PART I
WHY AND WHAT



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--> PART I WHY AND WHAT

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--> 1 Why Study Environmental Metrics? Overview And Objectives The ability to gauge improvement in any endeavor is critically dependent on establishing valid methods of measuring performance. Tracking progress toward an established goal serves to influence behavior by providing continual feedback, and it requires reliable and consistent metrics against which performance can be compared. In response to competitive pressures and the increasing informational demands of a wide range of stakeholders (e.g., customers, lenders, investors, regulators, local communities), many companies have begun investigating metrics that will improve their ability to assess the environmental aspects of their operations. Growing interest in environmental metrics, however, has exposed the considerable lack of coordination that currently characterizes their development and use. The measurement of industrial environmental performance is still in its infancy, but the practice has a high potential for growth, if industry's common use of sophisticated financial metrics is any indicator. Many of the financial measures developed in recent years would mystify Wall Street analysts from past eras, yet today they are seen as indispensable. As customers, investors, and regulators have demanded better financial information, companies have devised ever more detailed and instructive indicators to meet the demand. A similar evolution has now begun to take place in the area of industrial environmental performance metrics. Measures of environmental performance abound, spanning a wide range of

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--> issues related to governmental, societal, and commercial behavior. The word ''industrial'' defines the scope of this study. Despite the attention industry receives, there are many environmental effects attributable to human activity in which industry plays little role. It can even be argued that within many developed nations (e.g., those within the Organization for Economic Cooperation and Development), significant improvements in industrial environmental performance over the past 25 years may have lowered the share of environmental impact attributable to industry. As such, consideration must be given to assessing which issues lie within, and outside, industry's sphere of influence. Industry has a unique set of motivations and constraints with regard to the environment. Industry's primary goal is to service the needs and wants of its customers. In the process, the industrial sector often contributes products, services, and research that improve the quality of life for much of the world's population. The extent to which a company's products or services meet society's demands also determines how well the firm fulfills a primary corporate objective: maximization of shareholder value. The pursuit of increased shareholder value is, however, generally subject to societal and governmental constraints that inhibit practices viewed as socially detrimental. One of these is the imposition of an undue burden on the environment. As with other social checks, the environmental constraint is a product of governmental regulation, liability concerns, moral imperatives, popular sentiment, and customer demands. In the future, these factors are likely to increase industry's motivation to reduce environmental impact. Industry has been advancing along an environmental management learning curve since the early 1970s (Figure 1-1). Twenty-five years ago, protecting the environment was viewed as a drag on economic progress, and there was considerable resistance. The mode was reactive. In the 1980s some companies began to see that proactive or anticipatory approaches could help lessen environmental burden. There was an emergence of corporate pollution prevention plans and, later, of more comprehensive environmental management systems. In the 1990s industry began to develop a more comprehensive approach to assessing environmental costs based on the emerging principles of full-cost accounting (Banks, 1995; Thayer, 1995). Industry's environmental goals and metrics have also evolved over the past quarter-century (Table 1-1). Even among those skeptical of the it-pays-to-be-green paradigm, there is acknowledgment that all signs point toward continuing social pressure for improved levels of environmental performance (Dingell, 1990). As a result, companies capable of reacting swiftly and efficiently to the changing landscape will find themselves at a distinct advantage. Responding to, or in some cases anticipating, these changes requires not only the ability to vary one's products and processes to lessen environmental burdens but also to communicate improvement to a broad range of stakeholders. Successful companies in such a scenario will be

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--> Figure 1-1 Industry's environmental design and management learning curve. SOURCE: Adapted from Richards and Frosch (1997).

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--> Table 1-1 Evolution of Industry's Environmental Goals and Metrics Pre-1970 Mid-1970s–Mid-1980s Mid-1980s–Mid-1990s 2000 and Beyond Goals         None   Meet regulatory standards   "Cost" avoidance Emissions reduction Preempt regulations Image Leadership Legitimacy protection Competitive edge   Explicit mainstreaming of environmental goals –   Design for environment –   Life-cycle assessment –   Environmental cost management –   Recycling targets –   Alternative products Metrics         None   As required by regulation –   hazardous waste generation –   permit violations –   payout of regulatory fines   As required by regulation Rates and quantity of emissions Energy efficiency metrics Productivity improvement metrics Toxicity reduction metrics   As required by regulation Rates and quantity of emissions Energy efficiency metrics Productivity improvement metrics Toxicity reduction metrics Recycle rates "Weighted" metrics those that find new approaches for meeting consumer demands while lowering environmental impact. While many industries have significantly improved their environmental performance in recent decades, the committee observes that the majority of these improvements have been driven by government regulation. Consequently, metrics imposed by regulation have dominated. As industry begins to set environmental goals that move beyond compliance, new methods of measuring and tracking improvement need to be developed. To investigate potential advancement in the area of industrial environmental performance metrics, the National Academy of Engineering has undertaken this study with the following four objectives:

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--> examine U.S. industrial experience in setting goals and measuring progress in environmental performance; identify factors that have contributed, or will contribute, to improved industrial environmental performance in the United States; assess the relative successes and shortcomings of current methods of measuring industrial environmental performance; and recommend a set of industrial environmental performance metrics that define current best practices and identify directions for future improvement. Metrics provide a means of identifying trends and assessing performance with respect to a goal. Many goals will have strictly defined endpoints, for example the concentration of a pollutant in wastewater effluent or an explicitly stated reduction (e.g., 50 percent) in emissions. More broadly stated objectives such as increasing sales revenue or lowering environmental impact have some usefulness, but the committee believes that without including quantitative assessment criteria the usefulness of such objectives for measuring and motivating progress is limited. While defining environmental goals for society, industry, or individual companies is not the purpose of this study, goals are often an important precondition to establishing robust metrics. Many corporate goals flow, directly or indirectly, from national or state environmental objectives, generally communicated in the form of regulations. Compliance has been and will remain a powerful motivation, but increasing evidence suggests that improving environmental performance can also yield business-related benefits (Deutsch, 1998; Esty and Porter, 1998; Hart and Ahuja, 1996; Porter and van der Linde, 1995). Some of the recent interest in scrutinizing environmental performance has been driven by the growing realization that traditional methods of accounting often do not fully capture or identify environmental costs (Epstein, 1996; Ditz et al., 1995; United States Environmental Protection Agency, 1995). Corporate accounting procedures frequently place environmental expenditures into nebulous categories such as "overhead," thereby making it difficult to break out individual costs. Other problems can arise, as capital budgeting procedures frequently do not allow for the separate identification of environmental costs as part of investments in new equipment or processes. As companies have improved their ability to relate environmental costs to the bottom line, management's interest in assessing environmental performance has grown (Rappaport and MacLean, 1995). Interest in metrics capable of tracking environmental performance has followed. The emergence of the new field of environmental, or full-cost, accounting is seen by many as the next step in helping companies move from reactive compliance-based performance toward more pro-active strategies (Banks, 1995; Fischer and Schot, 1993; Popoff, 1993; Richards and Frosch, 1997). Despite the assertion by a number of researchers and companies that financial rewards await organizations that improve their environmental performance,

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--> there are admittedly limits to this model. Realistically, there are always wastes associated with most industrial processes and often significant costs involved in reducing them. Some maintain that lessening environmental burdens, at least in response to compliance standards, inhibits economic progress (Walley and Whitehead, 1994). Another group of researchers finds little correlation, positive or negative, between the bottom line and improved environmental performance (Jaffe et al., 1995). As should be apparent, no conclusive evidence or overarching theory has yet been preferred to conclusively link environmental performance and profitability. It is quite likely that the truth, as in most things, depends on individual circumstances (Clarke, 1994). Still, there is little dispute that when tailored to the needs of an individual firm or industry, environmental performance metrics have provided a means of improving both the environmental and financial performance of a growing number of companies. As this paradigm takes hold, some companies have begun to view environmental performance as a means of advancing primary business objectives (Magretta, 1997; Van Epps and Walters, 1996). These firms have started to incorporate environmental information into decisions on such topics as product selection, marketing, and strategic planning (Fussler and James, 1996; Hart, 1997). Following the adage that what gets measured gets managed, these companies have started down the path to "ecoefficiency," a term the World Business Council for Sustainable Development (1998) defines as "... the delivery of competitively priced goods ... while progressively reducing ecological impact and resource intensity ... to a level at least in line with the earth's estimated carrying capacity." While some companies and industrial associations have begun to research, test, and implement ecoefficiency metrics, little consensus has emerged as to which are most useful. Beyond direct financial incentives, the committee also notes that the development and use of improved metrics have been encouraged by the public's growing awareness of environmental issues. Rising interest in environmental performance has led to increasing attention being given to those things that, in a larger societal context, "should" be measured. The environmental load imposed by resource use, water pollution, air emissions, waste disposal, and other consequences of a highly developed economy have prompted questions regarding how actual impacts might be lessened. As a direct and indirect contributor to the global environmental burden, industry has begun to investigate the extent of its role and potential mitigating actions. Detailed exploration by the committee of how environmental impacts might be measured and characterized reveals that the process will not always be straightforward. Reducing environmental impacts presumes that one can reliably make a

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--> causal link between specific industrial activities and specific impacts. This is an area where considerable uncertainty still exist (National Research Council, 1997). While headway has been made in establishing links between some toxic substances and human health (United States Environmental Protection Agency, 1998a, b), connections between many social, industrial, and commercial activities and ecosystem health are less well defined. The need for clear understanding will become even more important as increasing attention is given to the concept of sustainability. Though a somewhat ambiguous term, sustainability is generally accepted as indicating movement beyond ecoefficiency. (See Chapter 11.) The World Commission on Environment and Development (1987) describes sustainable development as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs." Incorporating sustainability concerns into industrial management will require a much better understanding of how synergism and differences in temporal and spatial scale play out in complex environmental systems. It will also require an improved capacity to assess the regenerative and assimilative capacity of natural systems. Uncertainty and the high degree of interconnectedness of natural systems will make the task of identifying basic indicators difficult and, in some instances, possibly impractical. The committee believes a further challenge will be to devise a range of metrics capable of measuring all these complex interactions while still retaining a sufficient degree of simplicity and transparency. If such measures are not comprehensible, they will not be broadly useful. Fulfilling all of these requirements is a formidable task. The committee feels that the ideal metric, or suite of metrics, will need to have distinct and clear meaning as it points the way toward the goals of increased industrial efficiency and profitability and environmental sustainability. It is the ambitious intent of this report to provide some insight into how an industry might measure progress toward evolving environmental goals (both society's and its own) through the development and use of improved environmental performance metrics. The measurement of industrial environmental performance is stimulating considerable global interest. A number of efforts under way nationally and internationally are examining the issue. This effort differs from others in two key regards. First, it is an industry-centered study involving a committee primarily composed of professionals with corporate and manufacturing experience. As a result, the report may address environmental performance issues from a perspective that is different than that of many other studies. Second, in an attempt to provide more in-depth analysis rather than general commentary, this effort focuses on only four major manufacturing industries (automotive, chemical, electronics, and pulp and paper). While a review of many sectors, such as the service industry, is notably absent in this report, the sectors the committee did examine in combination represent a significant portion of U.S. industrial capacity (12.6 percent of gross domestic product in 1995 [Bureau of the Census, 1997]). In addition to their size,

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--> these four sectors were chosen because of the diverse nature of their products and processes. Operations within the selected industries combine to span the full spectrum of product life cycle, as well as a wide range of market niches (e.g., raw materials, component parts, finished consumer products). These sectors may therefore be taken as somewhat representative of large-scale U.S. manufacturing, perhaps allowing for the extrapolation of at least some results across industries or nationally. Because another objective of this project was the dissemination of U.S. best practices to industries within countries of the Asia-Pacific Economic Cooperation, the relevance of the four sectors to the Pacific Rim economies also had some bearing on which were chosen. Chapter 2 provides an introduction to industrial environmental performance metrics and the decisions they are intended to support. Also included is a discussion of the individual metric characteristics that companies, as well as commercial and public stakeholders, have found most useful. Chapters 3–7 contain an introduction and detailed case studies describing the past and present experiences of the four targeted industries. Chapters 8–10 review U.S. experiences while identifying present trends and challenges to improvement. Chapter 11 explores some of the long-term issues facing industry as it prepares to address expected future demands from the public for better environmental information. In this analysis, emphasis is on describing environmental performance metrics in terms of their links to related corporate goals identified by the committee. There is some discussion of how these goals are changing. Finally, Chapter 12 contains the committee's conclusions and recommendations. References Banks, R.D. 1995. Green costs and benefits. New York Times. July 9, Science Section. Bureau of the Census. 1997. Statistical Abstract of the United States. Washington, D.C.: U.S. Government Printing Office. Clarke, R.A. 1994. The challenge of going green. Harvard Business Review 72(4):37–50. Deutsch, C.H. 1998. For Wall Street, increasing evidence that green begets green. New York Times. July 19, Business Section, p. 7. Dingell, J.D. 1990. The environment and the economy: Striking a delicate balance. Pp. 137–143 in Environmental Policy and the Cost of Capital. Washington, D.C.: American Council for Capital Formation, Center for Policy Research. Ditz, D., J. Ranganathan, and R.D. Banks. 1995. Green Ledgers: Case Studies in Corporate Environmental Accounting. Washington, D.C.: World Resources Institute. Epstein, M.J. 1996. Measuring Corporate Environmental Performance: Best Practices for Costing and Managing an Effective Environmental Strategy. Chicago: Irwin Professional Publishing. Esty, D.C., and M.E. Porter. 1998. Industrial ecology and competitiveness: Strategic implications for the firm. Journal of Industrial Ecology 2(1):35–43. Fischer, K., and J. Schot, eds. 1993. Environmental Strategies for Industries: International Perspectives on Research Needs and Policy Implications. Washington, D.C.: Island Press. Fussler, C., and P. James. 1996. Driving Eco-innovation: A Breakthrough Discipline for Innovation and Sustainability. Washington, D.C.: Pitman Publishing.

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--> Hart, S.L. 1997. Beyond greening: Strategies for a sustainable world. Harvard Business Review 75(1):66–77. Hart, S.L., and G. Ahuja. 1996. Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Business Strategy and the Environment 5:30–38. Jaffe, A.B., S.R. Peterson, P.R. Portney, and R.N. Stavins. 1995. Environmental regulation and the competitiveness of U.S. manufacturing: What does the evidence tell us? Journal of Economic Literature 33:132–163. Magretta, J. 1997. Growth through global sustainability: An interview with CEO Robert B. Shapiro. Harvard Business Review 75(1):78–83. National Research Council. 1997. Building a Foundation for Sound Environmental Decisions. Washington, D.C.: National Academy Press. Popoff, F. 1993. Full-cost accounting. Chemical and Engineering News 71(2):8–10. Porter, M.E., and C. van der Linde. 1995. Green and competitive: Ending the stalemate. Harvard Business Review 73(5):120. Rappaport, A., and R. MacLean. 1995. Greening the CFO: Recent practice and emerging trends. Corporate Environmental Strategies 2(4):2–9. Richards, D.J., and R.A. Frosch, eds. 1997. The Industrial Green Game: Implications for Environmental Design and Management. Washington, D.C.: National Academy Press. Thayer, A. 1995. Full accounting for environmental cost offers benefits to companies . Chemical and Engineering News 73(28):10–11. United States Environmental Protection Agency. 1995. Environmental Cost Accounting for Capital Budgeting: A Benchmark Survey of Management Accountants. EPA742-R-95-005. Washington, D.C.: Office of Pollution Prevention and Toxics. United States Environmental Protection Agency. 1998a. Ecotox Threshold. Available online at: http://www.epa.gov/oerrpage/superfnd/web/oerr/r19/ecotox/index.html. [February 12, 1999] United States Environmental Protection Agency. 1998b. Superfund: Introduction to the Hazard Ranking System. Available online at: http:// www.epa.gov/oerrpage/superfnd/web/ oerr/ino_pro/npl/hrs/hrsint.htm. [February 12, 1999] Van Epps, R.E., and S.D. Walters. 1996. Measure for measure: Evaluating environmental performance with tact and insight. Corporate Environmental Strategy 3(2):42–48. Walley, N., and B. Whitehead. 1994. It's not easy being green. Harvard Business Review 72(3):46–50. World Business Council for Sustainable Development (WBCSD). 1998. Ecoefficiency Metrics and Reporting: State-of-Play Report. Geneva: WBCSD. World Commission on Environment and Development. 1987. Our Common Future. New York: Oxford University Press.

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