Accounting for Sustainability 22E29100(6cr) Topic: MEASURING AND REWARDING SUSTAINABLE PERFORMANCE Prof Eduardo Schiehll, PhD, FCPA Professor of Accounting HEC Montreal Visiting Professor Aalto School of Business

Accounting for Sustainability / Eduardo Schiehll Learning objectives: Construct a framework for measuring the sustainability impacts. Apply an input-process-output-outcome framework to assess the social, environmental, and economic impacts of a company’s accountability practices. Understanding the “Sustainability Accounting Standards Board (SASB) Materiality Map” 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Types of value creation: Internal value creation External value creation Economic value creation Internationalization, merger, restructuring, entrepreneurial posture, innovation, venturing Financial performance: stock market returns, assets turnover, return on equity, return on investment, sales growth Social value Employee well-being, workplace safety, workplace ethics, sustainable development Corporate social performance, customer satisfaction, job creation, environmental sustainability Adapted from Huse M. (2007). 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Types of value creation: Internal value creation External value creation Economic value creation Internationalization, merger, restructuring, entrepreneurial posture, innovation, venturing Financial performance: stock market returns, assets turnover, return on equity, return on investment, sales growth Social value Employee well-being, workplace safety, workplace ethics, sustainable development Corporate social performance, customer satisfaction, job creation, environmental sustainability Adapted from Huse M. (2007). 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

A framework for the design of a performance measurement system 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Epstein and Roy (2001) Sustainability in action 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Epstein and Roy (2001) Sustainability in action 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

In-Class exercise related to the team project: Adapt the Sector Level SASB Materiality Map to the company object of your “Sustainability performance measurement (team project).” Identify performance dimensions and respective KPIs for “Sustainability performance measurement (team project)” tailored to the sector your company operates. 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Three steps: Identify those sustainability aspects of sector- specific performance that impact society either negatively or positively; Define the most relevant or potential information (financial or non financial) that can be reasonably collected and used to assess it. Present ways to transform this information into performance metrics 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Why SASB? « Sustainability Accounting Standard Board » It distinguishes between those sustainability factors that are likely to have material impacts on “environmental and social performance” and those that are not as important. 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Source: Steve Lydenberg, Jean Rogers, PhD, and David Wood, PhD. From Transparency to Performance (Harvard University, August 2010) 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Suggestion: Dimension Issue (« Why is it material? ») Negative or Positive impact on « performance » Indicator Environment   Social Capital Human capital Business model and Innovation Governance Economic Performance 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Refer to « ESG Metrics » Exhibit 4: Material topics and KPIs for the Processed Food Industry 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Balanced Scorecard Several frameworks were developed to incorporate: financial and nonfinancial measures, output and process measures, and historical and forward-looking measures. The balanced scorecard approach is without doubt the most referenced framework. 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Balanced Scorecard The balanced scorecard includes four dimensions for which performance measures are used to manage the performance of an organization: Growth and learning, Internal processes, Customers and Finance How do we integrate the sustainability (environmental and social aspects of) performance 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Balanced Scorecard 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Figge (2002): core reading class 6 (week 47) Three different possible approaches of integrating Environmental and social aspects in PMS: Can be integrated in the existing 4 standard perspectives of the BSC framework. An additional perspective can be added to take environmental and social aspects into account. A specific environmental and social scorecard can be formulated. 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Figge (2002): core reading class 6 (week 47) Three different possible approaches of integrating Environmental and social aspects in PMS: Sustainability is a market force; incorporated into the economic model. Sustainability is a non-market force, more a social construct (value). Implies a deduction (from one of the above) of an environmental and social scorecard. 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

1. (When) Sustainability is a market force; incorporated into the economic model The Harthrow Case (Furniture sector) The beverage industry (Water as Raw material) The case of packaging industry. The Soela Case (Food industry or retailers) 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Balanced scorecard and strategy maps The balanced scorecard is used as a comprehensive framework to translate strategy into action, and to act as a bridge between strategic goals and performance monitoring. Strategy Maps 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Exhibit 8 Amanco’s Stragey Map (page 20) Amanco_case.pdf

Accounting for Sustainability / Eduardo Schiehll Strategy Maps The concept of strategy maps is closely linked to the notion of balanced scorecard. The process of strategy mapping consists in identifying how organizations create value by building on strategic themes such as “growth” and “productivity.” 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll Strategy Maps Adapted from Armitage and Scholey (2006) 15/11/2018 Accounting for Sustainability / Eduardo Schiehll

Accounting for Sustainability / Eduardo Schiehll 15/11/2018 Accounting for Sustainability / Eduardo Schiehll