It is important to note that the third element here – economic – does not simply mean the financial profit a business makes. Economic impact is wider than just financial impact. Financial profit focuses on the business itself, but the economic impact of a business is on society as a whole, for example, through creating jobs and paying taxes.
It is also important to recognise that social and environmental issues are not confined within a business’ normal financial reporting boundaries, but businesses also needed to consider sustainability issues across their supply chain, and the social and environmental practices of their suppliers (for example, supermarkets requiring suppliers to manufacture products from sustainable sources or eco-friendly materials, or to supply ‘organic’ produce).
Triple bottom line and different types of capital
We are all familiar with the logic that companies’ underlying objective is to deliver value for their shareholders. However, there is now an increasing recognition that the long-term pursuit of shareholder value is linked to the preservation and enhancement of different types of capital – natural, human, social, manufactured and financial – which can be broadly related to the three aspects of the triple bottom line:
Aspect of triple bottom line
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Type of capital affected
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Environmental
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- Natural capital: natural resources (eg air, water, land) and processes used by a business in delivering its products and services
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Social
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- Human capital: health, skills, motivation of employees.
- Social capital: relationships, partnerships and co-operation (eg with suppliers)
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Economic
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- Manufactured capital: buildings, equipment and infrastructure used by the business
- Financial capital: funds available to enable the business to operate. Reflects the value generated from the other types of capital.
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Integrated reporting
The recognition that businesses depend on different forms of capital for their success is also an important part of the rationale for integrated reporting (IR). However, IR also encourages a focus on business sustainability and organisation’s long-term success. By encouraging businesses to focus on their ability to create and sustain value over the longer term, IR should help them take decisions which are sustainable, and which ensure a more effective allocation of scarce resources.
Integrated Reporting is discussed in more detail in a separate article.
Sustainability and performance information
The argument that it is insufficient for businesses to consider only financial information alone is not new. There are echoes here to discussions around the need for multi-dimensional performance measurement systems (such as the balanced scorecard (Kaplan and Norton, 1996)) – which emphasise the need for financial and non-financial measures to be part of a business’ information systems.
Equally, one of the criticisms sometimes made of the way businesses use balanced scorecards is that they are linked to delivering traditional economic value (eg shareholder wealth), rather than considering the importance of corporate social responsibility (CSR) and sustainability. As such, some commentators have suggested the need to add social and environmental perspectives to the balanced scorecard.
However, others have argued that sustainability could be incorporated into the existing four perspectives. The logic of the scorecard is to link a business’ objectives and strategy to its performance measures, and the argument here is that businesses should include sustainability goals within their strategy.
As such, when selecting goals for the perspectives, a business should consider requirements for sustainability. For example:
- Customer perspective: Have the interests of sustainability stakeholders been taken into account eg green consumers; local communities; government regulators?
- Internal process perspective:
- Have the environmental impacts of processes eg resource usage; waste and recycling; impact on water and air been considered?
- Do HR processes take into account labour best practices around health and safety, diversity, equal opportunity etc?
- Learning and growth:
- How are training and development programmes helping to promote sustainability values and culture?
- How are innovations leading to more efficient use of resources and the reduction of waste, or leading to the introduction of more environmentally friendly products?
More generally, regardless of the performance measurement system it uses, in order to improve sustainability performance, a business needs to translate its overall objectives into specific practices, linked to sustainability, in each key area of performance. It then needs to identify specific measurement indicators, so it can assess how well it is achieving its objectives in each key area.
Key performance indicators (KPIs)
Monitoring key performance indicators (KPIs) is recognised as a crucial part of performance management for any business. However, many businesses don’t measure sustainability KPIs in the way that they would financial KPIs, for example. One of the key challenges with introducing sustainability KPIs is that the list of potential indicators is very large, so determining which are the most important to monitor (ie the key indicators) can be a complex task.
However, the following are some potential indicators a business could track in relation to sustainability:
Energy
- Energy consumption
- Energy saved due to implemented improvements
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Materials
- Raw material usage
- % of non-renewable materials used
- % of recycled materials used
- Product recycling rate %
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Water
- Water consumption/ Water footprint
- % of water reused or recycled
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Supply chain
- % of suppliers that comply with established sustainability strategy
- Supply chain miles
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Waste
- Waste generated
- Waste by type and disposal method
- Waste production rate
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Social
- Number of health and safety incidents (workplace safety)
- Number of sick days (employees’ health and well-being)
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Emissions
- Toxic emissions
- CO2 emissions
- Greenhouse gas emissions
- Carbon footprint
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As we have mentioned before, in addition to encouraging sustainability, monitoring these indicators could also help business performance more generally. For example, monitoring and trying to reduce energy consumption could help to lower energy costs as well as reducing environmental impact. Similarly, supply chain miles provide an indicator of how far a product is travelling before reaching its destination. If products are travelling large distances, this could mean they incur heavy costs along the way. Therefore, looking to reduce supply chain miles could influence a business’s choice of suppliers; not just to reduce carbon footprint, but potentially costs as well.
Evaluating measurement of sustainability performance
Having established the need to embed ‘sustainability’ into an organisation’s performance measurement systems, a key question to ask will be: how well are businesses actually doing this?
By definition, performance measurement is always selective. Businesses cannot measure every aspect of performance, so they must decide the most important metrics and indicators to focus on. When evaluating an organisation’s performance measurement systems (in relation to sustainability) key questions to ask will be:
- What is being measured? What measures are chosen?
- To what extent are aspects of sustainability covered in an organisation’s performance measurement system? Are measures of sustainability included?
- To what extent do the chosen performance indicators enable management to measure performance from a sustainability perspective?
- Are the measures chosen the most appropriate ones for the organisation to be using?
- Do the chosen measures provide a balanced picture of the organisation’s performance (rather than, for example, just focusing on areas which the organisation is doing well)?
One potential approach here when selecting areas to measure could be to analyse a business’s organisation’s value chain to identify the areas which have the greatest potential impact on sustainability. These should then be the priority areas to measure, so the business should select indicators which show well it is performing in these priority areas.
Reliability of measures
As well as the areas being measured, another important consideration is the extent to which the data being gathered is reliable and meaningful.
- How is performance measured (eg inputs; activities; outputs), and can the data be reliably captured?
- Are there benchmarks or comparators against which performance can be assessed?
- Are performance measures clearly defined so they can be consistently and reliably measured?
- Is information presented in a way which maximises its usefulness to its audience?
As with other performance indicators, it is important to monitors trends in indicators of sustainability performance to measure progress. However, for any trend to be meaningful, the indicators need to be measured consistently – over time, and across different parts of a business (and potentially between businesses).
One of the particular challenges in comparing sustainability performance between businesses is that, whereas financial performance can be monitored using a number of widely accepted indicators derived from the financial statements, the indicators of social and environmental impacts are less clearly established, and the information used to calculate them is often not part of mainstream information flows.
In addition, the perception of sustainability can vary across countries, communities and individuals. Some initiatives promoted by an organisation as environmentally friendly might not be perceived as by relevant or beneficial by green consumers.
Reporting Sustainability: Global Reporting Initiative and the UN Sustainable Development Goals
Given the increasing importance of sustainability as a major global issue, there has been increasing recognition for a globally accepted framework within which organisations can frame their sustainability strategy.
The Global Reporting Initiative (GRI) Standards provide best practice for reporting on a range of economic, environmental and social impacts, and give companies specific guidance on what information they should report on. However, the GRI Standards are not mandatory. And while there is an increasing recognition of the need to set a sustainability equivalent of the International Financial Reporting Standards (IFRS), to put financial and non-financial information on the same footing, this has not been achieved yet.
The United Nations’ Sustainable Development Goals (SDGs) could be more relevant at a strategic level, encouraging companies to embed sustainability measures into their ‘core’ performance reporting.
The SDGs are part of the United Nations (UN) 2030 Agenda for Sustainable Development. The Agenda, formally adopted by the UN in 2015, is a 15-year plan with the aim of ending poverty, combatting climate change, and fighting injustice and inequality. The SDGs are 17 high level goals for sustainable development, with each goal supported by a number of specific objectives. In turn, indicators are recommended for each objective to enable performance against it to be measured.
1: No poverty
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10: Reduced inequalities
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2: Zero hunger
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11: Sustainable cities and communities
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3: Good health and well being
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12: Responsible consumption and production
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4: Quality education
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13: Climate action
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5: Gender equality
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14: Life below water
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6: Clean water and sanitation
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15: Life on land
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7: Affordable and clean energy
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16: Peace, justice and strong institutions
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8: Decent work and economic growth
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17: Partnerships for the goals
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9: Industry, innovation and infrastructure
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Sustainable Development Goals – United Nations General Assembly (2015)
The overall goals are broad and aspirational. However, they are supported by a range of associated targets (169 in total) and indicators, which provide a quantifiable framework for assessing whether the goals are being achieved.
For example, Goal 8 'Decent work and economic growth' aims to 'Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.' One of the targets linked to this goal is to “Improve … global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation”. In turn, performance against this target is measured using the indicators:
- Material footprint, material footprint per capita and material footprint per GDP
- Domestic material consumption, domestic material consumption per capita, and domestic material consumption per GDP.
Implications of the SDGs on organisations and performance management
The principal responsibility for achieving the SDGs lies with national governments, but governments cannot tackle the issues on their own. Success in achieving the SDGs also depends on the active participation of businesses and non-governmental organisations (NGOs) across the world.
In this respect, two key challenges are:
- encouraging senior managers to evaluate the extent to which their business objectives create societal value and
- demonstrating the link between 'sustainability' and business.
One possible way to do this is to translate the language of sustainability into the language of everyday business and operations. For example, instead of asking a construction company 'How does climate change affect your business?', the issues could be identified more pertinently by looking at the risks that flooding or changes in water level might have on the company's projects and site operations.
More generally, the SDGs encourage businesses to adopt sustainable practices and integrate sustainability information into their reporting. As we mentioned earlier, in relation to the balanced scorecard, the challenge here is not so much adding additional perspectives for measuring performance, but embedding ‘sustainability’ into the existing perspectives, as an integral factor to consider in business decisions and business performance measurement.
Accordingly, in the APM exam, you should be prepared to evaluate how effectively a business measuring sustainability within its performance measurement system.
Written by a member of the Advanced Performance Management examining team
References:
Brundtland, G. (1987) Report of the World Commission on Environment and Development: Our Common Future, United Nations General Assembly document 4/42/427
Elkington, J. (1998) Cannibals with Forks: The Triple Bottom Line of 21st Century Business (2nd edition), Oxford: Capstone Publishing Ltd.
Kaplan R. and Norton, D. (1996) Strategic learning and the balanced scorecard, Strategy & Leadership, Vol 25, No. 5, pp 18-24
United Nations General Assembly (2015) Transforming our world: the 2030 Agenda for Sustainable Development, 21 October, A/RES/70/1
Available at: https://sustainabledevelopment.un.org/post2015/transformingourworld/publication