By Mark Tulay
Albert Einstein wrote “Not everything that counts can be counted, and not everything that can be counted counts” on the blackboard in his office at the Institute for Advanced Studies at Princeton. What was his point? The same as Robert F. Kennedy’s when he reflected on the inadequacies of our primary measure of economic progress – Gross Domestic Product (GDP):
“GDP counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl… Yet GDP does not allow for the health of our children, the quality of their education or the joy of their play…It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile” Robert F. Kennedy – March 18, 1968
Yet 45 years after RFK’s speech, GDP still is used globally as the primary indicator for measuring a country’s economic success. Why do we continue to utilize such an inadequate indicator for gauging our economic well-being? Similarly, why do we use share price and earnings to measure company performance? While such measures are seductively precise, isn’t there a better way to count what should be counted – both at the country and corporate levels? Assessing corporate performance and creating value in the 21st century requires a new approach. Below is one possible strategy – the creation of shared value – and a call to action for business, investors and NGOs in 2013.
Redefining the measurement of value and value creation by business
The Great Recession shook loose the pillars of trust and partnership between the public, investment community and companies. Over the last five years, most of the millennial generation has come to believe that Wall Street no longer serves Main Street. They see companies hoarding cash and holding back on hiring to pad the pockets of shareholders and executives. They often view business as the cause of, rather than the solution to, many social, environmental, and economic calamities facing the world today.
A fog of skepticism and malaise has rolled over global markets and undermined public confidence in whether companies can play a vital role in the transition to sustainability. Companies – such as BP and Apple – that once were revered for solving big problems are increasingly chastised for creating big problems at the expense of employees, communities and the environment. In a Harvard Business Review article, Michael Porter and Mark Kramer commented that the “legitimacy and credibility of business has fallen to levels not seen in recent history.” Such widespread disillusionment with business, if not reversed, portends a future of conflict and stalemate that neither people nor the planet can afford.
Many believe that we need a new roadmap for balancing corporate profitability and growth with the urgent need to protect and expand our “vital capitals,” which include not only financial capital but also human, social, intellectual and natural capitals. Some companies, though surely not enough, are taking on this challenge and demonstrating sustainability leadership. The last decade has witnessed the rise of sustainability as a defining element of responsible business strategy and performance. Companies like Nike, GE, Unilever, PepsiCo, UPS, Puma, Novo Nordisk, Natura and dozens of others recognize sustainability as integral to their global competitiveness and long-term prosperity. They understand that sustainability and long-term value creation are inextricably linked and that the world of 21st century business will not tolerate business-as-usual. The challenge is to move beyond this small pool of sustainability-conscious companies and vastly scale up their numbers in both developed and emerging economies. The time for business to lead on sustainability is now.
The Shared Value solution
Porter and Kramer’s Harvard Business Review article introduced the concept of “shared value,” which involves creating economic value in a way that simultaneously creates value for society by addressing its social, economic and environmental needs and expectations. Realizing this vision will require a new set of skills, tools and standards for disclosure and performance measurement, and a “far deeper appreciation of societal and environmental needs, and a greater understanding of the true bases of company productivity, and the ability to collaborate across profit/nonprofit boundaries,” says Porter. He further explains:
“The central premise behind creating shared value is that the competitiveness of a company and the health of the communities and the environment around it are mutually dependent. Recognizing and capitalizing on these connections between societal and economic progress has the power to unleash the next wave of global growth…It will also reshape capitalism and its relationship to society. Perhaps most important of all, learning how to create shared value is our best chance to legitimize business again.”
Isn’t it time for more companies to go “all in” on a more expansive, forward-looking, long-term value creation strategy that makes maximizing stakeholder value across the vital capitals its primary purpose? To guide this transformation, business innovation needs to be accompanied by a new generation of widely-accepted and globally-adopted corporate and product sustainability standards. These standards can serve as our GPS to steer the global transition to sustainability across all of the vital capitals. Standards are not a panacea, but they are integral to depicting normative business practices and outcomes that align companies with the principles of sustainable development.
Call to action
An unprecedented opportunity exists today for business, investors and NGOs to collaborate on and realize this vision of shared value creation and sustainability leadership. Five key sustainability initiatives are underway, and each is inviting stakeholder participation. Organizations, particularly companies, now have a small window of opportunity to engage in 2013 to this next generation of sustainability standards. 2013 is not the year to sit on the sidelines.
The five key sustainability initiatives are:
SASB. The Sustainability Accounting Standards Board (SASB) is developing sector-based Key Performance Indicators (KPIs) suitable for disclosure in standard filings such as the Form 10-K and 20-F. Through its evidence-based approach, SASB will dramatically improve the precision, materiality and disclosure of sustainability indicators to integrate ESG factors into financial markets. SASB is now hosting various sector-based groups to provide input into its KPI development.
GRI. The Global Reporting Initiative (GRI) is the de facto standard for corporate sustainability reporting. A total of 4,994 organizations have produced more than 10,000 corporate sustainability reports following GRI guidelines. GRI will introduce in 2013 the next generation – G4 – of its reporting guidelines.
IIRC. The International Integrated Reporting Council (IIRC), another disclosure initiative, is a global coalition of regulators, investors, companies, standard setters, accountants and NGOs. Together, this coalition shares the view that communication about businesses’ multi-dimensional value creation should be the next step in the evolution of corporate reporting. Already, hundreds of companies are experimenting in blending financial and sustainability reporting. IIRC is nurturing and tracking this process in its effort to build a generally accepted integrated reporting framework.
TSC. The Sustainability Consortium (TSC) is the leading authority on product sustainability standards. Under the leadership of TSC’s new Executive Director, Kara Hurst, TSC is expanding into China and is ramping up the release of scientific-based and collaboratively developed standards for improving product sustainability. TSC is staffed and supported by experts in academia, industry and NGOs.
GISR. The Global Initiative for Sustainability Ratings (GISR) is a new participant in the family of initiatives aimed at making capital and other markets agents of, rather than impediments to, achieving the post Rio+20 sustainability agenda. Complementary to the disclosure focus of SASB, GRI and IIRC, GISR’s mission is to create a world class corporate sustainability ratings standard as an instrument for transforming the definition of value and value creation by business in the 21st century. GISR’s new global standard will be coupled with capacity-building, certification and analytical tools to embed sustainability into capital markets worldwide. GISR will release the principles component of this standard in May 2013 at the Ceres conference. Organizations can engage with GISR as a supporting stakeholder and can participate in the standard development program in 2013. GISR is moving from startup to mezzanine stage, attracting a broad range of investors, companies and NGOs to participate in its activities in the pivotal year 2013.
Collectively these initiatives, each with a distinct but linked role in the emerging sustainability information landscape, will:
- Transform the way corporate sustainability information is disclosed by developing new disclosure standards for material sustainability information and value generating strategies;
- Reposition corporate reporting to tell a more complete story of how an organization’s strategy, governance, performance and products lead to the creation of value over the short, medium and long term;
- Improve the precision, materiality and disclosure of sector-based sustainability (ESG) KPIs; and
- Build general acceptance for a new standard for measuring corporate sustainability performance that can elevate ratings as a more powerful tool for accelerating the integration of ESG factors into investment decision making.
The early achievements of SASB, GRI’s G4, IIRC, TSC and GISR point to 2013 as a watershed year for accelerating the transition – and moving markets – toward more sustainable outcomes that both business and the world so urgently need. The shift away from myopic focus on short-term financial returns to a more expansive, long-term focus on vital capitals is an idea whose time has come. Such a transformation is no longer an option, but a necessity if the next decade and beyond is to avoid a “sustainability cliff.”
The time has passed for small commitments, hyperbole and platitudes – now is the time for leadership, investment and action. Please step in and lend your support to these efforts in 2013.
Mark Tulay has served in leadership roles in sustainability initiatives for over 20 years. As Program Director and the first employee of Ceres, he was involved in the early stages of the Global Reporting Initiative (GRI). He led a conservation campaign at the Nature Conservancy and served as an advisor to Greenpeace. He was the Head of Sustainability Business and Research for RiskMetrics (now MSCI), Institutional Shareholder Services, and IRRC where he served as the Head of sustainability research, ratings and business development. Mark currently serves as Program Manager for the Global Initiative for Sustainability Ratings (GISR), which is developing a new global standard for measuring corporate sustainability performance. Mark is the Founder of Sustainability ROI, a sustainability consulting firm that works with companies, investors and NGOs to accelerate the transition to sustainable markets.