The term "value chain" was originally used by Michael Porter in his 1985 book "Competitive Advantage: Creating and Sustaining Superior Performance." Porter contends that an organization is more than a random compilation of machinery, equipment, people and money; rather, the organization's ability to perform particular activities and to manage the linkages between these activities is the very source of competitive advantage.
When we apply Porter's theory within the context of sustainability, a new and fundamentally valuable conversation begins.
Examining the impacts
Where along an organization's value chain do the potentially positive and negative environmental, social and governance impacts occur? What are the consequences of these impacts, who should manage them, and how should they be managed? BrownFlynn refers to this process as impact mapping, as it prompts conversations that ultimately help an organization answer these important questions while visualizing how sustainability topics affect its value chain.
Impact mapping is an essential step as companies begin to undertake ESG "materiality assessments." The process can shed light on stakeholder concerns, business continuity or risk management issues. The release of the Global Reporting Initiative G4 Guidelines is a key driver for employing this type of process. GRI's new definition of boundary, Aspect Boundary, asks companies to describe where impacts occur for each material aspect.
Specific GRI disclosures encourage companies to develop a greater understanding of their sustainability value chain. For example, G4-20 and G4-21 ask that organizations report locations (such as particular entities or geographic regions) of material topics. As a result, companies look beyond directly controlled operations to develop a more holistic view of their impacts.
With the first season of GRI G4 reporting behind us, it is interesting to notice the benefits that companies gain when putting impact mapping into practice. We have observed six key benefits through our experience with impact mapping.
1. Perspective: Impact mapping enables companies to view their value chain in a new way, which widens their perspective and often highlights impacts that previously may have been overlooked. For example, Claire Castleman, sustainability analyst at Eaton Corporation, described that impact mapping "helped us identify where we have sustainability impacts upstream and downstream. It was beneficial to get clarity about who is involved in the value chain. It was also useful to consolidate information from various parts of the value chain to have one clear description of our sustainability impacts." By understanding the various ways companies affect their stakeholders and the community at large, companies such as Eaton can begin to prioritize their sustainability efforts where their risks and opportunities are the greatest.
2. Identification: Impact mapping often reveals management gaps in unexpected areas. Traditionally, companies divide their value chain into business units. The focus is often product- or service-based, considering the associated suppliers, customers, product or service uses, and lifecycle assessments. Beyond that, it is critical to identify impacts by region as well, as geographic diversity affects a company's influence. For example, one of our global manufacturing clients looked at its current operations' locations and where it was considering expanding its presence. Through this lens, it was able to identify risks, opportunities and impacts associated with specific regions. One sustainability topic is often more or less significant in different locations and identifying that is critical to determining boundary for particular metrics. A company also may uncover material topics unique to each region and can explore the significance based on presence, impact and future plans.
3. Precision: Rather than listing broad sustainability topics, Impact mapping enables companies to describe exactly where in the value chain the sustainability topics are addressed or need to be addressed. For example, the same global manufacturing client mentioned above recently catalogued all of its suppliers by spend. Together, we were able to identify the major categories of supplies/services being procured and their transportation mode. As a result, we uncovered the most significant impacts and where they can be better managed in the supply chain. This deeper understanding enabled the client to execute management strategies in a more precise manner.
4. Engagement: Impact mapping engages internal and external stakeholders in conversations about their impacts and how their work affects the "big picture" of the organization. By engaging stakeholders involved in and affected by different activities in the value chain, the company builds a deeper understanding of the significance of certain impacts, risks and opportunities. It's nearly impossible for leaders to know every facet of the business at a detailed level, so engaging those closest to the work and outcomes helps to put things in context. An added benefit of stakeholder engagement is that employees get a voice in the business, strengthening internal relationships and surfacing great ideas for sustainable developments. One transportation supplier told a client of ours that if instead of issuing RFPs that desire the use of carbon natural gas in the transportation of its products, it required it, that would help build out the U.S. CNG infrastructure, thereby helping our client to continue to reduce its carbon footprint.
5. Actionability: Based upon where the impact occurs in the companies' value chain, impact mapping illuminates how difficult or easy it will be to address an issue by understanding how deep in the value chain the issue is occurring and what controls they have to take action. For example, if a residential real estate company discovers that tenants buying local goods have more of an impact on the local economy than hiring local contractors during construction, then establishing a program that encourages residents to purchase locally would be more effective than training development staff on how to hire local contractors. The real estate provider becomes aware of where its time and investment in sustainability will have the most influence.
6. Planning: Impact mapping helps companies anticipate and plan for future risks and opportunities. For example, our global manufacturing client's impact map shed light on sustainability topics that were not receiving much attention, and sparked discussions about further research, greater focus, new partnerships and increased budget. As companies develop their materiality assessments, this widened perspective of company impacts will ensure that sustainability efforts are prioritized according to where they have the greatest impact.
To practice what we preach, BrownFlynn is conducting our own materiality assessment. As a part of the impact mapping process, we began with interviews with our senior leadership to identify where our impacts occur. We are mapping the management of those impacts to our organizational objectives and beginning the prioritization process. In the near future, we will identify and interview external stakeholders to deepen our understanding of how our business affects our stakeholders. We look forward to sharing our key findings when we release our sustainability report next year.
Top image of water drop impact by Vlue via Shutterstock.