Turning Environmental Metrics Inside Out
ESG issues are extremely important; the amount of time and money spent on surveys is itself an indicator of corporate recognition of its importance. But as Bob Kidder, CEO of Chrysler, once told me, “You get what you measure.” The reason we measure is to learn so we can modify our behavior and improve.
Managers are now spending so much time assembling data and responding to rating surveys, they often find they don’t have enough time to work on making things better, even when the data makes clear which actions would be most effective. The present cacophony of indicators, measurement systems, and analytical models is scarcely effective for guiding improvements. A company can do extremely well in one system and be at the bottom of the pack in another. And it’s hard to know why. Something is broken - or to put more positively - the system of reporting hasn’t matured enough yet to be really useful.
With more than 100 rating firms, plus dozens of academic, government, and NGO surveys, managers have to do triage to determine which surveys to participate in. Pick the wrong survey and end up with your CEO asking why the company got a poor rating. To make things worse, the transparency expected of participating companies doesn’t apply to the rating firms themselves. EHS managers don’t know how the data will be used, weighted, combined, or analyzed in the process, nor do they know if a particular model is appropriate for evaluating their company. More importantly, the rating systems are designed for external stakeholders and are rarely designed to be useful to companies themselves for strategic planning.
Perhaps the single most frustrating thing about the status quo is that almost all of the ratings systems rely on negative motivation. It’s about avoiding negative consequences - risks to brand value, stock price, and legal liabilities - rather than encouraging positive ones. This leads companies to continue treating environment as a necessary cost of doing business rather than as a tool for improving business performance.
When I spoke with environmental managers at the conference, I heard Bob Kidder’s words ringing in my ears. The measurement chaos is causing companies to focus more on improving their scores than on improving business performance. We need to turn our thinking inside out. Our primary goal has to be performance, not the score.
I’m convinced that solving our environmental challenges calls for an approach that isn't dependent on coming up with ever more sophisticated models and statistical averaging and indexing techniques for rating the negative impacts of entire corporations. The world is too complicated to objectively measure those impacts in a consistent and standardized way. And companies are too different to be compared in this way. We need an environmental performance measurement approach that is simple and conceptual.
The answer is to focus on managing resource use, rather than on managing the consequences of using the resources. Or in other words, focus more on reducing the inputs than on reducing the unintended outputs.
We also need to focus performance measurement on products rather than whole companies. This can be done if companies identify the real value each of their products delivers to customers. The critical issue is ultimately how much resource mass does it take, and should it take, to deliver a given amount of value to customers.
Think of it this way. Everything that comes out of a company and causes environmental problems was once a resource and was then lost due to inefficiency or lack of knowledge. Pollution is nothing more than valuable resources lost in process and released where they don't belong. If you don’t use the resource in the first place, you can’t spill it, lose it, or waste it. You also don’t have to pay for extracting it, refining it, transporting it, making it into useful components, etc. And you don’t have to worry about the environmental impacts of doing all that.
We need to measure the value we’re delivering to customers in relation to the resource mass required to deliver that value. Every time that you reduce product mass without reducing the value delivered, the savings are multiplied all the way back through the supply chain.
Companies must learn how to look at their goals in terms of the functions their products serve. From this perspective, a battery company should not think of itself as a battery company but as a portable energy company, while a washing machine company should think of itself as a clean clothes company.
This is the only way to truly align environmental metrics with business metrics. When you’re reducing resource inputs, you’re reducing costs, you’re reducing environmental risks, and you’re reducing fines. But most importantly, you’re gaining competitive advantage. The more companies think about delivering the most performance for the least mass, the greater advantage they’ll have in the marketplace.