September 14, 2021
Today, companies cannot shy away from their responsibilities towards the environment. With Extinction Rebellion keeping the climate crisis firmly on the news agenda, and COP26 in November gathering more international attention than ever, how businesses approach and champion sustainability is under significant scrutiny. At a local level, organisations are being set targets by the UK government to commit to 100 percent renewable energy sources by 2050, and failing to meet these objectives could have substantial repercussions.
What’s more, research is suggesting that both employees and customers alike place value on positive eco-contributions from businesses. For example, a recent survey by Unily has shown that 65 percent of employees are more likely to work for a company with strong policies on the environment. As a result, future-proofing the business now requires leaders to understand how to measure their environmental impact and place it on an equal footing with commercial performance.
Identifying industry confusion
Naturally, with both the internal and external pressure growing on companies, there’s been a shift towards defining what positive environmental and societal contributions look like. But it’s challenging to put a price tag on the impact on the environment, and the cost can appear invisible.
Publicly listed companies, in particular, have a special duty of care to reflect the ambitions and demands of their shareholders – often employees and consumers. But to make truly robust decisions, ecological and social impacts need a price tag. Only then there is a chance for them to be on equal footing with commercial performance.
But, traditionally, the road to measurement is challenging, and comparability is crucial, but not widely available. The root cause of this can be found in current reporting practices. While many companies already provide a wealth of information on how their businesses affect the environment, economy and society, each sets its own priorities.
Reporting frameworks such as the Global Reporting Initiative (GRI) provide basic guidance, but the corporate culture and type of business model results in different criteria emerging front and centre. Accordingly, reporting becomes company-specific and is insufficient for sustainable resource management.
Creating a common accounting language
Groups from a wide range of industries have set out to close the comparability gap through the Value Balancing Alliance (VBA). Companies such as BMW, Bosch, Deutsche Bank, Michelin, Porsche, and SAP are participating, together with the Big Four accounting firms (PwC, Deloitte, EY and KPMG) the OECD and universities like Harvard and Oxford. The alliance is working to create a methodology by mid-2023 that will enable companies to measure and evaluate their performance in a way that allows for comparison with that of other companies.
To achieve this ambitious goal, we must first implement a set of industry-wide standards that establish the outcome of a particular strategy and shows how sustainability can lend itself towards revenue for the business. This will mean establishing an all-encompassing approach towards sustainability management, as advocated for by the Club of Rome in the 1970s.
Let’s look at measurement first. The importance of this is particularly evident in the case of carbon dioxide emissions. After all, measurement effort here reaches far beyond the company itself. In the chemistry industry, for example, a large proportion of a company’s emissions footprint is produced upstream by suppliers. In fact, research has shown that indirect causes, such as the supply chain, are responsible for 77 percent of the industry’s total emissions.
Elsewhere, it’s the other way around: emissions only really start to rise downstream once the products have reached the customer. The measurement data that needs to be collected thus extends from the supply chain through to production and into the use phase. It can’t get much more complex than that. To solve this, the VBA is developing guidelines on how companies in a wide range of industries can credibly record the relevant data every step of the way.
The end of external costs
From this end-to-end data collection, a huge amount of information is generated and the VBA is creating guidance for calculating the monetary value of this data. For example, at SAP we have calculated that the total amount of carbon dioxide emissions associated with our purchasing decisions – which amounted to 2 million kilotons in 2019 – had an environmental impact of $189m.
But how did we arrive at this exact dollar value? The calculation runs on a set of rules – a price – representing all impacts resulting from the emissions. Climate change involves many complex chains of effects, from ecological changes to upheavals in economic systems, and combining all these effects in a single calculation is easier said than done. As such, the VBA experts rely on findings that have already been validated. However, in some cases the alliance is doing this work itself.
For carbon dioxide, for instance, the VBA proposes a kiloton price of $94 based on 2019’s estimates. Of course, this value is not set in stone, and it may need to be changed in the future. The responsibility of establishing proportionate financial targets should go to a globally recognised body such as a UN organisation, the World Bank or the OECD.
Where these new insights can be applied
While there is still a lot of work ahead, for the first time companies will soon have a methodology at their disposal with which they can uniformly measure and evaluate their impact. In addition to measuring environmental effects, such as the decline in biodiversity, and social damage, like human rights violations in the supply chain, the analysis also focuses on economic impact. Economic impacts on a business can include things such as the social benefit of further education or the economic effects of the taxes, duties and salaries that are paid.
Once the costs and returns of all these factors become clear, company leaders will have a much broader knowledge base to make truly sustainable business decisions.
A single framework could help companies articulate their positive contributions to the environment in a way that consumers understand. In turn, businesses can become more transparent in their reporting practices, while also accurately measuring their environmental impact.
Sustainability pioneers like the Club of Rome called for a 360-degree view of corporate sustainability and environment management more than 50 years ago. From 2023 onward, this vision will become much more concrete.