Chapter 11 Case: Accounting for Sustainability: How Does Timberland Do It and Why?

How Did Timberland Get Started on Sustainability Reporting?

As a publically traded company, Timberland was required to report on its financial performance and make disclosures about the business regularly to shareholders and the general public. However, this type of reporting traditionally does little to communicate to stakeholders the sustainability actions that the company undertakes.

Through its efforts in support of employee service and on other areas related to the social responsibility, Timberland developed a strong reputation and following in the national and global corporate social responsibility (CSR) leadership communities. This attracted the attention of the NGO Ceres, which was leading a national coalition of investors, environmental organizations, and other public interest groups working with companies to address sustainability challenges. Ceres’s mission is to “integrate sustainability into business practices for the health of the planet and its people.”

Ceres was one of the first organizations to formally introduce and advocate for the concept of sustainability reporting. Ceres believed that Timberland was a good candidate for publicly disclosing sustainability-related information specifically because of their unique employee service program. In addition to reporting metrics on employee service, the “beyond the traditional reporting” for Ceres also included the compliance area. This included reporting on the Timberland workplace and at the factories of their suppliers around the world, including issues such as child labor and unfair working conditions.

In 2001, Timberland released its first annual corporate social responsibility report. The nineteen-page report focused heavily on service related activities of the organization, including City Year. The following year, a second annual corporate social responsibility report was released. This was a more comprehensive thirty-eight-page report that included a more detailed discussion on environmental and social activities.

Starting in 2004, the annual CSR reports from Timberland began to feature the Global Reporting Initiative (GRI)A network-based organization that pioneered the world’s most widely used sustainability reporting framework. The reporting framework sets out the principles and performance indicators that organizations can use to measure and report their economic, environmental, and social performance. sustainability reporting guidelines and featured sustainable performance indicators (SPIs).A metric that measures an economic, social, or ecological performance area in a business. See Chapter 5 "Entrepreneurship, Innovation, and Sustainable Business" for a more detailed discussion. (See details on GRI and sustainability reporting in Chapter 5 "Entrepreneurship, Innovation, and Sustainable Business".) Sustainability reporting helped the company become a recognized industry leader on sustainability efforts, and this helped to strengthen the brand’s name, recognition, and value.

Beginning in 2008, Timberland started reporting on key CSR performance indicators on a quarterly basis. The main report is presented in a dashboard format, which contains SPIs in each of the four CSR strategy categories.

What Does Timberland’s Sustainability Reporting Include?

Timberland’s reporting and communications for sustainability includes the following:

• Full CSR reports released every other year that summarize their efforts in sustainability for the previous twenty-four months; their CSR reports are reported on their website http://responsibility.timberland.com
• Quarterly key CSR performance indicator reports and quarterly CSR dialogues
• Stakeholder engagement forums called Voices of Challenge on http://community.timberland.com, a web 2.0 platform that allows all types of stakeholders to interact with Timberland

Timberland also shares its social and environmental values and product attributes with consumers through retail messaging and product information. Their Green Index rating is intended to give consumers clear and easy to understand information about the impact their footwear choices have on the environment.

Source: Image courtesy of the authors.

Green Index

In 2006, Timberland introduced an industry-first “nutrition label” on all of its footwear boxes in an effort to provide consumers with greater transparency about the company’s environmental and community footprint and the environmental impact of the specific Timberland products consumers are purchasing.

The Green Index program is the company’s primary mechanism for pursuing “cradle to cradle” product design. This index measures and communicates critical aspects of environmental performance in a format that allows Timberland to guide product design and help consumer choice. The Green Index measures three areas of product impact:

• Climate impact—greenhouse gases produced in making raw materials and during footwear production that contribute to climate change. Timberland’s climate impact rating measures the emissions of greenhouse gases from the production of each material through the manufacturing of the final product.
• Chemical used—chemicals used in material and footwear production.
• Resource consumption—the score decreases as Timberland uses materials that require less land and water and fewer chemicals to produce.

The data are compiled to give a product an index score from ten to zero, with ten being a high impact and zero being no impact at all.

The Timberland CSR Team

Timberland has a team of employees dedicated to CSR in the company. It consists of a vice president of CSR, four managers, a team of fourteen code-of-conduct employees, and two community service employees. The CSR team works closely with senior management, including the CEO.

In December 2006, the company created a formal CSR committee within its board of directors. This group consists of four board members who are responsible for guiding all CSR strategy development. To accomplish this task, the committee meets regularly with the CSR leadership team to help set the strategic agenda and hold the team accountable for their actions.

Two members of the current CSR team are Beth Holzman, the company’s CSR strategy and reporting manager, and Betsy Blaisdell, the manager of environmental stewardship. Beth Holzman was a manager at Ceres before joining Timberland and interacted with Timberland in that capacity. Betsy Blaisdell had previous experience working in the New Hampshire state government and performing environmental research at the University of New Hampshire.

The CSR team’s responsibilities include developing the metrics to report and standardizing the reporting. It also includes collecting information, preparing reports, communicating information to senior management, and interacting with stakeholders.

A key objective is to ensure that the sustainability reports are used and integrated into the other departments at Timberland. As Betsy Blaisdell describes it, “Everybody wants to do the right thing at Timberland. And so for us, it’s taking something that can be a really complex environmental metric, like kilograms of CO₂ for a pair of shoelaces, and translating it into: this is the best choice, this is a good choice, and we really discourage you from using this approach.”

Another key objective is to standardize the reporting method and information in order to make reporting easier and more cost effective within Timberland but also within the industry. The goal is to create standardized sustainability metrics and standardized measures of environmental performance for Timberland’s products. The goal of standardization being that instead of Timberland collecting the information through their own business systems, suppliers would provide the information into a registry that Timberland and other companies could access.

Driving Forces behind Sustainability Reporting

In many respects, former CEO Jeffrey Swartz was the leader on CSR reporting efforts and a driving principle of the company’s sustainability reporting efforts has been radical transparency. For Timberland, radical transparency is about talking about the bad as much as the good. It is about being provocative, sharing information with the intent of receiving a reaction and response from stakeholders. It includes communicating things that are material and important to the company.

For example, Jeffrey Swartz was the champion of Timberland’s “nutrition” labeling for shoes. His view was that if consumers could go into a supermarket and look at a couple different boxes of cereal and know what’s good or bad for them, why couldn’t they do that going into a footwear store or going into a large retailer and see similar information reported?

On their website “Voices of Challenge,” Timberland managers share very difficult challenges and concerns related to sustainability and ask for candid feedback through blogs and social media. And consumers and NGO organizations have asked challenging questions to Timberland through this resource.

As Betsy Blaisdell describes it, “I think we’re always pushed further ahead by external stakeholders. And I’d say we’re largely influenced by requests that we get externally for improving or shifting our reporting. We had a major issue with Greenpeace a couple years ago. It had to do with transparency in our leather supply chain in Brazil and it really pushed us to have an industry dialogue about how can we take our protocol for assessing the environmental performance of our tanneries, and push that further back down the supply chain. That led to more transparency. And that was purely an external push from Greenpeace that led to that.”

For Timberland consumers are always the most important stakeholder group to reach, but the reality, at least for now, is that very few consumers actually read, understand, and act on the sustainability reports.

According to Betsy Blaisdell, “There is evidence that significant numbers of consumers do read the nutrition label on the footwear. But very few probably fully understand what it means…it’s hard for them to really use it because it’s not relative to anything. It’s not like they can compare a Timberland product with a Nike product right now and say, OK, price, performance, and aesthetics alike, I’ll take this shoe over this shoe. So I think it’s nice to do for consumers, but it’s not necessarily impacting their purchasing decisions, which is where we would love to take it.”

Other stakeholder groups that are leading Timberland to expand its sustainability reporting are the investor community, peer businesses, and other companies, including stores and retail outlets that Timberland sells its product to.

Outside the United States, there is more governmental involvement around sustainability reporting. For example, in France the government is moving to pass legislation that would require the nation’s companies to begin measuring the environmental life cycle impacts of their products. France is leveraging what some industry groups in Europe have already developed. The French government recognizes that businesses have been ahead of government on sustainability reporting, and this is the case of Timberland in the United States.

Benefits

Timberland has a goal of being the reference brand for sustainability and sustainability reporting, and they do not limit that to within their own industry. The company wants to be a leader, the brand that’s pushing the edge on transparency and reporting.

There is evidence that the efforts on sustainability and branding around sustainability reporting are affecting Timberland profitability, market share, and customer loyalty. Timberland’s highest-margin products—contributing the most on a dollar of sales basis to profitability—are the company’s Earthkeepers products and this is suggestive that consumers are willing to pay a premium for a low environmental impact product.

There is also anecdotal evidence of sustainability reporting contributing to Timberland’s market performance; however, the company has struggled to put a hard dollar value on this. Timberland’s marketing managers and public relations professional report that sustainability efforts and the various sustainability reports Timberland have released over the last several years has resulted in an increased number of positive media impressions. Timberland receives other kinds of anecdotal evidence in market research and focus groups with consumers that sustainability initiatives generate brand heatPositive feelings when exposed to a brand name.. Brand heat is a marketing term to describe the positive feelings when exposed to a brand name. There is even less evidence that brand heat actually leads to a purchase. A challenge for Timberland is quantifying and linking sustainability to the financial bottom line.

Challenges

One of the hardest challenges for Timberland was determining the right metrics to report on. Timberland, in part, used the indicators from the Global Reporting Initiative (GRI) as a starting point. However, the GRI has many performance indicators and many were not relevant to Timberland’s stakeholders or material to Timberland.

For Timberland the most important areas to report on, measure, and act on are those that are material to the company. Timberland’s areas of focus for materiality are the environment, consumers, and other stakeholders, including government. Timberland prioritizes measurement and action on the areas that are at the intersection of these three dimensions of materiality.

Dimensions of materiality at Timberland.

For example, Leather and rubber use is highly material to Timberland’s business operations. These two inputs have significantly more impact on the environment than any other inputs because of the volume of leather and rubber used in the manufacturing process and by the very nature of the materials. These manufacturing inputs are material to the environment, to customers, and to stakeholders and as a result are areas of focus and reporting for Timberland.

This strategy helps the company focus on the areas that have the greatest impact. For example, customers might think Timberland should focus on packaging, such as footwear boxes, because it is one of the aspects of the product that they most interact with. The environmental impact of their use of leather and rubber is much more materialHaving a connection or knowledge of which would affect a business decision or course of action. (significant) to the company’s ecological and social impact than its use of cardboard for shoeboxes, as the boxes come from recycled sources and also can be easily recycled.

Another major challenge for Timberland is the constant tension between measuring more metrics due to demands from different stakeholder groups and the resources required by Timberland to provide those metrics. This was a lesson learned by Timberland as the company started its sustainability reporting efforts. At the beginning, Timberland struggled with trying to provide more and more sustainable performance indicators due to stakeholder requests. The company expended significant resources to collect and report on the different disclosure requests that they received, which distracted the company from undertaking the activities necessary to lead to substantive improvements in its environmental and social impact.

Efforts at Standardization and Integration

Initiating sustainability reporting and developing the appropriate communication methods has been a significant undertaking for the company over the past decade. Sustainability reporting had to be done largely outside of Timberland’s regular business units and systems. A separate reporting software system was developed for storing sustainability performance indicators (SPIs), but, at the time, it was too complex for the corporate social responsibility (CSR) reporting system to be integrated with the company’s accounting and finance system tools or product design systems. They were all developed on different software platforms and did not communicate.

The other reporting and management systems were not designed to include sustainability measures, as it was not part of standard business practice. For example, in designing a new product, there was limited product design reporting system ability to take into consideration the sustainability impacts of different designs, as they were not developed for environmental reporting.

Just recently (2011), business decision software systems companies, such as SAP, and the designers of product life cycle management systems are developing systems software that have environmental modules. This means that what were two or three separate systems before can now become more of one integrated system to include environmental and, eventually, social impact along with product design and financial analysis.

Timberland is moving toward being able to upload CSR metrics into their financial information and product design systems. Their environmental and financial information systems are starting to “talk” to one another. Timberland can take into consideration reductions in energy or material usage reductions from both an environmental and financial perspective.

The benefits include not only being able to better tie environmental efforts with bottom line considerations but also enabling the CSR team to reach and impact key decision makers in finance and product design who were outside the Timberland CSR reporting system. The sharing of information and reporting systems integration allows different business units and functional areas to begin to speak a more common language and take a more systems and full-cost and benefit perspective in their decision making about financial, product design, and sustainability actions.

Timberland is focusing its sustainability reporting efforts increasingly on this integrated systems perspective, using a core set of metrics to help identify problems and then identifying root causesThe initiating cause of a causal chain of events, which leads to an outcome or effect of interest. and finding the best solutions. The company can then link the problem and solution to the financial performance of the firm.

As Betsy Blaisdell describes it,