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The Sustainability Measurement Conundrum: Recognizing the Elephant in the Room
It is difficult to imagine a sustainability professional making a speech without including the mantra, “What gets measured, gets managed!” This popular sentiment is backed by scores of books on sustainability metrics and measurement—not to mention the Global Reporting Initiative (GRI) and a number of investor-led movements aimed at finding the perfect ESG (environment, social, and governance) metrics. There are now so many metrics in use that people have invented “lenses” and materiality determinations to help beleaguered companies select the “right” sustainability indicators (and defend their selection). Metrics are so complex that the Global Environmental Management Initiative (GEMI) has created a metrics navigator.1 This mind-set has created a drive for companies to choose their sustainability metrics first and then develop a set of sustainability initiatives to help them meet their goal numbers. Invariably, most of the metrics chosen tend to be lagging indicators. They often are based on GRI’s list of 79 such indicators, which are divided into five categories. But is this really the best way to develop a sustainability program? Maybe what we need are metrics that can help drive an organization’s sustainability program forward, rather than judging the company on past performance.
Why companies need to use leading indicators and performance frameworks
Leading Indicators: Noticing the Elephant
If we want to develop a sustainability approach that truly meets the needs of the organization—rather than the needs of a standard list of metrics—then we have to add some leading indicators to the mix. These are the metrics that can help a sustainability program move forward over the long term. While most commentators recognize the need for leading indicators, they are almost never mentioned in articles about sustainability metrics. That’s why I call leading indicators the “elephant in the room.”
Lagging Versus Leading Indicators
Before moving on, let me make it clear that I am not denying the importance of lagging indicators. These indicators must be used to determine the progress that an organization is making on its sustainability program. They often are watched closely at the project level.
Robert B. Pojasek
© 2010 Wiley Periodicals, Inc. Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/tqem.20273
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But lagging indicators have a major drawback: When you measure them, the results show you only what you have done in the past. By contrast, leading indicators look forward and help drive the future performance of the sustainability management system. With leading indicators, the focus is on making changes that will allow the organization’s sustainability system to meet (and refine) its metrics going forward. This means that the system drives the metrics—not the other way around.
But that step is just one of many, and it should not be the focus of the management effort. Using a performance framework can help companies put metrics into perspective.
Making the Case for Leading Indicators
I have mentioned the topic of leading indicators in several past columns.3 This installment of “Quality Toolbox” is intended to pull that information together and show more clearly how leading indicators can enhance sustainability programs. The discussion begins with some background information, explaining how leading indicators can fit into an overall management and measurement scheme.
Business Excellence Frameworks: A Better Path to Sustainability
Leading indicators feature prominently in the performance frameworks associated with national quality and business excellence award programs, such Leading indicators still play almost as the Baldrige Nano role in sustainability programs, tional Quality Program even though they are well in the United States.2 established and well understood. But most sustainability professionals have little familiarity with performance frameworks, although they predate GRI by many years and are currently used in over 70 countries throughout the world. As a result, leading indicators still play almost no role in sustainability programs, even though they are well established and well understood. This is unfortunate, since performance frameworks (and the leading indicators they incorporate) offer a “way out” for companies whose sustainability initiatives are so mired in metrics that the focus is on the metrics themselves rather than on sustainability. The performance framework is becoming particularly valuable now that more companies are adopting management systems such as ISO 14001. These management systems rely on metrics for their monitoring and measurement step.
Plan-Do-Check-Act and Sustainability Measurement
Companies that use management system standards (such as ISO 14001) adopt a plan-docheck-act (PDCA) methodology as the basis of all operations. This methodology can effectively incorporate both leading and lagging indicators. If we apply PDCA to sustainability measurement, the steps might look like this: • Conduct a current-state assessment of your organization’s sustainability approach and compare it with the known elements of sustainability. • Identify the programs currently in use for implementing the sustainability approach. • Conduct a gap assessment of the sustainability approach using benchmarking information. • Establish a sustainability strategy to close the gaps and attain the desired future state. • Create an action plan to implement the sustainability strategy. • Deploy (implement) the sustainability strategy using leading indicators to drive the program by looking forward.
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• Measure progress with lagging indicators that are material (i.e., important) to your organization. • Identify the improvements you have made in order to support your business case and conduct your “lessons learned” exercise. • Refine your leading indicators (based on the lessons learned) in order to drive continual improvement looking forward. • Start the cycle over again. You may recognize the approach-deploymentresults-improvement (ADRI) principles embodied in these steps. There is a very close correlation between PDCA and ADRI. The former is programmatic, while the latter has a more practical orientation. (ADRI is discussed in more detail later in connection with scoring methodology.) The steps outlined above assume the use of leading indicators. So let’s take a closer look at some aspects of these indicators—including why so many sustainability professionals find them problematic.
• Determine what stakeholders and markets want now and what they will want in the future. • Continuously improve products and services based on determinations of how they perform against stakeholder expectations. Independent studies have demonstrated that companies who use leading indicators in their performance programs financially outperform other companies by a two-to-one margin. The major stock exchanges around the globe use a number of leading indicators as a Independent studies have “looking forward” demonstrated that companies who mechanism. Markets use leading indicators in their typically react more performance programs financially forcefully to leading outperform other companies by a than to lagging inditwo-to-one margin. cators. Experts might say that the market is basically driven by a forward-looking focus.
Using Standardized Leading Indicators
A review of performance frameworks indicates that about 15 leading indicators are currently in widespread use around the world. Appropriately for measures that are intended to spur future action, these indicators are phrased in terms of actions that an organization should be carrying out. Sustainability leading indicators might include the following: • Put effective and visible systems and processes of sustainability leadership in place at all levels of the organization. • Use systems and processes to strategically plan for sustainable success and to align the sustainability program to its core purpose. • Use knowledge to support decision making, stimulate innovative thinking, and ensure organizational success and sustainability.
Qualitative and Quantitative Indicators
Many sustainability professionals view leading indicators as qualitative measures. By contrast, most (though not all) lagging indicators are regarded as quantitative. This distinction is important since the prevailing position in sustainability circles is that metrics need to be quantitative. Some sustainability professionals view qualitative measures as “soft” metrics that are mostly valuable for capturing the attention of senior management and certain stakeholders. Interestingly, this attitude sometimes exists even in companies where senior managers are already using leading indicators in their performance programs and balanced scorecards. Performance should be a driver for all programs, and these programs can be continually improved using leading indicators.
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ADRI Scoring of Leading Indicators: Quantifying Qualitative Metrics
In reality, organizations do not need to choose between leading and lagging indicators. Both are required for a well-managed sustainability program. Moreover, the presumed distinction between qualitative and quantitative metrics is actually misleading. In fact, all of the qualitative metrics can The elegance of the ADRI be quantified using the scoring method is that it allows ADRI scoring methperformance scores to be compared odology. Here is how across companies of different ADRI scoring would sizes and in different sectors on an work for qualitative “apples-to-apples” basis. measures such as leading indicators.
ferent sectors on an “apples-to-apples” basis. A home office can use ADRI scoring to see how it compares to a production facility. How is this possible? It works because all businesses have approach and deployment action plans—and all can be judged on how well they have implemented their plans. This type of comparison capability is what GRI originally hoped to accomplish with its indicators. Instead, they have had to settle for sector comparisons, and are finding many differences, even within sectors. Using the GRI approach, it still is not possible to compare companies of different sizes even within the same sector, especially in the case of a heterogeneous sector like mining.
Aggregating and Disaggregating Scores ADRI Scoring Approach
Remember that leading indicators are phrased as actions to be taken. Every leading indicator should be linked to the four ADRI elements: • approach (how action will be taken), • deployment of the approach, • results of the approach and deployment (not to be confused with lagging indicators), and • improvement achieved through the approach and deployment. Each of these elements can be scored by independent or internal examiners, using objective evidence and a loaded scoring matrix. ADRI scores also can be audited by trained third-party examiners. Examiner training programs are well developed in all the countries that currently use performance frameworks. Another advantage of the ADRI methodology is that scores can be aggregated and disaggregated as needed. For example, a company may wish to score all its different businesses and then aggregate the scores to the enterprise level. Or perhaps a company wants to look at various elements of its supply chain using leading indicators. With ADRI methodology, they can roll the scores up into a single value stream enterprise score to demonstrate how risk is being managed and indicate the value that is being generated for shareholders.
All of this can be done on a completely transparent basis by allowing stakeholders to “drill down” into the scores. Companies that employ ADRI scoring can also use open-source XBRL (eXtensible Business Reporting Language) software with meta-tags on the numbers to show what scores were used in the aggregation. Many companies already use this approach for financial results.
Making Comparisons Transparent
The elegance of the ADRI scoring method is that it allows performance scores to be compared across companies of different sizes and in dif-
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Scoring Lagging Indicators
What about scoring lagging indicators? As I have noted in a previous column,4 lagging indicators can be scored using the answers to the following four questions, along with a scoring matrix: • How is the lagging indicator demonstrated to be material to the organization? • Is there a formal plan (approach and deployment) in place to achieve the goal associated with the lagging indicator? • How is management tracking and trending the progress over time associated with the results of the approach and deployment? • How has the organization benchmarked itself against others using the lagging indicator? Using the five GRI categories for lagging indicators, it is possible to provide each category with an aggregated score for the metrics contained within it. These can be further rolled up into a total “results” score. What is interesting about this well-established methodology is that the examiner does not need to know the result of the lagging indicator in order to score the indicator itself. While this may sound strange, it actually makes sense. The point of the scoring exercise is to determine how relevant the indicator is to the organization and how well it is being managed. When lagging indicators are well managed, they are likely to yield good results. So the mantra quoted at the beginning of this column might more correctly be stated as, “What gets managed will yield better results!”
Performance Framework Scoring: A Different Approach to Metrics
People who are used to the GRI indicators may think they are visiting Oz when they start to use performance framework scoring. That’s because these frameworks look at metrics in a different way—one that is unfamiliar to many sustainability practitioners. Performance frameworks refer to lagging indicators as “results.” They regard the term “performance results” as an oxymoron. These frameworks measure performance in a quantitative fashion. They use ADRI for leading indicators and they measure results (lagging indicators) with a scoring method based on answers to the four questions listed earPeople who are used to the GRI lier. indicators may think they are With the perforvisiting Oz when they start to use mance framework apperformance framework scoring. proach, it is no longer necessary to look for ways to compare something like “the amount of water used” between a company that uses lots of water in its operations and one that uses very little. In the latter case, the lagging indicator will simply be eliminated because you cannot answer the questions provided earlier using objective evidence. The approach still provides transparency, however, since all of the scores will be retained and one can drill down to see what was capable of being scored.
Why Bother With Scoring?
Performance framework scores provide some crucial benefits to organizational management systems. In particular, they can help the organization use corrective action more effectively. Management can make adjustments to its approach and deployment strategy—and see the impact of these adjustments in future performance scores.
Obtaining an Overall Score
The scores for leading and lagging indicators can be aggregated into one overall score. Many performance frameworks create a single score using a ratio of 600 points for leading indicators and 400 for lagging indicators.
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Some sustainability practitioners argue that their organization does not like to be scored. In fact, this is a common attitude. But performance framework scoring is not personal. It is not like getting a grade in school or a work-performance evaluation. Instead, the examiner is simply scoring how well the organization’s management system is performing. I have often noted how resistant people can be to any form of scoring in their operations. However, since sustainability is based on transparency and accountability, it is increasingly difficult to rationalize this rejection of scoring.
around the world is the Balanced Scorecard,5 which views the organization from four different perspectives: • • • • financial and market perspective, customer and stakeholder perspective, business process perspective, and learning and growth (human resource) perspective.
Deriving Business Value From Sustainability Metrics
Many people seem to view sustainability metrics as nothing more than “do-good” indicators. In fact, however, Sustainability metrics can play a well-developed susvaluable role in managing company tainability metrics can operations, especially since they offer practical benefits can be integrated into common to business organizamanagement approaches. tions and their investors, as the following sections explain. That’s because, fundamentally, sustainability is all about risk management. While some sustainability professionals like to focus on the “drivers” of sustainability, it is clear that these drivers are closely related to avoidance of risk. So when companies pursue sustainability, they are in fact managing risks that could have a substantial impact on their business going forward.
Companies that employ the Balanced Scorecard can use leading and lagging indicators from each of these four perspectives (or performance categories). In their book Performance Scorecards: Measuring the Right Things in the Real World, authors Richard Y. Chang and Mark W. Morgan advise companies to focus on “the ‘vital few’ measures that matter to your customers, your employees, and your stakeholders.”6 With this approach in mind, companies can include indicators from seven categories, based on the criteria used in performance frameworks: • • • • • • leadership and community social responsibility, sustainability strategic planning, customer and stakeholder engagement, knowledge management and innovation, employee engagement, process management and organizational effectiveness, and • sustainability results. Under this approach, performance scorecards would be maintained by the leader at the enterprise level. All of the leader’s direct reports would have their own scorecards, which would be carefully designed to help the enterprise achieve the level of performance that has been planned. Scorecards would be cascaded in a similar manner all the way down to the lowest rungs of the organization.
Using Sustainability Metrics in Operations
Sustainability metrics can play a valuable role in managing company operations, especially since they can be integrated into common management approaches. For example, one of the most widely used tools for managing operations
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It makes sense for operators at the plant level to follow their results (lagging indicators). Their supervisors would also have a leading indicator to follow that would help the operators looking forward. At the mid-management level, results could be scored and aggregated. A larger number of leading indicators would be used to drive operational performance, with these indicators being scored using the ADRI method. Senior leadership would have a minimum number of aggregated results scores and a small number of performance (leading indicator) aggregated scores that would be carefully tied to the cascading performance scorecards. There would be no need for complicated “dashboards” or long lists of lagging indicators.
Using Sustainability Metrics in Reporting: Addressing Investors’ Need for Information on Risk Management
It is often assumed that investors are interested primarily in financial reports. In reality, however, investors also need information on nonfinancial issues in order to confirm that these issues will not threaten the business organization’s financial performance. Sustainability reports provide nonfinancial information that is potentially crucial to investor decisions. To be of value to investors, however, corporate sustainability reports need to address how companies are managing risk. They cannot simply offer nuanced stories about how the company is “doing well by doing good.” Investors need a sustainability disclosure project (SDP), similar to the Carbon Disclosure Project (CDP).7 The CDP scores company strategies related to climate change and reducing greenhouse gas emissions. It would be possible to create a similar sustainability disclosure system using leading indicators and XBRL software. The investment community could use a consensus performance taxonomy to understand
how well business operations are addressing the operational risks disclosed in reports such as the United States Securities and Exchange Commission’s Forms 10-K and 20-F. It should be noted that an XBRL taxonomy for corporate social responsibility has already been developed.8 If a particular company is not publicly traded, investors could use ISO 31000 (an international standard on risk management) to identify and address the company’s operational, reputational, and regulatory risks. In some cases, the company may already be reporting information on these risks to a supply-chain manager (customer) or through insurance-related disclosures. Leading indicators are particularly valuable in this context beTo score well under a leadingcause they are designed indicator-driven SDP, an to address future activorganization would have to pursue ity—which by definiopportunities to improve its risk tion means helping profile. to manage risk going forward. To score well under a leading-indicator-driven SDP, an organization would have to pursue opportunities to improve its risk profile. Indicators could easily be tied to financial results. For each financial result, XBRL software can be used to describe the leading and lagging indicators responsible for managing risk. Performance would be supported by independently audited scores for all the leading and lagging indicators, as discussed in this column. Using an XBRL-based taxonomy, analysts would be able to drill down or “slice and dice” the supporting data to see how the enterprise is performing. Management could do the same during the course of the year, while also using the information to manage risks and deliver financial results. Sustainability award programs could be based entirely on transparent information obtained from these XBRL files. Contrary to what some might
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think, this would not limit the focus of such programs. It would simply provide them with transparent information and a means of defending the scores that are given to participating companies.
plish the next step, maybe we just need to make peace with the elephant in the room!
1. See http://www.gemi.org/metricsnavigator/. 2. For more on business excellence frameworks and how they relate to sustainability programs, see: Pojasek, R. B. (2009, Spring). Quality toolbox: Sustainability reports: An alternative view. Environmental Quality Management, 18(3), 85–92. Pojasek, R. B. (2008, Autumn). Quality toolbox: Framing your lean-to-green effort. Environmental Quality Management, 18(1), 85–93. Pojasek, R. B. (2007, Winter). Quality toolbox: A framework for business sustainability. Environmental Quality Management, 17(2), 81–88. 3. For more on leading indicators, see: Pojasek, R. B. (2009, Winter). Quality toolbox: Sustainability performance: Addressing the now with attention to the future. Environmental Quality Management, 19(2), 77–83. Pojasek, R. B. (2009, Summer). Quality toolbox: Using leading indicators to drive sustainability performance. Environmental Quality Management, 18(4), 87–93. Pojasek, R. B. (2009, Spring). Quality toolbox: Sustainability reports: An alternative view. Environmental Quality Management, 18(3), 85–92. 4. See Pojasek, R. B. (2009, Spring). Quality toolbox: Sustainability reports: An alternative view. Environmental Quality Management, 18(3), 85–92. 5. For more information, see the Balanced Scorecard Institute Web site at http://www.balancedscorecard.org/bscresources/ aboutthebalancedscorecard/tabid/55/default.aspx. 6. Chang, R. Y., & Morgan, M. W. (2000). Performance scorecards: Measuring the right things in the real world. San Francisco: Jossey-Bass; p. xxi. See also Richard Chang Associates, Inc., Introduction to performance scorecards, at http://www.richardchangassociates .com/pdfs/los_intro.pdf. 7. For more information on the Carbon Disclosure Project, see https://www.cdproject.net/en-US/Pages/HomePage.aspx. 8. For more information on this taxonomy, see http://xbrl .org/Taxonomy/rsc/RSC-XBRL-Summary.htm. 9. See, for example, Eccles, R. G., & Krzus, M. P. (2010). One report: Integrated reporting for a sustainable strategy. Hoboken, NJ: Wiley.
Making Peace With the Elephant
Performance frameworks and leading indicators have become important tools for business organizations. Companies that already use these approaches—and a large number do—will most likely begin requiring their sustainability and corporate responsibility programs to adapt these tools and use them to improve their performance in the future. Sustainability professionals ignore the elephant at their peril. Investors may not yet fully appreciate how performance frameworks can help companies address operational risks. Investor groups generally are familiar with using these frameworks in the context of national business excellence award programs but often do not understand how they can serve as the basis for a “forward-looking” analysis of companies. Just as investors have embraced the CDP rating system, however, they would likely embrace SDP ratings that address operational risk management and its impact on financial performance. Performance frameworks and leading indicators could also provide the key to more integrated corporate reporting. For the past several years, many commentators have argued that companies should adopt an integrated approach that uses one report to cover both financial and nonfinancial information in a single place.9 Such a unified approach clearly is more feasible with performance frameworks. All the elements are in place for effective use of this alternative metrics approach. To accom-
Robert B. Pojasek, PhD, leads the sustainability consulting practice at Capaccio Environmental Engineering, Inc., in Marlborough, Massachusetts. He is currently serving as the chair of the board of governors of the Corporate Responsibility Officers Association. Dr. Pojasek has developed the “Five Basics of Sustainability,” which are the focus of his consulting practice and his popular distance learning course, “Strategies for Sustainability Management.” He received the 2008 Petra T. Shattuck Excellence in Teaching Award from Harvard University. You can reach Dr. Pojasek by telephone at 508-9700033, extension 137, or by e-mail at firstname.lastname@example.org.
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