Reporting has long been seen as a measure of a company’s commitment to sustainability. Annual reports are increasingly filled with numbers on carbon emissions, use of renewable energy, water consumption, waste reduction, diversity, training of employees and a lot of other indices. But an uncomfortable question is rising to the surface: Are companies measuring what matters, or are they just measuring what’s easiest to report?
This distinction is more important than it seems. A company can produce a sophisticated sustainability report, achieve impressive-looking environmental targets and still fail to identify the sustainability issues that could materially impact its operations, supply chain, profitability and long-term competitiveness. The next phase of sustainability reporting should therefore be about more than just producing more numbers. It should be about creating better information, and using that information to make better business decisions.
In recent years, sustainability reporting has reached a degree of maturity. The creation of standards such as IFRS S1 and IFRS S2 by the International Sustainability Standards Board is part of a broader trend toward sustainability information that is connected to business performance and decision-making. The standards target sustainability-related risks and opportunities that would reasonably be expected to affect a company’s prospects. This signifies a major change in thinking. Instead of asking “What sustainability activities did we undertake this year,” companies increasingly need to ask, “Which sustainability risks and opportunities are likely to materially impact our business, and how are we managing them?” That’s a far tougher question, but it’s also a far more valuable question.
Consider two producers. Company A said it cut electricity use by 8% at its headquarters and manufacturing plants. Company B reports a smaller 4% reduction but also finds that a substantial portion of the environmental impact associated with one of its major product categories comes from purchased materials and supplier operations. Then it collaborates with suppliers to redesign materials, cut energy intensity, and enhance resource efficiency. Which company is contributing more meaningfully to sustainability? The answer isn’t always the one with the larger percentage. The second company might just be measuring a more material issue.
One of the biggest challenges in sustainability reporting is to measure what’s available and not what’s important. Companies are drawn to indicators that are easy to collect, compute and present. The energy use within company facilities is quite obvious. Waste at a production site is fairly visible. So are employee training hours. But emissions from the supply chain, supplier working conditions, dependence on water, sourcing of raw materials, impacts on biodiversity, transportation emissions, and risks hidden several tiers up the supply chain are much harder to measure. This creates a dangerous gap between what’s reported and what’s real for the business.
For procurement and supply-chain leaders, this is particularly critical, as sustainability’s footprint doesn’t stop at the factory gate for a company. Usually it starts way earlier. Procurement decisions affect suppliers, materials, specifications, transportation, packaging and, ultimately, the environmental and social footprint of your products. A company can be more efficient in its own operations, but the supply base still has sustainability risks built into it.
Suppose a food manufacturer claims it has reduced waste in its factories by 10%. Sounds good — but what if the company buys packaging from a supplier using virgin plastic, ships it over a long distance and has little visibility into the supplier’s energy sources or waste-management practices? The factory may be more efficient, but the supply chain is still very resource-intensive. That’s why sustainability reporting can’t be separated from procurement intelligence.
Procurement teams should be asking more and more critical questions. How much of our spend is at risk from sustainability? Which suppliers are the worst offenders in terms of environmental or social issues? Where are our Scope 3 emissions? What raw materials are vulnerable to climate change, resource depletion and water scarcity? Which suppliers don’t have credible sustainability data? And perhaps most importantly, what sustainability risks could eventually become financial risks? Such questions transform sustainability from an exercise in reporting into a business discipline.
Think of a consumer-goods manufacturer called Green Home. The company has invested a lot in sustainability. Its factories use energy-efficient equipment; its offices have switched to renewable power, and it recycles 90% of its waste. Its sustainability dashboard is looking good. But as the procurement team maps out the product lifecycle, it finds something unexpected. A large share of the environmental footprint of the product is related to raw materials purchased from suppliers. One critical material is produced through an energy-intensive process and another is highly dependent on the availability of water in a region with increasing water stress.
Green Home has successfully measured its own operational footprint, but not the risks that matter most to the continuity and long-term sustainability of its product. The answer isn’t just to require more sustainability certificates from suppliers. The company must identify material risks, segment suppliers by their impact and criticality, develop meaningful supplier metrics, and link those metrics to sourcing decisions. Besides quality, cost, delivery and innovation, one aspect of supplier evaluation could be a supplier’s sustainability performance. The key takeaway is simple: a sustainability metric has strategic value if it can change a decision.
Another problem is key performance indicator inflation. Some companies build ever-growing sustainability dashboards, with dozens or even hundreds of indicators. More KPIs can create the illusion of more control. In fact, they may make decision-making more difficult. Executives face 150 sustainability indicators: Which five should guide capital allocation? Which three to use to select suppliers? Which two should cause management intervention? If the answer isn’t obvious, the organization is probably measuring too much and understanding too little.
The future of sustainability reporting should be prioritization. The key is to let materiality determine what gets management’s attention. A metric should have a clear purpose, and should help answer a business question. Ideally it should link to risk, cost, revenue, resilience, compliance, reputation or strategic opportunity. Most importantly, companies should ask themselves one simple question before adding another KPI: What is this measure going to change?
Companies don’t need more sustainability numbers for the sake of reporting. They need the right numbers, linked to the right risks, in the right decision-making place. The future of sustainability reporting will therefore be less about the volume of information companies disclose and more about the quality, relevance and business impact of that information.
Perhaps the most critical sustainability KPI isn’t the one that looks best in the annual report. It’s the one that guides the next steps for the company. Ultimately, the goal should be building a better, more resilient and more responsible business.
Engy El Ghalban is Operations & Supply Chain Management Instructor, Executive Education at the AUC Onsi Sawiris School of Business.