Sustainability Management


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Sustainability document to accompany slide show of same title: The doc fleshes out the 6 phases and provides links to key material.

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Sustainability Management

  1. 1. Sustainability Management Improving long term profitability Rowan Le Roux July 2010
  2. 2. Executive Summary Sustainability management is about the effective integration of People, Profits and Planet. It recognises that the economic profit motive is core to the ongoing success of a business but that this motive needs to encompass the ecological and social impacts that a business has on its surrounding environment and communities. This document aims to provide a high level framework to the implementation of a sustainability process as well as to provide suggested information sources. Increased needs, and demands for sustainability management are driven by a number of factors; Regulations, Customers, NGO’s and Media, Employees, Peer Pressure and ultimately Investors. In order to effectively engage with the various stakeholders as well as integrate the various aspects of sustainability (People, Profit and Planet) into an economic framework that drives business efficiencies, economic profit and reduces risk, the various impacts need to be identified, quantified and then managed (see figure). The implementation of a sustainability management program into an organisation, while being unique to the organisation, will invariably be undertaken in a phased approach. A six phase approach is recommended in this document. The phases presented here are deliberately broad in nature and would require specific instrument and/or concept implementation in order for the phases to be successful. The phases are: 1) Identification 2) Boundary Setting, 3) Quantification, 4) Materiality 5) Manage and Integrate and 6) Repeat. The availability of instruments and concepts to fulfil the requirements of sustainability management are increasing with time and research, cost-benefit analysis, eco-efficiency analysis and sustainability scorecards for example are increasingly being used and improved. A valuable document identifying numerous concepts and instruments and their strengths and weaknesses is the BMU/BDI (eds.) 2002, Sustainability Management in Business Enterprise: Concepts and Instruments for Sustainable Organisation Development. Sustainability management program’s should be designed either in conjunction with, or with a strong understanding of the needs of, various legislation, compliance standards or reporting practices. A number of such codes or guides exist, including: Global Reporting Initiative, ISO 14000 standards, the Sustainable Packaging Indicators and Metrics Framework to name a few. Each of these has certain degree of overlap with all focussing on people, profits and planet but to varying degrees. In order for corporate sustainability to be effective ‘sustainability’ as a business principle needs to permeate the entire operation. Page|2
  3. 3. Introduction Sustainability management is about improving company performance and profitability through: improving and optimising natural resource utilisation, increasing social awareness, integrity and acceptance, and reducing environmental exposure, waste and costs. Therefore sustainability management is concerned with the constant improvement of relations with all relevant stakeholders, including: current and future capital investors (profitability, dividends, and return on capital, improved efficiency and utilisation of resources), clients/customers (environmentally aware products, cost controlled pricing, risk reduced decision making and purchasing satisfaction), staff (wages, positive association, feeling of care and improved welfare), society at large (licence to operate, positive feedback loop and social acceptance) and the environment (efficient and optimal use of resources, reduction in waste and other environmental externalities, decreased environmental risk exposure and continued access to resources by future generations). Sustainability management is thus about people, profits and the planet. The first two aspects, people and profit, are well covered within the traditional learning material and management courses, including in most, if not all, MBA’s and business degrees. The third ‘P’ (planet) while not new, is definitely demanding more attention and businesses are realising more and more that many opportunities arise to improve profitability and both staff and customer satisfaction through the efficient use and management of environmental resources and that environmental sustainability is not simply an additional cost function. Add to this increasing social and customer demand for more sustainable practices and products as well as tightening legislation across the entire environmental spectrum, from land contamination, air and water pollution to increased product labelling and it is obvious why companies are increasingly demanding a better understanding of their environmental exposure and looking for ways to manage their overall sustainability practices. Below is a schematic (my interpretation) of the various aspects of sustainability management. The schematic attempts to identify all the areas that either 1) influence the company directly (represented in the schematic by the primary outer circles), such as raw material inputs, costs of production (electricity, staff, etc) 2) can be influenced by the company itself (represented in the schematic by the primary inner circles), such as carbon emissions, packaging material, logistics, and waste management, and 3) needs to be mitigated/adapted to as the company is unable to influence it in any manner, such Page|3
  4. 4. as the impact of climate change on water supply and raw material production (forestry) and legislation (represented by secondary circles around the primary circles). Figure 1. Sustainability Management Bringing opportunities and risks to account through sustainability management requires an understanding of the cost-benefits associated with various environmental and social exposures. Sustainability needs to be incorporated into the traditional business analysis through rigorous assessment of the financial exposure, the legislative/risk exposure and the goodwill impact (the latter being focussed on brand management, staff satisfaction and market credibility); it cannot be looked at in isolation and dealt with on an ad hoc basis. When sustainability is incorporated into the ongoing financial decision making, from capital allocation to marketing strategies, it can result in significant savings as well as improved sales, customer satisfaction and staff morale. Page|4
  5. 5. Key Drivers of Sustainability1 “Regulations. Governments at most levels have stepped up the pressure on corporations to measure the impact of their operations on the environment. Legislation is becoming more innovative and is covering an ever wider range of activities. The most notable shift has been from voluntary to mandatory sustainability monitoring and reporting. Customers. Public opinion and consumer preferences are a more abstract but powerful factor that exerts considerable influence on companies, particularly those that are consumer-oriented. Customers significantly influence a company’s reputation through their purchasing choices and brand loyalty. This factor has led firms to provide much more information about the products they produce, the suppliers who produce them, and the product’s environmental impact from creation to disposal. NGOS and the media. Public reaction comes not just from customers but from advocates and the media, who shape public opinion. Advocacy organisations, if ignored or slighted, can damage brand value. Employees. Those who work for a company bring particular pressure to bear on how employers behave; they, too, are concerned citizens beyond their corporate roles. Peer pressure from other companies. Each company is part of an industry, with the peer pressures and alliances that go along with it. Matching industry standards for sustainability reporting can be a factor; particularly for those who operate in the same supply chain and have environmental or social standards they expect of their partners. There is a growing trend for large companies to request sustainability information from their suppliers as part of their evaluation criteria. The US retailer Walmart announced an initiative for a worldwide sustainable-product index in July 2009. This initiative would create a database across leading retailers to facilitate comparisons of sustainability performance of leading products. Companies themselves. Corporations, as public citizens, feel their own pressure to create a credible sustainability policy, with performance measures to back it up—but with an eye on the bottom line as well. Increasingly, stakeholders are demanding explicit sustainability-reporting strategies and a proof of the results. So, too, are CEOs, who consider sound social and environmental policies a critical element of corporate success. Companies’ report that integrated reporting drives them to re-examine processes with an eye towards resource allocation, waste elimination and efficiency improvements. Balancing financial growth, corporate responsibility, shareholder returns and stakeholder demands also leads to an evaluation of the trade-off between short-term gains and long-term profits. Investors. Increasingly, investors want to know that companies they have targeted have responsible, sustainable, long-term business approaches. Institutional investors and stock exchange CEOs, for example, have moved to request increased sustainability reporting from listed companies, and environmental, social and corporate governance indices have been established such as the Dow Jones Sustainability Index. The Carbon Disclosure Project was developed in response to investor demand for a system for firms to measure and report greenhouse gas emissions and climate change strategies as a tool to set reduction targets and set individual goals”. 1 Extracted from: Global trends in sustainability performance management, a report from the Economist Intelligence Unit, sponsored by SAP, March 2010. Page|5
  6. 6. Sustainability Roadmap The management of a company’s sustainability profile will be unique to every individual company, both within the same industry as well as across industries. Financial sustainability requires a different approach to industrial or mining sustainability for example. However, below is my take on the beginning process required for a company to understand its sustainability needs and thus the manner in which it should be managed. PHASE I: Identification Within most business, the key stakeholders are usually readily defined and identifiable. The role of sustainability management is then to identify the key sustainability issues faced by each of these stakeholders. Stakeholders would include capital investors, shareholders, customers, staff, society and communities impacted or influenced by company decisions. It will also include the environment (increasingly being identified as a separate and unique stakeholder). The identification of direct environmental exposure, such as carbon emissions, biodegradable packaging, water consumption (and waste effluent) as well as solid waste disposal would often provide the company with a good departure point in identifying its largest sustainability concerns. Utilising the “Environmental Key Performance Indicators” as provided by the Department for Environment, Food and Rural Affairs (United Kingdom) per industry would assist all companies in rapidly identifying the key areas requiring focus. Similarly the ISO 14001 Environmental Management Standard is designed to assist companies with both identifying and managing environmental exposures. During the quantification phase it is important for the company to identify the various forms of exposure in detail. Effluent waste, for example, should be identified as finely as possible and not merely as a collective, this fine analysis facilitates the identification of opportunities. For example a number of effluent waste streams may be sources of revenue as raw material inputs into other businesses, similarly solid waste and certain air emissions can be identified as inputs into other companies and hence sources of revenue for the polluting firm. As part of the identification process the business should identify those ecosystem services that they depend on in addition to those they impact. Companies should understand their direct and indirect reliance on ecosystem services, such as the supply fresh or uncontaminated water for forestry operations or the level of biodiversity as a requisite to plant disease prevention (risk of mono culture), both ecosystem services could be indirectly required to maintain raw material inputs or directly required as part of the business process2. Social sustainability needs to encompass staff satisfaction as well as Corporate Social Responsibility (CSR) activities. Activities aimed at both improving staff satisfaction as well as CSR should be designed 2 For a comprehensive review and framework for identifying ecosystem services relevant to companies refer to: World Resources Institute (WRI), 2008, Corporate Ecosystem Services Review: Guidelines for Identifying Business Risks and Opportunities Arising from Ecosystem Change, Version 1.0. ( Page|6
  7. 7. to have a direct or indirect return to the company. As an example: the payment or provision of finances to an underprivileged school as part of CSR activities could often better be utilised through the payment of schooling for the lowest qualified staff dependants. Similar CSR ‘points’ are often earned, staff morale is improved and turnover reduced and thus the CSR contribution results in an indirect return to the company (lower training and staff turnover costs). Phase II: Boundary Setting Given that sustainability boundaries are widely disparate, the boundaries as to how far the company’s sustainability concerns should go need to be clearly drawn early on in the analysis. For example do the sustainability concerns extend to the disposal of the product (cradle-to-cradle sustainability) or does the concern end when the product is in possession of the customer (cradle-to-gate)? The Sustainable Packaging Coalition in its report “Sustainable Packaging Indicators and Metrics Framework” (Greenblue, 2009)3 defines two types of boundaries 1) organizational boundaries and 2) operational boundaries. The former referring to facilities and functions under control of the company, with the latter referring to functions that the organisation relies upon but does not directly control. Current legislation and international best practice is increasingly trending to cradle-to-cradle sustainability management, i.e. more focussed on operational boundaries. Boundary definition and identification should be guided by the Global Reporting Initiative “GRI” Boundary Protocol (January 2005). It is arguable that the boundaries should be set prior to the identification of exposures as set out in Phase I. However, I believe that a thorough identification of the various stakeholders and exposures would lead to a more informed boundary setting analysis as this would enable the firm to approach the topic of boundary setting from an informed perspective i.e. key stakeholders will not be left out of the initial boundary setting resulting in inappropriate actions being taken. This is, however, not to say that boundaries should be set as wide as possible, but instead should be set as manageable as possible and expanded on to include all relevant stakeholders over time. It is advisable for the company to start small and focus its initiative initially on the perceived key risk/opportunity areas, geographies, stakeholders and expand the boundary or scope of the sustainability process with time. Phases I and II are ongoing phases, as both increased sustainability exposures as well as increasing boundaries are likely to be identified, as well as incorporated, as the business grows. PHASE III: Quantification Perhaps one of the more difficult components of sustainability management is the quantification of the various exposures. In many instances quantification is impossible, such as the indirect benefit associated with CSR activities, however, where possible even these benefits should be identified. Easier elements to quantify, such as water exposure, carbon emissions should be quantified both in absolute 3 A copy of the document is available for download at Page|7
  8. 8. amounts as well as in financial amounts if possible (for example water effluent should be measured in terms of the total quantity emitted as well as the cost of emissions). “Corporate practices are moving beyond generalised standards to a more precise analysis of the sustainability of specific processes, such as water usage or carbon emissions in the manufacture of a particular product. This product-level reporting is where the future lies”. (Economist Intelligence Unit, 2010). The importance of quantification is realised once sustainability is viewed as a potential profit opportunity (through cost reduction) within the business, ideally a clear link between financial performance and sustainability behaviour needs to be made. By way of example: As legislation around carbon emission tightens, and the risk of a carbon tax increases companies need to begin to treat carbon emissions similar to other factors of production. Thus understanding the cost of carbon and the potential margin erosion a tax would have on the operations may facilitate the allocation of capital to lower emission technology thus resulting in a net saving and improved profits for the firm. This is also consistent with requirements under the King III corporate-governance code which requires companies to link their social and environmental behaviour to their financial performance. Phase IV: Materiality In some instances the quantification of exposure will automatically highlight key risk areas, in terms of materiality, through the sheer size of the exposure. However, in many instances the link between absolute exposure and financial and/or relative exposure is less obvious. “Once we identify what the major footprint is in the lifecycle, then that’s the real benefit from analysis because we can do something to reduce it.” (3M’s Keith Miller as quoted in Economist Intelligence Unit, 2010). Phase III can be conducted simultaneously with or sequentially after phase II as quantification provides the basis from which materiality can be measured, however, materiality needs to be measured in one of two key metrics: Financial or Risk. Financial materiality will have to take into account the opportunity for savings, the prospective changes in legislation (taxes, restrictions) and changes in prices (electricity tariff) which may increase costs. Risk materiality needs to include branding and social exposure (effluent that is not financially a concern may be a significant brand concern), change in legislation (environmental laws, social requirements) etc. A useful way of reporting materiality is via ratios, in order to determine so called “eco-efficiency”. Eco-efficiency is defined as the ratio of an economic (monetary) to a physical (ecological/social) measure (BMU/BDI (eds.) 2002: Sustainability Management in Business Enterprise4); examples include emitted CO2 / Cost of Sales or personnel accidents / Sales. Where monetary values of environmental and social exposure are available, eco-efficiency should be measured in financial ratios, an example would be Cost of Carbon / Cost of Sales emitted, such metrics 4 A copy of the document is available for download at Page|8
  9. 9. would allow financial and operational managers to estimate the impact on gross margins and operational efficiencies respectively. Phase V: Manage and Integrate Once the various exposures have been quantified and, where possible, incorporated into some form of metric (eco-efficiency measure) the next phase is to set out ongoing targets and ultimate goals with respect to desired levels of exposure. Performance management of these targets and the procedures by which the company will achieve these targets is critical to the success of the sustainability drive. “...improved management and tracking of performance allows companies to effectively communicate and connect with partners and customers in ways that deliver competitive advantages in the market.” (Aberdeen Group, 2009)5 Targets should be set utilising either 1) best-in-class company standards i.e. aim to at least match and at best better the competitors metrics (where available), 2) cost-benefit/quantitative/financial analysis to determine the optimal levels, 3) internal/external scientific research indicating achievable targets, and/or 4) legislative compliance. The latter should form the basis for minimum targets as ultimately sustainability management moves a company beyond basic compliance and in to the realm of opportunity identification, i.e. from being reactive to being proactive. It is at this point that sustainability management can be integrated into the traditional business evaluation, process and financial analysis. The use of metrics and clearly identified targets allows business units and individuals to incorporate these targets into their business deliverables, performance targets as well as remuneration packages. Cost-benefit analysis using financial information derived from environmental/social exposure can be included in the allocation of capital or in project feasibility studies for example. Phase VI: Repeat Sustainability management is not a once off process that can be concluded but is a continuous process aimed at improving the businesses financial operations, social interactions and environmental utilisation. While this document has been set out in a phased approach and initially would be conducted as such, once management targets for sustainability have been set the process would become iterative through time with the phases blending into a continuous system of improvement. As sustainability factors are incorporated into the business process the need to identify them as separate and unique factors for consideration becomes less. However, the continuous need to identify new opportunities (and threats) will always be present in the dynamic business environment, regardless of whether this is change is in competitive strategies, market dynamics or environmental reliance and as such sustainability issues need to be part of this process. 5 A copy of the document is available for download at “J.Senxian and C Jutras, 2009, The ROI of Sustainability: Making the Business Case, Aberdeen Group.” Page|9