Success should be measured by the ‘externalities’ of the business

The ways we measure a successful enterprise are changing – it can’t happen fast enough.

In the past, to evaluate the health and success of an enterprise, you would look to its balance sheet where the profit, margins, and revenue columns would lay bare the performance and trajectory of the business. But that myopic way of measuring success is rapidly changing. In the near future, a business will be measured as much by its financial performance as by its impact on the environment and society at large.

Companies are already facing pressure from their employees, shareholders and customers, to take responsibility and report on their ‘externalities’, the third-party effects that result from the production and consumption of their goods and services. These externalities can be positive – like carbon offsetting, or negative – like the impact of air or water pollution. They can also extend beyond the organisation itself and include the externalities of its suppliers and distributors.

As we continue to demand more from the planet and face the consequences of a climate crisis, these externalities can and should be measured and companies should be held responsible for their environmental impact.

It is likely that those businesses that aren’t already evaluating their externalities will soon be required to do so.

Last November, the UK Chancellor made a major announcement related to corporate sustainability. Not only did he outline proposals to support sustainable financial flows and extend the UK’s global leadership in green finance, he also highlighted plans for shifting the UK towards a net zero carbon future. As such, we can expect that UK businesses will soon be legislated on their sustainability efforts, particularly in the wake of COP26 – the UN Climate Change conference, being hosted this year in Glasgow. Here exists the opportunity for UK businesses to take the global lead and model what a truly successful, sustainable enterprise looks like. It also provides an opportunity for technology companies as these new measurement criteria will require technology that can gather the data and translate it into recognised standards that assign a monetary value for these externalities.

“It is likely that those businesses that aren’t already evaluating their externalities will soon be required to do so”

The ingredients of a successful enterprise in 2021

We’re all aware of the advantages inherent in being a ‘digitally native’ business. Now we’re beginning to see the influence of ‘green native’ businesses that have been established with sustainability at their core. For legacy businesses that are just beginning to shift to more sustainable practices, the process can be more challenging, but the following five measures are a good place to start:

1. Consider and evaluate externalities in day-to-day decision making: Say you run a confectionery company and are buying 100kg of cocoa beans for your company’s signature chocolate bar. You need to think beyond the cost and quality of the cocoa bean. You need to look into the CO2 impact of the farming and transport process, its impact on the ecosystem, the environment, and biodiversity and you need to make sure the beans were all sourced fairly with everyone being paid a reasonable wage along the way.

2. Invest in innovation that accelerates sustainability: There are many ways to make incremental sustainability improvements and the most radical improvements often spring from entirely new ways of doing business. For example, fashion apps like Depop, Vinted and Etsy have normalised circular fashion services. Britvic has introduced boiling water taps and flavourings – shaping more sustainable consumer behaviours and eliminating packaging along the way.

3. Commit to achievable targets: The days of companies making grandiose sustainability commitments with no plan to deliver are gone. Businesses should focus on delivering and demonstrating genuine progress through actions taken year-on-year. This means pivoting away from managing through commitment. A successful company should look to produce attainable goals against which they can be measured and show genuine ongoing progress.

4. Operationalise sustainability into the core organisation: As anyone who has ever managed a major digital transformation can attest, major change can only prosper with senior executive sponsorship. Many enterprises are now introducing a chief sustainability officer or head of ESR performance to the company management to oversee these changes. Their role is to ensure that sustainable models are integrated into business strategies and company culture and that sustainability metrics are embedded into KPIs and institutionalised as a core reporting function.

5. Provide integrated stakeholder transparency across the wider ecosystem: Businesses need to move away from simply reporting through financial statements which might include a small sustainability tab. Instead, enterprises should embed sustainability into their wider reporting and offer a much more integrated view with which the ecosystem can collaborate. This shows a true commitment to measuring sustainability.

“The simple fact is no business should need to ‘build a case’ to be more sustainable. It’s simply the right thing to do, for business, for society and for the future of our planet”

Building the case for a more sustainable business

The simple fact is no business should need to ‘build a case’ to be more sustainable. It’s simply the right thing to do, for business, for society and for the future of our planet.

But that doesn’t mean there aren’t very tangible reasons why companies should act fast to become more sustainable.

For one thing, government regulations are inevitably coming, creating financial implications for global multinational businesses that could range from millions to billions in fines, depending on their sustainability model (or lack thereof). Carbon pricing will also have a massive impact on the overall revenue and profit of a company, especially those with unsustainable business models as they will have a lot of work to do in playing catch-up against the rest.

Any sustainability work within businesses and organisations moves only as quickly as the weakest link. With the investor link accelerating, the employee link developing and consumers getting more informed on the subject, the regulatory context has for a while been the weakest link slowing any progress down. That one will, however, leapfrog imminently, and if businesses are not in control of all of these factors and are not pushing themselves already to be more sustainable, they will face the fiscal consequences.

Ultimately, these factors are all drivers for digital transformation, and they will become some of the biggest issues businesses will tackle over the next few years. Businesses who have anticipated these changes will have a head start on a more successful and sustainable future. 

Stephen Jamieson is head of sustainable business innovation, Northern Europe, SAP.