The New Metrics

Monday, February 10, 2014

18:00 - 20:30

Few would challenge the notion that today’s business metrics fail society and the environment. All too often an action that feels instinctively right to a management team can fail to meet minimum commercial requirements, leaving it on the cutting table.

Which is why the arrival of a new generation of metrics is so important.  There new forms of measurement change the way business decisions are made, and may point to an era where capital is deployed in a more sustainable manner.

With analysis from our commentators, Dorothy Maxwell and Doug Johnston, we heard presentations from 3 pioneers;

  •     Mark Gough on Total Contribution – how The Crown Estate measures its economic, social and environmental contribution to the UK.
  •     Michael Beutler on EP&L – how Kering is putting a monetary value on environmental impacts across the Group and why this is beneficial to the business.
  •     Adam Elman on Net Benefit – the formula that M&S uses to calculate the £320m net contribution delivered by Plan A over 6 years.

With the conversations continuing on the roundtables, this was a great chance for social intrapreneurs – particularly those in sustainability, corporate affairs and finance – to learn from each other.

Speakers

Adam Elman Marks & Spencer

See bio

Doug Johnston EY

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Dr. Dorothy Maxwell Natural Capital Coalition

See bio

Mark Gough The Crown Estate

See bio

Michael Beutler Kering

See bio

Oonagh Harpur Treasury Solicitors

See bio
Round Tables

The art of measurement

This table will digest the panel discussion, and try to draw some conclusions. When is a clear commercial case necessary when to use instinctive judgement, which intangible benefits should be tracked, the role of natural capital accounting, and more. Which companies does the table admire?

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I. Obstacles
• Markets and data transparency. Metrics can help drive a better understanding of your business and its impacts. It should help drive decision-making and support the allocation of capital and resources. However, it is often through the process of measurement that a critical question is raised - how well do you really know your business? Despite the significant role of metrics, there are a number of the challenges in gaining greater transparency through measurement.
• Commodities transparency. It is difficult to gain transparency and map where commodities come from with global trading markets and suppliers operating via agents/distributors. Although this is starting to change in certain sectors with new standards being put in place.
• Transparency costs. Costs are present at each step towards transparency. For example, the Rainforest Alliance has a premium cost for the stamp, yet companies cannot be entirely sure whether the product is actually environmentally sustainable.
• Communications. How important is it to have best endeavours being demonstrated? Will this message actually make a valuable contribution towards your brand or bottom line? A major benefit of investing in transparency is being able to communicate this effort to consumers; however it is difficult to prove whether this provides financial returns.
• Role of the board. Are boards asking for metrics? Are they placing pressure or providing a steer to help make business impacts more transparent? Where business leaders are behind measurement initiatives and provide clear direction the more likely metrics are able to inform and influence decision-making. Getting buy-in from the top must be a high priority.
• Methodology complexity. The more sophisticated methodologies may prove difficult for outsiders to understand and quickly apply to their businesses at present.
• Short termism and strategy. There are a number of incentives to encourage businesses to measure their impacts, such as regulations, taxes and credits. These incentives are not yet very effective; although regulators are getting better at monetising impacts. Where C-suite individuals make strategic investments to prepare for the future of their industry they are able to surpass current-day requirements, benefit from incentives and be ready to meet the ever-evolving demands in the future. For example, tailpipe CO2 emissions were overcome with the electric car. However, emissions can persist depending on how the electricity used by the car is generated. Today, many car manufacturers push any potential electric emissions/impacts upstream to energy suppliers, though in future, this may need to change.
• Global dissemination. How can more advanced businesses and regions support developing regions in gaining an equal grasp of impacts and measurement? Will developing areas tackle the same issues? Are there alternative solutions that might work better in one region due to cultural and resource requirements? Not only are we trying to gain a better understanding of our own businesses, disseminating such knowledge will prove to be another challenge.
• Data rationalisation. Even with data integrity it does not always help to make the right decisions. The decision-making process can benefit from monetising impacts, yet not all metrics can be monetised or quantified. In addition, decisions occur in complex global markets where the actual impact is often unclear.
• Incremental change. Given the economic demands placed on businesses, they will need to move forward incrementally and pragmatically to begin with, but continue to work on advancing the development and application of metrics and methodologies.

II. Red Flags (warnings)
• Data quality. Data from most company measurement activities is often drawn from estimations made on the best information currently available.
• Sector and product variation. Businesses are often compared on an even level, but actually sectors vary dramatically and standards and metrics need to be aligned to industry-specific requirements. For example, all products are not equal. Reducing washing power usage is not the same thing as reducing deodorant usage!
• Green washing. Some companies are driven towards measuring sustainability through market pressure or fear of a negative impact on branding. This may lead to skewed reporting, highlighting those metrics which are favourable to investment decisions and creating an unequal representation of companies’ impacts in the market.

III. Solutions
• Three types of measurement. This evening’s speakers covered three different approaches to measurement: activities costing, EP&L and total contribution. In all three cases the measurement process has helped businesses to better understand their core proposition and place a value on their impacts.
• EP&L. This methodology is the first to incorporate land use, take geography into consideration during impact measurement, and drill down to tier 4 suppliers in the company’s supply chain. The work done several years ago with PUMA also incorporated measurements using an external theoretical cost from a societal prospective. M&S Plan A measure actual costs incurred to the business. Below are a few input/output tables that are openly available to the public that can be used in EP&L measurements:
o www.wiod.org
o http://www.bea.gov/industry/io_benchmark.htm
o www.sustainabilityconsortium.org/open-io/
o www.eiolca.net

• Mavericks & the Jochen Zeitz effect. Leading companies such as, Unilver, Kering and Novo Nordisk, are using the more sophisticated methodologies and are often self-scrutinising, which helps to raise the bar in their respective industries.
• Value of loyalty. There is an incredible value on loyalty. By not asking consumers to pay more for sustainable values, this can then be the distinguishing factor amongst similar offerings competing at the same price point. This in turn promotes loyalty amongst consumers. Fostering such a culture internally also generates the highly sought-after employee loyalty.
• Nine planetary boundaries. This approach defines a safe operating space for a company by helping them to identify how to operate within each boundary. http://www.stockholmresilience.org/21/research/research-programmes/planetary-boundaries/planetary-boundaries/about-the-research/the-nine-planetary-boundaries.html
• Collaboration with academia. Perhaps there is a greater opportunity for businesses to collaborate with academic institutions to help move this area forward. Businesses can supply valuable real life data whilst academics can support the development of sophisticated measurement practices.

Environmental Profit & Loss accounting

There is a growing trend toward EP&Ls and other forms of natural capital accounting, but will it mainstream? Is it too dry for the passionate? Are there too many assumptions for comfort? What percent of big business, does the table predict will engage in natural capital accounting in 2020?

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Obstacles
• Social impact is difficult to quantify, given positive benefits of employment balanced alongside important negatives that arise from the business operations
• Biodiversity is also very challenging to measure especially in the context of tipping points in ecosystems. At the same time some important benefits need to be captured, for example crocodile farming is associated with the introduction of more eggs in the natural environment than would have been the case if wild capture. We need to learn to value species in the same way insurance companies have been valuing human lives for decades, otherwise it gets lost
• Getting it through management, especially middle management where decision making occurs.
• Materiality can be difficult to establish and double counting must be avoided e.g. LCAs are rarely comparable in terms of output
• Finance teams can get uncomfortable with E P&L’s and show resistance if they treat them as unpaid liabilities.
• The negative association of “valuing the environment” can be problematic to overcome.
• Red Flags (warnings)
• Mapping out the supply chain, which is a core requirement for an E P&L can be a very challenging process. Even within the same holding brands might not like to make public their supply chain because it is a source of competitive advantage. In the luxury market, there are incentives and suppliers are well known. In most other markets at best the first tier supplier is known. Even if this is possible, certain problems arise e.g. sourcing sustainable metals is difficult because they get melt down and traceability becomes impossible. When it comes to livestock farming, typically the meat is traced but not the skins.

Solutions
• When it comes to valuing the benefits provided by ecosystems, finding a relative value of the state of natural capital may be more important than finding an absolute financial value
• Often it will be easier to start off sustainability strategy with something like M&S Plan A, instead of a more “sophisticated” model like an EP&L; Plan A has a number of measurable targets and in a way is easier to communicate
• An excellent way to promote the use of E P&L is to demonstrate that it is a way to identify future supply chain problems and shortages that might arise, and to link that to future revenue. It can and should be used to make supply chain decisions. Everyone should be getting deeper into the supply chain to ensure business continuity.
• On the use of E P&L’s and public reporting: they should be akin to management accounting in the sense that nobody sees them but they are what business decision making is based upon. It is a useful tool to run the business off.
• If E P&Ls are used, they should clearly exemplify the value lost or created through the business, it has to be meaningful in the context of that business. Absolute values don’t matter, it is the magnitude.
• Need to strike a fine balance between using as internal decision making tool and a reporting tool that investors and stakeholders can use in their decisions. For the time being, it is probably better to do it and then talk about it, rather than the other way around. Need to manage expectations when it comes to E P&L.

Examples
• British American Tobacco works with a biodiversity assessment tool evaluating the biodiversity and landscape impacts of growing tobacco. It is licensed out through a cooperation with a number of NGOs.
• In the case of luxury goods, sometimes production is limited by natural availability pf biodiversity (eg. Crocodiles). In this case creating more farms is both a business opportunity and beneficial to biodiversity. Python farming can be good for plantations because pythons eat rats so they can keep palm oil farms pest-free. This benefit should be accounted for.

Measuring contribution

Companies such as The Crown Estate, BskyB and British Land are starting to measure their contribution to society, the environment and the economy. What is the motivation behind this, what are the pros and cons, and can the table seeing this becoming a mainstream activity?

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TABLE 3B:

We interpreted the Total Contributions methodology to be the way an organisation measures its contribution to the environment, society and the economy – i.e. a significant departure from the usual stakeholder groups. We saw The Crowd Estate, BskyB, and British Land as the pioneers of this methodology, with others such as Standard Chartered using variations of it in local markets.

Being an early stage methodology, our table generated as many questions as it did answers, but it was notable that the table saw its potential for it to be adopted by the mainstream. Our discussion focused on the following points;

• Who is the audience for this methodology? For whom are we measuring total contribution? This needs to be clear for it to be valuable. The stakeholders are a lot less clear than for other measurements. Some points to emerge from this;
o Many of the pioneers have been inspired by a desire to improve their license to operate, where the audience is often a government
o Thereafter the driver will have a desire to prove a social purpose – this methodolology could be used to measure Lloyd’s Banks recently announced commitment to “helping Britain prosper”
o If there is a clear audience, then it was agreed that this could influence internal decision-making.

• Measuring societal value presents the biggest challenge as it is the least developed area and there are methodological limitations.

• Companies are going to need to collaborate on the methodology in order for it to be regarded as robust. This includes collaborating on the methodology with direct competitors, so that direct comparisons can be made.

• How robust are the methodologies? Could this be the Achilles heel?
Currently producing hugely varied numbers e.g. M&S vs. O₂ on their net benefit methodology - is this credible?

• Do the extensive use of proxies gloss over too much information? Or do we need to take a high level view, not getting too bogged down in the detail in order for there to be progress and action?

Measuring net benefit

If profit drives capitalism, surely it makes sense to look at sustainability in terms of the profit generated. M&S, for example, estimates Plan A has generated £320m of net benefit in 6 years. Why are so few doing this, and what percent of big businesses will measure net benefit in 2020?

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TABLE 4a.

Obstacles
- From the examples provided in the plenary session 2 out of 3 were manufacturing companies. These companies have the benefit of being able to make efficiencies in their production line and supply chain which filters through as ‘net benefit.’ For service orientated businesses with small supply chains the softer benefits are harder to quantify e.g. staff retention.
- SMEs struggle with fewer resources and budget to dedicate the time to looking at measuring their net benefit.
- There are already leaders in sustainability reporting and being part of the ‘pack’ is not seen as quite as beneficial. Are there a large number of companies that are not vocal about what they do?
- The assumption in business is that sustainability does not equal profit and therefore provides a barrier to some sustainable initiatives.
- Companies often have to trade-off measuring the numbers/ seeing the profit opportunities and just ‘doing the right thing.’
- In measuring the numbers the real challenge remains around getting the data. Information management systems do not capture the data points required to measure everything.

Red flags
- There is a limit to how far you can take measurement of natural services, before you have to simply respect intrinsic value; otherwise there is a risk that the real value of a natural resource is diminished by its financial value

Solutions
- GRI sustainable SWOT
- The new metrics allow companies to make an informed decision when looking at sustainable initiatives but there is still a risk that the wrong decision is made.
- To review what is material to the business and then focus on these areas. M&S used a ‘hot spot’ approach.
- To have a sustainability team that is fully integrated into a company such as in Café Direct and M&S.
- Companies are required to react to regulation, internal stakeholder demands, successful Greenpeace Campaigns and to survive. Companies need to look forward to survive or they might become the next Kodak. Therefore, the use of sustainability metrics to drive action will need to become the ‘norm.’
- Sustainability is an unusual area where companies can work together, as shown by Kingfisher and M&S who have been sharing ideas.

Examples
- Marks & Spencer are following a policy of ‘seeing is believing’ which does not have an immediate return. The idea is that employees are taken to some of their sustainable investments such as eco factories in Sri Lanka.
- Big Youth Campaign gives 1500 kids work experience with no financial payback. The feedback from the workers in store shows that the scheme provides strong softer benefits.

Big data & sustainability

Do you agree with the statement that big data represents a big opportunity for sustainability? We ask this table to explore how the analysis and communication of data, and the creation of KPIs and metrics, benefit an organisation.

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Obstacles
• Understanding what is big data and how can we use it?
• Quality vs Quantity of data
• How do we translate environmental and social information into financial reporting and use this to enhance communication to investors?
• How does qualitative data become more than just a case study – communication of the data is a challenge to create something tangible.
• Capturing data is a challenge. Once the data is gathered is it being used practically?
• How do we get from small data to big data?

Red Flags (warnings)
• People are scared to use data as it is too complicated. Data is often tied behind spreadsheets and creates inertia once it is there. Needs to be extracted and let everyone play with it.
• If more people have ownership is there a trust issue? Not if you work in a sandbox environment and do not affect the validity of the data.
• Turn it around what do you want out of it? Then see where the gaps in data are and think about the end process you want to achieve. Output – does the data exist already and how do we get there.
• How can companies get hold of the data if it is external e.g. from suppliers?
• Analyse to see hotspots across supply chain what info do you want physical environmental or business impact on organisation.

Solutions
• Start with simple data e.g. energy and connect this with water, social engagement. Simple ideas supported by big data sets.
• Design the process with an end point to include KPIs and use this to drive the data gathering so the answer is there – this will improve data quality so when it comes in it is clean.
• Need to start somewhere. Start with top tier suppliers, start the chain of influence and set goals, then let them influence the next tier down, throughout the supply chain.
• Address the issues you know are there and let the data show you create a balance.
• Different levels within a business require different types of reporting – remember the audience.
• Get action without the board by creating league tables and publish them to encourage competition and improvements.

Examples
• NHS – they have data hidden somewhere but not being used, people need to be given access to it not just owned by one person.
• Like the CRC – didn’t work to rank businesses against each other using a standard measure. Sometimes can backfire and stop collaboration.
• Life Cycle Assessment – uses huge amounts of data create a standard methodology and work with your peers to achieve a solution. Once you answer your question it is important to follow through and use benchmarking.
• CDP – companies start with bigger suppliers which are easier to capture data from them finances are always recorded, get information from Financial Controller.

Water neutrality

Should “water neutrality” become standard ambition for UK businesses? Sainsbury’s has just developed a water neutral store, reducing use by 70% and offsetting the balance through a water saving partnership with two local schools.

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Initial Reflections
• There is a consensus that the discourse traditionally applied to carbon emissions, including terms like ‘offsetting’ and ‘neutrality’, must be applied with great caution to water-related issues due to the fundamentally different nature of the issue.
• The value of water within an eP&L is entirely dependent upon location. Neutrality is therefore important only within spatial context, and it is pertinent to evaluate the neutrality across a suitable, catchment-size scale. Neutrality within isolated, ambitious businesses can do very little to improve water management.
• There is wariness that successfully achieving “water neutrality” might contribute negligibly to the actual impacts of water use, due to insufficient scope of the term. See Discussion Point 2.

Example: Sainsbury’s
• Sainsbury’s launched two water-neutral stores in 2007, in Weymouth and Leicester, and have achieved a 50% improvement in operational water efficiency against a 2005/06 baseline.
o 70% of this improvement is accounted for by rainwater harvesting
o The remaining 30% is accounted for by mechanical installations (e.g. spray taps) and the introduction of water consumption logging metrics
• Sainsbury’s have highlighted that operational efficiency leading into neutrality does, indeed, successfully prompted the behavioural changes associated with stewardship. The two water neutral stores report the highest rate of maintenance calls reporting leaking taps.

Opportunity
• The limited impact that isolated cases of neutrality can achieve presents a compelling case for catchment-wide business to group together in order to create leverage.

Challenges
• The extent of a businesses’ water neutrality has little impact upon corporate exposure to risk. It will therefore be challenging to align this ambition with investor priorities in order to secure buy-in.

Discussion Point 2:
How can UK businesses be encouraged to move beyond operational efficiency towards water neutrality and, going beyond that, towards water stewardship?

Examples
• AB Foods, although agricultural in their operations, have limited impact on water through their direct operations. There is, however, scope to incorporate Corporate Sustainability into office functions, which are supplied primarily by rainwater harvest.
• National Express aren’t overtly water intensive and are therefore an example of where the discussed ‘new metrics’ might enable quantification of environmental impacts and thereby help shape a compelling cases to engage CFOs.
• Hotels contend with the prevalent customer mind-set that they, the customer, are entitled to maximising their benefit from the amenities for the duration for their stay. Metrics could be used to measure and minimise the water footprint, communicate net benefit to the customers and inspire a shared ‘feel good factor’ that invites customers to support the compromise
Opportunity
• The concept of Virtual Water, and the trade thereof (Allan, 1994) and Water Footprint Standard (expected 2015) make the impacts of this otherwise invisible resource clear, going some way towards tackling the cultural disconnect between UK water consumption and sustainability. The challenge is in using new metrics to present this to the CFO in a compelling business case.

Measuring brand value

The impact of sustainability and brand value is too nebulous to measure, right? But if the impacts are real, is it right to leave brand benefit unquantified? Are there ways of measuring brand impact from sustainability that do make sense, and improve decision-making?

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Overview
To introduce the topic the question was posed: What brand do you associate with and how would you measure improved/degraded sustainability performance of that brand? Key themes arising were:
• Sustainability is marketable – the uplift in sales would therefore be one way of measuring increased brand value.
• The value of a sustainable brand is founded on trust and reputation, which deliver repeat custom.
• Customers are increasingly expecting sustainability – organisations are merely ‘delivering on a promise’ in order to maintain brand value, rather than increase it.
• Penalties and clean up costs are easily measurable in cases of unsustainable behaviour, but measuring impact on brand is more complex.
• There are cases where bad ethics have a minimal impact on brand value e.g. Apple. This is due to existing ‘brand love’ outweighing the value of sustainability.

Examples
- Asics are a high end running shoe brand, however it has a lower market share than Puma. This is not due to product quality (Asics make better running shoes!), but brand awareness. This is in part due to Puma’s marketing campaign around its eP&L – sustainability has been used to add value to the brand.
- Fairtrade’s brand value is centred on trust. There is ~90% trust in the Fairtrade label and this is the main driver of the business model and of brand value. Starbucks used this to promote trust in their brand in the UK by only serving Fairtrade coffee.
- Converse shoes appeal to consumers in their teens - a generation who are caring increasingly about sustainability. This brand needs to focus more on being sustainable to stay attractive to their market i.e. to maintain brand value (they must ‘deliver on a promise’ of sustainability).
- Coke recently bought innocent – a portion of the price paid related to innocent’s brand value, which stems from sustainability. Therefore sustainable brands are valued in the market place, as there was a willingness to pay a premium here.
- BP’s tarnished reputation has led to difficulties getting concessions overseas. Some of the additional costs associated with this would be related to having an unsustainable brand image – however measuring this would be complex.

Red Flags
- Bad ethics do not necessarily equate to lower brand value. Apple, for example, still has a huge market share despite reports of conflict metals being used in products. In certain circumstances existing ‘brand love’ and good marketing over-rules the sustainability-value connection.
- The sustainability-value connection is not strong enough to drive innovation. Duracell are a company that are not innovating in the sustainability field – opportunities in areas such as rechargeable batteries, recycling etc. are not being taken. This would indicate that they do not see additional brand value in sustainability.
- Brand value is very sensitive to negative press. Sodastream re-launched in the US as a sustainable brand (less packaging/waste than conventional drinks companies), however Oxfam raised concerns with their supply chain which has already damaged the brand value despite the positive business model.

Net Positive – a movement?

The “Net positive” philosophy is gaining traction, with Coca-Cola Enterprises, SKF and The Crown Estate being recent additions.  We ask this table what obstacles would need to be overcome to turn this into a movement, and what the benefits could be?

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Barriers for boards (Debate: is it really that hard? Surely everyone wants to be Net Positive?)
• Big and scary when it is hard enough to reach a zero target
• May be difficult to see the added value
• Needs to be credible and defined

Consumer communication
• Immediate reaction may be of perceived extra cost to goods
• Needs to be credible not greenwash
• E.g. Kingfisher made a decision not to make it consumer facing (other than the actions themselves that contribute to the overall corporate goal)

Learning lessons from the Circular Economy ‘movement’
• More of a ‘movement’ than Net Positive though there are few examples
• Good PR & figurehead
• Academic grounding (no equivalent yet for Net Positive)
• Easy to articulate and understand (no need for a tag line)
• Very clearly business-led: at a distance from environmentalism

Are there any industries beyond the pale?
• Who should be part of it (extractive industry?) & who should decide?
• Have to be part of the movement if we continue to need them in the supply chain?

Key recommendations
• Emphasise optimism: looking at the purpose of business has the potential to inspire
• “You don’t have to do everything” message: practical & manageable approach
• Raising the profile:
o Davos 2016
o Book: a ‘how to’ but with business egs. (equiv. to Ray Anderson’s book)
o Harvard Business Review article
o Ted Talk/host a Tedx talk to promote business topics being included in TedTalks
• Figurehead (Brian Cox/ Victoria Beckham/ Stella McCartney/ Vivienne Westwood etc.)
o Leader needs to be enlightened
o Only with hindsight can you identify Ellen McArthur as a good leader
• Social media
o Potential for Net Positive film/game/animation e.g. on Upworthy (circular economy uses animations)
o App – personal net positive journey e.g. ‘Love app’ – positive thinking
• Central secretariat (with associated website & twitter feed) …needs funding
• Ranking of Net Positive plans to put on business’ agenda
• Approach rating agencies on including Net Positive in metrics & assessments
• Buddy system: companies make commitments to help x number of business up to a certain size to integrate net positive or work with banks on initial business pitches.

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