Articles have been published recently making the case that for all of it's importance to corporate strategy, sustainability isn't valued yet by corporate investors and that the disconnect comes from a lack of clear metrics to report. While it may be true that a difference in reporting will better connect financial stakeholders to sustainability's value if you drill down you'll find that the underlying assumptions are a little silly and a lot counterproductive.
Hello and welcome to Climate|Money|Policy where we explore climate change as a business issue and an opportunity to grow your organization. Tuesday's very well received post "The Sentence that Defines Your Sustainability Program" was all about metrics. For that reason you may expect agreement here with those articles. Instead, the case will be made that there are lots of critical business functions that add value but suffer from difficult and dis-uniform metrics. Consider these three:
Innovation- Called by a recent Economist article "The elixir of progress", innovation is a critical part of any modern business strategy but what are the metrics that get reported up to the level of the financial reports?
LEAN Operations/Manufacturing- No one questions the necessity of a continuous improvement process or that a commitment to one will yield gains. Would any of you care to tell me in advance how much money it will save a company?
Social Media (& marketing generally)- Where's the metric that tells me Apple and Coca-Cola are brilliant at marketing and that it matters to their bottom line? Better yet, how many CMOs out there carry P&L?
These are just a few, no doubt a few more have already popped into your head. So what's going on?
FEAR and the ghost of Values Investors
As a business leader you should start by accepting that there is no magic mystery metric that will validate your sustainability aims in the eyes of investors. The reason for that is that the problem doesn't rest with the content of the message but with it's delivery. To understand that consider these points:
Fear of Poor Returns
For a long time there was a notion that if you wanted your money to reflect your values then you needed to sacrifice on the return. "Values Investors" more often than not were fairly sophisticated yet somehow bought into the myth that the best business opportunities could only come at the expense of some environmental or social good factor. This is clearly a ridiculous proposition. Poorly run investments pose a much greater risk to an investor's money than a company with high ESG (Environmental, Social & Governance) metrics. Nonetheless, there are still a large number of average investors that see sustainability through that decades old lens.
How exactly do you make money, again?
If you think about it objectively there are really only a couple of investors out there that really understand your business plan. Most of them make their decisions based on the fundamentals of your company and sector. Since that's true it must also be true that once you control for the basics, companies with a larger valuation than their peers get there based on the stories they tell about their own inner workings. Apple isn't valued the way it is for it's revenue. Apple and Google are valued because they have told a story for years about how they do business. That they innovate in ways the competition can's and communicate to customers in ways that are alien to their peers. (What can you really say about Bing!)?
Telling a good story
Transparency is your friend. In the words of one famous fictional character, "If you don't like what's being said then change the conversation." So the market isn't rewarding you for your sustainability effort? Start talking about how industry standards have changed. Talk about how the modern company in your sector has a robust innovation pipeline to ensure growth, an effective sustainability program to hedge risk and disruption, and a world class continuous improvement effort to manage costs. Talk about the fact that your industry isn't an island and that it faces risks from market changes that your competition hasn't considered.
At it's core sustainability is about clearly predicting how the market will change and choke if some practices are not managed. It's incumbent on business leaders to tell the story of how they're managing those risks better than the other guy. That's what will make a difference on the next conference call, not a new metric that investors can't relate to.