|Measuring Up - Toward a Common Framework for Tracking Corporate Environmental Performance (WRI, 1997, 48 pages)|
To guide their decisions, businesses routinely use such indicators as production rates, inventories, return on investment, and earnings per share. These indicators are used both inside and outside of companies to track performance. The power of such indicators is that they are universally understood, comparable, and as such create a shared vocabulary for tracking progress. Unfortunately, there is no agreement on how to measure environmental performance. Given that environmental performance is now high on the agenda of many firms, the lack of comparable and commonly accepted indicators is a major obstacle to continued progress.
Firms need EPIs for the very same reason that others outside firms want them: to introduce accountability for environmental performance - particularly crucial in companies moving to decentralize responsibility to business units. Corporate environmental managers, especially those under mounting pressure to justify their budgets, have a major stake in measuring environmental performance. For firms operating internationally, across jurisdictions with multiple and conflicting standards, consistent EPIs are a practical necessity to manage environmental performance in an integrated fashion.
Using recent business experience, supported by results from the WRI-Tellus survey, this section shows how business is using EPIs. While the following examples represent only a small sample, they do help answer three basic questions: Which EPIs are being used? Where do EPIs make a difference? What makes EPIs most useful?
Tracking Progress Toward Corporate Goals
Many companies have adopted environmental policies with lofty goals. In fact 94 percent of manufacturing respondents to an Investor Responsibility Research Center survey of Standard & Poor's 500 companies indicated that they have articulated broad environmental principles or commitments as part of their overall policy (IRRC, 1996). Goals carry no weight, however, unless supported by concrete EPIs. As one respondent to the WRI-Tellus survey stated, "By examining our indicators on a regular basis, we have been able to see where we need improvements and make plans to carry us there." In short, measuring environmental performance is basic to internal accountability and communication, especially in companies that span the globe.
Nortel, a $12 billion developer of communication products, networks, and systems, has demonstrated leadership by adopting progressive environmental goals and creating an interesting set of metrics to measure their success. In the words of John Roth, Nortel's Chief Operating Officer: "We believe our approach to environmental management is a sound business strategy that gives Nortel a competitive edge." Between 1993 and the year 2000, Nortel set goals to reduce pollutant releases and solid waste disposal by 50 percent, cut paper purchases by 30 percent, and improve overall energy efficiency by 10 percent. Since publishing these targets, Nortel has taken bold steps to measure progress toward these and other environmental goals with a set of EPIs (See Box 2). For internal purposes, Nortel has devised a composite index of individual EPIs and a complex set of scores and weighting factors. This index can serve as a single barometer of environmental performance for senior management, although it must be amenable to disaggregation to track progress on the component parts or compare its environmental performance against another firm's. To its credit, Nortel has made a habit of disclosing information on the component EPIs.
In pursuit of its overall environmental commitment, Nortel tracks 25 indicators, including releases of air toxics, ozone precursors, and greenhouse gases, consumption of water, electricity, and paper, and regulatory violations. Some EPIs are normalized against the annual cost-of-sales to offset fluctuations in business volume. These individual environmental metrics are entered in a complex scoring scheme, matching actual performance against targets and the previous year's level. The targets decrease each year, which promotes continued improvement. The result is a single aggregate environmental performance index (EPIndex) for Nortel. A baseline of 100 was set for 1993, with higher annual scores indicating improved environmental performance. Under this custom scoring scheme, the maximum score in any year is 175.
Figure 5. Nortel's Index and Elements of Performance
Nortel's performance in three categories - paper purchases,
pollutant releases, and energy use - is summarized in Figure 5, along with the
composite EPIndex for 1993 to 1996. In constructing the EPIndex, Nortel weights
the individual EPIs (e.g., pollutant releases count for up to half the total,
compliance for one quarter, and resource consumption and remediation each for an
eighth). These weighting factors, admittedly subjective, reflect the relative
importance Nortel attaches to each performance category, considering risk and
potential impact. The EPIndex enables managers - environmental or others - to
grasp the company's overall environmental performance at a glance. While the
EPIndex was primarily developed to measure progress for internal consumption,
Nortel has made the information publicly available in their annual environmental
report (Nortel, 1997) and Website
ICI, the U.K.-based chemical giant, has a similar approach to accounting and reporting for waste. Rather than reporting total emissions in its annual environmental report (http://www.demon.co.uk/ici), ICI classifies pollutants by type of impact. Within such categories as global warming, human health effects, and ozone depletion, individual emissions are multiplied by a potency factor to define a quantitative measure of "environmental burden." Given the lack of data on the relative environmental or health risk of all emissions, this requires some judgment calls. ICI intends to use this approach to frame its emissions reduction strategy for the future. Future developments will also focus on extending this approach to the product supply chain upstream and downstream of the company. ICI has taken a step in this direction by evaluating some environmental aspects of the electricity it purchases.
Weighting schemes, like those developed by ICI and Nortel, ease the comparison of the multiple dimensions of environmental performance. But it is essential that the disaggregated data be made publicly available to allow comparisons both within and between firms.
The issue of comparability or standardization is at the heart of the business utility of EPIs. Firms with multiple operating facilities around the world are familiar with this issue. As Leslie Carothers, Vice President for Environment, Health and Safety at United Technologies Corporation (UTC) notes, "Getting UTC's far flung operations to report data is by far the hardest job I have. This is going to be a very long-term effort, undertaken by many of us in phases. Still, having common measures would greatly enhance the value of this exercise." Without standardization, firms face a plethora of reporting requirements that result in noncomparable information of limited utility.
Source: White and Zinkl, 1997
Respondents to the WRI-Tellus survey expressed similar views on the issue of comparability. When the survey asked which characteristics of EPIs are most important, respondents revealed a remarkably broad consensus about the importance of comparability. As presented in Figure 6, being able to track environmental performance over time and across facilities was deemed "essential" or "helpful" by virtually all respondents. Fully 75 percent of those surveyed also saw comparability across products, companies, and sectors as useful. More than half of the respondents considered international comparability helpful or essential.
Energy Use in Production and Products
Energy usage can be a major economic consideration in manufacturing and product use. General Motors (GM) is driving down the energy-intensity of its manufacturing operations by setting such annual goals as a 5 percent reduction in energy use between 1995 and 1996. In the 1995 reporting year, GM's North American operations included more than 170 facilities in the United States, Mexico, and Canada. GM tracks energy consumption and costs at each, distinguishing among electricity, natural gas, and other fuels. As a significant component of manufacturing costs, better management of energy translates into cost savings for GM.
As part of its energy conservation program and voluntary reporting of greenhouse gases, GM tracks energy use from stationary sources (notably their manufacturing plants), and from the use of GM vehicles (http://www.gm.com). To facilitate comparison, GM also estimates and reports greenhouse gas emissions from both mobile and stationary sources (See Box 3). By examining energy used in both manufacturing and product use, GM can compare environmental performance at different points in its product chain. Clearly, energy use and greenhouse gas emissions are more significant factors in the use of cars than in the manufacture.
Greening Product Chains
Many firms are redefining environmental performance to reach beyond the point of sale. The emergence of product "take-back" legislation in Europe, together with consumer pressure and voluntary initiatives, such as the U.S. Energy Star program, are extending corporate environmental responsibility to encompass product use and disposition (Dillon, 1996). In the electronics industry, international product specifications and market expectations are forcing firms to develop products that incorporate energy-saving and recyclability. Hewlett-Packard, for example, has developed a set of metrics to improve product stewardship and to equip management with the tools to measure progress. These focus on energy consumption during product use and materials used in manufacturing (e.g., product mass, recycled material content, disassembly time, and number and variety of parts). Using these metrics, product lines set specific goals for improvement. Over the past five years, Hewlett Packard's Vectra personal computer line has reduced product mass by 46 percent, slashed the number of parts from 1650 to 350, and improved the ease of disassembly and recycling.
EPIs not only allow firms to evaluate their own performance, but EPIs can also be applied upstream to select and manage business relations with suppliers. Some corporations, such as B & Q, Sun Microsystems, and the Body Shop, have already begun to develop environmental performance evaluation schemes for their suppliers. B & Q, the United Kingdom's largest home improvement and garden center, grades some 500 suppliers in 60 countries. Suppliers are evaluated both on their understanding of environmental issues and on their performance. Faced with a growing number of customer queries regarding environmental issues, other companies are following suit. Harmonizing what should be measured and how will reduce the burden of firms responding to multiple queries.
With many governments around the world in the process of developing green procurement guidelines for both suppliers and their products, and firms coming under increasing pressure from customers, the time is ripe for applying these EPIs. In the United States, Executive Order 12873 requires federal agencies to buy and use "environmentally preferable" products. In a first pilot project focusing on cleaning products, U.S. Environmental Protection Agency (EPA) discovered strong interest in information on ingredients and their characteristics, information basic to the environmental performance of the product, not just the ecolabel alone (U.S. EPA, 1997a).
Driving automobiles contributes about 16 percent to overall U.S. energy consumption and greenhouse gas emissions. Making the cars also contributes to energy consumption and greenhouse gases emissions. In its recent corporate environmental, health and safety report, General Motors, an endorser of the CERES Principles, backed up its commitment to conserving resources at every stage of the product cycle with interesting information about energy use. GM also voluntarily reports its greenhouse gas emissions under section 1605b of the 1992 Energy Policy Act. These GM reports break fresh ground by reporting on the contribution to greenhouse gas emissions during manufacturing as well as the subsequent use of their products in the hands of consumers (GM, 1996).
Even though the company has little control on how its products are used after the sale, and no legal responsibility to track the environmental performance of its products, GM projected energy use and greenhouse gas emissions from GM cars and light trucks in the United States. These estimates, presented in Figure 7, were based on assumptions about fleet fuel efficiency, the number of vehicles on the road, and the miles driven.
The results indicate that the use of GM vehicles accounts for significantly more greenhouse gases than their manufacture. As part of its longer term commitment to improve energy efficiency of vehicles, GM has joined the U.S. government. Ford, and Chrysler in the "Partnership for a New Generation of Vehicles" to help promote the development of affordable, fuel efficient, low-emission automobiles.
Figure 7. GM greenhouse gas emissions from U.S. sources
Materials Efficiency and Pollution Prevention
In an influential 1995 Harvard Business Review article, Michael Porter and Claas van der Linde argued that firms "...must learn to frame environmental improvement in terms of resource productivity." Polaroid, guided by the premise that decreased use and reduced generation of toxics minimizes the subsequent management of waste, has developed metrics to track materials use and waste generation (Epstein, 1996). Information on chemical use and generation of wastes is used to set priorities for changes in manufacturing processes and the design of new products, processes, and facilities. The company's centralized environmental accounting and reporting system produces corporate and divisional reports that monitor existing production and predict the impact of new chemicals on these key EPIs.
In the United States, some states require industrial facilities to go beyond TRI to provide information on chemical use. New Jersey has required chemical use reporting since 1987. Both New Jersey and Massachusetts have set overall goals for reducing wastes, and ask facilities to report their goals and progress on pollution prevention. A recent analysis of Massachusetts data revealed a 17 percent reduction in toxic chemical use and a 25 percent reduction in hazardous waste generation between 1990 and 1994 (TURI, 1997). A separate report from the New Jersey Department of Environmental Protection estimates a 50 percent decline in nonproduct output (NPO) in New Jersey between 1987 and 1994 (Aucott et al., 1996).
Figure 8. New Jersey and U.S. NPO (Using TRI Section 8 data)
SIC Codes 26, 28, 30, 33, 34
These encouraging results from Massachusetts and New Jersey stand
in sharp contrast to national trends where the generation of toxic chemical
wastes prior to treatment has steadily grown as illustrated in Figure 8.
In addition to these environmental benefits, in New Jersey for every dollar
spent by firms and the regulators on the additional reporting and planning
requirements, companies reported economic savings between $5 and $8 (NJDEP,
Many firms in New Jersey and Massachusetts have also found that information on toxic chemical use helps identify opportunities to reduce waste, increase productivity, and save money (See Box 4). In both states, large chemical users report a simple materials accounting of toxic chemical use at their facilities, which includes the amount of toxic chemical used, produced, brought on site, and shipped off-site as waste or product. The requirement to track chemical use is mandatory, for some facilities, in these states, which can create economic and environmental benefits for the firms.
Progressive businesses in other countries are embracing the importance of resource efficiency. The Colombian Business Council for Sustainable Development, which includes 30 large firms contributing 4 percent to the national economy, has developed tools for measuring and improving ecoefficiency (CECODES, 1997). Since 1995, participants have reported on a variety of quantitative indicators. For example, overall these firms estimate $1.6 in value-added per cubic meter of water and $4.5 in value-added per kilowatt-hour of energy.
Source: White and Zinkl, 1997
EPIs In Other Business Decisions
The WRI-Tellus survey revealed that EPIs are being used by respondents inside firms to make business decisions, not just environmental ones. (See Figure 9.) Respondents were asked to choose the top three business decisions most affected by the use of EPIs. Regulatory compliance was the most frequently cited use of EPIs; 61 percent of these environmental managers scored compliance decisions as those most affected by EPIs. This comes as no surprise, however, EPIs are also evident in other business decisions. Strategic planning was rated in the top three by 64 percent of respondents. Benchmarking, investment, and other core business decisions - such as purchasing, product design, and R&D - were influenced by EPIs, albeit to a lesser extent. One respondent noted that EPIs were used in evaluating the prospective acquisition of a new business. These results are encouraging in that they suggest that the respondents use EPIs to inform mainstream business decisions, far beyond the traditional boundaries of the environmental, health, and safety department.
The fact that employee compensation failed to make the top three decisions of any of these environmental managers is particularly noteworthy. This reinforces the findings of a 1996 Conference Board survey that revealed most firms do not include metrics for pollution prevention, materials efficiency, or product stewardship in employee evaluation and incentive schemes. This is an unfortunate omission, since internal incentives are a powerful means for driving the integration of environmental considerations into routine decisions.
Lessons from Internal Uses of Corporate EPIs
What does this brief foray into the world of corporate performance measurement indicate about current business practice? First, the four key EPIs are already being used inside firms to support a range of decisions, not just environmental ones. There is a clear business case for these EPIs. By creating environmental accountability within an organization, EPIs are driving improvements in resource efficiency, while increasing profitability. Perhaps EPIs are already being used in many other ways, a question that should be explored through surveys and case studies of other business decision-makers and industries. Second, comparability is a critical component in the business utility of EPIs. Businesses can't benchmark their own performance over time or against others without this. This is especially important for corporations with multiple facilities operating across international boundaries.
While the business examples together with the results of the survey offer promising signs, further progress is needed. More firms need to measure environmental performance. Firms that have started need to adopt a broader view of performance, up and downstream of their manufacturing activities. Ultimately, firms that are genuinely committed to improving their environmental performance will benefit from the widespread adoption of a common set of standardized, transparent metrics. In so doing, firms will be able to track their progress, take credit for achievements, and distinguish themselves from their competitors.