Get on target for ESG and sustainability

Setting SMART objectives and targets to improve ESG and sustainability performance in Australia

Clear ESG and sustainability objectives, metrics and targets are now central to managing projects and organisations across Australia. When framed well, they lift performance, provide a focus for teams, and act as a reference point for discussions about what must be achieved.

This ESG and sustainability ’management by objectives‘ approach is now a requirement in laws, standards and rating schemes, including the AASB S2 climate disclosure requirements, the ISO 14001 environmental management standard, and the Infrastructure Sustainability (IS) rating scheme. Getting it right means organisations can both improve performance and ensure compliance.

The origins of management by objectives

The concept of setting and measuring performance goals originated in business management thinking with Peter Drucker’s ‘management by objectives’ introduced in 1954 [1]. From there, a variety of concepts evolved, including ‘Key Result Areas (KRAs)’ now familiar in contracts and employee performance planning.

Critics point to limitations, such as workers attempting to meet quantitative targets by any means necessary, including compromising on quality. A greater emphasis on principled leadership is sometimes presented as an alternative [2].

Nevertheless, research shows that setting and following clear, quantified objectives and targets is associated with enhanced business performance (and we’re assuming) enhanced sustainability performance [3].

Good sustainability programs also focus on the importance of principled leadership.

What’s required under standards and rating schemes?

For sustainability objectives to be effective, they need to be structured properly. Australian legislation, standards and rating schemes now set clear rules on how objectives and targets should be developed.

Obviously, having objectives, metrics and targets that literally focus the project’s or organisation’s aims and effectively influence the behaviour of the people involved is what is needed.

However, recognising that these things work better if they are framed appropriately, legislation, standards and rating schemes set particular requirements.

Infrastructure Sustainability (IS) ratings schemes

Within the Infrastructure Sustainability (IS) ratings schemes, the ‘version 1 series’ requirements for Design and As Built were fairly basic. Objectives and targets had to cover environmental, social and economic aspects, and each policy commitment had to have at least one ‘objective and/or target’ linked to it.

The version 2 series (now moving to version 2.2 from version 2.1) introduced requirements for ‘SMART’ targets. Once again, this concept was lifted from business management.

SMART targets are Specific, Measurable, Achievable, Relevant and Time-bound.

One could say this is contrasted with targets that are Vague, Subjective, Unrealistic, Disconnected and Open-ended. (However, VSUDO doesn’t roll off the tongue.)

Under the IS rating scheme, sustainability objectives and SMART sustainability targets must:

• Be provided for each topic with high or very high materiality
• Be approved by the senior management team
• Have a person or position responsible for target performance
• Have an associated reporting framework developed.

AASB S2 climate disclosures

Although addressing the narrower domain of climate-related financial disclosures, AASB S2 sets out similar but more prescriptive requirements for metrics in Section 29 and targets in Section 33. It nominates specific metrics such as, ‘Absolute gross greenhouse gas emissions generated during the reporting period, expressed as metric tonnes of CO₂ equivalent.’

AASB S2 also specifies details to disclose such as, ‘The measurement approach, inputs and assumptions the entity uses to measure its greenhouse gas emissions.’ Further detailed requirements apply to targets, such as, ‘The base period from which progress is measured and any milestones and interim targets.’

The Task Force on Climate-related Financial Disclosures, on which AASB S2 is based, used the following concentric circles graphic to illustrate how metrics and targets underpin the overall approach.

Figure 1. Core Elements of Recommended Climate-Related Financial Disclosures, adapted from TCFD [4]

ISO 14001 environmental management standard

There are parallels with the ISO 14001:2015 Environmental Management Systems approach. It requires organisations to establish objectives taking into account the significant environmental aspects and associated compliance obligations, and considering risks and opportunities. It requires objectives to be:

• Consistent with the environmental policy
• Measurable (if practicable)
• Monitored
• Communicated
• Updated as appropriate.

Making your targets work in IS ratings

SMART targets are so central to version 2 series IS ratings that it is worth spending time setting them up carefully to serve multiple purposes across the scheme. They appear in multiple credits and are linked to stakeholder engagement and reporting requirements.

At Losee Consulting, we use a structured approach recording each SMART attribute in a central spreadsheet. This allows the same set of targets to be applied across different credits, sustainability reports and stakeholder engagement activities.

The diagram below shows a concept Losee Consulting uses to assemble SMART targets for application across version 2 series ratings.

Some things to consider:

• Don’t include everything

  You don’t need to include everything in the rating-wide set of objectives and targets. For example, there may be additional compliance requirements for environmental impacts such as air pollution. The core set of SMART targets are intended to enable leadership an oversight at a whole-of-project level.

• Focus on outcomes

  Where possible, look to measure outcomes, rather than processes or outputs. An example of process is conducting site inspections. An output might be donating $5000 to a local charity. An outcome would be increasing water efficiency by 30% thereby effectively reducing the need to take water away from dams.

• Include lead and lag metrics

  Including ‘lead’ metrics as well as ‘lag’ metrics will help drive change before it’s too late. For example, this is common is workplace safety management, where ‘lost time injury frequency rate’ is a lag metric but ‘safety toolboxes conducted’ would be a lead metric.

More precise meaning

Historically, in environmental management practice, the word ‘targets’ has often been used loosely, sometimes in place of ‘actions’. For example, ‘implement erosion control’ might have been labelled a target. But under modern sustainability frameworks, a target must link to a measurable outcome, for example, ‘Protect the local creek from sedimentation and nutrient enrichment — adjacent downstream surface waters remaining less than or equal to upstream NTUs (Nephelometric Turbidity Units) or not exceeding 5 NTUs.’

Losee Consulting recommends using clear definitions to avoid confusion:

Drawing on these definitions, the following are some examples of how to tighten your writing of objectives and targets.

Conclusion

While having a great set of objectives, metrics and targets won’t by itself deliver superior sustainability performance, they have an established role to play. Decision makers expect a discussion around targets and want to scrutinise performance against them.

Carefully framing your set of targets will ensure you comply with requirements, as well as increase the likelihood that people will understand where to focus their efforts, contributing to valuable sustainability outcomes.

References