Integral Thinking & True Materiality – Part 4/7: Success Definition For True Future Value Creation

This 7-part series has been first published on Sustainable Brands between late January and early March 2016 as a 6-part series and a follow-up by Bill Baue, co-founder of Convetit and the Sustainability Context Group. It captures the essence of my thinking I was able to gather through the extraordinary work of the Reporting 3.0 Platform, GISR and the ThriveAbility Foundation in 2015. What came out is a structure that I called a ‘new impetus embracing purpose, success and scalability for thriving organizations’. I am reposting the original 6 parts here and add a part #7 with reflections of others. This is part 4/7.

In this part of the series, we will focus on another very important aspect for the new reporting impetus that can serve the needs of a green & inclusive or regenerative economy – the question of how we define success. We are at this moment not able to truly claim when an organization is ‚sustainable’ (as laid out in stage 3 of the strategy continuum Diagram 4 in Part 3 of this series), and that just being ‚minimally good enough’ to indeed sustain the organization – and the real-world systems it operates within. Most reports aren’t giving a proper ‚world view’ or scenario context to their long-term targets.

Diagram 5: Integral thinking and true materiality need a renewed focus on the definition of success to create True Future Value for the economy we want to live in.

Progress in defining ‚micro-macro’ links

Discussions in recent years show progress on defining ‚micro-macro’ links between companies’ impacts and the health of the broader systems they operate within. The elaborations about context-based reporting, science-based target setting, together with Kate Raworth’s Doughnut that defines environmental ceilings and social floors, has added vision and revealed depth as to the ‚devil in the details’ of measuring them in relation to the corporate context, and splitting them up into local, regional or global ‚allowances’, raising the profile of around thresholds and allocations.

Also, the link to the economic system thinking around the usefulness of GDP as the leading success factor has been called into question through the discussion around ‚Beyond GDP’, the Global Footprint Network, and the enhanced (yet mostly unconnected) indicator systems around National Sustainable Development Strategies of regions (like the EU). We see combinations of indices – e.g. country Ecological Footprints versus the Human Development Index – revealing the corridor in which countries should end up being sustainable. The problem here is that the ‚micro-macro’ link is not expressed at the corporate level, so companies take note of these data, but don’t know how to apply them in their specific case. The bigger and the more diversified a company is (crossing national borders), the more difficult it becomes.

The SDGs are an interim step to help fill that ‚micro-macro’ gap by dividing the global challenges into silo’ed aspects of problem articulation. There is merit to see the SDGs as a valuable attempt to induce companies to consider their contribution to a threshold through science-based goal-setting and context-based reporting. The problem is that, while the SDG areas are interconnected, the performance indicators aren’t. We already see companies start to think about picking and choosing some of the SDGs closest to them and define contributions they could make, without taking the step of developing a worldview (see Part 3 on purpose) that articulates responsibility for helping achieve the SDGs. We should not think that the SDGs will get us to any economic system transformation through voluntary contributions by the world’s millions and millions of companies. But without this transformation, there won’t be regeneration, let alone sustainability.

A stable solution for the next couple of hundred years?

We are in an experimentation phase, I fully admit, but I also claim that now is the time to not only set conventions for delivery indicators for the SDGs by 2030, but something that we can use for the next couple of hundred years, and that gets me to … accounting systems. Jane Gleeson-White already proclaimed the ‚third accounting revolution’ in her bestselling book Six Capitals, or can Accountants save the Planet?, cutting through double entry bookkeeping that was invented in the 15th century for the throughput economy, towards multi-capital bookkeeping. We now need an accounting system that prepares us for the green & inclusive economy.

The litmus test question of success that needs to be answered, both for each and every single SDG, and also as the basis to define what we will define below as ‘true future value’ simply is: does an organization have a license to grow by showing that it hasn’t built financial capital on the back of any other capital – or, quite the opposite, that it has built business models that regenerate all capitals? If yes, this would be sustainable, and possibly gross positive (ThriveAble) over time (stage 5 in the Strategy Continuum in Diagram 4 in Part 3).

In order to get there, though, we will need to renew our accounting system from double-entry to multi-capital-based. Why?

• Simply because accounting is how economies and executives, boards and supervisory boards tick and answer questions: is my company successful? Where can I be more efficient? Do I deliver on my purpose? On my targets? On my benchmarks? Did my incentives work? What information does controlling need from accounting? What can I externally assure? Interesting how shy our community is to create this missing reporting link – also for the SDGs. We sorely need accountants to raise their voices on the need for multi-capital accounting!
• A multi-capital accounting system aims to cover all sets of potential performance calculations: on SDGs, for context-based reporting, for science-based targeting, for value cycle efficiency. An outcome capital of the supplier can be an input capital for the next phase of such cycle, so it can serve as ‘docking station’ in a seamless review of value cycles – if all partners agree on the necessary convention on how to account and disclose in what the recently published UNEP Raising the Bar report calls “Collaborative Reporting”.
• The structure of multi-capital accounting gives space to the necessary formulation of conventions (that’s what an accounting system mainly is, it’s not a 100% accurate discipline) and structuring of the discussions we need to have: what can be monetized? Is it necessary to monetize everything? How to link to local/regional/global thresholds? E.g., water has a different, more local or regional threshold basis than carbon emissions. How to implement threshold based and capital-absorbing indicators into corporate dashboards, into national statistics, into a ‘global pulse’ of how we are doing altogether.
• Finally, the painful and often repeated mistake is that we think we can create indicators without proper data architecture in mind, where aggregation and disaggregation are possible and where slicing and dicing of information for multiple aspects is possible. A multi-capital based systematic approach can support that, like activity-based costing does in controlling for a long time.

Multi-capital accounting to create ‘True Future Value’

Multi-capital accounting shifts from measuring value to measuring ‘True Future Value’. The ThriveAbility Foundation adds a forward-looking focus on true future value, assessing not only the ongoing viability of the organization and the systems it operates in (science-based thresholds), but also its potential for breakthrough innovation to reduce (and ultimately eliminate) negative environmental footprints while maximizing and optimizing social handprint value creation. It uses 7 capitals, adding relational capital as a separate capital to the group of 6 capitals as proposed by the IIRC.

Diagram 6: High-level formula for deriving at ‘True Future Value’; a more detailed version with all variables can be sent by the author on request.

Here are some of the advantages of using a multi-capital basis to create ‘true future value’ (TFV) results:

• CONTEXT SENSITIVITY – TFV is a context-sensitive methodology, which works on the basis of progressive approximation to arrive at a best-estimate based decision. The context of the decision/s being made is the very first factor taken into account when applying the equation;

• TRUE BENEFIT/COST – TFV is a holistic equation that measures the ratio of the value created in any human activity through synergies between human, relational, social and knowledge capitals (or “anthrocapitals” that generate thriving and benefits), relative to the natural and manufactured capitals costs associated with that value creation activity;
• THREE CORE VARIABLES – TFV includes three key terms – on the denominator we have Science Based Thresholds (social floors and environmental ceilings) divided by a Sustainable Innovation Factor (including, for example, circular economy/C2C, green chemistry, renewable energy, biomimicry and micro-biome based innovations); and on the numerator we have the Value Creation Capacity of the anthrocapitals that generate thriving;
• ALL EXTERNALITIES INCLUDED – TFV includes both positive and negative externalities in terms of metrics that measure both impacts and value/thriving, in such a way that context based sustainability thresholds are honored;
• THRIVEABLE DECISION BENCHMARKS – TFV provides a benchmark for decisions of all kinds through which a “thriveable” decision can be made, taking into account a full seven-capital, multi-stakeholder analysis of the true costs and true benefits of a particular investment, program or action.

True Future Value as the Basis for a ThriveAbility Index

Going a step further, the ThriveAbility Foundation has designed the ThriveAbility Index model in which the components of the TFV are embedded (see Diagram 7).

This model picks up on the idea of the three gap model in Part 2 of this series, and measures the gap closure in all three dimensions, and by that explaining where an organization stands in the continuum from surviving to thriving. It represents a different way to assess and report on the overall fitness of an organization. This is a completely new quality in helping to define the profile and positioning of an organization in a three-dimensional fitness space and probably represents the most holistic performance measurement. The argument that ‘sustainability’ or ‘thriveability’ can’t be summarized in one indicator, something the sustainability community has always declared impossible (and by that has kept the interest of multiple financial market players on a low simmer), can be overcome. This high level fitness indicator, to be developed for 10 cluster industries through the ThriveAbility Foundation by 2017 to 2019 (with the aim the have it ready to use in 2020), can be disaggregated into its three components, used for True Future Value Creation of any contextual area of interest (such as the SDGs) and offers high potential for a new quality of corporate, city, country or global performance dashboards. It can be used by Rating Organizations to produce a new generation of sustainability or ThriveAbility fitness ratings. It can be used by regions (e.g. counties) or national statistics offices as a meta- performance structure.

Diagram 7: Three axis model of the ThriveAbility Index model that corresponds with the three gap model assessing progress in all the gap areas (Source: A Leader’s Guide to ThriveAbility, page 38).

Will we get there?

We may need new and different networks to build what’s needed. I fear the existing standard setters alone won’t cut it, the UN system alone won’t succeed, the governments alone won’t deliver, the accounting standard setters need support, IT companies needs an architecture meta-structure to work in consortiums and open source (liberated data), and the majority of corporations in the mainstream will anyway only respond to legal requirements or ‘cookbooks’ that give them a step-by-step delivery template.

Reporting 3.0, mentioned in Part 1, a networked community of several hundred interested individuals has recently proposed a set of blueprints to recommend the necessary ‘glue’ between those defining a green & inclusive economy and those in reporting, accounting, IT and new business models.

The ThriveAbility Foundation offers masterclasses, pilot projects and a multi-year business plan to deliver on TFV and the ThriveAbility Index and invites partners into the Index development.

GISR offers principles and an accreditation scheme to align with the principles, many of them in support to ingredients mentioned here for reporting and accounting. The Labs, one of the components of their CORE program, offer space for joint creation of the basics for thriveable ratings.

 What to do in the short term?

 So, let’s again imagine a sustainability and/or integrated report that showcases a reporting organization’s contribution through a success measurement involving a multi-capital accounting approach (e.g. as showcased by The Crown Estate, UK, in their integrated reports on Total Contribution). What would a reader expect to see answered? Here are examples of what I would find substantial in that area, taking into account that it still takes time to report back in a complete and structured manner as described above.

Measurement:

• To what degree does the company inventory shows its impacts from the different levels of its value cycles (instead of value chain, reflecting the need for a circular economy)?
• Is the internalization of external effects seen as part of a ‘True-Value-Screening’ an option to better understand the value-creation process?
• Does one differentiate between various capitals and are these integrated in the success measurement? Does the company therefore know its value-creation potentials and weaknesses better? Does the company address the consequences from these outcomes?
• Does the company identify one or more SDGs to align measurement methodology that looks at context-based or science-based thresholds, and does it aim to develop multi-capital assessments about their contributions to these SDGs?
• Does the company also collect data about the organizational transformation capacity and leadership capacity, taking into account the 3-dimensionality of achieving ThriveAbility, responding to the 3-gap-problem?

 Target setting:

• Are there defined target corridors for the sustainable use of different capitals?
• Are ‘science-based-goals’ assessed and context used for connecting to ‘social floors’ und ‘environmental ceilings’ when targets are defined?
• How are long-term targets defined and then used to backcast mid- and short-term targets?
• How are data of organizational transformation and leadership capacity used in defining targets also for these categories?
• How are potential scenarios linked to target-setting?

Incentives:

• How does the company incentivize sustainable performance? How does it punish unsustainable performance? Is this based on the measurements as mentioned above?
• How does the company trigger and incentivize better leadership and transformational capabilities?

The combination of multi-capital approaches in internal accounting and controlling as well as external reporting, combined with experimenting their interconnections through True Future Value Calculations, and adding transformational and leadership capacity factors into measurement, target-setting as well as incentive structures, could help tremendously to report on the future readiness of an organization’s business model(s).

 

 

Integral Thinking & True Materiality – Part 3/7: Purpose Defines Connectedness

This 7-part series has been first published on Sustainable Brands between late January and early March 2016 as a 6-part series and a follow-up by Bill Baue, co-founder of Convetit and the Sustainability Context Group. It captures the essence of my thinking I was able to gather through the extraordinary work of the Reporting 3.0 Platform, GISR and the ThriveAbility Foundation in 2015. What came out is a structure that I called a ‘new impetus embracing purpose, success and scalability for thriving organizations’. I am reposting the original 6 parts here and add a part #7 with reflections of others. This is part 3/7.

In Part One of this series, Diagram 1 showed an overview of the three main areas of the proposed change need for integral thinking and true materiality; Part Two explained why we need this new impetus. Part Three now tackles the upper section of the triangle – the need for chrystalizing purpose to better show connectness to the problems that need to be solved in interrelated ways.

Diagram 3: Integral thinking and true materiality need a renewed focus on the purpose of the organization and connectedness to the economy we want to live in.

It has been interesting to see how the discussion about ‚the purpose’ of an organization or an economy has moved into the forefront in the last 1-2 years. The 2015 numbers of the Global Footprint Network (GFN) or from UNDESA on population, consumerism and the environment [insert link] are just telling one striking story: as a species, we humans are on a slow death path.

The fact that the ‚human’ role in sustainability now gets back into the focus simply shows that it dawns on us that we forgot to take people on board of the sustainability journey, in companies as well as in private circumstances. Sustainability is not exciting for the majority of human beings. We see constant shoulderclapping about reports in which we are told how much less bad a reporting entity became, without any ‚North Star’ that could tell us what is ‚minimally good enough’, or what would lead to an envisioned future beyond just having a ‚zero negative impact’; this was sucked up by our frugality of installing sustainability departments that took care of policies, management systems, reporting and assurance. The ‚three gap problem’ as discussed in Part Two of this series led to a reduced understanding of sustainability in which essential aspects of sustainability like ‚people, planet and prosperity’ became ‚people, planet and profit’ and intergenerational equity fell by the wayside.

In consequence, Sustainability Context still remains the most neglected Content Principle of any GRI-based sustainability report. Seldom does a reader understand the ‚world view’ of a company, its leadership advocation to change the economic system towards serving a green & inclusive economy, and how the product & service spectrum offered makes a positive contribution (instead of less negative impact), alone or in collaboration / co-creation with others.

It is amazing to see how disconnected sustainability or integrated reports are with ‚the whole’ which we are contributing to (or not). Reporters typically claim it’s too complex to envision a different economic model, exploring a new level playing field in which market mechanisms can automatically work towards an aimed-at state of being regenerative and inclusive. Isn’t that what scenario analysis was invented for?

We developed our current economic model as one set of conventions, and it is up to us to change that for the better. Haven’t we already decided to aim for a green & inclusive economy at Rio+20 in 2012? So where are we with that? There are indeed some positive prompters here:

• There is a whole set of macro datasets that show the ‚global pulse’ of our continued negative pathway, which means a better understanding of the interconnectedness of our doing and its effects on the planet is more and more possible. Various IT networks, data providers and technology firms work on making ‚the whole’ visible, up to artificial intelligence (AI) approaches (see a variety of these in the Reporting 3.0 2015 conference report, http://www.reporting3.org). The main issue here is to translate that into data clusters that corporations can use for their ‚micro-macro’ impact interpretation.
• A variety of companies and development organizations work with the idea of Creating Shared Value (CSV) as proposed and vividly defended by Porter and Kramer for years. While definitely a good learning approach, CSV doesn’t yet prove to be able to either move the concept beyond the ‚feelgood’ areas of collaboration and co-creation; the nasty issues aren’t really solvable since they need new ‚rules of the game’, a normative approach to global change. And secondly, CSV aims at optimizing within an existent frame of economic system boundaries. We won’t get to a sustainable or regenerative economy without also tackling those economic system boundaries to create new level playing fields in which industries can transform. Porter and Kramer, it seems, remain in the 1990s thinking of enlarging competitive advantage with creating (extra) shared value.
• The Sustainable Development Goals are an interim step towards learning to understand thresholds in a context-based sense, leading to less-bad impact, probably a planet of ‚Zeronauts’ (to stress John Elkington’s brilliant book from 2012). The translation to apply and measure contributions in the corporate world, in local and regional circumstances as well as globally, is still to be developed. A plethora of initiatives are underway to find out, and hopefully it will be a training area to explore the possibility of thriveable, gross positive impact as the greatest innovation boost ever. Each company needs to define where they stay in the continuum that the ThriveAbility Foundation has offered, see the following diagram:

Diagram 4: The strategy continuum to assess a company’s position in a world that needs to leapfrog from surviving to thriving (Source: A Leader’s Guide to ThriveAbility, page 18).

• Kate Raworth’s ‚Doughnut’ model, showing environmental ceilings and social floors, has given us a 2-dimensional picture of interconnectedness, but only good enough to get us from suffering to struggling – it misses the ‚operating system’ to create real thriving. This model needs adaptation to become 3-dimensional, adding the component of human transformation to accelerate positive change. This is what the ThriveAbility Foundation recommends to get us from stage 1-3 of the above diagram to stages 4 and 5, and in consequence appeals to a change from an ‚ESG Push’ towards a ‚GSE Pull’, addressing authority, decision-making and accountability in one stringent approach. This needs leadership in ways that until now only a Ray Anderson (Interface), Paul Polman (Unilever), Sir Ian Cheshire (ex-Kingfisher) and some other corporate leaders have shown. Only through this advocacy will we get to economic system boundaries change addressing the ‚macro-micro change area’, mainly though the combined integration of external effects into cost accounting, translation into pricing mechanisms, and counterbalancing those effects by a drastically changed tax and subsidies regime on a global scale. The work of Trucost, the True Price Foundation, Ex’tax and others in this area are therefore essential to get this masterplan done over time, together.

So, imagine a sustainability and/or integrated report that showcases a reporting organization’s contribution through a chapter on purpose and connectedness. What would a reader expect to see answered? The below are examples of what I personally would find substantial in that area.

On Contextualization:

• Does the company have a ‘World View’ and a long(er)-term idea of positioning in the continuum from ‘Compliance’ to ‘Thriving’ when it comes to impacts and outcomes across the multiple capitals? Where does it want to be in the future?
• Is there one strategy, or does the company have a separate sustainability strategy (which should be avoided, as it signals sustainability as a side issue)?
• Is the corporate strategy based on affecting the root causes of global non-sustainability, or is the strategy just based on curing symptoms of non-sustainability (like the majority of companies do at this moment)?
• Are there various scenarios in which the company is testing its possibilities to impact and gets addional insight into its long-term positioning?

On Leadership:

• Is the socio-cultural leadership gap addressed (part of the three-gap problem)?
• Are company leaders assessing the transformation blockages in the sustainability gap (also part of the three-gap problem)?
• How is sustainability visible in the organizational hierarchy? Is sustainability integrated in strategy and governance so that the sustainability team could veto non-sustainable corporate decisions?
• To what extent is the leadership group aware about a responsibility for sustainability above and beyond the legal construct of the organization?
• What does the company contribute to asks or campaigns to change the unsustainable boundaries of our current economic system, e.g. trade barriers, unsustainable subsidies, political lobbying, testing new ‘level playing fields’ through the combination of true costing, true pricing, true taxation?

On Ambition Level:

• What’s the company’s view on growth? How does it differentiate sustainable from non-sustainable growth?
• How does the company define its ambition level and how are short-term targets derived from succeeding its long-term ambition level (e.g. through back-casting)?
• How are all employees included in defining the purpose and connectedness of the corporate strategy to sustainability?
• How does the company differentiate efficiency gains, productivity gains and their respective rebound effects vis-à-vis the need for sustainable innovation?

It is these questions that build the ‚glue’ and segway into the vision of performance beyond just doing the minimum needed. It would add to the idea that current approaches don’t add up altogether and that technology alone won’t cut anything without the humans on board. This is tough work in hierarchical structures and even tougher in multinational companies. But it honestly the only way we can deliver. It is time for new conventions.

 

Reporting for the ‘future we create’ – shaping next-generation transparency

Recently the report of the October 6/7 Reporting 3.0 Platform Conference ‘Reporting at the crossroads – ensuring purpose, practicability, performance’ was posted at http://www.reporting3.org, together with a great video summary, a repository of presentations as well as an event gallery that wonderfully highlights the spirit and buzzing enthusiasm of the 170 participants from 4 continents and 13 countries. Please find the report attached here as well: R3_Conference_Report

I had the honor to curate the design and facilitate the conference on both days, together with a great team of BSD staff and voluntaries, and also wrote most parts of the conference report. During the whole process in the many months of preparing the conference (that included working on two Transition Labs and two Regional Roundtables), post-conference writing and thinking about how to shape Reporting 3.0 for 2015, I often wondered how much more would already be possible in reporting through a combination of existing vision, methodologies and tooling. Reporting 3.0 brought the majority of influencers together, so a glimpse of the possible was clearly visible already during the two days of the conference.

The report therefore also focuses on three main messages and gives a whole plethora of insights and examples:

1. The ingredients of the ‘green & inclusive economy’ are becoming much clearer and more tangible for corporate decision makers, investors and leading thinkers from academia and the civil society; 

2. New approaches, standards and benchmarks are under development or will be developed to close the ‘sustainability context gap’ in reporting; 

3. Information technology and respective providers offer new solutions for big data management and algorithms as well as applications that enable a new level of sustainability driven decision-making by corporate managers, investors and consumers.

As a teaser to read the full conference report I am also posting parts of my pre-conference speech that I held at the speakers dinner the day before the conference officially started here, shedding light on intentions, focus and ambitions.

“Let me start off by quoting Otto Scharmer, the author of Theory U, who once said, ‘We cannot transform the behaviour of systems (and the people in them) unless we transform the quality of attention that people apply to their actions within those systems, both individually and collectively’. I think this already comes quite close to what we want to achieve with Reporting 3.0, both the conference, but also the platform. We started off from three basic ideas: 1) that we will take serious the plea to achieve a green & inclusive economy and the design for a capitalism achieving that, made at Rio +20 in 2012; 2) that we believe that reporting has a trigger function to create necessary change (many from us come from the early days of sustainability reporting when that was indeed the case); 3) that reporting with that trigger function to achieve a green & inclusive economy will need to be different from what it is today, and most likely it is needed within just one decade.

Reporting 3.0 can change the ‚quality of attention that people apply to their actions towards an envisaged system’ through various pathways: 1) By taking note of the various developments that surround reporting, especially around new business models (circular, sharing, regenerative, restorative), and the enhanced role of (big) data, data architecture, and IT capabilities; 2) By assessing the necessary consequences of the idea of a green and inclusive economy to accounting, given the fact that these new business models need different accounting rules, and that accounting will need to embrace a grand design as well: true costing, true pricing, and even more necessary, true taxation, to balance the burdens to consumers and communities, and to allow to set new economic system boundaries in which market mechanisms can work towards the right direction, on a better and global level playing field; 3) By embracing the idea that measurement needs to much stronger close the sustainability context gap, meaning that macro-data and micro-data allow for assessing performance from a future-readiness perspective and give stakeholders confidence that what an organization says and does is good enough or in the right direction to achieve a green & inclusive economy.

Looking at the vast variety of players with different backgrounds, all knowingly or unknowingly part of the ‚grand design’, and many not from the reporting terrain, reporting more or less logically rather comes at the end of the thinking, if it comes up at all. And those in the reporting space often don’t have the time, capacity, capability to convene formats that deliver insights with these forward-looking players. They normally convene with other experts in the reporting field. The early infusion of knowledge to build the ecosystem for forward-looking reporting is rather uncovered terrain, reporting at this moment adapts to the unavoidable, and doesn’t deliver on a ‚grand design’.

To be clear, we already do benefit from what has been produced so far. There are indeed strong shoulders of that little child Reporting 3.0 to sit on! And still, not enough has been thought of, produced or tried out to sketch the new reporting landscape and to build a ‚grand design’, stemming from the North Star, the green & inclusive economy.”

 

 

Two Worlds Collide – One World to Emerge?

I was asked several times if there would be a separate download of my chapter in the HBS E-Book ‘The Landscape of Integrated Reporting’, so here it is. Just a quick summary of what I contributed to the book:

The Harvard Business School’s first conference on integrated reporting (October 14/15, 2010) has been sort of déjà vu for me since it reminded me of some of the early workshops I attended between 1998 and 2000 when GRI was working on the first generation of its GRI Sustainability Reporting Guidelines. At that time I was with Siemens, working on the business case for sustainability and transparency, but also bringing in views from the perspective of a European industry expert to GRI’s emerging multi stakeholder process. Between 2002 and mid 2008 I had great pleasure in helping the GRI as Associate Director Business Engagement and later as their CFO/COO/CIO, helping to prepare and deliver the G3 Guidelines and making the GRI a self-sustaining independent organization. Since 2008 I am Director Sustainability Strategies at Deloitte, working both on the Deloitte’s internal sustainability and also advising relationship and audit clients towards integrated CR and a holistic approach on sustainability. So, here’s the déjà vu: when I looked around in the conference room at Harvard I saw at least half of the people that I also met in 1998, many of them companions and partners in the strides towards more and more accurate sustainability reporting. The other half were part of the great new generation of advocates for sustainability, ranging from IT companies, proactive companies leading in various industry sectors, regulatory body representatives, consulting and assurance experts, and finally more representatives from the financial markets and accounting standard setters. 

I observed that I was one of the very few that have played a role in this community from three different  perspectives: that of a representative of a multinational heavyweight enterprise, of a non-for-profit multi stakeholder initiative (somewhat NGOish, although GRI would see it more sort of a platform and networking organization), and finally as someone working for one of the big 4 accounting firms. My contribution to the Harvard e-book is therefore based on this ‘triangular view’ and written as a proactive contribution to help increase the speed of the immense challenge in front of the IIRC, that is to come up with ONE standard for overall company reporting.

I touched on the following points (and please read the details in the link attached):

• focus on vocabulary
• focus on necessary funding
• focus on the scope of integrated reporting
• focus on purpose, planetary limits and the micro/macro link of integrated reporting
• focus on the technological revolution that asks for standards evolution (real time reporting)
• focus on the real meaning of one report: one company
• focus on co-creation, piloting and scaling up
• focus on aligned learning

HBS E-book – Thurm – Two Worlds Collide One World to Emerge

 

Sustainability – the next Kondratiev supercycle?

One of the last editions of “back to basics” did focus on the ongoing discussion about managerial trends and was proposing that sustainability needs to get into the DNA of management practice, starting from the Board room and supported from bottom-up, which will of course only happen if management theory accepts sustainability as a principle that keeps the organization alive (license to operate) and embeds the opportunity to prosper (license to grow). It remains to be seen what the consequences will be for Weber-type demand and control hierarchy, for the ongoing increase of workload for less staff in efficiency driven management programs, the ongoing segmentation of work packages in a Taylor-style way and one-way communication to customers. The champions of the last decade, including Google, Starbucks, Yahoo, ebay, but also Gore (not Al, but the textile company ;-)), Timberland and others throw a lot of this over board, use seamless stakeholder engagement and web 2.0 technology to enable internal and external networking communities and shape their business models. The internet development marks the most important milestone of the 5^th Kondratiev supercycle, and at the same time shapes the path into the 6^th Kondraftiev cycle; maybe this next supercycle will carry the name “sustainability cycle”?

Here’s a quick Wikipedia explanation of the phenomenon of so-called Kondratiev cycles (see http://en.wikipedia.org/wiki/Kondratiev_wave) : “The Russion economist Nikolai Kondratief (1892-1938) was the first to bring these observations international attention in his book “The Major Economic Cycles” (1925). (…) Early on four schools of thought emerged as to why capitalist economies have these long waves. These schools of thought revolved around innovations, capital investment, war and capitalist crisis. According to the innovation theory, these waves arise from the bunching of basic innovations that launch technological revolutions that in turn create leading industrial or commercial sectors. (…) Most cycle theorists agree on five waves so far since the industrial revolution, and the sixth one to come. These five cycles are

1.    The Industrial Revolution—1771,

2.    The Age of Steam and Railways—1829,

3.    The Age of Steel, Electricity and Heavy Engineering—1875,

4.    The Age of Oil, the Automobile and Mass Production—1908,

5.    The Age of Information and Telecommunications—1971.”

All new supercycles are normally aligned by recessions and/or wars; both tendencies are currently eminent. It is clear that from a technology perspective this next supercycle will focus on technologies that aim to sustain human life on this planet; health care, biotechnology (biomimicry etc.), next generation renewable energy and also – although conflicting – gene technology are subcategories. Even visionary concepts for the next generation internet is taking biological processes as the basis for further adaptation.

For all of us working in organizations and dealing with management issues one of the most important questions will be: will biology and its inherent logic of adaptation and communication also bring about a new mangement style? Will the next Kondratiev supercycle include innovation in technology AND management? Will we see a continuous flow of newcomer organizations becoming big in short time just simply because the earlier cycle champions became to slow to adapt because of their structure and size?

When I worked for the GRI I realized that the GRI itself was part of this change towards a new supercycle: first of all the existence of GRI as an organization is a logic answer of interested stakeholders – like many other GAN’s (Global Action Networks) – to the slow adaptability of world trade mechanisms, governments and companies with regard to the overall transparency needs of a fair and successful implementation of globalization. The idea is that world markets can simply function better (and will survive) if sustainability is accepted as the roadmap and the necessary transparency needed is available. And that needed to be organized globally.

GRI’s G3 Guidelines purposefully ask in great depth what management’s reaction to these new challenges will be. Is sustainability part of Board room discussions and is the organization aware about its impacts on sustainability issues? Vice versa, how do sustainability problem areas already affect strategy and business models? (see GRI G3 chapter on ‘Strategy and Analysis’). G3’s Disclosure on Management Approach then asks how the results of this analysis are translated into the management system implementation.  Last but not least G3’s indicators ask about the performance achieved and the targets and objectives aligned to them. In that sense using G3 and implementing a proper reporting process are a useful means to increase the above described adaptability.

Four years after the launch of the G3 Guidelines – now working at Deloitte – I realize how little information is still published in sustainability reports to really answer these questions. There are many reasons for this phenomenon, the short-term thinking (also triggered by the financial crisis with many companies in ‘cocooning’ mode) being only one of them. The biggest problem I think is a mental one: the mountain is just to high to think standing on top is realistic, so let’s continue with the little steps and probably find a new base camp. In depth stakeholder engagement  is still too much seen as a threat, and not as an opportunity, hence a real integration of sustainablity into the DNA of an organization still not achieved. The reality of Kondratiev’s new cycle will show that ‘to be less bad is not good enough’ in this next cycle, so it’s worth climbing ‘Mount Systemic Change’, the current base camp will most probably be hit by an avalanche at some moment!

 

Who reads sustainability reports?

For the second time since 2008 the Global Reporting Initiative launched the GRI Readers’ Choice Awards, giving readers a platform and a voice what they value most in sustainability reports and which reports they liked (and disliked) most. Are these reports addressing the material issues in a convincing way; is there a visible connection between the interaction with all groups of stakeholders (beginning with the question who those are) and the aspects the company chose to deepen in the report; is there a healthy balance between actual achievements and delays, does the organization say something about the dilemmas, threshold and obstacles they deal with; is there a clear link to the business strategy; in short: is the report a fair and balanced review of the past and a realistic outlook towards the future?

The GRI Readers’ Choice Award – in the end – tries to also deal with another fair question: “Who is reading all these reports and is it really worth the effort?” This is for many sceptics the most exciting question at all, but interestingly also still a big unknown in many organizations that publish sustainability reports; they simply don’t know! It’s one of the killer questions coming from those responsible for communication budgets and one that puts the staff responsible for sustainability often in a weak negotiation position . It is amazing that so little research has been done in the hundreds and thousands of stakeholder engagement processes running every year and that this question is also hardly addressed in the reports itself. Hopefully, the outcomes of the GRI Readers’ Choice Award 2010 can shed some more light and inspire reporting organizations to also do their bit of the research. There is so much possible nowadays with social media and interactive designs; the time of the questionnaire inlay in the printed sustainability report sent out to a thousand or a bite more multipliers by mail is long gone. Wikis, social media interest groups, even Twitter and Facebook could be used.

In that regard two other  things make me really wonder as well:

Firstly, I am always amazed how much capacity and money is available in nearly all companies that I have seen for their normal annual reporting process and print design, while sustainability reports still have to be produced with budgets that are “too much to die, but not enough to live”. Of course, there are difficult and overwhelming legal requirements to fulfil when pulling together annual reports. And yes, strict assurance practices are necessary as well; all that has to be well prepared and does cost money. However, in essence, this reporting is still mainly a look into the rear mirror, addressed to one stakeholder group only and not really covering the long-term future (in that sense: sustainability) of the company. One could argue that all these efforts are necessary for the professional readers of annual reports because that’s what they expect, that’s the way it has always be done, and that the next annual report needs to be better than any other annual report before. Well, let’s be honest – how many readers do annual reports really have apart from maybe 200 industry sector specialists, asset managers and other potential investors, ranking institutions, and probably some competitors and employees? How many printed (short) versions of annual reports that you hold shares in have you personally thrown away into the waste bin without having taken one single look at them? And how about XBRL? Isn’t that taking over much of the needed information transaction in the future? Maybe it’s time for a recalibration of the budgeting balance between annual reports and sustainability reports?

In contrast to this I have met so many companies where employees have learnt so much about their company (especially when they were large and/or multinationals) and have used sustainability reports as a reference document when visiting customers, shared them with friends and still have them at home, keeping every single version. I have seen students reading reports when figuring out which company could be a good employer, MBA students studying sustainability reports in their MBA courses and discuss the question what a specific company should be responsible for and how they would react in case of a certain dilemma, digging deep into the problems and build understanding of the rationale behind a specific decision that had to be made. And, don’t we also see more and more of the usual suspects for annual reports consumption reading sustainability reports because they want to learn how to invest more sustainable and long-term, making investment decision with a real sense – while still making money. Don’t we see more and more suppliers reading sustainability reports because they expect to be asked next about their specific responsibility in the supply chain by their customers? And don’t we see more and more communities and ministries really thinking about making sustainability information a requirement for their own procurement activities or making this sort of reporting mandatory simply because it makes sense to know more about an organization’s picture of the world and to assess if they are more part of the problem than the solution? So, is there anybody out there who likes to follow my bet that already today more people really read sustainability reports than annual reports?

Clearly, I am not arguing that less money should be spent on annual reports if it’s absolutely necessary. But it’s definitely time to make sure that sustainability reporting processes get the budgets they deserve! If the budget for the preparation of a good sustainability reports remains low over time, a clear story is told: it is not the lack of money, but the wrong prioritization of sustainability as a really important issue. I recommend stakeholders to ask in the next round of stakeholder dialog to get a ratio of money spent for the annual report versus the sustainability report. My guess is that a normal ratio is between 20:1 and 50:1. In my view its time for a recalculation exercise, also taking into a account the whole communication process linked to the publication of both reports, integrated reporting and the new design formats that allow a way more seamless communication of the organization’s results.

Secondly, isn’t the basic question about who is reading sustainability reports not also a worrying warning signal that stakeholder engagement, its process and the value connected to it, still not fully understood? While it is pretty clear that during the development of the sustainability report stakeholders need to be involved to define material issues, the question how to continue to involve stakeholders after the publication of the report also seems to remain a weak spot. Or has the communication strategy suddenly ended with the launch of the report (maybe still with an A5 card in the back as feedback form?) instead of making the launch of the report the starting point for even more stakeholder engagement (=input for the next report)? In summary the fact that we still ask ourselves the basic question about the readers of sustainability reports makes it a clear indication that some inefficiency in the overall reporting and feedback process still exists. Answers are welcome, let’s hope that many join the GRI Readers’ Choice Awards 2010 and help to decrease this inefficiency, so go to www.globalreporting.org and click further to the GRI Readers’ Choice Award. The GRI conference, to be held in Amsterdam on May 26-28 will surely be an exciting event to ‘ rethink, rebuild, and report’ – as the main theme for the conference is already proposing.

 

The ‘business case’ for sustainability

“Business cannot succeed in failing societies”, how often have we already nodded when this quotation has been used in articles, brochures or presentations. But if that is a given, why do we so often discuss the question “What’s the business case for sustainability (and sustainability reporting) and what’s really in it for us?” Here’s my take on it:

Organizations often lack a vision what sustainability really means for them and what they want to achieve over the next 20 or 30 years for themselves, for society and the environment. Or in short: what responsibility is taken over by whom and for whom? If I read sustainability reports I very often read about objectives and targets for the next reporting period, maybe for 2 years, but only a few organizations present a long-term vision and define mid- or short-term targets through “reverse engineering”, deciding through that lens what the necessary next milestones need to be. What gets lost is the overall context and rationale why and how the organization will contribute to solve global problems through its specific business model or how its business model design is already influenced by those problems today. The GRI G3 Guidelines purposefully ask reporters to make exactly that two-way assessment (inside-out and outside-in) in the strategy and analysis part, but often these answers are lacking .

A lack of a long-term vision will consequently lead to a lack of understanding what investment is really needed and when it is needed. All expenses for CSR today are therefore seen as costs and necessary capacities for the longer term will not have been properly budgeted. CSR managers are too often pushed into a corner where they are only tolerated because they help to secure a basic compliance to laws; they do lack the acceptance to be seen as important multipliers for business opportunities. In this environment an understanding for the long-term value of sustainability cannot really grow.

Reading sustainability reports offers a simple litmus test if an organization is willing to go the extra mile to explore the real value of sustainability: how is sustainability/CSR organized within the organization? Is CSR simply managed through an add-on department (extra question: “Is at least someone from the top management responsible for that department?”) or is there an indication of cross-cutting alignment? So, are there responsible managers in all corporate departments, business lines and regional operations (matrix organization)? Are there policies that are properly enforced by measurement and reporting processes? Finally, is sustainability/CSR integrated into corporate or business development and gets regular top management attention? Shouldn’t it belong there if the connection to the business strategy is so urgently needed? Clearly, the level of organizational integration reveals if sustainability is seen as a risk reduction necessity (survival strategy) or an opportunity for long-term business development (growth strategy).

Apart from the question on how CSR is organized my personal check list while reading reports continues like this (starting with the lowest priority for the business model): how much do I read about philanthropy activities, then about efficiency programs (e.g. some years ago zero waste costing was really en vogue), then about integration into risk management; next would be integration into corporate governance and internal audits. Until here, I have only mentioned aspects that keep the license to operate.

If you switch to the idea that further opportunities are possible to develop a license to grow, the issue link with research & development and (corporate) business strategy comes to mind as well as the always underestimated stakeholder dialog management and the networking capacity to integrate supply chains and customers. That simple check list is a nice and easy rooster to quickly detect where an organization stands with regard to CSR and its roadmap towards greater sustainability..

From my perspective sustainability needs the attention of top level strategists and integration into business model development. This ensures a connection with long-term target setting and the translation into strategies and milestones. The question about the business case for sustainability should then become obsolete. It’s a simple truth that if you don’t know where you’re going, you might simply not get there.

 

To start with: the value of transparency

Welcome to A|HEAD|ahead! Starting early 2010, this blog wants to capture some of my 20 year experience around sustainability.We’ll see where it takes me, sustainability is a journey, as was my job career, and this journey continues. Any comment is welcome! I’ll try to structure my ideas through useful categorization, please visit the menu on the left side to see the structure. So, let’s start right away with the first edition of the category ‘Back to basics’, that will capture a series of ideas I pulled together during my time as active blogger while working for the Global Reporting Initiative. Publishing them here again – with a certain facelift – allows me to continue where I stopped in 2008.

Sometimes overwhelmed by so many different views, details, different priorities and cultural takes on sustainable development, I find it useful to really go back to the “heart of the matter”, summarizing what we really need to achieve for a better future. I’ll start with an exercise that most of us go through at a certain moment of our career as sustainability experts, trying to explain to others in not more than 60 seconds why transparancy (e.g. through sustainability reporting) is so important if we really want to become sustainable. Here’s my elevator pitch:

“In today’s globalized world transparency is absolutely fundamental to create trust, which is the basic ingredient to create partnerships (we already know that we will only be able to create sustainable change in partnerships!); only through partnerships continuous improvement will be possible, which finally is a necessary essential to create sustainable change. Accepting this logic simply means that without the right level and depth of transparency sustainable change will not be achieved. We all need to decide if we can agree to this simple logic. Otherwise the other simple logic of W. Edwards Deming applies: “It is not necessary to change. Survival is not mandatory!”

But since we know that trust in most organizations is at an all-time low all over the world (open any newspaper on any day and just count how many articles you will find on this or somehow related topics), it seems that we finally understand that we need to work towards higher levels of transparency to recreate the necessary trust, even more after the devastating financial crisis has revealed the weaknesses of rather uncontrolled capitalism, with governments that have for a long time allowed to be sidelined by the capitalist logic, and  individuals that have missed to learn to get up from their couch and fight for change (seeing themselves more as victims of a system).

This is where using the GRI Framework can help. GRI facilitates the necessary dialog of all stakeholder groups from all over the world to define the aspects any organization should take into account while assessing how to close their own transparency gap. The problems we need to solve are global, so the format that structures the expected level of transparency to create sustainable change needs to be global as well. There is no other format than the GRI Framework that serves this purpose. So, why hesitate using it?”

Well, that’s the end of the pitch, hope you like it! Having worked with the GRI network since its inception in 1997 and as a GRI staff member from 2002-2008 I have seen a massive interest to complement standardized financial information with sustainability information. Although thousands of companies, some public authorities and several NGOs have published sustainability reports (some for more than 10 years already), this movement is still in its infancy, taking into account that there are more than 60.000 multinationals out there, only a small number of governments today ask for mandatory disclosure, and the mainstream financial markets still need to better understand the value of this transparency wave (‘we can’t digest more than 3 extra indicators’ – wow!) .

For many the GRI framework has served as a ‘trojan horse’ to get the necessary attention inside the company, for others it has been a ‘reference document’ to test in how far the existing reporting approach was complete and material. For all, it has become a visible proof of ‘practicing what we preach’ – for few a confrontation with ‘greenwashing’ accusations, a possible downside of the concept of transparency, but always solvable.  The next decade will show if we are able to understand the real value of transparency in a new economic paradigm.  I’ll finish this first post with the nice saying ‘ Sunlight is said to be the best of desinfactants’. Think about it!