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Wednesday, November 23, 2011
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Metrics and Measurement of Sustainability Performance

By Guest Author, Rafael E. Torres, MBA ’13, Yale School of Management, MEM ’13 Yale School of Forestry & Environmental Studies

The selection of sustainability performance metrics in a company’s sustainability or corporate social responsibility (CSR) management system is dependent on the relevant issues facing that specific firm, the issues facing its stakeholders, and the context of the company’s industry. CSR metrics are crafted to report on performance in the environmental, social, and economic contexts. Since the issues underlying CSR are complex, selection of particular sustainability metrics involves value judgments about their importance and the measurement methodology to be used. I offer below some issues to consider in developing sustainability metrics and reporting systems. This is by no means an exhaustive list, but rather a menu of issues to think about that are relevant to CSR measurement systems.

First, one sound business philosophy that I learned a long time ago from a college professor was: “you get what you measure and reward.” This philosophy has rung true over the years and I’ve seen it play out at many different firms. Any metric that the firm sets out to produce and track should somehow be weaved into the performance management and bonus incentive scheme of the company in order for it to have the greatest impact. If employees are not trained to consider CSR metrics as part of the results they manage to, and if they are not somehow directly incentivized based on CSR performance, they will focus and prioritize other areas outside of these metrics. In such a case, improvement to areas tracked by the CSR metrics will likely be incremental or nonexistent altogether.

Second, practically every individual metric has benefits and drawbacks involving tradeoffs of incentives or measurement goals. It is easy to create perverse incentives one way or another with any given individual metric. For instance, using an energy intensity metric (energy usage/output or revenue) has the benefit of factoring in the effect of more production by the firm, but has the drawback that the company’s absolute energy usage—and thus its total impact—can be increasing, while being masked by the intensity metric. Using absolute energy usage has the opposite effect, as it masks improvements in efficiency when the firm’s growth outpaces the related efficiency gains. These optical effects make it difficult for either metric to provide an accurate picture on its own, and it can result in employees managing to one performance indicator at the expense of the other. Often, good metric systems are designed to use sets of counterbalancing metrics whose effects cancel each other out. This helps provide a balanced performance picture and reduces the possibility that employees or managers will have incentive to improve in one area at the expense of another.

Third, when working with any type of metric, it is very important to develop benchmarks against which to compare the results. Such benchmarks need to be relevant to the objectives of the CSR metric system. When the desired objective is improvement over a prior year, then the benchmark is simply the prior year quantity. However, how do we determine benchmarks to achieve sustainability? One vocal sustainability researcher and metrics expert, Mark McElroy, holds that many CSR metrics in use today are lacking because they do not have a benchmark measure to compare against that represents the truly “sustainable” level of use for that resource for that company. In other words, if a firm states that it used 1.0 million (M) gallons of water in the current year as compared to 1.1 M gallons in the previous year, we can only say that this was an improvement over the prior year. However, what does it say about whether the 1.0 M gallon result is “sustainable,” meaning a rate that doesn’t deplete the resource beyond its capacity to regenerate? To know if that firm’s water use is sustainable, a more detailed assessment would need to be made about water availability and use in the firm’s geographic region, and such an analysis would require allocations of the resource base amongst industries and companies. It is, to be sure, a formidable undertaking, but Mr. McElroy’s point is well taken that CSR metrics reported without context stand little chance of achieving their objective of reporting on sustainability, as defined.

Finally, for companies wishing to report sustainability metrics externally, there are additional considerations of how to frame and execute such external reporting. Currently, many companies use annual CSR reports as a primary vehicle to communicate their environmental, social and economic performance. Such CSR reports are often complemented by press releases and other ongoing external communications. Surely there are good reasons to adopt this approach to external reporting, but it is worth considering whether it is a good idea to separate the company’s CSR reporting from its financial reporting. A public company in the U.S. files annual financial reports (Form 10-K) and quarterly financial reports (Form 10-Q) with the Securities Exchange Commission (SEC), and those are very likely the reports that 99 percent of investors pay most attention to. In that context, do companies risk creating the perception that CSR reports are a side dish when they divorce sustainability metrics from financial ones? As companies refine their CSR measurement and reporting systems, they may want to consider ways of unifying communications so that users of reports are not left feeling like there are double standards.

Designing and implementing any form of performance measurement system is indeed a challenging task, and it is no less so for a CSR measurement system. Organizations need to make sure their metric systems are tailored to the challenges of sustainability measurement and are set up to succeed.

Rafael is a 2nd-year MBA/MEM joint degree student focused on energy policy and strategy. Prior to Yale, Rafael worked almost 10 years as an external financial auditor, including as manager at Deloitte & Touche LLP. Rafael is a licensed Certified Public Accountant (CPA), and holds other financial certifications.

Posted in: Environmental Performance Measurement

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