Lecture7-ENBUS407W22.pptx

Sustainability Accounting Tools: Sustainability Balanced Scorecard

ENBUS 407

Feb 17th, 2022

Conventional Accounting Vs. Balanced Scorecard Accounting

Conventional Accounting

Focusing on financial figures

Balanced Scorecard Accounting

Connecting vision and strategy with financial figures

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

Cause and Effect

Strategy

Accounting

ROE can stop you from other decisions.

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.

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

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??

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

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.

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)

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

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

Metrics

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

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.

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?

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

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

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?

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

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

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

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

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

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:

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

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

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?

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

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

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

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?

Management

Governance

Individual responsibility and performance

Strategy

Risk Management Approach

Business Strategy

Engagement

Targets and Initiatives

Targets

Emission reduction initiatives

Communication

Governance

Strategy

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

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

Lecture7-ENBUS407W22.pptx

Lecture7-ENBUS407W22.pptx

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