A few months ago, I had a conversation with a Chief Sustainability Officer of a company in the northeastern U.S. She had been with her company for over 20 years and definitely took the long view of its success. They had been actively engaged in understanding and improving their environmental and social footprints for many years. She explained that they were now extending their sustainability goals to include not just “external” sustainability but also “internal” sustainability. This was going to include greater focus on lean management and strong processes. She called these “internalities” as opposed to “externalities.” She saw these changes as relevant to her mission as a sustainability officer.
This conversation has really stuck with me. It lead me to take a step back and realize that we need to use an integrated definition of sustainability. Externalities are an economic concept which Wikipedia summarizes as “the cost or benefit that affects a party who did not choose to incur that cost or benefit.” Attention to costs/effects of a company’s operations on the natural environment and on society are examples of the external sustainability that this CSO had long practiced. This is a pretty familiar concept to most business people and all people interested in environmental sustainability.
Interestingly, there is also a behavioral economic concept of “internalities.” We don’t often see it in business but it makes sense as we try to drive integrated thinking in a corporate setting. The Wikipedia definition of internalities is “a type of behavior that imposes costs on a person in the long-run, that are not taken into account when first making decisions.” This concept is used by economists in addressing behaviors like smoking cigarettes where the long-term negative effects that may get ignored because of short-term pleasure.
It’s not much of a leap to see how the internality concept can be applied in a corporate setting. In fact, the word sustainability is frequently used to talk about the stability of corporate earnings. But earnings sustainability fits the definition of an internality: maximizing earnings today might impose costs in the long run that are not taken into account. Driving attention to these internalities is built into the IIRC framework which endeavors to explain in a holistic way how a company creates value over time.
There’s one more level to what she was saying. That it is important for the company and its stakeholders to ensure its own long-term viability. It’s kind of like the message on an airplane. Put on your own oxygen mask before you help others. This is a message that often gets lost in the passion to solve big problems in our environment, economy and society. In other words, it is important to:
Account for both internalities and externalities
in order to
ensure both internal and external sustainability
This isn’t something traditional financial and management reporting is designed to address. That’s why the integrated model can be so helpful and practical. The integrated model is founded on the concept of sustainable value creation which I define as:
Use of a corporation’s capital (tangible, intangible and natural) to create value and profit today…while ensuring the sustainability of its capital and value creation capability for the future.
This concept and the integrated model give you a practical way to identify, measure and manage both internalities and externalities.
If you want more background on the integrated approach described here, please read our paper on the Three Big Ideas Behind Integrated Thinking and Reporting.
Image by USAF [Public domain], via Wikimedia Commons