New Metrics
Context, Business Risk & Stampeding Black Elephants

Would you invest in a business that gave you only one figure — number of customers — by which to assess both its current state and future prospects? Of course, not; you would inquire about total sales, costs, revenues, margins, market share, and other figures.

Any business decision-maker wants multiple figures. Context, and contextualizing data, is key.

Of course, our understanding of what is business-relevant context and data evolves over time. After the Great Depression, new rules and metrics were developed with the creation of the U.S. Securities and Exchange Commission as well as new reporting requirements for investors. During the dot.com era in the late ‘90s, the focus was initially on web-based companies’ user numbers. Sales, costs, revenues were often secondary to building brand and gaining users. Context and reality of course set in, as it does, and the dot.com bubble burst.

The question today is whether commonly used business figures provide enough information about context. Are we applying the right measures for today’s context?

CDP demystifies science-based target-setting

Join us to hear from CDP on setting science-based goals relating to everything from carbon and water to forests, at New Metrics '19 — November 18-20.

Consider the bumpy road that Coca-Cola has faced in India, in which not one, but two of its bottling plants have been shut down amidst community concerns and water issues. Consider nuclear power facilities that have faced operational disruptions as their source of cooling water (the ocean) has exceeded specifications, in Connecticut and France. Consider how entire industries have been stalled by flooding, such as hard-drive manufacturers during the 2011 Bangkok floods. Consider all of the businesses in São Paulo facing water outages, following on years of management issues, pollution and deforestation of the Amazon that has changed the “flying rivers.”

Are companies factoring the core dynamics behind these issues into business planning?

It is essential that companies consider key questions related to today’s context, such as:

  • Are we rapidly transitioning to low-carbon, greenhouse gas emissions and considering business in a climate-constrained world, throughout our companies and supply chains? And are we focused on investing in the changes needed to address core drivers of climate change, within our company and across the private sector, such as those laid out by the IPCC and We Mean Business Coalition?
  • Have we conducted a water risk assessment for our facilities and supply chain, to understand our companies’ water needs within the context of total watershed- or basin-level water demand and supply? How are we identifying water risks that we need to avoid or mitigate, as well as opportunities?
  • Have we assessed biodiversity loss as it affects ecosystem structure and function, particularly related to projected future water flows, recharge rates of aquifers, buffering against storms and floods, saltwater intrusion into freshwater, and other such issues?
  • Have we assessed local income and community ability to access essential elements to meet their basic human needs, such as water, shelter, food and other elements outlined in the UN Declaration on Human Rights?

Corporate guidance on risk and opportunity assessment, and decision aids, now exist in all of these areas.

For climate, numerous tools exist to measure corporate emissions, such as the Greenhouse Gas Protocol. Corporate pathways forward are clearly laid out, such as by BSR and the We Mean Business Coalition.

For water, the CEO Water Mandate provides guidance, which can be used with the Water Footprint Network's Water Assessment Tool, WRI Aqueduct Tool, WWF Water Risk Filter and other tools listed in CDP’s Water Disclosure Request. Ceres has also developed "Aqua Gauge: A Framework for 21st Century Water Risk Management." Once strategies, plans and actions are in consideration, then companies can consider implementing the Alliance for Water Stewardship's Standard.

For biodiversity, there is CI’s Integrated Biodiversity Assessment Tool (IBAT) that offers businesses relevant biodiversity information. The Business and Biodiversity Offset Program’s (BBOP) guidance materials provide a range of assessment details. In addition, decision aids now exist for assessing ecosystem services flows, from site-level (such as EcoMetrix) through landscape scale — such as InVEST, Oxford University’s Local Ecological Footprinting Tool (LEFT), and many others listed in summaries of existing ecosystem services tools by the WBCSD.

The list goes on.

And yet, are companies factoring these issues into their decisions? Are spreadsheets and PowerPoint slide summaries of corporate strategy calling out risks and opportunities related to water, biodiversity, ecosystem structure and function, as well as socioeconomic gaps, alongside traditional business measures?

Omitting these issues in corporate decision-making is akin to managing by magnifying glass, without picking one’s head up to look at the broader context. Business is operating in a climate-constrained world, marked by water issues, biodiversity loss, socioeconomic chasms. These issues are all key to the business context, and therefore business success or failure.

We live in an era — as Thomas Friedman referred to and Dougald Hine described — of “stampeding black elephants.” The context in which we conduct business has enormous, well-known issues that relatively few are seriously discussing (elephants in the room), with significant potential impacts from events that are difficult to predict (black swans). Uncertainty and magnitude of risk sit side-by-side, with inadequate strategic discussion about — or action on — either. Relatively few businesses factor key elements of this context into decision-making.

More and more diagnostic tools are emerging and ready to be coupled with scenario planning to deliver insights into business context. So why wouldn’t you use that insight to make decisions?

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