New Metrics

Integral Success Measurement for True Future Value Creation

Part Six in a 10-Part Series by Reporting 3.0. See previous parts below.

By Bill Baue | Published 7 years ago | About a 12 minute read

Part Six in a 10-Part Series by Reporting 3.0. See previous parts below.

“We have an economy where we steal the future, sell it in the present, and call it GDP,” said Paul Hawken in 2009, hearkening back to the 1968 Robert F. Kennedy quote that GDP “measures everything, in short, except that which makes life worthwhile.” These observations honed our thinking here at Reporting 3.0 in Chapter Five of our Reporting Blueprint, which focuses on the question, “How do we measure success?”

Bill Baue and Ralph Thurm
will discuss
Blueprinting the Future
of Reporting, Accounting
and Data Management
at New Metrics '17.“Inaccurately” is the most immediate answer for our current success measurement regimes, as financial growth (measured by GDP at the economic system level or market cap at the company level) is the default yardstick, yet such growth often comes at a cost: namely, ecological and societal deterioration. What’s worse, even the prevailing environmental and social metrics tend to operate in a vacuum, contextualizing these ecological and societal impacts relative to financial, year-over-year, or peer performance, instead of measuring against sustainability thresholds.

Reporting 3.0 Advocation Partner Mark McElroy sums up this situation nicely in a recent article:

Let’s be frank. Any organization that is genuinely committed to sustainability can’t possibly know how it’s doing unless it is also using metrics and indicators that take social, economic and environmental limits and thresholds explicitly into account. And if that same organization is publishing sustainability reports chock full of intensity-based goals and outcomes, it is a walking contradiction.

Part 5 of our 10-Part series, focused on Chapter Four of the Data Blueprint, examined how to accurately employ multicapital accounting to produce integral data. This article (focused on Chapter Five of our Reporting Blueprint) picks up from there, asking how to accurately measure success more broadly. And as with previous articles on the Reporting Blueprint, we look at both the What and the How when it comes to structuring success disclosure. First, some necessary preliminary framing:

Reporting 3.0 summarizes the question of success in a context-based, multicapital disclosure framework through the following ‘litmus test’: has growth of any capitals come from over-tapping other capitals? Or, does the business model use all capitals within their carrying capacities – or even regenerate capitals? If yes, that would be minimally sustainable, and possibly gross positive (‘thriveable,’ as per the Reporting 3.0 Strategy Continuum) over time. To us, this is what it’s all about, a reflection of an ‘integral success story’ in which no one in a ‘value cycle’ is losing.
Value creation, as we know it, is therefore only part of the story: value destruction is the other part of the story. In a multicapital success regime, appreciation and depreciation are on equal footing, and both must be communicated transparently (as befits the Reporting 3.0 Principles explained in Chapter 3 of the Reporting Blueprint).
The journey to context-based success across the multiple capitals will of course be an iterative learning process to find ‘good enough’ conventions through trial and error. Most organizations will need to strive for sustainable performance before aspiring to (true) net positive performance (in which negative impacts still occur) before engineering negative impacts out of their business models to achieve gross positive performance.

Disclosing Success: The What

Guided by the New Impetus triangle first introduced in the ebook Ralph wrote and Bill edited last year, the Reporting Blueprint homes in on three key areas that define success – measurement, target-setting, and incentives – which we address here in more depth below, with a series of questions on each area.

To what degree does the company risk inventory show its systemic impacts from the different parts of its value cycles (instead of value chain, reflecting the need for a circular economy)?
Is the internalization of external effects seen as part of an ‘Integral Value-Screening,’ an option to better understand the value-creation process?
Does the organization support the Reporting 3.0 Integral Materiality approach as described earlier in the principle of ‘relevance,’ supporting a context-based approach and the application of thresholds and allocations?
Does one differentiate between various capitals and are these integrated in the success measurement? Does the company therefore know its value-creation potentials and value-destruction weaknesses better? Does the company address the consequences from these outcomes?
Does the company identify one or more Sustainable Development Goals (SDGs) to align measurement methodology that looks at context-based or science-based thresholds, and does it aim to develop multi-capital assessments about their contributions to these SDGs?

Target-setting

Are there defined target corridors for the sustainable use of different capitals? How are sustainable impacts differentiated from unsustainable ones?
Are ‘science-based-goals’ assessed and context used for connecting to ‘social floors’ und ‘environmental ceilings’ when targets are defined?
Does the organization develop its thresholds and available allocations based on sustainability norms, helping to allocate proportionate duties to their organization? Are these determined with rightsholders, based on capital stocks and flows, and based on agreed-upon responsible populations for maintaining capitals?
How are long-term targets defined and then used to backcast mid- and short-term targets? Are scenarios used to define long-term targets?
How are data of organizational transformation and leadership capacity used in defining targets for these categories essential for transformation towards a positive contributor to a regenerative, inclusive & open economy?

Incentives

How does the company incentivize sustainable, net positive or gross positive performance? How does it punish unsustainable performance? Is this based on the measurements as mentioned above?
How does the company trigger and incentivize better leadership and transformational capabilities?

Disclosing Success: The How

Given that achieving Integral Success is an iterative journey, how do companies get from here to there? In the Reporting Blueprint, we point to existing examples as foundations on the “near side of the river,” and to conceptual ideals as foundations on the “far side of the river,” as a means of bridging from where we are now to where we need to be in order to achieve sustainability and a truly regenerative, distributive and open economy and society.

There are many companies that have come up with their first trials in new success measurement: starting with Puma’s 2011 Environmental Profit & Loss Account, followed by many others, such as Kering (owner of Puma), AkzoNobel, Novo Nordisk, DSM, NS (Dutch Railway Company), Yara Valley Water, etc. Most of them are based on various capitals, however they are not yet context-based, using thresholds and allocations. We see these altogether as a first generation, with the potential to help develop the first iteration that can help to create the necessary conventions as a next iteration.

Future Fit Business Benchmark

We would also like to mention the work of the Future-Fit Business Benchmark in designing an approach and Key Fitness Indicators linked to 21 Future-Fit Goals based on criteria that mainly avoid negative impacts. This is very profound work and supports the idea of thresholds (fitness criteria) based on a general concept of contextualization in which a basic ‘business hygiene’ is secured. We see the Future-Fit Business Benchmark as an enabler of stage 3 (sustaining) and beginnings of stage 4 (regenerating) of the Reporting 3.0 Strategy Continuum, ensuring basically a ‘zero negative impact’ approach and an incentivization to explore the ‘world beyond’ (moving from stage 4 to stage 5 in the Reporting 3.0 Strategy Continuum) by creating what F2B2 calls “system value.”

Sustainable Development Goals

There is also merit in seeing the SDGs as a valuable attempt to induce companies to consider their contribution to a threshold through science-based goal-setting and context-based reporting. The problem is that, while the SDG areas are interconnected, the proposed performance indicators aren’t. We already see companies picking and choosing particular SDGs where they can define their contributions, without taking the step of developing a worldview that articulates responsibility for helping achieve the SDGs holistically (see Part 4 on Purpose & Connectedness).

We do not believe the SDGs will get us to any economic system transformation through voluntary corporate contributions. But without this transformation, there won’t be regeneration or thriving, let alone sustainability. Still, we think that the SDGs, if connected to thresholds through science-based goal-setting, can be a learning pathway to full, context-based, multi-capital success measurement over time.

MultiCapital Scorecard & Aggregate Capital Sufficiency

McElroy, from the Center for Sustainable Organizations in Vermont and Founding Partner of Thomas & McElroy LLC, has led groundbreaking work around context-based sustainability management and applied this thinking to develop the Multi-Capital Scorecard approach. This is, in our view, the most advanced approach to context-based multicapital performance measurement. Recently, McElroy stretched this context-based, multicapital thinking from the micro level of organizational performance to the macro level of economic system performance with the concept of Aggregate Capital Sufficiency (ACS) as a new alternative to GDP. This aligns with our thinking about closing the micro-macro gap in disclosure.

Obviously, we are in an experimentation phase, but now is the time to not only set conventions for delivery indicators for the SDGs by 2030, but something that we can use for at least the next hundred years, and that will demand changes in accounting systems. Hence Reporting 3.0’s current work on the Accounting Blueprint.

True Future Value Creation

If growth in a regenerative, inclusive and open economy is to remain an incentivizing factor, we need to understand where growth can occur in the future and how the approaches now being tested could lead to a new overarching definition of success. In the Reporting Blueprint, we refer to the concept of Work Levels and their contribution to future value creation, as shown in Figure 2 and developed by Organizational Capital Partners (a member of the R3 New Business Models Blueprint Working Group).

the numerator describes value creation through the combination of various human-derived (or “anthro”) capitals;
the lower left side of the denominator describes the social floors and environmental ceilings captured in the environmental and social sustainability factors (data are based on science-based goals, according to the principles of context-based sustainability);
the lower right side of the denominator shows innovation rates in natural and manufactured capital synergies and substitutions, which reflect core competencies of the organization or system in focus.

The results of the equation can drive stakeholder decisions and allocation of financial capital, and a thriveable governance system can create the ‘ESG Pull’ needed. The True Future Value concept is still in very early stages and needs further work and testing, but we at Reporting 3.0 believe it represents the most advanced thinking on truly integral success measurement.