New Metrics

Elephants in the Glass House:
Contextualizing Sustainability and Integrated Reporting

Cutting the fluff out of reporting by looking at some of the root causes of sustainability challenges may help stakeholders to better understand in how far the majority of companies are part of the problem or can be part of the solution to human survival.

By Ralph Thurm | Published 11 years ago | About a 6 minute read

Shell recently published its newest sustainability report. The External Review Committee concluded their review with an astonishing statement: "While acknowledging the high quality of Shell’s sustainability reports … there is a growing desire on the part of the ERC to see more strategic context and content in these reports. The Committee would like to see a more comprehensive presentation of Shell’s vision, strategy and metrics for sustainable development in a world facing climate change, growing energy demand, and continuing concern about environmental and social impacts."

How on earth is it possible that a world leader in scenario technology that just recently published its newest scenarios misses the mark on putting its performance into relevant context? How is it possible that ongoing crucial discussions about the value of reserves on their balance sheet — now discussed by HSBC, Citibank, 350.org and Carbon Tracker as ‘Unburnable Carbon’ under a 2 degrees scenario — are not even mentioned in the report? How is it still possible that the company calls the stretch of its existing business model "sustainable innovation," while its programs around renewables just burn some play money? Troubled and disturbed readers are left alone to make the connection to Shell’s scenarios in which the company (finally) admits that renewables can have a majority market share in the future.

How refreshing and contrasting to Shell’s cocooning is the newest integrated report of Novo Nordisk, called "Strategy is all about choice." A main theme covered in the report is "sustainable growth — can it be done?" The company discusses on three full pages the contextualization of its business, posing various crucial questions right at the beginning: "Novo Nordisk’s projected growth trajectory puts the company’s sustainability aspirations to the stress test. How can it increase production while keeping environmental impacts down? How can it expand access to care where public healthcare’s financial means are limited or healthcare services are inadequate?" The company then introduces the "Blueprints for Change" program, a set of case studies that will look closer into the company’s foot- and handprints in a time of limits to growth and the need to increase health care in diabetes worldwide. The chapter closes with a clear commitment: "In our view, though, there is more to it than competitiveness. In our approach to business we strive to create long-term, sustainable value in a bigger picture perspective."

Missing sustainability context is mainly based on three root causes — elephants in the glass house if you like — explaining the need to disclose a proper positioning of a company’s business model towards these three aspects of sustainability context:

Global efficiency gains: Over the last decades the majority of efficiency gains in company approaches — mainly to save money — were reached through specialization and additional outsourcing; from a sustainability perspective this increased the need to bridge time & space, which in consequence led to an absolute increase in resource and energy use worldwide in transport & logistics as well as infrastructure. The digitization of production and logistical processes needed additional expansion in supporting electronic infrastructure, again leading to additional resource and energy use. While we globally saved money per unit of product — also due to the collective neglect to internalize external effects in cost accounting — the absolute resource and energy use went up and will continue to do so. This is a slow death path for humanity on a finite planet.
Productivity increase through innovation: Looking back at innovation waves, as characterized by the famous Kondratieff cycles, we need to understand that every new cycle didn’t just lead to the use of new technology but always left older technology behind and in use — either through new owners, or because they were shipped to other parts of the world. This accumulated world of old or stranded assets has not led to an absolute global reduction of resource and energy use and remains part of the problem as long as it is not completely built back, something that will remain difficult to impossible given the mingling of stuff in the past, not offering a lot of opportunity to reuse, recycle or re-enter them in a circular economy. Again, this adds to a slow death path of humanity on this finite planet.
Rebound effects additionally overshadow efficiency and productivity gains: These lead to an extra sharpening of the global resource and energy use scenario. Amongst them are:

Material Rebound Effects: A continuous increase of machines in daily lives and in industry make us completely dependent on tools and energy;
Demographic Rebound Effects: The increased number of humans, mainly in emerging markets and developing countries, lead to an even sharper increase in the need for "stuff," especially when a Western lifestyle is anticipated;
Financial Rebound Effects: Cost decreases lead to an increase in market asks through additional buying power. Income increases have the same effect;
Psychological Rebound Effects: The increase of "environmentally friendly" products often leads to a higher level of use of these products;
Political Rebound Effects: GDP growth has become the No. 1 need to allow a country to function given debt-financed systems, demographic effects and the inability of governments to reform social systems.

It’s no wonder that "green & inclusive growth" is now the new buzzword. Decoupling growth from resource and energy use is an absolute prerequisite for humans to have a right to live on this planet. All positive contributions to human wellbeing by companies are important as well, but will be worth nothing without a breakthrough in capitalism that can safeguard that markets work in favor of human survival and not against it.

Companies are the most important implementation power of this change. Sustainable innovation needs to be redefined in this context perspective — green & inclusive growth asks for an industry-coordinated adaptation plan; without cross-polination between industries the tough challenges mentioned above can’t be tackled and solutions can’t be scaled to real impact. Although difficult to address these broader context aspects in a sustainability or integrated report, stakeholders have a right to know how companies — one by one — plan to address these breakthrough challenges through their individual business models, including those that at this moment need to admit that they are more part of the problem than part of the solution. Honestly most are still part of the problem since their strategies are based on addressing symptoms instead of going to the root causes. Therefore strategies that include sufficiency, local economies and new creative solutions involving companies, governments and civil society are inevitable. What this sharpened context means for sustainable innovation and reporting will be addressed in my next blog(s).

Ralph Thurm

Co-Founder
Reporting 3.0 (R3)

Ralph Thurm is one of the leading international experts for sustainable innovation and strategy as well as sustainability and integrated reporting. He is the Managing Director of Reporting 3.0 and Oncommons gGmbH.

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