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IMPROVING SUSTAINABILITY RESULTS WITH QUANTITATIVE LEADING INDICATORS

By RL Expert Leesa Soulodre

Many companies are seeking to lower their  operational, regulatory and reputational risk by

involving their suppliers in their sustainability and CSR programs. Most of these companies are

using “scorecards” to help the suppliers focus on their sustainability results (lagging indicators).

The overall score achieved may be linked to the amount of business that will be transacted with

each supplier.

RL EXPERT Dr. Robert Pojasek, Ph.D. is also an adjunct professor at Harvard University, where he teaches a popular distance learning course, “Strategies for Sustainability Management.”


Many companies are seeking to lower their operational, regulatory and reputational risk by

involving their suppliers in their sustainability and CSR programs. Most of these companies are

using “scorecards” to help the suppliers focus on their sustainability results (lagging indicators).

The overall score achieved may be linked to the amount of business that will be transacted with

each supplier. However, the search for the perfect scorecard can only promote “short term thinking” without a “looking forward” component. One has to remember that results are merely the outcome of performance and do not measure performance directly.


In 2003, the United Nations’ Global Compact organization signed a memorandum of understanding with EFQM, a global non-profit based in Brussels (formerly called European Foundation for Quality) to create the “Framework for CSR” and the “Framework for Risk Management.”

These important frameworks helped link sustainability with the EFQM performance framework used by 30,000 companies in the European Union. Performance frameworks also exist in about 70 countries around the world. They focus on the improvement of business processes such as leadership, strategic planning, employee engagement, stakeholder engagement, resources and relationships, and process management, offering specific outcomes to measure and aim to achieve. Central to these performance frameworks is a means of converting the business process into a quantitative leading indicator. EFQM has developed a process that it calls RADAR logic.

RADAR consists of four elements: Results, Approach, Deployment, Assessment, and Review.

  1. An organization determines the results it seeks for its sustainability program; these results cover many of the lagging indicators found in the Global Reporting Initiative’s (GRI) G3.1 reporting guidelines
  2. It plans and develops an approach to deliver the selected results both in the short term and over a longer term
  3. The organization deploys the approach in a systematic way to ensure its implementation
  4. Finally, the organization assesses and reviews the approaches and the deployment by monitoring and analyzing the results achieved through the ongoing activity.
Trained assessors use a standard matrix to score how the organization executes on each of the elements described above. The score for each of the RADAR elements becomes the quantified leading indicator. These scores can be “tagged” using open-source software known as XBRL.
The numbers can then be aggregated and disaggregated for evaluation and reporting purposes. It is also possible to score the results using another matrix designed for this purpose. These scores or ratings are independent of the size of the operation and the sector within which it operates since they are unitless numbers. It is possible for investors to use the XBRL taxonomy to provide detailed evaluations of entire value chains and their component parts on an “apples to apples” basis. Independent studies have shown that companies using performance frameworks, such as EFQM, financially outperform companies that do not use these frameworks. Many firms are using performance frameworks to manage their business.
However, their sustainability reports make no mention of them. When considering improvements to a supply chain management program, a performance framework should be adopted to provide a “looking forward” focus. It will be more effective than the use of even the best scorecard. Such an approach should help lower operational, regulatory and reputational risk throughout the value chain. Score approaches using the RADAR logic are widely available.
There has been an argument that the use of quantitative leading indicators could compromise the competitiveness of the organization. This concern is completely unwarranted. Disclosing the use of a performance framework and sharing the RADAR rating score will not destroy competition. In fact, many companies in the United States actually publish their Baldrige performance report on their website. They see this as a proactive demonstration that their business is committed to managing the processes that produce results into the future, that is, moving past the short-term thinking of companies that focus only on lagging indicators.
Although GRI has announced that it will not include quantitative leading indicators in its upcoming G4 revision, there are a number of early adopter companies that are beginning to use this process. The value proposition lies in the ability to reduce operational, regulatory and reputational risk with this approach. It will also foster innovation in how the company can drive its sustainability results over the long term.
This interview was written by RL EXPERT Dr Bob Pojasek and published in the August 2012 Food and Beverage edition of RepRisk Insight, an ESG Risk publication co-founded by RL Expert and its partner RepRisk AG for the financial markets and their investee multinational corporations.
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