The Role of Sustainable Development Indicators in Corporate Decision-Making

Cory Searcy Assistant Professor, Ryerson University Associate, IISD The Role of Sustainable Development Indicators in Corporate Decision-Making Laurence Roca MASc. Candidate, Ryerson University

Outline How are corporate sustainability indicators used in practice? • Background • Corporate SD Indicators in Canada • Study Overview • Results • Summary

Background • Many corporations have made commitments to apply the principles of sustainable development to their operations • The hardest part about SD is actually applying it in practice • One of the keys to understanding corporate SD is performance measurement • Fundamental to this task is the creation of SD indicators • Sustainable Development Indicators • Signs, symptoms, trends, or warnings that identify relationships based on defined parameters • Show the presence, absence, or threats to SD • Roles: measure progress, communicate, educate, understand interdependencies, and inform decisions

Corporate SD Indicators in Canada • Numerous Canadian corporations have included SD indicators in their publicly available SD reports • A review of the GRI website and CorporateRegister.com showed that 95 Canadian corporations published a SD report or equivalent in 2008 • Many of these reports included an indicator “scorecard” near the beginning of the report • A content analysis of the 2008 Canadian reports highlighted: • A total of 227 indicators were reported (157 were used once, 35 were used twice, 13 were used three times) • The most reported indicators were:

CORPORATE SD INDICATORS IN CANADANumber of Indicators Reported by Theme

Study Overview • The purpose of this study was to explore the use of SD indicators in corporate strategic management. Focus was particularly devoted to three areas: • Board-level decision-making • Corporate strategic management • Supply chain management • The study consisted of three key phases: • A survey of relevant literature • A content analysis of 17 corporate SD reports • Interviews with 15 Canadian experts

PHASE 1: LITERATURE REVIEWLiterature Review • The literature review focused on both peer-reviewed publications and internet reports published since 1987 • Key areas of focus in Board-Level Decision-Making: • SD indicators, corporate governance, and performance measurement • Key areas of focus in Corporate Strategic Management: • Corporate SD (and related) indicators, sector-specific SD indicators, Balanced Scorecard, composite indices, and integration • Key areas of focus in Supply Chain Management (SCM): • SD indicators, green procurement, ethical sourcing, life cycle assessment, and sustainable SCM There is relatively little literature that specifically focuses on the use of SD indicators in the three areas of interest.

PHASE 2: SURVEY OF REPORTSSurvey of Reports • The review focused on the Canadian companies listed on the Dow Jones Sustainability Index (North America) • 19 of the 118 companies listed were Canadian • Industries represented in the sample: • Financials: 8 companies • Oil and Gas: 5 companies • Telecommunications: 2 companies • Basic Materials, Industrials, Utilities, and Technology: 1 company each • All but two of the companies provided a SD (or related) report on their website • The most recent SD report was reviewed

PHASE 2: SURVEY OF REPORTS Board-Level Decision-Making • The review in this area focused on four key questions: • Chairperson of the Board Statement: Did the report contain a formal, signed statement from the Chairperson of the Board of Directors? • Governance Structure: Did the report provide a description of the role of the Board in the governance of the corporation or reference to such a description available on the corporate website? • Board Committees: Did the report identify specific Board Committees responsible for environmental and social issues? • Use of Sustainable Development Indicators: Did the report specifically describe how indicators are used at the Board level?

PHASE 2: SURVEY OF REPORTS Board-Level Decision-Making • Chairperson of the Board Statement: • Only one report contained a formal statement from the Board chair • Two other reports contained a brief message or quote from the Board • Governance Structure: • All but one report contained details on the governance structure • Board Committees: • 59% of the reports contained some detail on how SD issues were addressed at the Board committee level • Several corporations created a distinct committee to address SD (or related) issues, while others incorporated SD in existing committees • Use of SD Indicators: • None of the reports specifically described how indicators were used, but there were limited examples on how SD information was shared with the Board

PHASE 2: SURVEY OF REPORTS Corporate Strategic Management • The review in this area focused on five key questions: • Top Management Statement: Did the report contain a formal, signed statement from the Chief Executive Officer (or equivalent)? • Measurements of Sustainable Development Performance: Did the report contain sustainable development indicators? Were economic, environmental, and social issues addressed by the indicators? • Clear Targets: Did the report contain explicit targets for the SD indicators that were highlighted in tables or figures? • Forms of Measurement: Did the report contain any reference to (1) the Global Reporting Initiative, (2) the Global Compact, (3) the Balanced Scorecard, and/or (4) composite measures? • Use of Sustainable Development Indicators: Did the report specifically describe how sustainable development indicators are used in corporate strategic management?

PHASE 2: SURVEY OF REPORTS Corporate Strategic Management • Top Management Statement: • All of the reports contained a statement from top management • Measurement of SD Performance: • All of the reports contained some measures relevant to SD performance • Most reports addressed all three pillars of SD, but the number and types of measures varied widely • Clear Targets: • Many of the reports acknowledged the importance of targets in the text • 35% of the reports clearly reported on progress towards targets for clearly identified performance indicators

PHASE 2: SURVEY OF REPORTS Corporate Strategic Management • Forms of Measurement: • 82% of corporations reported on at least some of the GRI indicators • 29% reported a commitment to the Global Compact • 18% referenced the Balanced Scorecard • 35% reported on some form of aggregated measure, though in no cases was a comprehensive composite indicator reported on • Use of SD Indicators: • Limited details on the use of indicators were provided in 4 reports • There were also numerous statements focused on integrating SD considerations into the decision-making process

PHASE 2: SURVEY OF REPORTS Supply Chain Management • The review in this area focused on three key questions: • Supply Chain Management Strategy: Did the report contain a description of, or reference to, the corporation’s supply chain management strategy? • Supply Chain Management Performance Measurement: Did the report contain indicators on the corporation’s management of its supply chain? • Use of Sustainable Development Indicators: Did the report specifically describe how sustainable development indicators are used in supply chain management?

PHASE 2: SURVEY OF REPORTS Supply Chain Management • Supply Chain Management Strategy: • 82% of reports provided some details • The reports generally focused on the incorporation of SD criteria into the supplier selection process, supplier compliance with corporate codes of conduct, and descriptions of corporate procurement policies • Supply Chain Management Performance Measurement: • 88% had some form of measurement relevant to the supply chain • Use of SD Indicators: • Only one corporation provided explicit insight into how SD indicators are used in its supply chain

PHASE 3: INTERVIEWSInterviews • The interviews focused on Canadian experts in corporate SD • 15 experts were been consulted: • 6 corporate experts (current or recently retired directors & managers) • 2 professors • 2 auditors of corporate SD reports • 5 other consultants • The interviews were conducted over the telephone, with calls ranging from 30 – 90 minutes • To provide some structure, several standard questions were developed

PHASE 3: INTERVIEWS Questions Asked • In your experience, what is the primary motivation for companies undertaking SD initiatives? • To what extent do you see PM and reporting as a key lever in both improving corporate performance and meeting societal outcomes? • In your experience, how are SD indicators being used in corporate strategic management? Can you provide any examples? • In your experience, how are SD indicators being used in supply chain management? Can you provide any examples? • Are you aware of any corporate Boards that use SD indicators to inform their decisions? Can you provide examples? • How could the use of indicators in Board-level decision-making, corporate strategic management, and SCM be improved? • What areas do you see for future work in SD measurement and assessment? What key challenges do you anticipate in these areas?

PHASE 3: INTERVIEWS Motivations • A wide variety of motivations were cited by the experts • Some of the key motivations cited included: • Corporate reputation • Brand value • Risk management • Cost savings • Recruitment and retention of employees • Competitive pressures • Many experts noted the motivation can change over time The expert answers generally align with what has been reported in the peer-reviewed literature

PHASE 3: INTERVIEWS Performance Measurement as a Key Lever • The majority of the experts consulted noted that performance measurement (PM) is a key lever in improving corporate performance and meeting societal outcomes • PM is at the heart of getting corporations to change • PM is a key to focusing the attention of senior management • PM plays a key role in corporate accountability • Several experts cautioned that PM alone is not enough • PM must be integrated into a broader information management system that encompasses data management and reporting • There can be misplaced emphasis on PM

PHASE 3: INTERVIEWS The Use of SD Indicators at the Board Level • The views expressed by the experts were mixed • Most felt that Boards do consider SD information, particularly from a risk management perspective • There were different views on how the Board considers SD information • Formation of Board committees • Internal quarterly reporting processes • Importance of indicators will vary by sector: e.g. GHG emissions • Although the Board may have a great deal of interest in SD issues, this is not necessarily being captured by indicators • There were few concrete examples on how Boards consider SD indicators beyond Health and Safety indicators and GHG emissions

PHASE 3: INTERVIEWS Use of Indicators in Strategic Management • The experts felt that senior management in most large corporations have access to at least some SD indicators • This is generally reflected in top management approval of SD reports, integration of SD issues with the Balanced Scorecard, and other initiatives • There were few concrete examples on how SD indicators are used in practice • In one corporation, the CFO received SD indicators (along with more traditional financial indicators) on a regular basis • In another corporation, the indicators are regularly reviewed and discussed in directors meetings

PHASE 3: INTERVIEWS The Use of Indicators in SCM • In general, the experts expressed that there is less emphasis on quantitative performance measures in this area • There are some exceptions, such as such as for safety indicators when hiring contractors • The experts noted that SD issues are on the radar of SCM, but are not generally driven by indicators • Typical areas of corporate focus include codes of conduct, green procurement policies, or requiring suppliers to achieve recognized certification (such as ISO 14001)

PHASE 3: INTERVIEWS Suggestions for Future Work • Many suggestions for future work were provided by the participating experts • Some suggestions focused on SD indicators: • Improve data management and control capabilities • Study the processes and contexts in which decisions are made • Focus on indicators that are useful in management decision-making • Focus on linking indicators to clear targets, including broader public policy goals • Some suggestions focused on SD reports: • Develop and apply standards for independent verification of reports • Renew study on what information and indicators should go in reports • Study how the information in reports is used in practice • Enhance the GRI sector supplements • Increase the visibility of SD info (e.g. carbon facts similar to dietary facts)

Summary • Work on corporate SD indicators is abundant and growing rapidly • This ongoing pilot study focuses on the use of SD indicators in three key areas: • Board-level decision-making • Corporate strategic management • Supply chain management • Despite many commendable efforts, work remains

The Role of Sustainable Development Indicators in Corporate Decision-Making