4. Integrating EPIs in Decisions Outside the Company

The last decade has witnessed a growing transparency in business environmental performance. Companies that once operated behind a veil of confidentiality now publicly provide information on their environmental performance. Increasingly, this external reporting is extending to at least some of the four EPIs proposed in Section 2. Concurrent with this growing supply of information on business environmental performance, there is an external demand for business to become more accountable for its environmental performance.

Several factors are prompting this increased accountability and openness. In some countries, mandatory reporting requirements have forced the disclosure of certain environmental performance information. U.S. law has mandated public reporting of chemical releases for a decade under the TRI, creating an inventory of over 20,000 industrial facilities. Voluntary corporate environmental reports and various reporting initiatives have also increased the volume of information (UNEP/SustainAbility, 1996). In some cases, these voluntary disclosures are applying these reporting requirements to their operations around the world.

While the transition to greater business transparency has begun, it is by no means complete. Few countries require mandatory reporting, and not all firms are required to report in those that do. Firms that voluntarily make information available on their environmental performance are still the exceptions. Furthermore, the variety of approaches to reporting environmental performance information makes it difficult, if not impossible, to compare products, facilities, firms, sectors, and countries.

Using examples drawn from around the globe, this section illustrates how the same EPIs that are useful inside firms can also serve users and uses outside firms, including governments, communities, financial institutions, and others. This section also highlights the need for a unified reporting framework that embraces transparency, comparability, and completeness. In the absence of such a framework, governments, communities, and companies will be awash in a sea of contradictory, disconnected, and incomparable measures of performance.

Using EPIs to Track National Goals

Just as firms need EPIs to track progress toward corporate goals, countries also need macro-level EPIs. Unfortunately, efforts to track progress toward national goals are typically limited by the quality and completeness of information and the receptiveness of policy-makers. National commitments under international conventions on climate change, biodiversity, and forestry could propel demand for better indicators of national environmental performance and shift greater responsibility to companies for measurement and reporting progress.

The Netherlands offers one of the best examples of a comprehensive national approach to environmental performance goals and indicators, an approach similar to Nortel's in Section 3. The Dutch have established a set of national environmental goals covering climate change, ozone depletion, acidification, eutrophication, dispersion of toxic substances, and solid waste disposal (VROM, 1997). Each is measured by a composite EPI that serves to signal progress as shown in Figure 10. The broad scope of these indicators allows for the tracking of national progress and for comparisons across economic sectors. Specific targets to reduce toxic substances, for example, also enter into sectoral and facility negotiations.

Figure 10. Tracking Progress Toward National Goals - The Dutch Experience

Source: VROM, 1997

The Dutch indicators are evolving in interesting ways. Although Dutch environmental authorities have maintained a broad emissions inventory for more than twenty years, they have allowed very limited public disclosure. Beginning in 1999, the largest industrial facilities will be required to submit annual pollutant reports, which will be made public. The contribution of smaller industrial sources and nonpoint sources, including transportation and agriculture, will be estimated separately. This merging of the macro-level indicators with a micro-level reporting (more akin to TRI) represents a powerful combination of goal-directed policy and disclosure-based pressure for improvement.

Although the United States lacks such a comprehensive set of national environmental goals, some aspects of environmental performance have given rise to quantitative milestones. EPA's 33/50 Program, a voluntary initiative to reduce emissions of 17 high priority TRI chemicals, established measurable goals and urged firms to commit to meeting them. Using the 1988 TRI reporting year as a baseline, the 33/50 Program sought emissions reductions of 33 percent by 1992, and 50 percent in 1995. What happened was that emissions of these chemicals were halved a year ahead of schedule. While the success of the 33/50 Program contributed to the overall reduction in TRI emissions, the actual generation (i.e., nonproduct output) of toxic chemicals has risen by 7 percent since 1991 (USEPA, 1997b). This suggests that improvements in pollutant emissions have been gained by pollution control rather than pollution prevention. Clearly, if pollution prevention is a national priority, then both goals and indicators must reflect these concerns.

External Comparability and Transparency

The U.S. TRI, a mandatory information tool, provides the prototypical example of how public disclosure of standardized environmental performance information not only measures progress, but also drives improvement. TRI requires annual reporting on specific amounts and types of several hundred chemicals released or otherwise managed by industrial facilities. Essentially all of the information contained in the TRI database is publicly available through public libraries, electronic channels (http://rtk.net), and other means. The original legislative language specified that the data be made publicly available in a computerized format. Between 1988 and 1995, total releases of these toxic chemicals fell roughly 46 percent from the reporting facilities, a testimony to the power of public disclosure to drive improvement (U.S. EPA, 1997b).

Box 5 Confidential Business Information Many firms remain leery about disclosing performance information, particularly materials use, for fear of disclosing trade secrets to competitors. Respondents to the WRI-Tellus survey also indicated little willingness to publicly report information on energy and chemical use. Only about a third of respondents favored publicly reporting these two indicators, compared to almost 75 percent for pollution emissions. In general, respondents opposed reporting at the product or process level, and were more favorably inclined toward disclosure at the facility and corporate level. Yet experience from New Jersey and Massachusetts, two states that require a materials accounting, shows that few companies ever claim chemical use data as a trade secret. In New Jersey, which automatically accepts trade secret claims as valid unless contested, only three out of the nearly 600 firms claimed trade secrets in the 1996 and 1997 reporting years (United States Public Interest Research Group Education Fund, 1997). Similar results were found in Massachusetts. One possible explanation is that the time lags between actual performance and public disclosure are long enough that the information is not very valuable to competitors. Nonetheless public reporting remains a cultural barrier within industry and must be addressed, while fulfilling the needs of stakeholders for information on corporate environmental performance. Perhaps Harris Gleckman, Director of Benchmark Consulting, was only half right, when he stated that, "Business efficiency is not a public issue. Business environmental impact is" (Benchmark, 1995). To the extent that business efficiency means more effective resource utilization and lower environmental impacts, it is very much a public issue.

TRI clearly illustrates the utility of data that is transparent, accessible, and comparable, but it has some serious shortcomings. It covers only toxic chemicals, the largest manufacturers, firms in the United States, and two of the four EPIs proposed in Section 2 - nonproduct output and pollutant releases. In a move to fill some of these gaps, EPA published final regulations in May 1997 extending TRI reporting to electric utilities, mining, waste incinerators, and four other industries (US EPA, 1997c). EPA has also announced its intention to propose an expansion of TRI data elements to include information on chemical use, which would begin to address another of the three key categories of EPIs proposed in Section 2. This proposal has triggered strong objections from industry associations and their member firms. In particular, there is concern that making chemical use data available will reveal trade secrets. (See Box 5.) While evidence from New Jersey and Massachusetts suggests that these concerns may be overstated, the architects of this new framework must be sensitive to the protection of legitimate commercial confidentiality.

Box 6 Comparing Environmental Performances in North America The Commission for Environmental Cooperation (CEC), the tri-national organization set up under the North American Agreement on Environmental Cooperation, is developing a series of reports that assemble existing public information on pollutant release and transfer registers in Canada, the United States, and Mexico. The CEC believes that tracking environmental pollution is essential to enhance environmental quality, to increase the public's and industry's understanding on the types and quantities of toxic chemicals released into the environment, to encourage progress in emissions reduction, and to assist governments in setting priorities for action. Photo In an important step forward, the CEC published a report with the first rigorous comparison of reporting systems on industrial pollution in the three countries (CEC, 1996). There are some differences between the U.S. and Canadian inventories: in 1994, the TRI reported on 368 chemicals, the NPRI on 178. Differences also exist in the sizes and types of industries that must report. Mexico is currently in the process of a developing a similar system, the Registro de Emisiones y Transferencia de Contaminantes. A second CEC report compares 1994 data from Canada and the United States (CEC, 1997). Despite the differences, there are remarkable similarities in terms of which industries and chemical top both countries' lists. One surprising, but as yet unexplained, finding was that Canadian facilities report about twice the emissions of U.S. facilities as indicated in Figure 11. Figure 11. Average Pollutant Releases per Facility Sources: CEC "Taking Stock" Table 5-8, 1997

National Pollutant Release Inventories

Outside the United States, several countries are pursuing TRI-style national pollutant inventories. Australia, Canada, the Netherlands, Norway, and the United Kingdom are among several countries refining versions of national pollutant inventories. National environmental authorities, firms, researchers, and non-governmental organizations (NGOs) have shown keen interest in learning from each others' experiences. Through a series of international workshops, the OECD developed a guidance document to aid governments in developing "Pollutant Release and Transfer Registers" or PRTRs (OECD, 1996).

In a unique move, toward truly international comparability, the national environmental authorities of the United States, Canada, and Mexico recently agreed to create a regional pollutant inventory for North America featuring consistent data (See Box 6). Canada had modeled its National Pollutant Release Inventory (NPRI) on U.S. experience, and Mexico is benefitting from the joint collaboration. Soon North America will be the largest region in the world reporting on industrial pollution in a comparable way.

In addition to the pilot work in Mexico, demonstration projects have been initiated in the Czech Republic, Kenya, and elsewhere to assess the feasibility of these approaches in other contexts. Japan's Environmental Agency has been paying close attention to these developments and is organizing a conference on pollutant inventories in 1998.

Some governments and NGOs are making detailed information available via the Internet on pollutant from facilities in Canada (http//.www.doe.ca/pdb/npri.html), the United States (http//:rtk.net), and the United Kingdom (http//.www.foe.co.uk/cri/html). The Internet has emerged as a particularly quick, powerful, and cost-effective tool for disseminating and accessing environmental performance information around the world. For example, when Friends of the Earth-U.K. posted data from the country's Chemical Release Inventory as a map-linked database on the Internet, they clocked some 25,000 visits in the first year of operation (See Figure 12). In contrast, local offices recorded only 750 visits to review similar information on paper - a striking example of the distinction between public availability and public accessibility.

Figure 12. Industrial Pollutors in the UK are Mapped on the Internet

The trend toward greater public disclosure of industrial pollution information is by no means limited to TRI-style pollutant inventories. Denmark's environmental reporting law, which took effect in 1996, requires nearly 2,000 companies to publish environmental reports, known as "Green Accounts", for each production site (Rikhardsson, 1996). These reports, modeled on a financial reporting approach, will help standardize performance information on raw material use and pollutant releases.

Box 7 Benchmarking U.S. Petroleum Refineries In a creative use of publicly reported information, the Environmental Defense Fund, a US-based NGO, ranked the environmental performance of 166 U.S. oil refineries (Epstein et al., 1995). Detailed data on toxic waste generation and pollutant release were downloaded from the Right-to-Know Network (http://rtk.net), and normalized by refining capacity. The resulting EPIs reveal the relative performance across the sector, information which is valuable to communities, regulators, and the industry itself. These general patterns are borne out on closer inspection of these data. To illustrate. Table 1 presents results for the seven refineries in Illinois, along with their national ranking. The state, which stands fourth behind Texas, Louisiana, and California in refinery capacity, is among the most efficient in controlling toxic pollutant releases. Yet, barrel for barrel, the Shell Oil refinery at Wood River, Illinois releases over 18 times more toxic chemicals to the environment than dark Oil's Hartford, Illinois refinery. With regard to waste generation, the spread is even more dramatic, although this may reflect some lack of clarity in EPA's reporting instructions.

Table 1. Comparing Refinery Performance in Illinois

Company	Location	Capacity	Pollutant Release		Waste Generation
		barrels/day	EPI*	US Rank	EPI*	US Rank
Clark Oil & Ref.	Blue Island	65,000	0.67	#24	0,64	#15
Clark Oil & Ref.	Hartford	57,000	0,32	#14	0.33	#10
Indian Ref. L.P.	Lawrenceville	69,000	2.00	#49	727.00	#152
Marathon Oil Co.	Robinson	175,000	1,79	#40	3,20	#35
Mobil Oil Corp.	Joliet	180,000	0.58	#22	55.20	#107
Shell Oil Co.	Wood River	273,000	5.80	#104	60.50	#110
Uno-Ven Co.	Lemont	147,000	1 07	#31	3320,00	#160

*These two EPIs are reported in pounds of pollutant annually divided by barrels of capacity per day.

Source: Epstein et al., 1995

These actions described above all signal a major step in the direction of greater public accountability and comparability for industrial pollution. Although most actions have concentrated on pollutant releases and nonproduct output, they represent key opportunities for incorporating materials use and energy consumption for a broader section of industry.

Benchmarking U.S. Refineries

As TRI has evolved, an assortment of regulators, equipment vendors, financial analysts, researchers, activists for social justice, and journalists have found novel ways to interpret and apply the information (Unison, 1995). The Environmental Defense Fund (EDF), a U.S.-based NGO, combined TRI data with other information to benchmark 166 oil refineries by their pollutant emissions and nonproduct output (Epstein et al., 1996).

This study normalized the environmental data by refinery capacity (e.g., emissions per barrel of oil) to adjust for size (See Box 7). EDF also ranked the 34 states with refineries, aggregating pollutant releases and waste generation across each state's refineries. EDF concluded that states' regulatory and enforcement efforts vary greatly in their attempts to reduce waste releases and off-site transfers. Those states with poorer refinery performance included West Virginia, Kansas, and Texas. At the other end of the spectrum, New Jersey ranked among the best.

For U.S. oil refineries, pollutant releases generally correlate with waste generation. Yet, performance on both EPIs stretches over several orders of magnitude. Many factors lie behind the wide scatter in performance: the source of crude, product mix, and refinery vintage can have a bearing on environmental performance. Beyond the specifics of petroleum refining, this external benchmarking of facility-level EPIs offers an important lesson. EPIs - at least those that are comparable and transparent - can provoke questions about the determinants of performance and opportunities for improvement.

Performance Reporting and Alternative Regulatory Approaches

In some countries, the demand for new strategies for environmental protection is coalescing around the idea of performance-based incentives with greater public involvement. In the United States, several regulatory initiatives, as well as the President's Council for Sustainable Development, have sought novel ways to broker greater regulatory flexibility in exchange for better environmental performance (Aspen Institute, 1996; PCSD, 1996). As Leslie Carothers of UTC explains, "Having meaningful, auditable, public information on business environmental performance can and should free government regulators to focus on non-com-pliers and lagging companies, where the need for traditional regulation and enforcement is the greatest" In essence, EPIs provide a means for demonstrating and taking credit for improved performance - a "carrot and yardstick" approach to driving progress toward environmental goals.

In developing countries, the challenges are very different, but the importance of EPIs is still enormous. Rapidly growing economies, such as those in Southeast Asia, are experiencing growth in their manufacturing sectors of about 10 percent a year, which means a doubling of their industrial base within a decade. Yet, the regulatory institutions responsible for environmental protection typically lack the resources to effectively implement, monitor, and enforce compliance programs. For these countries, new approaches to environmental management that go beyond traditional command and control are essential to steer clear of serious environmental costs as a side consequence of economic success.

Indonesia provides an interesting example of how to implement a practical information-based strategy to combat environmental pollution (See Box 8). The national environmental agency of Indonesia has launched an innovative program known as PROPER to rank the environmental performance of facilities in water pollution control. On the basis of self-reported data, site inspections, and independent monitoring, 187 facilities were assigned to one of five color-coded categories. The top gold ranking, which no facility has yet attained, requires cutting emissions to less than half of the regulatory limit, controlling air pollution and wastes, and "extensive use of clean technology." While PROPER is far from perfect, it does show that EPIs are also applicable in developing countries and can be implemented in ways that suit local heeds and institutional capacities. The World Bank is currently working in the Philippines, Colombia, and Mexico to extend this approach.

Box 8 Harnessing the Power of Public Opinion in Indonesia Weak enforcement of existing water regulations combined with limited resources led Indonesia's National Pollution Control Agency, BAPEDEL, to try an alternative strategy for encouraging better environmental performance among its growing manufacturing sector. With the support of the World Bank, BAPEDEL launched a program for rating and publicly disclosing the environmental performance of Indonesia's major water polluters (http:\www.NIPR.org). The Pollution Control, Evaluation, and Rating program, or PROPER, rates firms on their performance at preventing and controlling water pollution. As demonstrated in Table 2, in less than two years the PROPER scheme has yielded significant improvements, especially among facilities previously out of compliance. Each of the 187 facilities selected were assigned to one of five color-coded categories on the basis of performance. In the first three rounds of evaluation, no facilities has yet achieved the highest gold rank, but there has been a large shift from red to blue, that is, into compliance. The number of laggards assigned to black has fallen from six to three to just one. Photo

Table 2. Indonesia's Environmental Performance Ratings

Rating	Environmental Performance	June 1995	Dec. 1995	Sep. 1996
Gold	World Class, Exceeds Waste and Air Pollution Standards	0	0	0
Green	Significantly Exceeds Water Pollution Standards	5	4	5
Blue	Compliance with Water Pollution Standards	61	72	94
Red	Below Compliance, Some Pollution Control	115	108	87
Black	Below Compliance, No Pollution Control	6	3	1

International Standards and Environmental Performance

From Oslo to Kuala Lumpur, attention is being lavished on ISO 14000, the new series of international standards on Environmental Management. While in some ways less demanding than Europe's EMAS, ISO 14001, the international environmental management systems (EMS) standard, is stimulating worldwide interest in corporate environmental management. Even firms that chose not to be registered are scrutinizing the requirements and guidance developed over the past several years.

Europe's EMAS distinguishes itself from ISO 14001 by virtue of its requirement for a site- specific public environmental statement. Using the model of financial auditing, EMAS provides for third party verification of both regular site audits and the public statement. The public environmental statement must provide information on raw material, water and energy use, pollutant emissions, waste generation, noise, and any other significant environmental effects - data elements similar to the key EPIs proposed in Section 2. Although EMAS was adopted in 1993 as a voluntary regulation, provision was made to allow it to be converted to a mandatory requirement for certain sectors and installations above a certain size. It remains to be seen how firms seeking certification will choose between ISO 14001 and the more stringent requirements of EMAS. Meanwhile, the European Commission has decided to consider ISO 14001 equivalent to EMAS, provided the facility publishes a public environmental statement.

ISO 14001, together with associated guidance on life cycle analysis, auditing, environmental performance evaluation, and labeling, identifies the machinery needed to build an environmental management system in the widest sense. To be certified, firms must document a suite of policies and procedures for environmental management, including a commitment to continuous improvement (Tibor and Feldman, 1996). Unfortunately, the standard is deliberately silent on what constitutes meaningful goals, leaving each firm to establish their own milestones and metrics. In fact, environmental performance is not a factor in certification, which has opened ISO 14001 to some serious criticism (Benchmark, 1995).

In a sense, ISO 14001 is premised on the assumption that "the system is the solution," that is, with better management comes better performance. Many NGOs, regulators, and even some business managers are skeptical whether the emphasis on management systems will yield real performance improvements. ISO 14031, the guidance on environmental performance evaluation, currently in draft form, acknowledges the importance of measuring inputs and outputs, much like the EPIs presented in Section 2. But the entire document, including the hundred illustrative EPIs, is optional (ISO, 1996).

While ISO 14001 is already a fait accompli, it will take time before the value of certification is established. Firms can take advantage of its skeletal architecture, imbue it with concrete goals and EPIs, and commit to forthright communication with their stakeholders. Companies that do this stand the best chance of earning greater respect from their employees, the communities in which they operate, and perhaps their customers and investors. Those that aim for the bare minimum, that hedge their bets by concealing their goals and progress, may bear the costs of these international standards without realizing the potential value. Meanwhile, outsiders in search of environmental performance will have to look behind ISO certification for concrete EPIs and evidence of the operational effectiveness of the management system.

Many countries now require firms to publicly report on some of the four key EPIs.

EPIs and the Financial Community

Given that today's investment decisions shape future corporate development paths, how can the financial sector's pivotal role be harnessed to encourage firms to adopt cleaner, more efficient technology, products, and processes? Although there has much debate on the link between environmental and financial performance and a fresh batch of anecdotal evidence and research (Schmidheiny and Zorraquin, 1996; Blumberg et al., 1997; Feldman et al., 1996), the financial community is dissatisfied with the current state of EPIs. When 85 financial analysts in London were asked about environmental disclosure and reporting, a mere one-third considered the information adequate for routine company assessments (Extel, 1994).

The attitude of the financial community may be changing. At the Third International Roundtable Meeting on Finance and the Environment, sponsored by the United Nations Environment Programme in May 1997, over 300 participants, including representatives from business and the financial sector met in New York to explore the connections between financial and environmental performance.

Half way around the world, the Jakarta Stock Exchange requires firms to have at least a "blue" rating in Indonesia's PROPER scheme, before they can go public - an illustration of how financial drivers can reinforce environmental performance, and vice-versa. A 1996 Natural Resources Defense Council report on the hidden environmental liabilities of power plant ownership ranked electricity suppliers according to greenhouse gas emissions per dollar of operating revenue (Cavanagh, et al., 1996). Control of greenhouse gas emissions such as carbon dioxide is the subject of intense international negotiation. From the least carbon-intensive utility (Pacific Gas & Electric) to the most (PSI Energy, Inc.), these indicators vary enormously. For each dollar of operating revenue, PSI-owned plants emitted 25 times more carbon dioxide as PG & E-owned plants.

Superior environmental performance can translate into reduced operating risk, lower costs, and a competitive edge. But two prerequisites are necessary to make environmental considerations a routine part of investment and lending decisions. First, a clear quantifiable link must be made between environmental and financial performance. It is particularly important that leaders in the financial community work with businesses, academics, NGOs and others to expand the collective grasp of the "dollars and sense" of EPIs. Second, information gaps on corporate environmental performance must be filled, and a standardized framework constructed to govern reporting. Widespread corporate adoption and reporting of these EPIs are important steps toward closing the information loop between financial and environmental performance.

Lessons Learned from External Uses of Corporate EPIs

Despite the lack of a universal framework for measuring and reporting environmental performance, these examples demonstrate a growing international transparency emerging in corporate environmental performance. Many countries now require firms to publicly report on some of the four key EPIs. Firms are also volunteering information on their environmental performance through corporate environmental reports, adherence to various codes of practice, and participation in environmental management standards.

When in a transparent and comparable format, the very same EPIs that were useful to people inside the firms are also being used by people outside the firms. EPIs represent powerful tools for holding firms publicly accountable for the environmental impacts of their activities. Experience from North America, Europe, and Asia suggests that the mere act of publicly reporting can drive firms to improve their environmental performance. Such information-based strategies can be implemented in ways that are compatible with the level of development and institutional capacity of the countries involved.