The Sustainability Index: How to Tell if You’re Getting Greener

Every few years it gets more complicated to run an organization. It used to be if you had a solid financial result, that was enough to be considered successful. About 30 years ago, new types of metrics started creeping in that were used to assess different aspects of organizational health. Product quality metrics become big in the 1980s, followed quickly by measures of customer satisfaction.

Next, organizations realized that much of their work was done by employees, so measures of factors such as employee satisfaction/engagement, safety and employee health become part of the corporate dashboard. Other measures of supply chain management, processes and even ethics began to find their way onto what Harvard Business School professors Robert Kaplan and David Norton came to call the “Balanced Scorecard.”

In the last five years or so, another way to measure the health of an enterprise has emerged: sustainability, or the degree to which an organization is environmentally responsible. This kind of thing was originally only considered important by a few tree-hugging companies run by hippies, but it has now become a mainstream concern. It may surprise you to learn that one of the leading companies in measuring and managing sustainability is Walmart.

Although I’m sure predictable companies like Patagonia or Whole Foods have good sustainability metrics, Walmart is clearly one of the leaders of this effort to measure and focus on sustainability as a key performance factor. The challenge is that sustainability often costs money, and there is no indication that Walmart will be paying vendors more for their sustainable products and practices. By balancing a focus on price, value and sustainability, Walmart will be putting pressure on its 60,000 vendors to have products and processes that are less demanding on the environment. A recent article suggests that it is getting harder to hate Walmart.

Getting Greener at the Santa Clara Valley Water District

The Santa Clara Valley Water District in San Jose, Calif., protects and manages all of the reservoirs and watersheds in Santa Clara County, and is the wholesaler of drinking water to all of the many cities and communities in the heavily populated Silicone Valley area of the state. The District has a “Green Index” on the scorecard of the CEO as well as many of the senior leaders. This area of performance is considered so important it was part of their three-part vision statement: “Getting greener, leaner and cleaner” under former CEO Stan Wilson.

The Green Index is divided into internal metrics and external metrics. Internal metrics includes factors such as use of solar energy to power their headquarters building, use of car pooling by employees, recycling of paper, plastics and other factors. External metrics focus on the creeks, reservoirs and other bodies of water in the county. Metrics were gathered on water quality, bacteria and the health of fish, game and plants that depend on this water.

By measuring and reporting on this Green Index monthly, and putting it on the scorecards of many managers of the district, they were able to improve performance and went on to win the Silver level California Award for Performance Excellence.

Characteristics of a Good Sustainability Metric

The first thing you need to understand is that sustainability cannot be accurately measured by a couple of simple statistics. As with financial performance, customer satisfaction, or any other important performance dimension, success is measured using a suite of metrics that roll up into summary indices. A common architecture used by my clients includes three categories of sustainability metrics in the index:

• Process metrics, which includes variables such as use of energy, water and other resources, employee behavior measures such as recycling and use of public transportation, facility metrics, LEED buildings, etc.
• Partner metrics, which includes measures of supplier/vendor performance, percent of partnerships with environmentally responsible companies, green audit scores, etc.
• Product metrics, which includes use of minimal packaging, environmentally friendly raw materials, products/services safer for environment (e.g., fuel efficient cars, jets/trucks that are more fuel efficient, biodegradable products, no bad chemicals such as BPAs, etc.).

The relative weight of each of the three categories of measures in your sustainability index depends on your organization. For a retail company like Target or Kroger that sells products manufactured by many vendors, the “Partner” portion of the index might be given a 50-60% weight. Similarly, a chemical company I worked with, spends 66 cents out of every dollar of expense on outside suppliers, so the “Partner” dimension would get a heavy weight. A service company might put the heaviest weight on processes and their own service (product) if they rely very little on outside suppliers/partners.

Another factor to think about is to make sure to include a balance of leading and lagging metrics in your sustainability index. A lagging measure might be something like gallons of fuel saved, or number of suppliers with good green audit scores. Leading or cholesterol metrics might include dollars invested in alternative energy technologies, education of employees or customers, perceptions/beliefs about sustainability issues, processes, use of technology that saves resources, and policies that promote improved environmental performance.

The key to determining the validity of your leading measures is that they correlate to the lagging ones. Beware of superstitious leading indicators that sound good, but do not really link to improved outcomes.

Select Metrics You Can Benchmark Against

Part of having a good sustainability scorecard is tracking measures that can be easily compared with others. Each metric in an index needs to have a target or objective to become meaningful. Most companies set values for green, yellow and red levels of performance. As I mentioned, Walmart is one of the pioneering companies in the area of sustainability measurements, but their initial measure of their vendors is simply a self-report questionnaire that they fill out. The plan is to gradually roll out more sophisticated and comprehensive sustainability over time.

Eventually, we may have a more standardized set of metrics that can be used to compare all companies. That day is probably many years off, however, since we don’t even have a standard set of financial metrics that all organizations use. In the meantime, try to pick at least a few of the measures in your sustainability index that can be compared to others. This will make it easier to set reasonable targets and to compare your own performance to others.

Not Just for Tree-Huggers Anymore

Sustainability is no longer something found in only a handful of environmentally conscious companies. The health and performance of organizations today is judged by how well they take care of the planet as well as how well they take care of customers, employees and shareholders. Forward-thinking companies are also measuring and managing sustainability as another key performance dimension.

As with anything you manage, you have to first be able to accurately measure it. Sustainability is sufficiently complex so as to require an index measure that is made up of a variety of individual metrics, sorted into categories. If you do a Google search on “sustainability index” you will find several companies that will sell you their metrics and access to comparative data, but you should try to develop your own metrics first before buying one of these packaged solutions. The individual metrics that make up your sustainability index need to be tailored to your industry, current performance and company.

By Mark Graham Brown, from: http://businessfinancemag.com/article/sustainability-index-how-tell-if-youre-getting-greener-0618