Making Sustainability Work: Best Practices in Managing and Measuring Corporate Social, Environmental, and Economic Impacts

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Now completely updated, Making Sustainability Work is the bible for applying real metrics and best practices to the often-nebulous realm of business sustainability. Mark Epstein and Adriana Rejc Buhovac provide concrete tools for measuring and increasing social and environmental impacts in a manner that businesses can understand and put to real use.

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1 A new framework for implementing corporate sustainability

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With growing sensitivity toward social, environmental, and economic issues and shareholder concerns, companies are increasingly striving to become better corporate citizens. Executives recognize that long-term economic growth is not possible unless that growth is socially and environmentally sustainable. A balance between economic progress, social responsibility, and environmental protection, sometimes referred to as the triple bottom line, can lead to competitive advantage.1 Through an examination of processes and products, companies can more broadly assess their impact on the environment, society, and economy, and find the intersection between improving sustainability impacts and increased long-term financial performance. To aid executives in achieving sustainability, this chapter will:

• Define the principles of sustainability

• Identify important stakeholder relationships

• Introduce a framework—the Corporate Sustainability Model—to guide managers in measuring and managing sustainability performance. This framework will be the basis for the remainder of the book and provides a tool for the implementation of corporate sustainability and the evaluation of corporate impacts

 

2 Leadership, organizational culture, and strategy for corporate sustainability

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Identifying, measuring, and reporting social, environmental, and economic impacts cannot begin until the board of directors and CEO are committed to improved sustainability management. Often it is through mission and vision statements and values, or the development and articulation of a corporate sustainability strategy that the board and CEO set the tone at the top. It is then necessary to drive this commitment through the organization by implementing the various systems for identifying and measuring impacts, stakeholder engagement, product design, product costing, capital budgeting, information management, and performance evaluation.

The CEO communicates the values of the organization, the behaviors expected, and the results ultimately achieved. The CEO is responsible for inspiring, insisting on, and implementing action plans for boosting performance. Effective and consistent leadership provides an alignment between sustainability activities and corporate goals and provides internal credibility to promote progress toward improved sustainability management within business units and organizational functions. Management support is particularly important when companies are implementing global sustainability standards across their business units.

 

3 Organizing for sustainability

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Once leadership commitment is established, corporations need to implement their sustainability strategy through appropriate organizational structures, performance measurement and reward systems, culture, and people. This alignment of strategy, structure, and management systems is essential for companies in both coordinating activities and motivating employees (see our model [Fig. 1.4] on page 29). In this chapter we discuss:

• The challenges for global corporations

• The integration of sustainability throughout the organization

• Information flow

• Outsourcing

• Collaboration with NGOs

The organizational structure around sustainability issues often entails organizing activities and resources spread throughout many locations.1 Corporations must consider whether key resources and activities should be centralized or decentralized and decide on a level of central control versus business unit autonomy. These decisions must be appropriately aligned with corporate culture. The decision to either centralize or decentralize an organizational structure can depend on several contextual factors, including:

 

4 Costing, capital investments, and the integration of sustainability risks

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Once the leadership has established the corporation’s sustainability strategy, it needs to implement that strategy through the effective use of various management systems. These systems are instrumental in achieving positive sustainability impacts, improving stakeholder reactions, and financial performance (Fig. 1.4, page 29). The systems should take into account the organizational culture and the resources, both human and financial, available to the company. Sustainability systems should also include ways to implement strategy and measure sustainability performance. In this chapter we discuss:

• Capital investment decision systems

• Costing systems

• Risk assessment systems

In later chapters we will look at other organizational systems for sustainability, including systems for performance measurement, evaluation, incentive and reward, internal and external reporting, and verification.

Few business decisions impact a company’s long-term capabilities and operational strategies as much as capital investment decisions. Capital investment decisions influence innovation, productivity, costs, revenues, capacity availability, and quality. These decisions help to determine the company’s competitive stance and long-term positioning. Most capital investment decisions require an evaluation of the cash flows associated with the costs and benefits of the decision, as well as a measure of risk. According to the AICPA (American Institute of Certified Public Accountants) poll, only 84% of companies do not formally integrate social and political risks in financial calculations and capital investment decisions.1

 

5 Performance measurement, evaluation, and reward systems

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In developing strategic responses, it is important for senior executives to understand the causal relationships between sustainability performance, and financial performance, to understand the payoffs from social, environmental, and economic improvements, and to create a culture where employees understand and work toward corporate social, environmental, and economic goals. Corporate incentive and reward systems can be a critical tool to implement sustainability and align the interests of the corporation, senior managers, and all employees. These systems are usually a part of a broader set of systems to evaluate the performance of the organization, its various units, and individuals. They will probably measure success in numerous areas, including both sustainability and financial performance. Systems that measure performance and encourage employees to pursue sustainability are necessary to improve social, environmental, and economic impacts, to communicate the value of sustainability to the organization, and to hold employees accountable for their contribution to the sustainability strategy. In this chapter we discuss some of the systems that encourage performance and aid in performance measurement:

 

6 The foundations for measuring social, environmental, and economic impacts

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Measuring the payoffs of sustainability initiatives is challenging even without specifically identifying the appropriate inputs, processes, outputs, and outcomes. However, to know if sustainability strategies are succeeding, measurement of these elements is critical. In addition, surveys indicate a growing market in impact investments that are made into companies, nonprofit organizations, and funds with the intention to generate measurable social, environmental, and economic impact alongside a financial return.1 Although it is difficult to precisely measure sustainability performance, social science, economic, and financial analysis techniques that provide reasonable estimates for social, environmental, and economic performance do exist. These measures provide substantial and valuable information that enables managers to more accurately evaluate the trade-offs made in day-to-day management decisions.

In this chapter we look at the conceptual foundations for measuring social, environmental, and economic impacts and risks before discussing the practical applications of these approaches in Chapter 7.

 

7 Implementing a social, environmental, and economic impact measurement system

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The identification and measurement of the costs and benefits from corporate sustainability activities is critical to the evaluation of projects within the company and the evaluation of the company and its components and members. As the previous chapter shows, there is a solid academic foundation for measuring sustainability performance. Significant improvements in the development of corporate performance measurement systems that include both financial and nonfinancial measures permit much-improved evaluation of social, environmental, and economic impacts. This is aided by vast improvements in corporate information technology capabilities that permit the collection, aggregation, and disaggregation of information for improved analysis, management, and reporting.

In the last chapter we looked at methods such as hedonic pricing, market pricing, and contingent valuation. In this chapter we translate these concepts and approaches into systems and measures that can be effectively implemented. We look at:

 

8 Improving corporate processes, products, and projects for corporate sustainability

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Analysis of sustainability performance, as discussed throughout this book, is important for improved performance. The organization’s measurement system will provide important information to aid in management decision-making, but improvements will occur only if managers and organizations learn and redesign processes, products, services, projects, and other activities to achieve improved sustainability impacts and performance.

The feedback process is an important aspect of sustainability performance and will probably challenge and change strategies and assumptions. Various mechanisms at different levels in the organization can provide feedback to top management to promote knowledge sharing and to enhance capabilities for improved sustainability performance. The performance evaluation systems and performance indicators discussed earlier are critical in providing relevant information to managers as they improve processes, products, and projects. And stakeholder engagement is effective only if the organization uses information gathered to affect changes and improve decision-making.1

 

9 External sustainability reporting and verification

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It is critical to collect and analyze information on sustainability for improved resource allocation decisions. This information should then be included in internal sustainability reports to improve managerial decision-making regarding processes and products. How companies perform on sustainability is also an important factor for external stakeholders since they are affected by corporate strategies and actions. Sustainability disclosure is valuable because it helps a company demonstrate that it is managing its risks and has a track record of paying attention to its sustainability performance. Surveys reveal that a positive sustainability reputation adds an extra layer of protection, leads to higher total returns, and such companies are more likely to enjoy a lower cost of capital. The 2011 global survey by the CDP (Carbon Disclosure Project), for example, reported that companies in its CDLI (Carbon Disclosure Leadership Index) and CPLI (Carbon Performance Leadership Index) provided double the average total return of the Global 500 between January 2005 and May 2011.1

 

10 The benefits of sustainability for corporations and society

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Global companies are increasingly faced with difficult dilemmas. There is significant pressure to reduce costs in the supply chain, yet switching to lower-cost suppliers may increase social, environmental, and economic impacts, and reactions from various stakeholders, including employees, customers, regulators, and community activists, may have a detrimental effect on financial performance. Senior management often faces complex decisions about facility location that in simpler times could be made by examining differentials in labor, shipping, and raw material costs. Now social, environmental, economic, and political risk must become part of the calculus.

Business unit managers are regularly told by the CEO about the importance of sustainability, yet they receive daily pressure to increase short-term profitability. And their bonuses are typically based entirely on profits. Making the decisions (and these are often trade-offs) about achieving excellence in both sustainability and financial performance is a big challenge.

 

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