Accounting for sustainability performance: Organizations that manage and measure sustainability effectively could see benefits to their brand and shareholder engagement and retention as well as to their financial bottom line.

• Author: Hespenheide, Eric
• Position: ACCOUNTING

The past decade has witnessed a surge in companies clamoring to build reputations as good corporate citizens focused on improved social and environmental performance. What started as a public relations or marketing device for some and a cost-savings initiative for others is evolving to a new level as the market demands greater transparency and traceability of sustainability performance across the supply chain.

[ILLUSTRATION OMITTED]

Consumers can be confused by labels like "green" and "eco-friendly." Some investors are skeptical that sustainability efforts really pay off beyond a slight boost in corporate image. Cash-strapped companies want to make sure their investments are targeted at the most high-impact projects. And, what's more, many levels of government and other stakeholders are starting to demand greater transparency regarding social and environmental performance and impact.

Sustainability Key Performance Indicators

Sustainability should be a key component of any company's corporate strategy and risk management efforts. A strategically driven sustainability program has the potential to achieve much. Such a program can help improve operations, attract talent, promote positive public relations, enhance transparency and accountability and streamline regulatory compliance. It can also inspire supply chain partners, draw investors, energize stakeholders, heighten competitiveness and, ultimately, boost the company's bottom line.

As sustainability, carbon and climate change initiatives become more widespread and efforts currently deemed voluntary in terms of reduction and reporting become regulated, chief financial officers are likely to be called upon to develop and report sustainability performance metrics, especially those with direct and material financial implications.

The same can be said of social performance indicators such as those involving labor practices, fair trade policies, employee compensation and the impacts of businesses on local communities. These indicators are important to meeting evolving disclosure requirements and effectively managing sustainability programs.

A 2009 Deloitte survey of its largest clients found that more than 60 percent offered some form of sustainability reporting in addition to their regular financial report. While this reporting is currently voluntary in the United States, the U.S. Securities and Exchange Commission and other agencies are evaluating mandatory reporting on sustainability performance.

Meanwhile, the United Kingdom, as well as several other countries, already require reporting of certain nonfinancial performance, particularly climate-related.

[ILLUSTRATION OMITTED]

There are currently four primary factors motivating companies to develop and disclose key performance indicators on sustainability.

* Stakeholder Demands. Customers and consumers are increasingly interested in the social and environmental performance of companies. Wal-Mart Stores Inc. has announced the "Sustainable Product Index," which will require suppliers to provide data on their sustainability performance and ensure alignment with Wal-Mart's sustainability goals.

This effort is another step toward creating a global set of standards for measuring and communicating the sustainability impact of products and their suppliers to build a green economy. Companies are also experimenting with disclosures such as "carbon labeling," and trying to evaluate if providing this information to consumers influences behavior.

* Shareholder Expectations. More than ever, shareholders are taking an active interest in the social and environmental performance of their investments. In January, the SEC voted to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.

At press time, the specifics are not clear as the SEC has not yet posted its interpretive guidance, but what is clear is that companies will need to further develop the proper internal controls and mechanisms to gather the necessary information for accurately reporting and disclosing how issues such as energy, emissions and access to natural resources will impact business operations and shareholder value.

...