Category Archives: Governance

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.

Dr. Seuss Essay on Auditing Updated

In the early 1970s, buried in one of his books, Dr Seuss penned a little known essay on auditing. For those not familiar with it, the full text follows:

Oh, the jobs people work at!


Out west near Hawtch-Hawtch
 there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch…
is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.

Well… he watched and he watched. But, in spite of his watch, 
that bee didn’t work any harder. Not mawtch.

So then somebody said,
“Our old bee-watching man
just isn’t bee-watching as hard as he can. 
He ought to be watched by another Hawtch-Hawtcher!
 The thing that we need
is a Bee-Watcher-Watcher!”

 The Bee-Watcher-Watcher watched the Bee-Watcher.
 He didn’t watch well. So another Hawtch-Hawtcher
had to come in as a Watch-Watcher-Watcher!


And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch,
Watch-Watching the Watcher who’s watching that bee.


You’re not a Hawtch-Watcher. You’re lucky, you see!”

Words of wisdom from an unlikely source.  And for a little amusement, Elm takes Seuss a little further.

We decided to try our own hand at rhyme
And update the story to these current times.

Auditors watch the things clients do
And also suppliers when they’re in scope too.
They see if the list of everything bought
Was made in conditions just like it was thought
Or from those hoping they’re not getting caught.

The Hawtch-Hawtch bee watcher failed as you know
Since audits alone don’t work, we shall show.
What can we learn from those watching the bee?
I see two things – well, actually three.

The bee – when watched – was supposed to work more
But that’s not what bee itself had in store.
Instead what it did was kept right on doing
Not a thing – the watcher was just cud-chewing.
The town of Hawtch-Hawtch thought things would be fine
As long as an auditor watched all the time.

That, my dear friends, is flaw number 1 –
Audits alone are but one part of the fun,
After the watching, there’s more to be done.

The next wrong expectation in this story I find
Is the scope of the watching is not well defined.
What does it mean to “Watch as hard as you can?”
The watchers weren’t sure – down to the last man.
Had they been told, they could do the job well
And not let past problems fester and swell.

Today, what of CSR, governance and sustainability?
The words are unclear – I think they’re meant to be.
No clarity was given those Hawtch Hawtch bee watchers
So they all failed, got sore feet and bad postures.

And now, my beloved, we’re at flaw number three
Which is simply bad audit and auditor quality.
Bad bee watching – at least supposedly so –
Made the line of watch-watchers grow – grow – grow
That perpetuated the flaws that all went before
Meaning Hawtch-Hawtch kept getting more, more and MORE
Of the same watch watchers already there
Who did nothing more than stare, stare and stare
At the same old thing day after day,
Focused on billable hours, bonus and pay.

Most of them ranked low and were unqualified
To be a watch watcher – they weren’t certified.
Maybe because that would cost a bit more
Than the ineffective work that had been done before.
But Hawtch-Hawtch didn’t care to look into this
Not concerned with things that were possibly missed.

Now Hawtch-Hatwch is not a maker of stuff
That uses slave labor and treats their folks rough
And whose business will shrink when good auditors see
What unscrupulous companies do with glee.

In sum, Seuss told us of things one through three
These things – for auditing – are important and key.
But, I say friend, don’t take it from me
Go back and look that old Hawtch-Hawtch bee.

What Does Trump and GOP Control Mean for Conflict Minerals, Sustainability?

UPDATE:  Acting SEC Chairman Piwowar issued a statement on January 31, 2017 opening the rule and the 2014 Guidance to public comment.

It has been an unusual campaign and election for the US presidency.  Donald Trump will take office in January and the Republicans will control of both houses of the legislature.

So is the fate of the US conflict minerals disclosure mandate in jeopardy?  Perhaps, but in our opinion the Trump administration will not change anything before the May 31, 2017 filing deadline for the CY2016 disclosure.  We recommend that all companies subject to the conflict minerals filing  continue to move forward as planned.  Looking even further out, we expect that the administration will face other dragons to slay through 2018 as well.  This is expected to be a topic of many conversations at the CFSI workshop we are attending this week.

Trump has made clear his disapproval of the Dodd-Frank Act in toto, so there is a general expectation that change will come, yet he faces other higher priority matters such as healthcare and the Federal budget.  But with the Senate and House now controlled by the Republicans, there likely will not be much opposition to a repeal of, or amendments to, Dodd-Frank.

Emerging regulatory initiatives such as expanding SEC reporting to include sustainability matters is also likely to face far more opposition during the Trump administration.

We occasionally are asked what we would do if the conflict minerals mandate was eliminated.  We would see some business loss, but Elm Sustainability Partners and The Elm Consulting Group International do much more than conflict minerals advisory.

Elm Sustainability provides a range of sustainability, corporate responsibility and supplier auditing services.  We review existing social auditor results and qualifications and are known for calculating economic value of sustainability programs using methods that withstand tough management scrutiny.

The Elm Consulting Group International has been in business for 15 years providing clients with the highest quality environmental, health and safety auditing available and that business continues to grow.

Through our six years in the conflict minerals space, we have made many friends and new clients we hope to continue to serve, whether related to conflict minerals or otherwise.  If you are looking for sustainability, social auditing or EHS auditing support, please give us a call.

The Best Sustainability Seminar in 20 Years – National Association of Manufacturers (NAM) Leading Edge Executive Forum

Yesterday I attended one of NAM’s new Leading Edge series of forums. The session was held in Chicago on the topic of generating real economic value from sustainability.  In 20 years of working in the sustainability space, this was by far the best meeting on the topic I have attended. There have been good ones in the past, certainly. But those typically include folks (ahem, usually consultants) trying to sell the idea of artificially bulking up financial benefits of sustainability initiatives by using soft numbers and intangibles in the ROI.

That is exactly the kind of fluff that destroys the business credibility of sustainability – which we have written about and commented on to the SEC as well. In stark contrast to fluff, BS and soft value, the NAM panelists spoke to how they quantify the real dollars from their various sustainability initiatives.  And I do mean real.  No attempts at assigning a value to reputational damage or brand image, no estiamated avoided contingent risks.  These were business initiatives that, oh by the way, also happen to fall within the scope of sustainability.

Yesterday’s gathering was set up in conversation style rather than a typical presentation, which allowed each speaker to discuss their approach to, or obstacles encountered in, a moderated topic. Speaking were representatives from Ecolab, Microsoft, Pfizer, BASF, Smithfield Foods, ArcelorMittal and Alcoa, with a wrap up from Subaru of Indiana.

One point that stood out came from Subaru, who showed the sustainability timeline for their manufacturing plant in Indiana, which began in 1994.   Back then, they developed a business case for a particular project based on real dollars that was successful.  By doing so, they set the foundation for future sustainability initiatives that probably would not have seen the light of day if the business foundation set in 1994 was unsound.

I’m not sure if NAM will repeat the session, but if they do we highly recommend attending.  If you would like to convince them to hold it again, please send us a note and we will forward it to the NAM program manager.

Shirts, Phones, Rocks and Shrimp

You are most likely asking yourself what the nonsensical title means. It probably won’t seem nonsensical after you read this article.

New and emerging legal requirements, customer/consumer demands and media attention are pushing product compliance and procurement staff in unprecedented directions. Suppler responsibility is now a critical component of their functions and is no longer limited to just certain products or industries.

Arguably, the emphasis on supplier responsibility has it roots in the garment manufacturing sector and specifically, the offshore subcontractors in areas such as Bangladesh and Viet Nam. Working conditions and human rights violations were brought to light and brands initiated supplier screening and audit programs. There we have Shirts.

The electronics industry was next but things went further as a new US law (Dodd-Frank Section 1502) required publically traded companies to disclose origins of the ore used to produce tin, tantalum, tungsten and gold in their products. The sale of some of these ores soured from certain African countries was thought to fund violence and human rights abuses by informal militias.   Now automakers are being pilloried for the mica in their paint.  Phones and Rocks now join Shirts.

New laws in the US and UK require companies to continue their supply chain assessment and screening to include whether suppliers are supporting (or actively engaged in) human trafficking and slavery. A high profile lawsuit against a major US retailer alleged that the retailer’s sub-sub-contractor used slave labor as part of the supply chain for commercial shrimp production. Although the suit was dismissed, the issue in the public eye remains. So there you have it – connective tissue between Shirts, Phones, Rocks and Shrimp.

If your company hasn’t begun evaluating your supply chain beyond your direct supplier, there is a risk that that your product could be the next addition to our article’s title. We are happy to discuss this with you, so feel free to call.

“Too Many Sustainability Standards” No Longer a Solo Chorus

We are not very popular with sustainability consultants, media and self-appointed standards setters.  Rather than supporting  the myriad of initiatives, we have decried them as marginalizing sustainability and splintering the market – thereby substantially diluting any real successes that may be achieved by those implementing initiatives.  But being a contrarian has left us singing acapella solo in the concert hall.

A bit of harmony was added from this article published earlier this week.  The author does a good job of explaining key problems with competing inconsistent standards.  We know of one major corporation who currently fills out more than 100 sustainability questionnaires each year from various stakeholders.  This is not a new development as I recall in the mid-1990s the forest products company I worked for responded to more than 40 such information requests/surveys annually.

Several of the newer sustainability standards/ratings emphasize that they don’t impose on the company for information – they use publicly available information in their algorithms.  In theory, that sounds nice, but it adds inconsistency beyond just the various algorithms – rating models based on surveys use different information than those relying on what is publicly available.

Then there is the matter of how each initiative/standard fundamentally defines “sustainability” and/or weights various associated factors.  Last year, I sat in on a panel discussion that was ostensibly a cheerleading session for the Sustainability Accounting Standards Board (SASB) with some of the major backers on the panel.  When I brought up the idea that sustainability is not clearly or consistently defined in the corporate world, the panelists were incredulous.  Yet others in the audience chimed in with additional comments supporting the variability in understanding of the term.

Its nice to finally have some company in the choir, but even so we expect that proliferation of standards/quasi-standards will continue as long as consultants feel there is money to be made.  We continue to take a very basic client-specific business based approach to defining sustainability based on the individual client, emphasizing achievable expectations and measurable business fundamentals.  This approach may not be as sexy as others, but it is realistic and, um, sustainable.

Don’t Call Us

Although Elm Sustainability is best known for our leadership position in the realm of conflict minerals, we provide other sustainability services as well. When we have one-on-one conversations with folks about our approach to sustainability, we get vigorous agreement. Yet not everyone agrees with us initially because we don’t buy into much of today’s sustainability sales pitches or media emphasis.

We emphasize reality in sustainability programs and initiatives. Past articles we published (see below) make this pretty clear. Soft economics and soft metrics may make up most of the sales hype and headlines seen these days. In our view, these build internal expectations that cannot be met, causing a downward spiral of management confidence, support and funding that may not be reversible. You won’t find us hawking any of that snake oil.

Sustainability is Stupid

Seriously, Consumers Don’t Want Sustainable Products

What you do see is Elm asking difficult questions, pulling back aspirations and pushing frank communications. You may end up with a smaller initiative than initially desired, but it will be realistic, achievable and actually measurable.

In other words,  what management considers key elements of success.

So if you want to go toe-to-toe with your executives on their terms to create sustainability initiatives, we may be your best ally. On the other hand, we aren’t the ones to call if you just want to publish a pretty CSR report with pictures of flowers and a nebulous narrative.

SPOILER ALERT: Amnesty International and World Economic Forum Kind of Agree on Supply Chain Responsibility

The World Economic Forum (WEF) just wrapped their annual meeting in Davos, Switzerland. The WEF headline garnering the most media attention was that of climate change, but a relevant and very useful report on supply chain responsibilities and accountabilities was also presented.  While the emphasis is not on conflict minerals, it is mentioned.

The report covered a number of topics in the context of a globalized economy and increased public pressures/expectations, concisely summing up the state of affairs as follows:

Despite significant investment from companies and episodic improvements, these efforts have been limited in the face of deeply entrenched human rights challenges.

Building off this fundamental insight, the WEF report continued to elaborate on the theme of “shared responsibilities”. In our view, the most compelling statements from the 24-page report include:

… a distinction needs to be drawn between visibility [into a company’s supply chain] and responsibility.

… consumers and the media assume that global brands have the capacity to know where their products are being produced or obtained.

…visibility does not equal responsibility; companies cannot and should not be held solely responsible for addressing challenges in their supply chains.

These challenges will never be addressed in a meaningful way if we put the burden solely on companies or governments to act alone… governments and other stake-holders should also identify the extent to which human rights issues are primarily related to significant governance gaps, caused by weak or inefficient regulation or corruption… This does not mean that companies should assume governments’ responsibilities to their citizens. Instead, it requires governments, companies and other stakeholders to work together to close governance gaps that are being driven, in part, by globalization and private sector demands.

At the same time, Amnesty International released a report highlighting environmental degradation, child labor and worker safety failures in the DRC related to artisanal mining of cobalt. In alignment with WEF, Amnesty pointed out that government plays a key role in improving conditions in a global supply chain, and in remedying specific failures in governments:

The research in this report exposes a clear gap in relation to the role of home states, such as China, as well as many others, in requiring transparency around cobalt supply chain practices.

Regulation is required to ensure transparency in relation to the points of extraction, the conditions of extraction and trading, and the chain of custody (actors involved) for cobalt. This will help to achieve the greater objective of ensuring that those responsible for the human rights abuses (including the companies who have on-going abuses such as child labour in their supply chains) become part of the solution.

Near the end of the report, Amnesty included three pages of recommendations to governmental entities to improve multiple areas of governance.

Yet the overall tone of the report focuses more on its accusations of corporate failures, which has unfortunately been reflected in the major media outlets. With the exception of The Verge, that coverage has omitted viewpoints on the current reality of supply chain visibility for cobalt.

We think both reports are worth reading.

Global Witness, Amnesty International Claim 80% Noncompliance with SEC Conflict Minerals Requirements

Today, Global Witness and Amnesty International (“GW/AI”) published Digging for Transparency:  How U.S. companies are only scratching the surface of conflict minerals reporting.  The report was also covered in Bloomberg news, Reuters, BBC and reflected in the OpEd section of the New York Times.  In the report, the two groups claim that

… almost eighty percent of companies in the sample, many of which are household names, failed, in our assessment, to meet the minimum requirements of the law.

This is surprising to say the least, given that we completed a comprehensive analysis of all 1300 filings and came to a dramatically different conclusion1.  We took a detailed look into the GW/AI report to understand the data and conclusions.

Perhaps not surprisingly, their numbers and methodology develop misleading findings to support their sensational headline. Several contradictions were identified between the text, the numbers and facts.  Although the text sometimes (but not always) clarified that certain reporting elements are not actually mandated by the SEC requirements, the statistics portray the elements as being required.  This theme runs through the entire report – the statistics reflect GW’s and AI’s preferences for the content/detail of conflict minerals reports, but not noncompliance with the legal requirements.

One example of this inconsistency on page 7 of the report states that “Awareness by companies of the need to follow OECD guidance was extremely high, with ninety-six percent of the companies we analyzed stating that their reports conformed to the standard“, yet the following statement is made later:

Only forty-six percent of the surveyed companies provided information to the SEC about what they had done to follow each of the five steps in the guidance. Responsible companies should describe their supply chain checks in detail.2

The word “should” is correct.  How companies describe their due diligence framework and measures is not prescribed by the SEC rule.

Another example is the basis for how they arrived at their figure of 80% noncompliance3 .  The groups used twelve criteria against which their sampling of reports was assessed (see page 6).  Figure 3 on page 15 shows the percentage of the sampled reports that meet these criteria.  Interestingly, only three of those criteria are legally mandated without discretionary implementation (“Do RCOI”, “Submit report”, and “Report on website”), and the report shows close to 100% compliance on those elements.  Filers have significant discretion on how they report on eight of the elements (for which the report shows a much lower level of conformance) and are based on data sources the filers have limited control over.  Where filers’ discretionary approach to reporting differs from GW/AI’s desires, the groups considered that to be a noncompliance, and the reported percent “compliance” drops off significantly.

The remaining element (“Determine if under the law”) is a bit baffling.  Filers are not required to affirmatively file or otherwise state that they are not covered by the law, so by definition all filers are covered by the law.  Specifically stating that they are covered is neither mandated nor sensical.

The report further states that “for the companies who filed Conflict Minerals Reports, doing due diligence in conformity with the OECD guidance is a legal requirement of Section 1502.4    While this is correct, one can argue about whether it is legally mandated to address all components of the OECD Guidance.  The ambiguity comes from the fact that the rule takes a voluntary framework – written in terms of “should” and allowing companies to implement it based on their own circumstances and position in the supply chain – and incorporates it by reference into a legal mandate.  So we are faced with a requirement that allows discretionary implementation.  This is the same conundrum faced by EPA in the early 1990s when it considered mandating the use of the voluntary ISO 14001 environmental management standard.

GW/AI criticized the Conflict Free Sourcing Initiative’s (CFSI’s) smelter/refiner auditing program, stating that

… the audit protocols do not require all of its participating metal processors to undertake supply chain due diligence in accordance with the OECD guidance.5

In reality, the protocols and procedures do guide the CFS auditor to review documentation from industry associations such as ITSCi, Certified Trading Chains and the ICGLR Regional Certification Mechanism for supply chain due diligence activities conducted by or for the smelter/refiner.  In fairness to GW/AI, the extent to which this is done by the CFS auditors is unclear.

These are only a few examples from the report.

It is our view that the report and its conclusions take liberties with facts and interpretations of the legal mandate.  While Global Witness and Amnesty International may have certain desires for the content of the SEC filings, that does not make for noncompliance with the legal mandates.

____________________

 The GW/AI report states that 1321 reports were filed with SEC, which we think double counts for amended filings by also including the original filing superseded by the amendment.  They selected only 100 companies (less than 8% of the total filers) to review and assess, some of which are our clients.

2 Page 19.

3  “The main finding of our analysis is that only twenty- one percent of companies in our sample met all twelve of the criteria that constitute the minimum requirements of Section 1502 (see Methodology section above). While these criteria do not represent an exhaustive list of steps companies should take, this demonstrates that seventy-nine percent of companies we analyzed did not meet the minimum requirements of the law.”   Page 15.

4   Page 12.

5  Page 26.

 

 

 

 

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.