Business environmental performance measurement

Peter James As hridge Managernen t Research Group

Organisations face increasing demands to measure their environmental performance. This is necessary in order to achieve sustainable development, to reassure financial stakeholders that their investments are not at risk, t o satisfy the demands of regulators and other non-financial stakeholders and to provide information for customers and employees. Measures can be grouped into ten generic categories - impact, risk, emissions /waste, input, resource, efficiency, customer, financial, normalised and aggregate. At least six different approaches to using measures can be identified - production, auditing, ecological, accounting, economic and quality. Although there has been some limited cross-fertilisation, in most cases they have developed in isolation from each other and have had different drivers, measurement focii and metrics. In order to achieve the comparison, integration and business relevance which is routine in financial performance measurement, a seventh approach - that of strategic environment-related performance measurement - i s both needed and beginning to develop. The long term challenge i s to stretch measurement systems to include the sustainability of business activities (through impact measures) and the competitive advantage they are creating (through customer and financial measures). A ‘balanced scorecard’ of measures i s essential too, as i s clear identification of the customers of the measures. The comparison which is facilitated by standardised measurement i s also a powerful spur to continuous improvement of environmental performance.

1 . INTRODUCTION

It is a truism that what gets measured gets managed. As the growing importance of environmental issues to business requires a management response, there is increasing emphasis on appropriate measures to track performance and guide organisational actions. A wide variety of business ‘envirometrics‘ - that is quantified environment-related data - have therefore been developed and used by business and

there is a developing academic and practitioner literature on the subject. In the UK, an overview of the subject has been provided by Gray et a/. and a recent report by Business and the Environment has given examptes of performance measurement in practice (Business in the Environment, 1992; Gray et al, 1992). In the USA, the topic i s regularly discussed in the burgeoning literature of the total quality environmental management (TQEM) movement (Executive Enterprises, 1993; President’s Commission, 1993; Willig, 1993). A joint report by Deloitte Touche Tohmatsu, the international institute for Sustainable Development and Sustainability has examined the related topic of environmental performance reporting in some detail (Deloitte Touche Tohmatsu, 1993). Deloitte Touche have also worked with the European Round Table group of companies to develop performance indicators for several industries (Hodgkinson, 1993).

This paper draws on this work and the first stages of an Ashridge research project to discuss current environmental performance measurement practice in Europe and North America. The Ashridge project has involved extensive desk

research, informal discussions with ten innovative companies, three bodies and three financial institutions in the UK, USA, Germany and Netherlands. The study also has an action research component in that the author i s working with a UK consultancy and several UK companies in actual implementation of performance measurement systems.

2. WHY MEASURE BUSINESS ENVIRONMENTAL PERFORMANCE ?

Pressures for business to quantify its environment-related performance are now coming from many different directions (Fischer and Schott, 1993; Schmidheiny, 1992). These can be summarised in terms of five principal drivers - the biosphere, financial stakeholders, non-financial stakeholders, buyers and people. Each of these requires a critical ‘deliverable’ from the company and appropriate measures to ensure that it i s indeed being delivered.

Many species, ecosystems and biogeochemical processes are already under threat and will become even more precarious as population increases and living standards rise. The 1992 Rio Earth Summit endorsed the need for sustainable development - that is, development which does not harm future generations - and stressed the key role of business in bringing it about. Companies must therefore do everything they can to ensure - and demonstrate by measurement - that their activities are sustainable.

Shareholders, bondholders and bankers require companies to be profitable - or at least not heavily loss-

BUSINESS STRATEGY AND THE ENVIRONMENT 59

making - in order to pay dividends and repay debt. In the long run, companies will be bankrupt if they allow environmental issues to compromise their basic profitability. Financial stakeholders therefore require measurement in order to demonstrate that their money is not at risk. A small but growing number of ethical investors also have a direct interest in the environment and seek measures in order to discriminate between good and bad performers.

Regulators, insurers, environmental groups, communities and other non-financial stakeholders also have an interest in a company’s environmental performance. They are typically interested in a wide range of measures in order to form a composite judgement about the credibility of a company’s environmen-al policies and actions.

Companies cannot allow the environment to jeopardise their core rationale of providing goods and services which customers value. However, many customers do value good environmental performance as part of the overall product mix - particularly if this is provided as a bonus rather than at a premium - and are therefore interested in measures which demonstrate this.

Finally, effective responses to external pressures requires change in the policy and practices of the organisation as a whole and individuals within it. Companies can drive these changes by developing and communicating a clear sense of strategic direction in the environmental area and using measures to track and motivate progress towards it.

3. CATEGORISING ENVIRONMENTAL PERFORMANCE MEASURES

All companies and industries are different and it is therefore no surprise that a large number of performance measures have been developed. After extensive analysis, the Ashridge project has identified ten generic kinds of measure. These form a diamond of measurement tools (see figure 1). Eight of these can be termed ’simple’ measures (in the sense that original data is in the same dimension so that no conversion is required) - measures of environmental impact and risk, em i ssi ondwaste measures, in put measures, resource measures, efficiency measures, financial measures and customer measures. These form a spectrum with the first three measures being primarily environment-focused and the three latter more business-focused. Two further categories of measures are those which are normalised (that is, relate data in two different dimensions but do not convert them) and those which are aggregated (converting data in different dimensions into a single dimension).

impact Measures

The extent to which the performance measurement system attempts to measure what happens to the environment as a result of the activities of the business, as distinct from the direct outputs of those activities. For example, the quantity of CO, emitted would be an emission measure: a measure of how much the rate of global warming was thereby accelerated (and of how any other aspects of the environment were also affected by the same cause) would be a measure of impact. One of the few examples of an

ENVIRONMENT

BUSINESS

impact measure in widespread use is biological oxygen demand (BOD) which is used to measure the impact of emissions on water quality.

The ultimate objective of environmental management, and therefore of environmental performance measurement, is to make the organisation‘s impacts compatible with sustainable development (Welford, 1 993). Impacts are therefore the most important environmental performance measure but also the most difficult to develop. They firstly require knowledge of sustainable burdens on the environment to which an individual organisation’s impacts can be related and then a means of differentiating one company’s impacts from another.

Risk Measures

These assess the likelihood and consequences of environmentally harmful events and are therefore proxies for environmental impact as well as being a useful means of identifying opportunities for risk reduction and deciding between alternative options. However, risk assessment i s difficult to understand and often generates disagreements about underlying assumptions.

EmissiondWaste Measures

Most environment-related data in business is expressed in terms of the mass or volume of emissions to air and water and of solid wastes. The most widely used emissiondwaste measure is probably that of emission of the toxic chemicals identified by the US Toxic Release Inventory (TRI) legislation. This is the centrepiece of most US environmental reports and some American companies, such as Dow and Monsanto, are now volunteering similar information for their plants outside the US.

Input Measures

Most performance measures - including those under the other headings - are concerned with results, particularly

60 BUSINESS STRATEGY AND THE ENVIRONMENT

BUSINESS ENVIRONMENTAL PERFORMANCE MEASUREMENT

measures of physical outputs, costs and customer perceptions. An alternative approach is to focus on the business processes which create products and services (Greenberg and Unger, 1992). If these processes work as intended, then the results are likely to be achieved. If not, the processes can either be improved or, if clearly sub optimal, re-engineered to develop completely new versions. One example of measuring inputs is Union Carbide, which reports the percentage of its sites which have implemented each of the 106 different codes of the US Chemical Manufacturers Association’s Responsible Care programme.

measure). This might be the sum of al l costs incurred for environmental purposes, or an estimate of the benefit of the future or indirect costs avoided as a result of current actions. 3M regularly tracks such figures and uses them to measure the benefits (often avoided costs) of its pollution prevention programmes - currently estimated at over $600 million.

A qualitatively distinct type of financial measure is when environmental data are converted into financial terms - usually as the first stage in aggregation to a total measure of environmental effect (see below).

Normalised Measures Resource Measures

These record consumption of energy, water, mineral, biological and other resources. The generation of these resources has major environmental impacts in its own right and can also be a useful proxy for the ultimate impact of the company.

Efficiency Measures

Efficiency i s the ratio of useful output to input (or vice versa). Businesses have always had a financial interest in converting as much as possible of costly inputs such as energy and materials into valuable outputs, and this is merely reinforced by the environmental arguments for reducing wastes. The most effective efficiency measure is probably that employed by 3M, which has developed a uniform methodology for comparing material inputs with valueless waste outputs. It uses this as its primary environmental performance measure in all parts of its operations.

Customer Measures

The ultimate purpose of business is to satisfy the paying customers for its goods and services. The quality movement has stressed the importance of identifying and satisfying customer needs and has extended the definition of customer to internal customers for departmental or individual activity. Thus the US Baldrige quality award criteria give 300 of the 1000 available points to actions to provide and measure customer satisfaction.

The advantage of customer measures is that they simultaneously measure both the effectiveness of environmental actions for key stakeholders and a key business variable, that i s customer perceptions of a firm and its products (Wells, 1992). In practice, however, few environmental performance measurement systems routinely track customer perceptions. One reason for this is a perception that customer satisfaction is a ’soft‘ issue best left to marketing departments (who seldom track it either). Another i s a failure to realise the practical value of such measures.

Financial Measures

Financial measures can be of two distinct types (Bennett, 1993). One is where the original data from which the measure is constructed is itself in monetary form (a ’simple’

Measures of environment releases or impacts are not of great value in their own right because they are influenced as much by economic factors as environmental performance. A company reducing its emissions of toxic chemicals by 10% may appear to be a good environmental performer but is not if production has dropped by 20% over the same period. Conversely a rapidly expanding company may see an absolute increase in its output of pollutants despite its best efforts at environmental management. .

A second disadvantage of absolute environmental data i s that it cannot easily be compared. We would expect a larger company, for example, to create more pollution than a smaller one but what differential is acceptable? The ability to make such comparisons enables companies, policy- makers, investors to make much more considered judgements about the relative environmental performance of individual companies or industries. There is therefore a strong case for the development of metrics which relate environmental performance to business activity. Possible indicators of environmental performance include mass of substances consumed or emitted or impacts on environment. Feasible measures of business activity include production, turnover, profitability or value added. The measures can then either normalise business activity to a given environmental unit (for example, value added per tonne of sulphur dioxide) or vice versa (for example, pounds of toxic releases per million dollars of turnover). In the case of the most developed system, that of the US Investor Responsibility Research Centre, TRI emissions and legislative violations are related to turnover to produce an ‘emissions index’ and ‘compliance index’ for the top 500 companies in America (Investor Responsibility- Research Centre, 1992).

The 1992 revision of the US Toxic Release Inventory (TRI) reporting requirements now makes it mandatory for companies to provide information about business activity so that comparisons can be made. Companies are free to choose the unit of activity but must report on the same basis each year. The choice given to US companies gives them considerable flexibility to respond to their individual situations but makes it impossible to develop aggregate indices, for example of an industry, and difficult to compare individual companies. One sensitivity analysis of the relationship between business indicators and the environmental ranking of different industries concluded that ‘the choice of a particular production index for normalising TRI releases and transfers does not substantially change the rankings of major industrial sectors’ (Behmanesh, 1993).


PETER JAMES -

APPROACH

PRODUCTlON

AUDITlNG

However, there were some individual differences and the authors cautioned that their findings might be rather different i f they examined companies and facilities rather than industries.

ORIENTATION DRIVERS

Engineering Efficiency

Legalistic Compliance

Aggregate Measures

ECOLOGICAL

Many users of environmental performance information want its complexity reduced to a single number which can be used as a basis for comparison. The range of environmental impacts by a business makes this inherently difficult but several attempts have been, and are being, made to develop aggregate measures.

Three broad methods of aggregation can be identified. Financial aggregation involves the assignment of monetary values to environmental information. Many observers oppose this in principle and there are formidable problems of valuation in practice. However, the Dutch software company BSO/Origen has tried it as a pilot exercise and some other companies are now following its example.

Scientific aggregation i s less controversial but equally difficult to achieve. For example, following Swiss work in the 1970s, Wehrmeyer has developed a workable system which has been tested with paper companies. He measures a company's performance by taking into account its actual impact (measured as the ratio of actual discharges or impacts to legal limits) and the general environmental stress caused by the particular impact. The latter is measured by first calculating the ratio of ambient concentrations to legal limits and then estimating the likelihood that a given ratio will cause damage to the environment (Wehrmeyer, 1993).

Finally, one can aggregate by means of qualitative scoring. The result is a number which is purely dimensional: of no intrinsic significance, but meaningful in comparisons of performance over time. Volvo and other companies have developed 'eco-points' schemes which assign numerical values to materials and energy sources: their usage can then be calculated and summed into a score for an individual product or component.

Individual production measures can be similarly weighted to reflect their relative importance, and then summed. The American electric utility, Niagara Mohawk, provides an example of a sophisticated environmental index being used in practice. Leading members of the UK Chemical Industries Association have also developed indices comprising a weighted average of the five components which have a most critical impact on the environment. This allows performance to be tracked over time and rates of improvement to be compared between companies but is significantly flawed by the fact that the details are confidential and that the index is not constructed in a standardised way (Chemical Industries Association, 1993).

Scientific Impacts

4. APPROACHES TO ENVIRONMENTAL PERFORMANCE MEASUREMENT

ECONOMIC

QUALITY

Environmental performance measurement i s neither a new nor a uniform activity. Indeed, our study has identified at least six different frameworks within which it has taken place, each with distinctive drivers and measurement

Welfare Externalities

Continuous

PETER JAMES

approaches - production, auditing, ecological, quality, accounting and economic (see Table 1). The prevalence of these approaches seems to vary between countries and industries. Much US activity, for example, has been within the framework of the quality and auditing approaches whereas these are much less pronounced in Europe. Conversely, ecological and, in some respects, accounting frameworks appear to be more developed in Europe.

There is also anecdotal evidence that the frameworks within which performance measurement is carried out is influenced by industry-specific factors - most of the consumer products companies interviewed, for example, were utilising life cycle analysis whilst few chemical companies were doing so (see also Sullivan and Ehrenfeld, 1992).

The production approach i s an engineering - driven approach and is primarily driven by a desire for more efficient utilisation of key inputs such as energy and materials. Engineers have always sought improvement in this area for both business and aesthetic reasons and this approach is the longest established. However it has become more sophisticated in recent decades by the development of mass balance and energy balance techniques for tracking the movement and transformation of materials and energy throughout a plant. The key metrics in this approach are those of efficiency - which engineers are always seeking to maximise - and financial and resource measures.

Environmental auditing developed in the US during the 1970s and is still more prevalent in North America than Europe or Japan. Although regular auditing can be a driver for continuous improvement - and is designed to be SO in environmentally proactive companies - it began with, and to



a considerable extent retains, an emphasis on compliance with government regulations in order to avoid fines, bad publicity and other disbenefits (Friedman, 1992). As such, its primary emphasis is on emissiondwaste, input and risk measures.

The ecological approach is one which is driven by a desire to map and scientifically assess the environmental footprint of business activities. It has two distinct focii- life cycle analysis and environmental impact assessment. Life cycle analysis - also referred to as eco-balance in Europe - aims at mapping the environmental footprint of a product from its ‘cradle‘ (raw materials) to the ‘grave’ (final disposal). However, there has been considerable controversy about the appropriate methods and data for individual life cycle analyses. Environmental impact assessment is focused on the impacts of individual sites and projects and is therefore easier to bound, and therefore slightly less controversial, than life cycle analysis. Both are primarily concerned with metrics of impacts and emissiondwastes.

As previously noted, environment has emerged as a significant accounting issue as a result of both altruistic and business factors. Gray (1 993) and other academic accountants have noted the relevance of accountants’ process skills in both measuring and tracking data and auditing to the environmental area.

Freedman (1 9931, Gray (1 9931, Owen (1 992) and others have also stressed the relevance of accounting concepts and skills to reporting of environmental information to external stakeholders. One practical manifestation of this approach has been the environmental reporting awards established by the Chartered Association of Certified Accountants. The accounting firm of Deloitte Touche Tohmatsu (1 993) has also been a co-publisher of an excellent report on environmental reporting.

The work of US accounting academics interested in environment has also tended to focus on external reporting, but has generally been concerned with the influence of a company’s poor environmental performance - and particularly potential environmental liabilities - on capital markets. This i s because Superfund and other environmental legislation has made environmental liabilities into a significant balance sheet issue and created an extensive professional debate on how they should be accounted for (Williams and Phillips, 1994).

One area which has received relatively little attention from accountants is that of environment-related management accounting (that is, accounting information for management support). Innovation in this area has been as much through TQM practitioners (see below) as the accounting profession (Bennett and James, 1994).

The economic approach has similarities with accounting in that it aims to assign ‘a monetary value to environmental impacts and activities. However, it differs from mainstream accounting (although not the social responsibility school) in that its basic orientation is more towards social welfare than corporate decision-making. The main driver is to internalise the costs of environmental externalities so that, instead of being borne by society, they are borne by the firm itself. The firm i s thereby given the financial incentive to reduce environmental impacts which i t previously lacked.

The economic approach has both capital and revenue impli- cations. Pearce (1 993) has suggested that a capital value can be assigned to natural assets and depreciation then calculated to reflect their rate of depletion. The revenue dimension is to calculate environmental impacts during a financial accounting period, assign a price to those impacts and then relate them to the turnover and profitability figures for that period. Although this approach seems theoretical, it has been adopted by the Dutch company, BSO/Origin (see below).

Over the last decade, western business has been profoundly influenced by total quality management (TQM). Although many TQM schemes have failed, a number have delivered considerable benefits. Research suggests that successful TQM schemes are those which see it as a revolution in management philosophy and style (Binney and Williams, 1992; Grant et al, 1994). At the heart of this revolution is a critique of short-term, financially driven, decision-making. By contrast, TQM practitioners stress the equal importance of issues such as product quality and customer satisfaction which, they argue, are the best route to long term financial health. Continuous improvement requires much greater availability of more sophisticated non- financial information and greater linkages of financial information with the key business processes which influence outcomes such as quality or satisfaction. A key area of information within a TQM approach is the ‘cost of quality’, that is the total costs of actions taken to ensure product quality and to deal with any failures to achieve it.

The quality approach to environment- sometimes termed total quality environmental management (TQEM) - stresses that environmental actions are taken for customers and uses measurement to achieve a continuous improvement in performance (Hocking and Power, 1993;James, 1994; Niedert, 1992). The customers are both external (paying customers, regulators, the environmental movement, the neighbourhood or the ecosystem) and internal (line managers as customers of environmental specialists). TQEM also places great emphasis on the superiority of pollution prevention over more traditional ‘end of pipe‘ pollution control approaches which accept the creation of pollutants

.and simply try to ameliorate their effects. In the US, i t has been particularly associated with the use of one particular measure, tracking of emissions of toxic release inventory (TRI) chemicals. In addition, it makes use of efficiency and input measures and therefore partially incorporates the production and auditing approaches.

The TQEM approach has also stressed the importance of financial information as a means of guiding corporate environmental management. its central concern with identifying the costs of ‘non environment’ has led to the creation of several frameworks for considering environment- related costs and benefits such as the US Environmental Protection Agency’s Total Cost Assessment (TCA) model (Tellus Institute, 1992a).

STRENGTHS AND WEAKNESSES OF CURRENT APPROACHES

Each of these approaches has benefits but also weaknesses when applied in isolation. The quality approach, for


PETER IAMES

example, stresses continuous improvement from current levels but will be inadequate if environmental impacts require an immediate redesign of products and processes. Its emphasis on immediate action and conceptual simplicity can be a powerful spur to improvement, but can also result in measures - and therefore priorities - being driven by the availability of data rather than objective environmental concerns. Effective pollution prevention, for example, seems to require a combination of simple emissiondwaste measures but also more complex efficiency measures which do not always emerge naturally from the quality process.

The lack of synergy between the different traditions is matched by differences between and even within companies. Many have invented measurement approaches and techniques to meet their own individual needs so that, except where required by law, no standardised information is available. Some select a few critical areas to measure and report on whilst others, for example, BT, measure and report at length on everything which seems related to the environment. The situation is reminiscent of accounting in the nineteenth century, where every company also had its own system and comparison was similarly difficult.

During the twentieth century, accounting has become much more standardised. Comparisons between companies and industries are both feasible and common and financial performance measurement is an integrated and strategically important activity in almost every company. The same need for comparison, integration and business relevance is also present in the environmental area and a seventh approach - that of strategic environment-related performance measurement - is both needed and beginning to develop (Auone and Manzini, 1994).

5. KEY THEMES IN ENVIRONMENT-RELATED PERFORMANCE MEASUREMENT

Our preliminary research is not sufficient to fully delineate this strategic approach. However, it is possible to identify some key areas for study. Neely (1 993) has identified three levels of analysis of performance measurement activities:

the individual performance measures; the performance measurement system as an entity; the relationship between the performance measurement system and the external environment.

All of these are relevant to environment-related performance measurement. The key issue with regard to individual measures is the degree of linkage with the company’s strategic objectives. Key issues at the system level are the need, for, and nature of, a ‘balanced scorecard‘ of measures and a supporting infrastructure. Finally, the third level involves the issues of disclosure of environment-related performance data, the feasibility and desirability of standardisation and the need to consider sustainability in environment-related performance measurement activities.

LINKING MEASURES TO STRATEGIC OBJECTIVES

Most discussion of performance measurement stresses the importance of deriving measures from an organisation’s strategic objectives (Dixon, 1990; Harvey, 1994; Maskell,

1991; Neely, 1993). However, the diversity of environmental issues, national circumstances and individual organisational strategies makes it inevitable that environment-related performance measurement activities wi I I be heavily influenced by contextual factors. Whilst the availability of standardised measures - such as TRI - can create some similarity of approach between individual companies, which may increase in future (see below), one can nonetheless hypothesise that:

1) environment-related performance measurement activities will continue to vary between countries and industries.

industry sector is likely to be the most significant contingent variable, as this will affect both the nature of the environmental impacts and the degree and nature of public concern. Other factors which might affect the measurement system are the political climate and legislation of the country, the size of the organisation, and its management style and culture.

It is not always clear what an organisation’s environment- related strategic objectives should be. Whilst minimisation of environmental impacts will almost always be one, there i s more disagreement about the validity of sustainability as an objective or, at the other extreme, an objective of deriving competitive advantage from environmental actions.

As previously argued, successful environment-related performance measurement will increasingly need to focus on both sustainability and competitiveadvantage. Evidence from pollution prevention projects and other areas suggests that gaining competitive advantage i s sometimes compatible at least with minimising environmental impacts i f not with approaching sustainability (Environmental Protection Agency, 1993; Johnston, 1993). However, the experience of the same pollution prevention projects suggests that many cost- effective opportunities will not be taken in normal business circumstances. Hence, business-focused environment-related measures - such as customer and financial ones - may be needed not only to meet the strategic objective of achieving competitive advantage but also - by providing a force for overcoming barriers to pollution prevention - to minimising environmental impacts. Or, to put the hypothesis in its strongest form for testing:

2) the more that companies use customer and financial measures to track environment-related performance, the more they wil l achieve both good business performance and good environmental performance.

BALANCING THE SCORECARD

In any performance measurement system there i s a risk that attention can become focused on only a few measures at the cost of paying inadequate attention to others. A frequent criticism of most conventional business performance measurement systems i s that financial measures such as profitability and liquidity come to take precedence, and more direct measures of strategic and operational success become under-regarded. Kaplan and Norton (1 993) and others have therefore advocated the need for a ‘balanced



scorecard’ of financial and non-financial measures. The same potential conflict between individual measures can be discerned in the environmental area. For example:

input measures are ineffective if they do not generate environmental results; emission and impact measures may not be taken seriously in the long term if they do not influence customers or the bottom line; customer measures can bias action towards the popular rather than scientifically justified; financial measures can prioritise gains to the company over environmentally necessary actions.

The environmental balanced scorecard will therefore need to contain a variety of measures. The key question for each is the number and type of measure, given the need to strike a balance between comprehensiveness and simplicity. However, it can be argued that, at the very minimum, environmental leaders wil l require at least one measure from al l the ten categories previously identified in chapter two. A third hypothesis is therefore:

3) the more categories of environment-related performance measures a company is using, the better its environmental performance will be.

THE INFRASTRUCTURE FOR ENVIRONMENT- RELATED PERFORMANCE MEASUREMENT

Effective financial and operational performance measurement depends upon sophisticated systems for collecting, collating, analysing and using relevant data. However, in the words of one recent study:

Most existing EMlS (environmental management information systems) are fragmented, point solutions resulting in inconsistency of data, duplication of data collection and processing efforts, and inflexibility to deal with changes - be they regulatory, organisational, or operational. The inability to manipulate a common data set to meet multiple information needs is at the core of E M l S performance and cost failures

(Orlin, Swalwell and Fitzgerald, 1993). The underlying techniques for collecting data inputs to

EMlS - such as life cycle analysis and material accounting systems - are also underdeveloped. Hence a fourth hypothesis i s that:

4) radical improvements in environmental performance will require the deployment of integrated - but feasible and reasonably priced - environmental information systems.

DISCLOSURE OF ENVIRONMENT-RELATED PERFORMANCE DATA

In recent years, environment-related performance measurement has been driven by external reporting. The disclosure requirements of the US TRI legislation have shaped the activities of many American companies, whilst

both they and some European companies have seen reporting as an important means of achieving credibility with external stakeholders. However, whilst reporting i s clearly useful and desirable for many companies, anecdotal evidence from this research suggests that it can sometimes distract attention from the development of environment- related performance measures for internal use. In particular, it may have led some companies to have put less emphasis on customer and financial measures than would otherwise have been the case and than i s perhaps desirable if environmental actions are to fully contribute to the achievement of strategic objectives. A fifth hypothesis is therefore:

5 ) companies will give much more attention in future to internal uses of environment-related performance measures and external reporting will become relatively less important.

STANDARDlSlNC MEASURES

No information has any intrinsic value in isolation from its context. Explicitly or implicitly, comparisons with other information are central to interpreting any set of signals. Different bases can be used for comparison:

tracking over time; comparing against other businesses; benchmarking against best practice; comparing against an ideal (for example, zero

Initially the most useful comparisons will be over time, since it is unlikely that comparable information will be available from other businesses. For many companies this will not only be the entry point into environmental performance measurement but also the terminus. They will not be interested in making external comparisons, either because of the difficulties of developing standardised measures or because they fear the results of such comparison. On the other hand, there are growing pressures from environmental groups, regulators and some leading edge companies (particularly those with a ’benchmarking culture’) for the development of comparative measures.

The US experience with TRI suggests that, as in the financial area, standardisation can create considerable benefits - in this case a measurement system which provides a readily usable means of focusing attention on a particular environmental problem and thereby driving continuous improvement. Indeed, there is an impression that this has resulted in more rapid progress in the US than in many European countries, which have had a greater diversity of approaches (ENDS, 1993). A sixth hypothesis i s therefore that:

pollution/emissions/impacts).

6) standardised, metacompany, approaches to environmental performance measurement are likely to be more effective than company-specific activities.

However, TRI itself is too narrow a measurement base and needs to be supplemented by a wider range of measures.

~~ ~


PETER JAMES - Whilst diversity will make complete standardisation impossible, the development of standardised financial performance measures from similarly unpromising circumstances over the last century means that it i s perhaps not too fanciful to imagine that a combination of government action, initiatives by international standards and ratings organisations and inter-firm co-operation will achieve this condition. This is particularly true if one maxim of performance measurement is borne in mind - 'it is better to be approximately right than precisely wrong'. Long-term consistency in measurement is more important - and perhaps more easily achieved - than absolute accuracy.

MEASURING SUSTAINABILITY

Most informed observers believe that humanity is already - or soon will be - placing an unsustainable environmental burden on our planet. If this is so, then individuals and organisations have to change. Business environment-related performance measurement can play a vital role in this by extending its remit from its present focus on the middle of the 'environmental performance diamond' (see figure 1) - and especially on emissiondwaste measures - to encompass issues of, on the hand, competitive advantage and, on the other - and even more importantly - of environmental impacts and their compatibility with sustainable development (Welford, 1993). A final hypothesis is therefore that:

7) companies wishing to be seen as environmental leaders will have to pay more attention to impact measures generally and measures of sustainability in particular.

This is not easy - and could require decades of work - but it may be one of the most important preconditions for sustainable development of our planet.

Peter James Ashridge Management Research Group

Contact Details: Ashridge Management College Berkhamsted, Hertfordshire, UK HP4 1 NS

Tel: +44 (01442 843491 Fax: +44 (01442 841181

NOTE

This article is partly based on a report by Peter James and Martin Bennett, Environment-related Performance Measurement in Business, which can be obtained from Ashridge Management Research Group, Berkhamsted, Herts, UK, HP4 2LE, price f25. I am greatly indebted to Martin Bennett for helping me to develop some of the ideas in the paper.

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Business environmental performance measurement