Round||Non Profit||Limited||No||EOL, Supply Chain, Chemical Use, Disclosure Design, Construction & Operation|
|Health Care||GGHC||Pilot||Non Profit||Limited||No||Design, Construction & Operation|
|Food Industry||Stewardship Index||Pre-Pilot||Non Profit and Industry||Limited||Will Be||Environment, Labor, EH&S, Fair Pricing|
|Hospitality||Green Hotels Global||Established||Private||Unclear||Yes||Carbon, Water, Waste|
However, nearly all of these systems are points-based, similar in approach to U.S. Green Building Council’s LEED program. Points are accrued for various actions, and a final score or rating is given. In our opinion, these rating systems suffer from the same issues described at the start of the article – it is difficult for the consumer to understand what 8 points out of 10 for supply chain management or a ‘Silver’ rating means for the environment or the firm’s overall footprint. In addition, it is very difficult for firms to prioritize strategic action based on points systems. To be integrated into core decision-making practices, performance metrics should be specific, measureable, comparable, reliable and capable of being reported in normalized formats. They should be strategic in terms of a company's business model, goals, and operations. Ideally, companies leading the charge will help those metrics evolve for the entire industry. Consumers often take this form of leadership into consideration through product and company loyalty.
Several of these new rating systems acknowledge the need to move to a metrics-based approach, or are in the process of developing industry-specific metrics. To do so will require leadership, good science, time, and stakeholder involvement. And the benefit is immense: if early sustainability efforts can be benchmarked against meaningful metrics, both the public and senior leadership will have a better sense of what sustainability means and how to get there. From our experience, helping clients fully integrate these types of metrics into core business strategy is critical to reaching and exceeding targets.
Industry-specific sustainability metrics are important measuring sticks, and will likely be used both for public reporting and to tailor the appropriate metrics, strategy, and operations for each firm. As industry-specific metrics drive operations, firm-level operations will also help refine metrics. So even in this early stage of evolution, leading organizations need to participate in this process to achieve more sustainable operations and more transparent relationships with stakeholders. This will be a benefit for both their bottom line and the planet.