This book is
about sustainability failures and obstacles, their origin and avoiding them. McKinsey
& Co.’s 2017 study on sustainability indicated that the top five
sustainability topics today are social issues rather than environmental
matters.
Key point: There is no consensus, clear and actionable definition of
sustainability/CSR.
In September
2015, the United Nations announced the adoption of the Sustainable Development
Goals, or SDGs. The UN SDGs are certainly a credible source for defining
sustainability/CSR but at a practical business level, the SDGs may be
overwhelming. The World Economic Forum (WEF) published its 10th Annual Global
Risks Report. Eight of the 17 SDGs correlate to the WEF’s risks and risk-trend
interconnections, and conversely eight of the WEF’s 13 most significant global
risk trends had a corresponding SDG.
Key point: One way to begin changing the perception of sustainability is to stop
using the word.
It is a
direct reflection of the book’s intent - end the old discourse on
sustainability/CSR and use new tools/approaches to help create new
conversations.
Key point: Like a hereditary disease passed on to next generations of management,
contempt about environmental regulations continues to be entrenched in
corporate culture.
Not every
environmental compliance professional or engineer was (or is) suited for auditing.
An auditor’s particular set of skills includes natural skepticism,
perseverance, curiosity and the ability to remain objective in assessing facts,
applying rules and communicating issues. Today, environmental, health and
safety (EHS) auditing is a mature, well-established profession that has proven
to be highly effective. The ISO 14000 series of voluntary environmental
management and certification standards focused on policies and management
rather than on performance or outcome.
Key point: ISO is still seen by many to be a distraction, with companies generally
more interested in hanging a certificate in their lobby than the actual outcome
of the EMS.
In order to
issue an ISO 14001 certification, the auditor did not have to consider the
effectiveness of the management system. Rather, the auditor was to assess
whether the system contains the elements required of the standard,
documentation supporting that, and to some extent whether programs were
implemented.
Key point: Assessing the mere presence of procedures is not the same as evaluating
the content, adequacy or effectiveness of those procedures.
Key point: A manufacturer’s influence - and corporate sustainability/CSR - extends
backwards into a company’s supply chain and forward to a product’s disposal or
recycling.
Any one
supply chain link can choose to change business practices and improve lives. Such
changes can also disrupt the business model, pricing and competitive position
of both parties, creating a powerful opposing force. Approximately 50% of many
companies’ costs are the cost of goods sold (COGS) - that is, the price paid
for the labor required to make the product, the direct materials used to make
the product, and overhead charges necessary for making the product. Sustainability/CSR initiatives can mean increases in all
three cost elements.
Key point: Today’s manufacturing business model presents the sustainability/CSR
professionals’ biggest challenge. Manufacturers have minimal influence beyond
their direct suppliers and supply chain initiatives. Imposing
sustainability/CSR requirements on suppliers can increase COGS.
Key point: A manufacturer can impose contractual requirements onto their direct
suppliers, but they must rely on those suppliers to then push
requirements/initiatives down further.
Things and Stuff Used in Other
Things and Stuff
Key point: The more things and stuff that are made, the more other things and
stuff are required - meaning the manufacturer at the end of the line has to
invest in understanding and managing supply chain sustainability/CSR.
Things and Stuff Used Indirectly
Key point: Indirect materials are a component of COGS for manufacturers and their
suppliers, and therefore, are not excluded from cost pressure.
Sustainability/CSR initiated changes may again impact costs, so resistance is
to be expected.
Things and Stuff Discarded
Just because technology exists to
recycle materials does not mean recycling actually occurs. No alternative has
yet been identified to effectively manage the volume of materials previously
sent to China. The enlightened way to manage back-end impacts of disposal is to
address them in the beginning - designing products to extend their useful life,
minimize hazardous chemical content and reduce post-use recycling burdens. Design
for the Environment (DfE) was an initiative US EPA started in the 1990s,
primarily in the technology industry.
Key point: Current expectations are that manufacturers maintain some level of
responsibility through the end of a product’s useful life.
Corporate
procurement guidelines sometimes give preferential consideration to products
that are sustainable or socially responsible. “millennials” also seem committed
to the same buying preferences.
Key point: Consumption of things and stuff is what creates the need for the supply
chain in the first place. This burden can be recast into business opportunity.
Key point: Current CSR audit price points are a major driver of audit quality, or
lack thereof.
Key point: Brands and factories share blame for poor CSR audit quality because
they establish scopes, hire auditors and set market prices.
Anyone
committed to improving CSR audits procured on behalf of a company should
consider the following: * Adjust expectations or pricing to match the quality
and scope of activities desired. * Explore the auditor(s) professional
qualifications. * Test the auditor(s) technical knowledge beyond checklists. * Find
out how much time the auditor(s) spend onsite, and on each audit activity. * Look
at audit report findings and cited evidence. * Determine how audit reports are
peer-reviewed, if at all. * Don’t get swayed by broad company or program
certifications such as ISO. Audit fatigue at facilities at all points in the
supply chain has become an epidemic. To fix problems, problems have to be
fixed, not simply found.
Key point: No audit is effective if audit findings are not addressed.
Sustainability
professionals have searched for a credible financial metric to quantify the
value of our efforts. Only 26% of those responding to McKinsey & Co.’s 2017
sustainability survey reported a positive financial impact of their
sustainability/CSR activities, and approximately 25% reported not knowing what
the financial impacts or benefits are at all. “Maximizing shareholder value” (MSV) has been a
corporate mantra for decades. MSV is really MEPW - Maximizing Executive
Personal Wealth. MSV fails for multiple reasons. Public shareholders do not invest in a corporation’s
productive capabilities. In theory, companies issue shares in exchange for
money to invest in growth. In reality according to Lazonick, “stock markets in
advanced countries have in fact been insignificant suppliers of capital to
corporations.”
Key point: In our zeal or a need to justify our existence in the context of
Maximizing Shareholder Value, sustainability/CSR practitioners overreach; our
biases turn into obstacles when we try to force a solution or valuation where
one may not exist, or is inappropriate - destroying credibility.
Key point: Linking sustainability/CSR to stock price may not the right approach.
Key point: In the US, traditional accounting and financial reporting measures have
become less valuable to investors. Non-GAAP financial disclosures are growing
in importance, meaning reported sustainability/CSR valuations should be
supported with credible processes, assumptions, and data.
Key point: The question must be asked if the intended audience understands what is
being said, and whether they are astute enough to realize what is not being
said.
from Albert
Einstein: “If you can't explain it simply, you don't understand it well enough.” “The definition of genius is taking the
complex and making it simple.”
Key point: Use simple and jargon-free language when possible.
Key point: Sustainability generally remains the domain of big companies and
certain industries. Internal challenges to sustainability/CSR in smaller
companies are frequently greater than in large companies.
Key point: Countering Friedman’s position on sustainability involves developing a
sustainable product that is clearly aligned with the company’s traditional
offerings.
Key point: Rather than attacking a “company,” consumers and investors should try
to influence corporate managers by appealing to their personal sense of morals
and responsibilities.
Key point: Established thinking is difficult to alter because physical neural
pathways in the brain are not easily changed.
Key point: When discussing sustainability/CSR, we may unintentionally evoke frames
that undermine our ability to convince others of our position.
Key point: Behavior is frequently driven by the wording in instructions, guidance
or even naming products/services, whether intentional or not.
Thaler
describes choice architecture - the design of thoughtfully presenting
information choices or options “in a way that will make choosers better off, as
judged by themselves.” Wording of options and the way they are offered impacts
how people act and this behavior can be predicted. Choice architects influence
behavior by how they offer information and choices. This is what Thaler calls a
“nudge.” Choice architecture and nudging principles include minimizing and
focusing options, using careful wording to subtly influence behavior, and
formatting the presentation of options. Fundamentally, choice architecture is
about reducing cognitive effort and overload; making it easy to choose the
“right” choice.
Key point: When presenting options for consumers or executives, apply choice
architecture to reduce - or maximize - desired bias and behavior in the
outcome. In other words, nudge.
Key point: Public disclosure can be an effective nudge for initiating change
because executives wish to avoid being called out as a result of what is
disclosed.
Key point: Consumers may not follow through on behaviors they demonstrate in
market surveys or testing, so new products or marketing campaigns can be built
on false expectations.
Stoknes
points out that humans hate financial losses about two times more than they
like financial gains.
Key point: Presenting a sustainability/CSR opportunity in terms of avoiding a
risk/negative may be valuable because humans are psychologically biased to
avoid risk, but it may be better to frame the opportunity in positive terms.
Assess the best direction for a specific audience.
Stoknes
states “what we choose to purchase depends not only on price and technical
information, but even more on how the choice is presented.”
Key point: To resolve the tension of cognitive dissonance, people can choose to
change feelings or thoughts and continue their desired behavior.
Key point: Once thoughts or feelings are altered to justify existing behavior,
confirmation bias becomes another obstacle.
Key point: Framing sustainability appropriately to executives is a prerequisite to
communicating facts and nudging toward the desired outcome.
Key point: Maximizing short-term extra-normal profits resulting from
sustainability innovations may involve reducing transparency in order to
maintain the exclusivity of those innovations.
Key point: The internal perception of sustainability’s place in the org chart, its
leader and staff can predetermine a program’s success or failure.
A 2016 Bain
& Company study on organizational aspects of sustainability indicated that
only two percent of 300 companies surveyed actually achieved or exceeded the
sustainability goals those companies established for themselves. “dilution of value and mediocre performance”
in sustainability. The reasons for this failure boil down to two themes:
ineffective sustainability leadership and lack of convincing valuation of
sustainability programs/efforts.
Where?
Key point: If the program is seen as an important part of the company, the
pressure is on to retain that respect. Otherwise, time must be spent reframing
and building credibility before perception changes.
if the
C-suite takes a specific interest in sustainability/CSR, then it tends to
happen. Looking back at articles about sustainability/CSR success at major
brands, the C-suite is featured on a regular basis.
Who? (He’s on First)
Personality, technical skills,
business acumen, interpersonal skills and communication all factor into how a
leader is perceived by others and the judgments made about the leader.
Key point: Finding the right leader involves clearly defining what
sustainability/CSR means to the company, evaluating candidates against criteria
based on that definition and determining if/how gaps can be closed.
Changing
a long-embedded operating culture of “production first” is challenging. The
goal is to change long-established mindsets and behaviors of people whose
priorities typically center on production.
What? (Second base!)
Key point: If your background is a concern, tackle that perception by continually
reinforcing the present and future of sustainability/CSR initiatives in a
credible manner.
“short-termism.” This disease causes
executives to focus almost exclusively on quarterly financial performance
instead of establishing and managing toward long-term goals.
Key point: Executives have incentives to manage short-term financial performance
that can compromise long-term thinking. In these situations, the credibility of
the sustainability/CSR organization, leader and financial justification are
crucial, as is the ability to effectively frame the value.
Key point: To many executives, the word sustainability is a cue to stop listening
based on existing frames.
Key point: Building sustainability/CSR choice architecture that appropriately
balances executive points of view and new sustainability frames requires effort
and skill.
Identify where
sustainability initiatives may make sense within the company’s operating
context. Where a potential project is identified, discuss relevant business
benefits using the appropriate business words. Link initiatives to key buying
criteria or other customer requirements. Focus on real economic value created
and try to avoid couching value in terms of risk avoidance. Eliminate the
unnecessary barrier, artificial distinction and separation from business that
“sustainability” creates - don’t use the word until near the end of any
conversation: “Oh, and it’s a sustainability success, too.” Michelle Edkins of
BlackRock suggested using “language of long-term operational excellence …
innovation and adaptation and sustainable financial performance, the companies
tend to be very fluent and well-versed in those issues.”
Key point: Some sustainability squirrels are worth catching; others, perhaps not.
Sustainability practitioners should critically evaluate each and make the
determination.
Customers
understand customers’ key buying
criteria, how their perceptions of sustainability impact decisions and then
meet their needs.
CDP
CDP, formerly the Carbon Disclosure
Project, is a UK-based non-profit that has operated for 15 years. CDP is very
well known and is essentially the standard for reporting greenhouse gas
emissions. They also collect and track water use data.
Statement of Significant Audience
and Materiality
Yet in analyzing “hundreds of
quarterly analyst calls” over multiple years, not one analyst raised a question
about sustainability, CSR or ESG.
ESG Ratings and Investors
Environmental, social and governance
(ESG) ratings are essentially the terminology the investment community uses to
mean sustainability/CSR. investors view companies with good ESG performance as
having lower systemic risk and beta, therefore reducing the expected CoC. This,
according to MSCI, results in “higher company valuations.” Organizations have
differing opinions on ESG ratings and their importance. Make that assessment
before
Sustainability/CSR Reporting
Sustainability programs should focus
on implementation, not on the report. A company can have an excellent
sustainability program without reporting on it or may reflect it poorly in a report.
What tends to be more common is the opposite - a company publishes a beautiful
sustainability report aligned with a reporting framework, but the actual
program maturity and implementation differ meaningfully from what is
communicated in the report.
When
considering whether - or what - to report, think about the following:
&Why
does the company want to report? Is the company looking to improve its
reputation? Join a CSR index? Because competitors are reporting?
&Will
reporting have a negative impact? In certain circumstances, issuing a
sustainability/CSR report may weaken the company’s competitive position.
&Who is
the intended audience? Is the company most interested in engaging the public,
customers, investors or NGOs? Use the answer to define what and how to report.
&What
story should be told? Is the goal to communicate financial impact of
sustainability/CSR efforts, focus on specific matters or to tell a general
story?
&How
should it be told? Is the story most effectively communicated by using a
narrative, technical data or metrics? Should it follow a specific reporting
framework for standalone sustainability/CSR reports, or will it be integrated
into the financial report?
&Should it be audited/verified?
In the US, it is not common for sustainability/CSR reports to undergo an audit.
Doing so is voluntary, but may be considered worth the cost.
The G20's
Task Force on Climate-related Financial Disclosures (TCFD) released their
reporting recommendations in June 2017. TCFD recommendations involve reporting
on major themes of climate risk governance, strategy, risk management metrics
and targets. TCFD intends that climate disclosures be incorporated into
financial reports rather than in stand-alone sustainability/CSR reporting. But
the process of reporting can consume those involved, distracting from what is
really important. Some well-known global corporations have a surprisingly weak
reality behind their impressive looking reports.
Supply Chain/Supplier CSR
Evaluations
Auditing should not be considered
the end game. The goal is for identified deficiencies to be corrected and
eliminate environmental, social and safety risks. Supplier CSR audits can be
valuable if they are given due respect by buyers and executed professionally by
auditors.
In a perfect world,
sustainability and corporate social responsibility would be so deeply
integrated into company strategy, products and operations that it would not be
distinct or identifiable.
