For accountants and finance professionals, it’s no longer a question about whether to consider sustainability issues but rather how to manage them. While it’s clear that macroeconomic trends such as climate change, resource constraints, and trade globalization can impact the bottom line, it’s often very difficult to weave these big-picture societal challenges into a company’s strategic priorities.
Of course, key performance indicators (KPIs) play a major role in helping organizations achieve their strategic goals. But finding social and environmental metrics that both illustrate progress and are useful for management decision making is a tall order. The Sustainability Accounting Standards Board (SASB) has developed an approach with that goal in mind.
SASB develops sustainability accounting standards on an industry-by-industry basis so that each standard is tailored for companies with shared challenges and opportunities. This helps organizations manage strategic performance on the societal challenges that are most relevant to their business. After all, it makes good intuitive sense that greenhouse gas emissions, for example, would lack relevance for a commercial bank. Likewise, a professional services firm is unlikely to be concerned about materials sourcing or supply chain management.
Instead, when attempting to associate costs with production or to better understand cost drivers, managers in the following types of organizations might consider these industry-specific KPIs:
- Processed foods. Mismanagement of food quality and safety can lead to recalls and lawsuits that will impact a company’s operations through fines and diminished brand equity. As a result, managers are likely to find value in monitoring nonconformance rates and associated corrective action rates with respect to Global Food Safety Initiative requirements.
- Oil and gas (midstream). An aging pipeline infrastructure can lead to spills and leaks that represent lost revenues and may result in contingent liabilities, such as fines, remediation costs, and legal damages. Managers can therefore benefit from tracking the number of reportable pipeline incidents and the percentage that are significant.
- Coal operations. Companies that mismanage waste from their operations are likely to face higher regulatory compliance and waste-handling costs than their competitors, reduced revenue-earning opportunities due to permitting challenges, and increased reputational damage. Accordingly, data on the percentage of mine sites where acid rock drainage is predicted to occur, actively mitigated, and under treatment or remediation is likely to prove useful to decision makers.
- Industrial machinery and goods. Companies in this industry rely on critical materials, such as rare earth metals, as factors of production. Decreasing supply and rising competition can result in increasing and/or more volatile costs for key inputs as well as lost revenue due to production interruptions. As a result, the percentage of materials costs for products containing critical materials can help inform managerial decisions.
LINKED TO FINANCIAL PERFORMANCE
There’s little economic sense in pursuing sustainability for its own sake. Ad hoc initiatives may address a specific risk or yield incremental reputational benefits, but they are unlikely to translate into sustained, long-term value creation or identify potential sources of competitive advantage.
On the other hand, a limited set of sustainability accounting metrics that are tied to fundamental, industry-specific value drivers can be integrated more easily into a firm’s core strategy. They can conceivably enhance or be incorporated into management’s performance evaluation systems to promote goal congruence and coordination, communicate expectations, motivate unit managers, provide feedback to top-level decision makers, and inform benchmarking efforts. Such KPIs can help management focus on what matters—the needle, not the haystack. In fact, a recent study at Harvard Business School (“Corporate Sustainability: First Evidence on Materiality,” http://hbs.me/1goDaOk) found that companies that have focused their efforts on the high-value sustainability issues identified by SASB have achieved superior accounting and market returns.
As the 2014 IMA Statement on Management Accounting, “The Evolution of Accountability: Sustainability Reporting for Accountants” (http://bit.ly/EvolutionOfAccountability), points out, “The management accountant who fails to identify the factors contributing to the sustainability of the organization is not providing management with a full picture of both the organization’s value and the breadth of risks that need to be addressed in maintaining and enhancing the organization’s value.”
BETTER DATA, BETTER PERFORMANCE
In November, SASB will issue guidance for implementing sustainability accounting standards to benefit both external reporting and internal decision making. The SASB Implementation Guide for Companies (www.sasb.org/standards/using-sasb-standards) identifies key integration points with respect to strategy, governance, performance management, and stakeholder engagement. It also covers a variety of considerations for integrating sustainability information into existing decision-support systems—including internal control frameworks—to ensure quality data that’s strong enough to be relied upon.
Integrating sustainability metrics into core processes can drive companies to reexamine their activities through a new lens, helping them identify opportunities for improved resource allocation, waste elimination, and efficiency. A more holistic view should also lead to a better informed understanding and evaluation of the trade-offs between short-term and long-term gains.
As companies continue to integrate sustainability into their performance management systems, scorecards, and dashboards, it’s worth considering whether the chosen KPIs are closely linked to strategy, operating performance, or financial outcomes. If they aren’t, it’s worth considering whether others, like those in the SASB standards, might be. Either way, sustainability KPIs that are truly “key” are a step in the right direction.