Metrics
Critical need for simplicity

Swamped by sustainability indicators that fail to drive transformation ... Even if companies are taking action to reduce sustainability impacts, they may collectively overstep planetary boundaries, warns Allen White

Burgess COMMENTARY

Peter Burgess

Swamped by sustainability indicators that fail to drive transformation ... Even if companies are taking action to reduce sustainability impacts, they may collectively overstep planetary boundaries, warns Allen White

Indian farmer drought

IMAGE Even if companies reduce their impacts, is it enough? Photograph: Dipak Kumar/Reuters

Amidst the blizzard of sustainability indicators populating the information marketplace, one issue looms large, complicated and unresolved. How do we know a high performing company when we see one?

The numbers speak for themselves. Based on ongoing research, the Global Initiative for Sustainability Ratings (GISR) has uncovered over 1500 indicators spanning almost 600 issues.

Even allowing for overlap and redundancy, the numbers remain intimidating to companies, investors and other users seeking yardsticks of excellence that are manageable, understandable and rigorous.

And there is no end in sight. The Sustainability Accounting Standards Board (SASB) estimates that each of its approximately 80+ industry groups will eventually have on average 12 indicators suitable for disclosure under the US SEC 'materiality' rules. Do the math: that's over 900 indicators across all industries that will enter the reporting landscape by 2015.

Over time, convergence may, and should, occur among GRI, SASB, Integrated Reporting Council (IIRC) and other reporting frameworks. But even if it does, the question of discerning performance excellence remains fluid.

Disclosure, after all, is a necessary but not sufficient condition for defining excellence. It is the engine that delivers data to the market. But disclosure is a means, not an end. It does not discriminate between leaders and laggards. This, of course, is the job of sustainability raters. But among raters, definitions of excellence remain widely divergent owing both to methodological differences and, more importantly, conceptual differences that define the very meaning of excellence.

Consider the hypothetical case of four comparably sized specialty chemical plants in an arid area of India. Like forest products, mining, refining and beverage, chemicals is a water-intensive industry. In this hypothetical setting, all facilities draw water from the same, increasingly stressed, aquifer to meet the needs of their industrial processes.

Company A during the last four years has performed well by steadily reducing its water intensity an average six percent per year. Company B has reduced its water intensity at four percent per year, but has set the most aggressive intensity target among the four plants—10 percent per year over the next five years. Company C's performance is the best among its peers for last two years—at eight percent per year, though prior to that it trailed its peers by achieving only four percent annual reduction.

Finally, Company D has achieved reductions equal to Company A, six percent annually over four years, but measures and report not against its historical performance nor its peer group but, instead, against its 'fair share' (defined through an independent, external authority) of the absolute withdrawal limits essential for preserving a sustainable aquifer. Company D, in other words, subscribes to the principle of 'sustainability context.'

Which company, then, is the superior performer? Is it defined in relation to historical performance, goals, superiority among peers, or historical performance contextualised within defined limits or thresholds?

From a performance excellence standpoint, all approaches have merit. And different users may well favour different approaches. All appear in the scores of sustainability ratings currently in play. Perhaps a composite approach that blends history, goals, peers and context is optimal.

But the stressed aquifer in our hypothetical Indian case exposes one irrefutable reality. Even impressive intensity reductions across all companies may lead to overshoot of available finite resources within the local aquifer.

In that case, efficiency gains, regardless of magnitude, will fail to avoid the exhaustion of the shared and limited resource upon which all companies depend for their livelihood. To identify a company's water usage as 'sustainable' when its absolute water use exceeds fair share of sustainable withdrawals is arguably an oxymoron.

The case of the Indian aquifer illustrates a broader principle that applies to any resource –biodiversity, carbon loadings, and persistent organic pollutants—for which global, regional or local limits are reasonably definable, as work of Johan Rockström and colleagues ascertains.

This 'sustainability context' principle may also apply to social thresholds, expressed not as maximum but minimums, for example regional or local living wages or educational attainment. Violations of either an ecological or social nature are a recipe for the disruptive, perilous environmental and social upheavals such as those afflicting Brazil, the Middle East and South Asia.

As sustainability ratings evolve in the coming years, the field will benefit from creative thinking about the meaning of performance excellence. Incremental efficiency gains by companies, while laudable, may well fall short of the dramatic shifts in resource use essential to truly sustainable production.

Strong performance relative to peers may serve the needs of best-in-class stock-pickers but fall woefully short of performance essential to avoid ecological overshoot or social undershoot. And goals companies individually establish—even stretch goals—collectively may overstep boundary conditions even if realised.

The remarkable advancement of sustainability reporting in little more than a decade from an extraordinary, to an exceptional, and then to an expected business practice stands as one of the most notable business innovations in recent years.

It is a moment for ratings to make a similar leap forward by shifting from the incrementalism of an ESG orientation to a true sustainability perspective while growing the ratings market worldwide. Scientific advances, methodological innovation and public expectations are converging to drive this necessary transformation.

Allen White is Co-Founder and former CEO of the Global Reporting Initiative, Co-Founder of Corporation 20/20, and Founder and Co-Chair of the Global Initiative for Sustainability Ratings.

Theory Z expressed by Ouchi that organisations and employees have a loyalty code. Towing the company line means a job for life although in todays world, 18 months seems a good innings. This lack of tenure stifles the sustainability debate as to speak up is contrary to a career path. At worst, an individual can be blacklisted as anti corporate whereas strategic planning requires a continual scan of the environment.

Theory Z also provided useful insights in that the culture recognises that the young are more able to question the status quo, and are a necessary part of consensus making. The article is quite right that the number of measures increases complexity. It is also correct to say that despite all our efforts we may fail. But by creating measures, we give tacit authority to stakeholders to discuss an issue openly without fear of persecution.

The dramatic shifts in industry are seldom linear. Measures of failure stimulate a new round of innovation and provide opportunity for brands to be thought leaders. In Australia, a dialogue has begun on the use of communications technology in farming for food security. A few years ago, such a dialogue would be limited to a few stakeholders at best. Without a measure, we fail to give priority to issues that ensure the natural environment continues to meet our needs.

A recent discussion on Twitter suggested SWOT is dead. On youtube, Roger Martin explained that business schools are playing catchup to a world post Friedman. Theory Z might suggest the students begin to ask the embarrassing questions. It might be our best hope for transformation. Business schools, and universities should be tasked with considering solving problems as part of the right of passage. While entrepreneurship is a valuable skill, system thinking would provide resources for scale.