Marks & Spencer (UK) has a Plan A sustainability program aimed at achieving carbon neutrality, zero waste to landfill and a significant increase in its sourcing of organic cotton by 2012. The CEO Stuart Rose commented: “We’re calling it Plan A because we believe it’s now the only way to do business. There is no Plan B.”
Story Nick Ridehalgh
The global time bomb is ticking. Reading the newspaper every day, it appears that mankind is the primary cause of an escalating environmental, social and financial disaster.
The scientific community is virtually certain that the abnormal levels of greenhouse gas in the atmosphere have been caused by recent human activities.
Demographers are expecting the human population to peak in the next 30 years at about 9 billion people, with the 30 per cent growth occurring mainly in developing nations. We already have significant food shortages, HIV and extreme poverty – all of which will only aggravate the population problem and lead to more misery and civil unrest.
To make matters worse, we are also depleting the world’s natural resources (eg, oil reserves and fish stocks) at an unsustainable rate.
Resolution of these global and inter-related problems appears to be almost impossible. To succeed we need to heed Al Gore’s advice towards the end of An Inconvenient Truth: “There is no silver bullet (to fix these problems), but perhaps there is enough silver buckshot (to restore the equilibrium).” The pressure on business is growing. Over recent months we have seen a significant change in the way organisations are thinking about climate change and more broadly about the long-term sustainability of their businesses.
The capital markets and major financial institutions, led by the major global superannuation funds, are demanding more detailed information on how companies are addressing business risks resulting from these significant global issues.
The Carbon Disclosure Project (CDP) asks the world’s largest companies how they are addressing the risk of climate change in their business. Signatories to the Principles of Responsible Investment (PRI) – mainly banks and investment houses – are requiring their clients to be transparent in reporting their Environmental, Social and Governance (ESG) performance.
The war on talent and the ageing population in developed nations is also putting pressure on boards and senior management to think more about sustainable employment practices.
Business is also concerned about the sustainability, security and quality of key raw materials and supplies.
And there is pressure from customers for more responsible suppliers, as well as an increase in the availability of green or more sustainable products and services. This is all before governments impose regulation to change corporate behaviours or protect endangered resources.
Every aspect of business activity is under the microscope and because of the Internet, the public results and commentary on all aspects of a business’ performance is instantaneous and permanent. Sustainable business practices are starting to be synonymous with a company’s ongoing
licence to operate.
The ability to develop Plan A requires a strategic re-think.
The quality of the sustainability reporting has improved over the last few years – most Australian reports have moved away from PR to become more fact and performance based.
However, these improvements are not necessarily addressing the pressures on business referred to above, and will have little impact in defusing the global time bomb for two principal reasons: - the organisation’s sustainability strategy is n adjunct (at best) or a sideshow (at worst) o the core corporate strategy – it is not rioritised, aligned and integrated
- strategic and sustainable business practices are not embedded into the day-today DNA of most organisations.
Focus on fundamentals
To develop Plan A, organisations need to focus on the fundamental objectives (strategy) of their various businesses, and then determine what the critical outcomes should be in terms of financial, environmental, social and ethical returns.
Once this is clear, the company can look at its available resources, both tangible (assets, funding) and intangible (people, patents/ IP/brands, customer relationships, supply chain) and work out how these need to be leveraged to deliver the required outcomes.
It might sound easy, however with competing or misaligned priorities, the temptation to take on too much or the inability to be ruthless in priority selection, organisations can get bogged down. Teams need to think of Al – look for a few strategically aligned, reliably measurable and achievable longer-term goals.
Developing Plan A
So where does a company start in developing Plan A?
The first step in developing a prioritised, aligned and integrated sustainable corporate strategy is to revisit the corporate strategy and look at it through a sustainable business lens.
For example, one of the company’s strategic objectives may be to grow organically by X per cent over the next year and Y per cent over the next five years. The company will prepare forecasts and detailed plans to underpin these strategic objectives, predominantly built bottom up by product, business, customer and so on.
The sustainability lens looks at the forecast growth model differently and asks long-term questions about the ongoing validity of the underlying assumptions, for example: - materials: How dependent are we on a specific resource? How scarce is it? What alternatives are available? How confident are we in the ongoing quality and security of supply? How will a carbon cost, or scarcity, impact on price? What are we doing to assist our key suppliers, producers and growers?
- skills: What key skills do we need to achieve this growth? How scarce are they? What alternatives are available? How can we better leverage technology? How confident are we that we can attract and retain these required skills? What incentives can we offer to drive loyalty and continuity of service?
- product/customer needs: How are these global issues impacting on the requirements of our customers? What changes do they require to our product range? What is the competition doing? Can we actually make the required changes and at what cost?
- brand: What is our current reputation and brand-value in the market? What do we need to do to maintain or improve it within our local communities or with our stakeholder groups?
- governance: How strong and transparent is our governance framework? How good are we in identifying, managing and reporting on business risks? How well do we integrate new acquisitions?
The list goes on, but the key factor is to consider the core strategic objectives through a different lens, one which focuses on the longer-term health of the business. Once these questions have been considered, companies need to identify, agree, manage and report against relevant and measurable strategic outcomes. From a financial perspective, the outcome is X per cent growth in 12 months and Y per cent over five years. But what are the longer-term outcomes from a sustainability (environmental, social and ethical) perspective?
Let us assume that our company is a regional building society. One fundamental sustainability outcome required might be to demonstrate good governance (to enhance public trust and reputation). How would the company build this into their core growth strategy and manage and report performance?
Part of the answer would be structural – demonstrate compliance with the ASX Corporate Governance principles – but that would not be enough.
Perhaps the Board and management decide that responsible lending is a key governance indicator. The key is then to define the required outcome and associated measure(s), and to set medium to long-term targets.
Sustainable Practices
The second step is embedding the strategic and sustainable business practices into the organisation’s DNA. Continuing with the building society case study, the company may decide to define the outcome and relevant metrics with respect to home loans as:- no loans of more than 95 per cent of value of the underlying asset without adequate security (metric 100 per cent compliance)
- all borrowers to be offered a 0.25 per cent discount on interest rates for the first five years as a result of implementing the Green Home Improvement Pack – to be defined (metric 50 per cent new loan take-up in year one)
- all first-time home buyers to have a face-to-face meeting with a financial advisor on the implications of taking on a home loan as it relates to available funding, potential risk scenarios and impact on life style (metric 90 per cent take-up in year one). There will be other criteria defined by the company to demonstrate the success or otherwise of this strategic objective.
The key to success in establishing sustainable strategic outcomes is the ability of management to actually manage the levers underpinning the metric. That is – if performance fluctuates, management knows how to respond in order to get things back on track.
In order to do this, management of the metric and the underlying levers must be embedded in the day-to-day operating processes, with exceptions being reported and cleared in line with the normal internal control framework. This requires updates to manuals, training for impacted staff and an alignment between metric accountability and any performance-based remuneration.
At present, confidence in the accuracy and validity of the underlying data supporting key sustainability metrics is a major concern for senior management who rely on them for decision-making purposes as well as for external users who assess these key lead indicators once they are published. This is an area requiring management attention and focus.
Where key measures are non-financial in nature and are disclosed publicly, management can enhance their value for users by seeking to quantify the impact of actions taken.
For example, if there is an increase in the borrower numbers at the building society and customer surveys show that the Green Home Improvement Pack is a primary cause then the financial benefit of this strategic initiative can be measured and disclosed. This would certainly be valued by analysts, as it is clearly aligned to the sustainable growth strategy. At the same time it fires some silver buckshot at the global climate change issue.
If the company adopts a sustainable strategy with clearly defined outcomes, and the ongoing management and monitoring is embedded in the well-controlled day-to-day operations of the business, then it is likely that the sustainable business strategy will be successful.
Finally, the extent to which the information has been subject to either internal or external assurance will be important and valued by its users. Any public reports should clearly articulate the level of assurance provided over these key sustainable business disclosures.
Time Bomb Ticking
So can we stop the time bomb in time? It may be true that there is a global time bomb ticking, and that immediate action is required at all levels of government, business and society. There is no silver bullet. But if all organisations (and individuals) start to develop their own Plan A and integrate sustainable business practices into their strategies and the way they manage and leverage their resources to achieve required outcomes, then sustainable business is business and in working together we may create enough silver buckshot to defuse the global time bomb.
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