The recent death of Dana Meadows hit me as hard as if a close personal friend had died. I had only met her once. At the end of a long, tedious meeting in Boston she came up to me, full of warmth and goodwill, to express the desire to talk more. We made fervent mutual promises to spend time together some day, but we did not pursue them with any urgency. And then the unlimited time we thought we had ran out. Still, I feel as though she is part of my thinking, because she introduced meand so many othersto the idea of interdependent systems and feedback loops.
Now I see feedback loops everywhere. Sometimes when I drive to pick up my sons at school I take a street that runs down a long hill. It's a residential street, so the speed limit is only 20 miles an hour, but because of the length of the hill and the effect of gravity it is extremely easy for one's speed to pick up. The local police recently solved the problem by installing a simple but effective feedback device. It consists of a large electronic display on wheels. Above the display it says "Speed Limit: 20 Miles An Hour." The electronic display says: "Your Speed" and then shows a number transmitted from a radar gun pointed at oncoming cars. When drivers approaching the sign realize that they are going too fast, they instinctively tap the brakes until the electronic number comes into alignment with the printed one. It's a classic loop: behavior is translated into communicated information, and the information was translated back into behavior. It's a well known, natural phenomenon. Every time we snatch back our hand from a hot pan, or slow down on an icy sidewalk, we are adjusting our behavior on the basis of information.
This feedback principle lies at the heart of both business and investment. Sometimes, when one stops to look at a business as a physical processthe amazingly intricate sequencing of ideas, words, actions, and objects all interacting across so many moments in time and points in spaceone is astonished that human beings are capable of such complexity. We have succeeded because we have learned to create particular kinds of feedback loops that distill and simplify data. To calculate whether a firm is "making money" (a strange phrase, when you really think about it) we need not only to define, understand, and measure revenues and expenses, but also to understand their relationship over periods of time. Defining, measuring, and establishing the relationship between valuations at different points in time is in fact at the heart of finance theory.
Equally important, our inability to design good feedback loops can lead to serious failureswith long-term consequences for ourselves and for the world around us. More and more investment and accounting professionals have come to realize that despite the enormous sophistication and years of accrued learning embedded in our accounting systems, they are missing very basic, critical information about companies. A new magazine recently targeted at "intellectual capital investors" appeared with articles by eminent securities officials and accounting leaders. They all point out that despite the importance of information and knowledge in the modern economy, current accounting has no way of measuring "intellectual capital" as an asset. "Assets" are still predominantly defined as physical objects, even though physical objects may represent only a tiny fraction of the value of the firm.
Another area where too many critical decisions and impacts remain invisible is, of course, that of sustainability. For years it was impossible to tell the difference between those companies that wasted resources, took dangerous environmental risks, and ignored both the short and long-term damage they were causing from those that had begun to integrate environmental improvement into their core business strategies. Thanks to the work of the social investment community in promoting the CERES Principles and CERES reporting standards, it is now considered "best practice" for companies to issue an environmental report. The discussion is really no longer about whether a firm should report but how.
There was a danger, just a few years ago, that the intensity of interest in reporting and disclosure could actually backfire by producing conflicting standards of information release. Back in 1997, taking a leaf from the work of the Financial Accounting Standards Board and International Accounting Standards Committee, CERES decided to launch an international processknown as the Global Reporting Initiative (or GRI)to build consensus on sustainability reporting guidelines funded by the MacArthur, Ford, Mott, and United Nations Foundation, the GRI evolved into a strong alliance that includes the United Nations Environment Programme, key advocacy groups from all over the world, some unusually bold companies, and international accounting societies. Driven partly by the surge of global interest and the easy interaction of e-mail, consensus was built rapidly enough to release a "beta test" document in March 1999 and a "version 1.0" set of guidelines in June 2000. The guidelinesand an immense amount of information about the GRI processare available at www.globalreporting.org.
Over the next year GRI plans to move aggressively in two directions: the continued improvement of the guidelines and the establishment of a permanent GRI. The revision of the guidelines is being guided by a large number of people from many organizations and regions under the overall direction of an international Measurement Working Group. The group is already hard at work evaluating appropriate disclosure requirements on everything from greenhouse gas emissions and biodiversity impacts to labor and human rights standards. The work will be completed over the course of 2001 so that the 2002 version of the GRI guidelines can be released in time for the World Summit on Sustainable Development at the tenth anniversary meeting of the Rio Earth Summit, which will take place in Johannesburg.
The establishment of the permanent GRI is also actively under way. Currently managed by CERES and UNEP under the guidance of an international steering committee, the GRI will migrate towards the end of the year to a new structure with an international Stakeholder Council, a Technical Advisory Committee, and an independent board of directors. The special Nominating Committee, chaired by World Resources Institute president Jonathan Lash, is being formed and will soon begin the sober task of picking new permanent board members. A final piece of the puzzlewhich should emerge late next fallwill be the creation of a "charter group" of civil society organizations, companies, UN agencies, investor and accountancy groups, and others who will step forward to support the formation of the permanent organization.
With a new set of guidelines and a new organization to provide stewardship and improvement, the GRI will be addressing a problem that social investors have identified for years: the need for credible, comparable information about the environmental, social, and human rights performance of companies. The impact of this new tool is likely to be immense. Companies will have a set of management tools and indicators that allow them to manage their operations and respond to the vigilant, well-connected stakeholders. Stakeholders, in turn, will have strong, well thought-out mechanisms to insure disclosure of key impacts of companiesbacked up, in time, by a network of internal and external auditors and verifiers. This system, when applied to the financial world, has allowed for the creation of dynamic capital markets that have improved the economic health of many communities. Now is the time to use those same methods to improve the social and environmental health of those same communitieswhich is, of course, the goal of sustainability.
This brings us backnaturallyto the feedback loop. Can something as simple as the measurement and disclosure of information really cause fundamental changes in behavior?
Probably the best illustration comes from an experience my two sons had at a nature camp several years ago. About fifty children from the same school had gone away together for a week to study eco-systems on the coast of Rhode Island under a program known as "Nature's Classroom." The children ate all their meals together, sitting at long tables in a dining hall. At the end of each meal, the staff scraped all the children's uneaten food off of their plates into a 5 gallon plastic bucket. Then they put the bucket on a scale and weighed it4 pounds of waste. They marked that amount on a bar graph on the wall in the dining room.
The counselors explained to the children that after every meal they would do the same thingcollect the food, weight the total, and mark the result on the bar graph, which was called the "Ort Report." What's "ort?" It turns out that it is a real wordfrom Old Englishwhich means "uneaten food." Centuries ago people were regularly hungry, and the existence of "ort" was considered a sin. The goal, said the counselors, was for the children to choose their food carefully and not to put more on their plates then they would actually eat. If they did that, they would drive the daily Ort Report graph down to zero.
The children, some of whom were only eight year olds, understood the concept and the challenge immediately. That night, at dinner, the children who had been outside all afternoon, put much too much on their plates and the Ort Report went up to six pounds. But starting the next day they quickly revised their behaviorand over the course of the week, the Ort Report steadily went down. On the last meal of the week, the Ort Report showed that food waste had been reduced to a few ounces of orange rinds and banana peels.
Our businesses and economies are running way over the ecological speed limit. Why? Because we haven't yet designed the right feedback loops through which information changes our individual, collective, and corporate behavior. But through the work of thousands of investors, activists, and executives whose work has helped lay the foundation for the GRI, that may finally change. We must hope sobecause, as in my unrealized friendship with Dana Meadowswe may have much less time that we think.
Bob Massie is Executive Director of CERES and chair of the Global Reporting Initiative Steering Committee. For more information go to www.ceres.org
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