Category Archives: Environment

Forthcoming Book on Sustainability/CSR Expected to be Controversial

Lawrence Heim, Managing Director of Elm Sustainability Partners, is finishing his book Killing Sustainability, expected to be published in February 2018.  Killing Sustainability is a painfully candid look at sustainability/CSR failures & obstacles and getting past them.

“The book is intentionally different.  It is written in an informal, concise and blunt style to make it an easy, quick read,” Heim said.  “Plenty has already been written about organizations with robust and successful programs.  The intended audience is sustainability/CSR professionals and executives in small/medium sized companies who need to completely change conversations internally and with customers.”

Perhaps the most controversial aspect of the book is the critical evaluation of sustainability/CSR professionals and their approaches to convincing others of their value.  “Painful introspection is necessary for sustainability/CSR practitioners at this moment in time. We need to understand our own shortcomings, how many executives truly perceive us and why that impacts their decisions.”

Killing Sustainability analyzes the starting point of executive mindsets and current research in behavioral economics and science to influence change.

The title reflects the ultimate end game – when “sustainability” is so fully integrated into a company’s operations and strategy that it can be killed off as a stand-alone concept.

For more information and updates or to join in the conversation, visit www.killingsustainability.com.

Predicting the Failure – or Success – of Sustainability Leadership

Ed. Note: Elm Sustainability Partners is exceedingly grateful to Commander Kerry F. Gentry, USN (Ret.) who has granted Elm the use of his leadership assessment framework, data and tools developed over more than forty years as a Commander in the US Navy Submarine service and numerous positions within Computer Sciences Corporation.

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“Let’s make sure our sustainability program and initiatives fail.”

It is doubtful any company thinks like that. Some companies use sustainability as a fundamental business tool and competitive advantage. Internal organizations are created to support the strategy and people are promoted from within or hired from outside to be Directors/Vice Presidents.

But are those individuals leaders or simply managers? Are they suited to moving all the necessary parts of the organization? Or are they predisposed to mediocrity and be ineffectual? No company intends for their sustainability initiatives to disappoint but by not ensuring the needs of the position match the individual, failure is all too often an option.

Two recent business cataclysms – Wells Fargo and Equifax – perfectly illustrate mismatches between leadership needs and their respective CEO’s capabilities. Both resulted in the CEOs losing their jobs, being grilled at Senate hearings, major loss of customers and of course meaningful drops in stock price and investor confidence.

Even more bad news: these CEOs’ inadequacies were predictable. This article presents Elm’s method for assessing leadership capabilities that can help prevent self-destruction of corporate sustainability success due to inadequately matching the correct person to the unique attributes of sustainability.

Leadership is …?

Leadership is often seen as an intangible characteristic few people innately possess. In the corporate world, managers routinely rise through higher levels of management and increased responsibility, yet few become true leaders. There are examples too numerous to count of managers initiated into internal leadership development or mentoring programs, only to stagnate. Enterprises, law firms and management consultants reward situational success (to be explained later) with promotions up to a point, until an individual’s star fades while another individual rises who demonstrates true leadership, or disappoints.

But these failures are often less the fault of the individual than their assignment to a position inappropriate to their personal aptitude. They are the result of how a company assesses and selects individuals for leadership positions.

Leadership itself should be clarified and defined. Most requirements of leadership are universal, but each situation is unique due to the environment in which the individual must perform. There are four primary components:

  • Setting or accepting objectives and goals
  • Aligning objectives and goals of individuals with those of the leader/organization.
  • Influencing those individuals to achieve those objectives of their own volition.
  • Managing risks to those objectives and goals

Situational success is frequently misinterpreted as leadership. A manager’s success is based on the entire team/organizational ecosystem in which the manager is embedded. Changing the team structure/dynamics, or placing that manager in a different setting frequently produces dramatically different results. In other words, managers perceived as leaders may only be successful in a specific situation; if their situation changes, their ability to succeed may falter. In 1969, Laurence J. Peter published The Peter Principle – a theory that promotions are based on a candidate’s performance in their current role, rather than on abilities relevant to the intended role. Or as commonly summarized – “an employee will be promoted to their level of incompetence.” This is situational success.

Why is situational success not equivalent to leadership? Because each leadership need/position is its own unique situation, with its own unique team/organizational ecosystem.   In assessing leadership, the company must clearly define what is important to be successful in the new role, not how well an individual has performed in their current one.

Leadership is generally confused with management, but they are not the same. Management is characterized by defined processes and learned skills. Because these are conflated, managers are promoted primarily for their management abilities (a technical skill) to the exclusion of other – more important and less teachable – attributes. And, as noted by Laurence J. Peter five decades ago, managerial assessments focus on past performance, not needs of the new position. Managers rise beyond their abilities; leaders rise to their abilities.

The Leadership Wheel

The Leadership Wheel was developed by Commander Gentry as director of the US Navy’s Atlantic Fleet FBM Submarine Training Center. As shown below, it illustrates the relationship between leadership factors. Every position/opportunity requires its own distinctive mix and weighting of leadership characteristics, so there is no “standard.” However, an inventory of frequently identified factors was developed by Commander Gentry and is being adapted by Elm.

At the hub of the wheel are core personality attributes that are necessary for an individual to be a leader in a specific position. These are hard-wired into our brains by the time we are a few years of age. They are essentially not changeable through training, incentives or punishment. Certain abilities and personality attributes – good and bad – exist at different levels within different individuals.

The spokes represent habituated behaviors that characterize an individual’s interaction with others, and are those necessary to the position. Behaviors can be learned to varying extents, depending in large part on an individual’s core personality attributes. Generally, modifying behaviors is effective only when training and intervention is sustained over a long period of time.

The rim represents technical skills necessary for the position and is perhaps the most frustrating paradox in leadership decisions. Individuals tend to be selected for leadership positions based mainly on their technical capabilities. Yet of the three leadership elements, technical skills are the most teachable and easiest to attain/modify. Underlying personality attributes and behaviors are less teachable and therefore tend to be more important in leaders.

 Using information from reports about the recent disasters by Wells Fargo and Equifax CEOs, we can build the following example table with some interesting contrasts – but with similar calamitous results. 

Leadership Element Wells Fargo CEO Equifax CEO
Hub
Morality No Uncertain
Empathy No No
Courage No No
Spoke
Confidence Yes No
Decisiveness Yes No
Rim
Communication No No
Disclosure Knowledge Uncertain No

 

The individual traits are obviously notable, but the dynamics between them are also highly relevant. In the case of Wells Fargo, early assessment of the CEO’s deficient moral compass with high decisiveness would have foreshadowed a propensity to make independent decisions that place the CEO’s own interests ahead of the company’s. And had Equifax identified an apparent lack of courage, decisiveness and confidence as attributes of their CEO, they may have prevented catastrophic hesitation in timely public disclosure of their massive data breach, along with his singling out of one employee as the scapegoat. Recall that hub traits are not teachable and spoke behaviors are minimally learnable; therefore, training and education on those topics would be ineffective at altering the actions of those two individuals.

Characterizing Sustainability for the Company

Having defined principles of leadership, the same must be done for sustainability. Sadly, corporate sustainability still is a victim of ambiguity and inconsistency. It is couched in terms of environmental impact, social issues, human rights, employee satisfaction, safety, chemical content of products, supplier behaviors, corporate transparency, talent retention, climate change, governmental lobbying, governance, community involvement and/or philanthropy. The 2017 United National Sustainable Development Goals encompass 17 different topics.

The breadth of sustainability’s potential scope frustrates corporate efforts to describe the concept internally, let alone outside of the organization. There are also diverse views on where a sustainability function should be placed within an organization – does it fit it the EHS department, Investor Relations, Quality, Finance/Reporting or HR?

Setting criteria for performance, success and leadership is problematic without basic scope/definition of a sustainability function and understanding where it fits organizationally. Successful sustainability leaders have necessary defined characteristics in an appropriate mix to influence others in achieving the company’s sustainability objectives. Obviously, without clarity on what sustainability means and where it fits in the corporate structure, a company will be unable to attain effective leadership, and the individual and program are unlikely to last long or prosper.

Connecting the Dots

The common thread between leadership and sustainability is the need for clarity. Clearly defining sustainability helps establish appropriate leadership characteristics, relative importance of skills and expectations of performance. That is used to establish clear criteria with which the company can appropriately assess individuals and create performance goals.

  • What are the core personality attributes necessary to achieving the objectives that are aligned with the scope/definition of sustainability? Critically, the organization must understand that personality attributes are fundamental to an individual’s personality and difficult to modify. Therefore the individual’s inherent character must be well-suited to the particular position to begin with.
  • What behaviors related to interacting with others are required? Does an individual need to change or adapt to the new position/ecosystem and to what extent can the individual do so?
  • What technical skills are necessary and what is their relative importance? What knowledge does the individual currently possess, are there gaps compared to the requirements of the new position and how important are they?

Spinning the Wheel

Elm is adapting the Leadership Wheel by identifying position requirements and developing dynamic interactive versions in Excel to quantitatively assess individuals against those requirements. In order to create requirements for a successful sustainability leader, an inventory of hub, spoke and wheel competencies is developed using internally identified criteria in conjunction with Commander Gentry’s inventory of frequently identified factors. Once the position-specific inventory is ranked and completed, candidates complete a self-assessment, with the same assessment performed by subordinates, peers, managers, mentors, internal sponsors and others. In some instances, third parties such as customers may also provide valuable input. The assessment process can consist of written questionnaires, tests, interviews and role playing exercises. The results are entered into Excel individually and charted/graphed, allowing the data to be analyzed in different ways and manipulated to reflect changes in position requirements, actual assessment results or what-if scenarios.

Applying the Leadership Wheel in practice for both the enterprise and the individual helps avoid placing individuals in highly stressed positions for which they are ill-suited rather using them where they are most valuable and comfortable – benefitting the company and the individual.

Obvious comparisons arise to what HR departments and recruiters do, but leadership assessments are different in several critical ways.

Leadership Assessment Performance Reviews
Leverages specific data from hundreds of previous structured assessments, with consistent themes Inconsistent data over time due to constantly changing corporate performance management systems, review methods and criteria
Specifically focuses on the individual’s attributes and capabilities by eliminating ecosystem influences on situation success Do not differentiate between the “masking effects” of the ecosystem and the individual’s past performance.   Many times performance is specifically assessed in terms of team – rather than individual – performance
Structured and quantified process of assessing an individual’s attributes and suitability prospectively Use a position requirement statement to compare individuals against each other on past performance. Annual performance reviews are frequently seen as a perfunctory administrative task that is not used after completion

Give us a call to learn more about ensuring the success of your sustainability program by selecting the appropriate leader.

Results from the Auditor QuickQuiz

Our auditor quiz is now closed after a month. The questions were based on existing international non-financial auditing standards, Association of Certified Fraud Examiners (ACFE) fraud identification/examination techniques and US Government Auditing Standards for non-financial audits. There were fewer respondents than we had hoped so we can’t extrapolate beyond our dataset. Even so, some notable trends did emerge.

Of those who responded, 47% were EHS auditors and 27% were CSR auditors. We had hoped more CSR auditors would have participated. Other information about the respondents’ backgrounds:

  • 60% had no certification or “other”
  • 50% have 10 years or less auditing experience
  • 50% have 50 or fewer audits
  • 13% have participated in more than 500 audits during their career
  • 63% spend at least 75% of their time conducting audits

There were only 2 “passing” scores – i.e., greater than 70%. The average score was 49% – far lower than was expected.

Knowledge of standard terminology seems to be lacking, further reflected in poor scores for questions that embedded the terminology within them. For instance, only 30% correctly defined “audit criteria” as meaning the audit protocol. This likely led to 53% of respondents incorrectly answering that QA/QC reviews should include assessing the correctness of the “audit criteria used by the auditor.” QA/QC reviews of auditor working papers should look at how an auditor applied the audit criteria, not the inherent accuracy of the criteria (or audit protocol) used by the auditor. Indeed, only 10% correctly identified that none of the answer options are appropriate for QA/QC reviews.

Only 3% considered interviews better than document reviews when asked directly what type of evidence is strongest. Yet when the question was placed in a practical setting, 73% indicated they would rely on interviews over documentation. Only 26% correctly identified the evidence hierarchy (from strongest to weakest).

On a more positive note, 83% answered that they would decline to develop a document that they audited, meaning 17% did not view this as a conflict of interest. Frankly, we were disappointed that there was not a perfect score in identifying this to be an independence issue.

In answering the question listing possible common evidence problems, just over half (53%) correctly indicated that all of the answer options are common evidence problems.

Finally, 2/3 incorrectly answered that initial determinations of significance/materiality should be made after assessing evidence. It is possible that respondents did not read the question carefully and pick up the word initial.

Certainly more responses would have provided a better representation, but we think there are some valuable take aways from our limited data.  Among them – the gap between EHS/CSR auditor knowledge and existing (and theoretically similar) non-financial audit standards may be larger than previously thought.  As the importance – and liabilities – of sustainability/CSR audits grow, increased auditor training and competence seems warranted.

A 1960s Economic Model for Sustainability Value

Innovation can create “extra-normal profits” – profits higher than the normal expected ROI based on the risk. But these extra-normal profits are short-lived and disappear once the innovation has been adopted by competitors, thereby equalizing the playing field. You may know these by the term “first mover advantage” – something intangible. But there is a 50 year old economic model for this, known by a far more difficult-to-pronounce name – Schumpeterian profits,  after German economist Joseph Schumpeter.

In April 2004, Yale Economics Professor William D. Nordhaus penned what has become a widely referenced Working Paper for the National Bureau of Economic Research (NBER). Then in 2015, Xie Fan School of Economics & Management at South China Normal University followed up with a study more specific to sustainability matters (more on that paper later).

To summarize Nordhaus, innovation generally leads to reduction in the cost of production without a concurrent reduction in the price charged for the product, meaning increased profit for the innovator until such time as others “appropriate” the innovation and create more or less equal competition. An example of this is patents – once a patent expires, other companies can sell essentially the same product, driving prices down, along with the “extra-normal” profits of the original patent holder. Very simply, the longer a company can hold on to its innovation on an exclusive basis, the longer it can maintain those higher profits. Nordhaus presents a formula for calculating specific values. Looking at historical data from 1948 – 2001, he estimated the Schumpeterian profits (i.e., the extra-normal profits only) to range from -1.3% (during the major recession of the 1970s) to a high of 6.3% of total corporate profits.

We reached out to Nordhaus to see if his paper has been updated and the applicability to sustainability. He answered that no update has been issued. His response about sustainability reflected a limited (and perhaps erroneous) concept of sustainability as relating primarily to environmental protection. This is important in one respect that we won’t delve into here (it relates to the social value of innovation), but in our view is less of a factor than the direct production cost reductions achieved from business-focused sustainability initiatives.

Xie Fan explored whether innovations related to CO2 emissions regulations in China had an economic development benefit as well as an environmental one. Fan’s summary states that

… first of all, the environmental regulation affects the total factor productivity growth in China’s pollution-intensive industries; in the second place, the environmental regulation does not promote producer’s scientific and technological innovation level in China’s pollution-intensive industries; in the third place, the environmental regulation has reduced Schumpeter profits in China’s pollution-intensive industries.

In the end, we see that both Fan and Nordhaus offer complementary  models for sustainability value. In our view, Fan’s point is that once an environmental issue becomes regulated, compliance innovation may not provide Schumpeterian profits, although this seems to contradict the famous Porter Hypothesis. Yet applying Nordhaus to discretionary sustainability business innovation, short term extra-normal profits are to be expected and can be estimated with his formula.  But doing so may also involve reducing transparency in order to maintain exclusivity of sustainability innovations.

All food for thought.

 

 

 

 

 

New Advanced Auditor Training Program for HSE/CSR Auditors

Elm Sustainability Partners and Elm Consulting Group International have launched a new training module for senior-level and experienced health, safety, environmental and social auditors seeking to improve their auditing skills and get updates on timely topics related to non-financial auditing and technology.

It is also relevant to those buying HSE/CSR audit services who are looking to improve the quality of audits they receive.  After this course, buyers can identify specific areas of audit practice improvements to request of their providers.  Alternatively, these buyers may wish to require their external HSE/CSR auditor to complete this training themselves.

A partial list of what is covered includes detailed review and practicum concerning:

  • auditor independence standards and managing impairment threats
  • audit criteria requirements
  • audit and evidence limitations
  • evidence hierarchy, weighting and corroboration
  • fraud, forgery and tampering – including new concerns brought about by technology
  • interviewing skills including fraud examination and FBI techniques
  • discussions of US Department of Justice Criminal Division Evaluation of Compliance Program criteria (2017), the June 1, 2017 US Public Company Accounting Oversight Board (“PCAOB”) auditor reporting standard on Critical Audit Matters and EU Non-financial reporting rule
  • audit QA/QC considerations

Each participant will take a pre-test to establish a knowledge baseline and identify specific areas for improvements.  Exercises are administered throughout and a post-test will conclude the session demonstrating the advanced competencies gained.  HSE/CSR regulatory and other technical topics will not be covered as this is not a regulatory update session.

Elm Principals are BEAC Certified Professional Environmental/Health/Safety Auditors (CPEA), have served on the Board of Directors of The Auditing Roundtable (recently merged into the Institute of Internal Auditors (IIA)) and BEAC, and have trained thousands of internal and external HSE auditors over the past three decades.

Contact us to learn how you and your team can take advantage of this unique program.

You Are What Your Suppliers Do: Supplier Actions Make Headlines, Break Business

With companies facing increasing pressure for the actions of every part of their supply chain, demand for – and reliance on – supplier/corporate social responsibility (CSR) audits conducted by third parties has grown rapidly.

Shirts, Phones, Rocks and Shrimp

But there is concern about the quality, reliability and credibility of these audits.

CSR Auditing and Toilet Paper

Is Social Auditing Really Auditing?

Harvard Professor Identifies Factors for Meaningful CSR and Supply Chain Audits

You Don’t Know What Your Suppliers Are Hiding

Companies rely on their CSR audit firm to utilize qualified auditors, employ adequate QA/QC processes and expend adequate time to conduct a reasonable audit. Yet there are no generally-accepted professional CSR audit practitioner standards. Moreover, due to cost pressures, lowest cost audit providers are frequently selected that may not have appropriate auditing skills or training – the largest CSR audit firms conduct tens of thousands of these audits each year. Increasing audit time and costs to improve quality or credibility is typically not realistic – the business model is inherently high-volume, low margin.

Are these audits effective at findings supplier actions that create risks for you? Can a company gain confidence in their CSR audits without adding costs? Is a change in auditors necessary?

Improve Credibility for Disclosures, Media and Customers

Changing audit firms is not necessary, nor is another layer of auditing. Instead, a formalized auditor training program can be a low cost yet effective solution.

The Elm Consulting Group International is expanding our well-proven auditor training program to companies who use CSR/supply chain auditors. The intent of this program is for brands to provide detailed communication and training to their current CSR/supply chain auditors about the company’s requirements for auditor competence, audit quality and processes in order to enhance the credibility of audit information.

Our formalized training for existing CSR auditors builds their client’s confidence in the quality of the work provided. The program is not intended to provide training on specific audit topics such as child labor or worker rights. Instead, the focus is on proven audit techniques such as:

  • Understanding and applying professional skepticism
  • Interviewing and active listening
  • Identifying and responding to non-verbal cues within multi-cultural contexts
  • Evidence sampling methodologies
  • Using information from different sources
  • Verification and recomputation techniques
  • Judging audit evidence quality and limitations
  • Fraud detection
  • Using working papers and audit protocols
  • Writing effective and complete audit findings
  • Audit quality expectations, requirements and processes
  • Maintaining auditor independence, including auditor rotation

Our Qualifications as The Leader in Auditor Training

Our HSE auditor training experience began in the 1980s and we have successfully trained hundreds of external and internal auditors. Elm Principals hold auditor certifications from the US Board of Environmental, Health and Safety Auditor Certification (BEAC, now wholly merged into the Institute of Internal Auditors) and UK Institute of Environmental Management & Assessment, are approved trainers for the IIA EHS auditor certification program and are subject to annual continuing education requirements ourselves. Further, Elm Principals have served in various Board positions in The Auditing Roundtable (merged into the IIA in 2016) and BEAC, including the current BEAC Chair.  More information about our internal audit quality and auditor competence standards is available here.

Give us a call at 678-200-3424 or contact us via email to discuss how we can help you increase confidence in your CSR audits.

Sustainability is Stupid

Please read the entire article before sending me nasty notes. At the end of this piece, you may actually agree with me.

It’s a pretty inflammatory statement.

But I mean it. Just not in the way you may think.

Stupid Is As Stupid Does.  It is probably worth starting with the background on which my perspective is based. I have about thirty years professional experience cycling through the relevant environmental buzzwords of the times: environmental compliance in the mid-80s, environmental management and value in the 90s, environmental risk and sustainability after the turn of the century, and now corporate responsibility and supply chain sustainability for this decade.

In 1994 I was fortunate to obtain a pre-print copy of Michael Porter’s and Claas van der Linde’s seminal work Toward a New Conception of the Environment-Competitiveness Relationship, (Journal of Economic Perspectives (1995), Vol. 9, No. 4, pp. 97-118). The work was essentially reproduced in Green and Competitive: Ending the Stalemate (Harvard Business Review, September – October 1995). As cliché as this sounds, the article truly changed my career as I began seeking economic-environmental linkages with projects, clients and as in-house environmental staff at a Fortune 150 manufacturer.

I have read hundreds of research papers, articles, studies and analyses that, in a nutshell, attempted to link environmental or social responsibility performance to economic gains of some type. Others tied “intangibles” to financial benefits, defining/creating value, and valuing risk reduction. I have pored over texts on traditional cost reduction, cost accounting, marketing, strategy, etc., even completing executive education on these topics.

And yes, much of this has been put into practice (or at least attempted). I have been through a couple McKinsey exercises and a misguided and inappropriate implementation of Economic Value Added (EVA)1. I helped develop internal environmental performance metrics and reporting and attempted to create in-house sustainability initiatives. I served as a team member for sustainability and LCA tool development in GEMI, AIChE and on the US SubTAG to ISO for the Environmental Performance Evaluation standard.  For clients, I have developed and reviewed sustainability criteria, performance metrics and calculated the economic benefits; developed environmental risk assessment and valuation criteria leveraging traditional risk management/insurance models; and quantified the value of environmental risk avoidance investments/activities.

You get the idea.  My point is that I am fairly competent on the subject, if not a relative old-timer with an appropriately receding (or altogether non-existent) hairline. I don’t claim know every aspect of sustainability, but can speak credibly to the issue.

What’s Stupid About Sustainability?  Really, it isn’t sustainability that is stupid – it’s how sustainability is “sold” to business, including:

  • The lack of a consistent, reasonable and/or actionable definition
  • The flood of (mis)information, articles and studies about sustainability that are highly divergent in approach and results –  due in part to the lack of a consistent, reasonable and/or actionable definition
  • The inherent bias of sustainability media and practitioners that identify inappropriate or inconclusive linkages between economic value/financial returns to sustainability practices.
  • Ignoring customer perceptions of performance tradeoffs for sustainable products

Consistent Inconsistency.  About the only thing everyone can agree on about the word “sustainability” is that in its English form, it has six syllables. There are even disagreements about capitalization – should the “S” be capitalized to signify some importance of the word or not?

Readers can likely offer at least three different definitions of the word. I have no intention of listing various definitions here – it isn’t necessary. If you think about it, sustainability is not about doing more, it’s about doing less – spending less, wasting less, reducing resource use. Probably not everyone will agree on that either, but that is really the point – how can a company take on an initiative that can’t even be defined? And even if there is internal agreement, not all stakeholders will concur.

Buried Alive.  How do you go about establishing a definition from which to work? One answer is look to sustainability subject matter experts, studies, articles and white papers. This sounds straightforward (if not tedious), but the amount of available information is completely overwhelming, only increasing confusion. Just for fun, I did a simple test by doing an Internet search on the word “sustainability” and a few other very popular corporate buzzwords. The results speak for themselves.

sustainability table* Search conducted April 9, 2015

Think about this for a moment – some of the most popular (and ridiculed) Buzzword Bingo lingo rank significantly lower than sustainability in terms of Google results. I was actually surprised by this.

Clearly, this isn’t the answer.

Stupid Money.  As sustainability professionals, our knowledge creates biases that can turn into obstacles – forcing a sustainability solution where one may not exist, or may not be appropriate. This is where many sustainability professionals go wrong – and get stupid.   A major myth stemming from the sustainability bias is that sustainability performance is financially material. We wrote back in 2011 –

A myriad of studies completed dating back to the late 1980s attempt to demonstrate “environmental value”.  Most of these studies have shown rather tenuous linkages or used meaningless metrics. Interestingly, most of these studies link to equity markets – i.e., stock prices.  Maybe because stock prices grab headlines, are tied to compensation or are the target to which Boards and senior executive generally manage.

The thought is still on point2. More interesting, however, is the thought we expressed that sustainability value is more appropriately viewed in the context of bonds rather than equities (long term versus short term). Today, that is proving true as demonstrated by the global growth of clean energy financing through bonds which according to Bloomberg New Energy Finance, rose 16% last year to a record $310 billion, boosted by commitments to sustainability investments from Deutsche Bank, Citigroup, Barclays, Bank of American, Credit Agricole, Goldman Sachs and BlackRock.

As we said in 2011, “Given … the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices – perhaps it is time to redirect our efforts at finding relevant and credible metrics.”

Are Customers Stupid?  About twenty years ago I wrote a thought piece on sustainability and circulated it to a small group of colleagues. My basic premise was that sustainable products are a luxury for those able to afford the price differential or willing to accept certain trade-offs. For example, alternative fuel vehicles cost more than comparable gasoline powered cars, so alternative fuel vehicles were not likely to be economically successful in low-income populations. On the flip side, those able to pay more for the sustainability attributes of alternative fuel vehicles had to accept trade-offs in vehicle size, performance and selection.

This premise remains valid today, although the situation has improved. We now have more options for electric/hybrid vehicles and prices have come down for many makes/models, so trade-offs have been reduced in this instance. But other sustainable products still cost more, and the perception of performance trade offs still exists.

Four years ago, we wrote about a study undertaken by professors of marketing at William & Mary, Ohio State and the University of Texas. The study results were presented in The Sustainability Liability: Potential Negative Effects of Ethicality on Product Preference. Briefly, the authors’ study demonstrated that customers frequently feel that improving ethical aspects of a product reduces the ability of the product to fully perform its expected function. In addition, the authors demonstrated the impact of bias on the part of customers when they are being observed (such as in a survey scenario) versus when they aren’t observed (or don’t know it). Connect the dots – customers being observed as part of new product research aren’t likely to show their true concerns about sustainable products and may not buy them when they are available 3.

Going back to automobiles, Tesla has done a good job of battling perceptions of driving performance (such as creating an Insane driving mode that rivals traditional supercars in 0-60 times) and range limits. Few other companies or products seem to have attacked the trade-off perceptions in a similar manner.

To sum it up, you need to understand your customers’ key buying criteria, and how their perceptions of sustainability impact their decisions.

Don’t be Stupid.  Approach internal decision makers in their terms and you keep their attention with a higher likelihood of success. Or ignore that and emphasize ill-defined, unproven or irrelevant pie-in-the-sky sustainability concepts and see where that gets you.

To begin, you need to understand the company, how it operates and why it exists. Act as though you are the VP of Operations, Marketing, Communications, Supply Chain, Product Development and HR. Pretend you are working on a case study at Harvard Business School. Learn as much as you can, such as:

  • What does the company make or offer? What need does it fill? Why does that need exist in the first place?
  • What are key internal words, phrases, programs and initiatives?
  • What are the manufacturing processes involved?
  • What is the manufacturing capacity and efficiency?
  • How does the company make money?
  • What are the most critical aspects of revenue generation and profitability?
  • What are the direct and indirect cost drivers with the biggest impact?
  • Why are certain suppliers used? What are your company’s key buying criteria?
  • Why do customers buy from your company? What are your customers’ key buying criteria?
  • What is important in a new product? How is the market analyzed and demand predicted?
  • Who are the most important audiences for the company’s external communications?
  • Why do employees work at the company? What is important to them?
  • What are the different relevant compensation programs, metrics and triggers?

After learning “the business” you can then put on your other hat and identify where sustainability initiatives may make sense. Where you  find a potential project, your pitch should be about the relevant business benefits using the appropriate business words. The word “relevant” is emphasized.  Unless specifically prompted by management, don’t use the word sustainability until near the end of any conversation: “Oh, and we also get to highlight this as a sustainability success, too.”

What? Why de-emphasize the sustainability aspects? Your audience is likely to be focused on traditional drivers/metrics of the company’s financial performance. Capital is limited, revenues need to increase, costs need to decrease, the stock price is too low and competitors are gaining market share. Cynical management only needs one reason to pull the plug and divert attention/funding away from the sustainability initiative.  Remember your audience and what your ultimate goal is.

Conclusion.  I don’t actually believe sustainability is stupid – quite the contrary.  But I do think that the concept is too frequently portrayed in a stupid manner in publications, by service providers and around corporate conference room tables. Being smart about it is easy as long as you can temporarily disconnect your sustainability expertise/bias and focus on your company’s business fundamentals.

Of course there are exceptions to this; numerous companies have embedded sustainability into their corporate culture and don’t operate as I described. The wide-ranging definition of sustainability also creates a broad (perhaps overly broad) set of examples.  All of these will be waved under my nose as examples of how wrong I am. Yes, it is right that I am wrong in those instances, but those companies are very much in the minority. As sustainability professionals, we need to create opportunities for that silent majority so they can reap the real rewards of sustainability.

We just have to be smart about doing that.

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1 EVA is intended to evaluate capital expenditure opportunities, but in this instance, each staff member had to demonstrate our own personal economic value added by applying the methodology to our everyday activities. That is why I call it inappropriate and misguided.

2 In contrast, perhaps the best examples we have seen that in our view comes the closest in realistically linking sustainability and equities valuation are (a) the April 17, 2015 letter from Ceres to the SEC on climate disclosure. Technically, the letter is about disclosure of climate risk as material information to investors, discussing the matter in terms of asset risk, materiality of future pricing/demand scenarios and long-term capital expenditure plans/assumptions for oil and gas companies; and (b) a recent study from Harvard Business School Corporate Sustainability: First Evidence on Materiality.  This paper isn’t necessarily easy to understand, but the authors performed a number of tests to validate their findings.  One possible weakness is that the authors relied on materiality guidance and data from the Sustainability Accounting Standards Board (SASB) for determining what sustainability matters are considered material, rather than independently confirming that assumption, or developing their own materiality benchmarks. We are not aware if SASB guidance and methodologies have been independently validated.

3 We recently brought these concepts forward to a major consumer products company who was looking to develop a marketing campaign based on sustainability attributes of a new product. After evaluating the matter further, the company put that campaign on hold.

Cyber Attack on Iron Furnace Controls Causes Physical Damage to Plant

A few years ago, we wrote about how the growth of cyber attacks should be considered when companies assess environmental risk of their operations.  As highlighted in that article, rogue code was discovered before harm was done.

But an iron foundry in Germany was not so lucky.  As reported in this  WSJ article,

The plant’s control systems were breached which “resulted in an incident where a furnace could not be shut down in the regular way and the furnace was in an undefined condition which resulted in massive damage to the whole system,”

This situation should cause concern to anyone responsible for HSE and sustainability matters.  Malicious control of production operations can result in all sorts of nightmare scenarios, especially where the manufacturing operation involves the use of chemicals.  In the most minor case, environmental permit violations and media coverage are probable.  The worst scenario could involve the intentional weaponization of manufacturing by hacking operational controls and intentionally creating another Bhopal or Chernobyl.

We continue to recommend that companies consider these issues when conducting environmental risk assessments of their operations.

Do HSE Management Systems Audits Support Regulatory Compliance? Not So Much…

A recent survey in the UK continues to demonstrate the gap between technical regulatory compliance and HSE management systems conformance.

An article published in the June 2013 the environmentalist (the journal of the Institute of Environmental Management & Assessment, or iema) provided a short overview of research results that compared accredited certification bodies processes and “whether third-party audits of an environmental management system (EMS) could provide sufficient assurance of a firm’s legal compliance”.

The findings:

the competence of [EMS] auditors is generally limited to assessing the presence of procedures.

Clearly, assessing the mere presence of procedures is not the same as evaluating the content, adequacy, appropriate or effectiveness of those procedures. Not even close.

There was a notable divergence in opinions on the perceptions of how well EMS audits address regulatory compliance. Not surprisingly, 92% of the certification bodies were convinced their audits reflect regulator conclusions very well or quite well. Yet the regulators themselves hold a far different view with only 17% saying EMS audits address regulatory compliance very well or quite well.

We would call that a gap.

The article is also available online for iema members and subscribers.

 

We Haven’t Forgotten What We Do

Although Elm has invested much time and effort into our conflict minerals services over the past three years, we continue to provide our core services of HSE auditing and program development.

We gain new clients and engagements each year with much of that growth outside the US.

Those who have come to know us in the conflict minerals arena, we would be pleased to talk with you about how Elm can assist you with HSE audit program support.

Please do not hesitate to contact us with questions. We look forward to talking with you.