Industrial Environmental Performance Metrics: Challenges and Opportunities (1999)

Current environmental practice and use of environmental metrics by a majority of U.S. industrial firms are best characterized as ''cleaner production.'' As defined by the United Nations Environment Programme (1997), cleaner production is "the continuous improvement of industrial processes and products to reduce the uses of resources and energy; to prevent the pollution of air, water, and land; to reduce wastes at source; and to minimize risks to the human population and the environment." A few firms have embraced "ecoefficiency" as a standard of performance. Ecoefficiency makes the link between improved economic performance, higher resource efficiency, and lower environmental impact. It involves either "improving the productivity of energy and material inputs to reduce resource consumption and cut pollution per unit of output—in essence, making more and better products from the same amount of raw materials with less waste and fewer adverse environmental impacts" (World Resources Institute, 1998)—or using fewer raw materials or different, more environmentally benign materials. An even smaller number are beginning to assess the impacts of their activities within the context of sustainable development. This latter approach presents a daunting challenge, since it requires broadening the view of the relation between industry and nature to include community—a paradigm shift from "greening to sustaining" (Gladwin et al., 1995a; Hart, 1997).

In many ways the movement toward sustainability is a continuation of the "greening" shift that began in the 1970s. Since that time, companies have begun internalizing environmental costs in decision making. In many companies, environmental considerations are now integrated into core business functions such as research, development, distribution, provision of services, and product disposal.

This shift has been hard won and has required proof of environmental causes and effects and the development of new problem-solving techniques. It has been enabled by public policies and a range of technological innovations that reach well beyond environmental control or cleaner production. Innovations in information and communications technologies, in particular, have transformed production and management strategies throughout industry, changes that have brought unintended environmental improvements (Freeman, 1992).

The greening shift took about a generation to find mainstream acceptance. Time was needed to demonstrate the reliability of improved analytic principles and problem-solving techniques. Such a gestation period is not unusual. Kuhn (1962) has observed that new paradigms generally emerge without a full set of concrete rules or standards and often encounter considerable resistance that may require a generation or more to overcome. Sustainable development, first proposed in 1987, is complex and controversial, particularly when considered within the context of its social dimensions. A sustainable industrial enterprise incorporates and moves substantially beyond cleaner production and ecoefficiency. This chapter explores the idea of a sustainable development-oriented industrial enterprise and considers the challenges in developing associated performance metrics.

The call for sustainable development is driven by observations that global environmental conditions are in decline and that significant environmental problems are deeply embedded in the socioeconomic fabric of all nations (United Nations Environment Programme, 1997). Presently, environmental decline is especially pronounced in the Asia-Pacific region, Latin America, the Caribbean, West Asia, and Africa (United Nations Environment Programme, 1997). Environmental trend data suggest a continued deterioration in the health of natural systems of these regions, taking the form of declining renewable resources, large-scale alterations of global biogeochemical cycles, and a threatened biological base (Brown et al., 1998; World Resources Institute, 1998). These environmental threats are cumulative and interactive, often arising from multiple causes, as shown in Figure 11-1.

Environmental deterioration is closely related to a variety of social trends.¹

Figure 11-1

Conceptual model of human impacts on natural systems. Human effects, however manifested, have a systemic impact. Human and natural systems are increasingly coupled, especially at current and future scales of human activity.

SOURCE: Allenby (1999). Copyright ã, 1998, Lucent Technologies. Used by permission.

Those in the business community who have responded to the sustainable development challenge cite 10 threats to ecosystem viability (Box 11-1). Technology and economic success can change the nature of these threats and their impacts on individuals and society. However, complexities associated with the interactions between human and natural systems make the quantification and management of such risks a daunting task (World Business Council for Sustainable Development, 1998).

The move toward the sustainable business enterprise presents an interesting mix of challenges and opportunities. The challenges lie in managing the long-term uncertainties inherent in resolving complex, coupled interactions between human and natural systems. Long-range analysis of trends in the efficient use of energy, materials, and land shows that it may be possible to decarbonize the global energy system and drastically reduce greenhouse gas emissions; that the material intensity of the economy can be reduced by leaner manufacturing, better product design, and smarter use of materials; and that it may be possible to increase the area of protected lands by reducing agricultural needs through the use of advanced farming techniques (Ausubel and Langford, 1997). In the short term there are opportunities to disseminate "best practices" in environmental management as well as environmentally friendly products and services. A cleaner environment has been achieved in concert with robust economic growth. Despite the successes of the U.S. system, there is considerable room for efficiency improvements. Even greater opportunities for global efficiency gains are to be tapped in less developed emerging economics.

Sustainable development was most influentially defined by the World Commission on Environment and Development (1987) as "development which meets the needs of the present without compromising the ability of future generations to meet their own needs." This original definition and subsequent refinements² remain controversial.

Nevertheless, metrics are emerging around three aspects—economic, environmental, and social—of sustainable development. Economic measures of corporate performance are tied to financial reporting and have evolved and matured over the past century. Environmental performance metrics, by contrast, began emerging only in the 1970s, and corporate environmental performance reporting appeared only in the last decade. Such reporting reflects a disparate and uncoordinated mix of metrics. Many firms provide qualitative descriptions of actions they have taken to improve corporate environmental performance, while some are beginning to provide an increasing amount of quantitative performance infor-

mation. Interest in so-called social reporting, first seen in the 1970s, has experienced some resurgence as companies have had to defend the working conditions and wages of their suppliers (e.g., Nike) or justify operating in countries with questionable human rights records (e.g., Shell). Such publicized incidents tarnish corporate image and alienate the customer base and, in extreme cases, can eventually lead to shareholder concerns about management policies and practices. Corporate sustainability accounting and reporting, while still somewhat nascent and exploratory, attempts to merge all three elements of sustainable development.

A review of sustainability-related economic, environmental, and social metrics by Fiskel et al., (forthcoming) reveals that there are currently well-established rules and standards for financial accounting and reporting. However, more sophisticated internal accounting metrics (e.g., activity-based accounting and economic value-added accounting) have helped reveal underlying drivers of economic performance and shareholder value (Blumberg et al., 1996).

If economic performance metrics are to evolve beyond merely accounting for profitability and cash flow, they need to quantify hidden costs associated with the utilization of materials, energy, capital, and human resources. They must also estimate uncertain future costs associated with external impacts of industrial production and consumption and lead to understanding of the costs and benefits incurred by various stakeholders (such as customers, employees, communities, and interest groups) across the life cycle of a product or process.

Environmental performance metrics are less well developed than financial metrics. Most are based in regulations and require companies to measure their output of wastes and emissions. While many companies track their material- and energy-use efficiencies, these are not commonly reported. Indeed, even within a single industry, there is great variety in what companies report as their environmental performance. Interest in standardization of environmental reporting is growing as individual companies experiment with ecoefficiency indicators. Consensus on an approach to measuring ecoefficiency could be an important prelude to any quantitative assessment of sustainability.

Social performance evaluations, perhaps the newest set of metrics to emerge in response to stakeholder pressure, are intended to track a firm's social accountability. They appear to fall into two categories: surveys of stakeholder responses on specific categories of performance (see, for example, those developed by the Body Shop [http://www.the-body-shop.com/news/index.html]) and attempts to evaluate social performance through community case studies (see, for example, British Petroleum [http://www.bp.com/_nav/commun/]). Metrics to assess social performance are embryonic and will require a great deal of development, improvement, and acceptance if they are to be truly integrated into business strategies and decision making.

Currently, there are no sustainability performance evaluations that attempt to integrate economic, environmental, and social measures. However, sustainability

reports by Interface (1997), the U.S. carpet manufacturer, and Monsanto (http://www.monsanto.com/monsanto/sustainability/), the newly reinvented life sciences company, indicate commitments to the concept of sustainable development and point to possible metrics.

As envisioned by Gladwin et al., (1995b), sustainable development means protecting, maintaining, and restoring the integrity, resilience, and productivity of natural and social life support services (Figure 11-2). Ecosystem services, shown at the top, include purification of air and water, hydrologic regulation, waste treatment, soil fertility, pollination, pest control, seed and nutrient dispersal, biological diversity, climate and atmospheric chemistry regulation, culture, and aesthetics (Daily, 1997). By analogy, sustainability would also demand that a broad array of social system services that support citizen and industrial activity be protected and maintained, as displayed at the bottom of Figure 11-2.

This life support service model of sustainable development has been used to develop "working principles" for potential application at the level of the firm. For example, the ecologically sustainable enterprise, as envisioned by Gladwin and Krause (1996), would

• eliminate all harmful releases into the biosphere;
• use renewable resources such as forests, fisheries, and fresh water at rates less than or equal to their regeneration rates;
• preserve as much biodiversity as it appropriates;
• seek to restore ecosystems to the extent that it has damaged them;
• deplete nonrenewable resources such as oil at rates lower than the creation of renewable resource substitutes (e.g., solar) while providing equivalent services;
• continuously reduce risks and hazards;
• dematerialize, substituting information for matter; and
• redesign processes and products into cyclical material flows, thus closing all material loops.³

The socially sustainable enterprise, as envisioned by Gladwin et al., (1995b), would

• return to communities as much socially and economically as it gains from operating in them;
• meaningfully include stakeholders impacted by its activities in planning and decision-making processes;
• ensure no reduction in, and actively promote, the observance of political and civil rights in the domains where it operates;
• widely spread economic opportunities and help to reduce or eliminate unjustified inequalities;
• directly or indirectly ensure no net loss of human capital within its work forces and operating communities;
• cause no net loss of direct and indirect productive employment;
• adequately satisfy the vital needs of its employees and operating communities; and
• work to ensure the fulfillment of the basic needs of humanity prior to serving luxury wants.

These principles are beguiling in their simplicity, contestable on several fronts, and controversial in terms of the social orientation suggested. While offering some direction for how the shift to sustainability might be accomplished, they also lead to many complex questions. For example, the environmental implications of the design of a product such as an automobile or a service such as overnight delivery are often obscure. They depend on a variety of factors, including methods used to acquire raw materials, the environmental impacts of manufacturing wastes, how the product is used while in operation, and the product's final disposition. From a larger systems perspective, environmental impacts also depend on the number of automobiles on the road and their cumulative effect. From a social and economic perspective, transportation choices depend on cultural and social values.

Moving beyond pollution prevention and ecoefficiency to the sustainable development paradigm would require a profound transformation in the measurements and analysis used to gauge industrial performance. The set of transformations charted in Figure 11-3 involve large uncertainty, extraordinary detail, and dynamic complexity (i.e., nonlinear interactions between system components; significant time and space lags; complex feedback loops; unknown thresholds and irreversibilities; and multiple scales, resolutions, and rates of change). They also force the sustainability analyst into the realm of systemic interaction and aggregation, for conditions of sustainability reside in properties of "wholes,"

Figure 11-3

The transformation of pollution prevention and ecoefficiency metrics to sustainability metrics.

^a Direction refers to trends such as reductions in energy, water, or materials use.

^b Target zones refer to specific goals or ranges for targeted reduction or substitutions of resources.

which are something different or more than the sum of their parts. To determine, for example, whether the emissions from a factory are ecologically sustainable, one would first need to know, or at least be able to make reasonable estimates of, the conditions and assimilative capacities of all the ecosystems receiving those emissions, the character of all other disturbances flowing into those systems, the synergistic interactions among all the resulting, stresses and biotic processes, and so on. This implies that impact assessments of a given product, process, or facility would need to be done with greater consideration given to these complexities and at broader temporal and spatial scales than those traditionally conducted by an individual firm.

It may be some time before the notion of sustainable industrial performance is translated into operationally measurable metrics. The five metrics described and included in Figure 11-3 provide a theoretical basis for achieving this goal. There are over 50 initiatives under way around the world to develop "sustainability rulers" for business. Alt of these efforts are struggling with the difficult challenges of complexity, comparability, credibility, and completeness (Ranganathan, 1998).

The traditional environmental performance model advised industry to achieve improvements basically by reducing their loads, or footprints, on the environment (i.e., reducing material, energy, and service intensity; reducing or eliminating toxic dispersion; enhancing product durability and materials recyclability; etc.). The sustainability framework would demand, in addition, that all such behaviors be judged according to their actual impacts on the environment and society. Judgments about sustainable performance would depend on assessments of changes in the states of nature and society, something quite different from change in the pressures placed on nature and society. The sustainability analyst would also need to consider how gradual but persistent impacts can accumulate. ''Preventing the slow, persistent, and cumulative degradation of natural systems resulting from human activity is the ultimate environmental challenge facing society. On a world scale, cumulative effects and sustainable development are inextricably linked, reflecting the mega-environmental problem and the mega-environmental solution, respectively'' (Beanlands, 1995).

Pollution prevention mandates, product stewardship, energy and material efficiency, and cleaner production all contribute to lessening the environmental harms of industrial inputs and outputs. They fail, however, to provide guidance on how well industrial activities fit within the carrying capacities of local, regional, and global environments. Sustainability implies moving from metrics that measure environmental friendliness, consciousness, or greening to absolute benchmarks or "zones" of performance as determined by ecosystem and socio-system health, the resilience and dynamic adaptability of life support systems, or social and ecological carrying capacities. The underlying calculus of ecoefficiency metrics is the efficient allocation of resources based on utility maximization according to market and price signals. The logic of sustainability would accept this goal but insist that it be constrained and defined by first assessing and ensuring that the scale and nature of human activities are sustainable.

The industry case studies in this report reveal that the majority of currently employed metrics are concerned with material productivity, energy intensity, and toxic emissions. While these metrics will be of continued relevance and importance, the sustainability approach suggests that the primary threats to the ecosystem lie in habitat destruction (and the concomitant loss of biodiversity) and the exploitation of renewable resources (i.e., fresh water, fisheries, forests, wetlands, etc.) beyond their rates of regeneration. This pushes the performance analyst

more deeply into the life sciences and emergent notions of ecosystem health (Costanza et al., 1992), ecological integrity (Woodley et al., 1993), and services. The sustainability analyst ultimately wishes to understand how a given industrial behavior affects the capacities of natural systems to maintain their vigor, organization, and resilience. Much of the requisite science and analytical technology to accomplish this has yet to be developed.

Indicators of corporate environmental performance in use today are generally considered to be distinct and unconnected. The sustainability framework would require a holistic assessment, focusing on wholes rather than parts, of industrial performance in relation to impacted living systems. Such a methodology would examine interrelationships and feedback processes rather than linear cause-effect chains. Because dynamics and cyclicality are so fundamental in social and ecological systems, the sustainability approach would tend to focus on patterns of change in system structure rather than static snapshots. Sustainability metrics would build upon conventional metrics that have tended to focus on narrow or concentrated scales of space, time, and organizational complexity to inquire about impacts that are longer term and wider in geographic scale. The sustainability analyst would need to make connections across multiple spatial and temporal scales. Assessments would be sensitive to unknowns likely to arise from discontinuities (passing over unknown thresholds of disruption or irreversibility) and synergisms (problem interaction producing multiplicative rather than additive effects).

Social progress is commonly acknowledged as one of the three pillars of sustainable development (along with ecological balance and economic progress), but it is typically downplayed or ignored in most business treatments of the topic. Problems such as poverty, gender bias, population growth, and environmental degradation are highly interdependent (Dasgupta, 1995) and often result in vicious downward spirals of ecological and economic decline (Durning, 1992).

Without gains in a variety of social factors, any gains in human progress derived from pollution prevention and ecoefficiency could be negated (Gladwin et al., 1995b). Sustainability metrics therefore must focus on industry's impacts on co-evolving social and natural systems. The sustainability analyst would need to simultaneously consider the consequences of industrial actions for ecological capital (i.e., renewable, cyclical, biological resources, processes, functions and services); material capital (i.e., nonrenewable or geological resources such as mineral ores, fossil fuels, fossil groundwater); human capital (i.e., people's knowledge, skills, health, nutrition, safety, security, motivation); and social capital (i.e.,

civil society, social cohesion, trust, reciprocity norms, equity, empowerment, freedom of association, other qualities that facilitate coordination and cooperation for mutual benefit). Environment-friendly developments such as cleaner automated factories or agricultural biotechnology would be assessed, for example, in terms of their employment consequences for factory workers and traditional farmers, respectively. The sustainability analyst is thus forced into the "morally thick" realm of social justice, appraising whether industrial activities shift costs or risks onto other human interests, today or tomorrow, without proper compensation.

Moving from traditional notions of industrial environmental performance toward models and metrics of sustainable enterprise represents a long and difficult yet exciting and potentially rewarding journey. The journey has just begun. The scientific challenges of constructing and operationalizing impact-based metrics, geared to targets of sustainable systems, and gauging ecological and social consequences in a holistic and dynamic manner are extraordinary (Costanza et al., 1993). While the task of developing sustainability standards and associated metric systems will involve the scientific, governmental, corporate and nongovernmental communities, the responsibility for ensuring a sustainable world will fall largely on the shoulders of the world's businesses.

"Between the idea and the reality, between the conception and the creation, falls the shadow," said T.S. Eliot. The notions and metrics of sustainable enterprise currently lie in this shadow. The central task of corporate leaders moving into the next century is to bring them into the light.

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