20 issues on building a sustainable business

20 issues on building a sustainable business

Business briefing series

The Institute of Chartered Accountants in Australia (the Institute) is the professional body representing Chartered Accountants in Australia. Our reach extends to around 70,000 of today’s and tomorrow’s business leaders, representing approximately 57,000 Chartered Accountants and 13,000 of Australia’s best accounting graduates currently enrolled in our world-class Chartered Accountants postgraduate program.

Our members work in diverse roles across commerce and industry, academia, government and public practice throughout Australia and in 108 countries around the world.

We aim to lead the profession by delivering visionary leadership projects, setting the benchmark for the highest ethical, professional and educational standards, and enhancing and promoting the Chartered Accountants brand. We also represent the interests of members to government, industry, academia and the general public by engaging our membership and local and international bodies on public policy, government legislation and regulatory issues.

The Institute can leverage advantages for its members as a founding member of the Global Accounting Alliance (GAA), an international accounting coalition formed by the world’s premier accounting bodies. With a membership of over 800,000, the GAA promotes quality professional services, shares information, and collaborates on international accounting issues.

Established in 1928, the Institute is constituted by Royal Charter. For further information about the Institute visit charteredaccountants.com.au

Disclaimer The information in this briefing paper is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The Institute of Chartered Accountants in Australia and KPMG expressly disclaim all liability for any loss or damage arising from reliance upon any information contained in this briefing paper.

Copyright© The Institute of Chartered Accountants in Australia. All rights reserved. This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, it may only be reproduced for internal business purposes, and may not otherwise be copied, adapted, amended, published, communicated or otherwise made available to third parties, in whole or in part, in any form or by any means, without the prior written consent of The Institute of Chartered Accountants in Australia and KPMG.

© 2011 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

ABN 50 084 642 571 The Institute of Chartered Accountants in Australia Incorporated in Australia Members’ Liability Limited. 1011-01ABN: 51 194 660 183 KPMG

KPMG is one of the world’s leading professional services networks. KPMG’s Climate Change & Sustainability Services group works with clients to respond to sustainability and climate change issues in order to manage risk, create value and achieve a competitive advantage.

Part of KPMG’s Global Climate Change and Sustainability Services network, our practice provides services to leading businesses and public sector organisations across the globe.

Our multi-disciplinary teams with backgrounds in business risk, environment, social studies, compliance, finance, tax and audit mean we bring a holistic and integrated approach to help our clients respond to the complex business challenges and opportunities arising from climate change and sustainability.

Services include:• Sustainability Advisory. Assisting organisations to create

value and manage risk through appropriate sustainability strategies, programs and reporting.

• Climate Change Advisory. Helping organisations prepare for, and perform successfully in, a low-carbon economy.

• Water Advisory. Working with governments, water corporations and businesses to respond to the challenges of water scarcity. We assist governments execute their water reform agendas and identify and manage public and private investment in water projects.

• Assurance services – sustainability reporting and greenhouse gas emissions. Providing assurance services to enhance the credibility of reported information associated with sustainability practices and greenhouse gas emissions. We combine the rigour of the financial audit approach with a deep understanding of sustainability and greenhouse gas data management and reporting issues.

For more information visit kpmg.com.auAll rights reserved.

All information is current as at October 2011

First published November 2011

This communication provides general information which is current as at the time of production.

Published by: The Institute of Chartered Accountants in Australia Address: 33 Erskine Street, Sydney, NSW 2000

KPMG Address: 10 Shelley Street, Sydney NSW 2000

20 issues on building a sustainable business First edition

National Library of Australia Cataloguing-in-Publication entry

20 issues on building a sustainable business /Institute of Chartered Accountants in Australia, KPMG.

ISBN: 978-1-921245-89-3 (pbk.)

Business enterprises. Success in business.

Institute of Chartered Accountants in Australia. Klynveld Peat Marwick Goerdeler.

Business briefing series.

338.7

Business briefing series: 20 issues on building a sustainable business 3

Business briefing series20 issues on building a sustainable business

While many businesses are committed to the principles of building a sustainable business, many find it difficult to implement practical strategies that will enable this.

At the Institute, accounting for environmental, social and governance (ESG) factors impacting an organisation has been on our agenda for some time, with the advent of Broad-Based Business Reporting (BBBR). A recent leadership paper, integrating sustainability into business practices: a case study approach, highlighted five case studies of Australian and New Zealand organisations that have implemented sustainable business practices.

In this leadership paper, Business briefing: 20 issues on building a sustainable business, we have partnered with KPMG to take a strategic, big-picture look at how businesses can address ESG risks and practically incorporate sustainability into their business plan.

The paper offers guidance in a number of business areas, including strategy, internal and external buy-in, risk management and reporting principles.

This is the fifth publication in our successful Business Briefing Series, which provide guidance for business leaders and financial professionals on a range of issues relevant to contemporary businesses.

As the profile of sustainability evolves, I hope this publication sheds some light for you on how to make a sustainable business your reality.

Rachel Grimes FCA President Institute of Chartered Accountants in Australia

4 Business briefing series: 20 issues on building a sustainable business4


Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Build sustainability into your strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1. Understanding industry externalities and stakeholders’ expectations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2. Mapping business risks and opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Assessing competition and defining positioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

4. Integrating sustainability into strategy and strategic objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

5. Developing the business case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Implement the strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

6. Leading from the top. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

7. Building internal awareness and knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

8. Developing a cultural change process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

9. Involving external stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

10. Developing relevant sustainability metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Embed sustainability into core business processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

11. Incorporating sustainability within the risk management framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

12. Understanding product development and customer attitudes and behaviours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

13. Promoting sustainable procurement and supply chain management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

14. Understanding the investment decision-making process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

15. Measuring performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

16. Ongoing monitoring of externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Create value through reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

17. Determining your audience and objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

18. Developing reporting principles and guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

19. Moving to integrated reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

20. Identifying assurance needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Resources and further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Contact details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Back cover

Contents

Business briefing series: 20 issues on building a sustainable business6

Sustainability is a business caseSustainability has transitioned from an environmental issue to a serious business consideration. Industry leaders have already anticipated the management implications of this shift and are embedding sustainability throughout the operations of their business and strategic goals. However, running a sustainable business appears challenging to corporations across Australia, many of which require a new approach to remain competitive in a fast-changing world.

The World Commission on Environment and Development has defined sustainability as ‘economic development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs’.1 Sustainability issues can potentially affect most elements of business strategy, including the price and availability of capital, competitive relativities, operating costs, risk management, process improvement, innovation, consumer preferences, supply chain management and regulatory compliance.

There is growing official and public expectation that organisations will conduct their business in a sustainable manner in order to retain public trust and their licence to operate. Beyond that, however, there is a realisation across all industry sectors that an organisation’s sustainability poses significant risks and opportunities to its future profitability.

This position is reflected in the views of business leaders, according to a 2010 UN Global Compact, Accenture CEO Study.2 It reported that 96% of the business and civic leaders polled thought that sustainability issues should be fully integrated into strategies and operations, up from 72% in 2007. Over 90% of CEOs surveyed believed that sustainability matters would be critical to the success of their businesses.

Sustainability has entered the mainstream of corporate life, according to a 2010 study by KPMG and the Economist Intelligence Unit.3 Nearly two-thirds of the companies surveyed had already adopted a strategy for corporate sustainability, up from just over half in February 2008. A further 11% were currently developing a sustainability strategy.

Sustainability issues are reshaping the rules of business competition, driving new business models, transforming industry structures, redefining markets, and creating new risks and opportunities. How businesses choose to respond to and integrate sustainability with core business strategy will underpin their success in achieving a long-term competitive advantage.

This paper identifies 20 key issues that are relevant to implementing a new strategic approach to sustainability in a corporate context. These are discussed under four headings:

• Build sustainability into your strategy

• Implement the strategy

• Embed sustainability into core business processes

• Create value through reporting.

Executive summary

1. Oxford: Oxford University Press, Our Common Future: World Commission on Environment and Development, 1987.

2. United Nations Global Compact, Accenture CEO Study, A New Era of Sustainability, 2010.

3. KPMG in cooperation with the Economist Intelligence Unit, Corporate Sustainability: A Progress Report, November 2010.

Building a sustainable

business

To build a sustainable

business, start with the strategy

Implement the

strategy

Create value through

reporting

Embed sustainability

into core business

processes


Build sustainability into your strategyTo build a sustainable business, sustainability related issues, developed in consideration of externalities and stakeholder concerns and expectations, should be appropriately considered and embedded in the business strategy. You may also consider trade-offs in order to optimise social, environmental and business performance for long-term value creation.

The resulting strategy will identify and respond to both potential limits to growth and business opportunities, such as access to new products or new markets, and apply across the entire organisation. Performance measurement should be aligned with corporate level objectives and resonate with management’s business priorities.

Currently, some companies have developed separate standalone sustainability strategies, while others have integrated sustainability considerations into core business strategy. As integrated strategies are becoming more commonplace, sustainability is increasingly acknowledged as a critical component of good governance, risk management and a source of competitive advantage. The issues are presented in the context of an integrated strategy, but are equally relevant for standalone sustainability strategies.

1. Understanding industry externalities and stakeholders’ expectations

Isyourorganisationexposedtoindustry-specificregulatorychanges?

Whatphysical,social,environmental,technologicalandeconomicfactorsmayimpactyouroperatingenvironment?

Doesyourbusinessstrategyincorporatechangingstakeholderexpectations?

Understanding the broader context in which your organisation operates is a critical first step in incorporating sustainability considerations into business strategy. This requires taking steps to capture, understand and assess the unique sustainability-related factors impacting an organisation’s industry and geography, such as how stakeholder expectations, changing societal tastes

and needs, and demographic shifts may impact the assumptions behind business strategies.

Each industry faces its own unique environmental and social challenges which may affect business models, technological innovation and business outlook. It is important that a strategy is formulated to capture the various risks and opportunities, with particular attention to physical, environmental, technological, social, regulatory and economic factors that will impact the operating environment of the organisation. It also requires recognising and understanding the interconnections between industries, where a disruption in one may cascade to other industries with random consequences (e.g. fires in Russia may result in export embargoes, which may push up grain prices around the globe or lead to an increased demand for corn-based bio-fuels, which may influence affordability of basic food produce).


Example: Sustainability challenges facing the airline industry Theairlineindustryishighlycompetitiveandcharacterisedbythinmargins,volatileyields,price-sensitivecustomersandtechnologicallimitations(e.g.relianceonoil-basedfuels).Theseandotherfactorsimpactbusinesssustainabilityandsustainabilityperformance.Othersustainabilitychallengesmayinclude:

• Managingandreducinggreenhousegasemissionswithintheconstraintsoflimitedabatementopportunities

• Managingtheeconomicimpactofemissionconstraintsindifferentglobalmarkets

• Monopolisticbehavioursinpartsofthevaluechain(e.g.airportmanagers)

• Growthconstraintsashubairportsreachcapacity

• Poorlabourflexibilityandproductivityincertainmarkets

• Airlinesafetyandsecurityissues.

Stakeholder engagement involves obtaining input into key strategies and objectives, which will ensure that organisations understand and respond to external input when developing strategy.

In this context, stakeholders can include shareholders, investors, financiers, employees, customers, suppliers, governments, regulators, NGOs, academics, and communities with strong links to a particular enterprise. The table below summarises issues facing the financial services industry and relevant stakeholder groups.

Seeking input from relevant employees, as critical stakeholders, during strategy development allows their unique understanding of risks and opportunities to be captured. In addition, early engagement will strengthen internal ownership of the strategy during implementation.

Build sustainability into your strategy (continued)

Issues facing the financial services industry and relevant stakeholder groups

Material issues Relevant stakeholder groups

Bank fees and charges, and interest rate decisions Customers, governments

Sustainable and responsible investment, lending, products and screening

Environmental social governance (ESG) and mainstream investment analysts, employees, NGOs, customers, academics

Customer service Customers, ESG and investment analysts, employees

Equal opportunity Employees, ESG and investment analysts

Job security, talent retention Employees, ESG and investment analysts

Financial inclusion and global financial crisis Customers, ESG and investment analysts

Climate change Community, ESG and investment analysts, customers, employees, NGOs, academics

Governance and compliance ESG and investment analysts, employees, customers

Economic contribution ESG and investment analysts, employees, community

Safety and security Customers, employees, unions


2. Mapping business risks and opportunities

Whatindustrychallengesandgrowthconstraintsaremostmaterialtoyourorganisation?

Isaprocessinplacetoreviewchangesandassesstheimpactoftheseissuesonstrategy?

Howcanthesechangesbeleveragedtocreateacompetitiveadvantage?

Mapping business risks and opportunities will help relevant linkages and relationships become evident.

Doing this allows you to pull together and summarise the knowledge and ideas developed in earlier phases of strategy formation. At this stage, it is important to make sure that the relevant industry challenges, growth constraints and stakeholder expectations have been properly assessed and included in the process.

The mapping process captures relevant knowledge at a point in time. This process needs to be regularly reviewed because many of the inputs can change as a result of technological, economic and regulatory developments. For example, the risks presented by the introduction of a carbon price in Australia will be intensified during the first year as businesses adapt to the changes and opportunities will increase over

time with regard to abatement activities developed through technological innovation.

Materiality is another issue to consider. Certain sustainability issues will have a larger effect on the performance of the organisation than others, just as certain activities produce more significant sustainability consequences than others. Concentrate on identifying issues that are likely to have the greatest negative or positive impact.

While sustainability challenges vary considerably between organisations and industries, they invariably relate to physical, regulatory or market-driven factors that can limit growth and impact on competitiveness. Limitations can be physically imposed (e.g. water scarcity), regulatory driven (e.g. carbon pricing, emission standards) or a consequence of consumer preference (e.g. demand for greener products).

Identifying and understanding constraints to growth are key challenges and require strategic responses. Crucial for business longevity and competitive advantage is an understanding of tipping points and your organisation’s preparedness to respond to these factors.

Ultimately, with good planning, constraints and limits can be turned into opportunities and competitive advantage.

Example: Mapping the key issues in New Zealand Agribusiness

Highest ranked priority issues for New Zealand agribusiness (on a scale of 1 to 10)

Source: KPMG Agribusiness Agenda 2011

0 2 4 6 8 10

Maintain a robust biosecurity system

Understand global products and eating trends

Ensure practices support ‘clean/green’ image

Effective mechanisms for extension

Build high value solutions with customers

Recognition of importance of governance

Aligned industries with a common goal

Recognise consumer trends around sustainability

Develop brands for global fast moving consumer goods markets

Realise benefits of free trade agreements

KPMGrecentlyconductedasurveyofover80agribusinessindustryleadersinordertounderstandthekeyopportunities,policysettingsandindustryactionsfacingagribusinessinNewZealand.

RecognisingthattheagribusinesssectorshouldbecloselyinvolvedasthekeydriverofNewZealand’sexportearningsinthefuture,thesurveyresultscouldhelpindustrystakeholdersdevelopastrategythatwillcapturethepotentialthatexistsforthesectoringlobalmarkets.Keyissueswererankedbylevelofpriority,andmanyofthoseinthetop10relatetosustainabilityissuessuchasbiodiversityandchangingconsumertrends.



Limits to sustainable

growth

Licencetooperate

Ecoefficiency

Supplychainpressure

Workforceconsiderations

Customerneeds

Regulatorychange

Regulatory change. Sustainabilitystrategyshouldincludeacapacitytotrackandrespondquicklyandeffectivelytorelevantregulatorychanges(e.g.apriceoncarbonemissions,changestoenergyefficiencystandardsorwaterallocations).Whiletherehasbeenconsiderablefocusonchangestoenvironmentalregulations,governmentsarealsoincreasinglyusingregulationtoaddresssocialissues.Anexampleofthisisthefederalgovernment’splantointroduceplainpackagingfortobaccoproductsby1July2012inanefforttoreducesmokingratesandimprovepublichealth.

Eco-efficiency. Thevalueofconstrainedresourcesandtheabilitytomaximiseaccesstothemwillbecomeamajordriverofcompetitiveadvantage.Inmanycases,activitiessuchasimprovingenergyefficiencyorreducingpackagingcanalsoleadtoareductioninoperatingcosts,increasedinnovation,andenhancedbrandimageandregulatorycompliance.

Customer preferences and brand loyalty.Whilethereisonlyanecdotalevidenceofsustainabilityissuesimpactingacustomer’sdecisiontobuyaproduct,thereissignificantevidencethatcustomersmaychoosenot to buyaproductonthebasisofanorganisation’ssustainabilityperformance.AnexampleofthisisthebacklashfacedbyNikeduringthe1990safteraccusationsofusingsweatshopsdrewtheattentionofhumanrightsgroupsandthemedia,promptingcampaignstoboycottproducts.Customerexpectationsneedtoberesearchedandmonitoredastheyevolve.

Licence to operate.Mostorganisationsfunctionunderanimplicitlicencetooperate.Adversedevelopmentsinpublicopinionandgovernmentattitudescancausethelicencetoberemovedorhaveconditionsimposeduponit.Eventsinvolvingoneindustryparticipantcanhaveadverseconsequencesforotherplayers.Forexample,theBPoilspillintheGulfofMexicoin2010resultedintighterregulationoftheglobaloilandgasindustries.

Workforce considerations.Sustainabilityneedstobeconsideredinthecontextofanorganisation’sabilitytoattract,manageandretainqualityemployees.Thiselementmaybeacriticalissueinregardstoemploymentchoices.

Supply chain pressures.Sustainabilityfactorsarebecomingincreasinglyimportantinsupplychainsecurityandperformance,andareinfluencingconsumerchoices.Issuessuchassustainablesourcingofrawmaterials,carbonandwaterperformanceandemployeehumanrightsareincreasinglybecomingbrandandreputationissuesfororganisationsandarethereforeattractinggreaterscrutiny.Anexampleofthiswasseenin2010whenGreenpeacetargetedNestlé’sKitKatproductoverconcernsabouttheuseofpalmoilandtheresultingimpactonthehabitatsoforangutans.AviraladvertisingcampaignledtosignificantpressureonNestlé’sbrandandtheproductitself,promptingNestlétoannounceitwouldstopusingingredientsthatmaybesourcedasaresultofrainforestdestruction.

Common risks and opportunities for consideration in a sustainable growth strategy


3. Assessing competition and defining positioning

Howdoyourcompetitorsdefineandimplementsustainability?

Doyoursustainabilityinitiativesplaceyouasanindustryleader?

Howcanyourorganisationbedifferentiatedtogaincompetitiveadvantage?

Analysing your organisation’s peers and competitors is critical in order to define an appropriate strategic positioning for market differentiation. For example, are you seeking to be an industry leader and innovator, a fast follower or a niche player? This analysis provides an understanding of your positioning within your industry and helps to identify how and where your organisation wishes to move in the future.

Integrating sustainability risks and opportunities within business strategies is an opportunity for individual organisations to positively differentiate themselves from their competitors. Organisations can gain positional advantages (both in terms of cost and brand reputation) by establishing themselves as industry leaders in sustainability matters. Consumers respond positively to perceptions that organisations conduct themselves in a sustainable and ethical manner.

As noted in Issue 2, how an organisation tackles the risks and challenges posed by management of sustainability issues will provide the greatest opportunity for differentiation from competitors and for the broader positioning of the organisation.

Sustainability issues can directly impact competitive positions within industries. For example, in one high-emission manufacturing industry, the leading organisation sources and manufactures most of its products within Australia, while its major competitor sources material offshore. Consequently, the imposition of a carbon price in Australia is likely to impact their relative competitive positions.

4. Integrating sustainability into strategy and strategic objectives

Isyoursustainabilitystrategylinkedtocorebusinessobjectives?

Whatpotentialintangiblebenefitscouldinvestmentinsustainabilitydeliver?

Doesyourorganisationhaveresiliencetosustainabilityshocks?

An effective sustainability strategy should focus on delivering core business objectives and creating business value in terms of cost reduction, revenue growth and enhanced brand value, or any combination of these.

One of the challenges is balancing short- and long-term business needs. A popular lens for sustainability investment is the ‘J curve’ (see below). This involves initial investment to deliver longer-term benefits for the organisation. At times, this investment may need to be not only ahead of the market but ahead of regulation in order to maximise the competitive benefit. Indeed, a common challenge in investment approval is the lack of recognition of intangible benefits, such as reputation and improved customer loyalty, within cost-benefit and payback analyses.

The development of an effective sustainability strategy will involve certain business performance trade-offs, and numerous considerations must be taken into account to determine how to best optimise the situation. A saving in energy efficiency that in turn increases waste may not necessarily be considered sustainable. Decisions also need to make commercial sense. Overall, strategy formation is about optimising the balance.

Sustainability investment returns over time

Ret

urns

0Time



Trade-offs: The Qantas experience‘Managingenvironmentalimpacts(andothersustainabilitytargetareas)isabalancingact.Actionstomitigateoneconsequentlymayadverselyaffectanother.Forexample,theGroupiswashingmoreaircrafttoreducedragtoimprovefuelefficiency.Whilefuelconsumptionisreduced,waterconsumptionisincreased.Anotherexampleisthatthemostfuelefficientflightpathmayreducegreenhousegasemissionsbutmayincreasethenumberofpeopleexposedtoaircraftnoise.Insomecases,theGrouphasbeenrequiredtooperateafullynoisecompliantbutlessfuel-efficientflightpathinresponsetolocalcommunityconcerns.Thesetypesoftrade-offsbetweendifferentimpactareascreateadditionalcomplexityinbothsettingenvironmentalimprovementtargetsandinidentifyingimprovementinitiatives.’

Source: Qantas Data Book 2010

Decisions tend to become more difficult as sustainability’s ‘lowest-hanging fruit’ is picked and consumed. Technological innovation, regulatory change and shifts in the economic climate can offer opportunities for sustainability and performance breakthroughs. The ability to identify such opportunities ahead of competitors is becoming a highly desirable competency.

One of the outcomes of integrating sustainability into strategy is that it enables an organisation to develop resilience to sustainability shocks. Sustainable business policies and practices should provide a measure of protection against adverse, unexpected external events by making your organisation capable of responding to shocks and setbacks.4

Once it has been determined to what level sustainability will be integrated into an organisation, it is important to clarify these decisions within the strategy with clear goals and objectives.

Setting sustainability goals and objectivesAfterassessingtheactualandpotentialimplicationsofsustainabilityissuesforyourorganisation,itisimportanttoestablishclearbusinessobjectives.Thiswillincludedefiningwhatsustainabilitymeanstoyourorganisation,giventhattherearemanydifferentdefinitions.

Insettinggoalsandobjectives,yourorganisationneedstoconsiderthescaleofthreatsandopportunities,thepotentialimpactsoncurrentbusinessandgrowthgoals,andpositioninginrelationtocompetitorsaroundtheseissues.

Assuggestedearlier,isolatingsustainabilitywithinonlyonepartofyourorganisationissettoalmostguaranteefailure,asthecostsofsustainabilityprogramswillbeincurredbutmanyofthebenefitswillnotbecaptured.

Sustainabilityshouldbecomeapartofcorebusinessactivities,suchasprocurement,riskmanagement,marketingandproductdevelopment.Thisintegrationneedstobeimplementedacrosstheorganisationbothhierarchicallyandgeographically.

Implementingasustainabilitystrategyandbuildingresilienceintoyourorganisationrequiresprocesschangesandbehaviourchangeatalllevels.Sustainabilityconsiderationscanalsobeintegratedmorebroadly,inareassuchasrecruitment,culturalchangeprograms,partnershipsandalliances.

4. Examples of this can be found in Early warning systems: can more be done to avert economic and financial crises, a leadership paper released by the Institute in February 2011.


5. Developing the business case

Isthereanopportunitytoreducelong-termoperatingcoststhroughimplementingsustainabilitymeasures?

Isthereathreattobrandequitybeyondtheoperationalcontrolofyourorganisationwhichcouldbeminimisedthroughsustainabilityinvestment?

Demonstrating the business value of a sustainability strategy is an essential element of building a sustainable business. When building a business case, there are three key areas of value to consider:

• Reduced operating costs With increasing energy, water and waste costs, reductions in use will not only reduce dependence on scarce resources and greenhouse gas emissions but also impact future operating costs. To give an accurate picture of operating cost reductions, modelling future price increases is essential. For example, DuPont (once named the most polluting company in the world) found it cost less to implement energy-saving measures than it did to buy and burn fuel. As a result, the company estimated that every tonne of carbon it displaced saved it $65.

• New product and market opportunities For many organisations, there is a potential upside in integrating sustainability into business strategy via new products and markets. A striking example of this is General Electric’s ‘Ecomagination’, a business initiative focused on developing green technology. This helped turn the company’s image around following its controversial dumping of toxic chemicals in the Hudson River.

• Brand equity Sustainability draws focus onto both the protection and promotion of an organisation’s brand. You need to be aware of the risks to brand and reputation, particularly around areas where you have reduced control, such as joint ventures, contractors and supply chain if they are not meeting your standards. Appropriate influence should be applied to third parties so that their performance supports your organisation’s reputation.

The introduction of a carbon price in Australia creates further incentive to address these key areas of value as they will be fundamental in mitigating any additional carbon costs faced by businesses directly and throughout their supply chain.

5. Lovins, L. Hunter, The economic case for climate action (March 2010) p 12, www.climateactionproject.com/docs/HL_Economics.pdf


Implement the strategyTo ensure a sustainability strategy is successful, an organisation’s leadership will play a critical role in supporting and driving its implementation.

6. Leading from the top

AretheBoardofDirectorsandseniormanagementactivelyinvolvedincommunicatingthevalueofsustainabilitytotheorganisation?

Arethedriversandoutcomesofyoursustainabilityapproachrelevantandcleartoemployeesandstakeholders?

As with most organisational changes, lasting progress on sustainability is unlikely without strong and focused leadership, preferably starting at the Board level. Many employees welcome sustainability initiatives and are ready to apply them once they see strong leadership on these initiatives.

Strong leaders create both passion and momentum around sustainability issues. To do this, leaders should consider a number of questions:

• What does sustainability mean for our organisation? A clear definition sets the boundaries within which to consider these issues. Sustainability could take on different meanings for different people6

• What are the drivers for sustainability issues to be among the top issues facing the organisation? In other words, why are we doing this? These drivers are likely to include alignment with organisational values, regulatory compliance, meeting of stakeholder expectations, improved operating efficiencies, cost reductions, enhanced competitiveness and increased innovation. It is important to outline opportunities as well as risk mitigation as a key driver for change

• How will sustainability initiatives fit within the existing business strategy? It is critical that the sustainability strategy is integrated into the current and future business strategy from the beginning of the process. Articulating how the strategy will protect and promote current business objectives will help the rest of the organisation, as well as external stakeholders, put the work into context.

• How and when will the change process take place? While the detail of the strategy development and implementation is likely to be articulated by specialist leaders, senior management should outline the overall approach, accountabilities and timeline

• Are support structures in place throughout the organisation? While leading from the top is essential, it is also important to show support for middle management, who can be caught between the demands of the Board and the resistance of employees.

Key leadership success factors• Takeeveryopportunitytodiscuss

• Behaveinawaythatisclearandconsistent

• ‘Livethevalues’andembedsustainabilityintoyourdailylife

• Showsupporttomiddlemanagementandoperationalemployees

• Communicatethestrategyandhighlightresults

• Encourageemployeestochallengethestatusquo,andrewardinnovativethinking.

Board directors and senior management should think about why they are supporting and promoting sustainability and ensure the organisation clearly understands this. Demonstrating value and obtaining buy-in is crucial for securing internal support.

Enabling cultural and business change is an essential part of success and needs to start at the top. This will help ensure the effective integration of sustainability into the business strategy.

6. Examples of different sustainability case studies can be found in Integrating sustainability into business practices: a case study approach, a leadership paper released by the Institute, May 2011.


Demonstrating value and securing internal support for sustainabilityManagementsometimesviewssustainabilityasacomplianceexercise,andadistractionfrommoreimportantactivities.Thisviewcanbechangedbyclearlyaligningsustainabilitystrategywithcorebusinessobjectives.TheSloanManagementReview/BCGstudy7foundastronglinkbetweenanorganisation’sabilitytointegratesustainabilityintooverallbusinessstrategyandboththeeffectivenessoftherelevantsustainabilityinitiativesandtheoverallperformanceoftheenterprise.

Toplacesustainabilityinitspropercontextforemployees,anorganisationshoulddiscussthebusinesschallengesfacingit,andtheroleofsustainabilityinmeetingthesechallenges.BoardsandCEOsshouldclearlydemonstratethevalueofsustainabilitytotheorganisationandthestakeholders,makingitclearthatdecisionsandchoicesthatleadtobettersustainabilityoutcomeswillberewarded.

Assustainabilitybenefitscansometimesbedifficulttomonetiseandreducetoacalculationofreturnoninvestment,gainingbusinessbuy-inandsupportforsustainabilityinitiativescanbechallenging.Earlyconsiderationofalternatewaystomeasurethebenefitsisoftenrequired.

7. Building internal awareness and knowledge

Arethe‘bigpicture’sustainabilityobjectivescleartoemployees?

Iseveryoneintheorganisationawareoftheirroleintheimplementationandongoingsuccessofsustainabilityasacorebusinessfunction?

Whattoolscanyouusetoenhancecommunicationandsupportemployeeawareness?

Successfully integrating sustainability into your organisation requires employees to be aware of the ‘big picture’ of what is trying to be achieved, as well as what they need to do as individuals for implementation to be successful. The key question for business is how to build this awareness in a cost and time efficient manner, using existing programs for employee engagement where they exist.

Arguably, the most critical factor for successfully incorporating sustainability into a business is that each employee clearly understands what they are responsible for and that they acquire the right knowledge to be successful. How this is achieved will vary and is influenced by existing structures for employee engagement and knowledge sharing. Here are some suggested strategies:

• Conduct group-level workshops to explain how the sustainability strategy will affect each business group, and encourage group members to develop their own implementation strategies

• Identify key individuals from each business group to take on the role of sustainability ‘champion’, to identify and communicate what the group is required to do, generate ideas, drive implementation of the strategy within the group, and identify and seek assistance to remedy blockages in the implementation process should they arise

• Create a ‘live’ library of sustainability information relevant to the business which individuals can access and add to

• Start with achievable ‘quick wins’ in the sustainability strategy and ensure they are communicated to employees

• Provide access to knowledge sources such as industry and interest groups, newsletters, magazines and journals.

7. MIT Sloan Management Review and the Boston Consulting Group, Sustainability: The ‘embracers’ seize advantage, 2011


8. Developing a cultural change process

Arethedifferencesbetweenthecurrentcultureandthedesiredcultureclearandunderstoodbyemployees?

Whichareasoftheorganisationarelikelytobemostheavilyimpacted?Whatsupportisinplace?

For many organisations, embedding sustainability into the core function of a business requires a significant shift in the culture. For implementation to be successful, the organisation needs to know where support is required to sustain this change, and to put it in place before the transition.

It is often useful to identify what the current culture of the organisation is and how this compares to the desired culture. This will indicate the degree of support required to facilitate the transition.

A cultural change process is most successful when individuals are well informed and supported. The following are some steps organisations can take to identify what is required:

• Ensure everyone in the organisation understands what is trying to be achieved and what this means for them in their individual roles (as discussed in Issue 7)

• Identify which individuals and groups across the organisation will be more impacted than others. Ensure they and their managers understand what they require to successfully fulfil their roles

• Ensure appropriate mechanisms and supports are in place before people transition to their new roles

• Be prepared to change goals and key performance indicators, retrain individuals, provide access to further education and/or reassign roles

• Link sustainability criteria to incentive schemes

• Bring together groups or individuals who have previously worked independently and will now be required to interact and share information.

9. Involving external stakeholders

Whichkeyexternalstakeholderscanprovideinputtoyourorganisation’ssustainabilityposition?

Haveexternalstakeholdersbeenengagedearlysotheycanunderstandyourorganisation’ssustainabilityperspectives?

Arethereopportunitiesforpartnershipswithkeystakeholderstodrivesustainabilityresults?

Effective stakeholder engagement is essential as your organisation progresses its sustainability agenda. Many organisations focus stakeholder relationships on governments, shareholders and industry bodies, with consumer research also providing input. However, engaging with other groups – such as non-government organisations (NGOs), academics, customers and community groups – can also provide significant input into an organisation’s sustainability position.

Effective engagement requires clearly defining who your organisation’s stakeholders are and their perspectives on sustainability issues and concerns. Engaging with stakeholders early in the strategy development process brings important external input into this process. Early engagement also helps organisations ‘stress test’ their strategy externally, signal to key stakeholders that the organisation is seriously addressing sustainability concerns, and identify partnership opportunities which will support the achievement of outcomes.

Your organisation should also continue to engage with stakeholders during the implementation process. Done effectively, this will create trust and enable the organisation to positively influence outcomes to support sustainability and business objectives.

Ongoing engagement and communication with stakeholders can be achieved via a variety of methods. Some organisations create a stakeholder council, which meets several times a year and is consulted on key organisational initiatives. Other organisations take a more targeted approach by creating close relationships with a select group of stakeholders. For broader engagement, a major channel of communicating with stakeholders is public reporting and disclosure. The quality of reporting is a critical factor in effective stakeholder engagement (see Issue 18).

Implement the strategy (continued)


10. Developing relevant sustainability metrics

Whatarethesustainabilityindicatorsmaterialtoyourorganisation’sstrategicobjectives?

Dotheyaddressmeaningfulkeyperformanceindicators(KPIs),targets,andshortandlong-termoutcomes?

Increasingly, companies understand the value of transparent, accurate and timely reporting of matters material to their business, as both the core of corporate governance and a requirement of the market. But the success and sustainability of an organisation will be influenced by how well it can measure, manage and report its performance against a range of new reporting metrics. Sustainability metrics will become increasingly important in defining the value of an organisation and providing indicators of long-term growth potential.

Further, your organisation’s strategy should reflect issues material to the organisation and its stakeholders. Measuring sustainability performance against strategic objectives and benchmarks is essential to ensure sustainability-related initiatives retain their credibility.

The challenge is to translate strategic goals into meaningful KPIs and targets, and achieve the right balance between long-term performance (required to deliver sustainability outcomes) and short-term performance pressures.

Organisations should avoid wholesale adoption of indicators specified in sustainability reporting guidelines without first mapping those indicators against identified material issues and strategic priorities.

Information systems need to be in place to capture the required information and to measure, monitor and report against KPIs. Key to developing an appropriate and lasting system is the support of your finance team. The team’s involvement in developing and measuring metrics and achievable sustainability targets will help ensure consistency of data management and reporting, and in the long term help with the transition to integrated reporting (see Issue 19).

Example: Stockland liveability indexLiveabilityisfundamentaltothelong-termsustainabilityofresidentialcommunitiesdeveloper,Stockland’s,business.Stocklandisdesigningitsownliveabilityindextobetterunderstand,benchmarkandmeasureliveabilityintheplanninganddevelopmentofitsresidentialcommunities.ThesustainabilityandliveabilityofitscommunitieshasalwaysbeenatoppriorityandakeystrategicobjectiveofStockland;however,priortodevelopingliveabilitymetricsitwasdifficulttoquantifyandobjectivelymanageliveabilitywithinacommunity.

Stocklandrecognisedthatenhancingtheliveabilityofitscommunitieswasbothakeysustainabilityinitiativeandakeybusinesspriority.StocklandManagingDirectorMatthewQuinntoldarecentSustainability challenge: business creativity in practiceforumthatinnovativeapproachestosustainabilityandcustomerengagementcandeliverstrongfinancialrewardsforbusinesses.

TheliveabilityindicatorsthatStocklanddevelopedhelptomeasuretheuniquethemesthatcreateliveabilityincommunities.Thisindexwillrevolvearoundsixkeythemes:

• Affordablelivingandworking

• Economicprosperity

• Accessandconnectivity

• Senseofbelongingandidentity

• Wellbeingandhealthyliving

• Governanceandengagement.

Asaresultofdevelopingtheliveabilityindicators,Stocklandwillbebetterplacedtointernallymeasuretheliveabilityofprojects,enhancetheliveabilityofcommunities,andexternallycommunicatetheliveabilityofprojectstoplanningauthorities,customers,andotherkeystakeholders.InadditiontoimprovingtheliveabilityofStocklandcommunities,Stocklandbelievestheindicatorswillprovideacompetitiveadvantageinthemarket.


Embed sustainability into core business processesSustainability considerations touch on many management functions and processes. Organisations should assess the extent to which sustainability risks, opportunities, goals and performance targets need to be reflected within these processes. Failure to adequately review and update processes may result in dysfunctional or sub-optimal decision-making, or a lack of alignment with strategy and commitments.

11. Incorporating sustainability within the risk management framework

Havetheoutputsofstakeholderengagementbeenconsideredintheriskmanagementprocess?

Aretheimpactsofsustainability-relatedrisksunderstoodandquantified?

An organisation’s risk management framework is central to its business. Ensuring that sustainability issues are adequately covered in your organisation’s risk management framework will minimise the potential for sustainability-related risk to impede the achievement of business objectives. It will also provide a formal framework for managing these risks through establishing clear mitigation actions and accountabilities. Common challenges organisations face include:

• Reconciling the enterprise risk map to the identified material sustainability issues In some cases, the risk mapping process may have been carried out without sufficient consideration of sustainability risks. In others, there may be insufficient linkage between the outputs of stakeholder engagement, which is a core mechanism for capturing current and emerging sustainability risks, and the risk management process

• Quantifying the impact of risks associated with brand and reputational damage Some sustainability-related risks fail to become recognised and prioritised because their impacts are not appropriately quantified.

Detailed information will enable your organisation to create a risk profile which can be used to compare elements such as likelihood and size of impact. This will determine the level of threat and guide appropriate actions. Proactive leaders in this space will be able to use the risk management framework to identify opportunities to develop new products and services and enhance market credibility.

12. Understanding product development and customer attitudes and behaviours

Hasyourorganisationundertakenadequateresearchtounderstandcurrentandfuturetrendsandtheirimplications?

Whatfactorsarelikelytodrivechangesinyourindustry?

Aretherefinancialincentivesavailabletosupportnewsustainableproductinnovation?

Individuals’ responses to sustainability issues affect their attitudes and behaviours as customers. Anticipating market transformations and the factors driving them can help your organisation respond more effectively to changes in consumer behaviour and societal norms. With this in mind, leading organisations often engage and collaborate with customers in product development.

It is also important to explore emerging trends and drivers that may impact on product demand. Customer preferences, identified today through engagement, may not provide insight into tomorrow’s demand. For that, deeper research and engagement with industry experts may be beneficial. The example overleaf illustrates the dynamics that impact food demand trends flowing from changing demographics and income levels.

A range of considerations influence purchasing decisions. Care must be taken in teasing out the various factors involved, and in understanding their relative importance and how they interact with each other.


13. Promoting sustainable procurement and supply chain management

Whatelementsofyoursupplychainmaycreateextrariskorlackefficiency?

Haveenvironmental,socialandethicalcriteriabeendeveloped,inadditiontopriceandavailabilitycriteria,inyourpurchasingdecisions?

Canyouleverageyourpositionintheindustrytoinfluenceyoursuppliers’actions?

Major global corporations, such as large retailers Tesco and Walmart, have enjoyed considerable success in getting their suppliers to be ‘greener’ and more sustainable. In 2009, Walmart introduced its Supplier Sustainability Assessment, a brief survey that evaluates the sustainability of suppliers (in terms of energy, climate, material efficiency, natural resource use, people and community), with the intention of developing the first index of a product’s lifecycle impact.8 Walmart’s suppliers are required to develop systems to measure and report the sustainability issues of each product,

which may not have been a consideration previously. While examples like this may pressure an organisation to reduce waste and cut emissions, it may also increase awareness and potentially improve profitability.

ManyAustralianbusinesseshaveundertakenthejourneytowardssustainablebusinesspractices.DetailedexamplescanbefoundintheInstitute’spublication,Integrating sustainability into business practices: a case study approach,availableonourwebsite.

Most organisations lack the ability to leverage supplier contracts that these powerful retailers have, but they can still incorporate sustainability considerations into supply chain decision-making. They can also enter into partnerships with suppliers to drive both sustainability and efficiency. Understanding the sustainability risks that may impact the supply chain and having effective mitigation plans in place, is essential to building supply chain resilience.

8. Walmart Sustainability Index accessed on 17 May, 2011 from http://walmartstores.com/sustainability/9292.aspx

Key consumer attributes and corresponding food product trends

Healthy lifestyle desirability

Income levels/income distribution

Household size decreasing

Emerging consumer profile attributes

Different expectations of ‘food product’ e.g. portion sizes, prepared vs. making from scratch, more competition with take-away

Organic food demand, education seeking, ‘natural‘ food, alternative products to traditional market

Base demographics (age and ethnicity in particular)

New food offerings desired

Trend implications


Technology is enabling ethical choices for consumersOrganisationsareunderincreasingpressurefromconsumerstoensuretheirproductsandservicesareproducedinanethicalandsustainableway,andnewtechnologyandsocialmediaaremakingiteasiertomakethesechoices.Forexample,iPhoneapplicationssuchasShop Ethical!showconsumerstheenvironmentalandsocialrecordofcompaniesbehindcommonbrandsinthesupermarket,allowingthemtomakeinformedchoicesbasedonconsiderationssuchasfoodmiles,palmoiluse,overfishing,childlabour,geneticengineering,multinationalownershipandpackaging.Therearealsoapplicationsthatsuggestalternativeproductsavailable,whichisbasicallyfreemarketingforthemostsustainable.

Integrating sustainability into the procurement process

• How is it done? Organisations should factor sustainability into purchasing decisions and matching the intention to be sustainable with the action

• What criteria would you use? Organisations can use environmental (e.g. lifecycle) or social (e.g. working and living conditions) criteria to decide who to buy goods and services from, in addition to conventional purchasing criteria such as price, availability and value for money

• Key drivers of action: Globalisation of supply chains and increasing scrutiny and awareness from stakeholders (e.g. consumers and specialised NGOs), drive organisations to act in the sustainabillity space.

Six reasons to implement sustainable procurement:1. Corporate reputation

2. Legislation

3. Increased revenue (opening new markets)

4. Stimulant for innovation

5. Reduced risk of conflict with stakeholders

6. Shareholder value.

Putting sustainable procurement into practiceTo facilitate putting sustainable procurement into practice, consider the following questions:

• Strategic level How can sustainable procurement help achieve business goals? What is our ambition – industry leader or fast follower?

• Tactical level What product categories and suppliers should we focus on? How do we collaborate with suppliers?

• Operational level What requirements do we have for product specification, supplier selection, control and monitoring, follow-up, evaluation and implementation?

14. Understanding the investment decision-making process

Aresustainabilityissuesandrisksproperlyevaluatedaspartoftheduediligenceprocess?

Wheretheycanbemeasured,aresustainabilityfactorsincludedinyourvaluationmodels?

There are heightened sustainability risks associated with some of the most critical business decisions an organisation might make, such as mergers and acquisitions, entering a new market overseas, forming a joint venture and making major capital expenditures. Sustainability should therefore be seen as part of the due diligence process. In relation to a potential investment, your organisation could consider, for example:

• How a carbon price could be factored into your organisation’s valuation model

• How constraints and variability of the supply of water impact operations and supply chain

• How human rights and corruption risks apply in an organisation’s country of operations

• How a potential joint venture partner’s sustainability record and alignment of policies and practices align with your organisation’s standards.

Embed sustainability into core business processes (continued)


It is important that due diligence and capital expenditure processes properly incorporate sustainability risks and considerations. In most organisations, actions required to achieve this include:

• Updating procedures and decision-making criteria, and changing documentation for process approvals

• Upskilling the due diligence and capital project appraisal teams to be able to properly identify and evaluate sustainability issues and risks

• Ensuring related governance processes incorporate an assessment of the appropriateness of the consideration and mitigation of sustainability-related risks and issues.

By ensuring sustainability considerations form part of the due diligence process, an organisation will have a broader understanding of the longer term risks arising from any potential investment.

Schematic overview of procurement process

Procurement / Ordering

Mission & Vision Purchasing Function

Supply Policies

Commodities /Segments

Supplier Selection

ContractSupplier Performance Measurement

Level Definition

Strategic level

Long-term impact of purchasing and supply decisions on an organisation’s business; determine mission and vision on purchasing responsibility of top-management

Tactical level

Encompasses the involvement of the purchasing function in decisions affecting product, process and supplier selection; draw directive supply policies for commodities/segments; medium-term impact

Operational level

All activities related to Supplier Selection (product specification, supplier selection), Contracting of supplier and Supplier Performance Measurement (monitoring and evaluation)

Source: KPMG


15. Measuring performance

Canincentiveschemesbeimplementedorupdatedtoaligntokeysustainablebusinessgoals?

Howcanthequalityandreliabilityofsustainability-relatedmetricsbecontinuallyimproved?

Once your organisation has appropriate metrics and targets in place to manage sustainability-related commitments and issues, the main considerations that follow are:

• What are the implications for incentive schemes and systems and how should they be updated to align outcomes with new commitments and targets? Which targets need to be revised to enforce compliance with commitments?

• How does management reporting need to change to incorporate the wider focus on sustainability- related metrics and targets? Is there clarity on which metrics are core? What are the implications for internal assurance over core metrics?

Typically, systems that support the reporting of sustainability measures are less mature than those relevant to financial reporting. Organisations need to understand the quality of information relating to sustainability and develop a roadmap for improving the reliability of information.

The involvement of your organisation’s finance team in identifying sustainable value drivers, related KPIs and measureable targets and outcomes will enhance the credibility of the systems and processes, and the effectiveness of the reporting structure. KPIs and qualitative outcomes must be relevant and material if they are to be aligned with overall strategy and vision.

16. Ongoing monitoring of externalities

Whattools(suchasindustrygroupsorassociations)canbeusedtokeepyourorganisationinformedofrelevantdevelopments?

Canyourorganisationbeinvolvedintheregulatoryprocessandalsomaintainindependence?

Whoisresponsibleformonitoringexternalities?

Regulation, societal attitudes and physical conditions can change rapidly, with significant consequences. While relevant externalities can initially be identified and assessed in developing a strategy, it cannot be assumed that they will remain static and relevant over time. As such, these factors need to be monitored and considered on an ongoing basis.

Two major considerations for organisations when it comes to monitoring are who will be responsible for monitoring and how trusted and up-to-date information can be sourced in a cost-effective way.

Which individual or team is responsible for monitoring will largely depend on the size of your organisation and their ability to commit resources to the task. In larger organisations, dedicated sustainability managers are often assigned this task, with assistance from group-level individuals. In smaller organisations, it is often an individual with a personal and passionate interest in sustainability issues who is best for this role.

When it comes to monitoring factors that have the potential to impact the organisation, ongoing (day-to-day/week-to-week) monitoring is more effective than annual monitoring. Having regular access to information relating to relevant factors will enable your organisation to flag changes and respond in a timely manner, thereby minimising potential impacts.

Embed sustainability into core business processes (continued)


Meaningful internal and external reporting and disclosure of sustainability performance is essential for informing decision-making and appraising how an organisation is tracking against strategy and targets. Reporting must be meaningful and robust to enable effective communication with stakeholders. The development of policies on external sustainability reporting and related matters can also enable your organisation to build capacity and capability to deal with sensitive issues.

Public disclosure of non-financial indicators is becoming an obligation for public companies. In 2008, nearly three-quarters of America’s top 100 companies published corporate responsibility data.9 Eighty per cent of the Global Fortune 250 group of companies now release this kind of information.10 All firms listed on the Johannesburg Stock Exchange are now required to produce an integrated report with details on finance, governance and sustainability. The formation of the International Integrated Reporting Committee (IIRC) demonstrates this trend with an international cross section of leaders from the corporate, investment, accounting, securities, regulatory, academic and standard setting sectors.

Pressures for greater and more precise disclosure in these areas will only increase, including the emergence of proposals to make such disclosure mandatory in several jurisdictions. Increasingly, the credibility of reporting and alignment to strategy is what counts.

Create value through reporting

17. Determining your audience and objectives

Whatkeymessagesareyoutryingtosendby

reportingsustainabilitydata?

Dotheyinformyourstakeholdersofrelevantissues?

With a diverse range of stakeholders, information needs often differ significantly. A detailed understanding of these needs may already have been worked out in the strategy development phase. The emphasis here is to ensure that stakeholder engagement informs the content and channel of communication to your audience.

Management should also be clear about the objectives of reporting. Agreeing on the objectives upfront sets the tone and direction of the report. For example:

• An organisation wanting to report publicly to address strong media criticism over contentious aspects of

its sustainability performance or plans may devote significant effort to articulating its positions and responses in those contentious areas. It may use the report to provide different views on areas of concern. It may also consider how it might commit itself to the highest sustainability standards (see Issue 18)

• An organisation wanting to use the report to demonstrate leadership in sustainability and accountability may devote significant parts of its report to innovative solutions to industry challenges.

A sustainability strategy is about addressing short,

medium and long term risks to an organisation.

Reporting enables an organisation to communicate

which risks the organisation faces and how it is

addressing them. To ensure reporting is effective it

is vital that an organisation understands the audience

it is communicating with.

9. U.S. Corporate Sustainability Reporting Doubles since 2005 Environmental Leader Oct 2008 accessed at: www.environmentalleader.com/2008/10/27/us-corporate-sustainability-reporting-doubles-since-2005)

10. KPMG International Survey on Corporate Responsibility Reporting accessed at: www.kpmg.com.au/Portals/0/KPMG%20Survey%202005_3.pdf


18. Developing reporting principles and guidelines

Whichguidelineswillinformstakeholdersandguidethedevelopmentofyoursustainabilityreport?

Dotheyaddresskeyissues?

Reporting guidelines, such as those from the Global Reporting Initiative (GRI), can provide a good reference point for organisations in terms of principles that can guide development of a sustainability report. The intent of such guidelines is to ensure that reporting is balanced, transparent, complete, accurate and relevant to stakeholders.

Such guidelines also outline common information in which multiple stakeholder groups would be interested, such as:

• Explanation of the strategy and how it takes account of sustainability considerations and stakeholder needs

• Description of management approaches to addressing key issues

• Articulation of the main challenges, conflicts and dilemmas faced in balancing sustainability concerns with other business objectives

• Generic and sector-related performance measures.

Organisations should not treat guidelines as a compliance ‘tick-box’ exercise, but actively consider the appropriateness of disclosures and KPIs for the intended audience against the reporting objectives, in contemplation of relative materiality and for the unique position of the organisation and its strategic priorities and goals.

19. Moving to integrated reporting

Wouldanintegratedreportincreasethestrengthandalignmentofyourorganisation’sstrategy,orrevealweaknesses?

Doesyourorganisationhavethesystemsandprocessesinplacetosupportmovingtointegratedreporting?

Just as sustainability issues are increasingly integrated into strategies, management processes and reporting, there is a trend towards integrated reporting of financial and sustainability performance. Major drivers for this shift include the following:

• There is a growing consensus that annual reporting does not provide sufficient useful information to stakeholders, including the capital markets

• Analysts and investors find it difficult to extract meaningful information from sustainability reports as they often do not effectively explain sustainability in the context of value-creation and competitive advantage

• The embedding of sustainability within core business strategy, risk management and performance appraisal naturally leads to a need to develop a single platform for communicating performance and targets.

‘Integrated Reporting demonstrates the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates.’InternationalIntegratedReportingCommittee(IIRC)

The IIRC was formed in 2010. Its purpose is to develop a globally accepted framework for integrated reporting which considers financial, social, environmental and governance matters in a comprehensive manner, in order to adequately assess the performance and the short, medium and long-term sustainability of an organisation.

Create value through reporting (continued)


The IIRC has released a discussion paper, Towards Integrated Reporting: Communicating Value in the 21st Century, which explains the benefits of reporting on an integrated basis. The responses received from this discussion paper together with the results of a pilot program will lead to the development of an integrated reporting framework.

Organisations looking to adopt an integrated reporting framework need to consider the various reporting frameworks and sector supplements available and adapt one to fit their strategy and sustainability targets, not the other way around. It is important to focus on reporting

information and metrics that are material, relevant and aligned with your organisation’s vision.

Benefits of an integrated report• Increasedcompetitivenessthroughenhanced

understandingofrisksandopportunities

• Increasedconfidenceandtrustamongstakeholdersandenhancedbrandreputationduetotransparencyinreportingalong-termholisticviewofyourorganisation’schallengesandstrategiestoovercomethemsustainably.

Source: International Integrated Reporting Committee

Integrated Reporting (IR) Framework

Supporting the information needs of long term investors

Showing broader and long term consequences of decision-making

Bringing reporting closer to the information used by management

Rebalancing performance metrics away from short term practice

An Integrated Report

PurposeTo reflect the connections between economic,

social, environmental, governance and financial factors and their impact on the long

term performance of a company.

Strategy &

decision-makingEconomic valueSustainable value


Create value through reporting (continued)

20. Identifying assurance needs

Whichelementsneedtobeassuredtoensurecredibility?

Doesinternalaudithavethecapabilitytoassesssustainabilityrelatedissues?

Having an independent expert provide assurance over sustainability information increases the confidence that can be placed on the information for decision-making purposes.

The key considerations concerning assurance should be:

• What should be assured? As for all information used in managing the business, what is assured should be correlated with what is important to management and external stakeholders. The starting point would be strategic priorities over material issues, including measures of progress in these areas

• What should be the role of internal audit function? If sustainability performance and compliance of the organisation with relevant sustainability-related commitments and policies are recognised as important elements of business enterprise risk management, then it follows that internal audit should incorporate sustainability into the audit program. Given that most companies’ internal audit functions do not have experience in sustainability auditing, there would be a need to develop a capability roadmap

• What reporting framework should be applied? Issue 18 deals with reporting principles and guidelines. Those frameworks assist reporters in what and how to report on sustainability issues. Assurance providers should adhere to recognised assurance frameworks that guide the direction and depth of effort, as well as the assurance conclusion and report to management. The International Standard on Assurance Engagements ISAE3000, is a principles-based framework for large scale audits concerned with non-financial data process monitoring.11

11. International Federation of Accountants, www.ifac.org


Resource and further information

Links

The Institute of Chartered Accountants in Austalia www.charteredaccountants.com.au

KPMG www.kpmg.com.au

References

The Institute of Chartered Accountants in Austalia Broad-Based Business Reporting

Early warning systems: can more be done to avert economic and financial crises

Integrating sustainability into business practices: a case study approach

KPMG Capital markets in the dark: an unsustainable state of play

Integrated Reporting: Performance insight through better Business Reporting

KPMG International Corporate Responsibility Reporting Survey 2011.

Business briefing series: 20 issues on building a sustainable businessBusiness briefing series: 20 issues on building a sustainable business28

29Business briefing series: 20 issues on building a sustainable business

Top 20 issues on building a sustainable business checklist

Build sustainability into your strategy Yes No N/a

1. Understanding industry externalities and stakeholders’ expectations

• Is your organisation exposed to industry-specific regulatory changes?

• What physical, social, environmental, technological and economic factors may impact your operating environment?

• Does your business strategy incorporate changing stakeholder expectations?

2. Mapping business risks and opportunities

• What industry challenges and growth constraints are most material to your organisation?

• Is a process in place to review changes and assess the impact of these issues on strategy?

• How can these changes be leveraged to create a competitive advantage?

3. Assessing competition and defining positioning

• How do your competitors define and implement sustainability?

• Do your sustainability initiatives place you as an industry leader?

• How can your organisation be differentiated to gain competitive advantage?

4. Integrating sustainability into strategy and strategic objectives

• Is your sustainability strategy linked to core business objectives?

• What potential intangible benefits could investment in sustainability deliver?

• Does your organisation have resilience to sustainability shocks?

5. Developing the business case

• Is there an opportunity to reduce long-term operating costs through implementing sustainability measures?

• Is there a threat to brand equity beyond the operational control of your organisation which could be minimised through sustainability investment?

Implement the strategy Yes No N/a

6. Leading from the top • Are the Board of Directors and senior management actively involved in communicating the value of sustainability to the organisation?

• Are the drivers and outcomes of your sustainability approach relevant and clear to employees and stakeholders?

7. Building internal awareness and knowledge

• Are the ‘big picture’ sustainability objectives clear to employees?

• Is everyone in the organisation aware of their role in the implementation and ongoing success of sustainability as a core business function?

• What tools can you use to enhance communication and support employee awareness?

8. Developing a cultural change process

• Are the differences between the current culture and the desired culture clear and understood by employees?

• Which areas of the organisation are likely to be most heavily impacted? What support is in place?

9. Involving external stakeholders

• Which key external stakeholders can provide input to your organisation’s sustainability position?

• Have external stakeholders been engaged early so they can understand your organisation’s sustainability perspectives?

• Are there opportunities for partnerships with key stakeholders to drive sustainability results?

10. Developing relevant sustainability metrics

• What are the sustainability indicators material to your organisation’s strategic objectives?

• Do they address meaningful key performance indicators (KPIs), targets, and short and long-term outcomes?

30 Business briefing series: 20 issues on building a sustainable business

Embed sustainability into core business processes Yes No N/a

11. Incorporating sustainability within the risk management framework

• Have the outputs of stakeholder engagement been considered in the risk management process?

• Are the impacts of sustainability-related risks understood and quantified?

12. Understanding product development and customer attitudes and behaviours

• Has your organisation undertaken adequate research to understand current and future trends and their implications?

• What factors are likely to drive changes in your industry?

• Are there financial incentives available to support new sustainable product innovation?

13. Promoting sustainable procurement and supply chain management

• What elements of your supply chain may create extra risk or lack efficiency?

• Have environmental, social and ethical criteria been developed, in addition to price and availability criteria, in your purchasing decisions?

• Can you leverage your position in the industry to influence your suppliers’ actions?

14. Understanding the investment decision-making process

• Are sustainability issues and risks properly evaluated as part of the due diligence process?

• Where they can be measured, are sustainability factors included in your valuation models?

15. Measuring performance • Can incentive schemes be implemented or updated to align to key sustainable business goals?

• How can the quality and reliability of sustainability-related metrics be continually improved?

16. Ongoing monitoring of externalities

• What tools (such as industry groups or associations) can be used to keep your organisation informed of relevant developments?

• Can your organisation be involved in the regulatory process and also maintain independence?

• Who is responsible for monitoring externalities?

Create value through reporting Yes No N/a

17. Determining your audience and objectives

• What key messages are you trying to send by reporting sustainability data?

• Do they inform your stakeholders of relevant issues?

18. Developing reporting principles and guidelines

• Which guidelines will inform stakeholders and guide the development of your sustainability report?

• Do they address key issues?

19. Moving to integrated reporting

• Would an integrated report increase the strength and alignment of your organisation’s strategy, or reveal weaknesses?

• Does your organisation have the systems and processes in place to support moving to integrated reporting?

20. Identifying assurance needs

• Which elements need to be assured to ensure credibility?

• Does internal audit have the capability to assess sustainability related issues?

Top 20 issues (continued)

Contact details

The Institute of Chartered Accountants in Australia

33 Erskine Street, Sydney, NSW 2000

GPO Box 9985, Sydney, NSW 2001

Service 1300 137 322 Phone 02 9290 1344 Fax 02 9262 1512 Email [email protected]

charteredaccountants.com.au

Lee White Executive General Manager – Members

Phone + 61 2 9290 5598 Email [email protected]

KPMG

Adrian King Partner-in-charge, Climate Change & Sustainability Services

Phone +61 3 9288 5680 Email [email protected]

Chi Woo Director, Climate Change & Sustainability Services

Phone +61 2 9295 3916 Email [email protected]

www.kpmg.com.au

20 issues on building a sustainable business

Education