The Rapid Response Institute

Tag: management science

  • ESG Explained

    ESG Explained

    According to Investopedia, “Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.”  Definitions of the three components are pretty straightforward:

    • Environmental–Generally refers to the stewardship of the planet and how organizations facilitate that responsibility.
    • Social–Facilitating organizational responsibility to the global society, at all levels from the globe to the local communities firms operate in.
    • (Corporate) Governance–Typically, the umbrella organizations put in place to assure issues such as transparency, fraud, safety culture and ethics are in compliance with social norms and local regulations.

    Since the Deepwater Horizon incident of April 2020, operators (oil and gas companies) have extended and enhanced the above criteria to their supply chain ecosystem and in some cases even customers with a Safety and Environmental Management System (SEMS).  This is true of most other Critical Infrastructure sectors as well.

    Likewise, the Sarbanes-Oxley Act of 2002 enhanced transparency and increased fraud protection after the Enron (and other) scandals.  Other incidents have triggered governance changes as well and some are referred to in linked materials.

    Why Is ESG Important?

    By one account, approximately $12 trillion in investments made in 2018 were driven by those who consider themselves socially responsible.  According to Forbes, in 2019 this accounted for almost 25% of total investments and are seen through the lens of sustainability.  Moreover, between 2016 to 2018, the growth rate in such firms grew at 38 percent.

    These numbers confirm our research going back to the turn of the century and perhaps earlier.  In 1993 we controversially posited that the Principles of Scientific Management were applicable to software development by Knowledge Workers.  Developed by Frederick Taylor, his monograph was published circa 1911.

    In other words, owners (investors) have always demanded top notch, legal and ethical performance.  Activist investors, i.e. Carl Icahn are not new.  As always, they have a very important role to play in the current markets.

    Asset/Equipment Integrity Governance

    There is a buzz of newness to ESG; however, from a contrarian perspective, this is not necessarily the case.  After the Deepwater Horizon failure with significant loss of live and many billions in economic losses to many parties including BP, it became clear that traditional Governance models did not have a focus on operations and the management of capital assets, i.e., manufacturing plants, marine vessels and other revenue producing sources.

    In our book we addressed a New Risk Environment from large corporate operations in which ‘failure is really not an option.”  We stated as a risk element, “Escalation of Consequences: The level of consequences of a disaster in the energy industry can now be larger than from the accidental release of a multi-megaton nuclear weapon.”

    Still governance models continued to struggle.  We believe that in the critical infrastructure sectors there is a lack of strong bonding, in other words top management is still hands off and operating from historical ‘control’ models that are no longer relevant or applicable.

    We do not believe this will change until a Strong Bond (tightly coupled) model is adopted.  We define the term as, “A strong model is used by High Reliability Organizations (HRO) and as part of that model, trained; knowledgeable personnel are empowered to make the right decisions in the field.  The strong model provides an organization with the capability to become and remain and HRO.”

    In 2011, we released our monograph, Asset/Equipment Integrity Governance: Operations–Enterprise Alignment; A Case for Board Oversight (AEIG).  In addition to developing a financial model documenting the Return on Investment (ROI) from strong governance, a Compliance Model, as well as a robust AEIG Matrix which incorporates an Asset Maturity Model are part of the solution.

    The AEIG extends the enterprise governance model to include the full ecosystem including subcontractors to its primary supply chain partners.  While not directly addressed at the time, Diversity, Equity and Inclusion (DEI) is implicit in the model.

    This roadmap is comprehensive and is a good starting point for developing and implementing a vigorous ESG initiative.  Other monographs in our Changing the Dialogue series (exploring our New Business Dynamics) include Structural Dynamics and Rapid Response Management are available online.

    Relationships, Behaviors, Conditions

    Scroll down on The Rapid Response Institute, Operational Excellence Platform page and you will find our R B C Framework Cultural Transformation model.  Shown below for ease of readership.

    The R B C model was originally developed to research international (cross cultural) negotiations.  We have extended it to support the transformation process to a robust and model organization culture such discussed herein.  Readers should note that this model is focused on Operational Excellence and is comprised on Processes & Methods supported by Enabling Tools.

    Built on Structural Dynamics which was developed as part of Dr. Shemwell’s doctoral dissertation in 1996.  It is defined as, “The morphology or patterns of motion towards process equilibrium of interpersonal systems.”

    This proven Framework is grounded in Management Science yet is a useful tool (Roadmap) that real originations can successfully and cost effectively implement.  We believe it is the best approach for attaining ESG.

    Summary

    One can view the current ESG status as part of a continuum to hold organizations accountable as appropriate and frankly, increase their Operational Excellence.  We have long known that firm’s that are well managed command superior stock market multiples and greater equity value.

    Many ‘self-serving’ consultants and pundit would have us believe ESG is breakthrough Thought Leadership in need of their help.  Nothing could be further from the truth.

    In the early 1990s, we document the history and evolution of Management Science/Thinking.   It is not written in stone, like most human endeavors it evolves and has for thousands of years.  ESG is a step in this continuum.

    How is Your Organization Addressing the Requirements of Active Investors?

    For More Information

    Please note, RRI does not endorse or advocate the links to any third-party materials.  They are provided for education and entertainment only.

    For more information on Cross Cultural Engagement, check out our Cross Cultural Serious Game.  Two current online games; Safety Culture and Diverse Teams specifically address issues raised by ESG Criteria.  If you have any questions, please contact this author as well.

    Graphic Source: The Rapid Response Institute derived from a Storyblocks image under license.

  • Heavy Metal Rocks

    Heavy Metal Rocks

    Not the rock bands of the 1960s–1980s, but the mining required to extract the heavy metals necessary for electric vehicles and other renewable energy solutions.  So, what is a heavy metal and why do we care?

    Typically, “In science, a heavy metal is a metallic element which is toxic and has a high density, specific gravity or atomic weight. However, the term means something slightly different in common usage, referring to any metal capable of causing health problems or environmental damage.”  Often these toxic elements are carcinogenic.

    For most readers this will not come as a surprise.  The heavy metals in batteries can be recycled, thus minimizing their negative impact on the environment and subsequently, humans and other life forms, i.e., the food chain.  However, smaller batteries are typically tossed into the trash.  Larger ones such as lead acid automotive batteries are usually reclaimed (for a fee to the consumer).

    From this pundit’s perspective, it is too early in the technology maturity to fully understand how millions of EV (electric vehicle) will be recycled effectively and economically.  Managing the lifecycle of these ‘elements’ from mining, use, recycling and reuse is a significant component of these renewables.  There is a cost associated with this process, both monetary and socially.

    Total Carbon Ownership

    In the business, the term TCO usually referees to the Total Cost of Ownership.  Updated, this Lifecycle metric may better reflect the Total Carbon impact of a product/solution, i.e., large scale batteries, solar panel, fossil fuels, etc.

    TCO = Carbon as a function of two major lifecycle elements; Operations and Decommissioning.

    For this purpose we define Operations (aka Use) as the lifecycle process from mineral extraction, manufacturing, deployment and maintenance.

    Decommissioning is the process of taking out of service, removal and appropriate disposal of components, including recycling.

    Follow on from our blog of November 2, 2021, where Milton Friedman detailed the complex supply chain required to manufacture a simple yellow graphite pencil, one can only imagine how complex the requirements are for a wind turbine.  Carbon neutral is not a simple problem to solve.

    Enter Structural Dynamics

    Many readers understand that Machine Learning Algorithms use the statistical multivariable method, Multiple Linear Regression–defined as, where “one variable is estimated by the use of more than one other variable.”  While this tool can be useful when assessing the impact and relationships of several independent variables, it does not necessarily help organizations to understand their TCO.

    Theoretically, every economic actor in the supply chain or the decommissioning process can calculate their carbon footprint for each​ product/step they control.  In the real world, such intangibles, i.e., safety are open to interpretation, ‘fudging’ or worse.  Moreover, we can expect large gaps or errors (inadvertent or otherwise) in carbon models that must be addressed if we are to realistically address the carbon problem.

    In the 1990s as a result of watching a number of systemic enterprise failures and/or poor performance, and wondering how this happened with such regularity the questions was raised–why?  This led this author coin the term with the subsequent book, Structural Dynamics: Foundation of Next Generation Management Science.

    Most do not understand the processes and structural changes at work on a daily basis.  Focused on near term performance metrics, they lose sight of the forest while concentrating on the trees.  The subsequent disruption caused is often rapid and economically cataclysmic.

    Structural Dynamics uses tools such as Structural Equation Modeling (SEM) to seek to identify the underlying process and structural movements.  It appears to be a useful tool to address the Total Carbon Ownership that organizations will have to address in the very near future.

    Dealing With Residuals

    Whether heavy metals or carbon, organizations must also assure ESG (Environmental, Social, and Governance) criteria are met throughout the energy lifecycle.  However, there is a cost associated with these and other organizational structures from the deployment and/or use of energy of all types.

    TCO is a decades long cost that can transcend actual corporate life, i.e., acquisition, bankruptcy, etc.  Currently, the oil and gas industry is littered with assets no one claims ownership.  Two cases follow:

    • Stranded assets are, “those investments which are made but which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to generate an economic return, as a result of changes in the market and regulatory environment.”  These resources are no longer worth continued investment.
    • Abandoned assets have reached the end of life.  By one source, it is estimated that there are approximately 53,000 Gulf of Mexico offshore oil and gas well in this category.  Remediation costs range from $500k to $10 million per well–min $26.5 billion.

    It is reasonable to expect that all sources in the ‘energy basket’ will have similar end of life futures.  Green is therefore, not unique.

    “Forewarned is Forearmed”

    A Serious Assessment

    This pundit believes that scant attention has been paid to the lifecycle (economic and social) price of renewables and that the Total Carbon Ownership cost has never been calculated–certainly not published.  However, there are tools that will shed light on this going forward.

    TCO is a function of a detailed and long lifecycle, not unlike oil and gas assets that in some cases are over half a century old.  Any subsequent model of this process is by default complex, detailed and full of unknowns, or unmeasured latent variables.

    The approached this writer has developed using Structural Equation Modeling driven by Structural Dynamics seems well fitted to address this longitudinal and futuristic problem.

    For many, the so-called ‘green energy’ seems without consequences.  The history of energy suggests otherwise.  A full assessment using Structural Dynamics can reveal gaps, misunderstandings, errors and omissions.

    This model will advise management and even regulators what the true cost of an energy source is.  The approach is worthy of a serious discussion.  By the way, this model works for all sources of energy including coal and other fossil fuels as well as renewables.

    What is Your Firm’s TCO and How Can It be Lowered?

    For More Information

    Please note, RRI does not endorse or advocate the links to any third-party materials.  They are provided for education and entertainment only.

    Interested in Cross Cultural Engagement or DEI, check out our Cross Cultural Serious Game

    We presented, Should Cross Cultural Serious Games Be Included in Your Diversity Program: Best Practices and Lessons Learned at the Online Conference, New Diversity Summit 2020 the week of September 14, 2020.

    Contact the author for information on these and others subjects covered in the Critical Mass series.