State of the Planet

News from the Columbia Climate School

Defining and Measuring Sustainability

While the U.S. national government rushes to dismantle regulation, last week’s Wall Street Journal featured a series of articles about the move by top corporations to adopt sustainability measurement and management. Even the venerable Journal has figured out that corporate managers are increasingly saving money while reducing the environmental damage caused by their organizations. Moreover, the best and brightest brains they hope to attract to work in their organizations value the planet and want to be sure that the organizations they are building don’t destroy it. Environmental protection is no longer a frill but a necessity for the modern corporation.

Last week, a Wall Street Journal article by Dieter Holger and Fabiana Negrin Ochoa reported on the growth of corporate sustainability reporting in recent years. According to Holger and Ochoa:

“…a new Wall Street Journal ranking of the world’s most sustainably managed firms, underscores how sustainability reporting is capturing the corporate world. Not only are companies facing demands from some investors for data on their environmental, social, and governance (ESG) risks and practices, they are being pressured by employees and consumers to focus on issues such as climate change and diversity. Last year, 90% of companies in the S&P 500 index published sustainability reports, up from about 20% in 2011, according to Governance & Accountability Institute, a New York-based consulting firm. As disclosure has improved, so has the value of corporate ESG data, researchers say. Assets under management in funds world-wide that weigh sustainability factors when making investment decisions grew to $40.5 trillion this year from $22.9 trillion in 2016…

The increased prevalence of corporate sustainability reporting is a strong indicator of the importance of sustainability in 21st-century corporate management. Our private sector must compete on a more crowded, resource-challenged planet that is not only battling a global pandemic but must also address the existential threat posed by climate change. Ideological politicians might be able to spin these issues and pretend they are not real for a short period of time, but corporate performance must operate in the actual world. A major problem with sustainability management and measurement, recognized by all concerned, is the different definitions assigned to the concept and the wildly different metrics utilized when measuring it. Central to the conceptual fuzziness has been the effort to create an index or ranking system that combines indicators of environmental sustainability with measures of a company’s work to promote equity and positive community impacts. My view is that this has been an effort to combine all the “do-gooder” elements of corporate behavior into a single measure. I do not see these practices as examples of corporate altruism but instead as evidence of effective management closely related to profit. Others act on the assumption that these are “add-ons” that do not contribute to corporate profit. The effort to measure these very different areas of performance in a single measure makes little sense. The organization’s environmental performance and efforts to be good places to work and have a positive social impact are three separate concepts that should have three distinct sets of measures.

A second problem with sustainability measurement today is that dozens of non-governmental organizations depend on the revenue they generate by analyzing and scoring corporate sustainability. This leads to an inherent conflict of interest in the current system of measurement. My personal research and teaching are in the field of environmental sustainability. Others, typically experts in human resource management, focus on workplace equity and fairness. Another field rooted in sociology or public policy study seeks to measure corporate impact on and engagement with local communities. Each of these elements of corporate performance should be measured and understood. But these critical performance measures must be designed and regulated by government. The model I propose is that we imitate the approach taken when we developed generally accepted accounting principles and require sustainability reporting by publicly owned corporations and audits by organizations certified by government to conduct those audits.

I would include measures of environmental sustainability, measures of workplace equity, and measures of corporate community impact as distinct, but routine measures of corporate performance. My argument is that these measures are central to corporate performance and need to be understood by investors. An organization that pollutes, emits greenhouse gasses, and wastes energy and other resources is an organization that is likely to be poorly managed in other ways and in any case is at risk to incur damage charges due to environmental liabilities. An organization that treats its workers poorly poses risks to investors in an increasingly brain-based economy. An organization that neglects or damages its home communities will find its expansion constrained and its brand degraded. For example, Amazon’s failed attempt to locate a campus in Long Island City, New York. Just as financial indicators provide compelling evidence of corporate performance, so too do these other indicators.

In the case of environmental sustainability, I believe we need to develop a set of generally accepted environmental sustainability indicators. Measures of energy use, water use, material use, waste management/product reuse, pollution and greenhouse gas emissions should be developed for service and manufacturing organizations. Just as financial indicators have been refined by government over time, so too should these indicators. Sustainability units in corporations could be charged with reporting on these measures and the NGOs and private firms now producing corporate sustainability reports could be trained and certified by the U.S. federal government to audit these reports. Standard indicators would be developed and reported. The same process could be repeated for workplace equity and community impact.

The unregulated sustainability measurement system now employed is reminiscent of U.S. corporate financial reporting in the 1920s. The result back then was a stock market less reputable than a casino and the crash of 1929. Investors had no real information on the value of their investment. The New Deal innovation of regulated corporate reporting under the Security and Exchange Commission helped correct that deficiency and eventually built a huge market for corporate securities. This regulated financial reporting system contributed to the economic prosperity of the second half of the 20th century. A similar system could stimulate the corporate behaviors needed to decarbonize the economy and possibly reduce the extreme levels of income inequality, along with the racial and gender inequity now common in American society.

Corporate interest in sustainability measurement and reporting is a reflection of changes in environmental perceptions and values. It is an indicator of changes in the objective reality of life on this planet. People recognize that we must start applying our ingenuity and brainpower to the problem of supporting the material needs of a planet that will probably peak at a human population of 10 billion. If we are to have sustainable peace and prosperity on this planet, a fairer and more equitable set of national societies needs to develop. Corporate behavior can have an enormous impact on our ability to achieve these goals. To influence corporate behavior, we need to integrate environmental performance into their ability to attract capital. While I am less expert on issues of social governance, I believe the same arguments hold there.

Environmental performance is not more important than issues of social governance, but it is easier to measure. A greenhouse gas or lead in drinking water is a physical phenomenon that can be easily measured. A company’s impact on a community is measurable, but the measures are more difficult to develop and analyze. Nevertheless, as we often say in order to manage something it needs to be measured. Without measurement, it is impossible to know if performance is getting better or worse. While I do not think that it makes sense to measure ESG in a single indicator, I do believe these elements of organizational performance must be measured and performance in these areas must be integrated into overall corporate management.

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