Measuring Environmental Performance

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MeasuringEnvironmental Performance

• ESM 210
• November 10, 2008
• Vered Doctori-Blass

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Today

• What is environmental performance?
• Who measure environmental performance?
• Why we should measure environmental performance?
• How to measure environmental performance?
• How to communicate environmental performance?
• Example

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Business Environmental Indicators scale and form
Industry
Company
Scale
Division, site
Unweighted
Process, product susbstance
Weighted
Absolute
Relative
Waste in tons
Waste per ton of production
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Physical Indicators

• Energy use (kwH)
• Waste generated (lb)
• Water consumption (gallon)
• Emissions (CO2 ton)
• Toxicity etc.

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Single indicator Ex Royal Mail

• Calculates an absolute aggregate indicator of its
  CO2 based on both electricity and fuel
  consumption
• Measure expressed as grams of CO2 per thousand
  letters delivered
• At different levels of aggregation
• individual sorting and delivery offices
• regional and national level

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Management Indicators

• Measure the internal workings of the organization
• such as management systems
• Environmental investment
• money invested in technology change
• Training
• number of sites with employees trained in
  environmental health and safety
• Management commitment
• number of times a year plant managers address
  environmental issues with staff
• Employee awareness
• percentage of employees aware of environmental
  issues, tracked by survey
• Systems
• existence of a management plan for each
  underground storage site

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Other Indicators

• Access to info and transparency how many clicks
  to environmental page/report
• Commitment who is signed on mission
• Does the report follows GRI guidelines
• Goals for improvement
• Third party verification

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Socially Responsible Investing (SRI)

• Integrating personal values and societal concerns
  with investment decisions
• Social investors include individuals and
  institutions such as corporations, universities,
  foundations, insurance companies, pension funds,
  nonprofit organizations, etc.
• Estimate about 11 of professional managed
  assets (2.7 trillion) invested with SRI in mind
  (social investment forum 2007)

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NGOs

• Greenpeace Greener Electronics
• (www.greenpeace.org/greenerelectronics
• Sierra Club Stock Fund (http//sierraclubfunds.com
  )

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Why to measure?

• Support decision making of stakeholders
• Investors
• Consumers
• Government
• Support decision-making of the firm you need to
  know where you are to improve
• Tracking performance and raising awareness to
  drive improvement
• Monitoring
• Communicating environmental performance
• Transparency
• Need a common base for comparison

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Screening

• Inclusion or exclusion of corporate securities in
  investment portfolios based on social or
  environmental criteria
• Sophisticated methodologies including
  environmental performance, compliance, and
  environmental management practices
• KLD, Innovest, SAM, Sierra Club
• Socially concerned investors generally seek to
• own profitable companies with
• respectable employee relations
• strong records of community involvement
• excellent environmental impact policies and
  practices
• respect for human rights around the world
• safe and useful products

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Does Screening Matters?
Beccheti et al. 2007 Deletion from DS400 has a
negative effect on returns
Source http//www.kld.com/indexes/ds400index/perf
ormance.html
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DJSI World
Source http//www.sustainability-index.com/06_htm
le/publications/presentations.html
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Innovest Group Rating System AAA - CCC

• Financial Risk Efficiency Capacity
• Balance sheet strength
• Insurance cover adequacy

• Historical Contingent Liabilities
• Superfund
• State and hazardous waste sites
• RCRA
• Toxic torts

• Managerial Efficiency Capacity
• Strategic corporate governance
• capability
• Environmental management
• systems strength
• Environmental audit/accounting
• capacity
• Supply chain management
• Training capacity and intensity
• Generic environmental management protocols
• Relationships with stakeholders
• Industry-specific protocols

EcoVALUE 21 RATING

• Operating Risk Exposure
• Toxic emissions
• Product risk liabilities
• Hazardous waste disposal
• Waste discharges
• Supply chain management risk

• Eco-Efficiency and Sustainability Risk
• Energy intensity and efficiency
• Raw materials natural efficiency and
  intensity
• Product life-cycle durability/ recyclability
• Exposure to shifts in consumer values

• Strategic Profit Opportunities
• ability to profit from
• environmentally-driven industry
• and market trends

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SAM Corporate Sustainability Criteria
http//www.sustainability-indexes.com/
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KLD Rating System

• Companies are rated in seven major qualitative
  issue areas
• Environment
• Community
• Corporate Governance
• Diversity
• Employee Relations
• Human Rights
• Product Quality and Safety
• Analysts assign Strengths and Concerns associated
  with these issues, providing a social and
  environmental profile of companies
• Industry benchmarking
• In or out of DS400 Index

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KLD Rating System (indicators)

• Environmental Indicators
• Concerns
• Climate change (derive profits from selling coal)
• Manufacture Ozone depleting chemicals
• Manufacture harmful agriculture chemicals
• Substantial liability for hazardous waste
• Compliance problems
• Substantial toxic emissions
• Other
• Strengths
• Clean energy (as input)
• Manufacture beneficial products and services
• Pollution prevention programs
• Recycling
• Management system
• Other

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Challenges

• Skepticism about SRI. How accurate are the
  rankings? What do they mean in terms of
  environmental performance? Are the right firms
  rewarded?
• Lack of transparency provided by SRI funds about
  choices made in terms of indicators and levels
• No real agreement on what is the right measure of
  environmental performance and ratings are highly
  sensitive to assumptions

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ISO environmental performance Evaluation (EPE)
standard ISO 14031

• Helps a company to develop indicators in 3 areas
• Management
• information on the organizations effectiveness
  in such areas as resource allocation, legal and
  other requirements
• Operations
• environmental performance related to materials,
  products, energy usage, physical facilities
• Conditions of the environment
• local, regional, national and global
  environmental conditions as a context for
  identifying significant environmental aspects and
  for selecting indicators for the management and
  operational areas

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Global Reporting Initiative

• Voluntary reporting framework
• Moving form 2002 guidelines to G3
• The Framework is applicable to organizations of
  any size, constituency or location
• Self ranking (Application Levels) declaration
  system (A to C)
• Participating firms searchable database is
  available http//www.corporateregister.com/gri/

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GRI Environmental Indicators

• Materials
• Energy
• Water
• Biodiversity
• Emissions, Effluents, and Waste
• Products and Services
• Compliance
• Transport
• Overall

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(No Transcript)
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Main Measuring Challenges

• Which indicators and variables to include in the
  analysis?
• Environmental impact (toxic releases, air,
  water)
• Regulatory compliance (number of violations,
  fines)
• Management practices and reporting (IS0 14001,
  env reporting)
• Reliable and consistent data is limited
• How to aggregate criteria metrics and to assign
  weights to specific criteria?
• Static versus dynamic comparison
• How to establish the screening cut? What is the
  difference between the top performer and the
  second or the third?

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Publicly Available Information

• United States
• Number of noncompliance penalties (ECHO)
• Volume of toxic chemical releases (TRI)
• Health and Population Risk (RSEI)
• Number of oil spills
• Number of chemical spills
• Number of environmental litigation proceedings
  (10K)
• Superfund sites
• Elsewhere
• Denmark, New Zealand, the Netherlands and France
  have already started introducing legislation on
  environmental reporting
• voluntary European Eco-Management and Audit
  Scheme (EMAS)

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Web Sites

• http//www.epa.gov/tri/
• http//www.epa-echo.gov/echo/
• http//www.epa.gov/oppt/rsei/
• http//www.innovestgroup.com
• http//www.sam-group.com/
• http//www.kld.com/
• http//environmental-performance.org/
• http//www.riskmetrics.com/
• Firms (sustainability page/report)

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Example Evaluation of 15 firms

• Screening of 15 publicly traded firms in the
  chemical sector based on different indicators
• Data sources for years 1998-2005
• Enforcement and Compliance History Online (ECHO)
• The Toxic Release Inventory (TRI)
• Risk Screening Environmental Indicators (RSEI)
• Firms reports and web sites
• For each indicator, firms are ranked from 1 to 15
  and in categories best (1-4), middle (5-10), and
  worst (11-15)
• Comparison of the ranking results
• Discussion of results and challenges
• Conclusions
• Delmas and Doctori-Blass, 2008, the Trade offs
  of Socially Responsible Investing (under review)

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Toxic Releases

• Toxics Release Inventory (TRI)
• US EPA collects data on releases and transfers of
  certain toxic chemicals from industrial
  facilities, and makes the data available to the
  public in TRI
• Total Pounds
• Main common method is aggregation and un-weighted
  sum of hazardous pollutants
• Health and Population Risk
• RSEI computes the human risks associated with
  toxic releases.
• Includes amount of chemical released, the
  location of that release, the toxicity of the
  chemical, its fate and transport through the
  environment, the route and extent of human
  exposure, and the number of people affected.
• Risk related score Surrogate dose x Toxicity
  Weight x Population
• Data is available form the EPA (Online and CD)

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TRI and RSEI Ranking Results
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Reporting and Transparency

• Based on voluntary information
• Example of indicators
• Availability of Environmental or sustainability
  report
• Adhering to Global Reporting Initiative
  guidelines
• Management commitment
• Information availability on the web
• Goals and improvement targets
• Performance numbers
• Third party verification
• Similar indicators are used by SRI companies

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KLD Ratings
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Ranking Based On One Indicator
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To weigh or not to weigh?

• Not assigning weights is assigning weights.
• Be clear on the percentages and what this means
  for the ranking overall
• Model behind the ranking, how do the criteria
  relate to the bottom line?
• Survey of importance of criteria

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Policy Implications

• Choices of metrics and weights matter
• Current lack of transparency
• Institutions creating these rankings may not have
  the incentives to disclose their methodology
• Establish minimum mandatory reporting
  requirements
• Educate firms on what to measure and what they
  are being measured on
• Data verification is required

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Conclusions

• Trend toward more transparency on environmental
  performance
• Environmental Performance Indicators used by
  financial community and NGOs
• A powerful tool
• Good environmental performance indicators should
  be
• Comparable
• Credible (verification by third party)
• Include Input (organization) as well as Output
  (performance)
• Process and product (i.e. life-cycle of product)
• Need more transparency from ranking institutions
  and better methodologies

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• Questions?
• Think Green!