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Corporate Social Responsibility (CSR) and Socially Responsible Investment (SRI)

Corporate Social Responsibility (CSR) and Socially Responsible Investment (SRI)



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    CSR And SRI CSR And SRI Document Transcript

    • Market-Integrating Market-BasedSustainability Indicators AndPerformance Management Systems Wali memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 Abstract 2A promising new way to define “sustainability” for organizations, and to help them make itreal, is to examine the way investors are defining Corporate Social Responsibility (sustain-ability). The very recent and rapid rise of the Socially Responsible Investment (SRI)movement allows us for the first time to identify a market-based definition of sustainabilitythat organizations can use to add value and compete globably and sustainably. This papershows how investors define sustainability, and how using this definition provides a practi-cal working definition of a sustainable organization. To help firms actually implement sus-tainability, we integrate sustainability elements with the Baldrige national quality stand-ards used to promote competitiveness. The Baldrige framework has great potential as aframework for pursuing sustainability because it is process-based, performance-driven,recognized by organizations large and small around the world, and it already incorporatessocial responsibility and pollution prevention. This paper shows specifically how to incor-porate sustainability into a recognized quality system. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 Managing For Sustainability 3 Using Performance Management SystemsSocially Responsible Investment (SRI) is the use of specific social and environmental cri-teria, in addition to traditional financial criteria, to make investment decisions. Most SRI isdone by mutual funds and institutional investors who buy and sell shares of publicly tradedcorporations. In the past, SRI has generally been about avoiding undesirable sectors suchas tobacco, nuclear power, gambling, etc. This is called negative screening in SRI. But inthe last few years SRI has changed to a positive approach of looking for the best practicesamong competitors. SRI funds that use positive screening have criteria for Sustainabilityor Corporate Social Responsibility (CSR), a more traditional term) to evaluate compa-nies. These Sustainability / CSR criteria cover a wide range of topics, including health andsafety, corporate governance, pollution prevention, labor relations, indigeneous peoplesand more.The SRI market has become quite developed. There are market indexes that list “responsi-ble” or “sustainable” companies, and numerous research firms selling information aboutsustainability of various companies. Their customers include a full range of financial mar-ket institutions, and they are all supported by information providers and advocacy groups.Figure 1 shows the structure of the SRI market. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 4Figure 1: Structure of the SRI Market Mutual Funds Private Equity Funds SRI Indexes Venture Capital Funds SRI Advi- sors Development Banks Commercial Banks SRI Networks SRI Publications SRI NGOsAs of October 2004 there were at least 12 “families” of market indexes of sustainable com-panies, and over 35 individual indexes in at least 7 countries. There are more than 700 SRImutual funds, and about a hundred SRI funds that are specifically focused on sustainable Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009companies and not just negative screening for undesired sectors. The SRI indexes and 5funds publish the specific criteria for sustainability that they use to select or recommendcompanies for investment. Leading international banks are also publishing the sustainabil-ity criteria they will require for financing certain projects. In short, the market is clearlystating how it defines sustainability. Another perspective is that investors are telling uswhat are the specific types of sustainability that they believe will lead to more profits.All of this data about market-based sustainability critera gives us a unique research oppor-tunity. We can cluster the criteria and identify the core elements of sustainability that arevalued by a relatively large number of investors. Now we can say, “If you want your com-pany to be attractive to investors and buyers, these are the most important sustainabilityelements you must have.”The process of creating these criteria is self-reinforcing. Figure 2 shows the cycle of mar-ket-based sustainability development. Funds and indexes publish their criteria for sus-tainability. This causes companies to develop management processes for those sustainabil-ity elements and to make public reports about their performance to potential investors andothers. The funds and indexes study these reports and refine their criteria for sustainabil-ity, and so on. This cycle will continue to increase the market knowledge about what kindsof sustainability lead to higher market value. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009Figure 2: Development Cycle of Investor-based sustainability Criteria 6 Sustainability Funds Investor Criteria and Indexes for Sustainability Management Public Sustainability Processes Reporting for SustainabilityThere are thousands of examples of investor criteria for sustainability. We wanted toknow, What are the core criteria for sustainability and CSR that are being used mostfrequently by investors now, and how can that information be used to promote sus-tainable organizations? We believe that managers will be more convinced to improvetheir sustainability if they can see clearly what are the specific kinds of sustainability thatare valued the most by investors and bankers.We conducted original research to identify the core criteria for sustainability that are im-portant for investors. There are over 700 “responsible” investment funds, and about 100that define themselves as specifically supporting “sustainable” investment. But it was notpossible to learn from all of them what are their specific definitions of sustainability.As a proxy for their criteria, we studied 12 of the market indexes of socially responsiblecompanies that now provide information to the SRI funds. These indexes exist to sell datato investment funds, so they must be designed to provide sustainabilty data that investors Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009desire. Table 1 shows all the indexes we identified. We included the criteria from the ones 7in bold type. We could not obtain details about the others.Table 1: Market Indexes of Sustainable / Responsible Corporations 1. Dow Jones Sustainability Index 2. Ethibel Global Index 3. Ethical Global Index 4. FTSE4GOOD Global 100 Index 5. Humanix 200 Global 6. Natur-Aktien-Index 7. ASPI Eurozone Index 8. Ethinvest Environmental Index Australia 9. Westpac-Monash Eco Index Australia 10. Jantzi Social Index Canada 11. UmweltBank-Aktien Index Germany 12. Morningstar Japan Socially Responsible Investment Index 13. Johannesburg Stock Exchange / FTSE 4Good Index South Africa 14. Humanix 50 Index Sweden 15. Calvert CALVIN Social Index USA 16. KLD Domini 400 Index USA Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 8The first part of our investigation was to find the core sustainability criteria used by the 12SRI indexes that publish their methods. With a population of 202 criteria, many of themsimilar, we need to cluster them to identify the core concepts that are interesting to inves-tors and also make sense in an organizational framework. We followed these steps 1. Semantic Analysis and Rewrite: Many of the criteria obviously mean the same thing but are some are written differently or vaguely in comparison with related cri- teria. First we had to study all 202 criteria to determine what each one means. In many cases where criteria were vague (for example, “social utility” is one criteria – what does this mean?) we had to read in detail both the primary literature pub- lished by the index companies, and also the secondary literature about the SRI in- dustry. A set of common terms for criteria were established. Of course this intro- duced judgment by the investigator into the process but this is unavoidable when we have to study concepts rather than measurable items. 2. Frequency Cluster: We then sorted the criteria alphabetically to count the crite- ria by conceptual groups. The results are listed in Table 2. It shows the most popu- lar criteria used by the SRI indexes.Table 2 lists the positive criteria used by the 12 indexes according to their frequency.Health and safety is mentioned the most often, included in 9 indexes. Criteria that are only Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009mentioned by one index are not included. The frequency is also expressed as a percentage 9of the 12 index groups.The most significant observation from this distribution is the strong focus on internal em-ployee relations for sustainability, such as health and safety, labor relations and pollutionprevention. It is not surprising that investors understand that good performance is createdby a good business culture. It emphasizes that sustainability programs should focus on in-ternal development first, and external efforts second. It should also be noted that three ofthe dominant criteria are often integrated: training and education leads to pollution pre-vention which improves health and safety. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009Table 2: Frequency Analysis of Criteria in Market Indexes of "Sustainable" 10CorporationsFrequency Sustainability Criteria Frequency Sustainability Criteria9x = 75% 4x = 33% Communication Health and safety Discrimination Legal compliance8x = 67% 3x = 25% Contracts Corporate governance Codes of ethics CSR performance re- Animal relations porting Risk management Labor and union rela- Environmental performance tions Relations to customers and Pollution prevention suppliers Energy sources6x = 50% 2x = 17% Leadership and incentives Training and education Management Quality Non-executive director remu- Compensation neration Diversity Conduct of business Sustainability assessment Rights Management Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 Profit sharing 11 Family support Product safety Recycling Environmental management system5x = 42% Innovation Benefits Human rightsPerhaps the most striking aspect of this table is its tremendous variety. Sustainability, ac-cording to investors, covers a lot. Most of it is internal, and most of it supports the peoplein the organization. And it is very specific - this is clearly not about “values sharing” andcorporate vision statements. All of these are elements that could have performance metricsand reporting. And in fact, the reporting criteria is one of the most important. If you can’ttell anyone about it, are you doing it?Now we know how investors define sustainability: • Investors define sustainability with a strong focus on improving internal operations rather than prioritizing community welfare or external charity. The most frequently mentioned sustainability element is employee health and safety, which indicates the Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 focus of investors on internal management that drives sustainability. Of course this 12 is perfectly sensible; employees can think about doing their work in a more sustain- able way only if they are happy and healthy. • Investors value pollution prevention and resource conservation. • Investors consider the triple bottom line of finance, environment and social issues. On finance, governance is a very important issue emphasizing that sustainability in any organization requires commitment from the top. It need not be led from the top, but it must be supported. Pollution prevention is the most important environ- mental issue to investors, including product design and supply chains. Employee welfare and community welfare top the social concerns. • Investors want recognition of and working towards recognized standards. This in- dicates that the organization is paying attention to official definitions of best prac- tices, that it is looking up and out and around to learn how to do better. But con- formance is not critical, if the organization demonstrates consistent excellence in management processes. • Investors reward innovation. Product and service design are very important as in- dicators of future growth as well as customer retention. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009So now we can show what are the most important criteria for sustainability, according to 13profit-seeking investors. But we still have a problem of implementation. These criteria areall over the map, so to speak. How can they be organized in a way that supports implemen-tation and adds value, and does not ask people to learn some brand new theoretical sys-tem?Most importantly, we must show clearly how specific sustainability elements fit into an ex-isting and respected business management model that adds value. The most importantmodel we can identify is the Criteria for Performance Excellence from the Baldrige NationalQuality Program in the USA. This model already includes some concepts of sustainability.The Baldrige Quality System and Social ResponsibilityQuality management (QM) as a skill for companies was pioneered by Edward Deming in theUSA in the 1950s. His ideas were adopted in Japan in the 1960s and are widely credited forthe expansion of Japanese exports from the late 1960s. In fact in Japan the national qualityaward is called the Deming award.In the USA the federal Department of Commerce set out to promote quality as a competitiveforce for US industry. In 1987 the National Institute of Standards and Technology (NIST)established the Malcolm Baldrige National Quality Program and a national contest for qual-ity in business management. NIST created an advisory group of experts in quality and Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009management and produced detailed guidelines for assessing quality in organizations. The 14program quickly grew and the guidelines are revised every year. Now, in 2004, the guide-lines are called “Criteria for Performance Excellence.” Organizations, including companiesor non profit organizations, follow the criteria to describe in great detail their processes,measurements and results for performance.The Baldrige performance excellence criteria are a framework that any organization canuse toimprove overall performance. There are seven categories of Award criteria: 1. Leadership – Examines how senior executives guide the organization and how the organization addresses its responsibilities to the public and practices good citizen- ship. 2. Strategic Planning – Examines how the organization sets strategic directions and how it determines key action plans. 3. Customer and Market Focus – Examines how the organization determines the re- quirements and expectations of customers and markets. 4. Information and Analysis – Examines the management, effective use, and analysis of data and information to support key organization processes and the organization’s performance management system. 5. Human Resources Focus – Examines how the organization enables its workforce to develop its full potential and how the workforce is aligned with the organization’s objectives. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 6. Process Management – Examines aspects of how key production/delivery and sup- 15 port processes are designed, managed, and improved. 7. Business Results – Examines the organization’s performance and improvement in its key business areas: customer satisfaction, financial and marketplace performance, human resources, supplier and partner performance, and operational performance. This category also examines how the organization performs relative to competitors.The growth of the quality movement coincided with the development of guidelines for En-vironmental Management Systems (EMS). The ISO 14000 series of environmental man-agement standards were launched in the early 1990s. The ISO 14001 standard for EMSwas partly modeled on the ISO 9000 standards for quality management. ISO 14001 usesthe same Plan-Do-Check-Act cycle for continuous improvement and focuses on the organi-zational processes needed for effective environmental management. Various authors de-veloped guidelines for Total Quality Environmental Management to show how the conceptscan be integrated. In 1994 the Global Environmental Management Initiative (GEMI), a con-sortium of major US corporations focused on Environment, Health and Safety, published“Total Quality Environmental Management – The Primer”. This short manual shows how touse the classic TQM tools, such as process maps, run charts, cause and effect diagrams, andothers to improve EHS performance. Most of the GEMI companies claim to use this ap-proach in EHS.The potential application of the Baldrige quality criteria to environmental managementwas recognized quite quickly. In the early 1990s the Council of Great Lakes Industries, an Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009association of large companies around the Great Lakes region of the USA, developed and 16experimented with an EMS model based on the Baldrige system. The model uses the sameseven major categories for performance measurement and describes a “ladder” of bestpractices for each one, to help companies increase their performance in each category(Wever, 1996). Companies such as Kodak experimented with the model, in fact the Kodakefforts are described in a business school teaching case study (Lave 1998).Government has begun using this approach in promoting sustainability. The New MexicoState Government developed the Green Zia program in 1998 for promoting environmentalexcellence with assistance from Dr. Robert Pojasek at Harvard University, who has pub-lished several papers demonstrating the use of the Baldrige model for environmental man-agement (Pojasek 2000a, 2000b). Green Zia is a state assistance and recognition programthat helps companies with environmental quality management and uses a similar evalua-tion process based on Baldrige to give annual awards to the best performers. The programis oriented to smaller companies, but large organizations such as Lawrence Livermore Na-tional Laboratory of the US Department of Energy also report excellent results using theprogram. Because of the large Latino population in New Mexico the program has producedmost of its publications and guidance in Spanish as well as English.All of this activity has been of great interest to the advisors to the Baldrige National QualityProgram. They have continually improved the integration of sustainability into the criteriafor quality and performance excellence in the Baldrige program (NIST 2003). It is specifi-cally included as one of the two major sub-categories for Leadership, as shown in Table 3. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 Table 3: Social Responsibility Assessment in the Baldrige Quality Award 17“(Words in CAPITALS are specifically defined in the Guidelines)Describe HOW your organization addresses its responsibilities to the public, ensuresETHICAL BEHAVIOR, and practices good citizenship. Within your response, include an-swers to the following questions:a. Responsibilities to the Public1. HOW do you address the impacts on society of your products, services, and opera-tions? What are your KEY compliance PROCESSES, MEASURES, and GOALS for achievingand surpassing regulatory and legal requirements, as appropriate? What are your KEYPROCESSES, MEASURES, and GOALS for addressing risks associated with your products,services, and operations?2. HOW do you anticipate public concerns with current and future products, services,and operations? HOW do you prepare for these concerns in a proactive manner?b. ETHICAL BEHAVIORHOW do you ensure ETHICAL BEHAVIOR in all STAKEHOLDER transactions and interac- Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009tions? What are your KEY PROCESSES and MEASURES or INDICATORS for monitoring 18ETHICAL BEHAVIOR throughout your organization, with KEY partners, and in yourGOVERNANCE structure?c. Support of KEY CommunitiesHOW does your organization actively support and strengthen your KEY communities?HOW do you identify KEY communities and determine areas of emphasis for organiza-tional involvement and support? What are your KEY communities? HOW do yourSENIOR LEADERS and your employees contribute to improving these communities?”The Baldrige criteria promote integration of quality elements throughout the system. It isimportant to include here the guidance for integration of social responsibility into otherprocess areas. • “N1. Societal responsibilities in areas critical to your business also should be ad- dressed in Strategy Development (Item 2.1) and in Process Management (Cate- gory 6). Key results, such as results of regulatory and legal compliance or envi- ronmental improvements through use of “green” technology or other means, Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 should be reported as Governance and Social Responsibility Results (in Item 19 7.6). • N2. Measures or indicators of ethical behavior (1.2b) might include the percent- age of independent board members, measures of relationships with stockholder and nonstockholder constituencies, and results of ethics reviews and audits. • N3. Areas of community support appropriate for inclusion in 1.2c might include your efforts to strengthen local community services, education, and health; the environment; and practices of trade, business, or professional associations. • N4. The health and safety of employees are not addressed in Item 1.2; you should address these employee factors in Item 5.3. An integral part of performance management and improvement is proactively ad- dressing (1) the need for ethical behavior, (2) legal and regulatory require- ments, and (3) risk factors. Addressing these areas requires establishing appropri- ate measures or indicators that senior leaders track in their overall performance re- view. Your organization should be sensitive to issues of public concern, whether or not these issues are currently embodied in law. Role model organizations look for opportunities to exceed requirements and to excel in areas of legal and ethical be- havior.”It is very important to recognize the message being sent by the Baldrige program about so-cial responsibility. It is something that can and should be measured and managed as an or-ganization process, not as philanthropy. It is tightly integrated into related with other pro- Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009cesses, particularly those for governance and for employee management and performance. 20The point is that social responsibility is about professional management, not just ethics andcharity.This perspective is being transmitted around the world through national quality programs.At least 77 countries now have national quality programs. The Baldrige program is themodel for most of them. The Deming Award in Japan and the European regional qualityaward are also used as models (Calingo 2002). Of course the three leading programs sharetheir perspectives, and social responsibility is being firmly integrated into the measure-ment of organization excellence around the world.This is strongly reinforcing the movement in SRI to measure sustainability at the processlevel in organizations as a basis for investment decisions. The Baldrige criteria do not letcompanies get away with simple codes of conduct or philanthropy as a basis for sustaina-bility. And SRI fund managers are also not accepting such simplistic gestures. They arelooking for results that indicate the quality of professional management and integration ofsustainability into the basics processes of the organization. It is vital that companies hearthis message, otherwise they will not be competitive in quality or investment. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009Integrating Quality and Sustainability 21Baldrige gives us a framework that matches the specificity of the investors’ criteria for sus-tainability. Although we have summarized the investors’ definition of sustainability, westill have a wide range of important concepts. Baldrige gives us a way to express those cri-teria in a way that leads to their implementation.Table 3 presents our argument for arranging the most important market criteria for sus-tainability in the Baldrige framework. The concepts were aligned based on our best under-standing both of the desired outcomes and the necessary processes to support them. Ofcourse others could arrange the concepts differently and we welcome such debate. How-ever we feel this is a very good step towards practical sustainability for organizations.Baldrige provides the framework and sustainability provides the desired goals or im-portant themes. This gives users a global network, already existing and mostly free, tosupport their performance improvement, and another sustainability network to supporttheir visions of the future.This approach lends itself well to some more specific approaches. For example, it would bestraight forward to arrange the Balrige criteria against specific themes such as water andenergy conservation and waste prevention. In each row one can think how key organiza-tion processes support desired conservation and prevention goals. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 22Table 4: Core Market Criteria for Sustainability in a Quality Framework Baldrige Performance Criteria Core Market Criteria for Sustainabil- ity1.1 Organizational Leadership a. Senior Leadership Direction Sustainability vision and policy b. Organizational Governance Good governance Leadership structure c. Organizational Performance Review1.2 Social Responsibility a. Responsibilities to the Public Responsiveness Beyond compliance b. Ethical Behavior Codes of conduct c. Support of Key Communities Philanthropy Consultation2.1 Strategy Development a. Strategy Development Process Sustainability in strategy develop- ment b. Strategic Objectives Risk management Environmental and social strategies Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 20092.2 Strategy Deployment 23 a. Action Plan Development and De- Sustainability programs ployment b. Performance Projection3.1 Customer and Market Knowledge Stakeholder knowledge3.2 Customer Relationships and Satis-faction a. Customer Relationship Building Customer relationships Supplier relationships b. Customer Satisfaction Determination Customer satisfaction4.1 Measurement and Analysis of Or-ganizational Performance a. Performance Measurement Sustainability assessment b. Performance Analysis4.2 Information and Knowledge Man-agement a. Data Information and Availability Public reporting Labeling and advertising b. Organizational Knowledge Networking - continued next page Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 - Figure 2 continued 24 Baldrige Performance Criteria Core Market Criteria for sustainabil- ity5.1 Work Systems a. Organization and Management of Labor management and relations Work b. Employee Performance Management Compensation System c. Hiring and Career Progression Discrimination Diversity5.2 Employee Learning and Motiva-tion a. Employee Education, Training and Training Development b. Motivation and Career Development Profit sharing5.3 Employee Well-Being and Satis-faction Work Environment Health and safety Employee Support and Satisfaction Non-mandated benefits6.1 Value Creation Processes Pollution prevention Innovation Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 20096.2 Support Processes Supplier sustainability 25 EHS management systems7.1 Customer -Focused Results Sustainability benefits to customers7.2 Product and Service Results Resources use Waste and emissions Product certifications7.3 Financial and Market Results Profit distribution Taxes and subsidies7.4 Human Resource Results Health and safety results7.5 Organizational Effectiveness Re- Certifications of processessults7.6 Governance and Social Responsi- Compliancebility Results Awards Social and environmental impactsIt is important to remember that all the sustainability criteria are derived directly from in-vestor criteria; this is what people with money are looking for.The Balanced Scorecard and Sustainability Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009It is worthwhile to note that a similar approach to performance indicators has been used 26for sustainability management. The Sustainable Balanced Scorecard is a concept popular-ized by a group of European researchers and industrialists. It is based on the BalancedScorecard concept popularized by Kaplan and Norton in the late 1980s (Kaplan, R & D. Nor-ton. 1996). This proposes four major areas or perspectives for performance management:Financial, Operational, Customer, and Organization Development. In many ways the Bal-anced Scorecard is a more simple version of the Baldrige performance system. It hasachieved great popularity, perhaps because of this reason.Zingales et al published an expansive paper about the Sustainable Balanced Scorecard withan extensive literature review (Zingales 2002). The topic has been explored by others aswell (Figge et al 2002a, 2000b, Schaltegger 2002, 2004). The INSEAD school of business inFrance maintains a project on the topic. A Sustainable Balanced Scorecard is used by somecorporations. Figure 3 shows an example from Bristol-Myers Squibb (Zingales 2002). Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 Figure 3: Balanced Scorecard for Environment, Health and Safety 27 at Bristol-Myers SquibThis is a very business-like approach to a sustainability scorecard, focused on metrics thatcan be captured by the information and accounting systems of the corproration. An alter-native concept is shown in Figure 4. This scorecard shows broad areas for managementand how they interact. From the bottom up, the goal of sustainable profit is supported byinnovative approaches to performance of elements of sustainability (INSEAD 2005). Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 28 Figure 4: Example Sustainable Balanced ScorecardWe can build on this work by showing how the market-based sustainability indicators fitwithin a Balanced Scorecard framework. In Figure 5, we have taken the same market-based sustainability criteria that we identified earlier, and arranged them in a Balanced Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009Scorecard framework. The choice of which perspective best fits which criteria is some- 29times challenging, but sometimes it is quite clear. This approach gives a more simplebreakdown of the types of sustainability criteria and makes it obvious that operational fac-tors are the most frequently cited by SRI indexes and mutual funds. Figure 5: Market-Based Sustainability Criteria in a Balanced Scorecard Framework Financial Operational Customer / Stake- Development Perspective Perspective holder Perspective PerspectiveGood governance Leadership structure Responsiveness Sustainability vi- sion and policyRisk management Beyond compliance Philanthropy Codes of conductProfit distribution Environmental and Consultation Sustainability in social strategies strategy devel- opmentTaxes and subsi- Sustainability pro- Customer relationships Stakeholderdies grams knowledgeProfit sharing Labor relations Supplier relationships Sustainability as- sessment Compensation Customer satisfaction Innovation Diversity Product certifications Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 Training Awards 30 Health and safety Sustainability benefits to customers Non-mandated bene- Social and environmen- fits tal impacts Pollution prevention Supplier sustainabil- ity EHS systems Resources use Waste and emissions Health and safety re- sults Compliance Certifications of pro- cesses DiscriminationThis can be considered a more simple form of checklist for sustainability accounting: Itshows what to measure, and for what purpose. It is also a simple but effective tool for lead-ing discussions. For example, what are the driving connections between the items in the Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009columns? What do these terms mean? Why are they in those columns? These questions 31lead to good exploration of what it means to be sustainable.The Baldrige and Balanced Scorecard approaches offer interesting alternatives. Baldrige ismore complex and rigorous, with more objective support from sponsoring institutions.The Balanced Scorecard is simpler to understand and use, so perhaps more likely to suc-ceed in many situations. Regardless, they both have the same approach of identifying coreareas for performance management. Now that we can identify how financial markets de-fine the elements of sustainable performance, we can fit those elements into either perfor-mance management framework.Moving Ahead With Sustainable QualitySocially Responsible Investing is now a major force around the world for promoting Corpo-rate Social Responsibility. Academic and market evidence show that SRI has competitiveperformance with investing that does not consider sustainability or sustainable develop-ment. SRI funds and indexes have identified the specific sustainability performance criteriathat they believe have a positive correlation with profitability. SRI motivates companies tobe more responsible because it gives companies a clear answer to the question, “Whyshould I try to be more socially responsible?” The answer now is, “Because you can attractmore investors and make more money.” Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009Our research identified the core criteria for sustainability used in the SRI market. We clus- 32tered these criteria using a quality management framework that promotes their implemen-tation within companies so they are integrated with the business processes that add value.We used our model to develop a new tool for companies to evaluate their capacity or read-iness to talk with investors about their sustainability performance. Any company can usethis tool to learn if they would be accepted or rejected by investors or customers who areconcerned about sustainability.Besides individual companies and organizations seeking their own sustainability systems,there are several important strategic customers for our research. • Agencies promoting sustainable business should use this model. It overcomes two problems: “what is sustainability?” and “how do you do it?” By using the mar- ket based definition agencies do not have to get into a debate about what is sustain- ability. By using the quality framework, they will find a ready alliance with local quality promotion organizations. Also, they can attract customers based on both the sustainability and quality appeal and find alliance with organizations promoting re- gional competitiveness through quality. • Organizations promoting Quality should use this model to show how sustainabil- ity concepts can support all elements of a quality program. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 • Pension funds that invest for the long term should use this model for selecting in- 33 vestments. Firms with good quality and sustainability programs are quite likely to be better long term investments, according to the market research so far. • Regulatory agencies promoting “beyond compliance” behavior. This model covers many regulated aspects of business, such as employee welfare and pollution. It shows how these issues can be managed in a more integrated way, that provides a lot of additional support to customers.The market now tells us what is a sustainable organization, and the market is seriousenough to put its money on specific elements of sustainability. A business that wants to at-tract investors should be aware of these elements. Figure 6 provides a tool that a companycan use to determine how ready it is to talk to investors or others about their sustainability.There are other guidelines for this, such as the Sustainability Reporting Guidelines of theGlobal Reporting Initiative (GRI 2004), but they are not clearly based on market criteria(although they certainly are influenced by the market). This tools simply lists the thingsthat investors are looking for now. An organization does not need to give great answers toall, or maybe any, of these items, but certainly it will be helpful to be able to talk intelligent-ly about sustainability. And if current trends continue, some will be required to talk aboutit. Figure 6: Corporate Sustainability / Responsibility Assessment Tool Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 34 Rate your company’s capacity to talk to investors about Corporate Social Responsibility (CSR) CSR Criteria Used by Investors 0 1 2 3 4 CSR and sustainability vision and policy Good gov ernance Answer Guide Leadership structure Responsiv enessRate each criteria accord- Beyond com pliance ing to these responses Codes of conduct Notice Philanthropy * All positive answers* Consultation should be supported by CSR in strategy dev elopm ent documentation. Risk m anagem ent Environm ental and social strategies CSR program s0 = No capacity. Stakeholder knowledgeWe have nothing to say Custom er relationshipsabout this. Supplier relationships Custom er satisfaction1 = A little capacityWe are considering it and Sustainability assessm entcan describe our ap- Public reportingproach. Labeling and adv ertising Networking2 = Some capacity Labor m anagem ent and relationsWe can describe a few Com pensationactivities and responsibili- Discriminationties. Diversity Training3 = Good capacity Profit sharingWe can describe about our Health and safetyprogram for this in detail. Non-m andated benefits4 = Excellent capacity Pollution prev entionWe can describe our full Innov ationpolicy, program and re- Supplier CSRsults for this, OR we can EHS m anagem ent system sprovide our official CSR Sustainability benefits to custom ersreports Resources use W aste and emissions Product certifications Profit distribution Taxes and subsidies Health and safety results Certifications of processes Com pliance Awards Social and environm ental im pacts Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009 Bibliography 35Calingo, L. (2002). “National Quality and Business Excellence Awards: Mapping the Fieldand Prospects for Asia,” In: Proceedings: The Quest for Global Competitiveness Through Na-tional Quality and Business Excellence Awards. 18–20 September 2001, Asian ProductivityOrganization, Nadi, Fiji, pp. 3-18.F. Figge, T. Hahn, S. Schaltegger and M. Wagner (2002a). “The Sustainability BalancedScorecard – Theory and Application of a Tool for Value-Based Sustainability Management”In: Proceedings, 10th International Conference of the Greening of Industry Network. Göte-borg, SwedenFigge, F.; Hahn, T. & Schaltegger, S. & Wagner, M. (2002), “The Sustainability BalancedScorecard. Linking Sustainability Management to Business Strategy,” Business Strategy andthe Environment, Vol. 11, No. 5, 269-284.GRI 2004. Sustainability Reporting Guidelines. Global Reporting Initiative, Boston, Massa-chussettsINSEAD (2005). “Towards the integration of environmental and social strategies in the fi-nancial control system,” (2005, February 20). Available .http://www.insead.edu/CMER/research/strategy/sbsc.htm. (Accessed: 2005, February20).Kaplan, R. & D. Norton (1996). The Balanced Scorecard. Harvard Business School, Boston. Wali Memon
    • March 2, Integrating Market-Based Sustainability Indicators And Performance Management Systems 2009Lave, L., N. Conway-Schempf, and A. Horvath (1998). “Total Quality Environmental Man- 36agement at Kodak,” World Resources Institute, Washington DC.NIST (2003). Criteria for Performance Excellence. USA National Institute for Standards andTechnology, Baltimore, Maryland.Pojasek, R (2000a). “Lessons Learned and the Baldrige Model for Environmental Excel-lence,” Journal of Environmental Quality Management, vol. 9, no.4 pp. 87-93Pojasek, R. (2000b). “Striving for Environmental Excellence with the Baldrige Model,”Journal of Environmental Quality Management, vol. 9, no.3, pp. 91-99.Schaltegger, S. (2004): Unternehmerische Steuerung von Nachhaltigkeitsaspekten mit derSustainability Balanced Scorecard, Controlling, Sonderheft Strategische Steuerung, Heft8/9, 511-516Schaltegger, S. & Dyllick, T. (Hrsg.) (2002): Nachhaltig managen mit der Balanced Score-card. Konzepte und Fallstudien, Wiesbaden: Gabler.Wever, G. (1996), Strategic Environmental Management. John Wiley and Sons, New York.Zingales F., ORourke A. & Hockerts K. (2002). “Balanced Scorecard and Sustainability: Stateof the Art Review”, INSEAD Working Paper, Fontainebleau, France. Wali Memon