26 Feb 21 | Weekly podcast
Companies need now to focus on demonstrating the effectiveness of progressive strategy
As companies continue to deal with a tough economic landscape, creating sustainability projects remains a difficult challenge. Such factors as carbon footprint reduction or biodiversity protection, for instance, are rarely recognised as key metrics that will help justify the existence of and investment in a programme – there must be a compelling broader business case.
Measuring and communicating how sustainability performance directly impact the financial bottom line is crucial if senior managers and board members are to sit up, take notice and welcome efforts to address social and environmental issues. Just how quickly this direct economic impact must be demonstrated will vary from company to company, but linking sustainability and financial performance is key to securing investment.
Of course, many organisations have been using KPIs and a series of metrics that can be easily linked to cost reduction; reducing energy and water consumption across a business brings with it associated financial savings, to name just two examples. Calculating the return on investment of switching to a low-carbon fleet of trucks – and getting out of diesel – is a straightforward task, and one that more and more companies have realised.
Think ‘more good’
This type of focus on finding resource efficiencies, while positive, necessary and useful, only takes a business so far in building an inherently more sustainable company. Being ‘less bad’ does not necessarily mean a company is ‘more good’.
But there are increasing numbers of other ways to demonstrate the business value that sustainability programmes can create, despite being harder to measure. For example, if a manufacturing business invests in modern machinery it is not only likely to boost energy efficiency, but will also be more reliable, helping to improve productivity and fulfil more orders.
For food and drink companies, using fewer raw materials reduces dependence on unreliable supply chains and volatile commodity markets, for example. Companies such as Nestlé and Mondelez have well-established, and well-financed, sustainability programmes designed to alleviate any impacts that could be felt in several decades’ time. For example: the production of cocoa could massively decline if poor farming productivity leads future generations to seek alternative employment.
These companies can point to yield increases enjoyed by farmers that have received agricultural best practice training. And the reality is that if there is no cocoa being produced in the future, there is no chocolate to sell – which does help to focus the minds of the boards signing off on such investments.
DEG, which finances private companies in emerging markets, last year implemented a development effectiveness rating (DERa) to help understand where its investments could have the most positive impact. It is a tool that assesses a company’s three main contributions to development – decent jobs, local income, and market and sector development – as well as two critical ways of doing business sustainably – environmental stewardship and community benefits. The tool contextualises the positive achievements of a given sustainability project within the overall impact of a company on society.
“What we learnt from the 12 years of experience with our previous tool is that you need a baseline and a forecast,” says Christiane Rudolph, DEG’s head of department, strategy and development policy. The new tool captures results and sets an ambition – an anticipated forecast, five years after investment, which enables DEG to focus on sustainability projects that make the most out of investments
Too much information?
However, results need to be transparent and easy to understand for internal and external stakeholders, Rudolph warns. “This is why we concentrated on five categories with only two or three indicators, plus some limited extra reporting. Most of the indicators are quantitative too.”
Of course, traditional monitoring and measuring of core environmental metrics will continue. But in future, it will be up to sustainability teams to steer senior management conversations beyond this type of measurement and to foster a better understanding of what ‘good’ looks like in the context of a changing planet and the evolution of specific sectors and consumers. This will require new data – and new ways of evaluating that data that places different values on creating positive (or negative) environmental and social impacts.