Sustainability Accounting Tools: Sustainability Balanced Scorecard
ENBUS 407
Feb 17th, 2022
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Conventional Accounting Vs. Balanced Scorecard Accounting
Conventional Accounting
Focusing on financial figures
Balanced Scorecard Accounting
Connecting vision and strategy with financial figures
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Balanced Scorecard
Problems of Conventional Accounting
Numbers direct attention towards certain characteristics while blinding us to others
Financial tools are not merely responses to changing societal and business needs, but in fact shape them
Being assessed leads organizations to change goals and strategies to achieve better ratings
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Cause and Effect
Strategy
Accounting
ROE can stop you from other decisions.
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Balanced Scorecard
Translating vision and strategy into objectives, measures, targets and initiatives
Linking operational and non-financial corporate activities with causal chains to the firm’s long-term strategy
Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system. Harvard Business Review, 74(1), 75-85.
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Four Perspectives
Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system. Harvard Business Review, 74(1), 75-85.
What are the four main perspectives of business? Financial, Internal Processes, Learning and Growth, Customers
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Four Perspectives
Financial Perspective
Measures the ultimate results that the business provides to its shareholders
Customer Perspective
Focus on customer needs and satisfaction as well as market share
Internal Perspective
Focuses attention on the performance of the key internal processes that drive the business
Learning & Growth
Directs attention to the basis of all future success – The organization’s people and infrastructure
Where do Sustainability issues play a role? Discuss in pairs.
Is sustainability a cause of an effect??
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Two Types of Indicators
Leading Indicators (Cause)
Firm specific key performance indicators
Lagging indicators (Effect)
For strategic core issues of each perspective derived from the strategy of the business unit.
Indicate, whether the strategic objectives were achieved
Lower level lagging indicators can be higher level leading indicators.
What are financial indicators usually? Lagging
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Examples
Leading indicator
Motivated Employees
Lagging indicator
Customer satisfaction
Leading indicator
Low energy input in processes
Lagging indicator
Eco-efficiency
Leading indicator (higher level)
Customer satisfaction
Lagging indicator
Sales
Leading indicators can become lagging indicators and vice versa depending on the corporate level and department. For an organic food producer environmental indicators play a different role than for a conventional producer
Conventional accounting focuses on lagging indicators. If you know them it is often too late to act.
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Managing the Strategy through Balanced Scorecard
Translating the Vision
Clarifying the vision
Gaining Consensus
Communication and Linking
Communicating and educating
Setting goals
Linking rewards to performance measures
Business Planning
Setting targets
Aligning strategic initiatives
Allocating resources
Establishing milestones
Feedback and Learning
Articulating the shared vision
Supplying strategic feedback
Facilitating strategy review and learning
Balanced Scorecard
Balanced Scorecard is not only an accounting tool, but a tool that supports strategy development (important for sustainability strategy)
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Steps 1 – 7
Clarify the vision
Communicate to middle management
Develop business unit scorecards
Launch corporate change programme
Review business unit scorecards
Refine the vision
Communicate to entire company
Steps 8 – 12
Establish individual performance objectives
Create long-range plan and budget
Conduct regular reviews
Conduct strategic reviews
Link all performances to scorecard
Example
Objectives, targets, indicators
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Balanced Scorecard example: Strategic map for an E-Commerce Business
We are the Go-To for Customers and Clients
Our colleagues are fully engaged
We positively impact communities
Our products and services are designed to meet clients needs
We create sustainable returns above the cost of equity
How to account for being the ‘go-to’ bank? Develop leading indicators
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Metrics
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Strategic Initiatives
We are using technology to improve our customers’ and clients’ experience and to be responsive to their changing needs, such as through Barclays Mobile Banking, BARX, PayTag and Barclays.Net
We are they want to. making our most important customer and client interactions as simple and instant as possible – putting power in their hands to transact when, where and how
We are simplifying our products and services and improving what we offer to match customer needs with the right service model.
Impact of the Scorecard
The Balanced Scorecard gives clear strategic context what becoming the ‘Go-To’ bank will look like and lays out Barclays’ priorities.
The Balanced Scorecard is cascaded into business unit and function scorecards.
Line of sight to employees to the organisational goal.
Framework and starting point for all employees when they set their individual performance objectives.
Customer, colleague, citizenship, conduct, company
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Examples for BSC
Reasons for Implementing Sustainability Balanced Scorecard
1995
Time
External forces:
EM / Eco-efficiency
Customer needs
Regulations
Environmental certificates, EMS implementation
require objectives and measurement
CSR & profit
Environmental objectives and measures:
Alignment with profit-driven culture and CSR
Inadequate management reporting systems
Balanced scorecard
Integrating sustainability
Structured reporting framework
Financial causality
Internal context
Profit driven
Management by objectives
TQM
Integration of sustainability into strategy over time. Therefore, we need a strategy related tool.
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Eco-Efficiency Scorecard
Möller, A., & Schaltegger, S. (2005). The Sustainability Balanced Scorecard as a Framework for Eco-efficiency Analysis. Journal of Industrial Ecology, 9(4), 73-83. doi: 10.1162/108819805775247927
From general scorecards to sustainability scorecards. First type, eco-efficiency scorecard. Fill in eco-efficiency indicators into the conventional scorecard (financial, internal, learning and growth, customers, non-market)
What is the impact of eco-efficiency on the four fields?
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Sustainability Balanced Scorecard
Integrates the three pillars of sustainability into a single and overarching strategic management tool.
Identifies and realizes opportunities for simultaneous improvements in all three dimensions to achieve strong corporate contributions to sustainability.
Sustainability is a leading indicator
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Advantages of Connecting Corporate Sustainability to Corporate Strategy
Economically sound corporate sustainability is not an add-on, but becomes part of the strategy
Corporate sustainability becomes a competitive advantage
All three dimensions of sustainability are addressed
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Adding a perspective
Financial Perspective
Measures the ultimate results that the business provides to its shareholders
Customer Perspective
Focus on customer needs and satisfaction as well as market share
Internal Perspective
Focuses attention on the performance of the key internal processes that drive the business
Learning & Growth
Directs attention to the basis of all future success – The organization’s people and infrastructure
Sustainability Perspective
Focus on economic, environmental, and societal impacts
Development of a specific Environmental and Social Scorecard
Not in parallel to a conventional scorecard
Integrated in the first three approaches
Coordinated control of all strategically relevant environmental/social aspects
spread and integrated in the general BSC
How to Develop a SBSC?
1. Select strategic business units
2. Identify environmental and social exposure
3. Determine strategic relevance of environmental and social aspects
Financial perspective
Customer perspective
Internal process perspective
Learning and growth perspective
Non-market perspective
Select the business unit with the strongest environmental and social exposure or the whole corporation
Select a business unit
What are leading indicators?
What are lagging indicators?
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1. Select strategic business unit
For Volkswagen:
Select a strategic business unit with relevant sustainability issues
What are leading indicators?
What are lagging indicators?
Engine development, EV
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3. Determine Strategic Relevance of Social and Environmental Aspects
Top-down process
Financial
Customers / clients
Internal processes
Learning and growth
Non-market
Sustainability
Why is an EV strategy important? For finance, clients, internal processes, learning and growth, non-market
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Three stages of Strategic Relevance
Environmental and social aspects as performance drivers (leading indicators)
Environmental and social aspects as strategic core issues (lagging indicators)
Environmental and social aspects as hygienic factors
Have to be managed sufficiently to run a successful business
EV development as performance driver (leading) and as a measure to boost sales (lagging)
Hygienic: Re-achieve reputation
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Leading Indicators
| Financial perspective | Customer perspective | Process perspective | Learning and growth | Non-market |
| Product attributes (environmental and social)Customer relationshipImage and reputation | Cost indicators (environ-mental costs)Quality indicators (efficiency)Time indicators | Employee potentialsTechnical infrastructureClimate for actionDiversity | Energy useSustainability reputationSupply chain management |
See Figge, F., Hahn, T., Schaltegger, S., & Wagner, M. (2002). The sustainability balanced scorecard – Linking sustainability management to business strategy. Business Strategy and the Environment, 11, 269-284.
Connect to VW
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Lagging Indicators
| Financial perspective | Customer perspective | Process perspective | Learning and growth | Non-market |
| Revenue growthProductivity growthAsset utilization | Market shareCustomer acquisitionCustomer retentionCustomer satisfactionCustomer probability | Innovation processOperations processPost-sale services process | Employee retentionEmployee productivityEmployee satisfaction | Freedom of actionLegitimacyLegalitySocial license to operate |
See Figge, F., Hahn, T., Schaltegger, S., & Wagner, M. (2002). The sustainability balanced scorecard – Linking sustainability management to business strategy. Business Strategy and the Environment, 11, 269-284.
Conclusions
Balanced Scorecard connects visions and strategies with indicators
Sustainability can be integrated into the standard scorecard or being added
Sustainability aspects can be leading or lagging indicators
Strategy drives accounting
Sustainability Accounting Tools: The Carbon Disclosure Project
www.cdp.net
Have a look on:
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CDP
Holds the largest collection of self reported climate change, water and forest-risk data
Works with 767 institutional investors holding US$92 trillion in assets
Works with over 6,000 companies
CDP as a link between organizations and investors
Data collected through an annual questionnaire
Who founded CDP?
Investors
Firms
Public entities
CDP’s Goal
CDP is an international, not-for-profit organization (www.cdp.net)
Providing a global system for companies and cities to measure, disclose, manage and share vital environmental information
Working with market forces to motivate companies to disclose their impacts on the environment and natural resources and take action to reduce them
Not Only Carbon
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CDP Data
Why Disclose to CDP?
Business Improvement
Global high-quality system
Global marketplace
Investors
Peers, benchmarks
Contribution to climate goals
Climate regulations
Why Disclose to CDP: Business Improvement
Demonstrating to investors, purchasers, and governments that risks and opportunities in climate change, forests, and water are well managed
Emissions by Sector
Scope 1: Energy intensive sectors
Scope 2: Service sectors
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Emissions Scope
Scope 1
All direct GHG emissions
Scope 2
Indirect GHG emissions from consumption of purchased electricity, heat or steam
Scope 3
Other indirect emissions
extraction and production of purchased materials and fuels,
transport-related activities in vehicles not owned or controlled by the reporting entity
electricity-related activities (e.g. losses) not covered in Scope 2
outsourced activities, waste disposal, etc.
What are the university’s scope 1, 2 and 3 emissions?
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The 25 Biggest Emitters
| Scope 1 |
| RWE AG |
| Arcelor Mittal |
| GDF Suez |
| Gazprom OAO |
| Exxon Mobil Corporation |
| ENEL SpA |
| E.ON SE |
| Duke Energy Corporation |
| American Electric Power Company, Inc. |
| Holcim Ltd |
| Lafarge S.A. |
| EDF |
| POSCO |
| Royal Dutch Shell |
| Sasol Limited |
| Petróleo Brasileiro SA – Petrobras |
| BP |
| Chevron Corporation |
| Endesa |
| Eni SpA |
| Total |
| CLP Holdings Limited |
| Iberdrola SA |
| PTT |
| Scope 2 |
| BHP Billiton |
| Arcelor Mittal |
| Rio Tinto |
| Wal-Mart Stores, Inc. |
| Exxon Mobil Corporation |
| Praxair, Inc. |
| Air Liquide |
| Air Products & Chemicals, Inc. |
| Linde AG |
| Anglo American |
| Royal Dutch Shell |
| Lafarge S.A. |
| Sasol Limited |
| Dow Chemical Company |
| BP |
| AT&T Inc. |
| Iberdrola SA |
| Holcim Ltd |
| Exelon Corporation |
| Occidental Petroleum Corporation |
| General Motors Company |
| Samsung Electronics |
| Verizon Communications Inc. |
| Gazprom OAO |
Contribution to climate goals
Business taking action against climate change
Sustainable economy is a low carbon economy
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Climate regulations
Cap and trade
Carbon taxes
CDP Questionnaire – Information Request
Management
Risks and Opportunities
Emissions
Hand out information request form: How is it structured?
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Management
Governance
Individual responsibility and performance
Strategy
Risk Management Approach
Business Strategy
Engagement
Targets and Initiatives
Targets
Emission reduction initiatives
Communication
Governance
Strategy
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Targets and Initiatives
Risks and Opportunities
Climate Change Risks
Climate Change Opportunities
Risks
Physical
Reputational
Transition
Litigation
Risks
Opportunities
Emissions I
Methodology including base year
Emissions data
Boundary
Scope 1 and 2 data
Data accuracy
External verification or assurance
Scope 1 and 2 emissions breakdown
Emissions II
Energy
Emissions performance
Emissions history and performance
Emissions intensity
Emissions Trading
Scope 3 emissions
Methodology
Focus on this
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Emissions Data
Scope 1
Scope 2
Energy
Emissions Performance
Emissions Trading
CDP Scores
CDP Disclosure score
Metric of comprehensiveness of response, good internal data management, understanding of climate change issues, and a measure of company transparency on climate change.
Metric of data quality, not of how green a company is.
CDP Performance score
Actions are considered to advance climate change mitigation, adaptation and transparency
Does not consider the materiality of actions relative to a company's sector or business
Does not consider actual emissions, but rather improvements
Scoring
Performance Bands
Band A/A- (>85%)
Fully integrated climate change strategy driving significant reduction in emissions due to climate change initiatives
"A" signifies that in addition to achieving a score of more than 85, the company has met the additional criteria for entry into the Climate Performance Leadership Index
"A-" signifies that the company has achieved the high score, but not met the additional criteria.
Band B (>60%)
Integration of climate change recognized as priority for strategy, not all initiatives fully established.
Band C (>40%)
Some activity on climate change with varied levels of integration of those initiatives into strategy.
Band E (>0%)
Little evidence of initiatives on carbon management potentially due to companies just beginning to take action on climate change.
No performance band is allocated below a disclosure of 50, as there would be insufficient information on which to base a performance score.
Performance Distribution
FrequencyAA-BCDE345132755613
Frequency
Impact of CDP Disclosure on Share Value
Disclosure of carbon management positively correlated with the market value of equity
The positive correlation between the disclosure of carbon management and the market value of equity is stronger with a larger volume of carbon emissions.
Saka, C., & Oshika, T. (2014). Disclosure effects, carbon emissions and corporate value. Sustainability Accounting, Management and Policy Journal, 5(1), 22-45. doi: doi:10.1108/SAMPJ-09-2012-0030
Company
Name
Ticker
Symbol ISIN
GICS
Sector Country
Disclosure
Score
Performance
Band
Parent
Account Permission
Response
Status
Scope 1 (metric
tonnes CO2e)
Scope 2 (metric
tonnes CO2e)
3M CompanyMMM USUS88579Y1010IndustrialsUSA68CPublicAQ*40600002030000
ABBABBN VXCH0012221716IndustrialsSwitzerland76DPublicAQ*722000786000
Abbott LaboratoriesABT USUS0028241000Health CareUSA80BPublicAQ*834000822000
AccentureACN USIE00B4BNMY34Information TechnologyIreland93BPublicAQ*12098222168
Ace Ltd.ACE USCH0044328745FinancialsSwitzerland94APublicAQ*1286639609
Aetna Inc.AET USUS00817Y1082Health CareUSA38PublicAQ*717854375
AFLAC IncorporatedAFL USUS0010551028FinancialsUSA82BPublicAQ*458521188
Air LiquideAI FPFR0000120073MaterialsFrance82CPublicAQ*105490009994000
Air Products & Chemicals, Inc.APD USUS0091581068MaterialsUSA95BPublicAQ*144400009878817
Allergan, Inc.AGN USUS0184901025Health CareUSA90APublicAQ*4530951744
Allianz SEALV GRDE0008404005FinancialsGermany97AAllianz GroupPublicAQ*70150258733
Altria Group, Inc.MO USUS02209S1033Consumer StaplesUSA71CPublicAQ*279395267808
Ambev – Cia de Bebidas das AméricasAMBV4 BZBRAMBVACNPR1Consumer StaplesBrazil69DPublicAQ*775768185564
American Electric Power Company, Inc.AEP USUS0255371017UtilitiesUSA76CPublicAQ*1356712000
American ExpressAXP USUS0258161092FinancialsUSA89BPublicAQ*35313.09195839.5
American International Group, Inc.AIG USUS0268747849FinancialsUSA14PublicAQ*
Amgen, Inc.AMGN USUS0311621009Health CareUSA75BPublicAQ*126233274718
Anadarko Petroleum CorporationAPC USUS0325111070EnergyUSA70DPublicAQ*2371282
01000000020000000300000004000000050000000600000007000000080000000CO2e emissions in metric tonnesScope 1Scope 2