Environmental Strategy and Environmental Balanced Scorecards: How do you measure sustainability using the
Balanced scorecard and an Environmental Strategy Map

First a warning. If you are simply looking for ways to measure environmental effects such as carbon output, this discussion is not for you. However, if you want an organisation that has a deep culture that believes in sustainable environmental solutions and acts upon them in all its activities to lower its environmental impact, as a part of its normal business, then read on....

This raises two questions about managing environmental performance

1. How best to measure the organisation's of sustainable thinking and behaviour? How do I measure environmental activities. How do I demonstrate progress with my environmental strategy?
2. How do I present and manage them in our balanced scorecard?

An Environmental Balanced Scorecard

We have helped several clients to embed sustainable and environmental thinking into their culture and activities. To demonstrate that they are making a real difference through their actions, as well as eventual results. In other words our clients want to get way beyond "Greenwash" and also get beyond environmental reporting. They want to show leading indicators of real progress towards even better environmental credentials. To do this we use a modern balanced scorecard approach that describes what drives improvements from the culture, knowledge and behaviours, through the activities, to the outputs and for customers and financials.

I often get into discussions about how the Balanced Scorecard needs another perspective in addition to financial, customer, process and learning and growth to represent the environment. If you are trying to do an environmental scorecard read this, because it explains why adding an extra perspective will cause you to make many mistakes and miss a real opportunity. We started developing these over ten years ago, so know what works and what misses the point.

Adding an extra environmental perspective to your balanced scorecard seems an obvious thing to do, but it can cause two problems.

1) It can mean you will lose the drivers of sustainable activity.

2) It can also cause you to look at sustainable activities in isolation rather than as a part of what everyone does.

Both create problems for organisations and undermine sustainable and environmental activities. As you will discover reading further, you can represent any environmental strategy for an organisation within the balanced scorecard framework as a theme, which does not destroy its structure and increases the impact of your environmental strategy, objectives, measures and initiatives. It also makes it easier to tell the story of your environmental strategy: and that must be a good thing.

Some argue that you need a dedicated environmental perspective in the scorecard otherwise it does not address the significance of Kyoto (or other environmental legislation) and its impact on management reporting. For instance with Kyoto:

Chapter 40 of the Kyoto agreement sets out some national level PI's related to the environment and sustainability. Kyoto Chapter 40 defines Performance Indicators for use at Government level, and Government will pass the necessary measures into law that will force organisations, profit and not-for-profit, into reporting on them. Chapter 40 effectively demands such reporting be placed on the statute book of signatory nations with much the same level of precedence as financial reporting. The UK Government and other signatories have already implemented a number of measures as a direct result of Kyoto. Other Governments are doing the same kind of thing.

• Does sustainability reporting, as a global issue, fit into the Norton & Kaplan's balanced Scorecard model? (yes, easily when you know how).
• Isn't this balanced scorecard model ultimately profit driven? (No by the way).
• Doesn't sustainability address a wider social impact? Therefore it seems legitimate, if only on a practical data management basis, to have "Environment" as a fifth perspective. (Yes, perhaps, but not simply as an add on).

This is all true, but leads to a wrong conclusion. Trying to argue for a separate "Environmental perspective" misses a fundamental understanding of the balanced scorecard model.

Why does this thinking go wrong? Let us look at some examples that demonstrate how sustainability as a strategy is best represented.

(You can see examples of Environmental Balanced Scorecards and strategy maps that address Environmental and sustainability issues here)

Sustainability and environmental strategy are themes, not perspectives.

Your sustainability or environmental strategy is a theme of your strategy that spans the existing balanced scorecard perspectives. It is a (vertical) theme of your strategy map.

To understand this, just for a moment think of all the other similar aspects of a business. You could introduce new (horizontal) perspectives for financial compliance, Health and safety, Innovation, Customer service, Sales, Cost reduction and every other potential theme of the strategy (as people amazingly do).

Guess what? When you then ask "How are these related to the other perspectives in a cause and effect framework?" there is not a simple answer. Why? Because what they are doing is lumping anything associated with the environment into a single perspective of the strategy map whether they be related to values, capability (learning and growth), process, customers and their needs, financial impact or CO2 emissions. Therefore you lose the causal nature of the thinking and relationships between perspectives. They lose anything that drives and tells the story of the strategy. You also lose the ability to ask, questions about how the strategy happens.

There are at least five potential themes in a sustainability strategy map that illustrate how they should work. All of these illustrate how all the Balanced Scorecard's perspectives apply. Along side an organisation's strategic themes of making some sales, managing costs, complying with health and safely, etc, there are possibly another 5 themes to do with the environment.

They might have an interest in

i) Monitoring the environmental legislation to ensure you comply (Understanding it)

ii) Complying with the environmental legislation (doing it)

iii) Reporting statutory environmental compliance (proving it)

iv) Innovating how you comply with and help save the environment (doing it better)

v) Using PR about your environmental credentials to influence customers and investors (levering it)

Having worked with environmental specialists in various companies and public sector bodies we have made this work in practice. Let's look at the balanced scorecard perspectives for these themes:

Financial impact of sustainable practices:

Well, there is

a) the cost of compliance, the cost of innovation and the potential cost/risk of non-compliance (i, ii and iii),

b) the benefits of environmental processes, products and services that create revenue (iv),

c) The marketing and market value of improved good practice in cost of capital as well as the social costs of environmental improvement.

(Just simply think triple line accounting here - it works fine)

Customers of sustainable practices

There are likely to be at least four types of customers in the broadest sense:

• Actual customers that give money - real customers!
• People in the community potentially affected by who might incur the social cost
• Legislators/Government - who want you to comply or pay up
• Investors - who might be influenced to lower the cost of capital

Each of these customer groups will have needs that you will need to satisfy depending on the themes and your proposition.

Processes - and their potential L&G pieces

Well that is trivial from the themes now (you see clever design of the themes means that these things just fall out)

i) One represents your process for monitoring legislation. Of course you may need additional skills, knowledge and capabilities to this well which will appear in your learning and growth perspective. Fail and there will be financial costs. The customers are the regulators.

ii) You will have processes for monitoring your compliance with the legislation. compliance (and the cultural piece of embedding environmental thinking in the activities of production/maintenance which would be represented in the learning and growth perspective. Again, fail and there will be financial costs. The customers are the regulators.

iii) You may need an effective environmental compliance reporting process. I put this here to distinguish it from normal organisational compliance practices. Again you may need to develop environmental auditing skills or some other environmental capabilities. There are costs with reporting compliance. There are costs with carbon trading in both the trades and the transaction costs.

iv) If you have an R&D process (which some call an innovation process) and that is aimed at improving sustainability then you will also need to develop your organisation's R&D skills (L&G). If it is about including environmental capability and thinking into your existing R&D process, then the process remains the same but new skills, competencies and capabilities will be needed. Your customers are your customers and the financials will be mainly revenue based.

v) Oh yes. Or course organisations want to make something of their environmental credentials and therefore its useful to think of the environmental public relations process. If you manage to add to your environmental credibility, they you might improve your share price, attract new customers or win awards that add to your credibility and value.

As you can see, each of these are THEMES of the strategy. They illustrate how the perspectives of the scorecard tease out the underlying structure and system. They lie vertically across the four horizontal perspectives quite comfortably. So you don't need an environmental perspective.

What about CO2 you might ask. What about it. It is an output and therefore needs to be in the upper perspectives. Sometimes you will generate it directly through your activities. Sometimes your customers will generate it for you (for instance when your packaging is disposed of) , your product used or your product recycled at the end of its life.

You could simply place a (total) CO2 number in the financial perspective. This will have the effect of saying that our "environmental profitability" is

revenue minus costs minus environmental impact.

Associated with CO2 are financial outcomes. It is being given a financial value in the carbon trading protocols and through other means.

So finally I will contradict myself and say that you could, if you wanted to, put a CO2 perspective (Not an all encompassing "Envoronment" perspective) alongside the financial one to represent the carbon impact of your organisation's activities. Alternatively, just like the social impact you could report it and also account for it with a surrogate financial cost within the financial perspective explaining how it was derived just as you explain how your revenues, costs, loans, working capital, property and other financial assets are derived.

By starting with the view, it is not a separate perspective, you can see how we have teased out aspects of the environmental and sustainability agenda into the existing perspectives of the balanced scorecard and expanded the thinking about how you will achieve these ends. If you had simply popped anything and everything to do with sustainability and environmental issues into a single perspective, as many try to do, you would have lost this thinking about how you will achieve the environmental changes.

That is up to the management to decide.

(You can see examples of Environmental Balanced Scorecards and strategy maps that address Environmental and sustainability issues here)

The context and system you are dealing with

Just be careful which system you are thinking about as well. As an organisation you will operate in an industry that may have environmental initiatives and be subject to legislation. Likewise as an industry you may lobby or seek to improve its environmental impact. You are also working in the context of a government (or governments). Therefore your organisation's environmental strategy may be subject to local (or global) legislation and emphasis.

Be clear which part of these systems and at what level you are thinking and working. It helps to tidy up your strategy maps and your strategic thinking.

Getting started

Sustainability strategy maps and Environmental Balanced Scorecards

We have examples of environmental and sustainable strategy maps and balanced scorecard that we can use to help you develop useful and sensible environmental scorecards.

Climate change scenarios to test your strategy

We also have environmental scenarios explore how different environmental changes and legislation could affect organisations. They are really powerful for helping you to develop a sustainable environmental strategy.

To find out more, simply contact us.