Tag Archives: environmental compliance

Auditor QuickQuiz Update

Our short auditor skills QuickQuiz has only been live for a few days and we have logged responses.  The number of respondents is smaller than anticipated but trends are appearing.

The Good:  Respondents understand follow through with sampling plans, are aware of the Fraud Triangle and know the role body language plays in interviews.

The Bad:  Most importantly, respondents have been unable to identify specific threats to auditor independence and they have demonstrated a lower-than-expected understanding evidence corroboration and hierarchy.  Other areas where knowledge improvements seem necessary are materiality determinations, awareness of basic audit terminology and the scope of a QA/QC review.

Keep those responses coming in, and thank you for taking a few minutes to complete it.

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.

New Social Auditor Certification in the Works

We have been vocal in our concerns and criticisms concerning social/CSR auditing.  And we have ourselves been criticized for that. Fair enough.

The Association for Professional Social Compliance Auditors (APSCA) has released for public comment its draft Code of Conduct and Auditor Competency Standards – available here.

We support APSCA and its work towards improving the entire “ecosystem” of CSR auditing.  Anyone with a dog in this hunt should click on the link above and submit comments.  APSCA is keen to obtain input from as wide a range of stakeholders as possible to help become as credible as possible.  Given the breath of subject matter that is being demanded of CSR auditors by buyers of their services, there is a great deal of overlap in APSCA’s draft into environmental health, safety, transportation and other technical areas.

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.

Apropos: Dia de los Muertos and the Billable Hour

Today is Halloween in the US and Dia de los Muertos in Mexico.  It is a time based on the idea of reflecting on death.  Now we aren’t being morbid here – instead we grinned at the amusing irony of the timing of this article on LinkedIn which is an obituary to the billable hour.

We absolutely agree with the downsides of billable hours.  All of us at Elm, in prior points in our careers, have had ourselves and clients held hostage by the almighty billable hour.  Over the past several years, we decreased our use of hourly rates and billings – instead working on a daily rate or, increasingly, on a fixed fee basis.

Given all that is right with eliminating hourly billing, a reasonable person might ask why doing so remains ubiquitous for consulting/auditing firms?  Yet another irony for those of us who help client organizations in changing their internal culture – because it’s the way it’s been done in the past. 

Hmmmmm.

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.

Our Pick for the Super Bowl 2014 Ad Winners

Ok, we admit it – this post will be completely gratuitous and self serving.

You may have heard about the Super Bowl ad give-away contest sponsored by a well-known small business accounting software company.  CNN recently posted a story on it.

We thought it would be fun to give it a try, so we posted our entry.

Your vote and support would be greatly appreciated.  And we promise to post pictures from the Big Game if you help get us there.

 

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.