Here's a simplified approach to sustainability goal-setting
This is part 5 of a 6-part series revealing findings from SustainAbility’s recently released report, "Targeting Value," which focuses on how to maximize impact through corporate sustainability goal setting.
"Just because you are splashing in the water does not mean you are swimming." The same can be said for sustainability — just because you are setting corporate environmental and social performance goals does not mean you are a more sustainable business. Companies need to rethink how they set performance targets: Instead of setting more targets, they should set better ones. The benefit will be better buy-in across the business for goals that measurably reduce environmental and social impacts while at the same time creating more business value.
Large, stock-exchange-listed companies often lead the way by setting environmental and social performance targets alongside traditional financial goals such as revenue growth or margin improvement. More companies set goals, measure performance and disclose the results every year, as highlighted in the 2018 State of Green Business Report (SOGB 18) and shown in the figure below.
Whether it is about reducing water use or eliminating forced labor in supply chains, SustainAbility’s important new research, "Targeting Value," assesses the current state of best practice and showcases the variety of techniques corporate leaders are using to set and then achieve sustainability goals. For example, Hong Kong-based CLP Group set a goal of reducing its carbon intensity by 75 percent by 2050, based on industry scenarios generated according to the science available at the time.
But as both reports also show, the chasm is broad and deep between leaders establishing best practice and standard business practice more commonly applied around the world. The vast majority of about more than 40,000 listed companies are not measuring and disclosing any quantitative environmental or social performance data, let alone setting targets for improving performance. GRI’s Sustainability Disclosure database showed just 4,234 organizations submitted a sustainability report in 2017. Where targets are being set, they often lack business context. Fewer than 2 percent of the largest 250 quantify potential environmental risks in financial terms, according to recent surveys (PDF).
Environmental and social context is also missing from most sustainability targets, resulting in goals that lack sufficient ambition and do little to thwart actual risks to continued profitability. Corporate greenhouse gas emissions reduction targets are, on the whole, out of step with the goals that countries set to limit global warming to 2 degrees Celsius. As shown in the chart below from SOGB 18, the carbon reduction targets set by top global and U.S. companies in 2016 account for only 22 percent and 20 percent of their share of reductions needed by 2050.
It’s not just about carbon emissions. The World Economic Forum’s Water Resources Group (PDF) projects a 40 percent gap between the current available fresh water supply and expected demand by 2030, yet corporate water use in the U.S. has declined by a scant 4 percent in the past five years, according to the GreenBiz report.
Investors increasingly understand that unpriced risks and opportunities are associated with environmental and social issues of companies in their portfolios. Financially integrated corporate environmental and social goals are important to these investors because they provide forward-looking assessments. Investors are increasingly using sophisticated, data-driven approaches to quantify and financially value asset level environmental and social issues.
Examples include the extent that companies in an equity portfolio disclose on targets to generate revenue, or quantify how projects financed by bonds or loans have a green transition score that meet 2 degree Celsius climate targets. Creating positive impact by allocating capital towards projects and programs aligned with the Sustainable Development Goals is not just on the minds of the 25 percent of Fortune 500 companies signing on, but also investors such as CalPERS, the Rise Fund, PGGM, Aviva and others who publicly have committed their support.
Companies need to rethink the way they measure and set goals on environmental and social performance. Current practice often is based on a benchmark to peers’ standard practice, or uses a marginal increase approach to goal setting — how can my company achieve 10 percent more than last year? Better goal setting begins with business, environmental and social context.
As a first step, companies should understand which sustainability issues are aligned with the business strategy and where goals create financially material business value. For example, a water-intensive industry such as mining or food production would begin by asking how much water is required to realize its revenue growth ambitions and then determine if sufficient water is available in the future in the regions and supply chains where it does business, given that other water users in the region will be competing for the same limited supply.
Linking sustainability goals to business outcomes is not only vital, it’s also very often missing from the storyline. For example, current practice is to specify an "X percent" reduction in carbon emissions. What if the goal was to avoid $500 million in carbon pricing risk, or avoid 100 percent of margin erosion resulting from carbon pricing risk? That would get the attention of those responsible for capital allocation in the business. Business colleagues who don’t have a good grasp of environmental issues or aren’t on board with the scientific consensus on a changing climate also are more likely to buy in to this type of goal.
Companies need to rethink the way they set sustainability goals and set fewer, but more meaningful targets. The first step is to apply a more disciplined approach that focuses on material issues and uses data to link the goals to the business, environmental and social context and desired outcomes. SustainAbility’s Targeting Value report provides a roadmap, tactics and best practice examples for setting sustainability goals. Using a "better goals" mindset to leapfrog over current practice is more likely to avoid financial risk and make real progress to a more sustainable economy that supports business growth.
As is fitting at the start of any new year, I propose we go on a diet — a sustainability goal setting diet. Michael Pollan, the notable food journalist, wrote a manifesto on food and better diets a few years ago which could be captured in a few words: "Eat food. Not too much. Mostly plants." Let’s apply the same for better corporate sustainability targets: "Set targets. Not too many. Mostly about outcomes."