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.

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.

The GRI, which is widely considered to be the closest thing to a standardized reporting framework in the sustainability world, has conducted a study of existing integrated reports: reports that have been issued by organizations and self-identified as integrated.  These findings are shared in its recently published “The sustainability content of integrated reports – a survey of pioneers” report.  The report categorizes existing integrated reports into three categories:

1. Sustainability structure – The report focuses on sustainability while neglecting financial metrics, and is thus integrated in name only.
2. Cover structure – Sustainability and financial performance are discussed separately and published in the same document.
3. Embedded structure – The report contains “clear evidence of inter-linkage between reporting on financial and sustainability performance.”

In its report, the GRI is careful to describe these three reporting styles in neutral terms, but it is clear that an embedded structure is a more genuine integration of sustainability and financial reporting, and that this kind of structure is the direction in which they assume <IR> will evolve.  Feedback from companies currently practicing integrated reporting (of the embedded structure variety) confirms that they view the practice as “the natural logical expression of their intrinsic business model” and that to report in any other fashion would actually be “counter-intuitive.”

The companies that report such sentiments are most likely in the minority, and in fact, most companies probably have some work to do before integration becomes so comfortable, but the International Integrated Reporting Council is seeking to facilitate the transition to <IR> by developing a reporting framework that companies can use.  As a starting point, the IIRC released a Consultation Draft  of the International <IR> Framework earlier this spring, and they are currently soliciting feedback with an open comment period that started on April 16 and runs until July 15.

The main themes of the Framework are value creation over different time frames (short, medium, and long term); and accounting for the different kinds of capital, both internal and external, that an organization utilizes and creates.  Organizations are invited to decide upon and justify their individual short, medium, and long term time frames.  In its Framework, the IIRC categorizes capital as financial, natural, manufactured, intellectual, social and relationship, and human, and posits that each kind, whether owned or not, plays a role in creating or diminishing company value.  The IIRC also suggests that determining materiality – the factors that significantly affect value creation over time –  will be fundamental to an organization’s business model, its growth strategy, and its ability to participate successfully in the <IR> process.

During this open comment period, the IIRC encourages stakeholders to read and evaluate the draft Framework, and in addition to providing general commentary, to answer a specific set of Consultation Questions regarding the Framework’s content.  These questions generally pertain to definitions and the scope of the report, as well as how such a report might be verified.  The responses to these questions will be taken into account when updating the Framework, and the IIRC intends to publish the first – of probably many, in this iterative process – official version of the Framework in December 2013.  We look forward to the continued evolution of sustainability reporting, and of <IR> in particular.

The overarching recommendation is to encourage companies to use plain language in their communication with shareholders to allow them to effectively assess the board’s performance. The document can be accessed here.