Friday, October 22, 2010

The Paradox of Sustainability Reporting

Followers of this blog and my sustainability report reviews will know that I often refer to direct impacts and indirect impacts. Maybe I should clarify what I mean.

Direct impacts
These are all the actions of a company which have an impact on stakeholders. This can be anything from reducing carbon footprint to creating a new environmentally friendly product to paying employees a living wage to volunteering in the community - anything that the company actually does and its direct effect on stakeholders.

Indirect impacts
These, in my CSR lexicon,  are really the effects, results or outcomes of  direct impacts. By developing a cause marketing campaign (action which creates a direct impact on those involved in the campaign or benefit directly from the cause), a company may be influencing awareness and consumer behaviour in an indirect way. By developing a new environmental technology, a company may be influencing consumer habits far beyond the specific action the company invested in order to develop a product. A bank may lend money in a responsible way (direct impact) but the whether the money is used in a responsible way is the indirect impact. An ingredients supplier such as Danisco has an indirect impact on  (1) the way  manufacturers make products with more sustainable characteristics and thereby change consumer habits and (2) the sustainability impacts of manufacturing  supply chain processes at customers who buy their ingredients.   

Indirect impacts, in many ways, are outcomes of direct actions. A company cannot control indirect impacts, only direct impacts. But if we think of the direct impact as the driver and the indirect impact as the outcome, then indirect impacts should be of vital relevance to any company's sustainability thinking.   

The interesting thing about this is that in almost any business, industry or sector, the indirect impacts are always far, far greater than the direct impacts. This represents the real difference a company can make as it adopts a sustainability approach, impacting much more widely than its immediate actions. HP say this in their 2009 Global Citizenship Report: "The IT industry is responsible for about 2 percent of global GHG emissions. But our products and services offer great potential to help reduce energy use and emissions throughout the global economy—the other 98 percent."  In determining their sustainability strategy, HP is conscious not only of their activities for designing, manufacturing, marketing, selling and distributing products but also on the way they are used by consumers, in order to impact far beyond the scope of HP's actual operations. An HP printer may be manufactured in a sustainable way but the way it utilizes ink, enables dual-side printing, is recyclable etc determines the level of potential environmental impact through its lifecycle. By now, everyone knows that the carbon footprint of a T-shirt is mainly in the wear and laundry of the T-shirt thoughout its lifecycle which overtake the carbon emissions generated by its actual manufacture. 

Where am I going with this ? One more thing and we will get to the paradox. 

See, I read hundreds of Sustainability Reports. Most of these reports relate to what the Company is doing to behave as a responsible business and advance local or global sustainability. No matter what the report structure, they always come back to impacts in the marketplace, workplace, community and environment and the narrative is almost exclusively about what the Company has done, how much it has invested, how many people were involved and how good everybody felt. For companies that report metrics, these metrics measure all of this: how many volunteering hours, how many training hours, how many emissions, how many hybrid trucks are used in distribution, how many eco-products have been developed, how much money has been spent.  But frankly, what use is it to me to know that employees volunteered for 50,000 hours if I  don't  know what kind of a difference they made during those hours? I dont mean where they went and which project they advanced. I mean what DIFFERENCE did they make? Same with our HP printer example. Who cares if HP or any other company has developed a program to recycle printers? What we should care about is how many consumers actually recycle printers. The program is the input or the enabler, the actual level of recycling is the outcome. The outcomes are what we want.

All of these input -type metrics are important as management reports to guide decision making around resource allocation and get a sense of progress in working to plan. Usually, good basic sustainability practice should create strong indirect impacts. However, it takes time and energy to maintain adequate systems to manage sustainability practices and report on them. It's much easier to measure what you do than the result of what you do. So ...

and here is the paradox ....

companies spend their time and energy reporting on direct impacts when indirect impacts are much more crucial evidence of the way they are changing the world. What really matters most is the outcomes, but  very few companies report on these. Most indirect impacts can be measured to a lesser or greater degree with the right kind of analytical thinking, but very few companies go the extra mile to attempt this.

If one thing needs to change about sustainability reporting, it has to be the practice of publishing a shopping list of actions and instead reporting on the value a company adds to our collective sustainability. My strongest recommendation to all companies entering the reporting cycle for 2011 reports is just that:  Focus on where you are having an impact beyond your immediate actions. Let this be what drives your strategy, decisions, actions and reporting.  Think top-down, not bottom up. Make the effort to assess the difference you are making.

Get past the paradox.


elaine cohen, CSR consultant, Sustainabilty Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices  Contact me via www.twitter.com/elainecohen  on Twitter or via my business website www.b-yond.biz/en  (BeyondBusiness, CSR consulting and Sustainability Reporting firm)

7 comments:

Lavinia Weissman said...

Elaine, your timing is always exceptional. I have been constructing from my health research something similar.

The challenge is "language." People see the words and make up their own definitions because they cannot image the actual outcomes associated with impacts (direct or indirect).

Before CSR, Knowledge Management references "tangibles" and "intangibles". Then a brilliant financial genius, Baruch Lev began to distinguish the process of measuring intangible outcomes that grew out of tangibles in accounting practices.

I have discovered, which I am now writing into a post, that maybe what is lacking more than ever right now is the idea that "imagination" can turn into something concrete that can measure benefit to people and a company's 3bl.

Bill Baue said...

Great articulation, Elaine. I've had this same discussion with folks, using the GHG Protocol scheme as an example. As I'm sure you know, it divides a company's responsibility for greenhouse gas emissions into three categories, which basically break down into Scope 1 (direct emissions), Scope 2 (mainly GHGs emitted by the power plant supplying electricity to the company's operations), and Scope 3 (all other indirect emissions). Many companies focus just on Scope 1 (and sometimes 2), when these generally represent a sliver of the ultimate impact.

Take cars, for example. The biggest impact comes from driving them, not making them, yet car companies generally don't take much responsibility for the impact from the driving. Strictly speaking, responsibility for the GHG emissions of driving "belongs" to drivers -- but we drivers have very little control over the design of cars. We can send market signals by buying cars with better mileage, but only the companies can directly control the design of cars with radically better mileage -- which they forestalled for years!

A corollary problem is that companies don't apply sustainability context (a concept that GRI established) to their reporting. In other words, they don't provide a sense of the degree to which their practices actually contribute to achieving sustainability -- or looking at it the other way around, the degree to which their practices reinforce unsustainability, the status quo in many areas.

So, this is a long way of saying that I agree with your point that sustainability reporting is essentially paradoxical, because it doesn't actually report quantifiably on progress toward sustainability, either directly or indirectly.

Bill
Editor MurninghanPost.com
Principal TransitionGroupLLC.com

Andrea Learned said...

Love your point, here, Elaine. I recently talked with Ellis Jones, author of the BetterWorldShopper (.com)guide who grades corporations on the combination of their work on 5 issues - human rights, environment, animal protection, community involvement and social justice. The environment seems easiest for brands to understand/address - and thus, communicate about with consumers. The other four are "squishy" - hard to understand, hard to talk about and really difficult around which to measure immediate affects of change when any is made. While dealing with the environment is great, a lot of corporatoins need to start understanding that, addressing the environment in combination with the other four will deliver the exponential and "indirect" benefits/value. If a corporation is only doing and touting environmental work, they are now falling behind (and consumers are starting to notice, or at least have guide books and apps with which to help them notice).

elaine said...

Hi Lavinia, Thanks for your comment, though I think there is a different between direct/indirect and tangible/intangible impacts. A direct action can also deliver an intangible impact- for example the increase in employee motivation which cannot be calculated exactly on a corporate balance sheet. This is different to the indirect benefits I was referring to.
warm wishes , elaine

elaine said...

thanks Bill, sharp and informative/useful comments as usual. It did cross my mind to refer to carbon accounting in the post but I was lazy and wanted to finish the post! But of course you are absolutely correct.
Thank you
elaine

elaine said...

hi andrea, yes I agree with you. Sustainability is a holistic concept and all elements are synergistic. Its not an trade off:
super green performance does not cancel out bad human rights performance. It's a sum: green squared PLUS human rights PLUS all other elements = sustainability.
thanks for commenting
elaine

elaine said...

POSTING ON BEHALF OF HENK HADDERS @Henkhadders

Hi Elaine,
I agree that sustainability reporting is paradoxical and that it refers to the value a company adds to our collective sustainability and well-being. I arrive at the same conclusion using a different line of reasoning:

We both look at organizations and the impact of their actions or processes in the world. But what is impact? In my taxonomy for organizational performance there are indicators for input, process, output, outcome and impact (as a separate measurement category). I find it difficult to see indirect impacts as outcomes of direct actions. There are many dichotomies for "impact" including intended-unintended, actual-normative or sustainable-unsustainable. I advocate the use of the last two pairs in sustainability measurement and reporting. For me the most important sustainability question is whether the impacts of organizational processes are sustainable or not. But sustainability of what, and impact relative to what? I agree with Bill Baue that what is missing is context (or the whole); we need context-based sustainability management and context based sustainability metrics.

My thinking is greatly influenced by the work of my friend Mark W.McElroy (developer of the social footprint method). Corporate sustainability management is the discipline that focuses on measuring, managing and reporting overall sustainability performance of a company (often using TBL as the organizing principle). McElroy defines sustainability performance as a measure of an organization's impacts on vital capitals, relative to their effects on human well-being, based on norms of what such impacts ought to be in order to ensure human well-being. The use of a capital-based view (natural, human, social and manufactured capital) is not new in sustainability theory and practice, Capitals are "the things" that produce life-supporting services needed for human well-being. In short, primary and secondary processes can have a positive, neutral or negative impact on the vital capitals on which stakeholders depend for their own well-being.

We can describe (a theory of) well-being, in terms of an ontology of Areas of Impact (and its related vital capitals) connected with a corporation's responsibility, duties and obligations to its internal/external stakeholders. Sustainability management is primarily stakeholder and issue oriented. An organization is sustainable when it is sustainable in all of its relevant internal and external, ecological and social (economic) areas of impact.

Sustainability of business processes can be seen as a quotient, where the numerator is the actual impact on vital capitals and the denominator is the normative impact on vitals capitals needed by stakeholders for their own well-being. For more detail, look at McElroy's work; I find this a very promising approach.

In designing sustainability metrics, the same context-issue arises. From a quotient-based view most mainstream metrics are "top line" metrics, only specifying the actual impacts on specific areas over time. Could it be that you've read so many reports that say nothing at all about the contribution to true sustainability? What is lacking is Bill Baue's context or McElroy's denominator linked to actual ecological/social conditions in the world. For me the real paradox is that all these GRI reports don't measure what they are supposed to (although GRI does recognize the importance of context in a theoretical sense, but without operationalization in its framework). Sustainability management can best be seen as Stakeholder Sustainability Management "in context". It is about the actual impact of the organization related to its fair share or standards of performance. Its funny that GRI now talks about Integrated Reporting, while there still is no adequate solution to these issues in sustainabilty reporting. I think you hit upon a fundamental discussion; hope this contributes.
Henk Hadders, The Netherlands

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