Thinking and measuring sustainability in a business ecosystem
The increasing relevance of sustainability in a business context has been clear for some time now, as readers of Capital magazine can confirm: Working with data portal Statista, the business magazine recently published a CO2 study that identifies Germany’s most environmentally friendly companies. Incidentally, our parent company Porsche achieved the excellent ranking of eleventh place.
An objective metric known as the Compound Annual Reduction Rate (CARR) was the crucial factor in ranking the companies. This metric indicates the percentage by which a company reduced its greenhouse gas emissions within a specific period of time. The study covered 2014 to 2019 and only the companies’ own emissions were taken into account, i.e. only scope 1 and scope 2 emissions; scope 3 emissions were excluded.
Simply mentioning the different scopes of emissions catapults us right to the heart of the debate on how best to measure sustainability. This debate is necessary – not only because it is the only way to compare companies and identify progress, but also because binding metrics are essential for helping customers to make informed decisions. And, of course, because policy-based regulation depends on key metrics.
Various standards that were formulated at different levels and by different stakeholders are a key part of the discussion. Here is a brief overview:
Greenhouse Gas Protocol
The Greenhouse Gas Protocol (GHGP) is used around the world and comprises various standards for reporting direct and indirect greenhouse gas emissions. The greenhouse gases covered by the GHGP include carbon dioxide (CO2), methane (CH4) and hydrofluorocarbons (HFCs). A company’s emissions are divided into three scopes:
- Scope 1: Direct emissions by the reporting company e.g., from burning fossil fuels
- Scope 2: Indirect emissions from energy used by the reporting company e.g., for electricity, heating and cooling requirements
- Scope 3: Indirect emissions that the reporting company is responsible for e.g., by purchasing goods and services, or as a result of customers using products that it sells
In practice, companies generally do not directly measure their GHG emissions. Instead, they use emission factors from GHG inventories to calculate emissions based on consumption. There is no doubt that the GHGP’s explicit focus on greenhouse gases fails to account for the numerous other factors in sustainable business.
Global Reporting Initiative
While the GHGP focuses solely on climate change, the Global Reporting Initiative (GRI) covers several other factors to facilitate reporting on sustainability, non-financial aspects, and environmental, social and governance-oriented investment criteria. The GRI standardizes a set of metrics for environmentally and socially relevant actions, and for the activities, products and services of a company. One of the aims of the GRI is to improve the comparability of CSR reports. It therefore helps with the implementation of the CSR reporting obligation (CSR Directive Implementation Act [CSR-RUG]) that has been a requirement for listed companies in Germany since 2017.
In addition to three universal standards (GRI 1xx), the GRI includes over 30 topic-specific economic (GRI2xx), environmental (GRI3xx) and social (GRI4xx) standards with over 120 indicators that provide guidance for the report itself, the company and its performance.
The German Sustainability Code
The German Sustainability Code (DNK) is less comprehensive and therefore better as a starting point for small and medium-sized companies. The Code was adopted in 2011 and can be used across industries, even at an international level. It provides minimum requirements for companies and organizations when reporting their activities and, like the GRI, fulfills the legal obligations of the CSR-RUG. Twenty overarching DNK criteria form the basis of the standard, including strategy, environmental and employee factors, social issues, and corporate governance. The Code also includes either 28 selected GRI performance indicators or 16 indicators from the European Federation of Financial Analysts Societies (EFFAS), which are not covered in detail here. Each company report is compiled in line with the “comply or explain” system: Key metrics must be reported but where this is not possible or makes no sense, the omission must be justified.
Science-Based Targets Initiative
Less specific but still important, the Science-Based Targets Initiative (SBTI) aims to unite companies through a commitment to reducing greenhouse gas emissions using measures recommended by the scientific community. First of all, companies undertake to recognize their own contribution to the climate crisis and to define measures for a sustainable future. These measures are then refined using SBTI criteria before being implemented. Finally, the company publishes its plans and follows up with an annual report.
Every sustainability journey begins with a declaration – a commitment to taking a broader view that, in the past, has often been focused on short-term success and externalization. Transparency is not possible until this commitment is made, but once in place it enables all stakeholders – management, employees, customers and investors – to really understand the sustainability of a company.
There are several standards and frameworks available to achieve one common goal: a new economy geared toward people and the planet. Advice on how to maintain an overview while focusing on progress is just one of the services in MHP’s sustainability portfolio. Look forward to our next article in which we explain how we define and implement sustainability roadmaps with our clients.