Can sustainability reports regulate companies’ conduct?

Browsing articles in the research journal AAAJ the other day, I noticed that my own article, published over a year ago, was on their list of ‘most read in the past 7 days’. This fact made my week. It is more than great when your research matters to the research community, however, sometimes there are learning point for non-academic society too. Rereading the paper, I do think there are points in the paper that could be interesting for non-researchers as well. Hence this blog post.

In recent years, it has become mandatory for large companies to produce a sustainability report each year. In Sweden, it became mandatory because of an EU directive. The idea behind this kind of regulation is that the company’s sustainability report will inform its stakeholders- such as customers, local community, employees and investors- about what the company does in relation to sustainability issues such as climate change, human rights, anti-corruption etc. The stakeholders can then use this information, if they are unhappy with what the company does, to exert pressure on the company. The stakeholders can thus hold the company accountable for its actions. In this way, corporate conduct is regulated; the company will want to change its corporate conduct because of the stakeholder pressure. It is called ‘civil regulation’.

Interestingly, there are a number of cases in the research literature, specifically studying sustainability reporting, where civil regulation does not work as planned. There are cases of stakeholders, for example NGOs, that receive the sustainability reports and read them but do not feel equipped to exert pressure on the company. The company reports and the stakeholders receive it, but there is no civil regulation taking place. The company can continue with business as usual.

Reviewing these cases of ‘failed’ civil regulation, I try to explain why the reported information may not be enough to produce such civil regulation. My article argues that we, in these cases, tend to overestimate the ‘power’ of information and confuse it with knowledge. I use the example of ESG investor analysts, i.e. analysts that focus on how companies handle sustainability issues such as energy consumption, pollution, human rights etc. These investors do attempt to hold companies accountable for their unacceptable sustainability performance, a practice the industry calls ‘company engagement’. In my study I find that when the analysts do so, not all information is alike and the analysts rely on several other types of information, for example from consultants and media, plus many other types of resources such as theories, calculations etc. to show that they know what the company does and how it should change its practices.

Consequently, I argue that we need to carefully distinguish between information and knowledge. Information, such as sustainability reports, may indeed contribute to knowledge but is rarely enough on its own to hold the company accountable. We cannot assume that if someone has information about someone’s actions s/he will be able to hold this person accountable. What kind of information we hold matters: where it comes from, if it contradicts or confirms other accounts. It matters how it is used, together with other resources or to disprove other statements. Moreover, in some cases other resources other than information, for example theories, helped the analysts to hold the company accountable.

This study does not, however, show that sustainability reports are not useful for regulating companies’ conduct. It just illustrates that information in the form of a sustainability report is not enough on its own. If we construct this kind of reporting-based civil regulation, like the EU-directive, we should not overestimate the power of a single source of information. In this context, empirical studies such as the one in AAAJ can inform us about the role the reported sustainability information plays in practice.

Is globalization to blame for our environmental problems?

Following the debates in the newspapers, it seems globalization is to blame for a lot. It’s often described as the root cause of some of society’s big problems. Globalization causes inequality, financial crises, unregulated multinationals that act freely on a global scale, environmental pollution etc. An assumption in these debates is that globalization exists. However, few of us take the time to define what we really mean when we say globalization.

This however, is not how we do it at the introductory course ‘Companies and society’ which I teach at Örebro University business studies bachelor program. In the course, we review three perspectives on what globalization is and discuss whether it’s a good thing and lastly the students write a report on a company in the food sector as an example of globalization.

Teaching this course has fundamentally changed my view of globalization. While I used to assume that globalization is a fact, I don’t anymore believe we have ever had globalization. In fact, nowadays I concur with the ‘historical perspective’ on globalization i.e. that the economy, mobility and trade has, throughout the history, been highly international but never global. Even today we know of a few tribes who are undoubtedly isolated from the rest of us. Some countries are very interconnected, but not others. So maybe internationalization is a better word, if this is what we really mean?

Unlike me, however, most students agree with one of the other two perspectives on globalization in our course book: that globalization is a fundamentally new phase in recent history or that the term at least captures some critical new aspects of modern times.

Nevertheless, when the students investigate companies and globalization, they capture some of the acute sustainability issues in the food industry today. Thus not only do the students learn about globalization and read quotes from Stiglitz and others, they also get up to date on current sustainability issues in the food sector, such as how the industry calculates climate impact of chicken meat. Chicken is often argued to be a climate smart meat choice, but, as the group thoughtfully discussed, it depends on how you calculate and whether you include the climate impact of the feed (often imported soy). I have written about the fallacy of CO2 calculations on this blog before. It’s often overlooked that there are multiple ways to calculate climate impact of food.

Another group discussed the use of imported palm oil, often from Indonesia, in food products. By now most of us know that palm oil should be avoided or at least certified if we use it. However, this group of students highlighted that palm oil requires less land than other kinds of oils that could replace it and thus that the sustainability consequences are not clearcut. Clearly, we don’t want to use more land than necessary for food production. So there are both positive and negative environmental consequences of palm oil. How do you trade off one environmental consequence against another?

Two other groups discussed fish, a food that is rarely recognized as an environmental problem. One group mentioned how the fish feed used in aquaculture drives overfishing of the seas, something I have written about here before. The other group instead focused on sustainably caught fish, MSC certified fish, but that the company ships it half-way around the world for filleting by hand in China and then back to Scandinavia. While this seems illogical, the group explained that it means more of the fish can be used compared to machine filleting.

Overall, we learned a lot not just about globalization but also about how and why companies act as they do. Some of these behaviors seem unreasonable as an outsider. However, we need to identify not only the consequences of these ‘global’ corporate behaviors but also understand the rationale behind them. There is a reason and context to why the company started doing things as they do. Only when we understand this can we find alternative solutions.

Steering businesses towards a circular economy

As I have previously blogged about, the students in my master course ‘measuring sustainability’ at NHH have analysed and proposed indicators that H&M and other fashion companies can use to steer their business towards a circular economy. We are very thankful to H&M and sustainability manager Luisa Book for collaborating with us on this case. The topic is very much of the moment as an increasing number of companies, just like H&M, aim to become circular but then also need appropriate tools to help steer their operations in this direction.

Some of the indicators the students proposed, such as amount of recycled material out of total use of materials, are maybe not new but are crucial when a circular business is the target. Moreover, the number of times a material can be recycled needs to be monitored in order to make sure that recycling is not just a prolonging of a linear path (see Circular Flanders great illustration of this to the left). In an ideal world, materials can be recycled indefinitely.

The students also argued that it is key to keep track of collecting initiatives i.e. when brands collect used or discarded products. How much of what is sold returns to the company for recycling? Moreover, companies need to monitor what happens with collected garments- are they recycled into new garments or in fact only downcycled (used for other less valuable products)?

One reason materials cannot be recycled is because the materials are contaminated for example by chemicals that hinder recycling. The students here proposed to measure the use of such chemicals or substances. By monitoring, the company can also try to minimize such use. To know if the product is made with substances that might hinder recycling, you need proper information about what the garment is made of and how it is made. Here the students proposed that H&M could develop more elaborate tags with information about the item which could help the customer to take care of it and, eventually, facilitate the recycling of the garment.

Another point that is crucial to circular operations is to keep the materials in the processes. In the textile industry, a lot of fabric gets wasted and does not end up in any garment. Consequently, some students suggested to measure the amount of material that ends up in a garments in relation to total amount of materials used. Ideally, all materials used should end up in a garment. Similarly, the students also identified microplastics as a threat because it means that small amounts of plastic fibers continuously leave the circular flow and non-renewable materials are subsequently lost.

Another aspect commonly discussed in the context of circular economy is the slowing of the circle i.e. the prolonging of a product’s life span. Here the students reintroduced the idea of enabling users to repair their clothes, for example by making sure all items come with threads or buttons necessary for repair or providing repair services in stores. The company can track both the use of repair services and number of items that customers could repair themselves.

I hope that H&M and other companies will find the students work helpful. How to measure a circular business is really at the forefront of both practice and research. In fact, two research colleagues and I just last week got financing for a project on circular business practices by Vinnova. That the students managed this task so well and were able to develop these very helpful indicators show, to my mind, that we at University teach students useful and up to date skills. We educate students that can in fact contribute to and improve current business practices.

The link between circular economy & sustainability- a case with H&M

This morning, I introduced the case we will be working on this autumn on my course at the Norwegian School of Economics (NHH): managing business towards a circular economy and sustainability. The case is in partnership with H&M who is also a partner of the Ellen MacArthur circular economy initiative.

As I’ve written about before, I was not an early adopter of the circular economy. I do, however, teach circular economy as a trend in the sustainability area both at Örebro University and NHH. The more I reflect on the concept, the more of a convert I’ve become. So I thought I’d share some of my aha-moments about the circular economy and sustainability with you here.

First of all, what do we mean with sustainability? The established definition is from the UN Brundtland report (1987):

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs

As Kuhlman & Farrington (2010) (one of our key references in the NHH course) writes, this sustainability definition addresses the tension between mankind’s aspiration towards a better life on the one hand and the limitations imposed by nature on the other hand. This tension between social welfare and natural resources is more often than not ignored in the business debate on sustainability. We often pretend it does not exist. And of course, there are many win-win situations where environmental or social measures also bring down costs and/or increase income.  There are definitely low hanging fruit, efforts that are win-win or at least come at no cost.

However, there are cases where tension between social well-fare and environmental sustainability undoubtedly exists. The pharmaceutical industry is a prime example. The industry argues that it provides tremendous social benefit by saving lives (or at least reducing suffering) but the environmental pollution, especially chemical and water pollution, is high, both at production  and consumption sites. Why do such tensions between social well-fare and natural resources occur?

Operating in a closed system

Some of you might have heard about the Planetary Boundaries. Professor Johan Rockström and co-authors defined nine environmental boundaries we should stay within to ensure a stable living environment (see picture, borrowed from the 2015 article). What this figure tells businesses is that we are operating in a closed system. If we mismanage certain environmental resources, such as biodiversity and chemical pollution, we cannot compensate for these in other ways. If we cross these, there is no functional living environment we can operate within.

 

Why a linear business model does not work in a closed system

Now the problem with a linear business model (which most businesses have and what we often teach students) is that it treats input to businesses (and its outputs) according to the value chain- the business uses certain input and through a number of processes produces some outputs. These inputs, resources, the business uses appear to just exist. The environment is there for us to use and not affected by our use. Likewise, outputs and externalities from our production  just go somewhere. However, as the 1990 chapter on circular economy by Pearce and Turner states, eventually the waste we produce will affect the availability of new resources. And the accumulated waste affects our well-being too. The fact that business operates in a closed system has to be taken into account. Certainly for global businesses.

Now from the planetary boundaries perspective, the best would of course be to minimize consumption and for us to produce less in order to spare the environment and stay within the boundaries. This is in line with the minimalism and anti-consumerism movement. If we consume less, we do not need to produce so much. We can share, mend and repurpose etc. This is admirable and has a place, especially in societies with overconsumption. It is my approach to my own wardrobe situation. However, at this point in the debate, someone will throw in the argument that we cannot deny developing countries the same social benefits we have allowed ourselves. If we have been flying for decades, why shouldn’t they be able to?

Kate Raworth, with a background at Oxfam, illustrated this pedagogically in her ‘Doughnut Economics‘. It is a fact that there are large groups of people that are not getting their basic needs met. And to achieve progress on this point will in many cases require use of natural resources. Here, the tension between the social development and the availability of natural resources the Brundtland report sought to address is very clear.

Consequently, Raworth put those basic social needs into Rockström’s figure, in the middle, to illustrate that we want to maximize the social well-fare of people while at the same time staying within the planetary boundaries. We want to operate, she argues, within the green ‘doughnut’ formation in the figure.

Sustainability is getting the maximum social value while staying within the planetary boundaries

Working along the lines of minimizing and restricting consumption can, at least in some cases, thus deny us social value. Similarly, what many sustainability-minded businesses do is to try to minimize the waste and externalities from production. To reduce the ‘shadow’ of business, make them ‘tread lightly’ on the environment. There are many impressive initiatives with zero waste factories and water reduction regimes. These are all good, no doubt about it. We need these kinds of initiatives. However, the circular economy further adds that ‘waste’ should not simply be removed but could also become a resource for us to use. It’s a fact that we need some amount of production and that it uses resources and that there will be some amount of waste. What can we do with the remaining waste? How can we turn it into resources?

As this post is long enough, I will simply have to write about the challenges with making waste into circular resources in a follow up post. Still, I hope you see, like I do, why there is a case for circular business in a sustainable society. And I’m so excited about our case with H&M and what the students will come up with.

Almedalen: sustainability, research and politics

Last week I attended Swedish politics week, Almedalen, for the very first time. The occasion was a seminar about sustainability professionals in companies, their work and competences that my employer, Örebro University School of Business, hosted. We are starting a new master profile in sustainable business this autumn and have thus thought a lot about what knowledge and competences sustainability professionals need. So I represented our school and shared our experiences. When developing this master profile, we have been supported by representatives from businesses and student organizations, some of which- Nordea, Grant Thornton, Spendrups,  SEK, Telenor, Young Sustainability Professionals and Sustainergies– joined us for the seminar in Almedalen (which was recorded and can be found here).

Already there, I had the opportunity to attend over 4000 seminars arranged during the week. There was no way to attend all of them, sadly since a large proportion dealt with sustainability issues. However, I managed to attend some seminars on sustainability and some others on research politics.

The panels discussing sustainability and consumption were very gloomy. ‘Consumption has to decrease’ and is ‘destroying our environment’ and ‘the politicians are not doing enough’ seemed to be the general message. I have some major issues with these kinds of statements. First, one has to define what is meant with consumption. Services such as child care and going to the hairdresser are also consumption. We can consume second hand items and probably should increase this type of consumption. Basically, we have to differentiate between different types of consumption and their effects on the environment. Instead KTH researchers from Mistra’s project on sustainable consumption painted with very large brushes and suggested we should both consume and work less. I don’t see how they arrived at this conclusion and am consequently not convinced. Neither are my consumption researcher colleagues when I’ve discussed the issue with them. Consumption per se is not evil, but certain types, such as flying or single use plastics, are bad for the environment.

One take away from Almedalen is thus that it was engineering researchers that discussed economics and business issues such as GDP, growth and consumption. One panel even stated that ‘it is probably just as good that there are no economists on the panel’. I, however, was missing the economics and business researchers and I believe that our presence on the panels would have improved the discussions. Instead, I was sitting in the audience wondering how they defined growth and how they could state that Sweden has substantial GDP growth (clearly they did not consider GDP per capita). Of course research is interdisciplinary, but when it comes to basic definitions in business and economics, researchers in these fields have an advantage: we have worked longer with these concepts.

Attending the social events, generally organized by companies, was a more encouraging experience. I ended up having drinks with the electric cars lobby (who knew they existed?) and attending Atea’s afternoon around the topic of sustainable supply chains in the IT sector and conflict minerals. It’s really encouraging that so much is happening on both these issues. Our partner for the master program, Spendrups, invited us to an entirely organic dinner celebrating that they are now the world’s largest producer of organic beer. My take away from the company discussions is that a lot can happen in a short period of time in the corporate world. And as soon as there is something that looks like a business case for addressing a sustainability issue, companies will race their competitors to get there.

The research politics seminars were also a positive surprise and dealt with topics such as research communication and open science. As for the latter, the panel agreed that professional research communicators are needed and that we today lack incentives for researchers to address the general public. If we want to communicate outside of academia, we have to do it in our spare time. As for the latter topic, it seems as if open science is coming our way and it’s just a matter of time and of exactly how the solutions will look like. The Swedish Research Council (‘Vetenskapsrådet’) is arranging a conference in November about open science which I will try to attend.

Overall, Almedalen was a highly inspiring week that was well worth attending even for a researcher (there were very few of us there) and I hope there will be opportunity to be back next year!

The alternative facts debate: In defense of questioning the facts

It’s challenging times to be in the knowledge business. Twitter followers question whether climate change is real and FB-followers question facts because they are published  in unknown media. And when you don’t agree with someone else’s statement you call it alternative facts. This is, I guess, a sign that parts of the public question some commonly held facts.

While some see this as a dangerous development, that people question commonly held facts and hold alternative views, it is also an opportunity to dive further into the questioned facts and learn something in the process. To proclaim that ‘this is a fact, deal with it’ is unlikely to convince anyone. We teachers know that when our statements are questioned it forces us to learn and ‘know’ the issue on a more detailed level. Having commonly held facts questioned is a challenge for sure, but if we can defend them it’s generally worth the effort.

Unfortunately, some argue that those questioning our facts are driven by emotions and thus that logical arguments do not work. This is not a helpful picture to paint. Of course all of us are motivated by emotions. But if we would apply this at universities, that emotion is the motivation for questioning our teachings and that logical arguments is not an appropriate response, it’s a dangerous path to follow. Nobody wants to be treated as an emotional creature that cannot be reasoned with. In contrast, I would argue that many of us are convinced by logical arguments and remain unconvinced when we are left with incoherent arguments and told to ‘trust the expert’. Instead, if our commonly held facts are questioned, let’s sharpen our arguments further.

Increasingly, researchers are called upon to tell us if a fact is true or not. Are researchers suitable in the role as ‘ fact experts’? Why should researchers, and not others, be able to do this? Researchers are not experts because they work at a prestigious institution, have the professor-title or speak in a charismatic way. They are not better equipped to judge value issues, such as if one political measure is more valuable to the population than another (although we often think so ourselves). However, in certain cases researchers can help us when it comes to facts. It is true that researchers are, generally, good at handling facts because:

  • We are up to date on facts within our own field of research. This field, however, is usually quite narrow!
  • We use facts to test theories and potential explanations and are thus used to questioning and interpreting facts.
  • Occasionally, we develop facts. If facts are necessary for our research but unavailable, we might create them in order to conduct our research. These facts, such as the amount of plastic in the ocean or amount of companies with a sustainability strategy, can be of interest to the general public too.

Instead of raging against those that do not share our facts, don’t agree there is climate change etc., and labelling them alternative facts or anti- this or that, why not look at the explanations we provide. How pedagogical are we? Where are the weak points in our explanations? Which parts of the argument do they question? Do they have reasons to question these points? Can we support our statements further? We might just learn something about the issue and communication in the process.

Sustainability & fish farming: working with a real case

Aquaculture, such as fish farming, is a key industry to ensure  sustainable food production in the future. Foods deriving from the seas face many challenges such overfishing and water pollution. At the same time, sea food has many benefits such as low climate impact and high nutritional value.

It is quite clear today that wild fish supply is not sufficient and that aquaculture is necessary in some form in order to supply current populations with sea food. However, fish farming has been criticized for unsustainable practices through the years and the industry still struggles with some of them like sea lice, escapes and sustainable feed sources.

In the course I teach at NHH ‘Measuring sustainability’ we each year work with  a real case on how to measure sustainability. Last autumn, we collaborated with Norwegian Responsible Investment association Norsif on how we can measure and evaluate the sustainability of aquaculture companies. One of the things I love about these cases is the creativity the students show when coming up with new ideas and solutions. I truly believe this kind of creativity, combined with academic thinking and facts, is one of the most important skills we can teach students.

One of the learning points from working with the aquaculture case is how important national regulation is for sustainable fish farming. One of the drastic differences is the use of antibiotics. Aquaculture uses significant amounts of antibiotics, which is a critical issue considering antibiotic resistance, but the industry also shows that it can do without it when it has to, such as in Norway.

Another difficult issue is that fish farming in Europe is mostly done with omnivorous fish such as salmon. It is less efficient to raise fish that partly eats other fish than fish that only feeds on algea. Instead of feeding the salmon other fish, we could eat this fish directly and thus skip the step of raising the salmon. The fish in the feed can also lead to further overfishing. Of course we can feed salmon a vegetarian diet but salmon that are fed on vegetable rather than animal proteins may be lacking in Omega-3, which is one of the main reasons salmon are so healthy for a human diet. A better solution would be to instead farm a fish that naturally feeds on for example algea.

Another key issue for sustainability, the students discovered, is future orientation of the companies and investment in research to find sustainable solutions to issues we have not yet solved. During the course, we we’re visited by the head of sustainability and risk at Cermaq, Wenche Gronbrekk, who explained how the company works to address sustainability issues. Wenche has answered a few of my questions below and also describes their investment in future solutions: iFarm.

Sabina: The Norwegian aquaculture industry has made quite some progress in terms of addressing its sustainability challenges. What are, in your opinion, some of the main achievements? 
Wenche: We have made great progress in lifting the industry standard the past years through collaboration –  through dialogue and knowledge sharing between government, research and industry. Also, in the Global Salmon Initiative (GSI), addressing key issues such as standardization, feed ingredients and biosecurity. Vaccine development has also been key to advancing sustainability to the level we see today.

Sabina: Still, as we have learnt when working with this case, challenges remain. What’s on top of your to-do-list in terms of sustainability?
Wenche: Sustainability requires continuous effort, and we work every day to be better than just complying with minimum standards. Developing new solutions that address key problems is also a priority – such as our iFarm concept. It may solve many of the key challenges today through individualized treatment of each fish, increasing animal health and welfare, optimizing feeding and any need for treatment, which may in turn reduce the environmental footprint of our activities.

Sabina: Sustainability is, according to its definition, about the long term perspective, future generations even. Still most organisations operate with a shorter time perspective in their day-to-day business. How are you able to take the long term perspective into account?
Wenche: Salmon farming is largely dependent on taking a long term view – we operate in the sea and biological risks do not respect financial quarters. To have a business over time, our operations need to be sustainable in all aspects: environmentally, socially and economically. 

Sabina: Many who work as sustainability officers or even head of sustainability find that change management is crucial in order to conduct their work. Is this your experience as well?
Wenche: As a sustainability officer you need to work across the organization, break silos and in many ways be a change agent. Integrating sustainability in business strategy also means that many companies need to innovate their business model – and it is my experience that sustainability professionals often play a central part in this transformation.

A big thank you to Wenche and Cermaq for sharing your experiences with us and also to Norsif and Norsif member Folketrygdfondet and Tine Fossland who attended the students presentations and provided feedback on their evaluation models. We could not have done this without you!

When stakeholders oppose the company’s plans: the case of Schiphol airport

A key part of companies’ sustainability work is to communicate with parties that are affected by the company’s operations. This is generally called ‘stakeholder dialogue’ (see Edward Freeman’s definition from 1984).

Engaging local communities, environmental groups, customers and investors early on may prevent critic, and even boycott, of the business later on, when it might be too late to turn back. It can also provide valuable input and reveal opportunities. However, these different groups can, and most likely will, also have conflicting ideas and needs. So what can the company do when the stakeholders’ demands conflict with the corporate plans as well as with other stakeholders’ needs?

A NHH and CEMS student of mine, Elizaveta Sokolova, wrote her master thesis on precisely this issue. She used the case of the Dutch airport Schiphol and their stakeholders (local residents, regional authorities, the Dutch state, airlines, Friends of the Earth and more) to investigate how the airport handles the conflicting demands. The conflicts concerned for example birds that get in harms way around the airport, access to the airport and noise from the airport. Elizaveta found that even when the stakeholders do not disagree on the final goal, they can disagree on how to achieve the goals.

In Schiphol’s case, the stakeholder dialogue revealed the complexity of the issues. It also created a feeling among stakeholders that the problem is shared and only coordinated efforts can bring a solution. However, when the conflicts were too divisive, the airport decided to end, or at least limit, the dialogue. To read the full thesis, you find it here.

I asked Elizaveta, who also participated in the ‘Measuring sustainability’ course I teach at NHH, a few questions for the purpose of this blog:

You seem to have a keen interest in business and sustainability. What interests you most in this area? 

On the first glance, it seems that sustainability stop business from faster expansion and revenue growth. However, being more conscious of the impact that a business creates on people and environment allows to make the growth more sustainable, less dependent on external factors such as new policies or fuel/electricity/commodity prices. Finding examples of how this idea works in real life is what attracts me the most.

What is the main point we as readers can learn from your thesis?

The Schiphol airport example that I describe in my thesis shows that changing business towards sustainability and including diverse stakeholders for consultations is never easy: opinions vary. However, this approach leads to well-rounded final decision.

Writing the thesis, what was the main learning point for you personally?

For me personally, it was difficult to understand how to find a common ground on an issue when stakeholders’ opinions are literally opposite. The answer is: willingness to compromise and understand the opponent’s concerns.

Now that you have finished your master here at NHH, what are your plans for the future?

Now, when I have finished NHH, I am implementing the knowledge I got about stakeholder engagement in practice: I work at The Global Fund and deal with sustainability and transition. It requires a lot of negotiations and communications with different stakeholders, so the communication experience and theoretical background I got while working on the thesis is very beneficial.

Thank you Elizaveta for sharing your insights and good luck with your new job!