In this chapter of Environment Analyst's Corporate Guide: Accelerating your ESG transition, Jacolien Eijer-de Jong, sustainability director, and Micha van den Boogerd, transactions and responsible investment services director, at TAUW provide guidance on how to set reliable and credible stretch targets that demonstrate ambition.
Introduction
Every business leader knows that anticipating new developments is an important part of good business management. The question is, how far should our actions go in considering them, and to what extent should we try to anticipate developments with an uncertain likelihood of occuring? No CEO wants to be responsible for the decline of their company, or for missing opportunities that would lead to its growth.
One way of anticipating and capitalising on new developments is to use stretch targets. These can be key to withstanding market volatility, to responding to growing regulatory requirements and to capturing the potential of sustainable growth opportunities.
Stretch targets — but from which perspective?
Sustainability is increasingly important, both in terms of companies’ missions and visions, and in terms of setting targets. But the degree of motivation to incorporate sustainability varies between companies, as does the impacts of their actions.
When talking about credible sustainability targets, we mean objectives that fit the company, make sense and are achievable. As a pizza baker, your mission is probably more to do with baking the tastiest pizzas than solving the world’s food problems — but even as a pizza baker, you have plenty of reasons to consider resource use, energy consumption, water consumption, biodiversity and exploitation.
These reasons can come from an intrinsic motivation, or an extrinsic one: i.e. because your customers demand it. But they can also come from anticipating future developments, such as the fact it will become increasingly difficult to bake the tastiest pizza if you do not take into account changing resource flows and higher energy prices. This is where stretch targets for sustainability come into their own.
How do we define a stretch target for sustainability? This will depend on how a company looks at sustainability. We distinguish between three approaches in the way companies respond to the sustainability agenda, set out in the figure below:
Approach 1: Compliance-driven
Within this approach, companies strive to comply with and anticipate future applicable laws and regulations. They also see and anticipate developments in the energy and resource markets. The average time horizon for looking ahead is no longer than three years.
Approach 2: Future-driven
Companies seek to be future-proof. They recognise that the current way of living, producing and consuming is not sustainable, that the climate is changing and that important primary resources are being depleted. Future-driven companies realise that the world is changing (climate and biodiversity) or needs to change (production chains). Their personnel and clients are increasingly pushing for a more holistic sustainability approach. Not doing so can make them vulnerable, and they want to prepare for it. The time horizon is about 5-10 years.
Three approaches to incorporating sustainability in companies (source: TAUW)
Approach 3: System change-driven
As a disrupter, companies in this category want to be a driver of system change. They see that the current way of living, producing and consuming is unsustainable, that climate change is ongoing, and that important resources are being depleted. They believe that the Earth’s balance should not change too much and want to actively contribute to changing (the economic system or) production chains by making this central to their strategy. The time horizon for their company strategy is 10-20 years.
Why stretch? Urgency and unpredictability
It is important to realise that our planet is a closed ecosystem. There are various observable trends that show that this ecosystem is being pushed out of equilibrium. Ecologists know that an ecosystem that is not in balance can show extreme and hard-to-predict shifts, such as with climate change. The unpredictability is due to the enormous amount and complexity of inter-process relationships.
In ecology, many processes have a tipping point, at which an increasing effect, change or concentration suddenly has an effect, unseen until the tipping point. After passing the tipping point the system takes on a different state. Unfortunately, the return to the old state, even if possible, does not follow the same path as the outward journey. It is clear that we are already exceeding the planetary boundaries on many fronts and that our human and economic activities are operating well outside the means our planet provides. This is causing us to disturb our ecosystem, the Earth.
All economic activities are dependent on this vulnerable ecosystem. There is no escape from this, because sooner or later the changes will also affect your company. Therefore, it is important to have a clear understanding of the impact your company has on this Earth ecosystem (to prevent further disruption as much as possible) and what impact the probable changes of the system will have on your company. The concept of determining impact in both directions is referred to as double materiality.
In recent decades, companies around the world have focused on increasing revenue and profit while reducing costs. It is becoming increasingly apparent that this approach has had a significant undesirable impact, both socially and ecologically. Until now we have largely ignored the costs (and profits) for the environment and society. As a company or investor you can no longer ignore these negative impacts — nor leave it up to policy makers to address them.
Aspects to consider in soil and groundwater remediation (source: TAUW)
Considerations for setting credible targets
The targets that a company sets are tangible objectives that every employee should be able to relate to. If the time horizon is too close or the goal is easily achievable, it won’t inspire management or other employees to aim for their best. If a target is too ambitious, nobody will believe in it — or staff will give up very quickly. However, if targets are challenging and also combined with a credible plan, they can inspire employees to achieve previously unthinkable and innovative results.
At the same time, the outside world expects ambitious targets. But these targets must fit the company. They must be about relevant issues, on which the company truly has an impact (materiality), and they must align with the company’s goals. If this is not the case, the process will rightly be seen as greenwashing. The time has passed for local community work to be enough to convince stakeholders of corporate responsibility.
The outside world is becoming increasingly critical of unrealistic ambitions and of the feasibility or otherwise of how a firm addresses its impacts. Increased and more comprehensive reporting obligations will only increase this trend.
So where do you start with a credible yet ambitious stretch sustainability goal?
For consulting engineers like TAUW, there is a growing awareness of the need to think further ahead in order to come up with credible targets that align with external developments while at the same time being achievable. After all, engineers design the physical conditions for society for decades to come.
Determining appropriate KPIs
One of the common challenges companies run into when setting targets is identifying the right KPIs to monitor the targets. For climate change-related emissions, there is a common understanding that CO2 equivalents, as described in the Green House Gas protocol, are a relevant KPI to monitor and manage. While there can be discussion on which emissions to include in your monitoring and reporting, by and large CO2 equivalent emissions are increasingly seen as the driving KPI.
However, for many other sustainability-related topics, the task is much more difficult because of our evolving understanding of the complexity of the natural ecosystem we are a part of and the relationships that exist in this system.
For an agricultural business, it may be relatively easy, for instance, to identify having a healthy soil as one of the main objectives of an ESG policy. But determining which KPI best quantifies the health of the ecosystem services the soil provides is not such an easy task. Should we monitor the amount of worms in the soil, small organisms like nematodes, using DNA technology, physical parameters, the available nutrients, or a combination of these parameters? There is no commonly agreed practice or guidance on which KPIs to choose, in this and many other cases.
Another issue is data availability in the value chain. Due to company size and geographic location, it is not uncommon for suppliers to lack the necessary data. A similar problem is clear when looking downstream in the value chain, to the consumer level and beyond, for instance, on how the product or material is disposed of or what the reuse or recycling rate is. While this data may not be available yet, and the potential direct influence down the value chain may appear limited, this is an impact of your company that cannot be ignored.
Ultimately, consumers and others will react to your impact, either perceived or real, by choosing other products and services or by initiating political actions.
We notice that our clients sometimes wonder why they should bother setting goals and measuring performance when there are so many uncertainties. Our answer: start, learn and adapt!
Increased resiliency
We advise adopting a holistic approach that fits your company’s current and future needs. While not every company might aspire to be system-change driven, a failure to consider environmental and social impacts undoubtedly creates vulnerability to change, whether societal or environmental.
Creating insight into the impact of your company and products, and setting targets for the material aspects will, we are confident, increase resiliency and enhance the future-proofness of a company and its operations. The three examples below illustrate this.
Example 1: Soil and groundwater remediation
When dealing with contaminated soil, it is helpful to not only consider the primary goal of the activity — in this case reducing or removing the risk to humans or the environment — but to also consider other, broader impacts of this action.
By including biodiversity impact, the CO2 footprint, nuisance, land value and others, in addition to the commonly used parameters such as cost, health and safety and soil and groundwater quality, the impact on both the environment and the surrounding area is minimised.
Additionally, this approach allows for the identification of opportunities in value creation and maximising the potential future use of the area.
Example 2: Product stewardship
For companies using or producing hazardous substances, minimising the dependency on these products is another good example of a stretch target. If significant amounts of hazardous substances are used and/or produced, product stewardship becomes material. For some substances, the impacts to health and the environment are well known, for others these insights are evolving.
While it may feel like a moving target, setting a target to minimise and reduce the dependency on and use of these substances demonstrates an understanding of your impact, but perhaps more importantly, reduces the vulnerability to changing regulations and liability issues. Even being able to show that there is a lack of alternatives for hazardous substances reduces a company’s vulnerability.
Example 3: Working conditions in the value chain
When investing in solar power infrastructure, it is advisable to include working conditions and child labour in a project assessment. Many of the materials and resources used are produced in countries with limited or no legislation on these issues, or with questionable track records. In our experience, even due diligence analyses should include modern slavery, child labour and poor working conditions.
As a customer, you may have some influence on changing the conditions. Sometimes this influence is limited and alternative resources are not available. In this case an appropriate response could be to set a target for finding alternative resources in the future.
The toxic-free hierarchy (source: EU Chemicals Strategy, 2020)
Conclusion
In order to deal with the sustainability challenges of today and tomorrow, the targets a company sets need to be future proof. While insights related to sustainability impacts may change and data availability is sometimes imperfect, waiting is no longer an option.
That is why it is important to start now, if you haven’t already. To do this meaningfully, pick the best available relevant KPIs, be transparent about why you choose your targets and KPIs and be ready to adapt.
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This chapter of Environment Analyst's Corporate Guide: Accelerating your ESG transition was kindly authored by Jacolien Eijer-de Jong, sustainability director, and Micha van den Boogerd, transactions and responsible investment services director, at TAUW (www.tauw.com).