6
Sustainability Measurement and Metrics
Introduction
The transition to a sustainable economy has begun and, like the process of industrialization itself, we are looking at a transformation process that will last for decades. To speed this transition, we need to create an environment where all organizations integrate sustainability principles into routine management decision-making. To accomplish that, we need to do a better job of measuring the sustainability of our organizations, cities, and nations. A clear sign of the growing importance of sustainability management is the impressive number of efforts to develop and utilize sustainability metrics to enable organizations to effectively measure their sustainability. However, there are a variety of different methods for measuring sustainability and reporting those efforts, and it seems that each company, organization, city, and country has a different method.
While the development of these indicators is critical and must be continued, it is time to begin the process of settling on sustainability indicators that everyone can use and understand. We need a generally accepted set of definitions and indicators for measuring sustainability. It should be mandatory for organizations to disclose a common and shared set of sustainability metrics and definitions to ensure that the required sustainability data is reliable, valid and comparable. Independent auditors will need to verify reported information and policy must hold organizations accountable for their performance. We should develop comparable measures for cities and states. If we are to develop a common set of metrics, we will need the U.S. federal government to take an active role to stimulate a discussion of metrics and decide on those that should be adopted. Along with agreement in the United States we will need to enter into discussions with the global community as well to ensure that all nations utilize the same benchmarks.
This chapter provides an overview of the current landscape of sustainability measurement and reporting. We begin with a discussion of sustainability metrics, followed by an introduction to the frameworks and indices that aggregate those metrics. We then explore the challenges with sustainability frameworks and reporting at the corporate level, and present an argument for the necessity of a set of standardized, generally accepted metrics. Next, we turn to the role of the public sector in sustainability measurement and metrics, beginning with an examination of mandated sustainability reporting as it exists in other countries, and how it compares to reporting in the United States. Finally, we look at the role of the U.S. federal government in measuring sustainability at the national level.
What Are Sustainability Metrics?
As we discussed in Chapter 1, the term sustainability continues to resist a single, clear definition, yet its use and application has exploded in recent decades. Despite the lack of consensus over the term, the meaning has evolved from a vague concept to a set of precise definitions that attempt to present sustainability in quantitative terms and indicators (Moldan et al., 2012, 7). These quantitative definitions allow us to develop metrics and models for performance measurement and management. Metrics, or indicators, are the basic variables that are used to describe characteristics or states of a given entity or system. Among the broadest definitions, sustainability indicators are measures of resource and materials use, waste diversion, energy consumption, and efficiency, but they also track non-environmental factors like labor practices and corruption. This is because while some people interpret sustainability as environmental inputs and impacts, sustainability as a broader concept has expanded to include various social, governance, and economic factors as well.
This expansion of the definition is reflected in the widespread use of environmental, social, and governance (ESG) metrics. ESG metrics are often used interchangeably with sustainability indicators, especially by the corporate sector. Sustainability metrics can also be used to describe the triple bottom line, which features environmental, social, and economic factors, and are most typically used to describe governmental sustainability or sustainable development at the national or city levels. As one might expect, the sustainability metrics themselves are as varied as the definitions. In a recent research project undertaken at the Earth Institute, using the broad ESG framework as a definition of sustainability metrics, we found that there are close to 600 indicators measuring every imaginable facet of sustainability.
Looking a little more closely, we find that environmental indicators are what we call the physical dimensions of sustainability (e.g., greenhouse gas emissions per dollar of revenue or per unit, amount of wastewater produced, amount of freshwater utilized, percent of materials recycled, etc.). Social metrics measure organizations' performance in equality, justice, and other human aspects of operation; however, the definitions of social sustainability indicators are not very clear. The actual boundaries for these types of measures are quite vague when compared to environmental metrics, which tend to be more clearly defined and mostly, though not entirely, quantitative. In practice, social impacts are more difficult to observe and quantify than environmental impacts. For measures of social performance, quantitative methods are often applied to measuring only input (e.g., employee trainings, number of community-outreach activities, etc.), limiting their analytical use. Environmental performance involves both input and output, and thus can be measured more accurately. Governance indicators (not to be confused with data about the government or public sector) are the third type of sustainability metric. They measure things like how responsive a company is to its investors, the structure and function of a company's board, shareholders' rights, the disparity between a CEO's salary and the average employee's salary, overall transparency, and the prevalence of corruption, among other factors. Governance indicators are the least quantitative of the three types, and can even include a company's mission statement or profile.
Sustainability Frameworks and Indices
Sustainability indicators summarize a vast amount of information about complex and complicated environments into concise, policy-applicable and manageable information (Singh et al., 2012, 281). Because of the large universe of indicators, frameworks and composite indices have emerged to better organize and analyze these metrics. Sustainability indicators are either presented in a structured framework, which can be used to isolate and report on relevant indicators, or aggregated into a composite index or score. In general, sustainability frameworks provide a qualitative presentation and grouping of large numbers of indicators and can be more revealing and accurate than aggregated indices, while indices tend to be easy to use and more understandable by the general public. Frameworks, in contrast to indices, do not involve quantitative aggregation of data. Not surprisingly, the criteria for these types of frameworks and indices are as diverse as the concept of sustainability itself (Mayer, 2008, 279). We'll outline just a few here to showcase the scope of these measures and frameworks.
Since 1999, the Global Reporting Initiative (GRI), which is home to perhaps the most popular global framework, has been working to establish a credible set of sustainability indicators using four areas of performance and impact: economic, environmental, social, and governance. It provides general indicator guidelines as well as sector-specific guidance, both of which are refined and updated over time. GRI's reporting guidelines are now in their fourth iteration and specify 34 environmental indicators including energy, materials, impacts on biodiversity, and emissions. This reporting framework is currently used by almost 6,000 organizations across the globe and it gains more users and credibility every year (GRI, 2014). GRI aims to become the universal standard, regardless of an organization's size, sector, or location.
The Sustainability Accounting Standards Board (SASB) is a nonprofit engaged in the creation of sustainability accounting standards for use by publicly listed corporations. Investors, the general public, and the media can find sustainability disclosure material in annual reports, sustainability reports, and on corporate websites. The Sustainability Accounting Standards Board is developing sector-specific standards for reporting key sustainability impacts on existing financial reports in hope that this will allow all stakeholders to understand environmental, social and governance metrics and ensure reliable comparison. By focusing on industry-specific standards, they expect to be able to compare apples to apples. In 2010, Harvard University's David Wood, with Steve Lydenberg of Domini Social Investments and Jean Rogers of Arup, developed a methodology for determining industry-specific material issues and associated industry-tailored performance indicators. They applied their methodology to six industries, using indicators already in use by companies and analysts. The team focused on developing a process for determining key performance indicators, but stopped short of defining those specific metrics. They are in favor of accounting for industry-specific factors in any type of mandated sustainability reporting (Lydenberg, Rogers, and Wood, 2010). This methodology became the basis for the Sustainability Accounting Standards Board, which is currently developing standards in 10 sectors.
A recent development in the field of sustainability measurement is integrated reporting, which combines sustainability and other non-financial issues with financial information, ideally in a single report. Proponents of integrated reporting assert that such holistic thinking, which incorporates all sources of business value and risk, provides more accurate and efficient approaches to corporate reporting. In 2009, the International Integrated Reporting Council (IIRC), a coalition of regulators, investors, companies, standard setters, accounting professionals, and nongovernmental organizations (NGOs), was established to develop an international framework for integrated reporting. The framework was released in December of 2013 following a series of meetings, roundtables, and input from external stakeholders. It provides guiding principles and content elements to enable companies to develop an integrated report. The International Integrated Reporting Council (IIRC) launched a pilot program to test the framework, and includes over 100 businesses and 35 investor organizations (IIRC, 2014).
In the United States and across the globe, stock exchanges and financial firms have developed methodologies to track and score sustainability performance for their own sustainability indices. For example, many top-performing sustainability companies identified the S&P Dow Jones Sustainability Indices as one of the most important sustainability rating systems that they report to annually. This collection of indices, launched in 1999, measures global and regional market indices, and was the first global collection to track financial performance of sustainability-driven companies (S&P Dow Jones and RobecoSAM, 2013, 1). Companies are selected for inclusion in one of these indices based on an assessment of economic, environmental, and social criteria. The indices are maintained by S&P Dow Jones Indices and RobecoSAM, an asset manager focused on sustainability investing. Their assessment methodology is based on media and stakeholder analyses, questionnaires completed by companies, other public documentation and reports, and direct communication with an organization. RobecoSAM invites over 3,000 public companies to report annually and includes only the top 10 percent in the indices. As of June 2013, the indices had approximately $8.8 billion in assets under management across a variety of products (S&P Dow Jones and RobecoSAM, 2013, 1, 3).
The Challenges of Sustainability Measurement and Reporting
Ultimately, as is probably evident, sustainability officers spend a considerable amount of time and effort reporting to these many indices and rating and ranking organizations. A recent Ernst & Young/Green Biz Group survey sought to gauge the relative importance of these various reporting programs. They found that the Dow Jones Sustainability Index and CDP (formerly the Carbon Disclosure Project) are frequently cited as the most important, and Newsweek's Green Rankings, though not included in the actual survey, was frequently a write-in by respondents. Newsweek's Green Rankings was the only system from a mainstream media organization (Ernst & Young, 2012). Much of the data that companies report to these organizations is the same and there is considerable overlap in how it is used by reporting programs. Until a clear leader emerges from this pack of reporting agencies, or until a specific framework is mandated, companies must continue to engage with most of these rating organizations to compete with their peers.
While some of these reporting groups are rigorous and seek to provide comprehensive information about sustainability and ESG issues, most lack universal comparability, reliability, and materiality. Indeed, many of these efforts were not intended to achieve consistency, or to facilitate intra- or inter-industry comparability. Some groups, like the Global Reporting Initiative and CDP, are synergizing efforts, but there is still a long way to go before a universally accepted standard exists that replicates the applicability and universality of traditional financial indicators and generally accepted accounting principles (GAAP).
Organizations and individuals must wade through the array of ever-changing sustainability reporting and measurement standards, scorecards, and platforms to decide what to measure, how to assess information, how to differentiate between important and irrelevant information, what organization(s) to report to, and what reporting or benchmarking organizations they can depend on for reliable analyses. It has been widely argued that in many cases more is less, and abundant options may only serve to decrease productivity and confuse decision makers. The problem is more acute in sustainability measurement and reporting, when myriad choices and lack of consensus create confusion. Furthermore, these standards change over time, sometimes significantly in just a few years. When these benchmarking systems change, reporting can become a symbolic exercise rather than a tool for year-to-year analysis designed to influence decision making.
One of the most visible manifestations of the interest in sustainability measurement is the increase in corporate reporting. Going beyond simply reporting data to ranking or rating agencies, companies across the globe now voluntarily (or in some countries, by mandate) publish thousands of sustainability and corporate responsibility reports each year. However, activities and reporting efforts vary considerably across companies, industries, sectors, location, and time. Typically, these reports are not readily comparable. A reader of two sustainability reports can find completely different indicators reported in each, though both would claim to report on the sustainability performance of that given company. Because sustainability management is still a new field, reliable, consistently applied metrics for sustainability have not yet emerged. Even when organizations select the same indicators for their reports, they often use different units of measurement, different time frames, or different methodologies to calculate those metrics, which further complicates analysis and comparison.
The information gap also increases the difficulty of comparing metrics across different categories of effect; for example, it can be impossible to tell whether a product, process, or company that consumes less energy can be considered better or worse than one that uses more energy but produces fewer toxic by-products. Similar confusion arises when attempting to parse the effects of sustainability programs on a company's financial performance because different metrics of performance are used in different studies, increasing the difficulty of direct comparison. Comparing two sustainability reports can be like comparing apples to oranges. Consensus has not even been reached regarding the terminology for such reporting. Reports utilize terms such as “environmental, social, and governance goals,” “corporate social responsibility,” “sustainability development and practices,” “socially responsible investing,” “environmental governance,” “green operations,” “corporate sustainability performance,” “corporate environmental strategy,” and so on, to describe programs implemented to enhance sustainability.
Sustainability reports vary widely in scope and scale because sustainability means different things depending on whom you ask and what you want. This lack of consistency leaves public and private decision makers at a distinct disadvantage. While these reports may look comprehensive, they can be overwhelming, or at worst misleading, to those unfamiliar with the details of the measurement and reporting methodology for that specific company. It is difficult for the average reader of these reports to make sense of the information, and to know whether a given organization is reporting on the organization's most important sustainability issues or whether the report is simply green washing for public relations purposes.
Are companies cherry-picking data to report what makes them look better while excluding information that might call into question some of their practices or business value? Are organizations only reporting information that is easily accessible or inexpensive to collect? How were the indicators selected, and did decision makers have a sophisticated understanding of the materiality of those sustainability issues? Do the individuals developing these reports, and the people making decisions based upon this performance, understand the issues that are most relevant to the organization and to the health of the environment? Reading a typical sustainability report often provides few answers to these and similar questions.
These problems demonstrate the need for a set of mandated, generally accepted sustainability metrics. The many sustainability metric and framework initiatives have advanced the science of sustainability measurement, but we are not yet close to a set of adequate and accepted indicators (Dahl, 2012, 15). None have emerged from the literature as a standard. Parris and Kates point out that “to date, there are no indicator sets that are universally accepted, backed by compelling theory, rigorous data collection and analysis, and influential in policy” (2003, 581). They provide three reasons for this: “(1) the ambiguity of sustainable development; (2) the plurality of purpose in characterizing and measuring sustainable development; and (3) the confusion of terminology, data, and methods of measurement” (2003, 581).
We need metrics that measure performance and progress, yet, today much of the work on sustainability metrics focuses on disclosure or reporting of environmental impact and risk. This is particularly true when it comes to private sector sustainability reporting. Just because a company reports their emissions, energy use, and waste does not necessarily mean they are implementing programs to reduce their environmental footprint or improve their sustainability performance. Arthur Lyon Dahl calls this a focus on the “hardware,” which he describes as:
the measurable status of and trends in environmental, social and economic parameters (pollution levels, energy consumption, poverty, education, etc.) rather than the processes of decision-making and control (the “software”) that determine whether sustainability is really taken into account in decision-making. Adding indicators of processes and the dynamics of change would help to discriminate between conscious progress towards a sustainable system and incidental improvements or correlations that result, perhaps, from rising levels of economic prosperity (2012, 15).
Furthermore, the collection and reporting of these metrics is voluntary, self-completed, and inadequately audited, and there is no penalty for deceptive, incomplete, or incompetent reporting.
The Need for Standard, Generally Accepted Metrics
These challenges highlight the need for standards to be established to alleviate some of this confusion and to establish credible measures of sustainability within organizations or jurisdictions. Reliable metrics that measure sustainability performance are needed for organizations, cities, managers, policymakers, consumers, and investors to adequately assess growth drivers and connect sustainability to strategic goals, expenditures and investments. Performance metrics and measurement systems are critical to successful management strategies; without them, it is impossible to determine what is working and what is not. To once again paraphrase Peter Drucker, to be able to manage something, whether it's a process or organization, you must be able to measure it. Without measurements you cannot tell if management activities are making the situation better or worse. An organization needs to measure and benchmark its programs to know whether an activity is improving and advancing towards its goals. Before you can measure something, you need to define it, but sustainability has loose boundaries; its definition varies depending on the organization, jurisdiction, and context. There is simply no clear set of measures that defines precisely what and how an organization or place should measure its sustainability.
Sustainability metrics, like traditional financial and management indicators, provide decision makers with information to quantify, measure, and benchmark environmental performance of a given entity, be it a multinational corporation, a small business, a government agency, or a city. Definitive metrics enable organizations to set and meet goals, manage change, and make investments in order to make their operations more sustainable. Measuring sustainability and disclosing an organization's impact on the environment helps make the intangible benefits and risks related to these issues more concrete. Standardized metrics help decision makers distinguish information that is relevant from that which is secondary or irrelevant. In addition, a common set of metrics will not only allow organizations to track their own performance, but will also allow for comparison to entities in similar situations. The vague boundaries and definitions of sustainability means managers may be bombarded with information, or may receive very little at all. We need to know: What is the most appropriate, crucial information that managers at all types of organizations should receive, understand, and utilize?
Just as we have generally accepted accounting principles and clear definitions of financial indicators, we need physical measures of organizational performance: sustainability metrics. These measures should ultimately be part of the private sector's overall organizational performance measures, as important as market share, return on equity, and profit and loss. Perhaps in some way, monetized to influence the computation of return on investment and profits. In the public and nonprofit sectors, the organization's performance measures might be different, but of equal importance; sustainability metrics would be reported along with data on committed crimes, graduation rates, medical treatment outcomes, emergency response times, and other indicators of public sector performance. They should also be included in the normal organizational process and output measures such as labor productivity, efficiency, value of goods and services delivered, employment, personnel turnover, and so on. The physical dimensions of sustainability must be defined as a key and routinized element of organizational management. In addition to organizational indicators, we need indicators that can chart local, state and national progress towards a sustainable economy.
While the need for mandated universal indicators may be clear, the selection of those indicators is not. Some argue for industry-generic indicators that could apply to all organizations and could be supplemented with sector-specific metrics. Others argue that indicators must be industry-specific to be relevant and truly comparable. Many frameworks of indicators have been proposed, but there are no clearly established rules.
We expect that a core set of roughly a dozen common sustainability metrics will emerge as a nationally recognized standard that comprehensively measures the key indicators of sustainability for any given organization or locality (city or state) in the United States. While there are industry-specific and place-based metrics that aid in more detailed analysis and understanding, we expect that there are some indicators that cut across all organizations and locations. We also believe that physical sustainability indicators are the most universal type of environmental metrics and will ultimately comprise generally accepted sustainability indicators. The current inclusion of social and governance issues within the definitions of sustainability metrics will fall away as convergence occurs on widely accepted sustainability indicators. Social and governance metrics are inherently culturally specific, politically relative, and geographically based. Even though national consensus on these two types of indicators could potentially be achieved in the United States, they will not translate easily to other countries and will vary considerably across regions. These are also more likely to change over time as cultural and political norms and institutions change. We suggest that it is only the physical dimensions of environmental sustainability that will achieve national and, ultimately, global consensus. These environmental indicators are universal and will comprise the recognized sustainability standards.
In addition to a common set of metrics, we need a standardized process for data collection, verification, and audit. We need a measurement system, not simply a set of measures. The added cost of verification and audit, however, can be justified for only a few of the indicators. In the absence of a commonly accepted core group of metrics, it is difficult for policymakers to mandate disclosure of an open-ended range of indicators. The first job for government must be to move the sustainability field towards a common standard—something that the U.S. federal government has done before, when it arbitrated the development of generally accepted accounting principles (GAAP).
The Role of the Public Sector
The public sector is a key player in advancing and supporting sustainability metrics, measurement, and reporting. It can play a role in mandating and monitoring various forms of sustainability reporting, in guiding the development of specific information that private business, as well as public and nonprofit organizations, ought to measure and communicate externally. Government must also establish and maintain national indicators of sustainability, including measures of green jobs or the green economy.
Mandated Corporate Sustainability Reporting
In the United States, sustainability reporting is not required, despite the efforts of many organizations to evaluate environmental, social and governance issues. Internationally, however, over a dozen countries require some type of mandatory sustainability reporting.
The move toward required disclosure of sustainability metrics increases the importance of environmental issues, giving more power to sustainability officers; managers of environmental, health, and safety issues; and managers in corporate social responsibility (CSR) and government relations. It can even bring them to parity with chief compliance officers, chief operations officers, and chief financial officers. When this occurs, sustainability is inevitably more directly linked to core business decisions and values. When sustainability becomes part of regulatory compliance, increased funding and management attention is dedicated to it. It can also benefit from the support of more established processes and teams in the financial and compliance functions.
This is not to diminish the importance of motivated companies whose commitment to sustainability precedes government regulation. Mandated disclosure sets rules and establishes a level playing field, allowing established leaders and innovators to clearly demonstrate their competitive advantage. There will also always be companies who will not act until mandates are established. Instituting mandatory indicators could overcome a company's reluctance to disclose performance and would ensure comparability (Searcy, 2012, 251). Regulations set the minimum bar that can help organizations improve performance as they seek to improve their reported metrics over time. Required reporting is a prerequisite to any serious effort at improving performance.
Mandated reporting can also lead to innovative measurement and assessment tools as organizations and regulators adapt to new requirements for transparency and assurance. Even for organizations who already voluntarily publish sustainability reports, their procedures for data collection, measurement, and assessment will likely need to be refined to meet standardized verification rules. They may need to create new tools, programs, and processes to meet the expectations set by government regulation.
Countries around the globe, including many developing countries, are beginning to experiment with legislation that requires sustainability reporting and disclosures of environmental risks. A 2013 report by the Global Reporting Initiative, the United Nations Environment Programme (UNEP), KPMG Climate Change & Sustainability Services, and the Centre for Corporate Governance in Africa examined the growth of mandatory reporting measures globally. They found that in 2006, 58 percent of policies were mandatory (the rest were voluntary efforts for public disclosure of sustainability information), but in 2013, 72 percent of the 180 policies across 45 countries were mandatory (2013, 8). This represents a significant trend in the field. They also note this trend is likely to continue: “As reporting organizations voice their concerns about the various frameworks they may use or need to comply with, there will be increasing calls for the alignment and harmonization of frameworks” (2013, 9).
Many of these laws pertain only to specific environmental issues, such as climate change, or apply only to state-owned enterprises or specific industries, like the mining or financial sectors. For example, countries that specifically target state-owned companies for reporting include Brazil, China, France, India, Russia, South Africa, Spain, and Sweden (GRI et al., 2013, 17). Still, other regulations are more far-reaching.
France
France is considered a leader in corporate sustainability reporting. Since 2001, France has required public companies to report on social and environmental impacts in their annual reports. In 2010, it passed a new law, Grenelle II, expanding the requirement to include new types of entities. It now extends beyond listed companies on French stock exchanges to subsidiaries of foreign companies that are listed in France and unlisted companies with subsidiaries located in France. This new requirement is significant in that it is not limited to domestic companies, and could therefore have serious impacts on many international companies that operate in France. The regulations, which will be phased in by company size, also require that companies have their data verified by an independent third party auditor (Ernst & Young, 2012, 1–2). This new law is particularly strong, requiring disclosure of up to 42 environmental social and governance indicators.
China
In China, the number of sustainability reports grew considerably after recent government policies were enacted to increase sustainability reporting and disclosure. The 2007 Environmental Information Disclosure Act requires public disclosure of compliance with regulations, requiring reporting of any serious environmental pollution releases or failure to comply with requirements. In addition to this mandatory component, the act encourages companies to voluntarily disclose environmental information, including emission and pollution levels, reduction targets, resource use, investment in environmental technologies, and other related programs. The government provides incentives for compliance with the voluntary programs, including priority for grants (GRI et al., 2013, 57). China's stock exchanges, in partnership with government agency initiatives, also encourage, and in some cases require disclosure of environmental and corporate social responsibility information. This includes the Shenzhen Stock Exchange, the Shanghai Stock Exchange, the China Banking Regulatory Commission, the State Assets Supervision and Administration Commission, and the China National Textile and Apparel Council. In 2008, China adopted the Green Securities Policy, which sought to link environmental and financial policies, and was co-developed by the Ministry of Environmental Protection and the China Securities Regulatory Commission. It requires Chinese-listed companies in 14 highly polluting industries that trade on the Shenzhen Stock Exchange and the Shanghai Stock Exchange to report certain environmental information to the public (Wang and Bernell, 2013, 343–344). As a result, in 2012, over 1,600 sustainability reports were published, a 20-fold increase over 2007. However, there is still very little auditing of these reports (only 5 percent were assured by third parties) and the quality of the reports remains low, often with little or insufficient quantitative data on issues like greenhouse gas emissions and energy efficiency (GRI et al., 2013, 27–28). Despite these formal requirements, pollution levels throughout China continue to grow, and there is clearly a large gap between policy intent and actual implementation.
India
In India, the Ministry of Corporate Affairs announced Voluntary Guidelines on Corporate Social Responsibility. These were revised in 2011 to become the National Voluntary Guidelines on Social, Environmental, and Economical Responsibilities of Business. While the efforts themselves are voluntary, the guidelines provide broad principles for businesses to follow. They are complemented by the Securities and Exchange Board of India's 2012 requirement that the 100 top companies prepare business responsibility reports requiring responses to each of the voluntary guidelines. Requirements for other companies will be phased in over time. Also in 2012, India passed its first law on sustainability reporting, the 2012 Companies Bill, which requires companies to develop corporate social responsibility policies and to spend two percent of the previous three years' average net profit on implementing those policies (German Society for International Cooperation et al., 2012, 26–27). This funding requirement is a unique approach to environmental improvement.
South Africa
We see additional evidence of reporting requirements throughout the world. South Africa has emerged as a leader in integrated reporting, which incorporates sustainability and other non-financial issues with financial information in a single report. In 2002, South Africa first required, through the King Code on Corporate Governance, that all companies report annually on social, transformation, ethical, safety, health, and environmental management policies and practices, and in 2009, updated its regulation to require companies to produce an integrated report with this information (GRI et al., 2013, 35).
The European Union
The European Union (EU) has also been active in sustainability reporting, as it is incorporated into their broader corporate social responsibility disclosure requirements and rules. For example, the 2003 EU Modernisation Directive required that European companies include non-financial information in their annual reports if it is “necessary for an understanding of the company's development, performance or position” (GRI et al., 2013, 51). The directive leaves the decision of materiality up to the company, and does not go so far as to mandate non-financial information disclosure across the board. In 2013, however, legislation was proposed that would require all large companies in the EU to disclose policies, risks, and results relating to environmental, social, and governance issues. If a company did not believe an area was material to them, they would be required to specifically explain why it was not reporting on that issue (GRI et al., 2013, 30). The European Commission, recognizing the need to do more on sustainability reporting, adopted two reports in February 2013, highlighting transparency in sustainability reporting, “Corporate Social Responsibility: accountable, transparent and responsible business behaviour and sustainable growth” and “Corporate Social Responsibility: promoting society's interests and a route to sustainable and inclusive recovery” (European Commission, 2014b). These are strong indications of continued high-level government support for sustainability reporting across the European Union.
Denmark
Denmark's sustainability and Corporate Social Responsibility (CSR) reporting is voluntary, but large companies and state-owned businesses must disclose their views on corporate responsibility in their annual reports. If they do not have a sustainability policy, they must explicitly say so. This law, while not an outright requirement to disclose specific sustainability initiatives, can serve to encourage organizations without sustainability programs to establish them (GRI et al., 2013, 29). In addition to the Corporate Social Responsibility policy mandate, in 1996, Denmark established a green accounting scheme that was mandatory for large businesses and heavy polluters to require public disclosure of environmental impacts (e.g., material input, emissions, and waste) (GRI et al., 2013, 29). Subsequent analyses of Denmark's green accounts found that the public had little confidence in the published reports, and so, while about half of the compliant firms achieved environmental improvements, they were failing to effectively communicate those results (Jorgensen and Holgaard, 2004, 9). The law was later strengthened to focus on more holistic accounting, increased detailed and quantified information, and improved communication. Revisions of the law also required forward-thinking disclosures, such as environmental policies and pollution-prevention programs. It is not simply enough to report their impacts; Denmark wants its companies to show leadership and commitment to sustainability principles at the top levels of management (Jorgensen and Holgaard, 2004, 14–17).
The United Kingdom
Reporting on greenhouse gas emissions is one of the most common sustainability metrics, although this is only one aspect of the global sustainability challenge. For example, in June 2012, the UK Department for Environment announced that it was requiring all companies listed on the Main Market of the London Stock Exchange to report their greenhouse gas emissions in their annual reports beginning October 1, 2013. The UK is the first country to require greenhouse gas emissions reporting for all companies, regardless of size or industry. Methodologies for calculation must be included and any missing information must be noted with an explanation of why it could not be obtained. The measure is required to include “at least one ratio which expresses the quoted company's annual emissions in relation to a quantifiable factor associated with the company's activities,” commonly referred to as carbon intensity (UK Government, 2013).
Trends and Impacts
While these efforts vary from country to country, it is possible to detect four broad trends:
- Efforts are evolving over time to provide more quantified, verified information for shareholders. Every iteration strengthens the disclosure requirements to demonstrate that sustainability is being integrated into core management decision making.
- Policies are collaborative efforts between different public agencies and stock exchanges, using a variety of tools at the country's disposal.
- Many efforts are still industry-specific.
- Policies typically mandate general disclosure of environmental impact, but the state of this field is not yet at the point where countries are specifying a set of indicators that are universally mandated.
Most of the focus is on corporate behavior, although we see some efforts to improve the sustainability of government operations and a growing use of comprehensive urban sustainability plans. These plans, such as PlaNYC 2030, require periodic reporting of progress toward specific sustainability goals.
What is the impact of these efforts? In 2012, George Serafeim, of Harvard Business School, and Ioannis Ioannou, of London Business School, looked at data from 16 countries that had adopted some level of mandatory corporate sustainability reporting and compared those to 42 countries that had not. They found that companies that waited to disclose until there were legal requirements to do so, had significant declines in energy use, water consumption, and waste (5). They also found that mandated corporate sustainability reporting affects management practices, and that the impact is greatest in countries with systems for stronger enforcement and more frequent disclosure assurance (Iaonnou and Serafeim, 2012, 28). They also predict that integrated reporting would have an even greater effect. Integrated reports bring environmental issues up to the same level as financial disclosures and, according to Serafeim, the process “forces companies to explain the relationship between financial and nonfinancial measures and how managing these nonfinancial issues contributes to the long-term profitability of the company” (Blanding, 2011).
When compared to Europe, the United States lags behind on mandated sustainability reporting. In the United States, businesses themselves have led the effort to encourage action by federal regulators. In 2010, the Securities and Exchange Commission (SEC) provided guidance on disclosing climate change risk in existing disclosure requirements. This does not constitute a new requirement, but was issued to provide clarity and ensure that the rules are followed consistently (SEC, 2010). The guidance, which covers three areas: (1) regulatory risks, (2) indirect effects of regulation or business trends, and (3) physical impacts, was in response to business pressure to clarify climate risk information in corporate disclosures. According to Ceres, a network of investors, companies, and public interest groups committed to sustainability, over 100 institutional investors representing over $7.6 trillion supported a petition to the SEC requesting that it issue this guidance (Ceres, 2014, 1).
Another way that the United States has addressed the issue of corporate sustainability reporting is through its “Green Guides,” which are an effort by the Federal Trade Commission (FTC) to discourage greenwashing by helping companies properly market environmental products, ensuring that that sustainability claims do not mislead or confuse consumers (FTC, 2014). The guides were originally developed in 1992 and were updated as recently as 2012. The most recent update included revisions of existing guides, plus new sections on carbon offsets, toxicity claims, green certifications and seals, and renewable energy and material claims (FTC, 2012). These efforts are aligned with the mission of the Federal Trade Commission, which was established to prevent deceptive business practices and enhance informed consumer choice; however, the guides do not set forth rules or regulations issued by the Federal Trade Commission. These are meant to assist companies as they develop their marketing materials, not to mandate specific information about environmental impact. They are designed to describe the types of claims that the Commission would find deceptive under the Federal Trade Commission Act. The act empowers the Commission to take enforcement action against a company, which can include prohibiting the deceptive advertising and fines (FTC, 2012). While the Green Guides are a step in the right direction, they do not come close to what other leading countries are doing in this field.
A U.S. National Commission on Sustainability Metrics
Required sustainability reporting is a critical step towards advancing sustainable practices, but before the U.S. passes a mandate, there needs to be a consensus on what reports should include. We believe the logical next step for the U.S. is federally led action to help determine the metrics that organizations would be required to disclose. Like the decades-long process that resulted in generally accepted accounting principles(GAAP), we believe the process to establish a set of mandated generally accepted sustainability metrics—including standard methods of collection, reporting, and verification—will take years, if not decades. First, businesses, stakeholder groups, and academics must agree on a recommended set of core sustainability metrics, and those metrics must be selected based on the current state of environmental, earth, and management sciences. Second, the federal government must develop policy tools and regulations for compliance, monitoring, and enforcement of mandatory sustainability reporting.
The federal government can serve a role not only in mandating and monitoring the reporting of sustainability metrics, but first can serve as the forum to bring together interested stakeholders to develop consensus around a set of generally accepted metrics. To ensure their adoption and widespread use, the federal government can use its convening power to generate momentum for a standardized set of metrics. The absence of such an authoritative moderator of the discussion stunts the drive to develop robust, universal sustainability metrics.
The federal government, through the Department of Commerce, for example, could establish a national commission on sustainability metrics. The commission would include a variety of federal agencies, including the Environmental Protection Agency, Department of Energy, Department of Labor, Department of Defense, Office of Management and Budget, Securities and Exchange Commission, and the Office of Science and Technology Policy, and would serve to bring together a coalition of leading experts from top universities, nonprofit organizations, advocacy groups, think tanks, and industries to lead a coordinated national effort to develop and build consensus around a set of mandated, generally accepted sustainability metrics. Such a commission would bring together the top minds in the field for information sharing, collaborative research, and outreach relating to the importance of this critical field. The federal government has a unique ability to assemble top leaders in the field to communicate and coordinate their activities across disciplinary, organizational, and geographic boundaries.
The commission would be an authoritative and potentially objective moderator of the discussion on sustainability metrics. Academia, corporations, think tanks, environmental interest groups, and others would be key stakeholders in developing metrics, but none can have the final word. The U.S. federal government has this key role to play. Analyses developed by experts would form the basis for recommendations to a national commission, but this commission's report would subsequently propose legislation that could serve as the final authority on sustainability metrics. The final output of such a commission would be to report on the state of sustainability metrics today and recommend a set of nationally mandated metrics, a defined reporting framework and requirements, and a detailed plan to implement the collection, auditing, and reporting of these indicators. The commission would advise on and develop proposed legislation, policy tools, and regulations to create and enforce mandatory measurement and reporting of generally accepted sustainability metrics.
Measuring the Green Economy
Another role for the U.S. federal government in sustainability measurement is the development of local, state, and national sustainability indicators. It will be important to aggregate the various efforts at the individual, corporate, and city levels to have a comprehensive understanding of environmental performance on a national level. One example of a national sustainability metric was the Labor Department's effort to measure and report on green jobs. Unfortunately, this very important project was suspended in the spring of 2013 due to the budget reductions mandated by the sequestration process. This effort should be restored immediately, and other aggregate measures of sustainability at the macro level need to be developed and implemented.
Why is it so important to measure green jobs? Green jobs can be used as one proxy measure for the green economy, and we believe that the green economy is the key to a sustainable future. Again, measuring our sustainability performance at the national level can help us understand how we are progressing and spur action to make changes. However, as we have seen, it is difficult to measure sustainability and the green economy because related issues cut across all industries and sectors. The United Nations Environment Programme (UNEP) developed a definition of a green economy as “one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities” (UNEP, 2014). The green economy includes jobs that “protect ecosystems and biodiversity; reduce energy, materials, and water consumption through high efficiency strategies; de-carbonize the economy; and minimize or altogether avoid generation of all forms of waste and pollution” (UNEP, 2008, 3).
However, not all green jobs are equal in their environmental impact and questions arise about where thresholds exist to define green jobs. Where the bar is set substantially changes the size and scope of the green economy. Some businesses only spend part of their time on green practices or products, making it especially difficult to measure. Similarly, some individuals work on green projects as only a portion of their responsibilities. Some industries and activities that help green the economy are harder to define and capture than easily identifiable ones such as energy auditing or solar manufacturing. For example, many of the new technologies and process shifts that will yield environmental benefits will occur in existing companies and industries, and so are difficult to separate out when attempting to measure the green economy or the jobs associated with that work (UNEP, 2008, 36). How are these counted when looking at the green economy? Additionally, differences in opinion exist over whether or not to include process jobs that make a business greener regardless of whether the total output is environmentally friendly (Pollack, 2012, 5). For all of these reasons, isolating and counting green jobs is problematic, yet necessary to make informed short- and long-term policy and business decisions.
In our view, one of the most important measures of the green economy is green employment. As noted earlier, the U.S. Bureau of Labor Statistics (BLS) began measuring green jobs in 2010. This green jobs initiative was an effort to gather data on “(1) the number of and trend over time in green jobs, (2) the industrial, occupational, and geographic distribution of the jobs, and (3) the wages of the workers in these jobs” (BLS, 2012b). Without a standard industry definition, the BLS developed a definition of green jobs based on the interpretations of academics, business leaders, and government actors. It defined green jobs as either: “(A) Jobs in businesses that produce goods or provide services that benefit the environment or conserve natural resources, or (B) Jobs in which workers' duties involve making their establishment's production processes more environmentally friendly or use fewer natural resources” (BLS, 2012b). Across sectors, 333 industries have been identified through BLS as being potential producers of green goods and services (BLS, 2012c).
According to the first BLS survey data, in 2010, 3.1 million jobs in the U.S. were associated with the production of green goods and services, accounting for 2.4 percent of total U.S. employment in that year. Of the total, 2.3 million jobs were in the private sector, and 860,300 in the public sector (BLS, 2012d, 1). Using then current BLS data, the Economic Policy Institute noted that 1 in 20 federal jobs was a green job, and 1 in 50 private-sector jobs met the same requirements (Pollack, 2012, 5).
The most recent report by the Bureau of Labor Statistics on green goods and services was released in September 2012 and is based on data from 2010 and 2011. Underscoring the idea of “shades of green” jobs, the Bureau further subdivides its green jobs into “all-green” jobs, meaning their core purpose is producing a green good or providing a green service. The report notes that roughly three-fifths (or 1.9 million) of the 3.1 million green jobs in 2010 were in establishments that received all of their revenue from green goods and services (BLS, 2012d, 1).
Figure 6.1 Green-Goods-and-Services (GGS) Employment Level by Green Activity, 2010-2011 Annual Averages
Source: U.S. Bureau of Labor Statistics. “Employment in green good and services, 2011.” United States Department of Labor. April 1, 2013. http://www.bls.gov/opub/ted/2013/ted_20130401.htm
These data indicate that we are moving toward a green economy. The 2010 data serves as a benchmark from which we can measure our progress, but we can only do so if the Bureau of Labor Statistics resumes its green jobs initiative. The federal government is the only entity capable of collecting this type of data on a national level, and until we find other robust measures for nationwide sustainability, green jobs will remain a key component of measuring our green economy. The federal government must continue to play this critical role, and expand its initiatives as our understanding of the green economy continues to expand.
Metrics as Momentum for Change
We believe convergence on a set of generally accepted sustainability metrics will drive momentum towards a change in organizational focus from simply reporting, disclosure, and transparency to uncovering real opportunity, competitive advantage, and financial and non-financial benefits of sustainability. As sustainability becomes clearer and more accessible to a greater number of users, its uptake will expand. A federal effort to develop generally accepted standards can uncover decision making tools and models that can be made available to a variety of stakeholders who are eager to incorporate the physical dimensions of sustainability into their management practices. Deciding what indicators to track and to report is a critical step in engaging organizations, particularly in the private sector, in the transition to a sustainable economy. With consensus on metrics, the U.S. government can then mandate disclosure, drawing upon the many examples of other nations that now require sustainability reporting.
Complex sustainability challenges do not follow political borders or corporate boundaries. They cut across ecological and organizational systems, and so to truly understand our impacts, we must look at our performance on a higher level. It is not enough to know how well Walmart performed in comparison to Target this year. We need to know how their collective impacts are improving or damaging the country's sustainability performance overall. We must understand how the individual actions of companies, nonprofits, and governments in the United States are aggregated at a national level.
The federal government has critical roles to play in each of these processes. Top U.S. corporations and major U.S. cities already understand the importance of sustainability management, and as this momentum continues to build, we believe the U.S. federal government will emerge as a strong force in building a green economy that uses data-driven metrics to advance its sustainability goals. We fully expect to see the United States emerge as a leader in sustainability measurement.