Making CR measurement meaningful to the rest of the business

“Total sum of taxes of all types paid broken down by country.” “Total materials used other than water, by type.” “Evidence of consideration of human rights impacts as part of investment and procurement decisions.”

These three of the 40 core indicators from the Global Reporting Initiative (GRI) are tall orders for any company to calculate and report. When business people, not sustainability advocates, are faced with the full list, it leaves them cold. They rank with panel tender documents as the most onerous and tedious of corporate assignments. “Are these remotely relevant?” they ask, “How will knowing this make a difference to anyone?” “Surely totals are meaningless when our output varies?” And I struggle to answer them convincingly. The fact is that few of the standard measures inspire companies, or their people, to action.

Most companies will eventually report on sustainability metrics as and when required by law. But most will remain superficial partners in sustainability. That is, unless and until their line managers see the connection of their work with sustainability and until their performance is measured in those terms. For this to happen, three things need to fall into place:

1. If the standard measures represent the goals of sustainability, then we have some joining-the-dots to do for line managers, so that they appreciate the significance and importance of those measures.
2. While all standard measures need to be reported, the performance on some will motivate and interest a company’s people and stakeholders more than on others. Companies need a way to determine which these are and concentrate their strategy on them.
3. There may be some non-standard measures the pursuit of which would equally support sustainability, but would be aligned with the company’s business objectives in a way that was immediately apparent to both employees and external stakeholders. These again should be reported and pursued.

In other words, in selecting the measures for a sustainability strategy and the report that reveals it, a company must somehow align the public reporting expectations with the things that actually interest people throughout the organization.

Figure 1: Prioritizing sustainability metrics

One effective way to do this, as with other forms of culture change, is to build on what people already know, to apply well-known business processes to the sustainability tasks. This article registers and suggests ways to integrate sustainability into the company’s core strategic and performance management processes. To do this, it helps adapt parts of those processes to the purpose. Financial valuation looms highly in the minds of those conducting those processes, so sustainability needs to find a place there.

This, of course, sounds like a sop to business interests over sustainability. Our society needs business and it needs it to be sustainable. There’s an “and” there that should not be overlooked. So the challenge is to insist on every sustainability initiative being a win-win, within an acceptable timeframe for investment. It is a laudable argument that there should not be a business case for companies to pursue sustainability; that it is something they should do regardless, part of the cost of their licence to operate. But taking that tack only slows down the adoption of sustainability practice and reporting and denies much of its potential.

The problem with the business case generally presented, however, is that it lists all the potential benefits of sustainability as a wish list. Such lists do not go far enough to be compelling to the senior management who need to be convinced (as opposed to those systems thinkers who intuitively believe). What is needed is a way to spell out more immediately the links with business value. Linking sustainability issues and metrics to accepted financial valuation tools does just that.

First, though, we need to review where the potential sustainability metrics may come from.

 

Scanning for sustainability metrics
The Association of Chartered Certified Accountants global 2004 report “Towards Transparency: Progress on global sustainability reporting” pointed to the need “to focus on issues which are important to the communities in which organizations work, not just on corporate priorities,” but at the same time complained that the reports do not “address relevant, core business issues.” That balance can only be obtained by scanning widely for appropriate metrics.

GRI is the starting point for identifying metrics for sustainability reporting and every company should aim toward reporting “in accordance” with GRI by taking its metrics on board. But GRI, even with its sector supplements, is not the finishing point. Other fruitful sources include a review of published reports, dialogue with stakeholders on what matters most to them, current operational metrics of corporate culture or brand acceptance, industry standards on environmental, employment and social issues and metrics that indicate the long-term economic value of the company.

Insurance Australia Group (IAG) is a financial services company with some of the strongest insurance brands in the country, many having been built on the back of roadside assistance from its predecessor motorist associations. Among more standard metrics, it highlights in its sustainability report an “employee engagement score,” the result of an annual survey which measures how much its employees want to stay with the company (which is normalized against actual turnover figures). Such a headline figure can represent the impact of a host of other employment-related data. Similar perception surveys of community and environment profiles may complement the hard data of waste management and the needed stories of community engagement.

Brainstorming workshops run by both sustainability and facilitation experts can also reveal a lot of possibilities that matter more to your company and its stakeholders than they might to the outside world. One leading Australian resort operator, for example, is the dominant business in the world heritage areas in which it operates. It shares those privileged environments with indigenous aboriginal communities that, for reasons too complex to mention here, have health and employment levels well below what is acceptable in Australia. Can these luxury resorts sit cheek-by-jowl with such poverty indefinitely? The company doesn’t believe so and so it has included in its own sustainability reports both metrics on the health of its neighbour communities, and metrics on how it is helping to improve them. Nobody is going to expect such a metric as a general standard, but it is a tangible reminder to the resort staff of the challenges that they have a role in meeting. Why just report the money and effort spent on a problem, without reporting on the progress, or not, being made?

The idea is not to report on or measure all of these possibilities, but to filter out those feasible measures that matter most to the organization and its stakeholders.

 

Filtering out possible metrics
Most readers will appreciate the criteria for selecting the most appropriate measures to track and report. They include stakeholder expectations (including reporting norms and especially GRI), the cost of obtaining data, the lack of reliable data, whether there are other operational reasons for tracking the proposed metric, and whether they are alternative metrics that serve the same purpose in a better way.

These filters have been applied by the global mining company BHP Billiton. Much awarded as a sustainability reporter, BHPB reports in accordance with the GRI guidelines and indeed sits on the panel to support GRI’s further development. Nonetheless, BHPB has filtered out GRI indicators on the grounds of complexity (for tax information), negligible impact (on EC9 Subsidies) or impracticality (EN2 – process inputs that are by-products of other processes). Four out of 16 GRI environmental indices have partial or no disclosure on grounds that they would not be meaningful measures. A good indication of its sensible approach is found in its response to GRI indicator “LA9: Average hours of training per year.” BHPB reports that “collating and reporting average training hours … does not provide a meaningful measure of the quality of training and associated competencies provided by the company.” If the measure is not meaningful, internally and externally, and cannot be shown to be so to a company’s line management, then cull it.

Many absolute environmental measures may lack meaning when reported in their raw state. For example, metrics may be questionable where companies acquire or sell whole businesses: even if all companies reported, and they all reported an increase in their total greenhouse gas emissions, total emissions may have fallen because there may be fewer companies. At the global level, the measure is meaningful only if some other agency is adding up all the reported emissions and all companies are reporting. At the company level, the “total emissions” measure is pointless unless it can be converted to some other meaningful idea – be it the potential emissions trading value (at the current 4 euro/ton) or a figure proportional to output etc.

In other words, while all of the standard GRI measures need to be considered and most will be included in the report, some will be omitted and only a proportion will have management attention put on them as priority measures. What ones will they be?

 

Aligning sustainability with strategic metrics
A thorough review of the social, environmental and economic (rather than financial) possibilities of your company will offer perhaps 40 to 50 measures to be tracked annually and an equal number of qualitative issues to monitor. You may also want to set targets against each of these measures, list the initiatives that will help you reach those targets and report on some of those initiatives as case studies. Finally, if each initiative is to be set up for success, you will want to set and pursue some basic parameters to manage each of those initiatives for success (see box, right). That’s a lot of investment in both sustainability and its monitoring. Like any business activity, you’ll need to prioritize. How should you do that?

Of course, there is no one way. Working out how to prioritize your sustainability activity is akin to working out your sustainability strategy. While there’s any number of possibilities, let’s look at three interesting ways – the value-driver tree, metrics of a company’s financial “health,” and a risk-based strategy.

For each, the starting point is the general business case of sustainability – that it generates and supports long-term value for the company and does so in a number of ways. It is worth considering that about half the stock market value of a public company represents its current and known earnings and half represents the intangible assets that will determine its future earnings – its people, brand, intellectual property and relationships. Looking at Figure 2 (below), it is not hard to see how sustainability measures will support those intangibles, not to mention many of the more immediate benefits.

Figure 2: The potential value of sustainability

I have omitted from these three what is possibly the most common form of strategy – the brand-based strategy. The brand approach to sustainability calls for the company to clearly articulate for its people and its stakeholders what it stands for and why it is distinctive. Its sustainability activities and priorities are set to support that brand positioning. Those that have only a fleeting connection to the brand, initiatives that could be pursued by any company, would not be a priority. Such strategies are the best known among sustainability practitioners, so I have not pursued them explicitly here, though they are of course touched on below.

 

The value-driver tree
The “value-driver tree” is simple in concept, but quite an art form in practice. While it looks like there is one single breakdown of the costs and revenues for a business, there are in fact many avenues to the same end equation. Discussion of those possibilities gives a much richer understanding of the business drivers than the usual P&L tables.

Figure 3 (below) gives an example value-driver tree for one revenue stream (room takings) of a resort operator. Most branches of the tree, on the right hand side of the chart are straight financial calculations, with the numbers involved readily to hand in the management accounts. But at some point, what determines those numbers becomes more fluid; more of a judgment call. When does a guest decide to stay an extra day due to the number of attractions and activities at the resort? Management needs to make a judgment call on that ratio if they are to know how much they will invest in new attractions at or near the resort.

Figure 3: Prioritizing metrics for resort operator

In dialogue with management, then, you can extend the value-driver tree back to link to specific sustainability metrics and initiatives. Again, some of these links will be financially direct – e.g., the cost of water. Others will require a relative assessment to be made. For example, if federal government approval is needed to operate a resort in a world heritage area, what parameters does the government agency require to be met and how much investment will be needed to meet those? How much investment in local rehabilitation will make a difference to that ecology, rather than just appearing to be involved?

While these judgment calls have to be made on the sustainability initiatives, they are an extension of an existing management process, rather than something entirely new. Some people support sustainability because they believe they should and because it pays off. Others need convincing. Using a value-driver tree helps show what initiatives and performance measures have a direct impact on the financial bottom line.

 

“Corporate health” metrics
Unfortunately, it is still the reality that most business people will not believe a sustainability practitioner who says that attention to triple bottom-line issues and measures will create medium- to long-term value. But they may believe Tim Koller, co-author of the leading textbook Valuation 4.
In that book, Koller and his colleagues propose a contestable way of setting measures that capture the financial health of a company and so give a better predication of its long-term performance. Surprisingly, or perhaps not so, most of the indicators of the medium- and long-term health of the company coincide with corporate sustainability issues and initiatives. These are the metrics that “can gauge a company’s ability to create economic value in the future and the risks that might prevent it from doing so.

Figure 4: Eight generic health metrics

”The chain of metrics involved in the “corporate health” approach is divided into short-, medium- and long-term health metrics (see Figure 4, above). Each metric has corresponding sustainability drivers. Even the short-term metrics such as sales productivity include the ability to charge a premium (a brand premium influenced by sustainability reputation) and the ability to open new outlets (government and social licence to operate; location and venue partnerships). But as you would expect, the synergies are greatest in the medium- and longer term metrics. Commercial health metrics include:

• the product and innovation pipeline (R&D relationships, networks and investment);
• brand strength (positive recognition; word of mouth advocacy among suppliers etc.; community activity and impact);
• regulatory risk (environmental and employment compliance; governance of environmental or social risks); and
• customer satisfaction (repeat and referral purchases; survey responses and ratings).

Cost-structure health metrics include the ability to manage costs in the future (awareness of economic and social trends; involvement with alternative cost solutions and providers).

Asset health metrics include measures of how well the company is maintaining and developing its buildings and other capital assets (time between refurbishment; green building ratings; average length of tenancy).

Strategic health metrics include not only the ability to sustain its current activities, but “to identify and exploit new areas of growth.” As economic measures in a sustainability approach, then, companies may explore metrics such as investment in strategic modelling; new business investment; the number, size and progress of new portfolio businesses; and the number and geographic or industry reach of commercial partnerships.

Finally, organizational health metrics focus on the employee-related measures common in most sustainability reports and which perhaps have the clearest alignment with business objectives. Here, though, measures that purport to indicate a positive like “flexible work arrangements,” such as the number of part-time workers, may disguise a reduction in employee commitment and capacities. Dobbs and Koller cite the case of the US retailer Home Depot. “When it took on lower-cost part-time workers who often knew much less than its traditional store associates did, customers began to wonder what made the company special.” Home Depot switched back to attracting more full-time associates. Metrics that may have predicted such an issue include the proportion of employees with skills ranked by external stakeholders as above average, or the average time needed for new employees to be completely familiar with the company’s products, services and processes.

Again, the issue here is not to state what the metrics for a particular company should be – that is for the company to decide in appropriate dialogue. But the range of potential, relevant metrics that support both sustainability and business strategies is broader than the standard metrics may suggest.

 

Risk-based operational strategies
Two of the most successful Australian companies have their business philosophy grounded firmly in the management of risk, yet apply that philosophy in very different ways to their sustainability strategy. While the emphasis here is on risk, the cases could be taken to be examples of any defining operational strategy of the company and the way they guide the choice of metrics in reporting.

As an insurance company, risk is central to IAG’s business. For its sustainability report, IAG filters potential indicators against what it calls its four operational “pillars” – cost management, claims management, pricing risk and reducing risk in the community. For its customers, the risk

s are global (global warming) and local (traffic incidents and crime), while for the company the risks are to its people (health and safety).

Accordingly, many of the sustainability initiatives taken by IAG are aimed at reducing these risks and the data from these initiatives are reported. “These examples show how working to reduce risk, and consequently the number of claims, makes good commercial and good common sense,” states the CEO, while the report subtitle itself reveals the ambition: “The fewer the risks the better – for everyone.” Understandably, then, the primary environmental measures focus on the use of energy and paper and total GHG emissions. While the data from individual community projects are reported, however, there are no aggregated community metrics other than the dollar contributions.

BHP Billiton also holds risk management at its core. But BHPB keeps it there with a tight operational focus on eliminating risk that ensures that individual performance is improved by well-defined processes. It cascades its fundamental principles of risk management down from its formal charter, through its HSEC policy and management systems, key targets, GRI indicator selection and ultimately to sustainability reporting. The metrics they measure and report on are all therefore grounded in risk.

The approach to risk is revealed most comprehensively in the company’s series of health, safety and environmental management standards. They are the detail for BHPB’s HSEC Policy, the first operational commitment of which is to “develop, implement and maintain management systems for health, safety, the environment and the community that are consistent with internationally recognized standards and enable us to identify, assess and manage risks to employees, contractors, the environment and communities.” There are 15 independent standards in the set, drawn from SA8000 and ISO14000 standards as well as BHPB’s own systems. From these standards are drawn the HSEC’s Targets Scorecard, a clear indication of performance expectations, targets and progress. Of these 23 priority targets, all but four are directed to risk-management plans or hazard or harm reductions. Performance on this scorecard is included in management KPIs and counts towards performance incentives equally with other corporate, area and personal project objectives.

Risk has always been at the core of the sustainability business case. BHP Billiton notes that its stakeholders saw reporting on its key liabilities and risks “as one of the most important roles of the report.” The trend now is to formalize that risk focus, evidenced by the October 2004 announcement by corporate ratings agency Standard & Poors that they will be looking at sustainability indicators as part of their corporate risk assessment. Risk-based sustainability strategies find commercial favor, and fold well into more expansive governance processes.

Though BHP Billiton’s sustainability approach is already very comprehensive, the company is now looking at taking it beyond its current grounding in risk and aligning it with its more general “standards of operational excellence.” These standards build on the Six Sigma approach to continuous improvement made famous at General Electric. The advantage is that sustainability thinking would then be more thoroughly integrated into business and operational planning, rather than being seen as part of the risk management component. If it does, BHP Billiton may see even more possibilities for sustainability thinking to add value to its operations and so generate even more possibilities for community and environmental investment.

 

Internal engagement for sustainability metrics
Many line managers will push hard on sustainability metrics because they believe in their global importance and may have seen vague signals from the top that they are relevant to their company. But for most, these metrics must be juggled against financial metrics that have a far greater sway over their pay packets. Not all sustainability metrics can or should be aligned with those financial metrics. So persuasion in many forms is necessary.

An influence model, used by McKinsey & Company when pursuing any significant behavioral shift in a client company, is as relevant to sustainability as anywhere. Mindsets and behavior do not change without the four distinct influence levers – role modelling, fostering and understanding conviction, developing talent and skills, and reinforcing with formal mechanisms – being put into action. Unfortunately, in the case of sustainability, it is the “fostering understanding and conviction” that is left to do the heavy lifting. If any of the others are missing, people do not change their ways.

The formal performance management processes are perhaps the most neglected and it is still rare to find sustainability metrics among individual KPIs. However, many companies are following the lead of BHP Billiton and others in integrating sustainability metrics into their formal systems.
Connections with existing financial models and strategies can greatly accelerate that adoption of sustainability KPIs. There’s a risk that those metrics may be subsumed into the existing financial ones. But the notion of environmental and safety risks, as well as societal contribution and health, will no longer seem so out of place among line managers.

As with any other component of these systems, top-down dictation of KPIs will only go so far in motivating performance in most companies. Senior and middle management expect to be involved in setting their own KPIs, so long as they advance the corporate goals and sustainability metrics should be no exception.

 

Connecting the dots
The corporate world is rapidly dividing into two camps – those corporate leaders who believe in sustainability and are putting into action with integrity; and those who don’t believe and either do nothing or adopt a passive or minimalist approach. Sustainability practitioners need to be able to engage the latter camp on their own turf. That means using the financial and strategic processes that they use, and promoting the relevance to those processes of sustainability metrics and moves. Long-term valuations, value-driver trees and risk-based strategies are three tools that help connect the dots for line managers. There will be many more.