Coming of age: the new sustainability math

Last week, I went surfing for the first time with my 10-year-old son Evan. Not wanting to be outshined or embarrassed, I spent more time then I care to admit reading up on websites proclaiming to help 40 something’s like me learn how to surf. Initially, my preparation paid off and I was able to ride the first wave to the shore -- albeit in kneeling position. Success lasted a fleeting, blissful few seconds, just before reaching the shore while Evan was able to stand up on his second try, demonstrating the paradox in George Bernard Shaw’s quote: ‘What a pity that youth must be wasted on the young”. Or perhaps a more fitting for me is Oscar Wilde’s: ‘I can resist anything but temptation’.

Companies are now facing similar challenges adapting to the ‘new sustainability math’ where finding the right balance between investor, consumer, and stakeholders interests – including deciding which sustainability reporting standards to adopt, rating survey to respond to, or environmental initiative to engage with – is riddled with complexity and confusion. At the core of this challenge for companies is finding the sweet spot between demonstrating to investors ‘quantitatively’ the direct link between its sustainability initiatives and value creation while also communicating ‘qualitatively’ its sustainability story authentically to consumers.

The Sustainability Conundrum

Joel Makower’s recent piece titled:”#Fail: Why CEO’s and consumers are out of step on sustainability” describes this expectations gap between consumers and CEOs in citing a recent study by Accenture and Havas Media:

“Business is failing to take care of the planet and society” is the stark conclusion of a new global study of 30,000 people across 20 countries on five continents that found that nearly three-fourths (72 percent) of consumers believe that business is failing to live up to expectations.”

This follows similar findings from the most comprehensive CEO study on sustainability to date in a September 2013 report by the UN Global Compact-Accenture which surveyed more than 1,000 CEOs worldwide and concluded:

“Only 32% of CEOs believed that the global economy is on track to meet the demands of a growing population within global environmental and resource constraints…and 67% of CEOs believe that business is not doing enough to address global sustainability challenges… Companies feel constrained by market expectations and struggle to quantify and capture the business value of sustainability.”

These findings are in stark contrast to a more upbeat UN Global Compact-Accenture study in 2010 which expressed optimism among CEOs at the time of how ‘business could lead the way in tackling sustainability challenges’ and that a new ‘summit or peak’ was in sight for harmonizing global capitalism and sustainable development.

It seems in 2010 many CEOs’ got too far ahead of the wave, believing the journey to sustainability excellence was more a matter of tactics—a few new metrics, better supply chain management—than strategy, building competitive advantage by identifying long term needs for good and services in a resource constrained world. The hope for a predictable, smooth trajectory devoid of friction and qualitative judgment has given way to the reality that the pursuit of sustainability performance excellence is uneven, with often murky ROIs over the short-term.

The New Sustainability Math

“In Facts are stubborn things” quipped John Adams in 1770. The new sustainability math provides compelling evidence for companies to step up sustainability initiatives and rethink measurement of risk and value. The costs of ignoring climate change impacts, for example, are mounting as demonstrated by headlines such as:

• June 2014 was the hottest June ever recorded by NOAA since it began collecting records in 1880 and was the 352nd month in a row where the global temperature was above the 20th century average, according to NOAA.
• “Declining crop yields could put hundreds of thousands of people at risk for starvation” (The Nature Conservancy, Climate Change Impacts)
• “Carbon-Intensive Investors Risk $6 Trillion ‘Bubble,” Study says. (Bloomberg, Sally Backerall, April 2013)
• “Damages from storms, flooding, and heat waves are already costing local economies billions of dollars...With the oceans rising and the climate changing, the costs of inaction in ways that are easy to understand in dollars and cents—and impossible to ignore”. (Risky Business Project Co-Chair Michael R. Bloomberg)

The CEO response to the new sustainability math has been mixed. Many companies appear to be scaling back their sustainability investment and taking a step back on sustainability reporting. Companies seem to be in a holding pattern now in deciding the next big steps in sustainability performance improvement. Part of the reason for this pullback has been attributed to the perceived confusion and proliferation or so-called ‘alphabet soup’ of sustainability initiatives, standards and frameworks.

Some companies seem to express concern that can be encapsulated in Bob Dylan’s song, Along the Watchtower: “There must be some way out of here, said the joker to the thief. There's too much confusion, I can't get no relief.” But a deeper dive into this proliferation of initiatives unmasks solutions, innovations and opportunities and suggests reasons for companies to engage more deeply at this time.

In 1977, the Eagles introduced their smash hit “Hotel California”. Similar to the confusion today surrounding sustainability standards, there was confusion around the meaning of the lyrics of this iconic song. When Eagles lead singer Don Henley was asked to explain what the song was truly about, he said in 1980 it was about ‘the dark underbelly of the American experience’. Several years later, and a bit more circumspect, Henley said the song was really about the ‘uneasy balance between art and commerce’. And in 2013 Henley provided his final answer: Hotel California, he explained, was simply about the ‘journey from innocence to experience’. In a similar fashion, many companies today have mischaracterized the proliferation of sustainability initiatives in a negative light, where innovation is mistaken for chaos. More forward looking companies, however, realize we are now approaching the next phase, where new standards for sustainability disclosure and measurement are being developed and harmonized—and collectively this new ecosystem of standards promises to help companies scale sustainability at the pace needed to address global sustainability challenges.

Five years from now we may very well look back and regard this time not as a time of confusion, but rather as the renaissance period of the global sustainability movement–where companies that embrace the new sustainability math and engage in the next generation of sustainability standards will be more likely to emerge as the future fit companies of the 21st century.

The Emergence and Convergence of Sustainability Standards

An unprecedented opportunity exists today for business and investors to collaborate on and realize this vision of sustainability leadership. Four key sustainability initiatives are gaining momentum, and each is ramping up stakeholder participation. Organizations, particularly companies, now have a window of opportunity to engage to shape this next generation of sustainability standards that include:

1. SASB. The US-based Sustainability Accounting Standards Board (SASB) is developing sector-based accounting metrics 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 disclosure of US companies.

2. GRI. The Global Reporting Initiative (GRI) is the de facto standard for corporate sustainability reporting. Thousands of organizations have produced more than 10,000 corporate sustainability reports following GRI guidelines. GRI has recently hired a dynamic new Executive Director, Michael Meehan, who encouragingly said in his first interview that collaboration and finding ‘common ground’ with sustainability disclosure standards was a top priority.

3. IIRC. The International Integrated Reporting Council (IIRC), a disclosure initiative, is a predominantly industry led effort designed to help companies communicate about businesses’ multi-dimensional value creation as the next step in the evolution of corporate reporting. Already, hundreds of companies are experimenting with integrating financial and sustainability information. IIRC is convening new programs such as the Corporate Reporting Dialogue (CRD) launched in June to foster ‘better alignment and reduced burden in corporate reporting’.

4. GISR. The Global Initiative for Sustainability Ratings (GISR) is a new participant in the family of initiatives aimed at making capital markets agents of, rather than impediments to, achieving the post Rio+20 sustainability agenda. GISR’s mission is to create a world class corporate sustainability ratings standard and ‘Center of Ratings Excellence’ (CORE) as an instrument for transforming the definition of value and value creation by business in the 21st century.

Collectively these standards and frameworks, 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 accounting metrics;
• Accelerating the integration of ESG factors into investment and credit rating decision making.

Call to Action

The achievements of SASB, GRI’s G4, CDP, IIRC and GISR point to 2015 as a watershed moment 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.”

Companies committed to sustainability excellence and leadership should consider pursuing the following to optimize sustainability ROI over the long-term:

1. Closely examine the GRI’s G4 Guidelines and, in particular, the Principles for Defining Report Content and Quality and commit to publishing a CORE level report by 2015.
2. US-based companies should engage substantively with SASB and join an Industry Working Group.
3. Report following CDP’s climate change and water use disclosure protocols - and pay close attention to CDP’s climate ratings for climate change.
4. Join GISR’s Supporting Stakeholder Program and participate on one of its leadership committees.
5. Participate in IIRC’s Pilot Program Business Network and lend your support to the Corporate Reporting Dialogue program.

The time has passed for small commitments, hyperbole and platitudes – now is the time for leadership, investment and action. Companies that remain on the sidelines will sacrifice their opportunity to shape their own—and the planet’s—future.

 

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). Mark currently serves as COO for the Global Initiative for Sustainability Ratings (GISR), which is developing a new global standard for corporate sustainability and credit ratings. Mark is the Founder of Sustainability Risk Advisors, a sustainability consulting firm that works with companies, investors and NGOs to accelerate the transition to sustainable capital markets. 

 

Sustainability Metrics Master-Class, London & Amsterdam 21 & 22 October 2014
Mark will be leading a series of executive training seminars in London and Amsterdam (and Sydney in 2015), sponsored by GTQ International titled ‘Quantifying ESG: The New Sustainable Math for Business’ which will provide tools, techniques and guidance on the new sustainability math and standards.