20 Issues on building a sustainable business


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Sustainability is a serious consideration for businesses, and is no longer perceived as an environmental issue alone. The implications of this shift are significant, and subsequently, industry leaders are determining ways to embed sustainability throughout their business operations and strategic goals.

This publication, produced alongside KPMG, examines how organisations can approach sustainability, discussing how to build sustainability into your strategy, how to implement the strategy, how to embed sustainability considerations into core business processes and how to create value through reporting. Does your business factor in sustainability when making long-term decisions? How can you ensure your business has a viable future?

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20 Issues on building a sustainable business

  1. 1. Business briefing series20 issues on building a sustainable business
  2. 2. KPMG is one of the world’s leading professional services The Institute of Chartered Accountants in Australianetworks. KPMG’s Climate Change & Sustainability Services (the Institute) is the professional body representinggroup works with clients to respond to sustainability and Chartered Accountants in Australia. Our reach extendsclimate change issues in order to manage risk, create value to around 70,000 of today’s and tomorrow’s businessand achieve a competitive advantage. leaders, representing approximately 57,000 CharteredPart of KPMG’s Global Climate Change and Sustainability Accountants and 13,000 of Australia’s best accountingServices network, our practice provides services to leading graduates currently enrolled in our world-classbusinesses and public sector organisations across the globe. Chartered Accountants postgraduate program.Our multi-disciplinary teams with backgrounds in business Our members work in diverse roles across commercerisk, environment, social studies, compliance, finance, tax and and industry, academia, government and public practiceaudit mean we bring a holistic and integrated approach to help throughout Australia and in 108 countries around theour clients respond to the complex business challenges and world.opportunities arising from climate change and sustainability. We aim to lead the profession by delivering visionaryServices include: leadership projects, setting the benchmark for• Sustainability Advisory. Assisting organisations to create the highest ethical, professional and educational value and manage risk through appropriate sustainability standards, and enhancing and promoting the Chartered strategies, programs and reporting. Accountants brand. We also represent the interests of members to government, industry, academia and the• Climate Change Advisory. Helping organisations prepare for, and perform successfully in, a low-carbon economy. general public by engaging our membership and local and international bodies on public policy, government• Water Advisory. Working with governments, water legislation and regulatory issues. corporations and businesses to respond to the challenges of water scarcity. We assist governments execute their water The Institute can leverage advantages for its members reform agendas and identify and manage public and private as a founding member of the Global Accounting Alliance investment in water projects. (GAA), an international accounting coalition formed• Assurance services – sustainability reporting and by the world’s premier accounting bodies. With a greenhouse gas emissions. Providing assurance membership of over 800,000, the GAA promotes quality services to enhance the credibility of reported information professional services, shares information, associated with sustainability practices and greenhouse and collaborates on international accounting issues. gas emissions. We combine the rigour of the financial audit Established in 1928, the Institute is constituted by Royal approach with a deep understanding of sustainability and Charter. For further information about the Institute visit greenhouse gas data management and reporting issues. charteredaccountants.com.auFor more information visit kpmg.com.au All rights reserved.Disclaimer All information is current as at October 2011The information in this briefing paper is of a general nature and is not intended First published November 2011to address the circumstances of any particular individual or entity. Althoughwe endeavour to provide accurate and timely information, there can be no This communication provides general information which is currentguarantee that such information is accurate as of the date it is received or as at the time of production.that it will continue to be accurate in the future. No one should act upon Published by:such information without appropriate professional advice after a thorough The Institute of Chartered Accountants in Australiaexamination of the particular situation. Address: 33 Erskine Street, Sydney, NSW 2000The Institute of Chartered Accountants in Australia and KPMG expressly KPMGdisclaim all liability for any loss or damage arising from reliance upon any Address: 10 Shelley Street, Sydney NSW 2000information contained in this briefing paper. 20 issues on building a sustainable businessCopyright First edition© The Institute of Chartered Accountants in Australia. All rights reserved. This National Library of Australia Cataloguing-in-Publication entrypublication is copyright. Apart from any use as permitted under the CopyrightAct 1968, it may only be reproduced for internal business purposes, and may 20 issues on building a sustainable business /Institute of Charterednot otherwise be copied, adapted, amended, published, communicated or Accountants in Australia, KPMG.otherwise made available to third parties, in whole or in part, in any form or ISBN: 978-1-921245-89-3 (pbk.)by any means, without the prior written consent of The Institute of Chartered Business enterprises.Accountants in Australia and KPMG. Success in business.© 2011 KPMG, an Australian partnership and a member firm of the KPMG Institute of Chartered Accountants in Australia.network of independent member firms affiliated with KPMG International Klynveld Peat Marwick Goerdeler.Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. Business briefing series.KPMG and the KPMG logo are registered trademarks of KPMG International.Liability limited by a scheme approved under Professional Standards Legislation. 338.7ABN 50 084 642 571 The Institute of Chartered Accountants in Australia Incorporated in Australia Members’ Liability Limited. 1011-01ABN: 51 194 660 183 KPMG
  3. 3. Business briefing series20 issues on building a While many businesses are committed to the principles of building a sustainable business, many find it difficult to implement practical strategies that will enable this.sustainable business At the Institute, accounting for environmental, social and governance (ESG) factors impacting an organisation has been on our agenda for some time, with the advent of Broad-Based Business Reporting (BBBR). A recent leadership paper, integrating sustainability into business practices: a case study approach, highlighted five case studies of Australian and New Zealand organisations that have implemented sustainable business practices. In this leadership paper, Business briefing: 20 issues on building a sustainable business, we have partnered with KPMG to take a strategic, big-picture look at how businesses can address ESG risks and practically incorporate sustainability into their business plan. The paper offers guidance in a number of business areas, including strategy, internal and external buy-in, risk management and reporting principles. This is the fifth publication in our successful Business Briefing Series, which provide guidance for business leaders and financial professionals on a range of issues relevant to contemporary businesses. As the profile of sustainability evolves, I hope this publication sheds some light for you on how to make a sustainable business your reality. Rachel Grimes FCA President Institute of Chartered Accountants in AustraliaBusiness briefing series: 20 issues on building a sustainable business 3
  4. 4. 4 Business briefing series: 20 issues on building a sustainable business
  5. 5. ContentsExecutive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Build sustainability into your strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1. Understanding industry externalities and stakeholders’ expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. Mapping business risks and opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3. Assessing competition and defining positioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4. Integrating sustainability into strategy and strategic objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5. Developing the business case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Implement the strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6. Leading from the top. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7. Building internal awareness and knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8. Developing a cultural change process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 9. Involving external stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 10. Developing relevant sustainability metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Embed sustainability into core business processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 11. Incorporating sustainability within the risk management framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12. Understanding product development and customer attitudes and behaviours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 13. Promoting sustainable procurement and supply chain management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 14. Understanding the investment decision-making process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 15. Measuring performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16. Ongoing monitoring of externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Create value through reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 17. Determining your audience and objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 18. Developing reporting principles and guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 19. Moving to integrated reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 20. Identifying assurance needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Resources and further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Contact details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Back coverBusiness briefing series: 20 issues on building a sustainable business 5
  6. 6. Executive summary Sustainability is a business case Sustainability has entered the mainstream of corporate Sustainability has transitioned from an environmental life, according to a 2010 study by KPMG and the issue to a serious business consideration. Industry Economist Intelligence Unit.3 Nearly two-thirds of the leaders have already anticipated the management companies surveyed had already adopted a strategy implications of this shift and are embedding sustainability for corporate sustainability, up from just over half in throughout the operations of their business and strategic February 2008. A further 11% were currently developing goals. However, running a sustainable business appears a sustainability strategy. challenging to corporations across Australia, many of Sustainability issues are reshaping the rules of business which require a new approach to remain competitive competition, driving new business models, transforming in a fast-changing world. industry structures, redefining markets, and creating The World Commission on Environment and new risks and opportunities. How businesses choose Development has defined sustainability as ‘economic to respond to and integrate sustainability with core development that meets the needs of the present business strategy will underpin their success in achieving generation without compromising the ability of future a long-term competitive advantage. generations to meet their own needs’.1 Sustainability This paper identifies 20 key issues that are relevant to issues can potentially affect most elements of implementing a new strategic approach to sustainability business strategy, including the price and availability in a corporate context. These are discussed under four of capital, competitive relativities, operating costs, headings: risk management, process improvement, innovation, • Build sustainability into your strategy consumer preferences, supply chain management and regulatory compliance. • Implement the strategy • Embed sustainability into core business processes There is growing official and public expectation that organisations will conduct their business in a sustainable • Create value through reporting. manner in order to retain public trust and their licence to operate. Beyond that, however, there is a realisation across all industry sectors that an organisation’s To build a sustainable Implement sustainability poses significant risks and opportunities business, start the to its future profitability. with the strategy strategy This position is reflected in the views of business leaders, according to a 2010 UN Global Compact, Accenture CEO Building a Study.2 It reported that 96% of the business and civic sustainable leaders polled thought that sustainability issues should business be fully integrated into strategies and operations, up from 72% in 2007. Over 90% of CEOs surveyed believed that Embed sustainability matters would be critical to the success of Create value sustainability their businesses. through into core reporting business processes 1. Oxford: Oxford University Press, Our Common Future: World Commission on Environment and Development, 1987. 2. United Nations Global Compact, Accenture CEO Study, A New Era of Sustainability, 2010. 3. KPMG in cooperation with the Economist Intelligence Unit, Corporate Sustainability: A Progress Report, November 2010.6 Business briefing series: 20 issues on building a sustainable business
  7. 7. Build sustainability into your strategyTo build a sustainable business, sustainability related issues, developed in consideration ofexternalities and stakeholder concerns and expectations, should be appropriately considered andembedded in the business strategy. You may also consider trade-offs in order to optimise social,environmental and business performance for long-term value creation.The resulting strategy will identify and respond to both potential limits to growth and businessopportunities, such as access to new products or new markets, and apply across the entireorganisation. Performance measurement should be aligned with corporate level objectives andresonate with management’s business priorities.Currently, some companies have developed separate standalone sustainability strategies, whileothers have integrated sustainability considerations into core business strategy. As integratedstrategies are becoming more commonplace, sustainability is increasingly acknowledged as acritical component of good governance, risk management and a source of competitive advantage.The issues are presented in the context of an integrated strategy, but are equally relevant forstandalone sustainability strategies.1. Understanding industry externalities and needs, and demographic shifts may impact the and stakeholders’ expectations assumptions behind business strategies. Is your organisation exposed to industry-specific Each industry faces its own unique environmental and regulatory changes? social challenges which may affect business models, technological innovation and business outlook. It is What physical, social, environmental, important that a strategy is formulated to capture technological and economic factors may the various risks and opportunities, with particular impact your operating environment? attention to physical, environmental, technological, Does your business strategy incorporate social, regulatory and economic factors that will changing stakeholder expectations? impact the operating environment of the organisation. It also requires recognising and understanding theUnderstanding the broader context in which your interconnections between industries, where a disruptionorganisation operates is a critical first step in incorporating in one may cascade to other industries with randomsustainability considerations into business strategy. This consequences (e.g. fires in Russia may result in exportrequires taking steps to capture, understand and assess embargoes, which may push up grain prices around thethe unique sustainability-related factors impacting an globe or lead to an increased demand for corn-basedorganisation’s industry and geography, such as how bio-fuels, which may influence affordability of basicstakeholder expectations, changing societal tastes food produce).Business briefing series: 20 issues on building a sustainable business 7
  8. 8. Build sustainability into your strategy (continued) Stakeholder engagement involves obtaining input into Example: Sustainability challenges key strategies and objectives, which will ensure facing the airline industry that organisations understand and respond to external The airline industry is highly competitive and input when developing strategy. characterised by thin margins, volatile yields, In this context, stakeholders can include shareholders, price-sensitive customers and technological investors, financiers, employees, customers, suppliers, limitations (e.g. reliance on oil-based fuels). These and other factors impact business sustainability governments, regulators, NGOs, academics, and and sustainability performance. Other sustainability communities with strong links to a particular enterprise. challenges may include: The table below summarises issues facing the financial • Managing and reducing greenhouse gas services industry and relevant stakeholder groups. emissions within the constraints of limited Seeking input from relevant employees, as critical abatement opportunities stakeholders, during strategy development allows • Managing the economic impact of emission their unique understanding of risks and opportunities constraints in different global markets to be captured. In addition, early engagement will • Monopolistic behaviours in parts of the value strengthen internal ownership of the strategy during chain (e.g. airport managers) implementation. • Growth constraints as hub airports reach capacity • Poor labour flexibility and productivity in certain markets • Airline safety and security issues. Issues facing the financial services industry and relevant stakeholder groups Material issues Relevant stakeholder groups Bank fees and charges, and interest rate decisions Customers, governments Sustainable and responsible investment, Environmental social governance (ESG) and mainstream lending, products and screening investment analysts, employees, NGOs, customers, academics Customer service Customers, ESG and investment analysts, employees Equal opportunity Employees, ESG and investment analysts Job security, talent retention Employees, ESG and investment analysts Financial inclusion and global financial crisis Customers, ESG and investment analysts Climate change Community, ESG and investment analysts, customers, employees, NGOs, academics Governance and compliance ESG and investment analysts, employees, customers Economic contribution ESG and investment analysts, employees, community Safety and security Customers, employees, unions8 Business briefing series: 20 issues on building a sustainable business
  9. 9. Example: Mapping the key issues in New Zealand Agribusiness KPMG recently conducted a survey Highest ranked priority issues for New Zealand agribusiness of over 80 agribusiness industry (on a scale of 1 to 10) leaders in order to understand the Maintain a robust biosecurity system key opportunities, policy settings Understand global products and industry actions facing and eating trends agribusiness in New Zealand. Ensure practices support ‘clean/green’ image Recognising that the agribusiness Effective mechanisms for extension sector should be closely involved as the key driver of New Zealand’s Build high value solutions with customers export earnings in the future, the Recognition of importance survey results could help industry of governance stakeholders develop a strategy Aligned industries with a common goal that will capture the potential Recognise consumer trends that exists for the sector in global around sustainability Develop brands for global fast moving markets. Key issues were ranked by consumer goods markets level of priority, and many of those Realise benefits of free trade agreements in the top 10 relate to sustainability issues such as biodiversity and 0 2 4 6 8 10 changing consumer trends. Source: KPMG Agribusiness Agenda 20112. Mapping business risks and time with regard to abatement activities developed opportunities through technological innovation. What industry challenges and growth constraints Materiality is another issue to consider. Certain are most material to your organisation? sustainability issues will have a larger effect on the Is a process in place to review changes and performance of the organisation than others, just as assess the impact of these issues on strategy? certain activities produce more significant sustainability consequences than others. Concentrate on identifying How can these changes be leveraged to create a competitive advantage? issues that are likely to have the greatest negative or positive impact.Mapping business risks and opportunities will help While sustainability challenges vary considerablyrelevant linkages and relationships become evident. between organisations and industries, they invariablyDoing this allows you to pull together and summarise relate to physical, regulatory or market-driven factorsthe knowledge and ideas developed in earlier phases that can limit growth and impact on competitiveness.of strategy formation. At this stage, it is important Limitations can be physically imposed (e.g. waterto make sure that the relevant industry challenges, scarcity), regulatory driven (e.g. carbon pricing,growth constraints and stakeholder expectations have emission standards) or a consequence of consumerbeen properly assessed and included in the process. preference (e.g. demand for greener products).The mapping process captures relevant knowledge Identifying and understanding constraints to growth areat a point in time. This process needs to be regularly key challenges and require strategic responses. Crucialreviewed because many of the inputs can change as for business longevity and competitive advantage is ana result of technological, economic and regulatory understanding of tipping points and your organisation’sdevelopments. For example, the risks presented by preparedness to respond to these factors.the introduction of a carbon price in Australia willbe intensified during the first year as businesses adapt Ultimately, with good planning, constraints and limits canto the changes and opportunities will increase over be turned into opportunities and competitive advantage.Business briefing series: 20 issues on building a sustainable business 9
  10. 10. Build sustainability into your strategy (continued) Common risks and opportunities for consideration in a sustainable growth strategy Regulatory change. Sustainability strategy should Licence to operate. Most organisations function include a capacity to track and respond quickly and under an implicit licence to operate. Adverse effectively to relevant regulatory changes (e.g. a price developments in public opinion and government on carbon emissions, changes to energy efficiency attitudes can cause the licence to be removed or have standards or water allocations). While there has been conditions imposed upon it. Events involving one considerable focus on changes to environmental industry participant can have adverse consequences regulations, governments are also increasingly using for other players. For example, the BP oil spill in the regulation to address social issues. An example of Gulf of Mexico in 2010 resulted in tighter regulation this is the federal government’s plan to introduce of the global oil and gas industries. plain packaging for tobacco products by 1 July 2012 Workforce considerations. Sustainability needs in an effort to reduce smoking rates and improve to be considered in the context of an organisation’s public health. ability to attract, manage and retain quality employees. Eco-efficiency. The value of constrained resources This element may be a critical issue in regards to and the ability to maximise access to them will become employment choices. a major driver of competitive advantage. In many Supply chain pressures. Sustainability factors are cases, activities such as improving energy efficiency becoming increasingly important in supply chain or reducing packaging can also lead to a reduction in security and performance, and are influencing operating costs, increased innovation, and enhanced consumer choices. Issues such as sustainable sourcing brand image and regulatory compliance. of raw materials, carbon and water performance and Customer preferences and brand loyalty. While employee human rights are increasingly becoming there is only anecdotal evidence of sustainability brand and reputation issues for organisations and issues impacting a customer’s decision to buy a are therefore attracting greater scrutiny. An example product, there is significant evidence that customers of this was seen in 2010 when Greenpeace targeted may choose not to buy a product on the basis of an Nestlé’s Kit Kat product over concerns about the use organisation’s sustainability performance. An example of palm oil and the resulting impact on the habitats of this is the backlash faced by Nike during the of orangutans. A viral advertising campaign led to 1990s after accusations of using sweatshops drew significant pressure on Nestlé’s brand and the product the attention of human rights groups and the media, itself, prompting Nestlé to announce it would stop prompting campaigns to boycott products. Customer using ingredients that may be sourced as a result of expectations need to be researched and monitored as rainforest destruction. they evolve. Licence to operate Eco Regulatory efficiency change Limits to sustainable growth Supply chain Customer pressure needs Workforce considerations10 Business briefing series: 20 issues on building a sustainable business
  11. 11. 3. Assessing competition and 4. Integrating sustainability into defining positioning strategy and strategic objectives How do your competitors define and Is your sustainability strategy linked to core implement sustainability? business objectives? Do your sustainability initiatives place you What potential intangible benefits could as an industry leader? investment in sustainability deliver? How can your organisation be differentiated Does your organisation have resilience to gain competitive advantage? to sustainability shocks?Analysing your organisation’s peers and competitors An effective sustainability strategy should focus onis critical in order to define an appropriate strategic delivering core business objectives and creating businesspositioning for market differentiation. For example, are value in terms of cost reduction, revenue growth andyou seeking to be an industry leader and innovator, a enhanced brand value, or any combination of these.fast follower or a niche player? This analysis provides an One of the challenges is balancing short- and long-understanding of your positioning within your industry term business needs. A popular lens for sustainabilityand helps to identify how and where your organisation investment is the ‘J curve’ (see below). This involveswishes to move in the future. initial investment to deliver longer-term benefits for theIntegrating sustainability risks and opportunities within organisation. At times, this investment may need to bebusiness strategies is an opportunity for individual not only ahead of the market but ahead of regulationorganisations to positively differentiate themselves from in order to maximise the competitive benefit. Indeed,their competitors. Organisations can gain positional a common challenge in investment approval is the lackadvantages (both in terms of cost and brand reputation) of recognition of intangible benefits, such as reputationby establishing themselves as industry leaders in and improved customer loyalty, within cost-benefit andsustainability matters. Consumers respond positively payback analyses.to perceptions that organisations conduct themselvesin a sustainable and ethical manner. Sustainability investment returns over timeAs noted in Issue 2, how an organisation tacklesthe risks and challenges posed by management ofsustainability issues will provide the greatest opportunityfor differentiation from competitors and for the broaderpositioning of the organisation. Returns Time 0Sustainability issues can directly impact competitivepositions within industries. For example, in onehigh-emission manufacturing industry, the leadingorganisation sources and manufactures most of itsproducts within Australia, while its major competitorsources material offshore. Consequently, the imposition The development of an effective sustainability strategyof a carbon price in Australia is likely to impact their will involve certain business performance trade-offs, andrelative competitive positions. numerous considerations must be taken into account to determine how to best optimise the situation. A saving in energy efficiency that in turn increases waste may not necessarily be considered sustainable. Decisions also need to make commercial sense. Overall, strategy formation is about optimising the balance.Business briefing series: 20 issues on building a sustainable business 11
  12. 12. Build sustainability into your strategy (continued) Trade-offs: The Qantas experience Setting sustainability goals and ‘Managing environmental impacts (and other objectives sustainability target areas) is a balancing act. After assessing the actual and potential implications Actions to mitigate one consequently may adversely of sustainability issues for your organisation, it is affect another. For example, the Group is washing important to establish clear business objectives. more aircraft to reduce drag to improve fuel This will include defining what sustainability means efficiency. While fuel consumption is reduced, to your organisation, given that there are many water consumption is increased. Another example different definitions. is that the most fuel efficient flight path may reduce In setting goals and objectives, your organisation greenhouse gas emissions but may increase the needs to consider the scale of threats and number of people exposed to aircraft noise. In some opportunities, the potential impacts on current cases, the Group has been required to operate a fully business and growth goals, and positioning in noise compliant but less fuel-efficient flight path in relation to competitors around these issues. response to local community concerns. These types of trade-offs between different impact areas create As suggested earlier, isolating sustainability within additional complexity in both setting environmental only one part of your organisation is set to almost improvement targets and in identifying improvement guarantee failure, as the costs of sustainability initiatives.’ programs will be incurred but many of the benefits Source: Qantas Data Book 2010 will not be captured. Sustainability should become a part of core business activities, such as procurement, risk management, Decisions tend to become more difficult as marketing and product development. This integration sustainability’s ‘lowest-hanging fruit’ is picked and needs to be implemented across the organisation consumed. Technological innovation, regulatory both hierarchically and geographically. change and shifts in the economic climate can offer Implementing a sustainability strategy and building opportunities for sustainability and performance resilience into your organisation requires process breakthroughs. The ability to identify such opportunities changes and behaviour change at all levels. ahead of competitors is becoming a highly desirable Sustainability considerations can also be integrated more broadly, in areas such as recruitment, cultural competency. change programs, partnerships and alliances. One of the outcomes of integrating sustainability into strategy is that it enables an organisation to develop resilience to sustainability shocks. Sustainable business policies and practices should provide a measure of protection against adverse, unexpected external events by making your organisation capable of responding to shocks and setbacks.4 Once it has been determined to what level sustainability will be integrated into an organisation, it is important to clarify these decisions within the strategy with clear goals and objectives. 4. Examples of this can be found in Early warning systems: can more be done to avert economic and financial crises, a leadership paper released by the Institute in February 2011.12 Business briefing series: 20 issues on building a sustainable business
  13. 13. 5. Developing the business case The introduction of a carbon price in Australia creates further incentive to address these key areas of value as Is there an opportunity to reduce long-term they will be fundamental in mitigating any additional operating costs through implementing carbon costs faced by businesses directly and sustainability measures? throughout their supply chain. Is there a threat to brand equity beyond the operational control of your organisation which could be minimised through sustainability investment?Demonstrating the business value of a sustainabilitystrategy is an essential element of building a sustainablebusiness. When building a business case, there are threekey areas of value to consider:• Reduced operating costs With increasing energy, water and waste costs, reductions in use will not only reduce dependence on scarce resources and greenhouse gas emissions but also impact future operating costs. To give an accurate picture of operating cost reductions, modelling future price increases is essential. For example, DuPont (once named the most polluting company in the world) found it cost less to implement energy-saving measures than it did to buy and burn fuel. As a result, the company estimated that every tonne of carbon it displaced saved it $6 5.• New product and market opportunities For many organisations, there is a potential upside in integrating sustainability into business strategy via new products and markets. A striking example of this is General Electric’s ‘Ecomagination’, a business initiative focused on developing green technology. This helped turn the company’s image around following its controversial dumping of toxic chemicals in the Hudson River.• Brand equity Sustainability draws focus onto both the protection and promotion of an organisation’s brand. You need to be aware of the risks to brand and reputation, particularly around areas where you have reduced control, such as joint ventures, contractors and supply chain if they are not meeting your standards. Appropriate influence should be applied to third parties so that their performance supports your organisation’s reputation.5. Lovins, L. Hunter, The economic case for climate action (March 2010) p 12, www.climateactionproject.com/docs/HL_Economics.pdfBusiness briefing series: 20 issues on building a sustainable business 13
  14. 14. Implement the strategy To ensure a sustainability strategy is successful, an organisation’s leadership will play a critical role in supporting and driving its implementation. 6. Leading from the top • How and when will the change process take place? Are the Board of Directors and senior management While the detail of the strategy development and actively involved in communicating the value of implementation is likely to be articulated by specialist sustainability to the organisation? leaders, senior management should outline the overall Are the drivers and outcomes of your sustainability approach, accountabilities and timeline approach relevant and clear to employees and • Are support structures in place throughout stakeholders? the organisation? While leading from the top is essential, it is also As with most organisational changes, lasting progress important to show support for middle management, on sustainability is unlikely without strong and focused who can be caught between the demands of the leadership, preferably starting at the Board level. Many Board and the resistance of employees. employees welcome sustainability initiatives and are ready to apply them once they see strong leadership on these initiatives. Key leadership success factors Strong leaders create both passion and momentum • Take every opportunity to discuss around sustainability issues. To do this, leaders should • Behave in a way that is clear and consistent consider a number of questions: • ‘Live the values’ and embed sustainability into your daily life • What does sustainability mean for our organisation? A clear definition sets the boundaries within which • Show support to middle management and to consider these issues. Sustainability could take on operational employees different meanings for different people 6 • Communicate the strategy and highlight results • What are the drivers for sustainability issues to • Encourage employees to challenge the status quo, and reward innovative thinking. be among the top issues facing the organisation? In other words, why are we doing this? These drivers are likely to include alignment with organisational Board directors and senior management should values, regulatory compliance, meeting of stakeholder think about why they are supporting and promoting expectations, improved operating efficiencies, cost sustainability and ensure the organisation clearly reductions, enhanced competitiveness and increased understands this. Demonstrating value and obtaining innovation. It is important to outline opportunities as well as risk mitigation as a key driver for change buy-in is crucial for securing internal support. • How will sustainability initiatives fit within Enabling cultural and business change is an essential the existing business strategy? part of success and needs to start at the top. This will It is critical that the sustainability strategy is integrated help ensure the effective integration of sustainability into the current and future business strategy from the into the business strategy. beginning of the process. Articulating how the strategy will protect and promote current business objectives will help the rest of the organisation, as well as external stakeholders, put the work into context. 6. Examples of different sustainability case studies can be found in Integrating sustainability into business practices: a case study approach, a leadership paper released by the Institute, May 2011.14 Business briefing series: 20 issues on building a sustainable business
  15. 15. Successfully integrating sustainability into your Demonstrating value and securing organisation requires employees to be aware of the internal support for sustainability ‘big picture’ of what is trying to be achieved, as well as Management sometimes views sustainability as a what they need to do as individuals for implementation compliance exercise, and a distraction from more to be successful. The key question for business is important activities. This view can be changed by how to build this awareness in a cost and time clearly aligning sustainability strategy with core efficient manner, using existing programs for business objectives. The Sloan Management employee engagement where they exist. Review/BCG study 7 found a strong link between an organisation’s ability to integrate sustainability Arguably, the most critical factor for successfully into overall business strategy and both the incorporating sustainability into a business is that effectiveness of the relevant sustainability initiatives each employee clearly understands what they are and the overall performance of the enterprise. responsible for and that they acquire the right knowledge To place sustainability in its proper context for to be successful. How this is achieved will vary and employees, an organisation should discuss the is influenced by existing structures for employee business challenges facing it, and the role of engagement and knowledge sharing. Here are some sustainability in meeting these challenges. suggested strategies: Boards and CEOs should clearly demonstrate the value of sustainability to the organisation • Conduct group-level workshops to explain how and the stakeholders, making it clear that the sustainability strategy will affect each business decisions and choices that lead to better group, and encourage group members to develop sustainability outcomes will be rewarded. their own implementation strategies As sustainability benefits can sometimes be • Identify key individuals from each business group difficult to monetise and reduce to a calculation to take on the role of sustainability ‘champion’, to of return on investment, gaining business buy-in identify and communicate what the group is required and support for sustainability initiatives can be to do, generate ideas, drive implementation of the challenging. Early consideration of alternate strategy within the group, and identify and seek ways to measure the benefits is often required. assistance to remedy blockages in the implementation process should they arise • Create a ‘live’ library of sustainability information relevant to the business which individuals can access7. Building internal awareness and add to and knowledge • Start with achievable ‘quick wins’ in the sustainability Are the ‘big picture’ sustainability objectives strategy and ensure they are communicated to clear to employees? employees Is everyone in the organisation aware of their role • Provide access to knowledge sources such as in the implementation and ongoing success of industry and interest groups, newsletters, magazines sustainability as a core business function? and journals. What tools can you use to enhance communication and support employee awareness?7. MIT Sloan Management Review and the Boston Consulting Group, Sustainability: The ‘embracers’ seize advantage, 2011Business briefing series: 20 issues on building a sustainable business 15
  16. 16. Implement the strategy (continued) 8. Developing a cultural change process 9. Involving external stakeholders Are the differences between the current culture Which key external stakeholders can provide input and the desired culture clear and understood to your organisation’s sustainability position? by employees? Have external stakeholders been engaged early Which areas of the organisation are likely to be so they can understand your organisation’s most heavily impacted? What support is in place? sustainability perspectives? Are there opportunities for partnerships with For many organisations, embedding sustainability into key stakeholders to drive sustainability results? the core function of a business requires a significant shift in the culture. For implementation to be successful, Effective stakeholder engagement is essential as your the organisation needs to know where support is organisation progresses its sustainability agenda. required to sustain this change, and to put it in place Many organisations focus stakeholder relationships on before the transition. governments, shareholders and industry bodies, with It is often useful to identify what the current culture consumer research also providing input. However, of the organisation is and how this compares to the engaging with other groups – such as non-government desired culture. This will indicate the degree of support organisations (NGOs), academics, customers and required to facilitate the transition. community groups – can also provide significant input into an organisation’s sustainability position. A cultural change process is most successful when individuals are well informed and supported. The Effective engagement requires clearly defining who your following are some steps organisations can take to organisation’s stakeholders are and their perspectives identify what is required: on sustainability issues and concerns. Engaging with stakeholders early in the strategy development process • Ensure everyone in the organisation understands brings important external input into this process. Early what is trying to be achieved and what this means for them in their individual roles (as discussed in Issue 7) engagement also helps organisations ‘stress test’ their strategy externally, signal to key stakeholders that • Identify which individuals and groups across the the organisation is seriously addressing sustainability organisation will be more impacted than others. concerns, and identify partnership opportunities which Ensure they and their managers understand what will support the achievement of outcomes. they require to successfully fulfil their roles • Ensure appropriate mechanisms and supports are Your organisation should also continue to engage in place before people transition to their new roles with stakeholders during the implementation process. • Be prepared to change goals and key performance Done effectively, this will create trust and enable the indicators, retrain individuals, provide access to organisation to positively influence outcomes to further education and/or reassign roles support sustainability and business objectives. • Link sustainability criteria to incentive schemes Ongoing engagement and communication with • Bring together groups or individuals who have stakeholders can be achieved via a variety of methods. previously worked independently and will now Some organisations create a stakeholder council, which be required to interact and share information. meets several times a year and is consulted on key organisational initiatives. Other organisations take a more targeted approach by creating close relationships with a select group of stakeholders. For broader engagement, a major channel of communicating with stakeholders is public reporting and disclosure. The quality of reporting is a critical factor in effective stakeholder engagement (see Issue 18).16 Business briefing series: 20 issues on building a sustainable business
  17. 17. 10. Developing relevant sustainability metrics Example: Stockland liveability index Liveability is fundamental to the long-term What are the sustainability indicators material to sustainability of residential communities developer, your organisation’s strategic objectives? Stockland’s, business. Stockland is designing Do they address meaningful key performance its own liveability index to better understand, indicators (KPIs), targets, and short and long-term benchmark and measure liveability in the planning outcomes? and development of its residential communities. The sustainability and liveability of its communities has always been a top priority and a key strategic Increasingly, companies understand the value of objective of Stockland; however, prior to developing transparent, accurate and timely reporting of matters liveability metrics it was difficult to quantify and material to their business, as both the core of corporate objectively manage liveability within a community.governance and a requirement of the market. But the Stockland recognised that enhancing the liveability success and sustainability of an organisation will be of its communities was both a key sustainability influenced by how well it can measure, manage and initiative and a key business priority. Stockland report its performance against a range of new reporting Managing Director Matthew Quinn told a recent metrics. Sustainability metrics will become increasingly Sustainability challenge: business creativity inimportant in defining the value of an organisation and practice forum that innovative approaches to providing indicators of long-term growth potential. sustainability and customer engagement can deliver strong financial rewards for businesses.Further, your organisation’s strategy should reflect The liveability indicators that Stockland developed issues material to the organisation and its stakeholders. help to measure the unique themes that create Measuring sustainability performance against strategic liveability in communities. This index will revolve objectives and benchmarks is essential to ensure around six key themes:sustainability-related initiatives retain their credibility. • Affordable living and workingThe challenge is to translate strategic goals into • Economic prosperitymeaningful KPIs and targets, and achieve the right • Access and connectivitybalance between long-term performance (required • Sense of belonging and identityto deliver sustainability outcomes) and short-term • Wellbeing and healthy livingperformance pressures. • Governance and engagement.Organisations should avoid wholesale adoption of As a result of developing the liveability indicators, indicators specified in sustainability reporting guidelines Stockland will be better placed to internally without first mapping those indicators against identified measure the liveability of projects, enhance material issues and strategic priorities. the liveability of communities, and externally communicate the liveability of projects to planning Information systems need to be in place to capture authorities, customers, and other key stakeholders. the required information and to measure, monitor and In addition to improving the liveability of Stockland report against KPIs. Key to developing an appropriate communities, Stockland believes the indicators and lasting system is the support of your finance team. will provide a competitive advantage in the market. The team’s involvement in developing and measuringmetrics and achievable sustainability targets will helpensure consistency of data management and reporting,and in the long term help with the transition to integratedreporting (see Issue 19).Business briefing series: 20 issues on building a sustainable business 17
  18. 18. Embed sustainability into core business processes Sustainability considerations touch on many management functions and processes. Organisations should assess the extent to which sustainability risks, opportunities, goals and performance targets need to be reflected within these processes. Failure to adequately review and update processes may result in dysfunctional or sub-optimal decision-making, or a lack of alignment with strategy and commitments. 11. Incorporating sustainability within 12. Understanding product development the risk management framework and customer attitudes and behaviours Have the outputs of stakeholder engagement been Has your organisation undertaken adequate considered in the risk management process? research to understand current and future Are the impacts of sustainability-related risks trends and their implications? understood and quantified? What factors are likely to drive changes in your industry? An organisation’s risk management framework is Are there financial incentives available to central to its business. Ensuring that sustainability issues support new sustainable product innovation? are adequately covered in your organisation’s risk management framework will minimise the potential for Individuals’ responses to sustainability issues affect their sustainability-related risk to impede the achievement attitudes and behaviours as customers. Anticipating of business objectives. It will also provide a formal market transformations and the factors driving them framework for managing these risks through establishing can help your organisation respond more effectively clear mitigation actions and accountabilities. Common to changes in consumer behaviour and societal norms. challenges organisations face include: With this in mind, leading organisations often engage • Reconciling the enterprise risk map to the and collaborate with customers in product development. identified material sustainability issues It is also important to explore emerging trends and In some cases, the risk mapping process may have drivers that may impact on product demand. Customer been carried out without sufficient consideration preferences, identified today through engagement, may of sustainability risks. In others, there may be not provide insight into tomorrow’s demand. For that, insufficient linkage between the outputs of deeper research and engagement with industry experts stakeholder engagement, which is a core mechanism may be beneficial. The example overleaf illustrates the for capturing current and emerging sustainability dynamics that impact food demand trends flowing risks, and the risk management process from changing demographics and income levels. • Quantifying the impact of risks associated A range of considerations influence purchasing with brand and reputational damage decisions. Care must be taken in teasing out the various Some sustainability-related risks fail to become factors involved, and in understanding their relative recognised and prioritised because their impacts importance and how they interact with each other. are not appropriately quantified. Detailed information will enable your organisation to create a risk profile which can be used to compare elements such as likelihood and size of impact. This will determine the level of threat and guide appropriate actions. Proactive leaders in this space will be able to use the risk management framework to identify opportunities to develop new products and services and enhance market credibility.18 Business briefing series: 20 issues on building a sustainable business
  19. 19. Key consumer attributes and corresponding food product trends Emerging consumer profile attributes Trend implications Income levels/income distribution Different expectations of ‘food product’ e.g. portion sizes, prepared vs. making from scratch, Household size decreasing more competition with take-away Organic food demand, education seeking, ‘natural‘ Healthy lifestyle desirability food, alternative products to traditional market Base demographics New food offerings desired (age and ethnicity in particular)13. Promoting sustainable procurement which may not have been a consideration previously. and supply chain management While examples like this may pressure an organisation to reduce waste and cut emissions, it may also increase What elements of your supply chain may create awareness and potentially improve profitability. extra risk or lack efficiency? Have environmental, social and ethical criteria Many Australian businesses have undertaken been developed, in addition to price and the journey towards sustainable business practices. availability criteria, in your purchasing decisions? Detailed examples can be found in the Institute’s Can you leverage your position in the industry publication, Integrating sustainability into business to influence your suppliers’ actions? practices: a case study approach, available on our website.Major global corporations, such as large retailers Tescoand Walmart, have enjoyed considerable success Most organisations lack the ability to leverage supplierin getting their suppliers to be ‘greener’ and more contracts that these powerful retailers have, but theysustainable. In 2009, Walmart introduced its Supplier can still incorporate sustainability considerations intoSustainability Assessment, a brief survey that evaluates supply chain decision-making. They can also enter intothe sustainability of suppliers (in terms of energy, partnerships with suppliers to drive both sustainabilityclimate, material efficiency, natural resource use, people and efficiency. Understanding the sustainability risksand community), with the intention of developing the that may impact the supply chain and having effectivefirst index of a product’s lifecycle impact.8 Walmart’s mitigation plans in place, is essential to building supplysuppliers are required to develop systems to measure chain resilience.and report the sustainability issues of each product,8. Walmart Sustainability Index accessed on 17 May, 2011 from http://walmartstores.com/sustainability/9292.aspxBusiness briefing series: 20 issues on building a sustainable business 19
  20. 20. Embed sustainability into core business processes (continued) Putting sustainable procurement into practice Technology is enabling ethical To facilitate putting sustainable procurement into choices for consumers practice, consider the following questions: Organisations are under increasing pressure from • Strategic level consumers to ensure their products and services How can sustainable procurement help achieve are produced in an ethical and sustainable way, business goals? What is our ambition – industry and new technology and social media are making leader or fast follower? it easier to make these choices. For example, iPhone applications such as Shop Ethical! show • Tactical level consumers the environmental and social record What product categories and suppliers should we of companies behind common brands in the focus on? How do we collaborate with suppliers? supermarket, allowing them to make informed choices based on considerations such as food • Operational level miles, palm oil use, overfishing, child labour, What requirements do we have for product specification, genetic engineering, multinational ownership and supplier selection, control and monitoring, follow-up, packaging. There are also applications that suggest evaluation and implementation? alternative products available, which is basically free marketing for the most sustainable. 14. Understanding the investment decision-making process Integrating sustainability into the Are sustainability issues and risks properly procurement process evaluated as part of the due diligence process? • How is it done? Where they can be measured, are sustainability Organisations should factor sustainability into factors included in your valuation models? purchasing decisions and matching the intention to be sustainable with the action There are heightened sustainability risks associated • What criteria would you use? with some of the most critical business decisions Organisations can use environmental (e.g. lifecycle) an organisation might make, such as mergers and or social (e.g. working and living conditions) criteria acquisitions, entering a new market overseas, forming to decide who to buy goods and services from, in a joint venture and making major capital expenditures. addition to conventional purchasing criteria such as Sustainability should therefore be seen as part of the due price, availability and value for money diligence process. In relation to a potential investment, • Key drivers of action: your organisation could consider, for example: Globalisation of supply chains and increasing scrutiny • How a carbon price could be factored into your and awareness from stakeholders (e.g. consumers organisation’s valuation model and specialised NGOs), drive organisations to act in • How constraints and variability of the supply of the sustainabillity space. water impact operations and supply chain Six reasons to implement sustainable • How human rights and corruption risks apply in an organisation’s country of operations procurement: 1. Corporate reputation • How a potential joint venture partner’s sustainability record and alignment of policies and practices align 2. Legislation with your organisation’s standards. 3. Increased revenue (opening new markets) 4. Stimulant for innovation 5. Reduced risk of conflict with stakeholders 6. Shareholder value.20 Business briefing series: 20 issues on building a sustainable business
  21. 21. Schematic overview of procurement processLevel DefinitionStrategic Long-term impact of purchasing and supply decisionslevel on an organisation’s business; determine mission and vision on purchasing responsibility of top-management Mission & Vision Purchasing FunctionTactical Encompasses the involvement of the purchasinglevel function in decisions affecting product, process Supply Policies and supplier selection; draw directive supply policies for commodities/segments; medium-term impact Commodities /SegmentsOperational All activities related to Supplier Selectionlevel (product specification, supplier selection), Supplier Supplier Contracting of supplier and Supplier Contract Performance Selection Performance Measurement (monitoring Measurement and evaluation)Source: KPMG Procurement / OrderingIt is important that due diligence and capital expenditureprocesses properly incorporate sustainability risks andconsiderations. In most organisations, actions requiredto achieve this include:• Updating procedures and decision-making criteria, and changing documentation for process approvals• Upskilling the due diligence and capital project appraisal teams to be able to properly identify and evaluate sustainability issues and risks• Ensuring related governance processes incorporate an assessment of the appropriateness of the consideration and mitigation of sustainability-related risks and issues.By ensuring sustainability considerations form part ofthe due diligence process, an organisation will have abroader understanding of the longer term risks arisingfrom any potential investment.Business briefing series: 20 issues on building a sustainable business 21
  22. 22. Embed sustainability into core business processes (continued) 15. Measuring performance 16. Ongoing monitoring of externalities Can incentive schemes be implemented What tools (such as industry groups or associations) or updated to align to key sustainable can be used to keep your organisation informed of business goals? relevant developments? How can the quality and reliability of Can your organisation be involved in the regulatory sustainability-related metrics be continually process and also maintain independence? improved? Who is responsible for monitoring externalities? Once your organisation has appropriate metrics and Regulation, societal attitudes and physical conditions targets in place to manage sustainability-related can change rapidly, with significant consequences. commitments and issues, the main considerations While relevant externalities can initially be identified and that follow are: assessed in developing a strategy, it cannot be assumed • What are the implications for incentive schemes that they will remain static and relevant over time. As and systems and how should they be updated such, these factors need to be monitored and considered to align outcomes with new commitments and on an ongoing basis. targets? Which targets need to be revised to Two major considerations for organisations when it enforce compliance with commitments? comes to monitoring are who will be responsible for • How does management reporting need to change monitoring and how trusted and up-to-date information to incorporate the wider focus on sustainability- can be sourced in a cost-effective way. related metrics and targets? Is there clarity on which metrics are core? What are the implications Which individual or team is responsible for monitoring for internal assurance over core metrics? will largely depend on the size of your organisation and their ability to commit resources to the task. In larger Typically, systems that support the reporting of organisations, dedicated sustainability managers are sustainability measures are less mature than those often assigned this task, with assistance from group- relevant to financial reporting. Organisations need level individuals. In smaller organisations, it is often an to understand the quality of information relating to individual with a personal and passionate interest in sustainability and develop a roadmap for improving sustainability issues who is best for this role. the reliability of information. When it comes to monitoring factors that have the The involvement of your organisation’s finance team potential to impact the organisation, ongoing (day-to- in identifying sustainable value drivers, related KPIs day/week-to-week) monitoring is more effective than and measureable targets and outcomes will enhance annual monitoring. Having regular access to information the credibility of the systems and processes, and the relating to relevant factors will enable your organisation effectiveness of the reporting structure. KPIs and to flag changes and respond in a timely manner, thereby qualitative outcomes must be relevant and material if minimising potential impacts. they are to be aligned with overall strategy and vision.22 Business briefing series: 20 issues on building a sustainable business