Chapter 8
The Sustainability Index
- What is our carbon footprint?
- Are we recycling and minimizing use of resources like energy and water?
- Are our products produced or services delivered in such a way as to minimize pollution and trash?
- Is sustainability part of our culture and values?
- Do outsiders view us as an environmentally responsible organization?
TYPES OF ORGANIZATIONS WHERE THIS METRIC IS APPROPRIATE
Any large organization that sells products or services to consumers is certainly concerned with sustainability. Consumers in most countries care about this aspect of an organization’s performance, and with price and quality being equal will often choose to give their business to the company that has a good sustainability record. Of course, there are certain businesses where being green is even more important, such as oil, natural gas, chemicals, food (particularly meat), transportation, and manufacturing. Some businesses consume huge amounts of energy and water (e.g., steel or aluminum manufacturing), and others are in a business where sustainability is critical, such as garbage and waste management. Small businesses or health care organizations may think this metric is not important for them, but even the smallest of organizations can do their part to improve in this area. It may not be worth the time and trouble to formally track performance in this area if you are an organization with less than 10 employees, however.
HOW DOES THIS IMPACT PERFORMANCE?
Sustainability has a big impact on a number of different performance measures for an organization. One clear link is to cost. Being green often costs more money. Constructing LEED-certified buildings is often more expensive than standard construction. Using paper rather than plastic bags costs retailers more money. However, many efforts to improve sustainability end up saving money. My friend in Costa Rica cut his monthly electric bill in half by installing solar panels on his home there. Of course, the return on investment will require seven or more years to pay off, but he is still saving money in the long run. Another way sustainability impacts performance is employee engagement. If employees care about this as one of their personal values and practice good sustainability habits at home, they are likely to be less engaged at work if their employer has bad marks in this area. Thus bad performance on sustainability may lead to decreases in employee morale and engagement, and increases in turnover. A poor track record and image in this area may have a big impact on your ability to attract top talent, as well as impact consumer spending, thus hurting your profits and growth. In short, sustainability can have a big impact on your brand and image, as well as all sorts of financial performance measures.
COST AND EFFORT TO MEASURE
I would rate the cost and difficulty of creating and tracking sustainability as medium. Some things like water and energy usage are probably already tracked and will take no additional effort to measure. Others like carbon footprint, trash recycling, and sustainability performance of suppliers will probably require some effort. Walmart is presently only measuring suppliers and vendors on sustainability programs or efforts versus more objective measures such as waste reduction and use of recyclable packaging materials. However, they plan to move from process to outcome measures as vendors have had time to implement their sustainability programs. A poor track record in this area of performance will eventually mean that you are no longer able to sell your product to Walmart.
HOW DO I MEASURE IT?
Corporate Knights, a Toronto-Based research and investment firm, has created a sustainability index to assess corporations across the world. Based on this index, the company lists the Global 100 Most Sustainable Corporations. What I don’t like about this index is that it muddles things up with many factors that have nothing to do with sustainability. In fact, only 32 percent of the measures have to do with sustainability. The remaining 68 percent are measures of taxes paid, ratio of executive to employee compensation, R&D investment, and all sorts of other financial measures that assess the overall financial health of an enterprise. To further dilute the index, measures such as employee turnover, diversity, and safety and pension fund status are also included. Given that sustainability is only worth about a third of the weight, it is possible that an organization could be listed in its top 100 and have a mediocre level of sustainability performance that is boosted by stellar financial or human resources results. The four key measures that make up the 32 percent of the index that does focus on sustainability are:
This might be a good place to start in creating your own sustainability index. At least these four factors could be benchmarked against others if they are being measured the same way. I would assign an importance weight to these four factors differently, depending on the nature of your business. For example, a beef business probably uses huge amounts of water, and a transportation business uses huge amounts of gas and oil.
The Santa Clara Valley Water District in San Jose, California, protects and manages all of the reservoirs and watersheds in Santa Clara County and is the wholesaler of drinking water to all of the many cities and communities in the heavily populated Silicon Valley area of the state. The district has a Green Index on the scorecard of the CEO as well as many of the senior leaders. This area of performance is considered so important that it was part of their three-part vision statement “Getting Greener, Leaner, and Cleaner” under former CEO Stan Wilson. The Green Index was divided into internal metrics and external metrics. Internal metrics included factors such as use of solar energy to power their headquarters building, use of carpooling by employees, and recycling of paper and plastics. External metrics focused on the creeks, reservoirs, and other bodies of water in the county. Metrics were gathered on water quality, bacteria, and the health of fish, game, and plants that depend on this water. By measuring and reporting on this Green Index monthly and putting it on the scorecards of many managers of the district they were able to improve performance and went on to win the Silver-level California Award for Performance Excellence, which has the same criteria and standards as the Baldrige Award.
The first thing you need to understand when constructing a measure of this dimension of performance is that sustainability cannot be accurately measured by a couple of simple statistics. As with financial performance, customer satisfaction, or any other important performance dimension, success is measured using a suite of metrics that roll up into summary indices. A common architecture used by my clients includes three categories of sustainability metrics in the index:
The relative weight of each of the three categories of measures in your sustainability index depends on your organization. For a company like Target or Kroger that sells products manufactured by many vendors, the partner portion of the index might be given a 50–60 percent weight. Similarly, a chemical company I worked with spends 66 cents out of every dollar of expense on outside suppliers, so the partner dimension would get a heavy weight. A service company might put the heaviest weight on processes and its own service (product) if it relies very little on outside suppliers and partners.
Another factor to think about is to make sure to include a balance of leading and lagging metrics in your sustainability index. A lagging measure might be something like gallons of fuel saved or number of suppliers with good green audit scores. Leading or “cholesterol” metrics might include money invested in alternative energy technologies, education of employees or customers, perceptions and beliefs about sustainability issues, processes, use of technology that saves resources, and policies that promote improved environmental performance. The key to determining the validity of your leading measures is that they correlate to the lagging ones. Beware of superstitious leading indicators that sound good but do not really link to improved outcomes.
Part of having a good sustainability scorecard is tracking measures that can be easily compared with others. Each metric in an index needs to have a target or objective to become meaningful. Most companies set values for green, yellow, and red levels of performance. As I mentioned, Walmart is one of the pioneering companies in the area of sustainability measurement, but its initial measure of its vendors is simply a self-report questionnaire that Walmart fills out. The plan is to gradually roll out more sophisticated and comprehensive sustainability over time. Eventually, we may have a more standardized set of metrics that can be used to compare all companies. That day is probably many years off, however, since we don’t even have a standard set of financial metrics that all organizations use. In the meantime, try to pick at least a few of the measures in your sustainability index that can be compared to others. This will make it easier to set reasonable targets and to compare your own performance to others.
VARIATIONS
Environmental consultant Emma Stewart, PhD, suggests that while environmental metrics have evolved by leaps and bounds in the last 20 years, there has been a move from tracking discreet numbers like pounds of trash or gallons of water used to ratios or formulas that consider outputs such as energy cost per ton of steel produced. However, even with a number of these ratios, it becomes difficult for executives to get an overall assessment of sustainability without combining a number of these ratios into an index. While it would be great if there were a single index that all industries used, or even if there were one for each industry type, no such standardization exists. What this means is that it is up to you to craft your own sustainability index or use one that has been developed by others. Stewart suggests in a September 2008 blog post that the current challenge is not data availability but suitability, or tailoring to what makes sense for your industry and organization.1
A variation that many of my clients have included in their sustainability index is a measure of external image and internal values relating to sustainability. What the investment community and consumers think of your firm’s record in this area is a big factor. Many would not think of Walmart as a company known for sustainability, yet they are clearly working to change this image. Many are not aware either that Walmart sells more organic food than any other retailer. Whole Foods would probably come to mind first or second on both measures, because it may have done a better job than Walmart of incorporating sustainability as part of its brand right from the start. Some organizations have sustainability as one of their core values and hire for that as well as promote it as part of their overall strategy for success. If you hire people who don’t really care about sustainability, you might be able to change their behavior at work, but what they do outside of work is important, too. Google made headlines by offering $5,000 incentives to employees who purchased a Toyota Prius. My sister-in-law Meredith was among the first to take advantage of this offer, and Google’s parking lot is still filled with these cars, even though the offer is no longer on the table. This move encouraged employees to buy a gas-saving car, but it also helped Google’s image when all the news stories broke about how the company gave employees cash toward the purchase. This one program probably did much to move the needle on the brand image portion of Google’s sustainability index.
FORMULA AND FREQUENCY
As a straw man index to use to begin the customization process, you might start with a formula like the following:
| Process metrics | 40% |
Energy productivity |
10% |
Carbon productivity |
10% |
Water productivity |
10% |
Waste productivity |
10% |
| Partner metrics | 20% |
Process performance (see above) |
10% |
Outcomes |
10% |
| Outcome metrics | 25% |
Product attributes |
15% |
Service attributes |
10% |
| Brand and culture metrics | 15% |
External image—sustainability |
10% |
Internal culture—sustainability |
5% |
Typically the process measures are tracked daily, especially if these factors represent big line items on your balance sheet. Airlines track fuel costs daily, and manufacturing plants track energy costs every day. The partner metrics should be tracked at least once a month, but some may be daily as well. Outcome metrics might also be tracked daily. For example, a grocery store might measure the percentage of plastic versus paper bags used on a daily basis. Trader Joe’s gets a daily measure of how often customers bring their own reusable bags by having them enter their name in a drawing every visit to win a free bag of groceries. Brand and internal culture measures probably only need to be tracked quarterly, since these factors tend to move more slowly. However, one client tracks these factors monthly by watching internal and external communication regarding sustainability efforts.
The formula should be viewed as just a starting point for discussion, and the weights and individual measures would need to be tailored. For example, a beef processor would put a heavy weight on water consumption to productivity, whereas a bank might not even measure this factor in its sustainability index.
TARGETS AND BENCHMARKS
The targets you set for the metrics in this index and for the overall index are highly specialized and should be based on your own past performance, capability constraints, industry averages, benchmarks and industry best, and other related measures. For example, a goal of reducing construction costs for new facilities might impact your measure of the percent of LEED-certified buildings.
BENEFITS OF DATA
Some measures of sustainability, like external image, are harder to track than straightforward metrics like energy usage, which can be pulled right off utility bills. The cost and effort to collect data on this factor has to be weighed against the organization’s desire to get better at it. For a company like Walmart I’m sure there is a strong business case for putting a lot of effort into measuring and improving performance on sustainability. The benefits of data on sustainability are many. More and more organizations are being evaluated on other factors than financial results. That investment advisor firms grade companies on sustainability and that there are mutual funds of only companies with good sustainability and social responsibility performance indicates the importance of this as a measure of your overall success. As the population of the earth continues to grow and resources get scarcer, only those organizations with good sustainability performance will succeed in the world market.
NOTE
1. Emma Stewart, “Building Better Sustainability Metrics,” HBR Blog Network, September 2, 2008, http://blogs.hbr.org/leadinggreen/2008/09/building-better-sustainability-metrics.html.