Category Archives: risk management

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.

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.

We’ll Be Seeing You

We’ve been quiet over the past several weeks because we’ve been busy.  A number of companies took us up on our recommendation to get a program review and we are continuing to conduct those through the end of the year.  But we will be back out and about soon and available to meet and chat.

Although our parent The Elm Consulting Group International has long been recognized as a leading environmental, health and safety auditing firm and  Elm Sustainability Partners is most well known for our conflict minerals services, we also provide other sustainability/supply chain risk assessment services.  We recently summarized our general experiences with sustainability in comments to the US Securities & Exchange Commission’s Concept Release as they explore the need for including sustainability disclosures within standard financial reporting.

Where we’ll be

We are always happy to talk at meetings, conferences or phone calls.  Please don’t hesitate to reach out.

Elm Sustainability Partners Wins Global Awards for Conflict Minerals for Second Year

For the second consecutive year, Elm Sustainability Partners has been recognized for our global excellence as the Conflict Minerals Advisory Firm of the Year and as Niche Audit Firm of the Year.  “We are pleased that our clients and others supported us this past year, in terms of both business and this award,” said Lawrence Heim, Managing Director.  “With the US Dodd-Frank Act regulatory conflict minerals filings in their third year, the scope of  sustainability and related verification services is changing rapidly.  Elm continues to provide clients with the highest professionalism and value possible.”

Elm Sustainability Partners awards are on page 45 of the ACQ5 Awards issue.

The ACQ5 Global Awards, now in its 11th year, recognizes services providers that are truly world class in the way they are run and in the services they deliver to clients. ACQ5 Global Awards decisions are firmly based on peer nominations following the receipt of detailed submissions from market participants and extensive year-round research into the markets in all global region. ACQ5 Global Awards cover global categories, best-in-class awards in all regions in over 100 countries around the world.

“Experts whose intimate knowledge and expertise in the cultural, financial and legal arenas are redefining our industry,” says Jake Robson, Group Editor of The ACQ5. “The 2016 ACQ5 Global Award winners always represent the best of breed in the industry and have earned these honours by standing out in a group of very impressive finalists. We are lucky enough to work with some of the most influential and enterprising private organisations in the world and are proud to share their message with our readers. Relying on reader insight and experience to provide nominations to the panel remains the cornerstone of our program and to identify industry leaders, individuals, teams and organizations that represent the benchmark of achievement and best practice in the business world.”

The 11th Annual ACQ5 Global Awards honour the leading deal teams, firms and professionals whose activities set the standard for our markets. This year, companies and individuals, representing every major market in the world, became finalists for the awards.

“Operating a legitimately independent nomination process, our award winners are chosen by our readership. Every year, we seek their assistance of our readers, the industry itself, in recognising industry leaders, eminent individuals, exemplary teams and distinguished businesses, which we believe represent the benchmark of achievement and best practice in a variety of fields – and every year, we turn to them to help as we strive to recognise an ever-widening spectrum of services, markets, industries and organisations that serve our global market place. We believe that by consulting our readers we can better identify the groups that are confronting the issues which face us at this ongoing complex juncture, and our awards will rise above the status of participation certificate and actually be an endorsement of their work.” Robson continued.

Our poll was not only designed to reflect actual performance in any particular area of expertise, it was also aimed to reflect direct market share based on a number of criteria. Voters were encouraged to base their decisions on addressing professionalism: experience, value for money & responsiveness in order for ACQ to derive a numerical rating from 1 – 5. In that sense, this poll should be considered a reflection of how professionals view any practice, individual or related sector supplier in terms of overall quality of service.  Only nominees receiving an average 4-star rating or above achieved a short-list status.

It’s Your Turn: Comment on AFL-CIO Report on CSR Failures

Originally published Aril 23, 2013, the organization has reposted its report titled Responsibility Outsourced: Social Audits, Workplace Certification and Twenty Years of Failure to Protect Worker Rights. Perhaps the report reflects a certain agenda, but it also contains interesting information and learnings. It also allows us to look back at a few pivotal events in brand/supplier responsibility history and to gauge what progress, if any, has been made in CSR auditing and accountability. We have not independently verified any of the statements made in this report. The information is taken at face value and as the original author’s intent.

Below are some of the most direct and strongly worded passages concerning CSR audits and auditors. The footnotes can be found in the original document, to which there is a link in the above paragraph.

We welcome all comments and discussion on these statements and look forward to a lively conversation.

In many ways, the CSR industry’s reliance on subcontracting of inspection and verification replicates the structure of the very global corporations it is supposed to monitor. Accountability is frequently lost in the “CSR supply chain,”

[CSR audits are] based mainly on short and cursory visits to factories and no proper discussion with workers.

In the worst such case, nearly 300 workers died and many more were injured in a fire at an Ali Enterprises garment factory in Karachi, Pakistan… Just three weeks before, the factory had been certified as complying with SAI’s SA8000 standards on worker rights and safety. The SAI system approved the Italian company RInA to certify factories. RInA subcontracted the inspection to a local company, RI&CA, and never actually went to Pakistan to approve workplace conditions. Neither SAI, its own technical experts, nor RInA ever had visited the factory, which was not even registered with the government. Yet somehow, Ali Enterprises received global SAI certification and access to contracts with major brands and markets as a socially responsible workplace.

As SAI admits, RInA managed the work being done in Pakistan solely by telephone and meetings outside Pakistan, never going to Pakistan to observe conditions at the factory.7

As of early 2013, there is still no systematic evaluation demonstrating the impact of SA8000 on workers’ rights and workplace standard. A 2011 Harvard study did find that if consumers are told workers’ rights are being respected at SA8000-certified factories, they prefer products from those factories. However, the study analyzed only consumer behavior and did not examine conditions and rights at a single workplace. Such a study only shows that SAI may work as a brand among some consumers and says nothing about workers’ rights.61 The researchers stress that “we have not attempted to evaluate the benefits provided to workers through SA8000 certification of facilities, and to compare these benefits with the additional costs paid by shoppers in terms of higher prices. A full cost-benefit evaluation of the SA8000 model would involve a long-term evaluation of the effects of the program on workers and comparisons with alternative mechanisms….”62 Meanwhile, the use of SA8000 certification has expanded considerably.

The social audit industry depends on a new profession, for which few people are comprehensively trained. The social audit industry has grown to an estimated US$80 billion-a-year activity…

Companies typically prepare for [the audit], setting the stage to present themselves in a favorable
 light during that brief audit, which may take as little as four hours and almost never more than three days.

One experienced ethical trading professional estimated that the average amount of time spent is about five hours for a factory of about 600 workers.87

Nike, GAP and major social audit firm DNV (accredited by SAI) all have been on record since 2005 or earlier admitting that social auditing is largely a failure.99

As long ago as 2001, Jem Bendell, a business school professor and researcher sympathetic to CSR and SA8000, found that for an auditor following SAI’s exhaustive protocol for SA8000, “a thorough investigation of a production site cannot be done in a two- to three-day audit.” He further concluded that: “People who argue that it is possible either don’t know the complexity of the issues, have a very different understanding of the word ‘thorough,’ or have a commercial interest in saying so.”112 Other research since 2001 repeatedly has found audits often receive considerably less time than that.

 

Ice Cream Parties and Materiality in Conflict Minerals Reporting

There is an important distinction issuers should be aware of between materiality in reporting and significance in the GAGAS Performance Audit standards as those relate to the Independent Private Sector Audit (IPSA) of conflict minerals reports (CMRs).  And an ice cream party will help explain.

Materiality is a critical, but loosely defined, principle in accounting and financial reporting.  It is a threshold relative to the size and particular circumstances of individual companies, above which information is expected to be important to decisions of the users of the information.  Typically, materiality has a financial basis, “users” are considered “reasonable investors” (itself a loosely defined term) and “the information” refers to the total mix of information made available in SEC reporting.  The term “significance” is used in the GAGAS Performance Audit standards and has a similar meaning.

However, in the context of the conflict minerals IPSA objectives, significance relates to the presence, absence and/or relevance of audit evidence corresponding to the specified audit objectives. In their final release of the conflict minerals disclosure requirements, the SEC addressed potential IPSA objectives that were considered but not adopted[1].  Had they been adopted, significance in an IPSA would be more aligned with the general materiality definition for accounting/reporting.  Some of these rejected objectives include whether the

  • descriptions of procedures and controls performed are fairly described in the report;
  • descriptions of the due diligence process are accurate and the results fairly stated;
  • due diligence process conformed to a due diligence standard or was effective;
  • conclusions were accurate.

This distinction between reporting principles and auditing standards is quite important.  Determining significance for purposes of the second IPSA audit objective revolves around whether sufficient and appropriate evidence is available to support the description of due diligence measures undertaken as those are described in the Conflict Minerals Report; it does not involve determining whether the description of those measures diverges from the conflict minerals disclosure requirement or the conclusions made by the issuer.

If an issuer’s CMR  description of due diligence measures performed contains significant omissions or other inadequacies, but the issuer provides the auditor with sufficient and appropriate evidence that the measures described were undertaken, the auditor should not have an adverse opinion or conclusion[2]. Therefore, materiality in the SEC reporting context is not the same as significance in the IPSA context.

We have said in the past – should an issuer’s description of due diligence measures undertaken state that they threw an ice cream party for their sourcing staff, if the issuer provides sufficient and appropriate evidence for the auditor to confirm that the ice cream party was indeed provided for the sourcing staff, then the auditor should not have an adverse IPSA opinion or conclusion for the second objective.  Obviously there is an expectation that an issuer won’t really omit material information from their due diligence description or talk about ice cream parties.

Issuers who are trying to balance their concern about materiality in their SEC filing versus creating an efficient and low cost IPSA could consider this approach:

  • Become deeply familiar with various interpretations of “due diligence” and select an interpretation that meets internal requirements;
  • Carefully consider what aspects of that interpretation are material to the letter and spirit of the law and disclosure requirements.  You may want to involve senior management, the Board’s Audit Committee, Internal Audit staff and/or counsel in this process; then
  • Limit the description of due diligence measures undertaken to those material aspects of due diligence.

For example, if an issuer interprets “due diligence” to be equivalent to OECD Steps 3 and 4, they should assess the most important (i.e., material) aspects of those two steps.  They could decide that relying on CFSI smelter/refiner audits and conducting additional research into countries of origin are the most important aspects of Step 4.  For Step 3, perhaps they view the foundation of risk management is making internal decisions about how to handle the business relationship with high-risk suppliers, and keeping management apprised.  The issuer may then keep their CMR descriptions of measures undertaken to only these material aspects of Steps 3 and 4.  In our opinion (and others whose views are important in this matter), this should satisfy the SEC reporting materiality threshold while concurrently managing the IPSA effort.

Without worrying about the calories and fat of the ice cream.

__________________

[1] Conflict Minerals Rule Final Release, Pages 284 – 286.

[2] See also SEC FAQ Numbers 17 & 21 http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm – q13

Three More Letters to Add to Your Conflict Minerals Lexicon – FBI

Not ones to cry wolf, we had a bit of a shock at the ThomsonReuters Governance and Risk Seminar we participated in this morning. One of the sessions included a representative from the FBI’s International Corruption Unit. Just to be clear, this is the US Federal Bureau of Investigation. The topic was current enforcement of the Foreign Corrupt Practices Act (“FCPA”).   We asked if matters such as conflict minerals, human rights abuses and human trafficking were on their radar screen, expecting a blank stare or an overly-general “non-answer answer.” Instead, a direct – and rather unnerving answer – was given. To summarize:

  • The FBI has already identified linkages between known instances of FCPA violations/concerns (corruption, doing business in ”low integrity countries”) and human trafficking/human rights abuses. Human rights matters are of current interest to them.
  • FBI’s FCPA enforcement resources have grown dramatically in recent years.
  • FBI has unlimited global reach for FCPA compliance enforcement.
  • Conflict minerals experts would do well to have at least a basic understanding of FCPA.

We don’t know what that all means just yet, but we do think it adds another dimension of risk to the SEC filings, compliance status and supplier relationships.

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.

________________

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.

Reputation Risk and Conflict Minerals

Respected governance and internal audit expert Norman Marks posted a fascinating article on reputation risk.  He quotes a line from a recent survey that summarizes the main point:  reputation risk is driven by other business risks.  In many ways, he seems to be speaking directly to conflict minerals.  A few of his salient points are below.  Actually, the whole article is so on-point we almost need to quote it in its entirety.

It should be noted that the likelihood of a significant impact on reputation arising from, say, a safety issue is not necessarily the same as the likelihood of other impacts such as fines, lost time, and so on.

In addition, the impact on reputation may be positive while the impact on, say cash flow, is negative!

For example, the decision to divorce the organization from a supplier who is found to have broken the law may adversely impact costs and disrupt delivery of product to the market – while enhancing the reputation of the organization…

… when there is violence in some part of the world, people look to the US, EU, and others for a reaction. It’s not only the action that can affect reputation, but the failure to act

Actions by third parties that are part of the extended enterprise (suppliers, channel parties, agents, and even customers) can affect reputation. This needs to be identified, assessed, and monitored closely as well…

Of course, reputation risk is the basis of the Dodd-Frank Section 1502 conflict minerals disclosure so perhaps there is little surprise that Norman’s comments are so relevant.  Yet in the heat of effort companies are expending for SEC compliance, some may lose sight of this risk.

Reputation risk is a subject we explore specifically and deeply, from many points of view and sources.  We also explicitly drill down into impacts on supplier relationships – both positive and negative*.

Norman refers to the concept of “risk sensing” as a means of identifying and monitoring reputation risk.  We agree – as a matter of fact, given that our experience includes traditional risk management (insurable and non-insurable), this comes naturally to us.

One client has a particular exposure to reputation risk.  We knew this before the engagement because of our pre-engagement research and “risk sensing”.  In reality, this was easy to identify because the company is very well known and recently the subject of significant negative publicity about their core operations.  Because we were aware of this existing situation, significant time was expended discussing potential reputation impacts of conflict minerals matters.  Facilitated discussions took place between many business, communications, PR and procurement leaders (among others), leading the client to a thoroughly-considered conclusion and plan of action.

Norman’s article should be carefully reviewed and considered.  Afterwards, it may be worthwhile to revisit your own assessment of conflict minerals reputation risk.

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*  For instance, eliminating suppliers that are not conflict free can result in a consolidation of purchasing power (a positive), but also reduce supply chain resiliency in the event of a disruption, such as what occurred with capacitor manufacturing in 2011 (a negative).