Why Boards Must Measure Sustainability Capabilities, Not Just Outcomes

In today’s corporate landscape, operational sustainability and business capability have become central to long-term value creation and strategic resilience. However, a critical oversight often emerges at their intersection: the capability blind spot. This refers to the significant, yet frequently unmonitored, risk that arises when an organisation fails to deliver on its sustainability objectives due to inadequate or missing capabilities. This blog post will deconstruct this crucial gap and offer a practical framework for boards to address it, ensuring their organisations are truly equipped for a sustainable future.

What is Capability Risk in Operational Sustainability?

Capability risk in the context of operational sustainability is the potential for an organisation to fail in achieving its sustainability goals because it lacks the necessary combination of people, processes, systems, and knowledge.^1,2 Operational sustainability involves systematically integrating environmental, social, and governance (ESG) considerations into day-to-day operations while ensuring long-term business viability. ³

This risk materialises when there are gaps in fundamental areas, including: ^4,5

• People Capability: Insufficient skilled personnel with sustainability expertise.
• Process Capability: Inadequate systems for identifying, assessing, and managing sustainability risks and opportunities.
• Technology Capability: Missing or outdated systems for data collection, monitoring, and reporting on sustainability performance.
• Knowledge Capability: A lack of institutional knowledge regarding sustainability best practices and regulations.

Research indicates a significant sustainability capability gap, where strategic commitments fail to translate into operational execution. ⁶ This leads to a confidence-capability disconnect, with many organisations lacking foundational knowledge despite high confidence in achieving targets. ⁷

The Critical Oversight Gap: Driving by the Rear-View Mirror

Despite the profound threat of capability risk, it remains a glaring blind spot for most corporate boards. This isn’t due to negligence but rather systemic issues within traditional corporate governance tools. ⁸

The Tyranny of Lagging Indicators

The fundamental flaw in most current sustainability reporting is an overwhelming reliance on lagging indicators. These retrospective metrics measure what has already occurred, such as annual carbon emissions or waste reduction figures. While tangible and auditable, they provide zero foresight and no direct leverage to influence future results. Boards focusing solely on lagging indicators are left navigating the complex journey of sustainability by looking almost exclusively backward. ^8,9

In contrast, leading indicators are predictive metrics that measure the inputs, processes, and conditions likely to produce future outcomes. Examples include the percentage of employees trained in sustainability or the rate of investment in sustainable product design. These indicators provide proactive insights into future performance. ^8-10

Systemic Deficiencies in ESG Reporting Frameworks

Major ESG frameworks (e.g., GRI, SASB, TCFD) were primarily designed for disclosure of impacts, risks, and opportunities, not for assessing an organisation’s underlying capability to manage these outcomes.11 This focus on disclosing outcomes, particularly those deemed financially material, inadvertently discourages a focus on foundational capabilities. The data produced is often difficult to use due to a lack of comparability, absence of standard definitions, weak correlation to financial performance, and self-reporting bias. ^12,13

However, progressive models like the Institutional Limited Partners Association (ILPA) ESG Assessment Framework offer a blueprint for assessing ESG integration maturity, evaluating capabilities like “Capacity Building and Training” and ESG expertise integration, providing a powerful contrast to traditional outcome-based reporting. ¹⁴

The Quantification Challenge

Boards and executive teams primarily operate using quantitative data. The abstract nature of a “business capability” makes it difficult to capture its health and effectiveness in a single number. This quantification challenge, coupled with the complexity of sustainability, leads organisations to measure what is easy to quantify (lagging outcomes) rather than what is strategically important but hard to quantify (capability). This creates a vicious cycle, leading to “tick-box sustainability” and a “sustainability execution gap”, where organisations appear strong on reports but lack the fundamental capabilities to navigate future challenges. ^15-18

A Taxonomy of Core Sustainability Capabilities

To manage capability risk, organisations must understand the specific abilities they need. While unique, a common set of core capabilities underpins any credible operational sustainability program. ¹⁹ These can be categorised into:

1. Strategic & Governance Capabilities: ^20,21
   Sustainability Strategy & Planning: Defining a clear vision and pragmatic roadmaps.
   ESG Governance & Accountability: Establishing robust governance with defined roles and linking executive compensation to sustainability performance.
   Stakeholder Engagement & Management: Systematically identifying, consulting, and collaborating with stakeholders.
2. Core Operational Capabilities: ^22-24
   Sustainable Supply Chain Management: Ensuring transparency and promoting sustainability throughout the supply chain.
   Circular Economy & Product Lifecycle Management: Designing products for durability, reparability, and recycling.
   Energy & Resource Management: Systematically monitoring and optimising consumption of energy, water, and other natural resources.
3. Supporting Capabilities: ^{19, 25-27}
   ESG Data Management & Reporting: Gathering, consolidating, verifying, and analysing sustainability data for accurate decision-making and reporting.
   Sustainability Culture & Competency Building: Embedding sustainability into the organisation’s DNA through training and fostering a supportive culture.
   Sustainable Innovation & Technology Adoption: Identifying and deploying new technologies and business models that drive sustainability outcomes.

The High Stakes of Capability Failure: Tangible Consequences

The absence or immaturity of these core capabilities leads directly to severe, tangible, and often value-destroying consequences. ^28-31

• Reputational & Market Risk: A failure in capabilities like Sustainable Supply Chain Management can lead to catastrophic reputational damage and accusations of “greenwashing”. The Rana Plaza collapse is a stark example of deficient ethical sourcing capabilities.
• Legal & Regulatory Risk: Deficiencies in ESG Data Management & Reporting or Ethical Governance can expose a company to immense legal peril. The Volkswagen “Dieselgate” scandal, for instance, stemmed from a catastrophic failure in Transparent Engineering and Ethical Governance capabilities, leading to billions in fines.
• Financial & Investor Risk: An inability to demonstrate credible sustainability capabilities can lead to loss of access to capital, higher borrowing costs, and depressed valuations, as socially conscious investors increasingly screen for ESG performance.
• Operational & Systemic Risk: Weak Energy & Resource Management can lead to higher operating costs and supply disruptions. Similarly, a gap in ESG Data Management can result in data breaches, operational shutdowns, and loss of stakeholder trust.

A Practical Framework for Board-Level Capability Oversight

To close this critical oversight gap, boards require a new set of tools to make capability visible, measurable, and governable.

The Sustainability Capability Maturity Model (SCMM)

The SCMM is a structured framework that provides a common language for assessing an organisation’s current state and plotting a clear path toward a desired future state. It translates complex operational realities into a simplified, comparable score (e.g., Level 1 to 5) suitable for strategic oversight. ^32,33

The five levels of the SCMM are: ³⁴

• Level 1: Reactive (or Compliance-Driven): Sustainability is purely a matter of ad-hoc compliance, with high risk of non-compliance and reputational damage.
• Level 2: Developing (or Managed): Basic policies and processes are established, often focused on cost savings, but efforts remain fragmented.
• Level 3: Proactive (or Defined): Sustainability is an integrated component of core business strategy, with standardised management systems and quantitative targets.
• Level 4: Leadership (or Quantitatively Managed): Sustainability drives innovation, market differentiation, and competitive advantage, with sophisticated, forward-looking metrics.
• Level 5: Purpose-Driven (or Optimising): Sustainability is fully embedded in the corporate culture, driving all strategic decisions and innovations, focusing on being actively regenerative and restorative.

This model provides boards with a clear roadmap for progress, allowing for targets like “Move our Sustainable Supply Chain Management capability from Level 2 to Level 3 within 24 months”. ³⁵

Developing Leading KPIs to Measure Capability Maturity

With the SCMM, the board’s oversight shifts to guiding the organisation up the maturity ladder using leading indicators that predict an increase in capability maturity. The maturity level itself can be a high-level KPI. ³⁵

Examples of Capability-Focused KPIs for boards to consider include: ^{21, 36}

• ESG Governance & Accountability: SCMM Level for this capability, or the percentage of executive compensation linked to specific sustainability capability targets.
• Sustainability Culture & Competency Building: SCMM Level for this capability, or the percentage of employees who have completed mandatory sustainability training.
• ESG Data Management & Reporting: SCMM Level for this capability, the ESG data verification rate (internal/external audit), or time-to-collect and consolidate quarterly sustainability data.

Integrating Capability Assessment into Board Governance

Adopting this new measurement framework requires evolving board processes and structures. ^1,36-39

1. Assess Organisational Readiness: Commission a formal, objective Organisational Readiness Assessment (preferably by an independent third party) to establish a baseline maturity level for all critical sustainability capabilities against the SCMM.
2. Set the Board Agenda: Formally task management with developing and executing a plan to improve capability maturity levels, making progress against this plan a standing item on the board’s agenda.
3. Reform the Dashboard: Redesign the board’s sustainability dashboard into a “balanced scorecard” that gives equal prominence to leading capability indicators and lagging outcome indicators.
4. Establish KPI Governance: Create a clear governance process, potentially involving a dedicated performance management function, to oversee the development, validation, and evolution of capability KPIs.
5. Link to Incentives: Embed the achievement of specific SCMM level improvements and leading KPI targets directly into the long-term incentive plans (LTIPs) for senior executives. This signals that the board values building organisational capacity for enduring success.

A Call to Action

Capability risk in operational sustainability is a critical yet often overlooked dimension of corporate risk management. The gap between sustainability aspirations and operational delivery capabilities poses significant business risks that boards must actively monitor and govern. By incorporating capability-focused KPIs into their oversight frameworks, boards can ensure their organisations have the necessary foundations to deliver on sustainability commitments and create long-term value for all stakeholders. This represents a fundamental shift from reactive compliance to proactive capability development and strategic risk management. It’s time for boards to stop driving by the rear-view mirror and start focusing on building the capabilities that will truly future-proof their businesses.

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Close the Sustainability Capability Gap—With Action, Not Intention

True sustainability transformation demands more than good intentions. It requires measurable capabilities, strategic integration, and leadership alignment.

Ready to turn sustainability into your greatest competitive advantage?

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Your next move starts here—because capability builds credibility.

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