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The Emperor's Greenwashed Clothes

Posted by Ory Zik on Aug 10, 2015 12:10:47 PM

How to convert corporate sustainability reports from a poorly defined marketing exercise to a source of real actionable data

The number of companies reporting corporate social responsibility (CSR) figures to the non- profit Global Reporting Initiative (GRI) grew from 44 in 2000 to 7,795 in 2014. This nearly 200-fold increase reflects great progress in awareness of the importance of sustainability, but what can we learn about their actual performance?

To answer this, the Lux Research Data Analytics team set out to create a quantitative benchmark for sustainability performance. We downloaded 15,000 sustainability reports from GRIs’ website, purchased the CDP database, and used the information to analyze companies’ resource productivity across 25 sectors (such as Automobiles, Apparel, Food Retailing, Food & Beverage, Semiconductors, Materials, etc.).

Unfortunately, for the cause of corporate sustainability, our main conclusion is simply that reporting needs to change dramatically for any real insight to be drawn. Right now, managers that want to improve performance – or impact investors that would like to invest in sustainable companies – don’t have any meaningful KPIs.

Here are the 5 problems executives face currently, and 5 things that can be done to fix the situation.

Identifying problems

Executives that want to make use of sustainability reports find their ability to make decisions hampered for several reasons:

  1. Unfocused definition. Today, sustainability encompasses environmental, social and governance factors, and even in some organizations, health, safety, and compliance. However important they all may be, inserting all these complex, non-financial issues in one bucket – called sustainability – makes it harder to draw concrete conclusions about any of them. A focus on each separately would allow leaders to make clearer decisions. Our science-based approach solves for resource productivity.
  2. Lack of business unit granularity. When diversified companies report only aggregated data across their entire operation, it becomes nearly impossible to draw meaningful comparisons. For example, we could try to compare beverage giants Nestle and Coke – but Nestle's Gerber baby food and Coke's Dasani bottled water are very different products. When all these products are represented by one aggregate value, insight is wiped out. Companies need to report business unit and even product-level data to build meaningful claims.
  3. Poor data quality. Our analysis made it evident that some companies report numbers without careful review, allowing mistakes to creep in. We were surprised to find unit conversion errors. Greater discipline and data quality control are required.
  4. No financial normalization. Sustainability reporting needs to include financial performance so that observers can normalize results by the operational scale of the business: revenue, products, production index, EBITDA, etc. Companies compare their CSR results to past performance, but acquisitions, divestments, and revenue growth or decline, may be the driving factors behind the change. If a company reports that its carbon footprint declined, but the drop is simply because it sold off a business unit, this claim misrepresents its resource productivity.
  5. Need for geospatial calibration. Electricity from coal and hydro are very different; water in Boston and water in Albuquerque are very different. We need to take this difference into account to adequately assess resource impact, but most methods today do so poorly. Take, for example, the U.S. electricity grid – the current state of the art (called eGRID) – divides the U.S. grid into only 24 regions and provides an average for electricity generated in those regions. In contrast, Lux models represent about 20,000 power plants – the quality of information needed for meaningful sustainability decisions.

Moving to solutions

For corporate sustainability to be set on a path to more meaningful KPIs, companies working on reporting need to adopt the following principles:

  1. Use resource normalization. Current reports offer many different metrics but without inter-resource comparison. If water consumption increased but electricity consumption decreased, is the net effect positive or negative? What if electricity consumption decreased and so did Renewable Energy Credits (RECs)? We need a unified resource language with a consistent normalization methodology across resources, but there is no standard; and the science behind current attempts is very lean.
  2. Take a system approach. Companies often only measure a small part of their operation, and offer (or have) only poor visibility to the upstream (suppliers) and downstream (consumers). For example, Coke is proud of their < 3 liter-water use ratio, but that figure only counts what happens within its four walls. Considering the entire supply chain (growing sugar beets, etc.) brings the ratio to over 35! Obtaining supply chain data is a huge effort, but as Coke's example shows, this is often the most important place to boost resource productivity (i.e., the 32 L used outside its walls rather than the 3 used within them).
  3. Share best practices. Companies that already implemented solutions (whether fleet change, distributed energy, water reclamation, building insulation, or many others) have valuable case study data that can benefit both vendors and buyers. One of the goals of NGO’s and governments can be to build a data-sharing repository with project implementation data for the benefit of companies that want to implement resource-saving projects.
  4. Embrace innovation. Many organizations already run out of simple projects: “We've replaced the light bulbs with LEDs, changed the boilers, fixed the leaking pipes and gained 20% cost savings – now what?” New technologies, new materials, new processes, new business models, and essentially new ways to capture brand value are the path to ongoing sustainability performance. Nike’s Flyknit is a recently popular example for innovative system thinking that led to a product that uses significantly less material, while enhancing brand value and sales.
  5. Create better tools. The current tools like life-cycle analysis (LCA) are too expensive and ineffective. A recent PepsiCo case study, published in the Journal of Industrial Ecology, explains how their KPI analysis “saved PepsiCo an estimated 200 years full-time equivalent employee time, or alternatively US $30 million in LCA consultant fees had the LCAs of the 3,337 SKUs been carried out by traditional methods.” We need to challenge sustainability consulting like Zillow challenged real estate agents and Expedia challenged travel agents.

Move from data to action

Information is only as good as the decisions that it drives. Reporting that does not lead to crisp business benefits will result in reporting fatigue. However, from the corporate perspective, improving sustainability reporting can improve resource productivity and benefit the top and bottom line, not just their firm's public image. While companies may have very good reasons – from legitimate concerns about confidentiality to lack of good tools – for their inadequate performance to date, real science-driven benchmarking, best practices sharing, and an embrace of innovation can help make sustainability efforts real concrete contributors to corporate value.

 

For more on Lux’s research on data analytics, contact Ory at ory.zik@luxresearchinc.com.