Raising C-suite awareness of sustainability benefits is a critical initial step before even creating a roadmap. Some progress can be reported on this issue, as more CEOs are aware of the benefits of implementing corporate sustainability. According to MIT Sloan’s 2012 Sustainability and Innovation Global Executive Study, 48% of CEOs responded that they had changed their business model to incorporate sustainability; of those, 46% reported that sustainability added to their bottom line. However, out of 600 companies surveyed last year by CERES for The Road to 2020 Report, more than half still fall into the Tier 4 “Starting Out” in their Roadmap for Sustainability. In Tier 4, CERES catalogs those companies who are beginning to understand sustainability and which need considerable work to integrate sustainability into overall corporate accountability systems.

Corporate sustainability demands a broad view of issues and impacts, as well as a working understanding of what the company does and how it does it. Embedding sustainability means joining the two together through a series of concrete steps.

1. Understand sustainability and recognize what it means to the company

As a first step, it is important to define what sustainability means for every area in the company and to identify its benefits. From investment decisions, developing new products or services to changing procurement practices, sustainability has an increasingly central role in these decisions. Coca-Cola is one of the companies centering its investment decisions on sustainability. When considering the development and location of new production plants, water sustainability has been now included as a key factor. Sanjay Guha, president of Coca-Cola Great Britain says “potential markets and ease of distribution were once the only key factors. Now it is the long-term supply of water.” In order to understand where sustainability efforts should be concentrated in a company, it is necessary to identify those issues that have the biggest impact and are most relevant to the business and to stakeholders.

 2. Engage with stakeholders

Depending on its line of business, a company’s impact can vary among stakeholders. Generally, companies engage with the most influential groups, keeping close ties and a constant dialogue. However, engagement can happen on different levels and should respond to expectations from both sides. Different levels and methods of engagement bring benefits to both companies and stakeholders and can be translated into more sustainable practices. Bonnie Nixon, Director of Environmental Sustainability at Hewlett Packard explains, “allowing stakeholders to honestly critique us pushes us to improve our programs and helps us develop our thought leadership platforms.” In the same way, Procter and Gamble has benefitted through the engagement with local communities around the world by finding alternative uses for its waste materials. Through employee engagement, Kraft Foods has developed a model where employees contribute with ideas and viable plans to reduce waste while helping to reach the company’s waste reduction targets.

 3. Set goals and commitments

Once key environmental, social and governance issues have been identified and engagement methods for each stakeholder group have been defined, efforts must focus on reducing risks and seizing opportunities around these issues centered on sustainable practices. Whether driven by cost reductions, innovation or improved financial performance, sustainability commitments and goals need to be established.

For Wal-Mart, most of it commitments and goals on sustainability are focused around the use of renewable energy and the adoption of energy efficiency. Initiatives in these areas have resulted in the recognition of Wal-Mart as the largest on-site green electricity generator in the U.S. and have led to cost savings of over $500m USD a year. Another example is United Airlines. The airline aims to reduce its environmental impact through the participation of all its suppliers in its Sustainable Supply Chain initiative.

While companies like Wal-Mart and United Airlines aim for a complete transformation of their businesses, small companies are setting goals and commitments according to their scope of action. Initiatives mainly focus on cost reductions from energy use, waste management and commuting practices, as well as social actions in the community like local development projects and volunteering campaigns.

 4. Establish systems and processes

Once the goals are established, specific systems and detailed processes need to guide the implementation of each initiative. Throughout the design, processes and policies in place must be taken into consideration and collaboration among areas encouraged. At this point, gaining executive commitment is crucial. The appointment of an internal sustainability champion as the main driver of sustainability and the development of a successful employee engagement model are also good practice. According to the 2012 Report of Sustainability Leaders by VOX Global and Net Impact Berkeley, 78% of respondents say top management was a key contributor to embracing sustainability. However, 81% identified their colleagues across the company as primary drivers of success.

Unilever’s Sustainable Living Plan was launched in 2010. Under the leadership of its CEO Paul Polman, this ten-year sustainability plan has already accomplished considerable progress in its first two years. Under the umbrella of its comprehensive overall sustainability strategy, Unilever is utilizing its wide array of brands to target distinct social issues, invest in sustainable technologies and change consumer behavior. Unilever has also accomplished to fully embed sustainability across the company and to successfully engage external actors. Besides the appointment of a Chief Sustainability Officer in 2012, the company’s management structure includes a Sustainable Living Plan Steering Team, a group of external specialists in corporate responsibility and sustainability known as the Sustainable Development Group and the launch of the “Small Actions, Big Difference Budget” which finances employees ideas based on environmental benefit and financial return.

 5. Track progress, communicate actions and meet expectations

Lastly, it is important to set a system that measures the performance towards each goal. Defining key performance indicators to meet the identified goals will allow to detect areas for improvement and will gather relevant data to track progress. Metrics and indicators are also central for the reporting and communicating activities of the company. Internally, the availability of data contributes to the prioritization of issues and initiatives and to promote employee involvement around sustainability. Externally, collecting data is fundamental for an accountability strategy, to respond to stakeholders’ expectations and interests and to comply with reporting standards.

Companies reporting under the Global Reporting Initiative guidelines have already embraced the development of indicators. In addition to these guidelines, the Sustainability Accounting Standards Board is currently preparing frameworks that will standardize sustainability key indicators per sector. Alongside these efforts, companies are designing their own systems to measure performance, like Wal-Mart’s Sustainability Scorecards, which, among other criteria, ranks suppliers according to their environmental footprint and contributes to Wal-Mart’s performance measurement.

In the end, corporate sustainability needs to adapt to the maturity of the business and the company’s willingness to treat sustainability as a strategic opportunity. These steps are only the beginning of a process that can eventually transform a company’s entire business strategy into a sustainable business strategy.

Due to increases in energy prices, energy is being considered less a cost and more a strategic component of business. As part of sustainability efforts, the efficient use of natural resources, specifically of energy, is becoming a priority for businesses.

Although energy efficiency can be considered a low hanging fruit among sustainability practices, its adoption is not an easy task. Considerable investments are required to transform a company’s operations towards energy efficiency. In the 2011 Survey on Energy Efficiency prepared by the Economist Intelligence Unit, lack of funding was identified as a major obstacle in the implementation of energy efficiency. Most survey respondents believe energy efficiency will play a more important role in their business in the future; however, only large companies are taking aggressive steps to tackle energy use, as they are able to capitalize on economies of scale. In response to funding challenges, governments and other institutions such as energy service companies (ESCOs) are offering incentives and financing schemes to trigger public-private investments towards energy efficiency.

Besides funding, the survey reports proven return on investment as the most important obstacle for integrating energy efficiency initiatives into business strategies. While companies appear to embrace the benefits of energy efficiency, they are still struggling with how to implement energy saving measures. Skepticism and long payback periods – the period it takes for the project to recuperate the investment through savings – around these initiatives is keeping companies from going further than improving lightning or air-conditioning systems. Regarding payback, expectations tend to be for a 1 to 3 year payback timeframe. For energy efficiency projects, depending on the scale of investment, this may not be a feasible time frame.

Strategies on energy efficiency need to be tailored according to corporations’ energy demands. Companies in energy intensive industries such as steel, chemicals, refining or metals require the overall transformation of their processes and equipment. In the same way, corporations in manufacturing and retail incur in considerable investments to renovate supply and distribution chains. However, low energy intensive sectors and services can undertake gradual improvements without compromising a company’s financial situation. Changing habits and adjusting systems, supported by senior management and employee involvement, represent viable options that translate into significant savings.  Even turning off computers at night represent a 10% reduction in energy bills, according to the Carbon Trust.

Besides cost reduction, energy efficiency presents other tangible benefits related to brand value, performance and carbon emission controls. “Cutting carbon is a great environmental story, so customers will reward you for having proven low-carbon credentials”, says Harry Morrison, manager at Carbon Trust Standard Company. The carbon footprint also matters to investors in a company. The disclosure of information on carbon emissions and energy use is taking an increasingly central role in investment decisions by investors and shareholders.

There are still considerable barriers that stand in the way of fully adopting energy efficiency measures, and there is a long way to go. Efforts in measuring and monitoring energy usage, promoting energy benchmarking and auditing as well as disclosure on savings will certainly incentivize the adoption of energy efficiency in business decisions.

What is materiality and why is it important?

The concept of materiality has its origins in the auditing and accounting processes of financial reporting. In financial terms, a concept is considered material to the company if its omission or misstatement influences the economic decision of users. In recent years, the concept of materiality has been adopted in sustainability and is increasingly influencing the design of sustainable strategies and reports.

Compared to financial statements, sustainability considers a broader scope of action and covers a multitude of issues- environmental, social, economic and more. This context requires a more comprehensive definition for materiality. The Global Reporting Initiative (GRI) defines as material those issues with “a direct or indirect impact on an organization’s ability to create, preserve or erode economic, environmental and social value for itself, its stakeholders and society at large”.

In simple terms, materiality aims to identify the societal and environmental issues that present risks or opportunities to a company while taking into consideration the issues of most concern to external stakeholders. The process of labeling material topics in a company requires a comprehensive framework that methodologically identifies and prioritizes issues, risks and opportunities, commonly known as materiality analysis.

Materiality analysis

Source: PGS Advisors

When to perform a materiality analysis?

A materiality analysis is a tool that takes into consideration the company’s financial concerns while foreseeing future risks and opportunities around ESG issues. A materiality analysis is especially useful for companies building a sustainability strategy, preparing a sustainability report or looking to explore new business opportunities.

As in traditional enterprise risk management, strategic planning for sustainability requires a deep understanding of the impacts of a company’s operations and a comprehensive stakeholder map. Materiality analysis helps a company tailor its sustainability strategy and stakeholder engagement activities around the issues that are most pressing to their business and sector. It not only identifies issues with significant social or environmental impact for the company but also takes into account the understanding of stakeholders. When preparing reports, the availability of this information guarantees addressing the issues that represent a major concern to stakeholders and consolidates a company’s accountability strategy.

In addition, materiality analysis can provide information to develop products and services with the greatest potential for sustainable business growth and can influence a company’s decision-making process by weighing risks.

How to identify materiality

Generally, materiality varies considerably from company to company. Material topics can be similar within an industry or a sector, but they also respond to particular characteristics of a company such as size, location, time of establishment, level of stakeholder engagement, financial performance, etc. As a result, the practical application of materiality is constantly evolving. Recently, organizations like the Sustainability Accounting Standards Board (SASB) and the GRI have developed tools to consolidate the process of identifying materiality.

The SASB is in the process of building materiality maps for each industry. It has determined materiality according to issues under five categories: Environmental Capital, Social Capital, Human Capital, Business Model & Innovation, and Leadership & Governance. Until now, materiality maps for the healthcare and financial sector have been published. Maps per industry will be available in the short to medium term.

At the same time, the GRI developed a materiality framework to guide sustainability reporting: the Reporting Guidance for Defining Content in the GRI Sustainability Reporting Guidelines. Companies reporting under these guidelines are taking advantage of the materiality analysis beyond reporting and are using the process to target their sustainability efforts.

Common elements in materiality analysis include:

1. Identification of a universe of relevant economic, social, environmental, and governance issues for consideration;
2. Evaluation and ranking of the level of stakeholder concern regarding each issue;
3. Evaluation and ranking of the potential impact on the company of each issue;
4. Presentation of issues prioritization, typically in a matrix format that is subsequently used to inform strategy and reporting.

In addition, the process usually takes into consideration surveys involving consumers and sustainability experts, feedback from stakeholder meetings, engagement events, media scans, internal business impact surveys, corporate risk maps, etc.

Materiality analysis is about setting priorities right. By complementing financial and non-financial performance, materiality helps align a business strategy with a company’s ESG risks and stakeholders’ interests while achieving larger impacts in sustainability. It is quickly becoming the dominant concept in sustainability reporting and it is just a matter of time before companies realize the potential and benefits of a materiality analysis for their overall performance and sustainability in particular.

Corporations must be prepared for the introduction of tax and other policy tools and should be aware of the benefits and implications they represent. This post highlights three challenges corporations face regarding the implementation of green policies: 1) identifying relevant policies, 2) understanding their scope and 3) integrating them into the company’s operations.

Identifying relevant policies

The first challenge companies face is identifying and understanding the tools in place and their relevance for their operations. In most cases, companies are aware of relevant penalties but lack information on other instruments’ potential usefulness. Given that the green policies are increasingly focusing on incentives and other tools such as low-interest loans and grants, companies should take advantage of these incentives by reviewing strategies and operations, and evaluating the incorporation of incentives into new or existing projects.

Understanding policies’ scope

Companies often misinterpret the scope of green policy tools. In some cases, corporations believe these instruments are only relevant to companies offering green products or services or to companies who have a long-term sustainability strategy. Fortunately, green policies are addressing multiple topics and can result in the transformation of core strategies, the modification of everyday operations and the increase of the feasibility of projects in the pipeline. For example, the Japanese government is providing subsidies to acquire eco-friendly vehicles and fleets, which will reduce a company’s transportation costs considerably; Australian farmers are selling carbon credits to companies looking to offset emissions and are contributing to more sustainable farming practices in the country; and energy-efficient buildings deductions in the U.S. are representing millions of dollars in potential savings to corporations.

Integrating policies into everyday operations

The adoption of new policies into everyday operations can represent challenges that require leadership and collaboration. In this process, company leaders have to make sure that policies are considered an opportunity and not a threat. As reported in E&Y’s Six Growing Trends in Corporate Sustainability, setting the tone from the top is key to ensure the adoption of sustainable practices. The same approach should be adopted when aiming for the adaptation of green policies by companies.

At the same time, the introduction of new policies will require alignment across areas in both strategy and processes. In order to successfully adopt these, collaboration among areas is essential: the translation of sustainability issues into costs and benefits by financial teams, into project planning tasks by operations departments and so forth. Lastly, the communication of potential benefits and clarity in goals will be key to engage all areas of a company into making the necessary changes to adopt new policies.

Governments have taken steps – however timid – towards addressing environmental challenges. Corporations contribute to these challenges and should play a central role in addressing them too. As companies  incorporate green policy tools and become examples of successful adaption, the private sector’s perspective and experience will be an invaluable source of information for the future design and evaluation of green tax systems. It could be win – win for everybody…

In order to address the challenges of environmental changes, governments are designing and implementing green policy tools ranging from tax incentives to specific subsidies and grants. KPMG International’s Green Tax Index Report analyzes green tax systems from 21 countries. The Index provides information on “which countries are most active in using green tax incentives and penalties to drive sustainability”. It identifies over 200 individual tax incentives and penalties to achieve green policy objectives and categorizes countries into four quartiles according to the degree of tax use (see table below). The ranking of China in the first quartile and Finland and Germany in the third are certainly surprises.

Source: KPMG Green Tax Index Report 2013

The United States tops the ranking with a strong bias towards tax incentives due to its extensive program of federal taxes promoting energy efficiency, renewable energy and green building. Japan comes in second place, ranking higher on green tax penalties than the U.S, with a specific focus on the use and adoption of green vehicles. In third place, the United Kingdom leads on carbon and climate change and presents a more balanced approach between incentives and penalties.

Australia, Germany and Finland, associated with strong environmental policies, are surprisingly constituents of the third quartile. However, this is mainly explained by the wide range of green policies they have implemented, few of which are of the tax variety. Australia (18^th) has focused on non-tax tools such as grants, loans and direct investment to promote green innovation and energy efficiency. Similarly, Germany (17^th) favors low-interest loans and capital subsidies, and Finland (21^st) focuses on grant funding for green innovation.

The emerging economies Brazil, Mexico, Russia and Argentina are located in the fourth quartile. Policy tools in these countries are mainly applied as incentives: Russia leading in promoting energy efficiency and Brazil in green innovation.  However, overall, there are few instruments in place in these countries regarding the achievement of green goals.

Since January 2011, more than 30 green taxes have been introduced around the globe. This trend will continue to drive consumer and business behavior towards more sustainable practices. These policies will certainly contribute to already changing customers’ perceptions on greener businesses and products. Corporations must be prepared to benefit from these policies and to adopt them into their everyday operations. In another post we will discuss some of the implications these policies represent for corporations and their sustainability goals.