Progressive companies and organizations are trying to recognize and reward sustainable behavior. One of the most effective ways to do this is through integrated performance. That is, assessing impacts and dependencies on nature and society to use the information in business and investor decision-making.
Even though the problems we’re facing are complex, we cannot be paralyzed by the complexity. We need input and insights from a range of experts and practitioners — from corporate sustainability and EHS professionals to finical accountants, management accountants, enterprise risk managers, academics, conservation organizations and more.
Here’s how to make it happen:
1. Eliminate the jargon
I’m an ecologist by training and entered the sustainability world through environmental management and business. Although people with a similar background may be comfortable with technical discussions around, for example, how to define “natural capital,” I can understand why someone from a different background could get completely lost in the flurry of jargon.
For example, could the average person articulate the difference among ESG, natural, social and human capital, multi-capital, integrated capital, pre-financial, extra-financial, non-financial or environmental and social issues? Probably not.
One senior financial accountant from a major company recently told me: “Why would you ever want to use the term non-financial? It just sounds irrelevant, like the stuff you don’t really care about and shove to the side.”Surely, this isn’t the impression we want to give.
Individuals operating in the business and sustainability space need to align on terms and language because:
- The jargon intimidates people who may want to engage
- It makes newcomers think they need to start their education or assessment from scratch (they don’t)
- It’s even starting to confuse experts when, in truth, we’re all talking about the same thing.
Under section three of this paper are some tips about how to align and simplify, making sure that your language is appropriate for your audience.
2. Experiment, learn and share
I have yet to come across a company who’d say that they’ve cracked the methodology for measuring and valuing all forms of capital. Usually, people take pride in their companies’ efforts to do so, but there’s also modesty that comes from the fact that all organizations are still experimenting.
Some are further along on their journey and can lead by example. Take, for instance, Kering’s EP&L, BASF’s Value-to-Society, Nestlé’s Social Impact Valuation (PDF), AkzoNobel’s 4D P&L, Novartis financial, environmental and social impact (PDF), Solvay’s Extra-financial statements, Natura’s EP&L and upcoming SP&L, and most recently Philips EP&L.
Some leading cement companies — LafargeHolcim (PDF), Argos Cementos and CEMEX — also have used similar approaches to develop integrated financial-like statements that all use KPMG’s True Value approach. This is an exciting development. Will we start to see sector-led methodologies, where companies who have the most material impacts in common align on how to proceed?
What about those companies who are experimenting internally but not sharing externally yet?
Companies with useful approaches should share as soon as they are ready. There’s a great collection business examples on natural as well as social and human capital that are always expanding (see the Natural Capital Coalition’s Hub, for example).
We will only progress on practical, consistent and comparable approaches to integrated performance if we share what business is actually doing.
Kudos to those who publicly shared their methodologies back in 2015 (PDF) of which PwC with its 400-plus page methodology for valuing corporate environmental impacts used with clients — it’s time for others to join in.
3. Don’t reinvent the wheel
Although what’s out there isn’t perfect, the Natural Capital Protocol (2016) is a great step forward. It was developed by WBCSD with input from many organizations and experts, on behalf of the Natural Capital Coalition.
In other words, it was a joint effort that went through a public consultation and is regarded as a generally accepted framework for business to measure and value natural capital.
We’re working to do the same with social and human capital.WBCSD is also behind the draft Social & Human Capital Protocol and has established a new Social & Human Capital Coalition to drive convergence on how companies can assess their relationships with people and communities.
Whatever work a company is undertaking — an assessment, sector-specific guidance, a new metric or methodology on a specific issue — it’s best to connect it to these generally accepted references to encourage coherence, buy-in and uptake.
One effective way of doing this is to join and participate in the Natural Capital Coalition and the Social & Human Capital Coalition.
4. Collaborate, compare, converge
In 2016, a handful of leading companies as part of the informal Impact Valuation Roundtable (IVR) used their own valuation methodologies on a common hypothetical example and got completely different results. Why? Because the methodologies and data each company used were completely different.
Worldwide, organizations need to work together to converge on standard approaches to avoid this issue.
WBCSD is working with MIT SHIFT, a user-friendly library of sustainability resources, to create a “TripAdvisor for Tools” by transferring resources from the Natural Capital Protocol Toolkit and later on from the Social & Human Capital to the SHIFT platform. The idea is to reduce the number of platforms companies need to reference so that they easily can find the tools they need.
Based on an analysis of practical applications of the tools, our overall ambition is to identify the tools that could become standardized approaches and accelerate progress to more comparable results.
5. Prepare for integrated performance
Recently, the head of Socially Responsible Investing at an asset management company asked groups of investors to put their hands up if they think a carbon price will be included in investment decisions next year. “Maybe one or two people put their hand up,” he said. “Then I asked whether it will happen in 5, 10 or 20 years’ time. More and more hands go up.”
The future of financial accounting will change. We need to anticipate and influence what it looks like.
If we anticipate that investors increasingly will consider broader performance beyond purely financial measures, we need to think carefully about two fundamental things:
- First, how can ESG impacts be considered alongside financial performance? Given the current rules around financial accounting, you can’t just add — for example — a carbon price to a financial statement. But could you include it in a long-term, new forward-looking financial statement, as proposed by the Reporting 3.0? Or could there be an additional “integrated performance measure” related to ESG that complements existing financial performance measures?
- Second, can you add up E + S + G = total ESG performance? If you do, you might miss important trade-offs and risks. But by doing so, you also can get a sense of the overall relative value of the company to society. Just watch out when you interpret what the results actually mean, especially regarding a potential “net (positive) impact.”
The way forward
Transforming the financial system to reward the most sustainable companies all starts with measuring and valuing impacts and dependencies. This information then can feed into risk management, broader decision-making, capital allocations, retirement plans, budgeting, management accounting, strategy, investor relations and overall corporate finance.
We’re deep in the R&D experimental phase to figure out how to achieve integrated performance management. We should expect it to be messy. We should expect it to be challenging, and to challenge our assumptions, knowledge and expectations. But people have the power to come up with tremendous innovative ways to progress, and I’m looking forward to seeing how we converge, collaborate and together change the rules of the game to reward more sustainable companies.