1 session 8: measuring and communicating on sustainable supply chain performance

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Session 8: Measuring and Communicating on

Sustainable Supply Chain Performance

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Approach to Sustainable Supply Chain Management (SSCM): Overarching Framework

Framing the IssuesPreparing for

Implementation Assessing Impact

Session 1: From Sustainable Development

to Sustainable Supply Chains

Session 2: Governance of Supply Chains I: From

Compliance to Voluntary Standards

Session 4: Sustainable Supply Chains as a Lever of Competitive Advantage

Session 5: Integrating Sustainability into the

Supply Chain

Session 6: Managing Stakeholder Relations

Session 7: Building Supply Chain Partnerships

Session 8: Measuring and Communicating

on Sustainable Supply Chain Performance

Session 8: Measuring and Communicating

on Sustainable Supply Chain Performance

Session 3: Governance of Supply Chains II:

Introducing International Labour Standards

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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

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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

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Talking about performance measurement

1. What is performance measurement?

2. Why measuring?

3. Measuring…against what?

4. How to measure?

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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

evaluating a company’s progress towards achieving sustainability.

Richard LockeDeputy Dean and Professor of Entrepreneurship,

MIT Sloan School of Management

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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, strategic and operating measures to gauge how well a company meets its targets” (Gates, 1999)

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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

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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.

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Agenda

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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

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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)

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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

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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

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Beyond theory: the view from practitioners

Key reasons for measuring supply chain sustainabilityIllustrative example from the shipping industry

Source: North American Sustainable Supply Chain Report 2010

InnovationAttract

Attract

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Agenda

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Evolution of supply chain measurement systems (Beamon, 1996)

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

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.

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Three types of performance measures for supply chains (Beamon, 1999)

• 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

• Total cost of resources • Distribution/manufacturing cost• Inventory: investment,

obsolescence• Return on investment (ROI)

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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

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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.

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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’

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The GRI Standard Disclosures

Profile disclosures set the overall context for understanding performance - such as strategy and governance.

Management Approach disclosures explain how specific sustainability issues are managed, including goals and targets.

Performance Indicators elicit comparable information on economic, environmental, and social performance.

Source: Global Reporting Initiative G3 Guidelines, accessible at www.globalreporting.org

Measures express strategic approach, management goals, and performance results through three kinds of disclosures:

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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

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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.

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Sample Environmental Performance Indicators required by GRI

Source: Global Reporting Initiative G3 Guidelines, accessible at www.globalreporting.org

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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

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Sample Social Performance Indicators required by GRI

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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

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Agenda

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The number of companies reporting on GRI Guidelines continues to expand, with increased SME and emerging

markets participation

Source: Global Reporting Initiative 2010 Statistics

SMEs

MNEs

68% growth in Brazil 9% growth in China

Number of Reports 2010 Geographic Distribution 2010

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Global reporting statistics show an upward trend in the number of reports including meaningful sustainability

information…

Global Output Report 2010

In 10 years, the number of reports mentioning significant sustainability achievements grew by 6 times (Corporate Register)

FTSE100 Constituents Reporting

Annual growth 2009-2010 of FTSE100 Companies including meaningful sustainability information reached 10 percent

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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 factors such 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 reports by 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 trends that may materially affect financial performance

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Sustainability Reporting

“Sustainability reporting is the practice of measuring, disclosing and being accountable to internal and external stakeholders for 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

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Market forces influencing sustainability reporting

Financial/Market Forces

Regulatory 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)

• 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

• 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)

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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

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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.

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Agenda

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Class Example and Discussion: Danone’s Human Rights Indicators

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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.

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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

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Back up Slides

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Application Levels

G3 Profile Disclosure

G3 Management Approach Disclosures

G3 Performance Indicators & Sector SupplementsPerformance Indicators

Report on1.12.1 – 2.103.1 – 3.8; 3.10 – 3.124.1 – 4.4; 4.14 – 4.15

Not Required

Report on all criteria listed for Level C plus:1.23.9; 3.134.4 – 4.13, 4-16 – 4.17

Report on a minimum of 20 Performance Indicators, including at least one from each Economic, Environmental, Human Rights, Labour, Society, Product ResponsibilityCore + Additional Indicators

Management Approach Disclosures for each indicator Category

Report on a minimum of 10 Performance Indicators, including at lease one each of Economic, Social and EnvironmentalCore Indicators

Report on each core G3 and Sector Supplement Indicator with due regard to the Materiality Principle by either: a) Reporting on the Indicator orb) Explaining the reason for its omission

Not applicable is not valid – Must explain i.e. not material, no data, no commitment, proprietary information

Management Approach Disclosures for each indicator Category

Same as requirement for Level B

Report Application Level

C C+ B+B A A+

Report E

xternally Assured

Report E

xternally Assured

Indicator Guidelines:1. Depend on what level of report (A, B, C) you are aiming for2. Always core, then additional, then sector supplements, then others (industries, new, other)

Report E

xternally Assured

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Reporting Principles

Defining Content

Materiality Topics and indicators that reflect social, environmental, economic impacts that would influence stakeholder assessments and decisions

Stakeholder Inclusiveness

Identify stakeholders and explain how responded to their expectations

Sustainability Content

Performance in the wider context of sustainability

Completeness Material topics, indicators and definition of reporting boundary to reflect impacts

Defining Quality Balance Reflect both positive and negative aspects of performance

Comparability Issues and information should be selected, compiled and reported consistently

Accuracy Information sufficiently accurate and detailed for stakeholders to access performance

Timeliness Reporting occurs on a regular schedule and information is available in time to make informed decisions

Clarity Information presented in a manner that is understandable and accessible

Reliability Information and processes used to prepare report should be gathered, recorded, compiled, analysed and disclosed in a way that could be subject to examination

Boundary Setting

The Sustainability Report should include the entities over which the reporting company exercises control or significant influence both in and through its relationships with various entities upstream (e.g. supply chain) and downstream (e.g. distribution & customers)

Source: GRI G3 Guidelines

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Societal Values / NormsStandards/Principles/Instruments

Societal Values / NormsStandards/Principles/Instruments

Specific stakeholder Values / Views

Specific stakeholder Values / Views

Measuring against what?

FirmCore Values

FirmCore Values

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

Source: Simon Zadek, “The Civil Corporation”, 2006

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Linking Sustainability metrics and Business Strategy metrics

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 are the Key Thrusts?

• Strategic priorities• Market, financial, business objectives• Targets

What are the relevant metrics and KPIs?

• Economic growth• Customer satisfaction• Employee engagement• Stakeholder engagement

How are the sustainability goals woven in our supply chain activities?

What would be specific metrics related to sustainability goals?

Source: Latitude

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Reduce environmental impact

Linking Sustainability Strategy and metrics Example: Marks and Spencer Plan A

Sustainability related Objectives (By 2012)

Specific activities related to sustainability objectives integrated with other activities

Specific metrics related to sustainability objectives

• Fuel efficiency in warehouses

• Energy efficiency in warehouses

• Number of “Green factories”

• Number of “Green Stores”

• Store Energy consumption

Climate Change

• Reducing energy use

• Using green energy

• Tackling food miles

• Helping consumers cut carbon

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Key considerations in setting metrics to measure progress

1. There is an underlying objective for the measurement.

2. Measurement terminology is defined and used consistently throughout the organization.

3. Information needed for the measurements is obtainable.

4. The measurement will create behaviour that is in concert with organizational goals and objectives.

5. 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.

6. The measurements should be used to track performance trends.

7. Appropriate benchmarks and targets are identified.

Source: Butler et al, 2008

1 session 8: measuring and communicating on sustainable supply chain performance

Documents

supply chain session

measuring supply chain

sustainability performance

monitoring supply chain

sustainable supply chain

governance of supply

sustainability measurement

impact session