Measuring Sustainability That Matters
Written by Maxwell Kushner-Lenhoff, MBA ’18 and former CRB Fellow
Greenwashing is a real problem these days. Some companies either promote efforts that are insignificant when compared with industry progress or tout accomplishments that are completely unrelated to their day-to-day operations. Others are making real sustainability progress.
How do we separate the greenwashers from the greens?
This question matters both to individual consumers and, importantly, in the context of the broader stock market and corporate strategy. If companies can get away with greenwashing, they can convince customers and investors alike to consume their products and stock offerings as if they were more sustainable than they actually are.
When nearly $70 trillion of assets under management have committed to the Environment, Sustainability and Governance (ESG) focused Principles of Responsible Investment (PRI) over the course of just 10 years, that matters – a lot. Even institutions like the Vatican, who held their third annual impact investing conference this week, are committing to a more virtuous investing strategy. And with major asset management firms like BlackRock taking a leading role in pushing companies to pay more attention to broader societal and environmental impacts, there needs to be a way to measure progress against this goal.
Real and Relevant
So where can we look to tell whether a company’s sustainability efforts are real and relevant? Several years ago, the Sustainable Accounting Standards Board (SASB) set out to solve this challenge. The organization is focused on developing industry-specific standards that help to illuminate whether a company’s sustainability performance is “material” to its business.
In SASB’s context, “material” means sustainability efforts that have a real financial impact on the business in the short or long-term. Think of the water used by drilling companies in hydraulic fracturing or the community permitting necessary to site a wind farm. In a landmark paper, George Serafeim et al. found that “firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing.”
As I learned from Berkeley alums Sonya Hetrick and David Parham of SASB at a recent event hosted by the Center for Responsible Business, SASB’s standards also aim to give investors “decision-useful” and comparable measurements across all companies in a given industry. That compares to current disclosures by companies, more than a third of which consists of boilerplate language, defined as ”broad, nonspecific wording that does not describe the realities of the registrant’s particular operating context.”
Over a multi-year process, SASB has engaged companies, investors and government stakeholders alike in developing its standards. This summer, the organization will codify its initial standards list. That is good news for customers and investors alike. But to make a meaningful difference, companies will have to overcome the tragedy of the commons that a new set of standards entails. At first, reporting against these standards will be voluntary. Leaders in the sustainability field should begin to report against them. Already, companies like JetBlue have begun to lead the charge. Eventually, laggards will be pressured to become more transparent as well, encouraging them to be more genuine in their efforts and communication.
This voluntary reporting process is of course imperfect: what if companies only report against those metrics where they are leading? But it is at least a start in highlighting the sustainability efforts that truly matter for companies’ bottom lines. And, over time, companies using the standards can help SASB to improve them through its own refresh process.
If enough investors and companies come along, greenwashing could soon be a thing of the past.
About the Author:
Maxwell Kushner-Lenhoff is a Berkeley Haas MBA ’18 graduate and former Fellow at the Center for Responsible Business. Upon graduation, he joined Tesla as Global Supply Manager for Battery Materials. Prior to business school, Max earned his BS/MS in inorganic chemistry at Yale focused on renewable fuels production. He then spent four years in the Office of the CEO at The Dow Chemical Company, where he worked on the company’s 2025 Sustainability Goals, among other projects. While getting his MBA, Max spent the summer as an R&D Finance Associate at Genentech.