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The New Metrics of Sustainable Business: In With The Old, In With The New . . .
October 20th, 2011
Many companies that closely follow market trends make the mistake of deciding they need a “sustainability strategy.” Yes, sustainability is a transformative market trend and, yes, a strategy is always advisable. However, businesses would be much better served if they instead create a “business strategy that is sustainable.” This is a subtle yet incredibly important distinction.
Not surprisingly, under this viewpoint the “new” metrics of sustainable business look a lot like the “old” metrics of business. Financial and social indicators – such as revenue, profitability, margin, customer satisfaction, employee engagement – all continue to matter. In addition, environmental indicators have become much more prominent in both corporate disclosures as well as corporate decision-making. So, what is so different about the “new” metrics and why should you care? In this article I highlight three trends that are becoming best practice around the “new” metrics and identify three areas where “next” practices are still emerging.
Best Practices for a Business Strategy that is Sustainable
The first issue that companies need to address is that sustainability can mean many things, or even everything, to different stakeholders (see the 6-paragraph, 24-citation definition on Wikipedia if you haven’t experienced it yourself). A business strategy that is sustainable needs to clearly define what is material to each of a company’s stakeholders and provide a mechanism for remaining relevant over time. As a practical matter, this means that material issues may differ greatly for different companies, but should begin to converge at the industry/sector level.
SAP has addressed this issue by creating an interactive materiality matrix as part of our online sustainability report (Figure 1). This matrix allows stakeholders to easily provide comments using any web 2.0 log-in (Facebook, Twitter, Linked-In, etc.) and allows us to track and document evolutions in stakeholder views over time. Incorporating stakeholder engagements such as this, SAP has chosen to transparently report and track goals on eleven material sustainability indicators, a relevant, yet manageable number for our business.
2) Radical Transparency and Real-time Engagement
Technology has completely changed the way businesses must interact with their stakeholders. Brand risk has risen significantly as the world gets more unwired and connected. There are now more wireless devices in the U.S. (>320 million) than there are people, more than 800 million active Facebook users, and over 1.1 trillion text messages sent in the U.S. alone. This allows nearly instantaneous feedback from stakeholders, both good and bad, to a large global audience.
SAP has addressed this issue by providing radical transparency and real-time engagement around our sustainability report. We have chosen to publicly provide a green arrow/red arrow dashboard around our material indicators (Figure 2) and devote 1/3 of each page to real-time stakeholder comment.
As one speaker at the WRI value chain launch in NYC noted, customers have a much greater trust in businesses that are transparent in their disclosures. There is a strong sense in this age of connectivity that even if one customer doesn’t independently confirm the information provided, someone has likely reviewed it.
This is not only becoming a best-practice in the corporate world, but in government as well. The American Recovery and Reinvestment Act of 2009 required creation of a website "to foster greater accountability and transparency in the use of funds made available in this Act.” This site includes not only a massive repository of data to prevent fraud, waste, and abuse – it also allows users to analyze the data on spending and jobs across 15 different categories at the state, congressional, county, or even city level through Recovery Explorer, including providing this transparency on a platform where users are increasingly likely to consume it – as free apps for the iPhone and iPad.
3) Turning Data into Business-Relevant, Actionable Information
Analytics applications, such as Recovery Explorer, allow users an unprecedented view into correlations between different data sets and the ability to identify trends that were previously unapparent. Last year SAP worked with the U.S. EPA to provide similar capabilities for the public around emissions data for the electricity sector through the Clean Energy Experience site [Figure 3]. These tools allow easy visualization and analysis of the data and allow identification of trends such as how technology improvements, corporate policy, and state policy affect emissions across different regions.
The key to creating value from sustainability data is the transition from data to business-relevant actionable information. For example, at SAP we load our carbon and energy data into analytics tools and are easily able to globally benchmark data centers, identify those that are underperforming, and introduce and track corrective actions. An increased focus on energy use and identification of these types of opportunities has provided us savings of approximately a quarter billion dollars from business-as-usual trends over the past four years.
Many global companies are not only using this data to improve their corporate bottom lines, but to identify new business opportunities for their customers. As a business process software company, our largest opportunity is through helping our customer base become more efficient within their operations. This is beginning to lead to a significant global impact. Other companies, such as GE (>$85B in ecomagination revenues over past five years), and Proctor & Gamble ($26.5B in sustainable innovation product revenues) have found material improvements to revenue from new customer opportunities as well.
“Next” Practices for a Business Strategy that is Sustainable: What Areas Remain to Explore?
1) Correlation/Causation of Environmental, Social and Financial Performance
Additional data is becoming available every year that sustainable companies outperform the market. Recently the Carbon Disclosure Project and Bloomberg released data in the Global 500 Report that show companies on the CDP Leadership Indices significantly outperformed the index. (Figure 4)
This adds to data released by EPA a few years ago showing correlation around energy performance leaders in various sectors and stock price. There is also an interesting Wharton study around how employee satisfaction relates to improved market performance. The recent distinction of SAP as a “Bay Area Top Workplace provides some additional correlation for our own operations.
Reasonable questions remain around whether environmental and social performance is just strongly correlated to returns (i.e. well-managed companies manage energy use well, along with other material risks and opportunities) or whether it is a root cause of this performance (i.e. implementation of best and next practices leads to new business opportunities that would not have otherwise been identified). My personal view is the latter; however, more studies in this area are certainly needed.
2) Holistic Look at Supply/Value Chain
Another area that leading companies are beginning to address is a much more holistic view of risk and opportunity across the supply chain. Many of the same factors relevant to corporate efforts apply in the broader value chain: managing business and reputational risk, increasing efficiencies to lower costs, and innovation around safer and more sustainable products that can lead to new revenue streams.
A number of companies have created supplier “codes of conduct” to manage expectations, either voluntarily or under pressure from investors. Regulatory efforts such as the European Commission’s REACH program around chemicals of concern has been a major business driver and managing recall concerns has more companies looking at full product and batch traceability in their supply chains. For “next” practices, SAP recently piloted the WRI/WBCSD value chain protocol and now has a more holistic view of carbon/energy use across our entire value chain.
There remain many challenges around a holistic view of value chains, from standardization of data/reporting to willingness to share potentially confidential business information with customers, and the potentially vast amounts of datapoints required from continuously evolving supplier and customer relationships. There are many organizations working to create consensus around multi-stakeholder engagements, such as The Sustainability Consortium, WRI/WBCSD, Sustainable Apparel Coalition , and Carbon Disclosure Project , however, there is still a great need for harmonization of this work around different industry sectors, inclusion of multiple impact factors (from human rights, to chemicals, to calculated impacts around embedded energy/climate effects, etc.), and minimizing impact on small business.
3) Accounting for Non-Financial Indicators: Integrating Financial and Non-Financial Reporting
A final issue of vital importance to the “mainstreaming” of sustainability is the relationship between traditional financial and non-financial indicators, or “what belongs on the balance sheet?” Investor interest in the issue has increased immensely over the past decade with investors representing over $71 trillion requesting data through the Carbon Disclosure Project and investors representing over $20 trillion calling for policy action to stimulate private-sector investment in climate change solutions.
SAP provides an online sustainability report that goes into significant depth around our sustainability performance based on the GRI Reporting Framework at the A+ level (including third-party financial auditor assurance of the data). We have also chosen to include sustainability data in our Annual Report as “non-financial key performance indicators” and to discuss these topics on financial analyst calls since our quarter-billion dollar savings is significant to our business. However, much work remains around accounting for non-financial indicators let alone exploration of moving towards a more integrated report.
There is a lot of interest in additional research and developing frameworks for this topic. The International Integrated Reporting Committee is moving forward with piloting an overall framework for integrated reporting. The Dow Chemical Company and the Nature Conservancy have announced a partnershipon developing valuation for “Eco-System Services”, and groups such as HIP Investor are moving forward with pilots on “Human Resource Valuation.”
Great work has been done in many of these areas and much hard work remains to be done as we continue our journey towards a more sustainable business and more sustainable economy. In-depth discussions around many of these next practices will take place at Wharton next Monday during “Redefining Value: The New Metrics of Sustainable Business” and I look forward to continuing our progress there.