Session 8: Measuring and Communicating on Sustainable Supply Chain Performance

Session 8: Measuring and Communicating on Sustainable Supply Chain Performance

Approach to Sustainable Supply Chain Management (SSCM): Overarching Framework Framing the Issues Preparing for Implementation Assessing Impact Session 4: Sustainable Supply Chains as a Lever of Competitive Advantage Session 1: From Sustainable Development to Sustainable Supply Chains Session 5: Integrating Sustainability into the Supply Chain Session 8: Measuring and Communicating on Sustainable Supply Chain Performance Session 2: Governance of Supply Chains I: From Compliance to Voluntary Standards Session 6: Managing Stakeholder Relations Session 7: Building Supply Chain Partnerships Session 3: Governance of Supply Chains II: Introducing International Labour Standards

Session objectives • Understand the importance of measuring and monitoring to improve sustainability performance in supply chains • Learn about widely adopted methodologies and tools to measuring and monitoring supply chain and sustainability performance • Understand the challenges involved in identifying relevant metrics and consistently measuring results • Explore tools and systems to track and communicate results to stakeholders

Agenda 8.1 A review of Corporate Performance Measurement and Reporting 8.2 Drivers for sustainability measurement and reporting 8.3 Measuring supply chain and sustainability performance 8.4 Reporting on sustainable supply chain goals and progress 8.5 Class discussion: Reporting on sustainable supply chain performance

Talking about performance measurement What is performance measurement? Why measuring? Measuring…against what? How to measure?

The roadmap to sustainability’s biggest priority by far is performance.Companies must produce tangible results that put them on a truly sustainable path.Performance will be the ultimate measure for evaluatinga company’s progress towards achieving sustainability. Richard LockeDeputy Dean and Professor of Entrepreneurship,MIT Sloan School of Management

Four views on business performance measurement systems “An integrated set of planning and review procedures which cascade down through the organization to provide a link between each individual and the overall strategy of the organization” (Rogers, 1990) “…one output of strategic planning: senior management’s choice of the nature and scope of the contracts that it negotiates, both explicitly and implicitly, with its stakeholders. The PMS is the tool…to monitor those contractual relationships.” (Atkinson et al, 1997) “A PMS enables informed decisions to be made and actions to be taken because it quantifies the efficiency and effectiveness of past actions through….analysis, interpretation and dissemination of appropriate data.” (Neely, 1998) “A strategic PMS translates business strategies into deliverable results. Combine financial, strategicand operating measures to gauge how well a company meets its targets” (Gates, 1999)

Performance measurement is certainly NOT about profit alone • By early 1980s, Johnson and Kaplan highlighted the shortfalls of financial performance measures to reflect changes in the competitive environment and strategies of organisations • The 1990s saw a “performance measurement revolution” (Eccles, 1991; Neely, 1999) and a proliferation of frameworks that integrate wider criteria: • Balanced Scorecard (Kaplan and Norton, 1992) • Performance Measurement Matrix (Keegan et al, 1989) • SMART Pyramid (Lynch and Cross, 1991) • Baldrige Criteria for Performance Excellence • Performance Prism (Kennerley and Neely, 2000) • European Foundation for Quality Management (EFQM) Excellence Model • Six Sigma

Bottom line, the overall concept of corporate performance has evolved to integrate measures beyond financial indicators • After the accounting and reporting scandals of the early 2000s (e.g. Enron), corporate governance became a priority for stakeholders, from regulators to consumers • Additional stakeholder demand for transparency in areas such as board level remuneration, internal controls, procurement practices and management oversight have set new standards for corporate reporting • Closer scrutiny of practices, results and overall performance has resulted into more complexity, new metrics, new measurement systems and greater information available for stakeholders • The emergence of Globally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) have formalized the need to measure and communicate broader corporate activity through reporting. • More recently, the concept of Triple Bottom Line (TBL) emerged, referring to the expansion of accounting of financial performance to make corporations accountable for their environmental and social impacts.

Drivers for measuring sustainability performance • Monitor, review and adjust • Transparency and legitimacy: support claims for actions • Increased demands from multiple stakeholders: shareholders, customers, community, suppliers, investment community • Increased visibility of sustainable supply chain activities within overall business operations • Align sustainable supply chain goals and performance with corporate performance

The “business case” approach (Brown, 2006): creating value for shareholders • Social and environmental accounting seen as an expanded management toolkit for increasing shareholder value (Hedstrom et al., 1998) • Focuses on “identifying and pursuing forms of CSR and SEA that result in win-wins for both business and wider stakeholders…” (Brown, 2006) • BITC (2003) states that there are “rewards” to reap from an effective “business-led approach” that make “the business case compelling” • A way to demonstrate “positive impact on society” (BITC, 2003), and to “head off campaigns from activists….which have the potential to threaten business interests…” (Litvin, 2003) • “Business leaders are increasingly acting upon this responsibility (to report) because it makes good business sense. It helps companies mitigate risk, protect corporate brand, and gain competitive advantage…(Deloitte, 2002)

Business benefits from sustainability reporting (WBCSD, 2003): • Creating financial value • Attracting long term capital and favourable financing conditions • Raising awareness, motivating and aligning staff, attracting talent • Improving management systems • Risk awareness • Encouraging innovation • Continuous improvement • Enhancing reputation • Transparency to stakeholders • Maintaining license to operate

The Stakeholder-Accountability Approach (Brown, 2006): promotes a more open and transparent society • While stakeholders share interests, there is considerable potential for conflicts of interests (Brown) • Management’s primary responsibility is to society and managerial performance “should be evaluated in terms of both profit and the accomplishment of social initiatives” (Chen, 1975) • “The Corporate Report” backs up the notion that “stakeholders have rights to information” (Accounting Standards Steering Committee, 1975) • Accountability as “being called to account for one’s actions” • Recognizes the economic, social and political power that corporations have in society • Companies “accountable for the use of financial, human and community resources entrusted to them and that affected parties need safeguards against potential abuses…” • Access to information plays an important monitoring role in the process

Beyond theory: the view from practitioners Innovation Attract Attract Key reasons for measuring supply chain sustainability Illustrative example from the shipping industry Source: North American Sustainable Supply Chain Report 2010

Evolution of supply chain measurement systems (Beamon, 1996) An effective supply chain performance measurement system must rely in a combination of measures that acknowledge the interrelations within the supply chain, consider risks and uncertainties and are consistent with an organization’s strategic goals. • Single performance measures: e.g. cost, customer satisfaction (Christopher, 1994), supplier performance (Davis, 1993), risk management (Johnson and Randolph, 1995). Key considerations: • Inclusiveness • Universality • Measurability • Consistency • Strategic goal-driven measures: type of performance measurement directly related to the manufacturing strategy (Maskell, 1991) • Performance meeting strategic goals • Performance measure as a driver for achieving vision and goals • Strategic goals seldom refer to a single performance measure, but to a combination of measures

Three types of performance measures for supply chains (Beamon, 1999) • Total cost of resources • Distribution/manufacturing cost • Inventory: investment, obsolescence • Return on investment (ROI) • Quality • Customer response time • Number of items produced • Number of on-time deliveries • Manufacturing lead time • Shipping errors • Customer complaints • Volume flexibility: e.g. seasonality • Delivery flexibility: e.g. transport disruptions • Product mix flexibility: demand variations • New product flexibility

Frameworks for measuring social and environmental performance of supply chains broadly disseminated and adopted • WBCSD’s “Measuring Impact Framework” • Global Reporting Initiative’s Guidelines for measuring and reporting on sustainability performance • Prince of Wales’ Accounting for Sustainability Project: “Connected Reporting Framework” • AccountAbility’s AA1000 Accountability Principles

The “Global Reporting Initiative” guidelines is the most widely adopted measurement and reporting framework The cornerstone of the framework is the Sustainability Reporting Guidelines. The third version of the Guidelines - known as the G3 Guidelines - was published in 2006, and is a free public good.

The GRI Guidelines and supplements • The GRI Guidelines • Sector supplements– providing guidance that captures sustainability issues faced by specific industry sectors, e.g. financial services, telecommunications, auto manufacturing, mining • Technical protocols– providing detailed measurement methods and procedures for reporting on indicators contained in the core guidelines e.g. energy indicators providing definitions (e.g. direct vs. indirect energy) and measurement methodologies (e.g. conversions, units) • National annexes– providing national (local) country perspectives and particular influences, nuances and contexts to sustainability • Issue guidance documents– on topics such as ‘diversity’ and ‘productivity’

The GRI Standard Disclosures Profiledisclosures set the overall context for understanding performance - such as strategy and governance. Management Approachdisclosures explain how specific sustainability issues are managed, including goals and targets. Performance Indicatorselicit comparable information on economic, environmental, and social performance. Measures express strategic approach, management goals, and performance results through three kinds of disclosures: Source: Global Reporting Initiative G3 Guidelines, accessible at www.globalreporting.org

Measuring Economic Performance according to GRI • The economic dimension of sustainability concerns the organisation’s impacts on the economic conditions of its stakeholders and on economic systems at a local, national, and global levels (GRI3.1). They show: • Flow of capital among different stakeholders • Main economic impacts of the organisation throughout society

Measuring environmental performance according to GRI: • Performance and measures relative to inputs (e.g., material, energy, water) and outputs (e.g., emissions, effluents, waste). • Performance and indicators relative to biodiversity, environmental compliance, environmental expenditure and the impacts of products and services. • Corporate goals in the area and Policy • Organisational Responsibility: Management accountable for executing process • Training and awareness: Procedures aimed at creating awareness and training • Monitoring and Follow Up • Monitoring, corrective and preventive actions with emphasis on the supply chain • List of certifications for environment-related performance or other approaches to auditing/verification for the reporting organization or its supply chain. • Additional Contextual Information • Key successes and shortcomings • Environmental risks and opportunities • Key strategies and procedures for implementing policies or achieving goals.

Sample Environmental Performance Indicators required by GRI Source: Global Reporting Initiative G3 Guidelines, accessible at www.globalreporting.org

Measuring social performance according to GRI 1. Labour Practices and Decent Work • United Nations Universal Declaration of Human Rights • United Nations Convention: International Covenant on Civil and Political Rights; United Nations Convention: International Covenant on Economic, Social, and Cultural Rights • Convention on the Elimination of all Forms of Discrimination against Women (CEDAW) • ILO Declaration on Fundamental Principles and Rights at Work and The Vienna Declaration and Programme of Action • ILO Tripartite Declaration Concerning Multinational Enterprises and Social Policy • Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises 2. Human Rights • Main issues: nondiscrimination, gender equality, freedom of association, collective bargaining, child labor, forced and compulsory labor, and indigenous rights • Body of law: treaties, conventions, declarations 3. Society • Impacts on local communities • Bribery, corruption, monopoly 4. Product Responsibility: Customer Health and Safety, Labeling, Marketing, Customer Privacy, Compliance

Sample Social Performance Indicators required by GRI

Working Group Media First Draft Airports Construction & Real Estate Event Organisers Final Draft Food Processing NGO Oil & Gas Pilot Apparel & Footwear Automotive Logistics & Transportation Public Agency Telecommunications Additional sector-specific indicators:Sector supplements • Final • Electric Utilities & Financial Services Sector Supplement obligatory to obtain level A from 1 January 2010 • Mining Sector Supplement required to obtain GRI Application level A from 31 December 2011

The number of companies reporting on GRI Guidelines continues to expand, with increased SME and emerging markets participation Number of Reports 2010 Geographic Distribution 2010 SMEs MNEs 9% growth in China 68% growth in Brazil Source: Global Reporting Initiative 2010 Statistics

Global reporting statistics show an upward trend in the number of reports including meaningful sustainability information… Global Output Report 2010 FTSE100 Constituents Reporting In 10 years, the number of reports mentioning significant sustainability achievements grew by 6 times (Corporate Register) Annual growth 2009-2010 of FTSE100 Companies including meaningful sustainability information reached 10 percent

From corporate reporting to sustainability reporting As discussed, it is widely acknowledged that financial reporting captures only a portion of a company’s value creation potential and corporate risks Intangible factorssuch as strategy, innovation capacity, talent retention, reputation management, commercial risk reduction (e.g. bribery, occupational accidents), resource efficiency and others can be measured and disclosed through sustainability reporting Sustainability reporting complements financial reportsby integrating non-financial value drivers, such as human capital formation, corporate governance, management of environmental risks and the ability to innovate Reporting on social and environmental performance allows establishing the link between business strategy and sustainability by assessing the sustainability issues influencing the company’s competitive advantage: cost leadership, product/service differentiation and the formation of intellectual capital It is a tool to communicate with stakeholders, disclose and discuss risks, uncertainties, challenges and trendsthat may materially affect financial performance

Sustainability Reporting • “Sustainability reporting is the practice of measuring, disclosing and being accountable to internal and external stakeholdersfor organisational performance towards the goal of sustainable development. » • «Sustainability reporting is a broad term considered synonymous with others used to describe reporting on economic, environmental, and social impacts (e.g., triple bottom line, corporate responsibility reporting, etc.). » GRI Sustainability Reporting Guidelines Version 3.1, 2010-2011

Market forces influencing sustainability reporting • Institutional investors: risk management, compliance and performance • Sustainability investment performance track record • Sustainability driven corporate competitiveness and profitability measurement • Competitive benchmarking • Guidelines and indicators of performance: UN Principles for Responsible Investment (UNPRI), FTSE4GOOD and Dow Jones Sustainability Indexes, Ethibel Sustainability Index (Standard & Poors) Financial/Market Forces Stakeholder Forces • Voluntary sustainability initiatives and accountability • Stakeholder pressure for mandatory disclosure • Stakeholder pressure for mandatory pension fund disclosure • UN Environmental Programme Finance Initiative (UNEP FI), UN Global Compact, Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), Coalition for Environmentally Responsible Economies (CERES) Regulatory Forces • National environmental and financial metrics and disclosure demands • Intergovernmental legislation and action plans: EU communication on CSR from November 2011 • Mandatory Reporting on Greenhouse Gases Rule (US), OECD Guidelines for Pension Fund Governance, Sarbanes-Oxley Act

To Report or not to Report? • Factors influencing decision to report relate to size, stakeholder relations, regulatory requirements, etc. • Reporting has evolved to integrate several formats and channels: • Stand-alone Sustainability Reports • Integrated Corporate and Sustainability Reports • Interactive online Reports • Online, dedicated websites with regularly updated information • Different channels and content for different stakeholders

Future outlook: sustainability and integrated corporate reporting mainstreaming… Governments and the financial community strongly driving the trend • In France, a new law has expanded requirements for sustainability reporting to non-listed firms, becoming mandatory for around 2,600 companies. • In South Africa, companies listed on the JSE Securities Exchange must comply with the King Report on Corporate Governance for South Africa (King III), which recommends that companies should produce an integrated report rather than a separate annual financial report and sustainability report. • Mainstream investors increasingly looking for reliable information that can be independently verified and benchmarked within and across sectors • One out of every seven written questions from shareholders of companies on the CAC401, during general assemblies in 2010 related to sustainability issues • Specialist companies, such as Vigeo, Eiris and SAM, have emerged to provide sustainability ratings, providing independent assessments of ESG performance 1. France’s main stock index. It The index represents a capitalization-weighted measure of the 40 most significant values among the 100 highest market capitalized stocks on Euronext Paris bourse.

Class Example and Discussion: Danone’s Human Rights Indicators

Class Discussion: Danone’s Human Rights Performance Indicators • As preparation for the module, you have read the Danone Sustainability Report’s Section on Human Rights Performance Indicators and related pages • In your groups, take 45’ to discuss this section. Please use the following questions in guiding your discussion: • In your view, what are the main (2-3) initiatives Danone is taking forward in this area and what have been the results so far? • What are specific tools through which Danone measures the sustainability of their suppliers’ practices? • How are the corporate headquarters and the Country Business Business Units (CBUs) working together in implementing and monitoring procedures and practices? • What are in your view, areas on which Danone’s disclosure on human rights performance could improve? Please provide specific examples.

Conclusion • Several approaches to measuring and tracking supply chain performance, but no one-size fits all solution • Measuring and communicating allows for increased credibility and trust amongst all stakeholders (including workers) • Measuring and monitoring as a systematic process contributes to increased operational efficiency and hence, overall performance improvement • Different stakeholders are interested in different metrics. Tailor efforts and communication accordingly • The journey has just began. Transparency will become ever more important for consumers, investors, suppliers as instant connectivity grows and consumers engage at a deeper level with business

Back up Slides

Application Levels Report Application Level C+ B+ A+ C B A Report on 1.1 2.1 – 2.10 3.1 – 3.8; 3.10 – 3.12 4.1 – 4.4; 4.14 – 4.15 Report Externally Assured Report on all criteria listed for Level C plus: 1.2 3.9; 3.13 4.4 – 4.13, 4-16 – 4.17 Report Externally Assured Same as requirement for Level B Report Externally Assured G3 Profile Disclosure Not Required Management Approach Disclosures for each indicator Category Management Approach Disclosures for each indicator Category G3 Management Approach Disclosures Report on each core G3 and Sector Supplement Indicator with due regard to the Materiality Principle by either: a) Reporting on the Indicator or b) Explaining the reason for its omission Not applicable is not valid – Must explain i.e. not material, no data, no commitment, proprietary information Report on a minimum of 10 Performance Indicators, including at lease one each of Economic, Social and Environmental Core Indicators Report on a minimum of 20 Performance Indicators, including at least one from each Economic, Environmental, Human Rights, Labour, Society, Product Responsibility Core + Additional Indicators G3 Performance Indicators & Sector Supplements Performance Indicators Indicator Guidelines: 1. Depend on what level of report (A, B, C) you are aiming for 2. Always core, then additional, then sector supplements, then others (industries, new, other)

Reporting Principles Source: GRI G3 Guidelines

Measuring against what? Societal Values / Norms Standards/Principles/Instruments • Company’s own values and stated mission. This may explicitly set out social, economic and environmental goals • Values and interests that reflect views and aspirations of key stakeholders • Values institutionalized in law, conventions or rooted social norms Specific stakeholder Values / Views Firm Core Values Source: Simon Zadek, “The Civil Corporation”, 2006

Linking Sustainability metrics and Business Strategy metrics • What are the relevant metrics and KPIs? • Economic growth • Customer satisfaction • Employee engagement • Stakeholder engagement • What are the Key Thrusts? • Strategic priorities • Market, financial, business objectives • Targets What is the Vision, Goals, Objectives for the company? What is the vision for sustainability? What are the specific sustainability goals? How do they fit with business strategy? What would be specific metrics related to sustainability goals? How are the sustainability goals woven in our supply chain activities? Source: Latitude

Linking Sustainability Strategy and metrics Example: Marks and Spencer Plan A Specific activities related to sustainability objectives integrated with other activities Specific metrics related to sustainability objectives Sustainability related Objectives (By 2012) Reduce environmental impact • Climate Change • Reducing energy use • Using green energy • Tackling food miles • Helping consumers cut carbon • Fuel efficiency in warehouses • Energy efficiency in warehouses • Number of “Green factories” • Number of “Green Stores” • Store Energy consumption

Key considerations in setting metrics to measure progress There is an underlying objective for the measurement. Measurement terminology is defined and used consistently throughout the organization. Information needed for the measurements is obtainable. The measurement will create behaviour that is in concert with organizational goals and objectives. While there will likely be a combination of lagging and leading indicators, leading indicators are more appropriate to help predict how the organization will perform in the future. The measurements should be used to track performance trends. Appropriate benchmarks and targets are identified. Source: Butler et al, 2008

Session 8: Measuring and Communicating on Sustainable Supply Chain Performance