Understanding sustainability thresholds

The writing is on the wall – 2023 has been the warmest year on record.

All other things being equal, we are heading towards a world that is 2.8C warmer by the end of the century – and not 1.5C as the Caribbean has been demanding and the world agreed to in 2015.

Even with increased ambitions and implementation efforts, severe and disruptive change is inevitable.

One of the implications of this is that risk is increasing. For companies, this means that both dangers and opportunities are growing.

Most companies are now aware of these changes, and many have started to use the word "sustainability" in many different ways and for different reasons.

Many want to be part of the solution and not remain part of the problem by creating harm, even if inadvertently. They want to generate value that is sustainable and contribute to sustainable development. What does that mean, and what are some necessary governance and management conditions they need to fulfil?

When can outcomes, the changes that the organisation generates, be called sustainable?

Purpose and integrated value generation

One of the responsibilities that no board of directors can delegate is to define, specify and communicate the ultimate value the organisation intends to generate for specified stakeholders – in other words, the organisation’s meaningful reason to exist, its purpose (ISO 37000 definition).

Through the organisational purpose, a board establishes what meaningful problems of people or planet the company profitably seeks to solve and how it will avoid profiting from creating harm. The organisational purpose specifies its optimal strategic contribution to the long-term well-being of people and the planet.

In other words, the organisational purpose and values articulate what the company will achieve and how it will behave.

According to ISO 37000 Governance of Organisations – guidance, which is the global benchmark on integrated governance that supports sustainable development, the governing body should also interpret the organisational purpose by specifying five more related aspects (which together constitute the integrated value generation model):

(i) What are all meaningful changes in well-being the company seeks to create for different stakeholder groups and the natural environment? These are known as the value generation outcomes, and by achieving all of them, the organisation fulfils its organisational purpose. The board of directors should establish objectives and targets for each one of the value-generation outcomes. For example, what changes and what are the objectives and targets, if any, for consumers, company personnel, suppliers, communities, shareholders, the government and the natural environment?

(ii) The parameters within which the objectives and targets are to be achieved. This can include, for example, expected return on financial capital but also desirable (eg inclusive) and unacceptable ways (eg corrupt) of generating the outcomes. The organisational risk appetite should be specified amongst these parameters.

(iii) How will they assure the generation of value so that unintended outcomes and outcomes resulting from the organisation’s changing context are identified, understood, monitored and appropriate action is taken?

(iv) How will they retain or distribute the generated value in an accountable and transparent manner so that the organisation remains agile and viable over time and achieves its value-generation objectives?

(v) Finally, boards should also set clear strategic outcomes and guide the organisational strategy to achieve these outcomes through which the organisation will fulfil its purpose and value generation objectives.

Sustainability thresholds

While all well-governed companies will have a defined purpose and their boards will have a specified integrated value generation model, not all companies can claim to contribute to the sustainable development goals.

To be sure that a company is contributing to sustainable development, it needs to do more than the first step – committing to contribute.

The company needs to identify all relevant current and potential future impacts (positive or negative) on different stakeholders throughout their value chain.

Companies then need to prioritise the complete list of impacts based on their specific sustainability context, and that means that they need to consider global, national, and local SDG priorities, gaps and interdependencies.

Before boards can update their value generation models, and possibly also the organisational purpose statement, with the SDG-related impact information, there are two powerful but not widely understood concepts that boards and top management need to consider.

These are critical steps for impact effectiveness and to be able to claim and transparently account for sustainable value generation:

– For each of the outcomes or impacts generated by an organisation, a normative sustainability threshold needs to be established.

As the Impact Management Platform states, “Outcomes for people are sustainable if they are within the acceptable range determined by societal thresholds and outcomes for the natural environment are sustainable if they are within the acceptable range determined by ecological thresholds.”

As an example of a simple threshold, we can take the example from SDG five: gender equality. According to the UNRISD Authentic Sustainability Assessment manual, “The difference between the average remuneration of men and women in an organisation shall not exceed three per cent in any given year over the past five years.”

– Boards and top management need to be specific about what kind of impact goal they are aiming for each outcome (change) they generate.

All outcomes for which a company does not know its level of impact need to be classified as “does or may cause harm.”

Once the company has assessed the type of change it generates it can classify its impact goals into the following three categories:

– Act to avoid harm: This impact classification applies to outcomes generated by the company that are not sustainable because they are and will remain outside of the sustainable threshold region within the period for which the objective is set. This is quite common, and even if the company cannot produce sustainable value, it can minimise its ongoing negative impacts.

– Benefit stakeholders: this classification applies to outcomes where the impact objective is to maintain or cause improved well-being for one or more stakeholder groups and/or conditions of the natural environment within the range established by the societal or ecological threshold. Note that if any outcomes of the company are outside of the sustainable threshold range and are not acted on to avoid harm, then the entire organisation is classified as “doing harm” by impact investors.

– Contribute to solutions: this classification applies to a company that acts to reduce any harm it is causing and is addressing a social or environmental challenge not caused by the organisation by improving the well-being of one or more stakeholder groups and/or the natural environment so that it is within the sustainable range.

Embracing sustainability now

In an era of unprecedented sustainability challenges, understanding organisational impacts and the role of sustainability thresholds is vital for companies.

By understanding all of the changes the organisation brings about for stakeholders and the natural environment and how these relate to sustainability thresholds that ensure that a company’s activities remain within social and ecological limits, companies can not only avoid doing harm but contribute to sustainable development at a pace that is required.

Dr Axel Kravatzky is managing partner of TT based Syntegra-360 Ltd, vice-chair of ISO/TC309 Governance of Organizations and president of EUROCHAMTT. He enables companies to flourish through integrated governance, certified management systems and transformational leadership.