Four months and seven years ago, KoAnn Vikoren Skrzyniarz, founder of Sustainable Brands, launched the New Metrics of Sustainable Business conference. KoAnn invited me to be part of the “village” of birthing partners — with Dimitar Vlahov of SB, Nick Gower of HIP Investor, and Bill Baue of Reporting 3.0 — to bring together the leading case studies, videos, and webinars that showcase New Metrics. This launch in 2011 also lined up with the publishing of The HIP Investor textbook/e-book/audiobook (Wiley), a 250-page how-to guide of new metrics for investing, written so that my Mom could understand it.
The deep content of leading indicators of future risk, value creation and impact on society spurred annual conferences. First, hosted in partnership with my alma mater, The Wharton School of Business at the University of Pennsylvania in Philadelphia, and subsequently in partnership with MIT-Sloan in Cambridge, Mass., we now celebrate 7 years of a 21st century approach which can drive sustainable value for people, environment and society — and higher potential profit for companies and investors.
As a co-leader of the New Metrics movement, here are 7 insights from 7 years of New Metrics (and 11 years of HIP), in the drive towards a sustainable, responsible, impactful society – including investor portfolios that align with this vision.
Unilever’s double-digit revenue growth (in a single-digit growth industry) from products that are cleaner, greener and more accessible. Demand for organic milk exceeds supply, as consumers see healthy choices as lower future health expenses, and higher prices today as an investment in their own well-being in the future. The 17 U.N. Sustainable Development Goals are part of the product development, capital allocation, and strategic planning processes inside growth-seeking brands from Whirlpool to Novo Nordisk. Higher revenue, lower costs, lesser risk – there all can lead to bigger profits, and more sustainable, resilient investor portfolios (including 401ks). Is your company pursuing these New Metrics? Is your portfolio based on them? If not, the time is now.
Say “capital” and most of us think money; the most prudent investors focus on Return on Investment (ROI), not just operating budgets to be reduced. Yet capital includes Human Capital, people as innovators, operators and service-deliverers; Natural Capital, like the air we breathe, water we drink, and land we grow our food on; and Social Capital, the trust and resilience of our relationships and communities. When applying an ROI mindset, and valuing all capitals rather than just minimizing costs, we can realize the highest possible impacts and profits. MultiCapital scorecards, led by Mark McElroy, are a unified approach to goal-setting and managing multiple capitals in a science-based and context-sensitive way, applied by Ben & Jerry’s, Cabot Creamery and New Chapter (a Procter & Gamble company). How do you measure all your capitals?
Blackrock manages $4 trillion in assets globally in mutual funds, ETFs, and in private accounts, and advocates long-termism, (which appears to be in short supply), and has launched several sustainable strategies to serve investors – like Pitzer College’s $100+ million endowment — demanding environmental, social, governance (ESG) results, as well as pursuing profit. Bloomberg tracks 1000s of global companies on their people and planet metrics, which are used by large investors. TruCost, now a unit of Standard and Poor’s, offers several sustainable investment indexes that over-weight eco-focused firms, which have led to outperformance financially. Sustainability aligns with higher return potential, and lower risk and volatility. In finance, this is known as “alpha” generation, returns and risk that beat the market indexes. More investment firms are seeking to become alpha-dogs, and offering new investment choices. Aspiration’s Redwood Fund (CEO Andrei Cherney speaking at New Metrics Nov 15), ETHO Capital’s Climate Leadership ETF, and Change Finance’s Diversified Impact ETF are leading the way. Our team at HIP is working with big financial brands to deliver sustainability ratings, portfolios and 401(k)s. Even companies are leading, as Dave Stangis, head of sustainability at Campbell Soup facilitated investment analysts to learn sustainability in investor-relations briefings. Who will be the next leaders to add Green, ESG, Impact metrics into company quarterly earnings calls on Wall Street?
We have all heard CEOs say, “people are our most important asset,” which can also generate giggles and grunts. Why? Because people are primarily managed as a labor expense to be managed down, rather than an asset that appreciates and produces value for the organization. When Sustainable Brands’ annual flagship conference was in Monterey, California, I issued a challenge to the 500 leaders attending: Who will be first in the USA or Europe to put people on the balance sheet as an asset. Three firms raised their hand; one ultimately applied this approach internally – spearheaded by VP Sustainability Erin Meezan of sustainability leader Interface Inc, founded by the late Ray Anderson. Interestingly, India-based firms like tech-services leader Infosys had already implemented this approach from 1998 to 2012, and its human capital value tracked the stock market performance over time. Steph Sharma is co-leading a human capital track at New Metrics 2017. Will your firm truly measure and manage people as an asset?
Pollution can be priced, and used for corporate planning (like at Shell), traded as an asset, and taxed by governments. The private conglomerate Kering, based in France, owns the shoe company Puma. Early in the New Metrics journey, Puma created an Environmental P&L (profit and loss) report which priced land, water, carbon, and natural resources as if its true prices were paid across its full supply chain, back to the water-intensive cotton for its shoes. The results: Puma’s profitability would be 30% to 50% less if all environmental costs were truly priced in. The Dow Chemical Company analyzed five water scarcity solutions that involved nature and collaboration with other water users, identifying three that were cost-competitive with corresponding traditional solutions: restoring floodplains to expand reservoir storage, financing irrigation efficiency technology, and establishing a municipal rebate program for low-flow toilets or low water use landscaping. These three solutions could also provide extra benefits to the public and biodiversity amounting to $320 million over a 30-year period. What hidden costs are in your supply chain? How will you innovate to benefit the planet and profit? When will you produce an Ecological Profit and Loss statement?
The chemicals giant BASF has actively pursued sustainability across its products and geographies, seeing the risks to ongoing eco-sensitive systems, and the opportunities to win more customers and revenue. This year BASF will be presenting a promising prototype of a value-to-society calculator that estimates the brand’s contribution to society along the entire value chain. Coca-Cola is implementing water-efficient production approaches to reduce the risk of sourcing water reliably – and has dropped its water per unit of soda from 3 glasses to closer to 2 glasses – which still means every glass of Coke you drink, uses 2 not 1. (And drinking beer doesn’t help water-intensity, as water usage ranges from 4 to 10 pints per 1 pint of beer.) Small, innovative firms are bringing innovation faster, like real-estate-services firm Stok implementing a sustainable, fossil-free 401(k) to engage 100% of its employees. Whether your firm is big or small, start today – work with the influence and power that you have, and make the benefits of New Metrics contagious inside your organization!
We have Chief Sustainability Officers, but how many are officially on the Executive Committee, Leadership Team, or in the Boardroom as Directors? Sustainability is a compelling product, business and competitive strategy. The company and investor scorecards need to reflect that, requiring CFOs to embrace, design and implement more finely tuned performance reports that focus on Leading Indicators, not just historical profit, or labor costs, or tax reductions. Instead, a truly “balanced scorecard” that includes New Metrics can include: Revenue Growth from new products that solve human, social, environmental problems, including “green revenue” like rated and ranked in Newsweek; Net Expense Optimization, reflecting the carbon, water and waste intensities, and the financial savings from “trash to cash” like Closed Loop Fund focuses on; People as an Asset on the Balance Sheet, which can and should appreciate over time with more skills, capabilities, training, and teamwork. These metrics reflect the leading indicators from customers, employees, environment, and society. The more that big brands, their Boards, CEOs and executives lead from the top-down, the more bottom-up innovation can thrive – and lead us to a more sustainable corporation, that can be included in a portfolio, that maximizes the resources (money, people, time, trust) that can build a better world. Who are the sustainability leaders on your Board and executive team? Time to add this expertise to your leadership and governance.
Help create the next wave of insights, innovations and implementations — join the New Metrics ’17 conference in Philadelphia on Nov 13/14/15 — and the online community at SustainableBrands.com.
Also, as a guide for you to pursue New Metrics, we went into the Archives to share these educational guides: (1) Financial Statements of the Future (balance sheet, income statement, cash flow statement), by HIP Investor. (2) 22 Research Studies Proving the ROI of Sustainability, by Dimitar Vlahov and the SB team.
This post was originallly published on HipInvestor.com
Paul Herman
CEO & Founder
HIP Investor Ratings + Portfolios
October 26, 2017
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