Importance of business metrics after COP26: SAP insights
COP26 was the first UN climate conference that truly recognised the critical role of business in driving change. Accompanying the Glasgow Climate Pact – which set targets on the phasing out of fossil fuels, carbon emissions and financial flows to developing countries – was a commitment from a third of the UK’s biggest companies to eliminate their carbon emissions by 2050. If the spotlight was on how businesses approach and champion sustainability in the aftermath of COP, we expect this is only the start of the levels of scrutiny they will now come under.
But for many, this is unwelcome attention. Our earlier research highlighted that many leaders are still struggling to align sustainability commitments with their overall business strategy. It’s why a single reporting framework like the Value Balancing Alliance, born out of industry, could help businesses measure, evaluate and compare their environmental impact, and enable leaders to future-proof their businesses for years to come.
Identifying industry confusion
Prior to COP26, companies were already facing growing pressure to define their environmental and societal contributions. Governments and consumers alike were calling for greater action, but the starting point was unclear. How can any one business put a price on the impact of its actions, and how do you even begin to understand how much it costs?
Publicly listed companies have a particular duty of care to reflect the ambitions and demands of their shareholders – most often employees and consumers. However, in order to make robust decisions, ecological and social impacts need a price tag. Only then there is a chance for them to be on equal footing with commercial performance. However, measurement can be challenging and comparability is not always widely available.
The root cause of this can be found in current reporting practices. While many businesses already disclose information on the impact of their operations on the environment, economy and society, each sets its own priorities.
Reporting frameworks such as the Global Reporting Initiative (GRI) provide basic guidance, but the corporate culture and type of business model often results in differing criteria for measurement emerging. Consequently, reporting becomes company-specific and is insufficient for sustainable resource management.
Establishing a single framework
Groups from a wide range of industries have set out to close the comparability gap through the Value Balancing Alliance (VBA). Companies such as BMW, Deutsche Bank, Porsche and SAP are participating, alongside the Big Four accounting firms (PwC, Deloitte, EY and KPMG) the OECD and universities like Harvard and Oxford. The alliance is working to create a methodology by mid-2023 that will enable companies to measure and evaluate their performance in a way that allows for comparison with that of other businesses.
Along our 12-year sustainability journey at SAP, we have consistently embraced the idea that social, environmental and economic performance are interrelated. Being a founding member of this alliance will allow us to work with like-minded companies to create the foundation for widespread implementation.
In order to achieve this we must first implement a set of industry-wide standards that establish the outcome of a particular strategy, and also show how sustainability can lend itself towards revenue for the business. This will mean establishing an all-encompassing approach towards sustainability management, as advocated for by the Club of Rome in the 1970s.
Let's first consider measurement. The importance of this is particularly evident in the case of carbon dioxide emissions, which often reach far beyond the company itself. For example, in the chemistry industry a large proportion of a company’s carbon footprint is produced upstream by suppliers. In fact, research has shown that indirect causes, such as the supply chain, are responsible for 77% of the industry’s total emissions.
Elsewhere, it's the other way around: emissions only really start to rise downstream once the products have reached the customer. The data that needs to be collected therefore extends from the supply chain through to production and into the use phase, making measurement complicated. To solve this, the VBA is developing guidelines outlining how companies in a wide range of industries can credibly record relevant data at every stage of production.
Putting an end to external costs
A huge amount of information is generated from this end-to-end data collection and the VBA is creating guidance for calculating its monetary value. For example, at SAP we have calculated that the total amount of carbon dioxide emissions associated with our purchasing decisions – which amounted to two million kilotons in 2019 – had an environmental impact of $189m.
But how did we arrive at this exact dollar value? The calculation runs on a set of rules – a price – that represents each impact resulting from the emissions. Climate change involves many complex chains of effects, from ecological changes to upheavals in economic systems, and combining all of these into a single calculation can be extremely difficult. As such, the VBA relies on findings that have already been validated. However, in some cases the alliance is working this out for itself.
For instance, for carbon dioxide the VBA proposes a kiloton price of $94 based on 2019’s estimates. Of course, this value is not set in stone and may need to be changed in the future. The responsibility of establishing proportionate financial targets should go to a globally recognised body such as the OECD or the World Bank.
Applying these new insights
While there is still a lot of work ahead, for the first time companies could soon have a methodology at their disposal which will allow them to uniformly measure and evaluate their environmental impact.
This analysis can also account for economic impact, including the social benefit of further education or the economic effects of the taxes, duties and salaries that are paid. Once the costs and returns of all these factors become clear, company leaders will have a much broader knowledge base to make truly sustainable business decisions.
A single framework like the VBA could help companies articulate their positive contributions to the environment in a way that consumers understand. In turn, businesses can become more transparent in their reporting practices, while also accurately measuring their environmental impact. As corporations large and small look to adapt their operations in the months and years after COP26, a common reporting framework like the VBA could be invaluable for businesses looking to reach net zero.