Weakness of recent sustainability metrics & How to fix

Before coming to a recent discussion about sustainability metrics, I would like to introduce a paper of Cohen (2014) summarizing the growth of sustainability management, three groups of sustainability metrics related to environment, society and governance (577 total indicators in ESG sustainability metrics), and some challenges in this field.

Mentioning about challenges, beside of lack of consensus in the metrics being used by different associations such as Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB), the paper does not mention about the weakness of most of these metrics like Chen (2016) pointed out in “Why sustainability metrics fail to measure achievement, and how to fix them.”

In this article, the researchers argue that there are many indicators that can prove the efficiency in an activity done by a company but can hide the effectiveness. For example, a company can show to be efficient in reducing water consumption per unit output but in fact it does increase the total water consumption, which can be hidden in the indicator.

Therefore, the AVERAGE INTENSITY of the resource used can be put under tricks to make the EFFICIENCY of the resource used higher.

There are typically three situations a company can utilize to create such tricks.

1.       Partial outsourcing (or in-sourcing): “if a manufacturing step using water is moved to a third-party (outsourced) while the final production remains on site, average intensity will decrease.”

2.       Change in facility use: “When production is increased, average intensity will decrease because each unit of production will receive a smaller allocation of the fixed water use.”

3.       Change in product or service mix: Many activities in the production process can help produce many different products. If a mix of these activities can be arranged in a tricky way towards less resource-intensive activities, it can lead to a decrease in the average intensity.

According to Chen (2016), “Overall average intensity is a metric of limited usefulness, and serves as a very poor proxy for corporate efficiency.”. They also suggested the application of “a method based on flexible budgeting was jointly developed by Bacardi Limited and North Carolina State University and has been in practice by Bacardi for several years.”

“The method is able to effectively eliminate all of the distortional effects discussed in points 1 through 3 above, providing an accurate measure of a company’s overall performance for each sustainability parameter.”

They also provided a case study of the application of these metrics at http://onlinelibrary.wiley.com/doi/10.1002/tqem.21400/full

 Reference

Cohen, S. et al. (2014) The Growth of Sustainability Metrics [Pdf] Available at: http://spm.ei.columbia.edu/files/2015/06/SPM_Metrics_WhitePaper_1.pdf

Chen, Y.S.A. et al. (2016) Why sustainability metrics fail to measure achievement, and how to fix them. [Online] Available at: https://www.greenbiz.com/article/why-sustainability-metrics-fail-measure-achievement-and-how-fix-them