Chapter 7
Environmental Stewardship: The “E” in ESG
Sustainability Stories from the C-Suite and Boardroom …
In 2001, I was almost “kicked out” of Oklahoma for mentioning climate change. In my final year at consulting firm, Arthur D. Little, I was leading a high-profile consulting assignment for the CEO of Kerr McGee. (Since that time, the oil and gas and chemical company sold its chemical operations by IPO as “Tronox” in 2005. The balance of the company was purchased by Anadarko Petroleum Corporation in 2006. The company no longer exists today.)
The CEO had five business transformation teams that each focused on a major corporate function. I was the senior advisor to the environment team comprising six senior executives from across the company. Our team identified four areas that could have a significant cost or risk impact on the company. One of those areas was captured as “environmental strategy.” Taking pride in its strong compliance posture, the company wanted to be a leader.
Interviewing the Senior Vice President of Strategy, I asked what he thought a leadership posture on climate change might look like. I set the context with the company’s North Sea oil and gas competitor, BP, whose public posture on climate change was quite aggressive. BP’s CEO at the time, John Browne, publicly stated his position that it was reasonable to take a precautionary approach to limiting greenhouse gas emissions.
Sitting in a corner office on the executive floor of the Kerr McGee Building in Oklahoma City, I realized that this SVP was the CEO’s right-hand advisor. Along with the presidents of the oil and chemical businesses and the CEO, they comprised the executive leadership team. I asked the senior vice president a few strategic questions about carbon-related risk and opportunity. He looked me in the eye and said, “Don’t ever mention climate change around here” (implying in this company or this city).
Postscript: Six weeks later, our team was able to have a business-focused conversation about climate change and environmental strategy. A Kerr McGee UK production manager from the North Sea operations was in Oklahoma and joined one of our presentations to the executive leadership team. He was the one who brought up climate change. Furthermore, he completely surprised the CEO and C-suite executives when he stated that Kerr McGee UK actually had a position statement (similar to BP’s) on climate change.
As this story shows, sustainability involves tough—and evolving—conversations. If a company is not having those conversations, those in charge probably are dancing around the edges of the core ESG issues.
The Situation: Overdose on Environmental Issues
Environmental stewardship depicted in Figure 7.1 (see also Figure 1.2 in Chapter 1) has long dominated the sustainability headlines in the United States. The vast majority of articles and books written about sustainability over the past thirty years have focused largely on the environment: degradation, resource limits, externalities, climate change, pesticides, toxics, and waste. (The sustainability conversation in the United States has often had a lighter emphasis on the social dimension of sustainability (human rights issues, etc.) The conversation in Europe, in contrast, has often been fairly evenly balanced between environmental and social issues.
We mentioned in Chapter 3 that sustainability is two sides of a coin: one side represents risk, and the other represents opportunity. Every company must focus first and foremost on risk: reducing the “bad stuff” not only in your own company’s operations, but also throughout the supply chain. However, Stage 3 companies also see sustainability as a source of innovation to drive top-line revenue growth.
Materiality Assessment
In Chapter 2 (Why Bother?), we introduced the Global Risk Review—a report published annually by the World Economic Forum. Over the past thirteen years of that report, environmental and social issues have grown steadily. Today, they dominate the “upper right quadrant” of the risk profile—indicating the risks of greatest impact and greatest likelihood. So that is the backdrop for every CEO to figure out what issues are most significant (material) to his or her company.
The starting point for every company’s approach to environmental stewardship should be to conduct a robust materiality assessment. A materiality assessment should be the basis for considering sustainability goals and metrics, as well as the associated programs, initiatives, and performance incentives that drive actions to meet those goals.
However, this is where things go amiss for so many companies. The Global Reporting Initiative (GRI) uses the term “materiality” in a way that actually reinforces the lopsided sustainability conversation depicted on the left side of Figure 6.1. GRI defines materiality in a far broader way than investors do.5
–GRI defines materiality as a threshold for what they believe is important to be reported: “The report should cover aspects that reflect the organization’s significant environmental and social impacts; or that substantively influence the assessments and decisions” of the various stakeholders.
–Investors define materiality as a key threshold for making investment decisions.
As a result of this GRI definition, the vast majority of sustainability reports today include a materiality matrix. (Figure 7.2 shows one example format.) Many companies include as many as thirty or fifty ESG issues on their reported materiality matrix. Though these issues are important, the vast majority of them are not truly material (in the financial sense of the word).
An excellent report from Germany identifies the top three material ESG indicators for each of 68 different industries. This report, titled “Sustainable Development Key Performance Indicators (SD-KPIs),”i was initially developed for the German Environment Ministry. The report aligns with the author’s view that the vast majority of companies have only a small handful (typically just one to four) environmental or social issues that are truly material. For example, Chevron, Duke Energy, and General Motors are essentially “single issue” companies (and industries): the material issue is carbon/GHG. The material issues of BASF or Dow Chemical are typically safety, toxins, and carbon/GHG. For Coca-Cola or Pepsi, the material issues are water usage, obesity, carbon/GHG, and packaging waste.
The Sustainability Accounting Standards Board (SASB) is an independent, private-sector standards setting organization based in San Francisco, California. SASB is working to develop and disseminate sustainability accounting standards that help corporations disclose information to investors. SASB standards address the ESG topics that are “reasonably likely” to have material impacts on the financial condition or operating performance of companies in an industry. SASB recognizes that each company is responsible for determining what information is “material” and what information should be included in filings with the U.S. Securities and Exchange Commission (SEC). In identifying sustainability topics that are reasonably likely to have material impacts, SASB applies the definition of “materiality” established under the U.S. securities laws.ii
When companies define ESG materiality narrowly—as only a handful of truly material issues or impacts—they facilitate a conversation with the C-suite about strategy. Indeed, shortly after Jeff Seabright (current Chief Sustainability Officer at Unilever) arrived at Coca-Cola as VP Environment and Water and launched a major water initiative, the CEO added “water” as one of the company’s major strategic thrusts.
Environment: The Key Elements
NGOs and many chief sustainability officers tend to think of sustainability by issue (carbon, water, waste, etc.). Ask C-suite executives about environmental stewardship and they think about the way they run the company across the supply chain.
CEOs realize that every company is responsible today, like it or not, for the full environmental footprint of its products, services, and solutions across the supply chain. The days are over for a company to own responsibility only for its wholly-owned or majority-owned operations.
For example, Ford, GM, and Toyota own the carbon impact of consumers as they drive their cars and trucks. (Of course, if these companies did not create cars and trucks, someone else would; therefore, their impact is relative to what might be thought of as a standard of excellence.) McDonald’s and PepsiCo own their contribution to the obesity epidemic. Starbucks is responsible for how much water and pesticides are used to grow its coffee beans—as well as the labor practices involved. Tesco and Walmart own the ecological impact of producing the food and beverages they sell.
In the Corporate Sustainability Scorecard C-suite rating system, the many environmental issues are organized into three buckets aligned to the supply chain: your own operations footprint; your supplier footprint; and your product footprint (see Table 7.1).
Table 7.1: Elements of Environmental Stewardship
| Environmental Stewardship |
| –Environmental Footprint—Operations: Environmental impacts associated with wholly owned or partially owned operations, including managing purchased resource inputs (chemicals, energy, materials, water); managing own physical footprint (buildings, equipment, land); and managing non-product outputs (emissions and wastes). |
| –Supply Chain Environmental Impacts: Managing the environmental impacts of the company’s supply chain, including the posture and management processes governing supplier interactions; the means of addressing the most material supplier environmental impacts; and the nature and extent of supplier sustainability partnerships. |
| –Environmental Footprint—Products: Managing the environmental impacts of the company’s products, including the overall product stewardship approach, the product design process, and end-of-life product management following retail, consumer use, and disposal. |
For most companies, the large majority of the full life-cycle environmental impacts occur in only:
–One or two areas of environmental impact, for example, carbon/GHG; toxics, water, etc.
–One key part of the supply chain, for example, their supplier, their own operations, product use, and disposal
For example, Ford, GM, and Toyota have the vast majority of their impact in product use and energy/carbon. (As mentioned in Chapter 3, Ford has stated that approximately 90 percent of a vehicle’s lifecycle greenhouse gas emissions are attributable to CO2 emitted during customer vehicle use.)
Environmental Stewardship: Tomorrow’s Leaders Today
Below is a brief snapshot of how some leading companies are addressing the three key elements of environmental stewardship: their own operations, their suppliers, and their products.
–Environmental Footprint—Operations: Today’s leaders are driving relentlessly toward “zero waste” in managing their own operations. They are reducing or eliminating hazardous waste, achieving or working toward zero waste to landfills (Caterpillar, P&G, and Subaru), and working toward becoming carbon neutral (Adobe Systems, Google, IKEA, and small companies like Curtis Packaging). Companies as diverse as General Mills and Novelis are committed to sourcing their raw materials sustainably. Kering (France) and Nike have committed to phasing out all hazardous chemicals. IKEA and Kingfisher (UK) are following a roadmap to become “forest positive” (creating more forest than they use). Johnson Controls and Telus (Canada) manage their buildings for zero impact.
–Supply Chain Environmental Impacts: Stage 3 companies have taken bold steps to green their supply chains. Walmart, since 2005, relentlessly has driven “green” forward by demanding, for example, that suppliers reduce their packaging, hazardous materials, and water use. P&G and Kaiser Permanente followed Walmart’s lead and made similar demands on suppliers. Natura Cosmeticos (Brazil), Compass Group (UK), Hershey, and Rio Tinto (UK) demanded that their suppliers protect biodiversity. Baxter, HP, and Owens Corning led their industries in setting supply chain sustainability goals. Dell is using certified closed-loop recycled plastics in its computers. Adidas, Anvil Knitwear, and Nike (among others) put in place processes to verify the performance of their suppliers.
–Environmental Footprint—Products: Stage 3 companies have, for years, systematically reduced the environmental footprints of their products. SC Johnson was an early leader: its Greenlist program evaluates material components of the company’s products, and systematically phases out more hazardous ones. In the 1990s, Electrolux and Ikea offered a green product line. Desso (Netherlands) adopted a cradle-to-cradle approach in 2007. Today, many companies clearly are Stage 3 in at least one sustainable product attribute. Leaders in selected product attributes include: energy efficiency (EMC and HP), traceability (Hershey and Patagonia), material use (Adidas and Herman Miller), durability (Autodesk and DuPont), and recyclability (Electrolux and Shaw Industries). Finally, leaders in diverse industry sectors have staked out a leadership position in end-of-life product responsibility, such as BMW for vehicles and Sprint for cellphones.
Of course, one company’s products are often another company’s material inputs. If Walmart imposes a requirement on Dell, HP, Proctor & Gamble, and other suppliers that are required, for example, to reduce or take back their packaging material, that is a supplier issue for Walmart but a product issue for its suppliers.
The Scorecard: Environmental Stewardship
This chapter has provided a general overview of Environmental Stewardship, the third section of the Scorecard. As noted above, this section of the Scorecard contains three elements (own operations, supply chain, products).
In Part 2 of the book, a separate chapter (chapters 22 through 24) addresses each of these three elements in detail, aligned with the rating criteria on the Scorecard website, used by 60 companies by February 2018 and by a growing number since then.
In addition to providing the detailed scoring templates for each element of Environmental Stewardship, Part 2 also provide dozens of company best practice examples—which are defined as being in Stage 3 or higher.
i “SD-KPI Standard 2016-2021,” SD-M GmbH, September 2016.
ii “SASB Conceptual Framework,” Sustainability Accounting Standards Board (SASB), February 2017.