ERP and Sustainability

Comprehensive Sustainability Approach

ERP and Sustainability needs to be intertwined in order to achieve success. One might assume that sustainability solutions require only simple changes to traditional enterprise resource planning (ERP) systems. On the contrary, the impact to a business when seen through a wide sustainability lens is far more profound: It is causing shifts in the way businesses operate, interact with their customers (especially other businesses), and offer services and products. In fact, almost every aspect of a business will be affected by a comprehensive sustainability approach.

ERP systems are quite good at enabling financial reporting requirements. However it is becoming clear that environmental, social and financial are inextricably linked and can no longer be viewed in isolation. We believe that the environmental aspects of a company’s business should not be located anywhere other than in that company’s ERP system.

Sustainability Measurements and ERP Systems

Given the required transparency when big corporates adopt a sustainability approach, middle market companies will need to ensure their businesses are more sustainably in order to retain their large corporate customers and deliver competitive differentiation. For technology to support this need in middle market companies, sustainable modules and functions must permeate the business applications that run their businesses. The new functionality required in ERP, much of which will be extensions or modifications to existing modules, parallels the needs of companies as they mature in their sustainability practices.

As a company matures, sustainability goes from reactive to proactive, tactical to strategic.

The figure below depicts a sustainability maturity model consisting of five stages: operations compliance, operations measurement, operations management, product strategy and business strategy, each subsequent level being additive.

At the low end of maturation, the scope of sustainability is only the corporation itself; at the high end, it takes into consideration holistic relationships with all stakeholders. In some sense, greater maturity reflects the degree in which sustainability has become part of the “DNA” of the company.

At each stage, functionality that promotes sustainable business operations and product development must be easy to adopt and easy to use.

Operational Compliance »

When it comes to compliance, companies that are currently affected tend to be large global corporations and major emitters. Their first step is to comply with existing and foreseeable sustainability legislation and standards in the countries in which they operate. That means considering a wide range of regulations and standards, such as ISO 18001 for occupational safety and health, ISO 14001 for environmental management systems, U.S. laws under the Clean Air and Water Acts, and the E.U.’s Waste Electrical and Electronic Equipment Directive, and Restriction of Hazardous Substances Directive. To comply, companies must enforce policies under a corporate governance framework and assess associated risks.

Operational Measurement »

While compliance has been the minimum, mandatory requirement for a company to stay in business, demands for transparency are raising the bar. Either for mandatory disclosure to meet customer requirements or for voluntary disclosure to other stakeholders (e.g., the Carbon Disclosure Project), companies need data. Today’s ERP systems capture transactional data tied directly or indirectly to the company’s costs and revenue. To provide sustainability functionality, an ERP system must capture additional data relevant to sustainability. The data required are disparate; therefore, their capture occurs at various places within an ERP system. For example, to disclose their carbon footprint, companies must know not only the amount of energy they consume periodically but what their utility is burning to generate that energy.

Once they capture these additional data, companies may report their results to stakeholders. Indeed, many companies file sustainability reports on a yearly basis. But often, because the data is gathered manually, those reports are relegated to a snapshot in time.

Operational Management »

This type of visibility into a company’s sustainability measures leads to improvements in operational management. In this stage, companies can take corrective action to be more sustainable, turning the corner from a tactical approach to a strategic one. These changes can be assessed to ensure that they benefit the company not only in lessening impact, but in saving money. Indeed, though it used to be assumed that a greener operation is a more costly one, that notion has been turned on its head. As companies begin to follow greener practices, they are essentially driving efficiencies into their business processes that end up reducing overall costs in the long run alongside reduced impact.

Product Strategy »

As companies understand the sustainability impact of their products and services, they will likely reconsider their strategies and offerings. At that point, sustainability should become a significant contemplation during the conceptual phase of the life cycle of any good or service. During product design and development, it is entirely likely that companies will begin to consider efficient transportation logistics, reused and recycled production materials, environmentally friendly packaging, and an end-of-life cycle recovery plan. Not to mention the sustainability factors that need to be considered when sourcing from other companies. Interestingly, legislation, especially in Europe, is making elements of a sustainable product strategy mandatory.

Life Cycle Assessment »

A new requirement for product life cycle management is the support for Life Cycle Assessments (LCAs) — an attempt to evaluate the environmental aspects of a product or a service from cradle to grave. Typically, this requires an inventory of raw materials, or inputs, used to create the product or service, going as far back to extraction as possible, as well as an inventory of the outputs from creation of the product or service through end-of-life disposal. LCAs help product and service providers improve designs and implementations by understanding the detailed impact of the product’s full life cycle. LCAs are also important for making sustainability comparisons with competitive offerings because they provide a common language. Finally, they are important for the creation of eco-labels, which will ultimately serve to get sustainability information into the hands of consumers.

Supply Chain Management And Procurement »

Sustainable products, services and business operations require sustainable inputs. This dynamic, which is already affecting middle-market suppliers to large companies, also applies to suppliers of middle-market companies. In addition to traditional vendor information and product catalogs, therefore, companies will require sustainability information, such as whether a supplier is ISO 14000-compliant. Because product information changes over time or can be inaccurate due to quality mishaps, routine auditing by internal or third parties is necessary. Today’s software solutions are made to apply to closed systems in the sense that a company maintains its own data. However, to achieve supply chain transparency, this will need to change.
Several companies now require information predicated on LCAs for the products they purchase. Wal-Mart Stores Inc., for instance, recently announced a partnership with the Carbon Disclosure Project to measure the carbon footprint of various household products. Companies producing these products now need to measure the carbon generated to create them and put them on a Walmart shelf. In Europe, products carry the U.K.’s Carbon Trust “C” symbol to indicate they disclose a carbon footprint, while grocery stores make it clear which products are air-freighted to their location as their carbon footprint is negatively affected.

Business Strategy »

In this final stage, a company will consider significant transformations not only to its product strategy but to its overall business strategy. Many others are already starting to pursue the scenarios described above. Along the continuum from isolated entity to connected entity, companies that pursue a sustainable business strategy will see themselves as part of a closed-loop ecosystem, where environmental and social waste may disappear completely.

Sustainability Specifics

Despite its relatively simple definition, sustainability is more complicated in practice. How for instance, does a company know if its activities are sustainable? What does it measure?

Reporting frameworks such as the Global Reporting Initiatives (GRI’s) G3 Guidelines, which provide core performance indicators for economic, environmental, financial and social sustainability, help illustrate the types of data that companies can report.

The table below gives examples of the indicators, some quantitative and some qualitative, that are considered when evaluating a company’s sustainability. However, behind each can be substantial complexity and uncertainty in terms of data aggregation and calculation. In fact, to be calculated or comparable across periods and companies, many indicators require additional standards, such as the Greenhouse Gas Protocol and the ISO1400 series. As with other regulatory requirements, software can be a vital tool in helping to manage the types of data that are required for these reporting frameworks.

Type Aspect Code Description
Economic Economic Performance EC1 Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings and payment to capital providers and governments
Market Presence EC6 Policy, practices and proportion of spending on locally based suppliers at significant locations of operations
Environmental Materials EN2 Percent of materials used that are recycled input materials
Energy EN3 Direct energy consumption by primary source
Water EN8 Total water withdrawal by source
Biodiversity EN12 Location and size of land owned, leased, managed in or adjacent to protected areas and areas of high biodiversity value outside protected areas
Emissions, effluents and waste EN16 Total direct and indirect greenhouse gas emissions by weight
EN17 Other relevant greenhouse gas emissions by weight
EN20 Nitrogen oxide, sulfer oxide and other significant air emissions by type and weight
Social labor practices and decent work Employment LA1 Total number and rate of turnover by age group, gender, region.
Health and Safety LA7 Rates of injury, occupational diseases, lost days, absenteeism, as well as number of work related fatalities in the region
Diversity, and Equal opportunity LA14 Ratio of basic salary of men and women by employee category
Social Human rights Investment and procurement practices HR1 Percentage and total number of significant investment agreements that have undergone human rights screening
Freedom of Association HR5 Operations identified in which the right to exercise freedom of association and collective bargaining may be at significant risk and actions taken to support these rights
Child Labor HR6 Operations identified as having significant risk for incidents of child labor and measures taken to contribute to the elimination of child labor
Social Society Community S01 Nature, scope and effectiveness of any programs and practices that access and manage the impacts of operations on communities, including entering, operating and exiting.
Corruption S02 Percentage and total number of business units analyzed for risks related to corruption.
Social Product Responsibilty Consumer Health and Safety PR1 Life cycle stages in which health and safety impacts of products and services are assessed for improvement and percentage of significant products and services categories subject to such procedures