Environmental and Social Performance and the Balanced Scorecard

The Brundtland Commission^* defined a sustainable society as one where “the current generation meets its needs without jeopardizing the ability of future generations to meet their needs.” Given the accelerating progression of climate change in recent years, working toward sustainability is increasingly becoming a priority for many countries around the world. There are different views on the role that companies and managers should take in trying to achieve sustainability goals.

In order to raise awareness on the part of companies and shareholders about the importance of a sustainable future for companies’ business models, governments are increasingly pushing companies to report on the risks that environmental and social challenges put on their ability to deliver future value. For example, the Securities and Exchange Commission passed a rule in 2010 that requires companies to include the business risks related to climate change and its consequences in their annual reports to shareholders. Similarly, the European Union introduced the Non-Financial Reporting Directive (“NFR Directive,” Directive 2014/95/EU) in 2014. The Directive requires that, starting in 2018, large public companies operating in Europe disclose in their annual reports to shareholders information on environmental, social, human rights and anti-corruption matters that is important in understanding the company’s development, performance, position, and impact.

There are two fundamental schools of thought on whether companies should promote sustainability. The first view is that managers should focus only on long-run financial performance, and not be distracted by pursuing social and environmental goals beyond the minimum levels required by law. According to this view, companies’ responsibilities in society are adequately captured by the sole goal of long-run financial performance. However, even companies and managers that subscribe to this point of view are recognizing that environmental and social objectives are increasingly important for their organizations in order to maximize long-run financial performance. In these companies, sustainability objectives are part of the implementation of a strategy to maximize long-run financial performance. For example, managers have recognized that promotion of environmental and social goals helps to attract and inspire outstanding employees, improve employee safety and health, increase productivity, and lower operating costs, all contributing to long-run financial performance. Promoting environmental and social performance and being a good corporate citizen may also be in a company’s best interest from a risk-minimization perspective. For example, reducing greenhouse gases might ward off fines or more stringent carbon emission caps from the U.S. Environmental Protection Agency and decrease the risk of lawsuits and negative media attention and stakeholder activism that can damage a company’s reputation.

The second perspective is that companies and managers must pursue environmental and social objectives beyond what is legally required, and in addition to long-run financial goals—often called the triple bottom line—as part of a company’s societal responsibility. According to this view, environmental and social objectives are overall goals next to long-run financial performance, not just a means to an end. While pursuing sustainability objectives, such as reducing greenhouse gas emissions and non-recycled waste, and minimizing corruption may come at the expense of financial objectives—especially in the short run—it may also generate opportunities for the company that lead to strategic advantages and financial performance in the long-term. In fact, a distinguishing organizational characteristic of companies that emphasize environmental and social performance is their long-term orientation. For example, companies aiming for the triple bottom line may successfully benefit from innovating in technologies, processes, products, and business models that reduce the tradeoffs between financial and sustainability goals. These companies may also build transformational and transitional leadership and change capabilities needed to implement the strategies to achieve the multiple goals. Pursuing sustainability objectives may also enhance a company’s reputation with socially conscious employees, customers, and investors and boost its image and relationships with governments and citizens.

Managers interested in measuring environmental and social performance incorporate these factors into their balanced scorecards to set priorities for initiatives, guide decisions and actions, and fuel discussions around strategies and business models to improve performance. Suppose Chipset decides to emphasize environmental and social goals in its balanced scorecard. What measures might it add to the balanced scorecard presented in Exhibit 13-3? Exhibit 13-5 presents these additional environmental and social measures. In practice, Chipset, like most companies that emphasize environmental and social goals, integrates sustainability goals and measures presented in Exhibit 13-5 with business goals and measures presented in Exhibit 13-3 into a single combined scorecard.

One of the main benefits that Chipset gains from measuring environmental and social performance is that it improves competitiveness and provides strategic advantages to the business. For example, reducing greenhouse gas emissions motivates Chipset to redesign its product and processes to reduce energy consumption. Measuring non-recycled hazardous and nonhazardous waste prompts Chipset to work with its suppliers to redesign and reduce packaging and toxic substances in its materials and components. Measuring worker-related injuries and illnesses motivates Chipset to redesign processes to lessen the number of such incidents. In each of these initiatives, Chipset achieves environmental and social goals as well as gains competitive advantage by reducing costs and pushing itself to innovate and build a social and environmental value proposition into its business strategy.

If Chipset can measure growth in revenue or operating income from customers attracted to Chipset’s environmental and social actions with reasonable accuracy, the company might add that measure in its financial perspective. The scorecard shows that Chipset has achieved all its environmental and social goals, indicating that its environmental and social actions are translating into financial gains. These results would encourage Chipset to continue its environmental and social efforts.

Companies use a variety of measures for environmental and social performance in addition to the ones described in the Chipset example:

1. FINANCIAL PERSPECTIVE. Carbon taxes or fees (in countries that levy a carbon tax for emissions), cost of preventing and remediating environmental damage (training, cleanup, legal costs, and costs of consumer boycotts), cost of recycled materials to total cost of materials
2. CUSTOMER PERSPECTIVE. Brand image (percentage of survey respondents who rate the company high on trust)
3. INTERNAL-BUSINESS PERSPECTIVE. Energy consumption (joules per $1,000 of sales), water use (millions of cubic meters); wastewater discharge (thousands of cubic meters); individual quantities of different greenhouse gases, for example, carbon dioxide, nitrous oxide, or sulphur dioxide (grams per $1 million in sales); number of environmental incidents (such as unexpected discharge of air, water, or solid waste); codes of conduct violations (percentage of total employees); contributions to community-based nonprofit organizations; number of joint ventures and partnerships between the company and community organizations
4. LEARNING-AND-GROWTH PERSPECTIVE. Implementation of International Organization for Standardization (ISO) 14000 environmental management standards (subjective score); employees trained and certified in codes of conduct (percentage of total employees); employees trained in United Nations global compact, for example, human rights, fair wage, no child labor, corruption and bribery prevention (percentage of total employees)