Systems & Systems Thinking

Success in Systems 4 Four System Conditions

There are four system conditions that are needed for success according to the late W. Edwards Deming, the guru of transformational management. They are interdependent. They cannot be separated. They cannot be used in isolation.

The essential properties of a whole system derive their power from the interactions of all of its parts; their actions cannot be completed when taken separately. If a system is disassembled, it loses its essential properties and its value.

Systems thinking enables the understanding that when a forest ecosystem is undermined by the loss of a key species or a number of supporting species, the ecosystem will fail. The financial world is beginning to realize the material effect of the significant loss of biodiversity.

Likewise in the business forest, if an organization loses any of its interdependent parts, be it people, customers, suppliers, or materials, its viability is lost. If the organization loses its core value, and investors pull away, it becomes a stranded asset. Other stakeholders can also be adversely affected.

Neither scenario offers value.

When decision makers learn how systems behave, and know where the various places exist to intervene in a system, decisions and action can be made to empower and affect much needed change. This means that those working collaboratively in the business forest can benefit from different outcomes.

Systems Thinking

Whether as individuals or as decision makers within an organization, humans are challenged to think and act from a systems perceptive. Anthropologist Gregory Bateson provided the simplest explanation.

“Humans think one way and nature operates in another.”

Adoption of systems thinking tools, such as robust, credible, and reliable management systems, can help optimize performance, align with the rules by which Nature operates, and enable better results through collaboration.

Many organizations can benefit from the presence of a robust, credible and reliable environmental management system (EMS).

Some use an international voluntary standard referred to as ISO 14001. The standard does not contain all of Deming’s system conditions, but it outlines a framework on which to build an EMS. The task of implementation is up to the user, evolving the framework into a system that is unique to each organization’s context.

Adoption of the international standard may be based on an ongoing process for self-improvement or driven by changing market expectations.

ISO specification standards are designed by and for formally managed organizations. So it is not a surprise that small businesses tend to find implementation of international standards like ISO 14001 a challenge. They may find benefit in building a systems approach by using tools such as Going for the Green and EcoMarker.

E2M has been involved in helping organizations with the adoption and diffusion of environmental management since 1989. E2M’s principal consultant, Lynn Johannson, has had a key role in the development of ISO 14001 since 1993.

Lynn was invited to participate as an international negotiator for Canada because of her experience in applying quality management philosophy, principles, and processes to a business and environmental challenge for the glass container industry.

Since 1997, Lynn has held an influential role for Canada in the international negotiations process for these standards. She has served as the national chair for ISO 14001 and related standards, and then as national chair for the Technical Committee on Environmental Management (ISO TC 207).

Lynn has also been instrumental in a number of other standards initiatives internationally. In addition, she is involved in developing standards for green finance. This work is helping to forge the connection between fundamental EMS concepts, eco-literacy, and traditional financing.

Her depth of experience in developing ISO standards enabled her to understand the challenges for the plethora of small and medium-sized businesses, which tend to be informally managed. To address this challenge, Lynn led the development of the EnviroReady Report, which became the basis of the third option for conformity assessment included in ISO 14001. EnviroReady evolved from its Canadian roots to work with the international accounting profession.

Negotiating ISO 14001 with international experts in Tokyo

In 1996, the journal EQM published an article called “Greening the Zebra” by E2M’s President, Lynn Johannson. She outlined the challenge of ‘greening’ the world of finance for financial institutions. Lynn used the ecological relationship between the zebra and the tsetse fly to explain the story of risk that the world of finance faced. This analogy still holds.

Fast forward to 2021, what progress has been made?

There are key stakeholders in the financial world who are now taking decisive action based on the realization that capital, in all its forms, is at risk.

The 2020 World Economic Forum Global Risk Report identified the top five risks in terms of their likelihood as extreme weather, climate action failure, natural disasters, biodiversity loss, and human-made environmental disasters. In 2021, seven top risks were identified: extreme weather, climate action failure, human environmental damage, infectious diseases, biodiversity loss, digital power concentration, and digital inequality.

Unfortunately, not everyone understands that any environmental risk, not just climate risk, is a core concern for any company, regardless of size, sector or situation. The investment community is growing nervous about how climate risk will impact both our physical world and the global system that finances economic activities. While more innovation-oriented companies are responding to investor concerns, they often start with the short-term concerns associated with transition risks. Given the rapid changes that the financial world is experiencing, directors are and should be held accountable and responsible for the oversight of strategy, risk management and integrity of issues that are environmentally significant and material.

However, the reality and enormity of the challenge requires each and every person to take stock of their own environmental impacts and performance, and make radical changes in their personal and work habits.

As important as climate change and its associated risks are, experts at the Stockholm Resilience Centre indicate that three planetary boundaries have already gone into the red zone, meaning that our actions have placed humans, and other species, at high risk. These include biosphere integrity (genetic diversity), and biogeochemical flows, which include two elements, nitrogen and phosphorus.

The image that the Centre has developed brings to the surface some important issues that decision makers should incorporate into scenario analysis, decisions and action.

One, we are not yet in the red on climate change; the challenges we face today are only in the yellow zone. Imagine the consequences to society and the effect on financial markets if we cross into the red.

Two, while policy is striving for changes by 2030, 2040 and 2050, we do not know whether natural systems are at critical points because they operate synergistically. While we visually separate issues to reflect how we think, Mother Nature does not isolate systems. She optimizes everything.

Three, the UN’s seventeen SDGs offers thirteen socio-economic goals and only four environmental goals. As the source of all our wealth is based on what Mother Nature provides, protecting and preserving it is mission critical.

However, some describe the SDGs as a smorgasbord, but others see a different approach.

Planetary Boundaries: A safe operating space for humanity

What does green finance really mean?

There are many different initiatives that are underway by various organizations to normalize what it means to be ‘green’ in the world of finance. There are also efforts to establish standards to develop a common, consistent and coherent understanding of what ‘green’, ‘environmental’ or ‘sustainable’ finance means.

Consensus has not been achieved yet. Why not?

Stakeholders from diverse communities need to collaborate. To be successful, they need to have the scientific knowledge, environmental management skills, integrated with expertise from the world of finance. This collaboration needs a strategy that embodies a systems approach to enhance the emergence of a new green economy, balancing local needs with the potential to optimize the reality of a global market.

In the financial industry the loss of reputation is as abhorrent as the loss of money. So it is of concern that as the presence of financial instruments, such as green bonds, grows so does the rise of greenwash. Unfortunately, greenwash is already an issue in the marketplace; some of it is borne of ignorance and is presented as ‘inadvertent’ and some of it is purposeful or intentional. Neither is acceptable. Leaders in the financial capitals of the world need to address the ‘lack of authenticity’ before trust is undermined.

As demand by investors and other stakeholders for green financial products and services grows, it will be paramount that these do not sacrifice honesty for speed to market. ESG products (environmental, social and governance) must be managed with care.

Trust is the currency of good business and of life relationships.

Do not sacrifice honesty for speed to market.

What is ‘material’?

The short answer is – information deemed to be material is a matter of judgement.

The concept of materiality works as a filter through which management sifts information. Its purpose is to make sure that the financial information that could influence investors’ decisions is included in an organization’s financial statements. Investors are recognizing what the effects of phenomena like climate change are having on their portfolios.

However, the loss of biodiversity has undermined some of our systems, leaving them to be exposed to challenges such as pandemics. These global viral attacks wreak havoc on society and the economy. There are some experts, such as conservation biologists, who see Covid-19 as the first wave of disruption due to an unstable environment, manifested as Mother Nature’s onslaught to clean house on a global scale.

Climate risk and other environmental risks are some of the drivers redefining materiality in the financial world. While financial materiality is occurring under the purview of the International Accounting Standards Board (IASB), other entities, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), are involved in defining materiality in the context of sustainability.

For stakeholders in the environmental world, ‘significance’ is a term that precedes to the concept of materiality, as it reinforces the importance of putting Nature first.

These two concepts need to be better aligned through a collaboration of the environmental and financial worlds.

Materiality and significance share a number of characteristics. Neither are supported by an exact science. There is no single methodology for either concept. Defining terms is important, so that investors and investees communicate clearly and competently. Connecting these two concepts is one of the tasks these two worlds need to address. This must be tackled quickly so that all financial products evolve to be ‘green’.

Ultimately all financial products will need to be green.

Given the rapid changes required, there is a critical role for the accounting profession. Their participation is essential to normalize the inclusion of natural capital in core business strategy and reporting.

E2M is grateful for the cooperation offered by professional accountants who have collaborated with us on opportunities to drive this change.

Stakeholders need to collaborate to ensure a solid, common understanding of what ‘green’ really means. It is essential that action is undertaken now to integrate this knowledge into every decision and every financial transaction.

E2M’s role in this critical interface includes action that will:

bring like-minded people together, from both private and public sector organizations, to drive innovation and resilience
enable stakeholders to navigate uncharted waters and harness new relationships
develop and deliver tailored learning programmes
serve as a catalyst to develop tools to enhance the value proposition for both the environmental and finance communities
write international standards and knowledge briefs

E2M’s forte is founded on innovative thinking and a systems perspective.

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