Act now: Take the initiative for COP21

Should businesses wait for explicit targets from policy makers in order to start mitigating climate change? No. From November 30^th to December 12^th, 2015, the 21st Conference of Parties (COP) took place in Paris. For 12 days representatives of nations and various organisations gathered in Paris to formulate a universal agreement on climate mitigation and adaptation. This agreement aims to restrict the maximum warming of the global temperature to 2 degrees Celsius. However, past conferences have not brought what the world was hoping for: a concrete, global carbon emission policy. Companies are therefore increasingly taking matters into their own hands and setting up ambitious projects. And so can you!

What does my company have to do with COP 21?

Diplomats and heads of state recently gathered in Paris and, for the first time, each of the represented nations listed concrete proposals for future climate policy. For example, the European Union and its Member States are committed to a binding target of at least a 40% domestic reduction in greenhouse gas emissions by 2030 compared to 1990[1]. The United States intends to achieve an economy-wide target of reducing its greenhouse gas emissions by 26-28% below its 2005 level in 2025[2]. Although democratic institutions are not usually known for their decisiveness, The COP21 agreement aims to achieve a significant decrease in carbon emissions.

The intended decrease in carbon emission can have a wide range of implications at a company level. Countries can make laws on energy efficiency, they can come up with taxes on carbon intensive products (including fossil fuel use), or they can impose increased import tariffs on unsustainably managed forestry etc. The impact of these measures differs per type of business and per sector, but it most certainly has an impact, either direct or indirect.

Be a frontrunner, not a laggard

In the light of these important developments, companies are realising that the outcome of COP21 may affect their business proposition. But instead of waiting for politics to unfold, the business world is using the momentum created by the Conference to show initiative. Corporations like Danone and Unilever are voluntarily pledging to stringent emission targets[3]^,[4]. Furthermore, the CEOs of 78 major companies, including Siemens and HSBC, have called on world leaders to include carbon pricing in a global climate deal at COP21[5]. Even major oil and gas companies (BG Group plc, BP plc, Royal Dutch Shell, Statoil and Total SA) have, Taking the summit in Paris into consideration, set out their position in a joint letter to introduce carbon pricing systems[6].

These companies have already started recognizing and identifying the implications of a changing climate on their business proposition. By anticipating the outcome of COP21, they are taking a pre-emptive approach to prevent any potential damage in the future, or to improve their position in the market by grabbing the first-mover advantage. Those who move quickly may generate not only a head start on their future targets, but also a competitive advantage from a boost in reputation or increased efficiency.

So what can you do?

For companies that want to anticipate on a changing climate, there are several options for a climate change strategy. For an organisation that wants to get involved with climate change action, it is sensible to formulate a clear strategy plan. Should the focus be on mitigation or adaptation? What targets do you want to set? Here it can be useful to first map the impact on your business so that you know where the easy wins and biggest challenges are. With this knowledge, you can build a strong plan to act on.

A second step in corporate climate management is measuring your impact. CO₂ footprint, Life Cycle Assessment, and impact monetisation are all methods that can be used to gain an insight into the impact of your business practices. Not only do they measure the impact on the climate, but some also provide data on other environmental factors, which could prove to be valuable information in reducing your impact, or, costs.

To harness the beneficial effect on your business’ reputation, it is vital to report on your efforts. Reporting is a great tool to track and communicate progress. On the topic of climate change, numerous big corporations take part in the Carbon Disclosure Project (CDP). The CDP requires an organisation to report on its climate performance, risks and opportunities, and strategy. The outcome is a dual score: one for the actual performance of the organisation, and one for the quality of the disclosure. The performance score is relative to other organisation in the specific industry, making it easy for a organisation to compare itself with its competitors.

Jump on

While bureaucracy is typically a slow-paced environment, companies are much better equipped for fast change. In fact, as an early mover, you can prepare yourself for future regulations while you reap the benefits of being progressive. So don’t wait for the COP21 outcome. Use this momentum to get your company in the leading group in the battle against climate change now.

Nick de Ruiter is a partner at Sustainalize. He is a specialist in CSR strategy setting and performance monitoring. 

Misha Elkerbout is a specialist in life cycle analyses, impact monetization and CSR performance improvement.

Marcella van Steenbergen is intern at Sustainalize with a profound interest in CSR, CSR strategy setting, impact measurement and CSR reporting.

---

[1] Latvia/1/LV-03-06-EU INDC.pdf

[2] U.S. Cover Note INDC and Accompanying Information.pdf

[3]http://www.danone.com/uploads/tx_bidanonepublications/DP_DANONE_Climate-Policy_EN_091115.pdf

[4] http://www.theguardian.com/environment/2015/nov/27/unilever-to-stop-using-coal-for-energy-within-five-years

[5] https://agenda.weforum.org/2015/11/open-letter-from-ceos-to-world-leaders-urging-climate-action/

[6] http://www.shell.com/global/aboutshell/media/news-and-media-releases/2015/oil-and-gas-majors-call-for-carbon-pricing.html

It’s all about the money: Turning non-financial indicators into financial impact

‘Accountants will save the world’ was what Peter Bakker, president of the World Business Counsel for Sustainability (WBCSD) in 2013[1] stated about how companies should measure and compare their sustainability performance. Although he didn’t say how, he was right. This is reflected in an upcoming trend; the emergence of different methods to measure and compare non-financials such as the environmental and social impact of organisations. These methods are often based on quantifying the outcomes of an organisation in financial terms, better explained or popular named as the monetisation of impacts. Considering the early development phase in which these methods are currently positioned, a variation in design is apparent, and no ‘dominant design’ has evolved yet. Therefore, to get a clear view on these developments, this blog outlines the current state of monetisation methods and will explore why monetisation of impacts is important to organisations.

Why monetise impact?

Valuing impact can create several opportunities to organisations, as they gain insight into the organisation’s impact on society and the environment:

• Better overview of risks, which can be foreseen in an earlier stage.  This can prematurely mitigate potential problems and greatly improve decision making.
• Comply with the growing demand from stakeholders that increasingly ask for a larger focus on non-financials.
• It can reduce costs because of a better understanding of the internal processes (e.g. allocating resources and the impacts of safety and energy reduction), and could foster new innovations.
• From an external perspective, there is an opportunity for improved communication as society requests more transparency. 
• Consumers and future employees are increasingly appealed to buy and work for ‘responsible’ and/or ‘sustainable’ organisations.

Integrating Impact

Our world is full of societal and environmental challenges, and it seems obvious that we are in need of a system that is able to provide us with insight into the actual impact of our choices. This is also echoed by the International Integrated Reporting Council[2], which states that the value that an organisation creates is based on four stages. Namely, the input-, business model-, output- and outcome stage (more information on this value creation model is provided in our last blog on Integrated Thinking[3]). These four stages eventually result in the impact an organisation has on the environment and society. But how can organisations translate different impacts into a monetary value? A lot of organisations are experimenting with methods to monetise their impacts. Although there is no leading method yet, monetisation seems to have great potential for organisations to improve their performance. Therefore, some assistance is needed. At this moment, only several experts are able to provide this service. Albeit the market for providing this service is still relatively small, it is growing and shows a promising future. Should your organisation be on the sideline waiting for this market to move forward or engage in an active manner by experimenting with this method?

Best practices

Several organisations are experimenting with new methods of monetising impacts. Currently, they differ largely on their scale of application, namely by product, project, region or organisational scale. PUMA was one of the first organisations that monetised the environmental impact of its product. They used a method that calculated the true costs producing a pair of shoes by incorporating environmental costs into its production costs. Based on this information PUMA has made drastic changes and now aims to find alternative substitute leather types. The PUMA case dates back to 2011, however other have followed since then, such as Natuurmonumenten. This is the largest nature conservation society in the Netherland. The organisation monetised its impact of societal services such as CO₂ storage, particulates storage and natural water purification. With this method they found out that nature conservation does not halt economic development but instead is an important carrier for economic recovery, which strengthened the organisation’s license to operate. On a more regional scale, Heineken aimed to quantify the effects of its activities by performing socio-economic impact studies in several East African countries. This greatly helped the organisation’s management to make better business decisions based on actual facts on the impact it has on society. This study also gave insight in how Heineken could help to increase the yields of small-scale farmers, which indirectly improved their sales and income. These organisations have benefited from monetising impacts, but we believe many more organisations can benefit from this approach.

Monetization will repay your efforts

The main goal of impact monetisation for organisations is to better allocate resources in order avoid or decrease negative impacts and/or to increase the positive impacts. This is endeavoured by taking into account the different values of these impacts in different contexts, and thereby gaining a more comprehensive view of the total impacts of an organisation on society. It should however, be noted that monetising and valuing an organisations impact is not an ‘one size fits all’ approach, is organisational specific and requires a high level of insight in an organisation’s impact. Nevertheless, despite the initial effort that the monetisation of impacts requires for organisations, these are in our opinion most definitely outweighed by the benefits.

Nick de Ruiter is a partner at Sustainalize and has produced several Integrated Reports. He is also a specialist in CSR strategy setting and performance monitoring.

Mart van Kuijk is intern at Sustainalize. He is writing his master thesis on impact measurement and impact monetization.

---

[1] https://hbr.org/2013/03/accountants-will-save-the-worl/

[2] IIRC, 2014 (http://integratedreporting.org/wp-content/uploads/2015/03/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf)

[3] Integrated thinking: how to smartly visualise your unique selling points (http://cr-reporting.blogspot.nl/2015/10/how-to-smartly-visualise-your.html, 2015, 2015

Integrated thinking: how to smartly visualise your unique selling points

Recent developments in integrated thinking aim to strengthen the emphasis on the unique qualities of an organisation. Business strategies containing merely a standard set of social, environmental and economic aspects fail to add real value. The International Integrated Reporting Council (IIRC) and the Global Reporting Initiative (GRI) nudge organisations to include aspects which are material and have an actual impact on the organisation. Besides including material aspects in the strategy and report, it is important to establish the actual added value of your organisation.

Integration is key

When it comes to sustainability the focus is often put on the (integrated) report. Although the report is an excellent tool to communicate to your stakeholders, it is merely a tool and not the goal. As the IIRC explains, the purpose of integrated reporting is “to explain to financial capital providers how an organisation creates value over time”[1]. In order to actually reap the benefits of integrated reporting and creating actual value, an integrated strategy is required. Organisations should be able to clearly answer the following questions: how does your organisation distinguishes itself, how does it add value to your stakeholders, and how will your business model sustain in the future. Answering these questions and defining the value creation process can help your stakeholders to understand your value proposition, legitimises your business and smoothens the process of strategy setting.

The struggle continues

Many organisations however struggle with the value creation process. A common practice is to solely add a visual of the value chain in the report. Unfortunately, this approach fails to fully capitalise the value creation process into an integrated, profitable long-term strategy. Not to mention that it ignores to provide stakeholders with the ‘bigger picture’. In the end, the current practice might have the opposite effect of what was intended to be a helpful tool to strengthen businesses.

As the struggle continues this raises the question, how to integrate the process of value creation optimally? Below we describe a couple of important actions which are helpful in creating and integrating the process of value creation in the decision making process of an organisation:

·         If you reflect on the inputs,…

Which inputs are essential to your organisation, what do you need to keep your organisation running? Financial instruments are the first aspects that come to mind, but usually these are only a small fraction of the total inputs. A financial institution such as ING, depends most on human and financial assets. A chemical manufacturer such as AkzoNobel, on the other hand, dependents utmost on natural resources and innovation. Most organisations employ several assets simultaneously (both tangible and intangible). By further specifying and, if possible, quantifying these inputs (e.g. the number of employees, the financial investments or the amount of materials bought), the organisation will be able to internalise the first step of the process of value creation.

·         …describe the business activities and the unique properties of your organisation,…

Once established which inputs are needed to keep your business going, it is time to reflect on the business model. The aim is to describe the business model by identifying what distinguishes your organisation from its competitors. In order to do so, one should be able to reflect on the unique properties of the organisation. In other words: what makes your organisation unique? ROCKWOOL for example uses product differentiation by providing a high quality product with better results than competing products, namely non-flammable stone wool as isolation material. Another example is Interface, it differentiates itself by its Mission Zero, which sets out that Interface is to be the first company that is fully sustainable. Interface aims to achieve its mission through innovative thinking such as producing sustainable yarn, using methods to recycle yarn and reinventing its service by also leasing carpets.

·         …the outputs and outcomes follow naturally.

Essentially, what goes in, must come out. Thus explaining the outputs i.e. key products and services provided by your organisation. The assets as described in the first (input) stage are retrieved and translated into outputs. Subsequently, these outputs should be converted into outcomes. Outcomes describe the actual (positive and negative) impact the organisation has on its surroundings. This also includes internal and external consequences, and preferably outcomes which are quantified or even monetised. Both TenCate (page 20-21) and Avalex (page 12) provide valuable examples of a translation into (qualitative) outcomes in their latest annual reporting.

·      Integrating these insights increases the potential of an organisation

As described above the process of value creation and the corresponding value chain should be internalised and custom made to your organisation. The aim is to specify what distinguishes your organisation from its competitors, and how your business adds value to both its stakeholders and yourself. By focusing on the unique strengths and areas in which your organisation has the most important impact, it can improve its decision making process. Namely, the organisation is better informed on the relevant financial and non-financial indicators. Moreover, being fully aware of the value your organisation creates, will help to create a competitive advantage, may improve the resilience of your organisation as it improves the awareness of its strength and weaknesses, potentially increases sales, and boosts your reputation because now you have a coherent and clear story to tell.

Nick de Ruiter is a partner at Sustainalize and has produced several integrated reports. He is also a specialist in CSR strategy setting and performance monitoring.

Alissa Daurer is consultant at Sustainalize and is a specialist in value creation, the assessment of materiality and GRI G4.

Sustainalize (www.sustainalize.nl) is a global CSR consulting firm that specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance. Sustainalize’s client base consists of larger corporations across all sectors.

---

[1] Source: The IIRC. (2015). “Get to grips with the six capitals”. Retrieved from: http://integratedreporting.org/what-the-tool-for-better-reporting/get-to-grips-with-the-six-capitals/

Better government decisions through the integration of non-financial information

Although much has been said about the public sector lagging behind in terms of integrated reporting, research shows that integrated information and stakeholder engagement enable public sector pioneers to make better decisions, attune strategy to society’s needs and consequently create more public value or a better balanced budgeting system.

Integrated reporting was one of the topics of the conference on THE ROLE OF PROVINCIAL/REGIONAL AND LOCAL GOVERNMENT IN MAKING GOVERNANCE MORE EFFECTIVE, ACCOUNTABLE AND INNOVATIVE, held by the School of Public Leadership, Stellenbosch University, South Africa, August 19-21, 2015. 

Public need for understanding the creation of public value 

In many governmental organizations, much effort has been made to improve the quality of public administration. Attempts from different perspectives, but with the same underlying goal. In order to improve governance, much effort is aimed at developing organizational structures and leadership role models to support improvements in policymaking and decision-making. The increasing importance of governance has been a trend for several years. Linking outcomes to organizational activities as a basis for effective governance is a complex matter. It is often referred to as “an ongoing challenge" to be able to demonstrate a logical and explanatory relationship between public sector activities and societal outcomes. Simply linking outcomes and activities is not sufficient for a comprehensive understanding of the creation of public value. 

Integrated information improves the creation of public value 

With case studies and practice reviews, Hans Bossert (School of Public Leadership, University of Stellenbosch) and Lianne Dijkstra (Sustainalize) substantiated that integration of non-financial information improves government decisions. Their study confirmed the hypothesis that integrated information leads to better government decision-making, i.e. decision-making that is more focused on the process of public value creation and stakeholder engagement.  Use of information on the effectiveness of the organization’s strategy and policies as well as its efficiency and legitimacy leads to more efficient and productive allocation of capital for public value creation. 

Improved management decisions through stakeholder engagement 

Bossert and Dijkstra’s case studies regarding the 2014 annual reports of Avalex and the NOM also showed that stakeholder involvement in the reporting process plays a crucial role. For one, involvement will result in better management decisions, due to a better understanding of what stakeholders expect of government organizations’ creation of public value. In addition, providing stakeholders with integrated information facilitates better understanding and articulation of governments’ strategies, which in turn will improve stakeholder engagement.

Integrated reporting enables government organizations to better attune strategy to society’s needs 

Comparative case reviews of subnational government pioneers in integrated reporting show a clear correlation between the business model, the outcomes and the impact on society. In their annual reports, the cities of Melbourne, Warsaw and Johannesburg claim that by managing and disclosing both their financial & non-financial performance data, their strategies will be better attuned to society’s needs. Furthermore, the case reviews show that (subnational) government organizations apply leading protocols and standards on governance and integrated reporting (King III, GRI-G4, IR) in order to link outcomes to their business strategies and provide internal and external stakeholders with insight into how they intend to address sustainability issues.

Conclusion: the results of the study call for (subnational) government organizations to follow in the footsteps of public sector pioneers and private sector organizations in terms of integrating non-financial information and being transparent and accountable regarding their public impact.

Lianne Dijkstra is consultant at Sustainalize (www.sustainalize.nl). A globally active consulting firm that specializes in Integrated Reporting, CSR, CSR Reporting, CSR Strategy and performance monitoring in the private and public sector.