New Metrics

Redefining Value:
The New Metrics of Sustainable Business - The SB Community Weighs In, Part Three

By Sustainable Brands | Published 11 years ago | About a 7 minute read

We believe that nothing can drive faster organizational response to a changing business environment – or facilitate realignment between corporate functions or within value networks — than a shift in the metrics used to track success. In 2011 Sustainable Brands launched a series of conversations on this topic, both online and via the New Metrics of Sustainable Business Conference, convened again in 2012, and againnext week, September 24-25, 2013, in Philadelphia. The goal has been to bring together thought leaders from business, non-profits and academia to realize three objectives: understand the rapid progress toward developing and implementing New Metrics globally; advance the state of the art through focused discussions based on case studies; and nurture the emergence of new mental models to deliver and benefit from new forms of value.

About a month ago, we published a white paper entitled Redefining Value: The New Metrics of Sustainable Business, providing a recap of key themes and takeaways from New Metrics ’12, in the form of reflections on recent lessons and framing of forthcoming opportunities. It was meant mostly as a way to set the stage for future work and does not claim to be a comprehensive review or a thorough collection of relevant case studies. New Metrics leaders in our community are convening this week at New Metrics ’13 for up-to-the-minute updates and more leading-edge conversations — a jump-off point on the path to our next New Metrics paper, as well as upcoming hands-on work within our corporate member group and the broader Sustainable Brands community.

While we are working on capturing all the market-leading content New Metrics ’13 brings, we thought we’d share a few more highlights from the multitude of responses we received after publishing the white paper. (See more responses in parts one and two.)

John Swannick, Co-Leader, Laboratory on Valuing Non-Financial Performance and Technical Group Member, Project Delphi:

I have been immersed in these issues for some years, principally through co-leading a corporate/investor/academic project inspired by the European Commission — The Laboratory on Valuing Non-Financial Performance.

Having delivered our report in 2010, I have been involved in a follow up initiative to explore the metrics issue. Project Delphi is an investor workstream with around 50 leading asset managers and asset owners convened by State Street.

I am convinced there are a small number of metrics that matter. Matter in the sense they are directly and causally related to financial performance but also reflect performance in a wide range of other non-financial metrics. To some extent the Lab has proved this.

So I absolutely agree on your metrics short-list ethos. I would even say one metric is possible and I am pretty sure which one I would choose, if you held a gun to my head. The real challenge is making 'non-financial' metrics useable in both internal business case analysis and investors' valuation models which I think would transform the way in which investment decisions are made. There are a lot of people out there waiting for an alternative to the ‘multistakeholder’-derived long-list approach, whatever the latest materiality mantra, that is saleable within their business, particularly to the CFO.

The OceanTomo work you feature builds on research undertaken for Accenture which was very formative in the Lab’s thinking. But I wonder at the interpretation being put on it by some. What it shows is the growing dominance of Discounted Cashflow Forecast and other quantitative investor valuation approaches. The 80% intangible value — I prefer Accenture's 'unexplained value' label — is the collective projected future ‘risk-adjusted’ earnings of the market (S&P in this case but the same pattern is true for most mature markets). So it's not, as many like to believe, the non-financial or intangible 'capital' of the business but a market bet on companies' ability to maintain income growth trajectories over the next 10-20 years — or to ‘year n’ in Quant speak — based only on current evidence and without the tools or knowledge to factor in some of the obvious non-financial risks over that timeframe.

That said, I think monetising or valorising metrics is critical and there is an enormous amount of very exciting work going on in academia, consultancies, research institutes and, not least, in companies. But it's very, very fragmented. It's being done in silos by individual experts in HR, marketing, risk, economics, finance, reputation, change, sustainability etc., etc. Bringing it together is only realistic for a manageable number of focuses and so the 'metric minimalists' are at a distinct advantage. Maybe SB’s new metrics initiative can help convene this expertise and cross-fertilise the knowledge, particularly around brand, reputation, consumer perceptions and product and market development. The alternative is to let the 'long-listers' replicate the history of financial reporting and wait 200 years for something that still isn't very meaningful!

For people like me working to develop and implement new sustainability metrics (for business) as a way to aid the required paradigm shift from business as usual to one that inherently integrates sustainability, there is minimal value in this piece. For those not actively engaged in this work more value likely exists. A few ideas from the conference shown in the piece packaged existing ideas in a new way, providing synergy and connecting dots that will help us in our work. Also, the “sustainability is guilty until proven innocent” paragraph was fantastic and will likely be cited in future papers. However, the lack of new ideas and new information was glaring. The title states new metrics yet there were no proposed new metrics for practitioners to ruminate or debate.

The piece cited the fact that sustainability (and sustainability metrics) in business resembles the lawless and chaotic ‘wild west’ a stasis which is both productive and damaging. The productive nature of competition (and the trial & error process) is lost due to the [ecological] time constraints associated with the need to shift away from the status quo. Also, accounting cannot save the world by allowing the status quo, but accounting can adjust the way value is assessed and applied in a manner supporting the sustainability paradigm shift. SB calls for boldness in the final section of this paper. Where is the boldness to make declarative statements that say ‘this action is needed’ and ‘these other actions are destructive?’ Certainly these statements risk alienating some partners, however, if partners are not willing to change it must be asked if they are the proper organizations with which SB should be aligned.

Overall, I found this piece to be unremarkable and expect that it will join the cacophony of similar literature regarding sustainability and business. Perhaps this is a preliminary piece and a more substantial and bold document is forthcoming after the upcoming conference. Even if that is true, SB is not following its own call for boldness or for all due speed. What does SB stand for? What actions does SB believe are needed to move towards sustainability? What companies should be called out for not doing enough to make the sustainability transition? What metrics should be used to track progress?

We should stop patting large corporations on the back for making baby steps. At the same time, we should condemn the public at large (often referred to as consumers) for not supporting bold actions taken by some companies. Why is Interface almost the only example of boldness? Because their potential customers have trouble thinking of carpeting as an item to rent rather than to purchase — and perhaps that is due to current accounting practices.

I know the work SB is doing in this space is difficult and I don’t write this to condemn, to attack, or to make myself feel good. I write this to say I’m in the trenches with you and I know what it will take for us to achieve our mutually shared goals. I hope that the upcoming conference is productive and that the next white paper will include the needed boldness that has been identified in this piece.