Can sustainability data be used as a measure of risk?

As more businesses measure and report energy use and carbon emissions, it is possible to judge a firm on its responsible reputation. Extend this to its supply chain and you can build in a valid measure of risk and business continuity, argues Robert Clarke, CEO, Ecodesk.

A good reputation is everything, at least according to the Reputation Institute but as its name suggests, it has a vested interest in the headline. It did however conduct a survey of 4,719 US consumers in April, on attitudes towards 150 leading brands. While Walt Disney Co, Intel and Amazon topped the list (many financial businesses came out bottom), the Institute found that reputation built on products and services alone was not enough. Other factors came into to play to sway perception of a brand, such as governance, citizenship and financial performance but what I want to know is whether or not sustainability data can play a part in providing a more accurate and open measure of reputational risk?

For investors and other business stakeholders, a brand with a good reputation, in theory at least, minimises risk.This is fine if you have a clear vision of what has defined that brand’s reputation but for many businesses, reputation is often undone not by their own actions but by their supply chains. If the horsemeat scandal did one thing, it alerted businesses in all industries to the dangers of taking the supply chain for granted.

In January, The World Bank released a statement which suggested “Governments should take a holistic approach that considers the entire supply chain, focusing on all policies that impact supply chain efficiency to improve national competitiveness.”

This is fundamental. Understanding supply chains is critical to future business stability and growth but how can businesses minimise the supply risk? How can they protect reputation and investments in the face of unforeseen events which can impact supply lines?

Drilling down into every detail of the supply chain can be an expensive and laborious task. Some major consultancy firms already offer this service but it has limitations. Results are produced as one-off reports, limited by closed data and analysis. There is often no on-going risk assessment, which means reports are out of date very quickly.

Supply chain transparency

Full transparency of a supply chain is a bit of a golden chalice. While it is worth aiming for, it is also worth being realistic, which is why I would argue that energy data is a key measure of a business and therefore an indicator for customers on supplier viability and performance. Energy data is accessible and an on-going analysis of it can illustrate a business’s determination to control its costs, source responsible fuels, engage with staff and customers on energy reduction programmes and so on.

I am not alone. According to a Deloitte report released earlier this year, energy data is one of the key elements of understanding the true nature of a business. The report quoted Bruno Bertocci, Managing Director and Global Equity Portfolio Manager at UBS Global Asset Management who said, “managers need to understand the latent risks embedded in their company’s business model before they become a full-blown risk.”

It is also the view of the World Bank and the US and UK Governments, all of which have energy efficiency-driven incentives to understand business use of energy but with one important caveat. The data must be open, otherwise all we are creating is just another layer of curiosity and doubt, which doesn’t help mitigate risk and feed positive reputation.

Measuring and reporting energy data openly should be a baseline requirement for any modern business that takes reputation and risk seriously. There is also a hard economic reason why this should happen. With energy costs rising, emerging market supply chains increasing and competition putting pressure on products and pricing, anything that can offer competitive advantage has a value. Analysing energy and carbon data to identify cost benefit is the first stage in building a sustainable business future, something which should have immediate impact on profitability.

If this is extended into the supply chains it is possible for businesses to quickly build a picture of potential issues but also opportunities.Understanding suppliers in terms of energy consumption and emissions would clearly identify areas of waste and inefficiency, enabling institutions to shave unnecessary costs off of the inventory.

Sea change
There is certainly a momentum here and pressure is building on businesses and investors to take greater responsibility in driving change to benefit both business and the environment for the longer term. Last month the European Commission released draft proposals advocating more disclosure on diversity and non-financial risks – so that investors and other stakeholders can get a better understanding of the company’s risks and the board’s appetite for risk. Organisation such as Ceres in the US campaign and work with business to change capital market practices “to incorporate long-term environmental and social risks instead of merely relying on short-term returns as a measure of economic health.”

There are also a number of frameworks in place such as The Carbon Principles (due diligence for investment in power companies) and The Equator Principles (a framework for social and environmental risk assessment in project finance). There are also guidelines in development to help investors understand sustainability performance, as well as methodologies such as GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard, which provide a high-level framework for calculating and reporting value-chain emissions.

But all of this will be piecemeal without an open data approach that involves businesses and their supply chains openly sharing and analysing related energy data. Some organisations already understand this – GlaxoSmithKline, PepsiCo, Allergan and Microsoft, to name a few – and more are starting to get it. Connecting and sharing open sustainability data sits neatly on top of all the principles for measuring and reporting. It’s about communication. As research company Verdantix recently claimed, “Communication is an integral part of capturing the value of sustainability.”

Communicating sustainability performance that is backed up by reputable measures and certifications can fuel reputation and minimise risk for investors. Open energy data can empower investors and stakeholders. As businesses increasingly get to grips with sustainability data and its role in terms of risk and ROI (aDeloitte Touche Tohmatsu study revealed that 49% of the top 250 CFOs see sustainability data as a key driver of financial performance), they will increasingly recognise the value of a transparent supply chain and the business and investment opportunities that it will stimulate.

Robert Clarke is founder and CEO of Ecodesk, the World’s largest sustainability open data and communication platform, providing real-time, consistent and comparable sustainability information for companies and their supply chains. It currently has more than 112,000 on-line corporate profiles.