Until recently, business decision makers thought that improving the sustainability measures in their products and services drives up costs. However, this view is shifting in companies across the world as decision makers can now see that taking the steps to better their sustainability can create a source of competitive advantage. In this week’s post, we are talking about how vendors can measure their sustainability using a value management approach.
To learn more about implementing value management, please, check out our previous post.
Sustainability as a cost-driver
Typically, businesses measured the improvements they made to environmental, social and governance (ESG) areas on how much they cost. So, ESG developments were looked upon as cost drivers in the early days. But this assessment was pretty biased because it overlooked efficiency income. This caused business decision-makers to make unfit judgments and choices. For instance, if you make a product more sustainable, on the one hand, it could cost more to produce, because of more pricy but environmentally friendly manufacturing processes. But on the other hand, your customers might think this product is better and is worth more, so you can increase the selling price and, the product creates more income.
Can sustainability conversations focus on revenue generation?
Customers’ decisions are shaped by ESG matters, and industry leaders of today know they can find a source of competitive advantage if they make moves to measure sustainability. The difficulty, even for the leading companies comes with attaching a monetary figure to the effect of ESG improvements. It is really complex to attach a value to these actions, in dollars or any other currency. And it’s really tricky to work out how many customers have purchased a product because it’s sustainable, rather than for other reasons. It is also hard for companies to grow brand value centred on the sustainability improvements they make to their offerings. Without knowing the cash value, meeting rooms get jam-packed with futile discussions about costs, fluffy ideas to defend sustainability and messy notions to drive competitive advantage.
Here are some questions to think about before we start:
- Can you imagine a different situation?
- Would you find market tools, that can attach a monetary value to measure sustainability, useful?
- Could you make your product or offering even more attractive by adding sustainability values if you already use number-driven approaches, such as value management or value selling?
- And if you were able to show your customers how much value they could get, in money, from making sustainability improvements - would they be happy to pay more for your offering?
To make sure that your sustainability arguments are more positive, here is how to measure sustainability using value management.
Here are 4 steps to guide you on this journey:
Step 1: Know the ESG benchmarks in your industry
- Do you know where your industry stands with sustainability measures?
- And then where your industry stands in comparison to the next closest industry?
The first step is all about knowing just where you are. It’s best to get in the picture and to know your top industry benchmarks, so you can keep relevant and stay focused on your specific industry. When you understand your industry’s key ESG KPIs you will get to know your businesses context inside out, and this can really improve your competitive knowledge. You see, with this information it is much easier for you to set ESG targets. And, also, with cross-industry capabilities for every material ESG KPI, you can see which practices should be changed or improved to meet ESG targets. Since the ESG KPI options are vast and wide, choosing a select number of top-quality KPIs will give you the best results.
Step 2: Know which ESG benchmarks are the best ones for your company
Understanding where you stand
The questions to ask during this phase are: Where is your company positioned within your industry? Do you know how you compare to your direct competitors?
In step two, examine your key ESG performance indicators. This lets you compare them with your industry peers or leaders in sustainability. Once you understand your position, you can set realistic targets for effective, long-term decision making. You’ll be able to see which changes can benefit both your business and customers. It’s also a great way to see how large the gap is between you and the top industry players.
Step three is about evaluating your ESG KPIs in terms of percentages, tons, or other metrics and calculating their worth. This process can feel tedious at first, but it’s generally straightforward once you begin.
Assigning value to ESG measures
It’s relatively easy to find out how many tons of recycled packaging top industry performers use, or their CO2 emissions, or their percentage of minority employees. However, assigning a monetary value to every KPI can often feel like a difficult task. It can be time-consuming to translate your KPIs into monetary terms, and it may require collaboration and agreement across different teams.
Don’t be discouraged, though. These measures are always worth the effort. Cross-functional discussions and decisions will be much easier once these values are established. Some decision-makers may hesitate to buy into your qualitative sustainability story if they’re under financial pressure. However, when you can show the monetary value behind your KPIs, that story changes entirely.
Many businesses may feel prepared to engage in sustainability talks with customers without assigning a cash value to their KPIs. Yet, it’s always wise to do so. Economic downturns and financial pressures can affect any business, especially in uncertain times. By speaking the language of money, you’ll be better equipped for success in the future.
Step 4: Measure sustainability KPIs using a value tracker tool
This final step is crucial, though it’s often overlooked. The key questions here are:
- What will happen when you implement your sustainability strategy?
- How will you ensure you stay on track?
- How can you identify variances that might require changes to your action plan?
This stage focuses on measuring sustainability performance against selected ESG KPIs. Regularly tracking these KPIs helps you maximise the value of your ESG investments. You need to assess the economic value realised from these KPIs, compare it with the expected value, and identify any gaps. This analysis also includes forecasting future performance. It allows you to monitor your progress and track your sustainability transformation, enhancing the credibility of your sustainability narrative.
However, vendors who rely solely on in-house value management for sustainability measurement face challenges. Publicly available ESG data is often incomplete, unreliable, and unclear. Furthermore, sustainability teams frequently lack the time, resources, or expertise to conduct thorough analyses on their own. Outsourcing support can help overcome these obstacles and ensure more accurate and actionable insights.
In conclusion
You will be able to make smart, value-driven sustainability decisions if you are equipped with the right tools and processes. You can back up your decisions when you combine sustainability improvements with value management. The four key steps to measure sustainability using value management that we have discussed with you today, are based on industry and company benchmarking. Like the processes that are also applied in value selling, they will help you to find an economic value for each KPI and then you can track KPI improvements over time.
Ökol, our partner company at TVST, has developed a business intelligence software platform. This is a tool that offers data analysis and provides specific industry and company benchmarks, all focused on material ESG KPIs. The four steps we have discussed in this post, are all included in the Ökol methodology. Ökol offers all the ESG KPI tools that you’ll need, which can save you time developing your own.
Do you want to find out more about how Ökol or TVST can help you manage your value and sustainability improvements?
Can we help you? You can get in touch with us @ Ökol to speak to an expert member of our team – and please follow Ökol on LinkedIn too.
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